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EU takes new-member Croatia to book over deficit

28 January 2014, 19:39 CET

(BRUSSELS) - The European Union launched disciplinary proceedings on Tuesday against newest member Croatia for having an excessive budget deficit, giving it until 2016 to obey the bloc's rules.

Croatia finds itself in trouble just seven months after it became the 28th member of the bloc amid huge fanfare and great hopes.

European finance ministers meeting in Brussels said that Zagreb had to present plans to redress the problem by the end of April and urged it to take "decisive" action to curb spending.

EU rules set the ceiling for member states' annual budget deficit at 3.0 percent of gross domestic product but Croatia's is running at 5.5 percent.

"We have today opened an excessive deficit procedure for Croatia ... as well as recommendations setting out measures to correct the deficit by 2016," Greek finance minister Yannis Stournaras, the current chairman of the EU's Economic and Financial Affairs council, told a press conference.

The EU could potentially impose big fines on the former Yugoslav republic if it fails to cut its deficit within the next two years.

EU Economic Commissioner Olli Rehn said Croatia needed to restore confidence in the economy.

In the meantime Brussels was in "close and continuous contact with the Croatian government" about its proposals to cut the deficit.

"We want to look at them more closely, precisely, before we will make any kind of assessment," Rehn said.

He added: "We will make profound assessments on whether any progress has been achieved by Croatia by the spring."

Croatia's highly tourism-dependent economy has been either in stagnation or in recession since 2009, hobbled by a rigid labour market and weak business environment.

Reforms delayed for nearly two decades

In Zagreb, Prime Minister Zoran Milanovic said the EU's move would help force Croatia to make reforms which had been "postponed in this country for almost two decades."

Milanovic said his goal was to "create a stable and healthy economy that will reach a high level of readiness to enter the eurozone."

He vowed to reform the "unsustainable" health and education systems, overhaul labour laws, and restructure public services and the judicial system.

Croats celebrated its EU entry on July 1, 2013 as a sign of progress following the bloody break-up of the ex-communist federation in the 1990s.

But even then there were fears that membership could add to the country's economic burden.

Croatia's membership has given hope to others, especially neighbour Serbia, which has just started its EU accession talks.,

As well as the 3.0-percent public deficit rule, the EU requires member states to keep accumulated debt at no more than 60 percent of GDP and on this measure Croatia is doing better than most with 62 percent expected in 2014.

Many members have breached both limits -- and by a considerable margin in some cases -- but the debt crisis has forced the bloc to tighten up so as to make sure government's stabilise strained public finances.

Croatia's government admitted in November that its 2013 deficit was running at 16.3 billion kunas (2.1 billion euros, $2.9 billion), or 5.5 percent of gross domestic product (GDP).

Just two months earlier it had forecast it would keep the deficit to 3.5 percent.

The EU said on Tuesday that its projections showed the public deficit would rise to more than 6.0 percent in the 2013-2015 period without "corrective measures".


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