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Croatia's Path into the EMU and the Role of SOEs in Achieving Real Economic Convergence

Croatia constitutes the case of a country with vast and expansive sector of state-owned enterprises (SOEs). A detailed comparison leads us to this conclusion since Croatia has the lowest number of residents per one state-owned enterprise among the sample of post-socialist countries. However, this system is fundamentally incompatible with Croatia's ambition to adopt the euro and leverage its EMU membership for significantly lifting country's long-term growth prospects, which are currently meagre based on the European Commission's own estimates. In the EU, there were several prominent episodes of unsustainable nominal and real convergence such as those observable in Greece and Italy during the last eurozone crisis. More importantly, during the first few years of their EMU membership those countries enjoyed both real and nominal convergence paired with pronounced structural divergence. This mainly referred to their sharp deterioration in productivity growth, diverging macroeconomic indicators such as foreign and domestic debt and lingering institutional sclerosis (lack of judicial reforms and privatisations, onerous business regulations and inefficient public administration). So far, Croatia has missed an opportunity for raising real convergence both in absolute and relative terms. Nevertheless, it is to be seen whether Croatia's political elite is ready to show ownership of the reform process necessary to boost the performance of SOEs and that incorporates several important steps: privatization, liberalization and professionalization of corporate governance. It is certain that those steps are incompatible in the short-term with the current political equilibrium and that they provide large long- term benefits to the Croatian economy. What remains uncertain is whether and how the aforementioned political equilibrium could be overcome. Maybe recent July 2020 election results could provide us with some answers. Croatian Democratic Union won by a landslide and will form a new government under very auspicious circumstances, with only two undemanding and relatively weak coalitional parties. Unlike previous governments over the last two decades, new government headed by Prime Minister Plenković will finally avoid large government fragmentation as a well-known obstacle to achieving structural reforms. This time around there won't be major political excuses for backtracking on the aforementioned reform agenda.

State-owned enterprises, Croatia, euro introduction, real convergence, nominal convergence, structural convergence

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