Croatia Joins The European Union

There is less than a year to go until Croatia joins the European Union and analysts have been examining the country's readiness for accession

. On the positive side, a referendum earlier this year showed two thirds of the population in favour of joining the EU. Membership will give Croatia access to EU structural and cohesion funds and will encourage inward investment.

On the downside, Croatia is already uncomfortably dependent on Euroland, which buys more than 50% of Croatia's exports. Italy alone accounts for a fifth of them. Italy also dominates the Croatian banking sector, with Italian parent banks overseeing nearly 50% of all lending. The slowdown in Euroland has had a dampening effect on the Croatian economy. It saw zero growth in 2011 and is expected to shrink by-1% this year. That shrinkage is almost certain to mean the government will be unable to reduce its budget deficit to 3.8% of Gross Domestic Product this year. Total government debt was 46% of GDP last year and is likely to pass 50% in 2012.

So Croatia still has economic boxes to tick but they are well-documented and failure to do so in the next 12 months will not be prejudicial to EU accession. After all, Croatia's economy is on a better footing than at least the handful of Euroland countries which have so far had to ask for bailouts.

Spain and Cyprus were the most recent supplicants. Both have a problem with their commercial banks, which have lost more than they can afford on bad loans. The Cypriots lost it in Greece, the Spaniards in the domestic property sector. A particular feature of these new bailouts is that the money will go direct from the rescue fund to the banks. The purpose of this is to avoid adding to the government debt burden. For Spain this is a blessed relief. It already had tens of billions of savings to find in order to bring down its deficit to an acceptable level. France has a similar problem.

Investors are no more impressed by what they see in Euroland than they were a month ago. Over that time the euro has fallen by four US cents to a two-year low and by four cents against the pound. The euro has also fallen slightly against the Croatian kuna. EUR/HRK is now back below 7.50 to the level it occupied last autumn. The kuna is still toward the weaker end of its 7.1 - 7.6 range over the last seven years but the downward pressure has abated.

With the kuna roughly steady against the euro it is the sterling/euro exchange rate that matters most to Britons with an interest in Croatia. And GBP/EUR is approaching an interesting position. It is within three cents of its October 2008 peak, just short of 1.30. The pound will not find it easy to break upwards through that technical resistance, if only because there will be a long queue of investors and businesses keen to sell sterling at a four-year high. It might be worth joining that queue.

by: Milton Bougemire

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