GOC STRUGGLES TO COMPLETE 2009 BUDGET AS UNIONS REFUSE TO

UNCLAS ZAGREB 000826

TREASURY FOR OFFICE OF INTERNATIONAL AFFAIRS
DEPARTMENT FOR EUR/ERA AND EUR/SCE

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN HR
SUBJECT: GOC STRUGGLES TO COMPLETE 2009 BUDGET AS UNIONS REFUSE TO
MODERATE WAGE DEMANDS


1. SUMMARY: The Croatian government's efforts to control
expenditures by reaching an agreement on a reduced 2009 pay increase
for approximately 240,000 state employees reached a standstill
during the latest round of negotiations with employee unions on
December 2. The unions rejected the government offer and demanded
that the collective agreement signed in 2006, which guarantees an
annual 6-percent increase, be respected. Without an agreement, the
GOC now faces the difficult decision of whether to default on the
2006 agreement or find other areas for cuts in order to balance the
budget. Either avenue will be extremely unpopular, but with sources
of deficit financing severely constrained, the government will have
no choice. END SUMMARY.


2. On December 2, at the last of several negotiating sessions over
the past two weeks, the GOC and the public-sector unions failed to
reach agreement on wage increases for 2009. The unions demand that
the government hold up its end of a collective agreement signed in
2006, which stipulated a 6-percent raise for 2009. The government
contends that the collective agreement was made before the onset of
the current financial crisis and that the situation demands
flexibility from unions. As a compromise, the government proposed a
2-percent raise in April, a 1.5-percent raise in October, and for
employees in the science and academic sectors, an extra 2-percent
raise in August. The unions rejected this offer, saying the
government has not convinced them it does not have the 1.5 billion
HRK ($273 million) needed for the full 6-percent raises. Deputy
Prime Minister Jadranka Kosor responded that the government does not
have the necessary funds and may simply have to default on the 2006
collective agreement. According to one press report, however,
defaulting on the agreement could open the government up to
thousands of private lawsuits by employees. The government will
decide on the matter on December 5, with the goal of sending the
proposed 2009 budget to parliament the following week.


3. The unions have threatened to strike if the pay increase demands
are not resolved, though the public has not shown strong support for
their demands. A member of PM Sanader's newly established Economic
Council commented publicly that the government's proposal of a
3.5-percent raise would match inflation growth and thus put state
employees in a better position than many in the private sector. One
columnist for a prominent daily wrote that the unions, with their
"unrealistic" demand of 6 percent, had shown no desire to
compromise. He predicted the "war" ahead for the unions would be not
with the government but with the rest of Croatia's workforce, which
would foot the cost of any raise while facing cut-backs of its own.


4. COMMENT: With his top economic advisors all agreeing the
government must avoid a budget deficit for 2009, Sanader faces a
difficult decision this week in choosing the final cuts. He has
publicly shown reluctance to cut spending on major infrastructure
projects, saying projects such as the Peljesac Bridge (circumventing
the Bosnian coastal corridor) are "a matter of national pride." But
with over 14 billion HRK ($2.5 billion) already cut from the budgets
of ministries and other government programs, infrastructure cuts and
reduced wage increases remain the only options apparently still
under consideration. END COMMENT.

BRADTKE