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Croatia's COVID-19 Crisis Management: from Well-Played Half-Time Towards Gradual Meltdown in the Second-Half

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Croatia's COVID-19 Crisis Management: from Well-Played Half-Time Towards Gradual Meltdown in the Second-Half Croatia's COVID-19 Crisis Management: From Well-Played Half-Time Towards Gradual Meltdown in the Second-Half Act 1: Plenković’s Government Well-Played Half-Time… At the outset of the pandemic in March Croatia was on a steady course in terms of economic growth. Croatia was among the minority of EU member states that still managed to finish the first quarter of 2020 with a 0,3% growth, year on year. According to the Economic and Fiscal Policy Guidelines 2020-2022 Government expected real economic growth of 2,5% in 2020 and a continued reduction in the public debt to GDP ratio down to 68%, in line with its determination to proceed with an ambitious goal to adopt the euro in 2023.1 Notwithstanding the fact that during Plenković’s reign fiscal policy could have been even more counter-cyclical, which could have provided for even faster reduction in public debt, as well as the fact that Croatia proved as a laggard in implementing Country Specific Recommendations under the European Semester, Croatian economy benefited from several years of a relatively favourable external environment. Twin deficits (fiscal and current account) turned into surpluses since 2015 and Croatia’s external position improved markedly. Things were starting to look only sour at the end of February but nobody seriously expected what came with full force in the following months. After initial reluctance to opt for a national lockdown, which was also not unsual in comparison to other European peers, Croatian Government responded to the COVID-19 shock with one of the most stringest set of restrictions at the end of March among all EU-27 member states, based on the COVID-19: Government Response Stringency Index.2 Apparently, the main purpose of this approach had been to contain the virus prior to the Croatian parliamentary election that were held on 5th of July and prior to the start of tourist season, especially since the tourism has played such a significant source of growth over previous decade. This approach shaped the half-time score 1 Government of the Republic of Croatia, Gov't adopted Economic and Fiscal Policy Guidelines 2020-2022 (Government of the Republic of Croatia, 1 August 2020), https://vlada.gov.hr/news/gov-t-adopted-economic- and-fiscal-policy-guidelines-2020-2022/26538 2 Our World in Data, Coronavirus Government Response Tracker, https://www.bsg.ox.ac.uk/research/research- projects/coronavirus-government-response-tracker. of Croatia’s pandemic crisis management that looked very favourable due to low death and infections count. It seemed as if Croatia had managed to control the spread of a virus. At the end of May Prime Minister Plenković stated during his campaign trail that Croatia and Croatian Government have defeated the pandemic. The economic price was relatively high and Croatian economy suffered one of the sharpest downturns of all EU-27 member states. If we look at the percentage change of GDP compared with the same quarter of the previous year, only France, Italy and Spain performed worse than Croatia during the second quarter (Q2). Having said that, social cohesion was still kept by Plenković Government’s extensive furlough scheme that have led to one of lowest falls in employment rate in the EU, if we compare Q2 2020 data with that of Q4 in 2019.3 The aforementioned furlough scheme was financed by the state with approximately 10 billion kunas. These sums were paid out in the period from April till October, with almost 630.000 employees included in the scheme at one point in time. Additionally, out of 81,4 billion euros granted to 15 EU member states within SURE instrument (Support to mitigate Unemployment Risks in an Emergency) with the goal of supporting national short-term work allowance schemes, Croatia was granted 1 billion euros in favourable loans (one of the largest per capita allowances).4,5 The additional boost to macroeconomic and social stability came after both the ECB and the Croatian National Bank (CNB) had agreeded upon establishing a currency swap line in mid- April. This agreement allows for a bilateral exchange of Croatian kuna into the euro and vice versa to the tune of 2 billion euros. Exactly this manoeuvre has removed depreciation pressures from the Croatian kuna and calmed down financial markets. All of this was further reinforced by the fact that Croatia was admitted to the ERM II on 9th of July, which represents a milestone in the process of euro adoption. 3 Eurostat, Change in the employment rate by age group and country, https://ec.europa.eu/eurostat/statistics- explained/images/2/2e/Change_in_the_employment_rate_by_age_group_and_country_%28Q2_2020_compa red_to_Q4_2019%2C_in_percentage_points%29.png . 4 European Commission, Coronavirus: Commission proposes to provide €81.4 billion in financial support for 15 Member States under SURE (Brussels, 17 November 2020), https://ec.europa.eu/commission/presscorner/detail/en/ip_20_1496 . 5 This is almost 10 times the size of guarantees issued by the Croatian Parliament, which were indispensable for a successful launch of this EU-wide scheme. On top of that, Croatia managed to proceed with parliamentary election in early July that brought about a clear ruling majority. The new Croatian Government was formed subsequently in less than three weeks. Plenković’s slogan ‘Secure Croatia’ was well-accepted on behalf of the large swath of Croatian voters and many voters that are traditionally not in favour of the Croatian Democratic Union (HDZ) decided to reward Plenković Government’s crisis management. By having won surprising 37,3% of popular votes HDZ was able to claim 43,7% of seats in the Parliament.6 As compared to the ruling coalition’s composition also led by HDZ in the period between 2017 and 2020, the new coalition comprises even stronger HDZ as its backbone (HDZ currently commands 66 as compared to 61 MPs in the previous term). Together with two MPs from the ranks of Reformisti and HNS-Liberal Democrats, as well as 8 representatives of national minorities, both Plenković and HDZ enjoy significantly more leeway as compared to previous years. This time around there was simply no excuse for postponing the most pressing structural reforms in the wake of elections since less heterogeneity in terms of government’s composition opens up a space for an ambitious reform agenda. All of this invoked a careful optimism on behalf of many commentators and analysts. Therefore, despite some bumps in the road, everything looked quite promising at the end of July, especially when European Council conclusions on 21st of July made clear that Croatia was allocated a record-breaking sum of 22 billion euros within the next Multiannual Financial Framework 2021-2027 and Next Generation EU programme, the largest sum relative to 2019 output size of any EU member state.7 Having secured EU’s strong financial backing in the ensuing years, Plenković’s Government was able to put all bets on the swift economic recovery propelled by much hoped tourist revival. 6 Državno izborno povjerenstvo, Konačni rezultati izbora, https://www.izbori.hr/sabor2020/rezultati/1/ . 7 Cinzia Alcidi, Daniel Gros and Francesco Corti, Who will really benefit from the Next Generation EU funds? (Brussels: CEPS, 5 October 2020), https://www.ceps.eu/ceps-publications/who-will-really-benefit-from-the- next-generation-eu-funds/ . Act 2: Almost Complete Meltdown in the Second-Half Unfortunately, in spite of a very promising half-time score with regard to mitigating the impact of COVID-19 shock, the second-half produced the total unravelling of Government’s pandemic approach. In the week before 4th of December Croatia had the fifth largest number of COVID-19 deaths per one million population. At the same Croatia was ranked 31st in terms of cumulative deaths per million population since the pandemic outbreak and it continued its upward climb from the middle of the global distribution during summer months.8 As of this writing, Croatia still had a slight advantage relative to Europe when it comes to Case Fatality Rate (CFR).9 However, this gap has consistently and rapidly narrowed during autumn months.10 Besides suffering a significant death toll, Croatia was also not spared from bad economic news. Croatia was the worst performer if we look at GDP figures in the third quarter (Q3) of 2020, a drop of almost 10%. While France, Italy and Spain bounced back strongly according to the percentage change of their output over the previous quarter, Croatia performed very modestly. EU’s GDP recorded growth rate to the tune of 11.6%, compared to Croatia’s 6.9%. Sadly, despite the fact that the negative percentage change11 in nights spent at tourist accommodation establishments by residents/non-residents has been significantly lower in comparison to other tourism powerhouses such as Italy, Spain and Greece at the height of the tourist season, one can regret that the overall result has not been even better for August, September and October.12 If Croatia, Serbia and Hungary had the strictest restrictions in late March, by the end of August Croatia haphazardly embraced the Swedish approach since easing started in May. 8 Statista, Coronavirus (COVID-19) deaths worldwide per one million population as of December 4, 2020, by country, https://www.statista.com/statistics/1104709/coronavirus-deaths-worldwide-per-million-inhabitants/. 9 The Case Fatality Rate (CFR) is the ratio between confirmed deaths and confirmed cases. 10 Our World in Data, Case fatality rate of the ongoing COVID-19 pandemic, https://ourworldindata.org/coronavirus . 11 Compared to corresponding period of the previous year. 12 Eurostat, Percentage change (compared to corresponding period of the previous year) in nights spent at tourist accommodation establishments by residents/non-residents – monthly data, https://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=tin00172&plugin=1.
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