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EU newest member Croatia plagued by economic worries

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(ZAGREB) - As soon as the fireworks marking Croatia's entry into the EU a month ago died down, the bloc's newest member was faced with the grim reality of a struggle with economic stagnation.

Unlike most other recent EU entrants, Croatia has not experienced a boom due to its accession as the bloc is itself in mid-crisis.

So while Croatia's July 1 EU entry crowned a decade-long effort and marked the closing of a political chapter dominated by the legacy of its 1990s independence war, little has changed economically.

Most of Croatia's 4.2 million people are still focused on how to make ends meet amid gloomy prospects for recovery in an economy that has either been contracting or stagnating since 2008.

Around one in five Croatians is out of work. The youth unemployment rate surpasses 50 percent -- more than double EU average of 23 percent -- with only Greece and Spain doing worse.

For Kristina Basnec, 25, a recently graduated musical instructor, the daily routine is to scan the job advertisements in newspapers and drop in a Zagreb employment office to check for postings.

"The most important thing now is to get the economy going, to create new jobs," she said, hoping her quest for work would not last long.

With recession dogging many of its EU partners, which account for 60 percent of its exports, Croatia has been unable to count on a pick me-up from accession. Moreover, many trade benefits had been granted earlier.

The main driver of the country's economy is tourism centred on the stunning Adriatic coast, which has recently fared well.

But EU accession could paradoxically harm this sector as Croatia is forced to introduce visitors from non-EU countries such as Russia, with officials nervously watching figures.

Standard & Poor's last week downgraded the outlook on Croatia's credit rating to negative.

It forecast the economic benefits from EU entry "will be limited by structural challenges, political constraints to fiscal reforms, leveraged public- and private-sector balance sheets, and an unfavourable external environment."

Although qualifying for EU accession, Croatia's government has been widely seen as moving slowly on reforms needed to improve the country's economic performance.

International financial institutions repeatedly warn Croatia should improve the overall business climate, increase competitiveness as well as reform its huge and inefficient public sector.

Finance Minister Slavko Linic later said the ratings downgrade was a "message to the government to speed up reforms, boost process to restructure public firms and turn them towards investments."

The centre-left government of Prime Minister Zoran Milanovic hopes to eke out slim growth this year but analysts forecast gross domestic product (GDP) will shrink by 1.0 percent.

The country is already 39 percent below the EU average, with only Romania and Bulgaria behind it.

-- Government targets grey economy --

Croatia's centre-left government has recently moved to privatise its last state-owned bank, the main insurer and loss-making freight rail company to fill a budget gap and slow the rise of a public debt that is nearing EU's threshold of 60 percent.

It also plans to lease the operations of more than 1,000 kilometres (600 miles) of Croatia's highways for up to 50 years in order to repay loans taken for their construction.

Linic warns the moves are needed if Croatia wants to avoid "bankruptcy" as the budget deficit reached 3.4 percent of GDP in the first half of 2013.

"With the privatisation income, the government might cover the budget deficit, but it will emerge again next year if structural reforms are not implemented," economic analyst Damir Novotny warned.

The government has also chosen to go after the so-called grey economy that some estimate is equal to nearly a third of official GDP.

It has stepped up control over transactions to decrease tax evasion, including requiring cash registers at outdoor markets, a move that has not been welcomed.

"Look at my hands, they are wet all the time, I will have to put on gloves," market fish seller Mara told AFP. "The measure is ridiculous, we pay taxes anyway."

The measure is also part of a wider crackdown on corruption.

To become an EU member, Croatia had to clamp down on corruption and former prime minister Ivo Sanader was last year jailed for 10 years for graft.

But a lot remains to be done as anti-graft watchdog Transparency International warned petty corruption within public administration and services is still widespread.

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