Ivo Sanader with Gordan Jandrokovic and Vladimir DrobnjakThe way things pan out over the coming month could prove key to the future of Ivo Sanader's administration. If it wants to keep alive the possibility of closing the negotiations with the European Union by the end of 2009, Croatia has to find over the next thirty days an acceptable model for the privatisation of the shipyards, hammer out a deal that would end the Slovene blockade, and almost simultaneously lead negotiations with creditors on reprogramming debts in order to avoid seeking help from the International Monetary Fund. In these circumstances there is a growing conviction among some members of the cabinet that a short-term delay to accession to the European Union could be beneficial. A delay of that kind would also be acceptable to some top Croatian business people, who also feel that it would be better if the Croatian economy were to recover from the fallout of the recession first, and only then accede to the European Union. This is, however, only a backup plan, as accession to the European Union is probably Sanader's top strategic goal, and any kind of delay would be a serious political blow, regardless of the fact that Sanader could, at this point in time, cast a significant portion of the blame for the failure on Slovenia.

As early as on 9 January Croatian Government will find out at a meeting with representative of the European Commission whether its plan to privatise Croatia's shipyards is acceptable to the European Union. Nacional has learned from parties privy to the present course of the negotiations on the shipyards that the European Commission will almost certainly not accept the privatisation model Government is proposing. That will lead to further negotiation, and if the European Commission takes a firm position on its demands, the plans of the Croatian Prime Minister to wind up to the talks by the end of 2009 are likely to come to naught.

If, on the other hand, Croatia succeeds in working out an acceptable privatisation model with the European Commission, it will have to resolve, in very short order, the issue of the Slovene blockade of the accession talks. As a foreign diplomat in Zagreb told Nacional, Croatian Government has yet to demonstrate serious intentions to resolve the problem. "After Slovenia blocked the negotiations between Croatia and the European Union, I expected Croatia to launch an energetic campaign against the blockade. That, however, did not happen. What is more, Slovenia is now working intensively on mobilising its allies; Slovenian diplomats are touring European leaders and lobbying to build as much support as they can for their demands towards Croatia.

On the other hand, instead of responding to these moves on the part of the Slovenians with its own diplomatic offensive, Croatia is doing nothing. Your authorities are behaving as if this problem will go away by itself." Nacional's source feels that Slovenia will try to secure the support of two or three countries for its blockade of the Croatian negotiations. With that kind of support it would almost certainly succeed in maintaining the blockade to mid 2009, and that would mean that Croatia would have lost any chance of closing the negotiations before European Parliament is dissolved and before the end of the term of the current European Commission in late 2009. And while it is not known at the moment on whose support Slovenian diplomats are counting, unconfirmed reports say that these could be The Netherlands, Britain, Sweden and Denmark. In that situation Croatia should also secure the support of some of the bigger European countries, above all traditional allies like Germany and Austria, and some other major member countries such as Italy and France.

If Croatia has yet to launch a diplomatic action, however, it is an open question whether it will have the time to do so.

And while in Croatian Government they have said that they would intensify communication with Slovenia in January, it is very doubtful if that could lead to any progress. Slovene Prime Minister Borut Pahor, namely, insofar as the blockade of the Croatia negotiations in concerned, currently enjoys the support of almost all Slovene parliamentary parties. Pahor would face a great deal of criticism if he was to back down from any of the demands now, and the public would read his move as caving in to Croatia. Pahor took the post of Prime Minister on the heels of a very narrowly decided election, but his popularity is growing in the wake of the crisis in the relations with Croatia, so that it is hardly to be expected that he will make any moves that could jeopardise this trend. That is why Croatia will have to secure as much support as it can among the member countries of the European Union as fast as it can. The possible reasons for the current foreign policy inactivity lie in the fact that Government has been absorbed over the past while in financial difficulties, and in the feeling that has emerged of late among some members of the cabinet and top Croatian business people that a delay in accession to the European Union could at this point in time be of benefit to the Croatian economy. In the current climate of financial crisis, namely, there is a serious chance that a large number of Croatian firms would not survive the transition. This is valid foremost for companies receiving state subsidies, as many of these will be curtailed, and the decision to hand out state subsidies will no longer be the autonomous right of Croatian Government, but will instead depend on the decisions of the institutions of the European Union.

Almost all of the large agricultural firms, for example, receive subsidies. Just in 2006 Agrokor's Belje received 60 million kuna in subsidies, while unconfirmed reports say that the entire outfit gets upwards of 300 million kuna every year. Also receiving significant state agricultural subsidies are Vupik, PP Orahovica, Kutjevo, PIK Vinkovci and many other companies.

Borut PahorA speedy accession to the European Union would probably also cause problems for the many state-owned companies who have also been on the receiving end of significant state subsidies in recent years, such as the national railway company Hrvatske Zeljeznice and the shipping company Jadrolinija. These companies will have to make a very quick adjustment to doing business on an open market. Hrvatske Zeljeznice alone receive 1.7 billion kuna a year from the national budget. If there were cutbacks their operations would be threatened. Croatia could see significant changes in competition policy when it joins the European Union. In Croatia anti-monopoly oversight of the market is carried out by the Croatian Competition Agency, following Croatian law. But after Croatia joins the European Union the Agency will be shut down and its authorities assumed by the competent European Union institution, and significantly more restrictive policies will be introduced in Croatia.

It is to be assumed that market shares will then be revised, i.e. the way some Croatian companies do business, and that some of them will have to change their business model. That is why the idea has emerged among Croatian business people that a delay on accession to the European Union could be beneficial in a climate of massive economic crisis. Advocates of this idea feel that it would be better if the state spent its resources in these conditions on helping the economy and taxpayers, and that that is why a delay on accession to the European Union could be helpful to Croatia.

Ljubo Jurcic, an economic expert and a member of the Economic Council, feels that a delay would not be a good thing for Croatia now. "A delay would be fine if Croatia used the time for deep reaching reforms. We have to understand that we need to implement the reforms above all for our own sake, and only then for the sake of the Union. But the problem is that Croatia does not currently have enough human resources, i.e. enough sufficiently capable people in the state apparatus to implement the reforms. That is why I am afraid that it will end with us not implementing the reforms and with them not accepting us into the European Union." It is, nevertheless, hard to expect Government to implement reforms in 2009, as it will be spending most of its resources and time helping the Croatian economy in conditions of recession. But for the Government to even have the funds it needs to help the domestic economy finance minister Ivan Suker will in a few days time launch negotiations with foreign and domestic creditors on the reprogramming of the external debt, i.e. on getting lines of credit with which to pay off the national debts maturing this year.

Just in the first quarter of 2009 the state has to secure 600 million euro to pay off mature foreign debts. Government will likely try to finance these obligations by issuing bonds. Since the state's credit rating has not yet been reduced, it is assumed that Suker will find interested financers, but that the capital collected will be much dearer, i.e. that the state will have to promise creditors a much higher rate of interest than in previous years. The main reason why the talks on reprogramming the debts have been characterised as having priority is the Government's desire to at any cost avoid a scenario in which it would have to seek the help of the International Monetary Fund.

With the arrival of the IMF in Croatia, Government would lose the possibility of leading an autonomous fiscal policy, and given that it is an election year, it would then lose the opportunity to use increased social expenditure to win over voter sympathy ahead of the ballot. The problem is that Government will not have enough money in the coming year to help everybody that needs it, and will have to choose which economic sectors have the advantage in determining who gets assistance. As economic expert Damir Novotny told Nacional, Government will face huge dilemmas in 2009. "Who to help and who not to – will be the big question and dilemma. Many will need help, from shipyards and shipping companies to the tourism industry.

At the same time the state will only be able to help a few. I do not think that one-time financial transfers can solve the problem, and systematic assistance will have to be planned. Government should be led by the criteria of helping those branches of the economy in which it can achieve a positive effect the quickest, i.e. who can best make up for the drop in exports in 2009. The problem is that we have local elections in 2009, and we know that fiscal policy in Croatia is very strongly permeated by local politics."