Croatia joins the EU on Monday but price of integration may be high

28th June 2013

Croatia will become the 28th member state of the embattled European Union after ten years of negotiations but some fear the economics of Europe will put a lot of strain on the relationship writes Philip Scott.

Croatia’s membership marks the second ex-Yugoslav country to sign up after Slovenia did so in 2004. Since then a great deal has changed and the question now is, will membership of the European super club prove beneficial or detrimental to the young nation?

Some commentators have questioned whether Croatia ever actually managed to meet the criteria for entry or whether influential allies in Northern Europe fast tracked their application.

Jason Gaywood, director at foreign currency exchange brokers HiFX says: “The fact remains that entry to the EU at this time is a double edged sword.

“Initially, it is difficult to see how either party will benefit. With a credit rating of ‘junk’ and a deep-rooted recession, Croatia will need a good deal of EU aid in the coming years – some €13.7bn of ill afforded funds has been earmarked for infrastructure improvements between 2014 and 2020. An additional €655m or 1.5 per cent of Croatia’s GDP has been set aside for this year. So onboarding this small country on the Adriatic coast will be expensive for the rest of the already beleaguered Union in the short-term.”

From a domestic perspective, membership should be good for the Croatian economy. EU membership removes the trade barriers that have existed there until now. Overnight, the 20 per cent levies on EU imports will be removed for the nation and across the EU, exporters are likely to be pleased at the prospect of an additional four million plus new customers who will be keen to buy quality goods – particularly from Germany.

But experts fear the inefficient and cash starved Croatian manufacturing and agricultural sector will find it almost impossible to compete. In addition, the important tourist sector is unlikely to benefit as the domestic Croatian currency – the kuna is not set to be replaced by the euro for a couple of years at least.

Croatia, however wants to join the euro zone as quickly as possible despite the problems that have beleaguered the currency region in recent years, the Croatian National Bank Governor Boris Vujcic said earlier this month.

He said there were few drawbacks to Croatia joining the euro because the country’s monetary policy already lacks independence as it is constrained by the high level of euros already used in the country, particularly by banks as theWall Street Journal has reported.

Gaywood adds: “In the fullness of time, the balance of probability is that Croatia will reap the benefits of better roads and other infrastructure improvements but, as we have seen with Portugal, Spain, Ireland, and others, the price of integration could be huge for a nation keen to rid itself of a troubled past. Time alone will tell but history would suggest that the net result of an ill-informed arranged marriage is a bitter and expensive divorce.”

32 thoughts on “Croatia joins the EU on Monday but price of integration may be high”

  1. Mike from Enfield says:

    Hi Shaun,
    In the event of post-independence negotiations over splitting the debt failing to reach agreement, who holds the whip hand? To take an extreme case, could an independent Scotland just walk away, pay nothing and create their own currency without being considered (by the rest of the world) as defaulters?

    1. Andy Zarse says:

      Yes, this above!
      I do understand the political reluctance of both sides to engage in any discussions about who gets which bit of the national debt. But it remains, to me at least, the most interestingly contentious issue!
      It reminds me of the old “Scotsman” joke about Jock and Jimmy walking down a Glasgow alley late one night. A couple of muggers step out of the shadows… Jock and Jimmy turn round and walk back but two more muggers block their way, wielding knives. They’re trapped and, as the muggers bear down on them, Jock turns to Jimmy, sticks his hand in his back pocket and pulls out a big wad of cash. “Hey Jimmy, here’s that five hundred quid I owe you…” 🙂

    2. Anonymous says:

      Hi Mike

      Could an independent Scotland walk away from its share of the UK national debt? Not via the usual route as it does not seem to be planning to have much of an armed forces so it could not outright enforce it. But rUK is extremely unlikely to invade and in these times of a desire for yield how long would a default premium last?

  2. Anonymous says:

    If I was voting in that referendum, a fraction of a percent GDP either way and/or a new currency would be well down the priority list.

    Sweden’s neutrality doesn’t keep Russian nuclear subs out of Swedish territory. So who will pay for the attack subs and F35s to defend an independent Scotland from frequent Russian incursions ?

    As for England funding Trident, I recommend to Dave Cameron to call his Polish counterpart and ask if Poland would like to join and pay Scotland’s share. The lesson from Ukraine is simple – Russian guarantees of Ukrainian territorial integrity are worthless and Ukraine made a blunder scrapping it’s ICBMs.

    1. Anonymous says:

      Hi ExpatInBG

      So far the Yes campaign/SNP seem to have very little interest in defence and plan only small forces. It is a change in that in the past there have been plenty of Scottish regiments but going forwards there seems to be not much and certainly nothing to deter Russia.

      1. Anonymous says:

        The Americans spent lots to win the space race. There’s an old joke – NASA had problems using pens to write in space, so they commissioned the “astronaut pen” which worked in space item with R&D costing millions of dollars. It also enjoyed modest success on planet Earth as a novelty item. The Soviets when faced with same problem of writing in space used a pencil costing 10 cents

      2. therrawbuzzin says:

        Scotland’s proposed defence capabilities will be different, not smaller than, today’s.
        Sure, Trident will go, but Scotland will have a greater airborne maritime reconnaissance capability than the UK now has.
        If the Malaysian Passenger jet MH370 had disappeared over the Atlantic, it would have been NORWEGIAN reconnaissance planes which would have searched for it, as Britains Nimrods have all been scrapped.
        You see, Britain’s defence capabilities suffer from “small dick big car syndrome”; all tridents and aircraft carriers, but no capability for use, in the case of trident, or accompanying ships to PROTECT that shiny new phallic aircraft carrier (or even plane to go on it).

        1. Anonymous says:

          European defense is disjointed and offers poor value for money. I know the smaller US economy has higher defense spending as proportion of GDP (than the EC), but they manage to float 10 massive aircraft carriers and all the planes, support ships and submarine fleet.

          If independent Scotland and rUK separately spend equal amounts to current defense spending, total capability will be reduced. Small countries, overweight procurement and command bureaucracies and few real assets.

          After the “Kiev in 2 weeks” and the nuclear bomb threats, Cameron might find some keen Central/Eastern European partners wanting to join the nuclear deterrent club who can cover Scotland’s share of Trident costs.

          Independence won’t see the Trident base relocated overnight – moving the base is likely to take decades.

          1. therrawbuzzin says:

            Or, they may think about defence that’s relevant to each country, rather than trying to strut the World stage as a c-list has-been World power, spending money we haven’t got on weapons we can’t afford.
            Britain is not Ukraine, and suggesting that Russia has ambitions on Western Europe is preposterous.
            Trident could be moved relatively quickly, but Coulport, where the weapons are stored could take longer to replace; about five years.
            Independence vote does not itself guarantee removal of trident in event of Scottish Independence, that mandate would be sought in the post-Independence election of 2016.

          2. Anonymous says:

            I cannot read the future and do not pretend to understand Putin’s objectives.

            But history supplys many examples of countries unexpectedly overrun by powerful neighbors. Self defense isn’t optional – but I’d agree that Britain could not afford Blair’s neo-colonialist military actions.

            As for Russia and the state security apparartus – (which Putin is indoctrinated in), let me quote it’s history.

            Dealt with Roosevelt, accepted billions of $ worth of food, weapons etc and promised to allow democratic elections in Eastern Europe following the defeat of the Nazis. yeah right.

            Attempted to starve the population of West Berlin to acquire more territory for the communist empire.

            Ruthlessly suppressed popular revolts in Budapest 1956 and Prague 1968.

            When Chernobyl exploded and spewed fallout across Europe – they lied and denied -> to the point of forcing Eastern European youth to perform mayday parades in the fallout.

            They built gulags, not so different to nazi concentration camps. They killed their own citizens who were suspected of disloyalty.


            I’m prepared to criticise Bush (criticising your leader can be fatal in Russia), but history is clear. USA is more honest – they honestly reported 3 mile island. they carried out an evacuation. They care about their citizens.

            I value Western freedom, even the left’s arch enemies Thatcher and Reagan happily let wannabe communists freely depart for the USSR. Putin was involved in murdering people who tried to cross the Berlin wall.

            Brezhnev’s doctrine was clear – he openly stated his threats.

            Reports of Russian troops in Crimea were confirmed by Russian sources, everybody else reports they’re also in Ukraine.
            (Logically, the Ukrainian army would finish a small rebellion quickly – and the rebels continued fight provides strong evidence of foreign support) Ukraine is a sovereign nation, for which Russia has no right to bully or dictate policy.

            In the face of the evidence above, IMHO Putin’s Russia is a threat to European peace and democracy.

          3. therrawbuzzin says:

            It also depends on whether you see Russia’s actions in Ukraine as expansionist, or the (intended or unintended) consequences reacting to EU’s economic aggression, and overthrow of the legitimate government there.

            Your opinion has already been established.

          4. Anonymous says:

            In the mid-thirties there were plenty of Brits including Edward Windsor who claimed Hitler was harmless, but how could they know ?

            you say “suggesting Russia has ambitions on Western Europe is preposterous” – how can you know that ?

          5. therrawbuzzin says:

            Putin’s strategy has, until now, all the hallmarks of a reformer who, having learned what happened to the USSR under the weakness of Gorbachev is determined that Russia doesn’t suffer the same fate.
            For democratic reforms to take hold in Russia, they have to be implemented from a position of strength, not weakness, and Putin is the only Russian up to the job.
            The West should be supporting him.
            I cite Godwin’s law.

          6. Anonymous says:

            Democracy requires strong independent institutions. Democracy requires a free press. Democracy tolerates dissent. Democracy means zero censorship. Democracy recognises foreign countries right to self determination.

            Democracy cannot be imposed by a “strong leader”

          7. therrawbuzzin says:

            Democracy needs protection whilst these independent institutions establish themselves and gain their strength.

            Our press has shown that it has needed to be regulated.

            Democracy tolerates nothing of the sort:


            Democracy means zero censorship?
            See above.
            The right to self-determination does not include the EU’s toppling of the legitimate govt. of Ukraine, replacing it with an anti-Russian, pro EU Quisling of its choice.
            The August 1987 attempted military coup which brought down Gorbachev proves that democracy will not be allowed in Russia if there is a similar threat of disintegration, and needs the protection of a strong leadership in order to get established.
            Putin’s domestic political policy is materially different to that of EVERY TYRANT IN HISTORY.

          8. Anonymous says:

            You are entitled to your own opinion. I have detailed why I think the Russian state security appartus is not to be trusted. Alan Clark In “Barbarossa” writes that their was little difference bar language between the NKVD and the Gestapo.

            As to Ukraine, your definitions are incorrect. The EU did not instigate or arm a military coup. They offered a trade deal, which Ukraine could sign or reject.

            Ukrainians bought down a corrupt tyrant, in a manner similar to the poll tax protests that ended Maggie’s leadership.

            Ukrainians had an election, which Poroshenko won. To popular acclaim, he chose economic agreement with Europe. It’s simple – compare Belarus’s economy, and development statistics against Poland. The EU is relatively well run and rich, do you know how the 99% live in Belarus ?

            The “novo Rossiya” rebels would have no chance of withstanding the police and army unless supplied by a foreign state. They could not shoot down Ukrainian airforce planes unless supplied by a foreign state with sophisticated and expensive anti-aircraft missiles. The foreign coup is against Poroshenko and the evidence of Russian military intervention is conclusive.

            Also the judgement of these facts by world leaders is very clear. Condemnation and sanctions. Refusal to deliver frigates from France. Stengthening of NATO defences and commitments in Eastern Europe.

          9. therrawbuzzin says:

            I think you are prejudiced against Russia, and that clouds your vision.
            The reactions of states who have imho, involvement in the overthrow of the Ukrainian Govt. are neither surprising, nor corroboration of your position.

          10. Jer says:

            Speaking to an intelligent, nationalist, Ukrainian colleague he said one thing that casts light on the above. “What recent events have shown us about the Ukrainian army is that there is no Ukrainian army”.
            Speaking to them, and to intelligent Russian colleagues also I can say with confidence that there is little common ground between the parties.
            Note also that Russian nationalism is noticibly on the rise in the last year or two, and Putin is a buffer against that, not the agent driving it.

  3. dutch says:

    Zimbabwe is now using the US dollar so there’s Plan B.

    1. Anonymous says:

      Hi Dutch

      When the debate arose about the UK as a whole moving to the Euro I always wondered why no-one suggested the US Dollar which would have been a better fit. So actually Scotland might consider it although like the rest of the UK they seem set to ignore it.

  4. forbin says:

    Hello Shaun,

    “…but it might want and need interest-rate changes which it cannot have….”

    Ah the perils of a currency union …. just ask Cyprus or Greece…..

    Then sure as day if Holyrood wishes to run the country , they cannot have the Westminster dog wagging the Scottish tail …… they , if not at first, will have to go the Scottish pound way……


    1. Anonymous says:

      Hi Forbin

      I am not entirely clear why the Yes campaign has not pressed for Scotland to have its own currency and central bank. Then all aspects of economic policy would be in its own hands.

      1. therrawbuzzin says:

        Lack of control of monetary policy is a bigger problem within the Union than without, as an iScotland will have the fiscal powers to mitigate/compensate.

  5. Anonymous says:

    “The exchange rate will fluctuate with developments in the larger rUK economy rather than that of Scotland itself. Interest-rates will be set by the Bank of England to suit the rUK economy which may or may not be appropriate for Scotland.” –

    It’s not clear to me how this is different from today.

    “The whole situation about monetary policy post a vote for Scottish independence has had a very low standard of debate with both sides posturing.”

    This is correct, and should not be surprising. Posturing is the nature of the debate. The more useful analysis is to reason on the psychology of what may happen afterwards. Would the posturing continue? I doubt it. Instead there will be negotiations in the best interest of all parties. And it seems to me that something similar to the status quo – certainly in the short, multi-year term while negotiations continue – will be the result.

    Then, the many proportionally-represented parties, can advocate for different currency plans. I’d like to see a purely digital currency, and a 100% collatoralised banking system, with money-creation instead tied to a moving-average-velocity algorithm:

    “Scotland has a large financial and banking sector”

    Could you be more explicit about this please? What proportion of the economy is investment and fund mangagement, fully collatoralised or with no assets (as advisory) and what proportion involves money-creation and requires LoLR protection? Is – as I suspect – the vast majority of money-creation tied to loans for land purchase (mortgages), which land is unlikely to go away? (The land may fall in value if Scotland is poorly governed, but given the global desire to park the global surplus in walkable, climate-change-safe-ish land, I don’t see a huge risk.)

    “you could argue that joining in a larger currency is a way of attempting to avoid both possible petro-currency status”

    This is very interesting, and one of the key uncertainties. Should Scotland’s “natural” currency be cheaper than Sterling, because Sterling is propped up by London and Scotland is poorer, or should it be more expensive, because oil?

    In my opinion, the best resolution to the conundrum would be a separate currency (digital and with velocity-algorithm monetary policy instead of central bank, as above) and an oil fund.

    1. Anonymous says:

      Hi Neil and welcome to my part of the blogosphere

      In answer to your first question as we stand today the Bank of England is supposed to take Scotland’s circumstances as part of its deliberations whereas post any Independence vote it would not. Mind you other regions argue that they get ignored too so it is a moot point.

      As to the currency issue I thin that a new Scottish Pound would be propped up by the oil price and would therefore be more expensive. For example Scotland would have a strong trade position. The exact impact would depend on the oil price and assume that it will tend to trend higher over time.

      As to size of the Scottish banking sector it is no great surprise that this is disputed. The UK government tells us this.

      ” By contrast, Scottish banks have assets totalling around 1254 per cent of an independent Scotland’s GDP”

      The Yes campaign say that this is too high but I have not seen a specific number in reply from them.

  6. therrawbuzzin says:

    The point about monetary independence is that it’s supposed to be out of Westminster’s hands too.
    With economies so similar, there shouldn’t be a Greece/Germany problem like with the Euro, so, although there could be a divergence of economies, that is only likely to be the case IF THE SCOTTISH ECONOMY proves too strong, and so we’d benefit, in terms of exports, from a Scottish currency.
    As far as LOLR goes, I’d expect Westminster, quite rightly, to insist that, for Scottish banks to enjoy the security of BoE as LOLR, they’d have to be regulated to at least the same degree as English banks.
    In effect, the only worry for rUK WOULD BE ITS OWN BANKING REGULATION.
    Debt: As I’ve posted before, George Osborne laid claim to ALL UK debt, IN ALL CIRCUMSTANCES, when he made the “Walk away from the UK, walk away from the £ speech.
    This means that rUK will remain SOLELY responsible for debt servicing and repayment after Independence.
    If Scotland negotiates a share of UK debt, we pay it & interest on it to LONDON, not to the markets.
    As such, a default is not possible.
    The point about refusing to take on UK debt, is that lthe UK has non-Geographic assets like the Bank of England (nationalised 1946) which belong to the UK as a whole. YES’s argument is: if Scotland is refused access to its share of those non-geographic assets, which have, in part, been paid for with the UK debt and Scottish taxes, then it is not reasonable to expect us to take on a share of the debt.
    Lose your share of the house, but keep up the mortgage payments?
    Uncertainty: a lot of it can be dispelled with commonsense thinking, and it has been done.
    The Economic and Social Research Council has stated that it believes that, even if Scotland had to use Article 49 and not 48 for EU entry, it would be a de facto member in the interim.
    I mean, it’s bleedin’ obvious; nobody wants 1/4m EU citizens who live and work in Scotland to no longer be legally entitled to do so.
    NATO, the bleedin’ obvious, look at Scotland’s geographical position, strategic imperative that Scotland becomes a member on Independence.
    The rest? Well the real shame about this campaign is that uncertainty is the strategy of Westminster.
    It doesn’t want the people of Scotland to view the real alternatives, and to vote on them, it wants the Scots to cling to UK out of fear of the unknown.
    The thing is, the way Westminster has gone about it, has, doomed the Union, even if Scotland votes NO on Sept 18th.

    1. Anonymous says:

      Hi therrawbuzzin

      The situation as to how Scottish banks would be treated if they got in to difficulties post Independence needs nailing down. There are phases when a central bank might need to provide liquidity and help and that is not the time for discussing with the Scottish Treasury who pays and how much. Not fully sorting such issues made the Euro crisis worse than it needed to be and it had an advantage in that there were still national central banks which deployed their own funds at times.

      Under current plans Scotland would have no such central bank to fall back on in an emergency.

      1. therrawbuzzin says:

        The Adam Smith Institute RECOMMENDS that Scotland has no Central Bank, and the removal of limited liability in the sector, as this would pressure shareholders into enforcing banking prudence, and end moral hazard, however, there is international convention on this, and it is that banks are supported directly in proportion to the business done in the country.

        Professor Andrew Hughes Hallett,

        The real point here, and this is the real point, is by international convention, when banks which operate in more than one country get into these sorts of conditions, the bailout is shared in proportion to the area of activities of those banks, and therefore it’s shared between several countries. In the case of the RBS, I’m not sure of the exact numbers, but roughly speaking 90% of its operations are in England and 10% are in Scotland, the result being, by that convention, therefore, that the rest of the UK would have to carry 90% of the liabilities of the RBS and Scotland 10%. And the precedent for this, if you want to go into the details, are the Fortis Bank and the Dexia Bank, which are two banks which were shared between France, Belgium and the Netherlands, at the same time were bailed out in proportion by France, Belgium and the Netherlands. And furthermore the Government itself – of which Michael Moore, naturally, is a member – has already made its calculations of what Scotland’s own contribution to the bailout would have been. And that comes to… because I looked the numbers up and I used the latest GERS, that comes to about £0.9 billion, and not that [word unclear] £470 billion, or whatever you said to start with. So that’s on the basis of the sharing, so his own Government is already admitting that the sharing was going on. The last point I would make is by calculations from the Treasury and elsewhere, the cost of the bailout is actually largely in terms of interest charges in … and so on of loans that were made. The rest was actually guarantees, and therefore no money has actually changed hands in that sense. Of course, that makes it, of course, altogether cheaper, but as I said at the beginning, the real point is that it’s always the case here with bailouts of this kind – it’s shared across the countries. I might point out that it’s also… it’s not just the UK Government, but the US government, in the form of the Federal Reserve, bailed out on liquidity basis both RBS and HBOS. I think it was about $200 billon for HBOS and about $400 billion for RBS. That’s another example of international sharing.


        So just to be clear, then, I mean, if we assume that Scotland had been independent in 2007, just before this whole catastrophe began, Scotland would have only been responsible for bailing out that percentage of the bank activity taking place inside Scotland. The rest of the UK, as the… you know, Britain would then have become, would have been responsible for all of the bailout for their activities in the City of London where they would have been regulated by the English authorities.


        Yes, right – that’s the convention on this kind of activity. Yes, correct.


        But the point about that is really that would make – if you’re correct – that quite flatly makes Michael Moore and a previous secretary of state, Jim Murphy, absolutely wrong on this point.


        Absolutely. There’s no other way of putting it. That’s how it’s done, and, I mean, it’s not just within the UK – as I was pointing out, it’s within the eurozone exactly the same thing’s been happening, and that’s the way these bank arrangements work. And, of course, an independent Scotland would have been perfectly entitled to say, “We’ll pay whatever that 10% figure would be, or we’ll guarantee that much, and if you don’t want to guarantee the rest of it, then, of course, one of the bigger banks in the rest of the UK – 90% of the RBS – will go down and hurt the rest of the UK far more than it would hurt Scotland”. So I think there’s no difficulty in persuading people to keep to that convention.


        When you say they’re international conventions, presumably the UK has signed up to those?


        No, I say it’s convention. I don’t know whether there’s a treaty saying you do this, but this is a convention, and obviously if the UK has signed it up, then you can see that in, you know – and signed up in inverted commas – you can see that’s the case, first of all because of the American interventions already had happened for both RBS and HBOS, and secondly because the Government’s own calculations of what the Scottish contribution imputed to the Scottish budget – just short of £1 billion – also following a similar convention. So it’s something which they do already.


        So he was actually saying this in the House of Commons that Scotland would be liable for £27 billion at the same time as his own Government had already billed Scotland for less than £1 billion.


        Right. Actually, in effect, that’s what he’s saying. Now, I mean, it’s possible he didn’t know because he hadn’t gone through the accounts at that point, or it’s possible he was imagining a view [unclear – as heard] – and in some sense, and again in inverted commas – fine Scotland. You know, they’d make some other arrangements. But not being party to what his thinking was I can’t tell you why he said that, but the, you know, standard conventions and, indeed, the arrangements which his Government has gone through, implies a much smaller number.


        You’re an academic, obviously, but, I mean, what do you make of a situation where, you know, the… Scotland’s representative in the Cabinet can stand up in the House and make a statement of that kind? I mean, is that informing the debate?


        I think it’s somewhat misleading, to put it mildly. I’ve no idea what his motivations in saying that would be, other than his political position is buttressed by making a statement of that kind, but I’ve no idea what his motivation really is. It’s entirely possible that he doesn’t actually know what the arrangements typically are, but, you know, when the Council of Economic Advisers existed in a previous administration in Scotland, George Mathewson from the RBS was making the same points to the Scottish Parliament’s select committee on the economy. So, you know, this is not… what I’m saying is not unusual; it may not be widely known by everybody else, but it’s not unusual.

  7. Eric says:

    Hi Shaun,
    A good illustration of why a “Yes” vote would be a leap in the dark – for everyone. (So you don’t think the € is an appropriate route!)

    An independent Scotland may let bust banks actually go bust. Then we might discover if ” the alternative would be worse ” or not.

  8. therrawbuzzin says:

    TBH, I’ll believe in Carney’s proposed interest rates rises when I see them.
    That being the case, there will be no change to monetary policy post-Independence.
    Fiscal policy will however change markedly, from pseudo-austerity, which affects only social provision, to a push for growth from an independent Scotland.

  9. therrawbuzzin says:

    Central bank interest rates are going nowhere fast. The ECB rate is 0.05% and the BoE rate has been 0.5% for six years, and, since the banks are still in trouble, will probably be so for another six years.

    Interest rates in the economy have, because of banks increasing margins to rebuild their balance sheets, been divorced from Central Bank rates for a long time now, and is likely to continue for some time.

    The point being, in either a currency union, or sterlingisation, the only danger, in the short-to medium term, to a Scottish economy would be that we couldn’t raise interest rates in the event that our economy started to overheat.
    Fiscal measures, although unpopular, could easily be used as a substitute, and monetary measures have proven not to be too reliable.
    In fact Imperial nudists spring to mind.

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