THE LEADERS of the EU member states reached an agreement on Tuesday morning, after five days of marathon negotiation, about the recovery plan of the EU after the coronavirus pandemic, which is worth 750 billion euros and a seven-year budget of 1074 billion euros.
"We succeeded. I believe that this agreement will be seen as the key moment on the European journey, and will also lead us to the future," said the European Council President Charles Michel early on Monday morning.
The recovery plan of 750 billion euros forecasts 390 billion in non-refundable grants and 360 billion in loans.
Plenkovic's self-praise
Prime Minister Andrej Plenkovic didn't miss a chance to praise himself and his government. He stated that we could be extremely satisfied. When all the funds are taken into account, Croatia will get more than 22 billion euros.
"This is an unprecedented accomplishment, more than double in the first seven years since we're an EU member state. In this way, I believe that we will have a real, great, and strong lever for implementing reforms, for project realizations, for investments, and most importantly, for faster economic recovery," he said.
During an interview for Nova TV, he said that his speech held in Brussels was the turning point.
"The turning point happened a few nights before. There were three segments of the agreement. One was the funds as a reaction to COVID-19, which usually doesn't exist at the EU level. The countries we call frugal, such as Austria, Denmark, Sweden, Finland, and the Netherlands, wanted a 50:50 balance between loans and non-refundable grants. I held a speech that turned the situation and was supported by a few colleagues; I said that we've reached a tight schedule and that we haven't met face-to-face for five months. We've got a big problem and we need a big solution. I simply said that this is a time we stop deepening mistrust towards each other - north to south, and east to west," Plenkovic said.
The economic analysts commented on this decision for Index and revealed what it exactly means for Croatia and whether we will have any benefits out of it. We've singled out a few important elements of the agreement.
Lovrincevic: Money is a great opportunity for Croatia, but also a danger
"The money that Brussels earmarked for Croatia is a big opportunity, but also a danger because it threatens that the government will become a technical body which will actually only represent an extended of the European Commission in the next four years," said Zeljko Lovrincevic from the Zagreb Institute of Economics.
"The government will turn into a kind of an administrative agency which will withdraw European funds. The government's mandate will actually be reduced to the attempts to withdraw as much money from the EU funds as possible. This will not only be the case in Croatia but in many other EU member states, especially those who are more severely affected by the coronavirus crisis," said Lovrincevic.
The amount that Croatia was gained in Brussels is large, but our interlocutor warns that two important components should be distinguished. The first one is the amount that the European Commission has earmarked for the members, including Croatia, in its new seven-year financial perspective. This financial "envelope" is large for Croatia and represents the amount that we can withdraw by 2027. But Lovrincevic said that there is another side to this story because Croatia has to pay into the EU budget, so the net effect is still less than the mentioned 12.6 billion euros. Besides that, he said, the success of withdrawing these funds depends on each member state's ability to withdraw the money allocated to it, and Croatia doesn't have great experiences with that.
The other component is a 750 billion euros worth fund to combat the coronavirus crisis's effects, which accounts for about six percent of the EU's GDP. For the first time, the EU will borrow on its own in the financial market to alleviate the crisis caused by the coronavirus pandemic.
The grants will not actually be donations, but the loans will be more favorable than before
Lovrincevic warns that the grants will not actually be donations because it is planned to introduce a tax at the EU level that will be the revenue of the EU budget. The European tax scissors will, according to the announcements, most likely affect environmental protection and digital services.
"That's why the term grant should be understood conditionally because it actually means an increase of the tax burden as well as increasing demands for unification of fiscal policies in the EU," Lovrincevic pointed out.
When it comes to loans, adds our interlocutor, Croatia belongs to the category of countries that will probably fare better than to borrow on the financial markets by itself. Besides Croatia, Italy, Greece, Spain and some other countries are in that category as well. What these member states have in common is that the EU will borrow more favorably, i.e., get the money at lower interest rates and for a longer repayment period. The savings here could be huge.
However, this story also has it's another side because many countries without the EU support, can no longer even borrow money favorably.
All prime ministers will boast that they've received more money, but they must not stop the reforms
Our interlocutor said that, when it comes to Croatia, things are not black and white. By joining the European Exchange Rate Mechanism II and the beginning of the preparations for the introduction of the euro, Croatia will undergo stronger supervision from Brussels and Frankfurt. That could ultimately end as a good story because it will force Croatia to implement reforms, and it will still fare better in the financial markets than before.
"The prime ministers of all member states will return to their home countries and say that they've got more money than they expected. While that's partially true, it shouldn't happen that the government's policies are then reduced to just how to withdraw as much money as possible. The implementation of reforms is also needed to strengthen the EU's resilience and its member states to similar shocks in the future," Lovrincevic concluded.
Grubisic: It's unacceptable that the EU money is being used for financing someone's private business
Andrej Grubisic, the financial adviser from the Grubisic & Partners company, pointed out for Index that this agreement between European leaders has both positive and negative elements.
"Firstly, we have to be aware of the fact that it's not the EU money, but the money that the EU will sooner or later collect through taxes from residents of the EU member states. Secondly, this isn't about the benevolence of state bureaucrats, but the fact that they have authority and power to tax people and pretentiously distribute money to the people as if they earned it and how they generously share it. There's a lot of misunderstanding on the part of the people about whose money the states will receive," Grubisic pointed out.
He stated that the EU did not create additional values; it's a fact that they have to take from one in order to give to another.
"We cannot finance someone's private business. I mean, we can, but it's not fair. I'm against incentives for private business because in that way, others are forced to finance someone else's business, and they aren't even owners nor have shares in profits or any of that. States should not deal with entrepreneurs. Interest groups will always say that it's good for the state, but let's be realistic; it's good for them, and the rest of us have to handle the cost," said Grubisic.
Thirdly, he said, when the state deals with that amount of money because it has the opportunity to receive it, in that way it increases the dependence of all participants on the state itself.
"The conclusion would be that I have nothing against the EU funds to be used for financing public goods and infrastructures from which we can all benefit from."
Novotny: This only confirms that Croatia will experience a big decline
Economic analytic Damir Novotny analyzed the achievement of this agreement for Index and stated that there are several historical aspects, and one of them is that the EU is borrowing at the EU level for the first time.
"The European Commission will borrow because the EU can handle that and help the countries with that debt, such as Croatia, Greece, and Italy which are most severely affected by the coronavirus crisis because of tourism, and those countries will experience the biggest decline, so the EU intervention is good, and it was needed," said Novotny.
He emphasized that Croatia had done well with 22 billion euros, pointing out that it's more than Croatia would get in normal circumstances when the Croatian GDP and the participation of Croatia in the EU's GDP are taken into consideration.
While it's positive that Croatia received that amount of money, at the same time, it's bad news because it only confirms that the Croatian economy will experience a major decline.
"Croatia will get the money, but it has to implement certain reforms that should strengthen the national economy and transform the state and the public sector. Croatia has to strengthen the digitalization of the public sector and certainly has to increase the participation of digital technologies. Many changes need to happen to accelerate the local development and open space for private investors," said Novotny.
How was the EU money spent before? "The Czech Republic has created 150 jobs with every million from the EU, Croatia 20"
He pointed out that fiscal integration is necessary to strengthen the Eurozone's economy and the economy of the entire EU, as well as to increase resilience to future shocks, which will he said, certainly happen.
"Now the virus is the shock, one day it will be a war in the Middle East, mostly every ten years there's an external shock, after which the EU comes out stronger than non-EU countries," said Novotny.
He commented on spending the EU funds so far in Croatia and said that he didn't see any major manipulations by political elites, but that he saw bad regulations that prescribed how entrepreneurs can get the money. He said that Croatia was slowly withdrawing money for large infrastructure projects due to the lack of project documentation or property, and legal relations were not regulated, and he found several other major objections.
He gave examples of several member states that have done a good job of withdrawing funds and using them.
"The Czech Republic created 150 jobs for every million euros, and we created 20. The second big objection is that too little money went to entrepreneurship. The entrepreneurs had projects, and too little money was allocated to them. The most important thing now is to accelerate local economic development. Slavonia was completely neglected in the last European budget," Novotny said.
"There were no investments in Slavonia; no wonder people moved to Ireland to work as wait tables"
He stated that only towards the end of Plenkovic's mandate did some money go to Slavonia.
"We have a good example of regeneration of small towns affected by the war, such as Beli Manastir, Vukovar, Petrinja, and Knin, which got 200 million kunas each and a lot has been done on the physical regeneration. That program should be implemented in all Slavonian towns. It's normal that people are emigrating from Slavonia because they don't have conditions to live," said Novotny.
"For example, there are many neglected and unused castles in Slavonia. Hungary, Romania, the Czech Republic, and Slovakia have invested in their castles and put them in the function of tourism, so they develop economically. Besides, the people from the Czech Republic, Hungary, Poland, and Romania have transferred a large part of European funds towards encouraging private investments into the industrial sector. On the other hand, Croatia has completely ignored the need for reindustrialization in small towns, in Slavonia and central Croatia," Novotny pointed out.
He believes that these mistakes should be corrected in the future.
Therefore, he believes that Croatia should use the money in the EU budget to make the changes that he stated.