WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

On 11 September 2016, early parliamentary elections were held in Croatia. Only slightly more than half of the 3.8 million people eligible to vote used their voting rights, 8 percentage points less than in the last elections in November 2015.

Contrary to opinion polls, predicting a victory of the Social Democratic Party under Zoran Milanović, a former and very unpopular prime minister, the Croatian Democratic Union (HDZ) – headed by its new leader Andrej Plenković – won the snap elections, but fell short of the absolute majority. The SDP came in second. Most, a party which had been a newcomer in the November elections, formed by municipal politicians and independents, and coalition partner in the outgoing government, ranked third. The biggest surprise was probably the result of the populist anti-establishment party Živi Zid (Living Wall), winning 7 additional mandates as compared to the November elections.

The election results make again the formation of a coalition government necessary. It is very likely that HDZ, the winner of the elections, will seek a coalition with its former partner Most and at least one of the smaller parties, probably the representatives of the country’s minorities. Coalition talks may take some time since Most had made it clear already during the election campaign to participate in a new government only under certain conditions, such as changes in the electoral system and the financing of the political system or a reduction of the share of administrators’ salaries in revenues of regional authorities. However, given the repeated disputes between HDZ and Most during their previous collaboration, the stability of a new government with the same actors seems questionable. So far, the option of a grand coalition has been ruled out, both by Plenković and Milanović. A coalition led by the Social Democrats is not a very likely scenario.

Whatever government coalition will come into power, economic policy will not change dramatically, because it will have to comply with the recommendations under the excessive deficit procedure, i.e. to continue fiscal consolidation and to bring down the high public and foreign debt. The Croatian Democratic Union (HDZ), which will most probably lead the new government, has already stressed in its electoral programme that it will stick to these principles as fiscal stability – apart from economic growth – is key to achieve a better credit ranking and a more favourable position in the international financial markets. In 2017 Croatia will have to repay close to EUR 4 billion of maturing bonds and interest. Meanwhile, HDZ envisages the creation of 180,000 new jobs, improving the situation in agriculture, tourism and industry. However, even if the new government manages to absorb EU funds more efficiently than in the past, there will be the need for adequate national co-financing which might lead to a trade-off between fiscal consolidation and stimulating growth by an expansion of government spending.

Irrespective of the political turbulence during the recent months, the country’s economy has continued to recover from a long-lasting recession. GDP grew by 2.8% during the first half of the year – the strongest increase since 2007 – which also translated into an improvement of the labour market situation: employment rose by about 2% and unemployment fell significantly (to 15.4% in the first quarter of the year), thanks among others also to migration. Tourism developed extremely well, reporting a historic peak level in earnings.