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Croatia Politics June 2020

Croatia: Early parliamentary elections called for July unlikely to dent short-term economic outlook

On 18 May, Croatian lawmakers voted to dissolve Parliament, paving the way for general elections to be called for 5 July, several months before they were originally scheduled. The vote comes amid rising support for the ruling center-right Croatian Democratic Union (HDZ) which analysts contend it seeks to capitalize on its relatively successful handling of the Covid-19 outbreak. That said, the result is highly uncertain, with the Social Democratic Party (SDP), the main opposition party which leads the center-left Restart Coalition, neck and neck in the polls. Regardless of the outcome, the short-term economic outlook is unlikely to be significantly altered, especially in light of the new governments priority of tackling the economic fallout of the pandemic.

Recent polls show that HDZ is narrowly leading the pack with 33% support ahead of the SDP with 31%. Under such a scenario, it is unlikely that either party will win an outright majority in the 151-member Parliament. A grand coalition between these two rivals is also widely considered to be off the table. Polling in third place, however, is the right-wing Miroslav Skoro Homeland Movement with 11%, to which HDZ would likely reach out for support to form a government if it were to secure victory.

The election comes against a frail economic backdrop that has been rocked by the coronavirus pandemic. GDP growth slumped to a five-year low in the first quarter, as household spending took a beating amid the containment measures imposed in March. Exports also reeled as the key tourism sector suffered due to the collapse in foreign travel. Meanwhile, the outlook for the second and third quarter has darkened drastically as the full brunt of the Covid-19 shock is felt. That said, authorities have acted swiftly through a slew of fiscal measures to respond to the crisis, which the new government will take on the responsibility of managing.

Once the pandemic subsides, one of the main challenges faced by the new administration will be to raise the economys potential growth by boosting productivity through higher R&D expenditure and the removal of red tape to stimulate investment. Moreover, it is likely that the new government will continue embarking on economic and institutional reforms as part of its path towards euro adoption.

Commenting on Croatias Eurozone membership, analysts at Scope Ratings highlighted:

“[W]e expect any new government to pursue the course for joining the single currency, and the process towards adopting the euro will continue to enforce a degree of credit-positive prudence in policymaking […] Entry into ERM II, targeted for July, would officially fix the kuna against the euro, which would be allowed to fluctuate within set bounds supported by coordinated interventions from the ECB and HNB. Entry to ERM II, and eventually the euro, would reduce risks from the economys high exposure to the euro”.

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