Croatia became the European Union's 28th member state at the beginning of July 2013 and only the second entrant, after Slovenia, of the republics that emerged from the Yugoslav wars of the 1990s.
But after four years without growth and only limited efforts to reduce the state's role in the economy, debt and budget deficit levels breach EU limits.
The proposal followed the Commission's report published on 15 November – under the so-called ‘two-pack’ procedure (see background) – which revealed that the deficit and debt rules of the EU treaty remained unfulfilled.
The move is likely to result in Croatia being placed under an excessive deficit procedure (EDP).
Croatia's general government deficit reached 5% of GDP in 2012, and total government debt amounted to 55.5% of GDP. In the draft 2014 budget adopted on 4 December, the Croatian government envisaged that the deficit would stay above 3% of GDP over the entire period 2013-2016.
The Commission's Autumn Economic Forecast found that on current policies the Croatian deficit will increase to 5.4% of GDP in 2013 and 6.4% of GDP in 2014.
The Commission recommended that Croatia pull out of excessive deficit situation by 2016, setting out budgetary targets to achieve this.
Excessive deficits should normally be completed one year after they have been identified – that would mean 2015 in this case – unless there are special circumstances, such as here, where the Commission deems that Croatia needs longer to implement structural reforms.
EU finance ministers will consider the Commission’s recommendation when they meet next year, on 28 January, and are likely to set Croatia a deadline of 30 April to begin putting measures in place to deal with the deficit.