Croatia’s government makes a strong start

Sanader (left) and Prodi

In foreign affairs, Sanader has picked up where the outgoing prime minister, Ivica Racan, president of the Socijaldemokratska Partija Hrvatske, the Social Democratic Party of Croatia (SDP), left off.

To foreign politicians, Racan had personified the new and modern Croatia that sought good relations with western Europe. They approved of him. Now, if anything, Sanader has increased the sense of urgency underlying efforts to secure Croatian membership of the great western alliances.

He has been tireless in his efforts to woo those outside Croatia whose approval it needs to fulfil its ambitions of joining Nato and the EU. In the first few weeks of 2004, Sanader met Irish prime minister Bertie Ahern, EC president Romano Prodi, Austrian chancellor Wolfgang Schüssel, Italian prime minister Silvio Berlusconi, the Netherlands' Jan-Peter Balkenende, Luxembourg's Jean-Claude Juncker and Portugal's José Manuel Durão Barroso.

Only Gerhard Schröder's ill health saved the German premier from being caught up in this whirlwind of Croatian diplomacy in February.

Sanader has also held meetings with his counterparts in Romania and Turkey, Slovakia and Montenegro as well as with Javier Solana, EU high representative for common foreign and security policy, and Nato secretary general Jaap de Hoop Scheffer and dozens of other officials.

Sanader has also found time to entertain US defence secretary Donald Rumsfeld in Zagreb. As well as being eager to join the EU, Croatia is keen to be seen as an ally of the US in the war on terror and a fully paid-up member of the coalition of the willing.

Key decisions at home have been taken quickly. Soon after its victory in last November's election, the HDZ struck a deal with the main Serb political party in Croatia over minority rights. This is important: accommodating restoration of property to returning Serb refugees who fled Croatia during the homeland war is a key test for gaining EU approval this spring to begin a formal process of preparation to join.

Significantly, the new government has cooperated with the International Criminal Tribunal for the former Yugoslavia. Two retired Croat generals, Mladen Markac and Ivan Cermak, appeared before the UN war crimes tribunal towards the end of last month. They are charged with crimes including murder and persecution. Both pleaded not guilty.

When the new government took office at the end of 2003, investors in Croatia had been a little nervous. They did not know quite what to expect.

From January 2000 to November 2003, the SDP-led government had tried to overhaul the economy, establish a western European style of democracy and rule of law and to secure Croatia's future as an independent nation inside the EU. In April 2003, Croatia had formally signed up to a stabilization and association agreement with the EU.

The SDP-led government had also won the support of the IMF, which announced a largely favourable review of the country's economic performance under its $151 million stand-by arrangement in the run-up to last year's elections.

So when Croatian voters, perhaps disillusioned by the high level of unemployment that has accompanied economic transition, turned out the SDP last November, no-one knew quite what to expect from the HDZ.

The HDZ was led by president Franjo Tudjman until his death in December 1999. Tudjman led Croatia to independence during the homeland war of 1991-1995 that followed the break-up of Yugoslavia. But in later years his authoritarian government alienated neighbours. Tudjman refused to hand over to the International War Crimes Tribunal army commanders suspected of murdering Serbs during the homeland war. Meanwhile, the economy foundered amid widespread corruption and the HDZ lost power in the elections that followed Tudjman's death.

But worries about the HDZ's return to power have been quickly laid to rest. "From its very first day the government has provided a positive surprise," says Milivoj Goldstajn, member of the management board and director of the capital markets and large corporates division of Zagrebacka banka, Crotia's largest bank. "It has taken a lot of initiatives on the external front," he says. "But on the macroeconomic front," he cautions, "it's a little early to tell." He continues: "If we gain access to EU funds and technical assistance funds, we will be able to move forward much faster."

Bozo Prka, president of the management board of Privredna Banka, agrees that the new government has achieved a lot in the first three months in external relations. But he lays out a demanding set of economic challenges ahead. "We expect the government to improve the overall competitiveness of the Croatian economy by solving legal system issues, improving the country's capacity to enforce the law, reforming education and boosting the development of small and medium-size enterprises."

Prka, a former finance minister of Croatia, sits on the national competitiveness council. He suggests that the privatization and restructuring of the banking system, now operating largely under foreign ownership and producing strong results, provides a good model for the rest of the economy. The banks have shed jobs in search of modernization and profitability, and now do a good job of providing credit to corporates and individuals while returning healthy taxes on their profits to the government. Can the rest of the economy hope to follow this model?

Much of the heavy industry of the former Yugoslavia was centred in Croatia. It was mainly geared to Comecon countries and has had to reinvent itself. Unemployment is around 19% but a sizeable grey economy mitigates this. Prka sees no choice but to press ahead with restructuring.

He says: "We must improve competition by disenabling monopolies. The energy sector must be addressed first, then the agriculture sector requires substantial redesign. Shipbuilding requires government restructuring – two or three yards should be put into bankruptcy."

Privredna lends to one shipyard that it regards as competitive, financially solid and well managed. Prka says: "Others are financed either through the state development bank or government transfers but that is something we should stop." For its part, Zagrebacka does not lend to shipyards, though it will finance specific projects that have a government guarantee.