Inflation Soaring, Wages Stagnant: Croatian Standard May Halve

Lauren Simmonds

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As Poslovni Dnevnik writes, due to the increase in the price of energy and food, the Croatian standard could literally be halved. Then comes the big worry of price increases after the introduction of the euro in 2023. On top of that, 240,000 peoples’ bank accounts have already been blocked, Deutsche Welle writes.

“The Croatian standard of living will fall over the next few years due to rising energy prices, shocks in supply chains, as well as increased private borrowing, lending and the uncontrolled printing of money,” said Dr. sc. Marinko Skare, a rector and professor at the Juraj Dobrila University of Pula.

The Croatian population was hit by rising gas, fuel and electricity prices even before the outbreak of the war in Ukraine and the economic consequences that naturally follow, and due to shortages on the global market, a significant rise in food prices began last year.

The Croatian Government mitigated that price shock with a package of economic measures as part of which it reduced VAT on energy and certain foodstuffs.

Skare believes that the effects of these measures will be negligible: “It’s like 50 percent balances (discounts) on Trieste’s Ponte Rosso in the last century. They include two t-shirts and everything else remains at its normal price. The situation is the same with VAT: sure, the prices of napkins will fall, and the prices of all necessary consumer goods that people buy will rise. Food and energy prices will rise regardless of the government package and this price increase has already been calculated into inflation and prices. We all know that food and energy will become even more expensive, in an optimistic scenario, by around 10 to 15 percent,” said Skare.

Croatia’s entry into the Eurozone

Unfortunately, he added, the Republic of Croatia is almost entirely dependent on the tourist season and not a great deal else: “A once respectable industry-based economy has turned into the Dominican Republic or the Maldives. These measures must go towards energy self-sufficiency (LNG, solar panels), with the prolongation of Croatian Eurozone entry,” believes the Pula-based economist.

Namely, according to him, the introduction of the single currency from the beginning of 2023 will bring a further wave of inflation to Croatia, which is something nobody needs at this moment in time.

“The experiences of other countries have shown that the growth of prices on an annual basis after the introduction of the euro was on average 2 to 2.5 percentage points. Of course, this isn’t the right timing for the introduction of the euro in Croatia because the only instrument you have in the fight against inflation is monetary policy,” he explained. In his view, a single monetary and fiscal policy at the EU level is just another economic myth.

“The economies of Italy, Germany, Ireland and France have almost no similarities with the economy of Croatia. How will you solve the problem of inflation in Croatia through the ECB? In addition, the ECB is the worst of all, the ship is sinking, but the music is still playing, money is being printed, interest rates are at historically low levels, and inflation is going wild,” stated Skare.

When he talks about the more optimistic variant, he predicts the current level of inflation to remain as it is over the next three years. However, if the war in Ukraine escalates and leads to energy and trade wars, he believes there are no limits to rising prices in the coming years, and that doesn’t bode well whatsoever for the Croatian standard as we know it now.

Everything points to an enormous crisis

“The world has never been closer to a new Great Depression than it is now, possibly bigger than the one back in 1929. Unfortunately, all the causes of the 1929 crisis are before us: the possible collapse of the stock market (the uncontrolled printing of money) and global trade (a global pandemic and the war in Ukraine), the unadjusted policies of governments around the world and the potential decline in international lending and borrowing, future monetary contraction, bank panic and bankruptcies,” explained Skare.

He believes that the real Croatian standard could fall by up to 30 percent, and if the Ukraine-Russia war continues as it is and the ECB’s policy doesn’t adapt and change, he believes that a fall of up to 50 percent in the Croatian standard is also possible. On the other hand, he says there is no room for wage and pension growth to the extent that it would mitigate the fall in the real standard due to rising prices as it would lead to hyperinflation and stagflation on an unprecedented scale.

Everything is more expensive, yet the average Croatian income is the same

Along with inflation, the number of people across the country living on the brink of poverty is growing, as is the number of those who have had their bank accounts blocked due to accumulated unpaid debts. According to the latest data from the Financial Agency (Fina), more than 240,000 people have had their bank accounts blocked due to collective overdue debts of 24.8 billion kuna, along with interest.

Kresimir Sever, the president of the Independent Croatian Trade Unions, noted that the Croatian standard was greatly endangered even before the wave of price increases that started last year.

“According to the Central Bureau of Statistics (CBS), about 27.2 percent of the monthly cost of the average Croatian household falls on food and non-alcoholic beverages, and 17.7 percent on housing costs, which includes energy bills. Since these are areas where price increases have been very much pronounced, it’s clear that this is causing an extremely strong blow to a wider circle of people.

”Households in rural areas, those who are single and/or retired, those with more children, the unemployed and the sick are groups of people who are particularly at risk,” warned Sever.

“The Government doesn’t have many mechanisms at its disposal”

The at-risk-of-poverty rate for the year 2020 stood at 18.3 percent in Croatia, and since these official figures are solidly late, the real situation is much worse, according to Sever. It is realistic to expect a further wave of rising prices for food, transport, housing, and consequently other goods.

“Apart from the economic measures it has taken, the government doesn’t have many mechanisms at its disposal. A little more can be done in the area of ​​excise duties on fuel, the VAT on electricity can be lowered from the current 13 to 5 percent. However, when it comes to lowering VAT, for example on petroleum products, there’s no guarantee that, precisely because of the freedom to set prices, they will be reduced at all. When it comes to the possible freezing of the prices of some foods, there may be shortages because the seller doesn’t even want to offer these products because such prices reduce his profit,” concluded Kresimir Sever.

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