At the beginning of the new European Semester, the European Commission said on Thursday that Croatia was one of 16 countries which needed in-depth reviews of the macroeconomic situation to see if macroeconomic imbalances wee unwinding or accumulating.
The Commission will release the findings of the in-depth reviews in February, together with reviews of each member state's economic policy.
Today the Commission released the Annual Growth Survey, the Alert Mechanism Report and the Joint Employment Report. The release of these documents marks the beginning of the European Semester, a mechanism to coordinate economic policies within the EU to prevent another financial and debt crisis.
In the Alert Mechanism Report, the Commission noted Croatia's risks "as regards external and public debt sustainability and labour market adjustment."
"Therefore, the Commission finds it useful, also taking into account the identification of an excessive imbalance in February, to examine further the persistence of macroeconomic risks and to monitor progress in the unwinding of excessive imbalances," the document says.
Economic and Financial Affairs Commissioner Pierre Moscovici told a press conference that for five of those 16 countries - Bulgaria, France, Croatia, Italy and Portugal - excessive macroeconomic balances had been found and that they called for resolute political action and specific monitoring.
"In February 2015, the Commission concluded that Croatia was experiencing excessive macroeconomic imbalances requiring decisive policy action and specific monitoring, in particular involving risks related to weak competitiveness, large external liabilities and rising public debt, coupled with weak public sector governance, and dismal employment performance in a context of subdued growth," the document says.
Moscovici said it was necessary to do another in-depth review now to see the progress made so far and that there was no need to prejudge the outcome.
The speed of adjustment in Croatia was relatively slow and unequal given the prolonged recession and subdued price dynamic, he said when asked to comment on the situation in Croatia.
The current account has turned into a surplus, thanks to a marked decrease in internal demand and improved competitiveness, but the external debt remains high, which is why a considerable amount goes for loan servicing. The public debt continues to grow, while the private sector is deleveraging. The unemployment rate remains high, while employment continues to decrease. We therefore believe that structural reforms have contributed to the adjustment, but implementation should have been speedier, Moscovici said.
The Commission says in the Alert Mechanism Report that the "current account turned into a surplus in 2013 as growth of export volumes picked up and outpaced that of imports. The negative NIIP (net international investment position), as well as high net external debt, did not improve and remain at high levels. Despite recent annual gains in export market shares the cumulative losses remain very substantial."
"Even if below the threshold, private sector debt is high compared to peer countries. While banks are well-capitalized, credit growth remains weak in a context of deleveraging pressures, high NPLs (non-performing loans) and a weak macroeconomic outlook," the Commission says.
"Past compression of economic activity coupled with limited wage adjustment has taken a toll on employment, including long term and youth unemployment. People at risk of poverty or social exclusion continue to represent a relatively large share of the population. That said there are recent positive economic developments and an improved economic outlook."