CROATIA: SCENESETTER FOR CODEL BEAN

UNCLAS SECTION 01 OF 02 ZAGREB 000664

SIPDIS

E.O. 12958: N/A
TAGS: PREL PGOV HR
SUBJECT: CROATIA: SCENESETTER FOR CODEL BEAN



1. You are coming to Croatia at an exciting time, as this young
nation prepares to take its place among democratic, free-market
members of the Euro-Atlantic community with a level of freedom,
security, and prosperity that were unimaginable fifteen years ago.
Croatia will very likely receive an invitation to join NATO next
spring, is currently in accession negotiations with the EU and is
proving itself an important ally in advancing the USG's regional and
global interests.

GLOBAL CONTRIBUTOR TO STABILITY AND SECURITY
--------------


2. Just a decade ago, Croatia was a consumer of international
security resources, with U.N. forces ensuring the peaceful
reintegration of the eastern Slavonian region after the
disintegration of the former Yugoslavia. Today, Croatia is an
exporter of stability, both in the region and globally:
- as a strong, active partner in the Adriatic Charter, an initiative
including Albania and Macedonia to promote democratic and defense
reforms on the road to NATO integration;
- as a provider of soldiers and police to 11 UN peacekeeping
missions from Kosovo to East Timor, with plans to contribute to five
more;
- as a significant contributor to NATO operations, with a 172-troop
ISAF contingent in Afghanistan (set to grow to 200 by the end of
2007 and 300 in 2008),and liaison officers involved in Operation
Active Endeavor, NATO's counterterrorism mission in the
Mediterranean;
- as a host of NATO exercises, including the largest NATO civilian
disaster response exercise ever held in a non-member state last May.



3. Croatia's constructive engagement within the region continues to
be one of its greatest contributions to stability. Croatia just
hosted a high-level meeting on Southeast Europe in Dubrovnik and
concluded its successful chairmanship of the South East European
Cooperation Process in May with the formation of a permanent
Regional Cooperation Council. In the past four years Croatia also
has concluded several key regional agreements. For example, it
signed the Central European Free Trade Agreement in 2006, bringing
together the former Yugoslav republics (excluding Slovenia),
Albania, Moldova and Kosovo together in an effort to bolster free
trade relations among members and to strengthen WTO commitments and
EU trade practices. We have also had an increasingly productive
dialogue with Croatian leaders on Southeastern Europe's "unfinished
business" in Bosnia and Herzegovina and Kosovo.
Relations with Serbia remain sensitive, but President Stjepan Mesic
and Prime Minister Ivo Sanader both have good relations with their
counterparts in Belgrade and firmly support Serbia's future in
Europe and NATO.

COMMITMENT TO DEMOCRATIC VALUES
--------------


4. Croatia has come a long way since the 1990s, and the Government
has focused particularly on democratic reforms, recognizing they
have a significant impact on NATO and EU accession. Croatia has
achieved concrete progress on key areas, with the majority of
OSCE-related issues largely resolved. While judicial reform remains
an area for further reforms, significant progress has been achieved:
court backlogs are shrinking, and Croatian courts are trying war
crimes by people of all ethnicities in a fair manner, including
high-profile war crimes cases and cases transferred from The Hague
Tribunal. Many countries have recognized this progress, most
recently with the OSCE Chairman in Office calling for the closure of
the OSCE mission by the end of the year.


5. On refugee returns, Croatia has welcomed back more than 125,000
refugees of Serb ethnicity and the Government has largely completed
its programs of home repossession and reconstruction, infrastructure
development, and has begun housing programs for former tenants of
socialized apartments. In addition, it has agreed to meet by the
end of 2007 specific benchmarks in consultation with the
international community on outstanding issues relating to its
housing program and to pension credit for years worked under the
Serb administration.


6. Croatia is preparing for parliamentary elections this fall, with
all major parties supporting platforms of Euro-Atlantic integration,
increased anti-corruption initiatives, and continued market reforms.
The two major parties, the ruling center-right Croatian Democratic
Union (HDZ) and the left wing opposition Socialist Democratic Party
(SDP) are roughly even in the polls, signaling a tight race to
decide who will form Croatia's next government.

STEADY GROWTH, BRIGHT FUTURE
--------------


7. Croatia, together with Slovenia, was the economic engine of the
ex-Yugoslavia, accounting for a large portion of the industrial
output and hard currency revenues generated by its tourism sector.
Damage and dislocation from the war, the ensuing collapse of the
manufacturing and tourism sectors, combined with a mismanaged
privatization effort during those years, crippled Croatia's economy.
Political changes in 2000 brought with it economic reforms, with
the first years of this decade showing increasingly positive
economic trends.


8. Croatia's economy has enjoyed steady growth since 2000, led by
strong tourism receipts (tourism makes up 20% of GDP),a buoyant
construction industry and growing mortgage and consumer lending.
Although Croatia has grown at a slower rate than other economies in
Central and Eastern Europe, 2006 growth came in above expectations
at 4.8 percent. New figures for the first quarter of 2007 show the
economy growing at a brisk 6.9 percent. Unemployment, although
still quite high, has trended steadily downward, dropping under 12%
for the first time in 2006. The average monthly gross salary in
early 2006 was about $1,159. Although Croatia's per capita GDP of
$9,000 is high by regional standards and is reflected in a
relatively high standard of living, faster growth rates will be
essential to closing the gap between Croatia and its wealthier
western European neighbors.


9. The opening of EU accession talks in 2005 brought new confidence
in Croatia's economic future, particularly as the Government has
been forced to implement long-overdue reforms. Nevertheless, some
significant problems still remain. Corruption, lack of
transparency, an inefficient judiciary and an overly-large state
role in the economy continue to hamper Croatia's growth. Croatia
has made important improvements in its business climate in recent
years, but more remains to be done to realize the Government's
strategy of boosting foreign investment and quickening the pace of
economic growth.

BRADTKE