Identifier
Created
Classification
Origin
06ZAGREB192
2006-02-14 12:00:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Zagreb
Cable title:  

INDUSTRY AND REAL ESTATE POSSIBLE BUMPS IN

Tags:  ECON ECIN EU HR 
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VZCZCXRO6413
RR RUEHAG RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN RUEHLZ
RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHVB #0192/01 0451200
ZNR UUUUU ZZH
R 141200Z FEB 06
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC 5698
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
UNCLAS SECTION 01 OF 02 ZAGREB 000192 

SIPDIS

SENSITIVE
SIPDIS

EUR FOR EUR/SCE

E.O. 12958: N/A
TAGS: ECON ECIN EU HR
SUBJECT: INDUSTRY AND REAL ESTATE POSSIBLE BUMPS IN
CROATIA'S ROAD TO THE EU

REF: ZAGREB 135

UNCLAS SECTION 01 OF 02 ZAGREB 000192

SIPDIS

SENSITIVE
SIPDIS

EUR FOR EUR/SCE

E.O. 12958: N/A
TAGS: ECON ECIN EU HR
SUBJECT: INDUSTRY AND REAL ESTATE POSSIBLE BUMPS IN
CROATIA'S ROAD TO THE EU

REF: ZAGREB 135


1. (SBU) Summary and Comment: EU accession is Croatia's
top foreign policy goal and an area of unusual political
consensus. After beginning negotiations in October 2005,
the government of PM Ivo Sanader has set an ambitious goal
of accession by 2009, in time to participate in European
elections. Although most observers agree that such a
timeline is optimistic, it is not discounted as altogether
unrealistic. However, with only the initial screening
process begun, tough negotiations on several sensitive
issues lie ahead, such as weaning industry off of its habit
of generous state subsidies and liberalizing the sale of
land to foreigners. Both of these issues are likely to be
highly politicized and could derail the promised accession
timeline. Parliamentary elections due in late 2007 could
also lead to deferring some difficult decisions. End
Summary and Comment.


2. (SBU) The opening of EU accession negotiations on
October 3, 2005 marked a major political and diplomatic
victory for Croatian PM Sanader. EU membership enjoys broad
support, both within the Croatian political class and among
the general public, weathering even the highly unpopular
arrest of ICTY fugitive Gotovina. Polling after the
December 2005 Gotovina arrest showed support for EU
membership in Croatia running at 57%, with approximately 38%
opposed. However, public knowledge of the EU is scant and
the government has been criticized for its lack of an
effective public relations campaign to deepen public
knowledge and support for the EU.


3. (SBU) Procedurally, Croatia's EU accession is still very
much in its early stages. Croatian negotiating teams have
been in Brussels for the initial "screening" of Croatian
legislation against 11 of the 35 chapters of the EU
"Acquis." The government, however, has set an optimistic
timetable of concluding negotiations by 2008, with actual
accession following in 2009 in time for Croatia to
participate in European elections. As a matter of
mechanics, this timetable may not be unrealistic. Actual
"negotiations" on the individual chapters of the Acquis are
set to begin this year and run concurrently with the initial
screening of the remaining 24. Croatia has already been

preparing itself for EU membership for several years.
According to our Commission contacts, Zagreb is unlikely to
face great difficulties in bringing the remaining areas of
national legislation into agreement with the Acquis.
However, a few pitfalls lie ahead that are likely to spark
political divisions and be hugely unpopular with the public.


4. (SBU) EU accession is forcing Croatia to confront its
long-standing practice of subsidizing industry, as well as
the sensitive issue concerning the sale of land to
foreigners. Industrial subsidies consume an enormous part
of Croatia's state budget - approximately 3.0% of GDP by
most estimates. For the most part, these subsidies are
directed at a few loss-making industries where the
government is the primary shareholder and that still employ
a large number of people. The industries soaking up the
bulk of these subsidies are shipbuilding, metals, the
national railroad and the national airline. Although the
government has been under pressure for years from the IMF,
World Bank and the EU to come up with a plan to sanitize
these companies and wean them off public life support, no
effort so far has resulted in a credible plan. Previous
efforts to privatize some of the companies have met fierce
resistance from unions and local politicians, invariably
leading to a hasty retreat and yet another year of state
support.


5. (SBU) As the popularity of Croatia as a tourist
destination has increased over the last few years, so have
fears that the country will lose control of what it views as
its most valuable resource, its coast. Although foreign
nationals can already purchase property in Croatia, they are
not able to do so freely. Only nationals of those countries
that have a reciprocal agreement with Croatia can purchase
property and then only with the concurrence of the
government. In most cases, such approval is forthcoming,
but is slow and does not apply to all countries in the EU,
most notably Italy. Certain types of property, such as
"agricultural land" and many smaller islands are off limits
altogether. Nevertheless, even with the limited supply of
property available for purchase by foreigners, prices have
soared in the last few years. Croats fear that a complete
liberalization of property sales to other EU member state
nationals with their much greater purchasing power will
price them out of their own coast.

ZAGREB 00000192 002 OF 002




6. (SBU) Politicians have already begun to tap into fears
of how EU membership will affect Croatia. Neven Mimica,
opposition parliamentarian, former Minister for European
Integration and member of the multi-party parliamentary
committee supervising EU negotiations told us with a note of
irony that his own Social Democratic Party was now taking a
much more nationalistic position on property sales than when
it was in power just a few years ago. President Mesic has
spoken out frequently on this issue as well, suggesting that
coastal property remain in state hands and be given out only
as lease concessions. Possibly acting in anticipation of
this debate, the Sanader government recently announced
proposals for the state to have the right of first refusal
on the purchase of Croatia's many islands.


7. (SBU) Industrial policy and land sales are likely to be
some of the most protracted aspects of Croatia's
negotiations. Should they prove to be as inflammatory as
most observers predict, it could not come at a worse time
for the government. Not only will Croatia face
parliamentary elections in 2007, but any final bid for EU
membership will have to be put to a national referendum.
Under current law, a referendum must win a majority of all
eligible voters in order to pass. Already concerned that a
vote on EU membership under those conditions could fail, the
government has talked of introducing legislation to require
only a majority of voters who turn out.


8. (SBU) These and other potential pitfalls of EU accession
have the government nervous. Compounding this anxiety are
calls from some EU members for a cooling off period on
enlargement and fears that, if Bulgaria and Romania do not
make their Jan 1, 2007 targets, Croatia will be delayed as
well. Finally, there is the ever-present suspicion that
other EU countries want to link Croatia's accession to that
of the other states of the former Yugoslavia, a paranoia
that was further stoked by calls for a free trade area in
the Western Balkans (reftel).

FRANK