Croatia: From conflict zone to EU member

SASA PEKEC

Croatia hasbecome the 28th member state of the European Union as of July 1. This is the first EU enlargement since 2007, and occurs at a time when there are multiple voices across Europe reexamining the costs and benefits of the union.

Why would a country that recently fought a war for independence, voluntarily and deliberately want to give up some of its sovereignty and risk potentially damaging economic costs in order to join the European Union at the time of its biggest crisis? And why would the EU want to accept a new member country stuck in a recession, while multiple member nations are struggling to cope with their own economic woes? A simplistic answer is that there is no viable alternative in the long run.

Croatia has always been, is, and always will be a European nation, so isolating it economically or politically would be unsustainable, if not irrational, both for the country and the EU. In fact, this seemingly awkward timing for Croatia’s accession serves as a reminder that the idea of the European Union is still very appealing: we share common civilizational values, a desire for peace, and an understanding of the diversity of European nations and cultures.

Giving up some unilateral powers is dwarfed by the strength of being a member of the Union of member states committed to joint success, solidarity in testing times, and trust in the common future. Croatia and 27 other European nations found a positive value for themselves in this trade-off, resulting in a union that remains the largest economy in the world.

Current EU members and their economies are guaranteed winners of Croatia joining the EU. Croatian economic borders will open and provide an opportunity to invest in the country, all without any risks associated with doing business in an institutionally unstable post-communist emerging economy. Similarly, more favorable risk could attract other investments from around the world. Early movers will likely profit the most from the opportunity.

For Croatia, accession to the EU is largely symbolic: it marks the successful completion of a 15-year long process (Croatia established its Ministry of European Integrations in 1998). Given the length of the accession process and numerous transformations over the years, Croatians will not see any spectacular changes on July 1. In fact, a prevailing sentiment is that Croatia has culturally always been part of Europe, so July 1 is just a rubber-stamping of an obvious fact.

If anything, there is a sense of discontent among the Croatian public with the level of scrutiny and the standards imposed during the negotiation process. Croatia faced the strictest negotiation rules of any country that ever joined the EU. However, despite the anticlimax of July 1, there is great economic and political significance and importance in Croatia’s joining the union.

Economically, Croatia is joining the EU economic zone, ensuring free movement of capital, goods and people. This could prove to be costly for Croatia’s transitional economy, as many non-competitive businesses will have to adjust quickly in order to survive in the new competitive realities. Perhaps the biggest threat to Croatian companies relates to doing business in non-EU markets in the region. Specifically, Croatia will start to apply EU common trade policies and withdraw from trade agreements with non-EU countries in the region, such as the Central European Free Trade Agreement, thereby suddenly making Croatian products more expensive and less competitive in these important regional export markets.

A similar scenario occurred during the EU’s great expansion in 2004 when several post-communist transitional economies joined. If these examples are any guidance, the prevailing opinion is that joining the EU had overall positive economic impact and accelerated the restructuring of these nations’ economies. Essentially, globally competitive industries are likely to become stronger, while non-competitive ones that rely on special protections and government support might face quite uncertain futures. Croatia’s economic transition is probably facing an accelerated final stage, with hopefully more winners than losers to emerge from this process.

Politically, the EU is expanding into a historically turbulent region of southeast Europe, fundamentally changing the political calculus and providing the strongest possible guarantee of stability in the region. The conflict in the Balkans was quite costly for the international community. The EU and the US tied up significant diplomatic and military resources in the region. Going from a war-ridden global trouble-spot to a EU member state in less than two decades is a remarkable turnaround. The international community can proudly point to Croatia’s success story when providing support to other troubled regions in the world. Given the history and context, July 1 and Croatia’s ascension to the EU is a win for humanity.

Sasa Pekec is a professor at Duke University’s Fuqua School of Business. He is a member of the Council of Economic Advisors to the President of Croatia.