Should EU Cash go to Croatian Private Sector for Investment Purposes?

Lauren Simmonds

Thanks to a good pre-crisis initial capitalisation, Croatia’s banks have enough potential to continue to provide all the services they have provided so far, but should future EU cash injections go to the Croatian private sector for investments?

As Poslovni Dnevnik writes on the 3rd of January, 2021, although the second wave of the ongoing coronavirus pandemic is now at its peak, announcements of an effective vaccine and the expected natural calming down of the spread of infection with the arrival of spring 2021 gives us hope that all of those promises of domestic economic recovery will come true. At the same time, what’s more important than that growth itself is what the quality of the recovery will be, how long it will last for, and for those at HUB, the most important thing is to analyse what the role of banks could be in that saga.

Owing to a good pre-crisis initial capitalisation, banks have enough potential to continue to provide all the services they have provided so far. This potential can be applied equally to liquidity and available capital. Good projects, as well as the needs of people who will regularly repay their obligations will be financed at the lowest interest rates in Croatia’s history. How can we ensure that the start of Croatia’s economic recovery in 2021 and the availability of funds at a very low cost of capital turn into lasting recovery at high growth rates? The answer depends on how the country uses European Union (EU) funds.

It is of the utmost importance to use those funds so that as much as possible falls into the hands of the Croatian private sector, more precisely the corporate sector, in order to increase investment. Banks are ready to support such projects, because investments accompanied by favourable financial structuring strengthen the sense of trust in clients and this improves their creditworthiness in general in the long run.

An important part of European Union funds is that which is used for various financial instruments. This is of great importance when it comes to the very structure financial instruments so that they don’t crowd out the market but instead complement and improve it, in two ways. First of all, the improvement of the framework for resolving insolvency and the development of capital markets, especially venture capital funds, is imposed as a necessity to increase the economic dynamics on the way out of this terrible and unprecedented crisis. It is good that these measures are mentioned in the National Development Strategy 2030 and are in the recommendations of the EU Council to Croatia, so the implementation of these measures can now be readily expected.

Second of all, when it comes to debt instruments, the trend of sectoral and earmarked fragmentation of credit guarantee schemes needs to be reversed. The guarantee schemes of HBOR and HAMAG-BICRO, which are financed from EU funds, should be simplified, reduced in their numbers and made more flexible and transparent according to the needs of the market. This will encourage risk-taking that wouldn’t have been taken without government intervention, which directly increases investment and economic growth.

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