Political Economy of Croatian Membership

O licencima - Creative Commons https://creativecommons.org/licenses/?lang=hr CC BY-ND Ova licenca dopušta redistribuiranje, komercijalno i nekomercijalno, dokle god se djelo distribuira cjelovito i u neizmijenjenom obliku, uz isticanje Vašeg autorstva. Pogledajte sažetak licence (Commons Deed) | Pogledajte Pravni tekst licence Imenovanje-Nekomercijalno CC BY-NC Ova licenca dopušta drugima da remiksiraju, mijenjaju i prerađuju Vaše djelo u nekomercijalne svrhe. Iako njihova nova djela bazirana na Vašem moraju Vas navesti kao autora i biti nekomercijalna, ona pritom ne moraju biti licencirana pod istim uvjetima. Pogledajte sažetak licence (Commons Deed) | Pogledajte Pravni tekst licence Imenovanje-Nekomercijalno-Dijeli pod istim uvjetima CC BY-NC-SA Lučev, J., et al.: Economic policy independence in EU member states: Political economy of Croatian membership Ova licenca dopušta drugima da remiksiraju, mijenjaju i prerađuju Vaše djelo u Josip Lučev Dario Cvrtila JEL: E580, E650,nekomercijalne H620, N140 svrhe, pod uvjetom da Vas navedu kao autora izvornog djela i University of Zagreb Libertas International University Review article Faculty of Political Science 10000 Zagreb, Croatia https://doi.org/10.51680/ev.34.1.17licenciraju svoja djela nastala na bazi Vašeg pod istim uvjetima. 10000 Zagreb, Croatia [email protected] [email protected] Received: February 13, 2020 Revision received:Pogledajte July 14, 2020 sažetak licence (Commons Deed) | Pogledajte Pravni tekst licence Accepted for publishing: August 31, 2020 This work is licensed under a Creative Commons Attribution- NonCommercial-NoDerivatives 4.0 International License Imenovanje-Nekomercijalno-Bez prerada CC BY-NC-ND ECONOMIC POLICY INDEPENDENCE IN EU MEMBER Ovo je najrestriktivnija od naših šest osnovnih licenci – dopušta drugima da STATES: POLITICAL ECONOMY5 od 6 26. 06. 2017. 12:24 OF CROATIAN MEMBERSHIP Abstract Purpose: The independence of the economic policy of national states in the European Union is a relevant and politically controversial issue as notions of lost sovereignty are often evoked by populist political options. It is therefore important to distinctly outline the actual state of affairs. Methodology: Methodology is descriptive and comparative. The article starts by surveying traditional and recent political, institutional and economic arguments on policy convergence in areas undergoing economic integration. The article continues by contrasting the complex notion of economic sovereignty and the ongoing development of economic policy constrictions of EU (and eurozone) membership. Croatia is then compared to relevant economies in key economic policies in response to the crisis of 2008/09 in order to evaluate the maneuvering room left by the various policy constrictions. Results: Particular attention is devoted to the comparison of exchange rate policy, fiscal policy and monetary policy employed by member states in response to the crisis of 2008/09. While economic independence in terms of crisis management is clearly reduced by virtue of EU and eurozone membership, its effects should not be felt as a change of policy direction in the case of Croatia. Conclusion: We conclude that the policy restrictions imposed by EU membership and expected entry into the eurozone are in line with economic restraints and exhibited national policy preferences prior to EU accession. Keywords: Economic policy constrictions, monetary policy, fiscal policy, EU, Croatia 1. Introduction: relevance of the independence Therefore, it is important to tackle the issue with issue regard to the political economy of the matter, in hopes of adding to the existing scientific discourse. The issue of economic policy independence for EU members is relevant at least for two reasons. Firstly, Independence of economic policy of national states it is politically contested, and it may be operation- in the European Union is often evoked by populist alized as threatening national sovereignty or well- political options, providing an increasingly pressing being. Secondly, it is economically contested, as dif- political issue. Populism has swept the developed world since the crisis of 2008/09. Its proponents fering schools of thought have conflicting opinions claim to represent the authentic will of the people, on economic integration and policy convergence. unlike the political mainstream, and often carry a Vol. 34, No. 1 (2021), pp. 225-240 225 Lučev, J., et al.: Economic policy independence in EU member states: Political economy of Croatian membership protectionist message – frequently viewing the 2. Arguments for and against economic policy market relations with other countries as inherently convergence exploitative. In the US, a gradual shift in the Re- publican Party eventually culminated in the Trump In its essence, the European project is an econom- presidency, vowing to “make America great again” ic integration – and a harmonization of various by putting America first and draining the swamp economic policies is its important component. It of Washington bureaucracy. In Europe, a wave of started as an international strategic management of parties emerged to challenge the prevailing politi- coal and steel resources, but developed into a cus- toms union, single market and, finally, economic cal elites, often using an anti-EU platform. From and monetary union. This step was symbolically UKIP and Brexit Party in the UK and Alternative vital as it introduced the salient common currency. für Deutschland in Germany to Movimento 5 Stelle However, it is very widely criticized as having been in Italy, Syriza in Greece and Živi zid in Croatia – premature and destabilizing, crucially contribut- these parties often find their countries exhausted ing to the macroeconomic imbalances which have by their foreign economic ties, and the various made the 2009 recession and its aftermath so pain- constrictions stemming from EU membership (e.g. ful from the European perspective (e.g. Krugman, austerity or migration) and must put themselves 2012; Stiglitz, 2016). It should be helpful to provide first, which they cannot do as long as they are pres- a brief overview of traditional arguments, as well as sured by the bureaucracy in Brussels. the state of recent debates on economic policy con- The economic side of the debate is also vibrant, with vergence in EU member states. the more economically liberal leaning economists generally favoring economic integrations as a path 2.1 Traditional arguments to a broader scope for market- based coordination, At the basic theoretical level, closer trade integra- while prominent Keynesians like Paul Krugman tion is viewed as a positive outcome by definition. and Joseph Stiglitz find fault with the deeper end Today, this position is dominant amongst econo- of integrations – particularly the common currency mists and social scientists in general and stands at the center of the European project itself and pro- at the basis of liberalism, as it is traditionally con- cyclical austerity measures at the center of its fis- strued in the context of International Relations cal integration aspect. In this context, much energy and International Political Economy. In fact, it has has been devoted to discussing Optimum Currency been dominant since Adam Smith’s refutation of Area criteria with the goal of ascertaining whether mercantilists thought in 1776, gaining further trac- or not the euro harmed the economic prospects of tion though David Ricardo’s comparative advantage the less competitive EU members. spin on Smith’s argument in 1817, the Heckscher- The objective of this text is to assess the level of eco- Ohlin argument publication in 1933 and its further nomic independence in Croatia as an EU member, corollaries. These specific approaches have their focusing on anti-crisis policies. The methodology clear differences, but at the heart of all of these is is descriptive and comparative. The following two the conviction that close trade integration provides sections will offer an overview of relevant literature mutually beneficial specialization of all economies covering both traditional arguments on policy con- involved. Free trade forces all economies to special- vergence and recent research on economic inde- ize in what they may produce most competitively pendence in the EU and EMU. Section 3 will also and leads to the best possible outcome in terms of outline the concepts of economic independence goods available for consumption globally. and economic sovereignty and their growing con- For markets to be fully efficient, free trade becomes striction within the EU and EMU through post a necessity, and any policy which inhibits it is not 2008/09 institutional reforms. Section 4 compares considered desirable: the overt ones, such as cus- Croatian post-2008 national economic policies to toms and quotas, and the covert ones, like the regu- strategies in EU member states (fiscal policy, ex- latory burden in the product markets. The deeper change rate policy and general monetary policy). the integration, the broader the need for policy Section 5 offers an interpretation of the somewhat coordination, and it soon moves far beyond trade specific Croatian position and strengthens the over- policy. Most notably, the creation of the common all argumentation by providing the limited data on currency has brought forth issues of urgency con- the policy responses to the still developing COVID sidering the appropriate institutional framework recession of 2020. Section 6 concludes and suggests

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