VZCZCXRO6413
RR RUEHAG RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN RUEHLZ
RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHVB #0192/01 0451200
ZNR UUUUU ZZH
R 141200Z FEB 06
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC 5698
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 ZAGREB 000192 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
EUR FOR EUR/SCE 
 
E.O. 12958: N/A 
TAGS: ECON ECIN EU HR
SUBJECT: INDUSTRY AND REAL ESTATE POSSIBLE BUMPS IN 
CROATIA'S ROAD TO THE EU 
 
REF: ZAGREB 135 
 
¶1.  (SBU) Summary and Comment:  EU accession is Croatia's 
top foreign policy goal and an area of unusual political 
consensus.  After beginning negotiations in October 2005, 
the government of PM Ivo Sanader has set an ambitious goal 
of accession by 2009, in time to participate in European 
elections.  Although most observers agree that such a 
timeline is optimistic, it is not discounted as altogether 
unrealistic.  However, with only the initial screening 
process begun, tough negotiations on several sensitive 
issues lie ahead, such as weaning industry off of its habit 
of generous state subsidies and liberalizing the sale of 
land to foreigners.  Both of these issues are likely to be 
highly politicized and could derail the promised accession 
timeline.  Parliamentary elections due in late 2007 could 
also lead to deferring some difficult decisions.  End 
Summary and Comment. 
 
¶2.  (SBU) The opening of EU accession negotiations on 
October 3, 2005 marked a major political and diplomatic 
victory for Croatian PM Sanader.  EU membership enjoys broad 
support, both within the Croatian political class and among 
the general public, weathering even the highly unpopular 
arrest of ICTY fugitive Gotovina.  Polling after the 
December 2005 Gotovina arrest showed support for EU 
membership in Croatia running at 57%, with approximately 38% 
opposed.  However, public knowledge of the EU is scant and 
the government has been criticized for its lack of an 
effective public relations campaign to deepen public 
knowledge and support for the EU. 
 
¶3.  (SBU) Procedurally, Croatia's EU accession is still very 
much in its early stages.  Croatian negotiating teams have 
been in Brussels for the initial "screening" of Croatian 
legislation against 11 of the 35 chapters of the EU 
"Acquis."  The government, however, has set an optimistic 
timetable of concluding negotiations by 2008, with actual 
accession following in 2009 in time for Croatia to 
participate in European elections.  As a matter of 
mechanics, this timetable may not be unrealistic.  Actual 
"negotiations" on the individual chapters of the Acquis are 
set to begin this year and run concurrently with the initial 
screening of the remaining 24.  Croatia has already been 
preparing itself for EU membership for several years. 
According to our Commission contacts, Zagreb is unlikely to 
face great difficulties in bringing the remaining areas of 
national legislation into agreement with the Acquis. 
However, a few pitfalls lie ahead that are likely to spark 
political divisions and be hugely unpopular with the public. 
 
¶4.  (SBU) EU accession is forcing Croatia to confront its 
long-standing practice of subsidizing industry, as well as 
the sensitive issue concerning the sale of land to 
foreigners.  Industrial subsidies consume an enormous part 
of Croatia's state budget - approximately 3.0% of GDP by 
most estimates.  For the most part, these subsidies are 
directed at a few loss-making industries where the 
government is the primary shareholder and that still employ 
a large number of people.  The industries soaking up the 
bulk of these subsidies are shipbuilding, metals, the 
national railroad and the national airline.  Although the 
government has been under pressure for years from the IMF, 
World Bank and the EU to come up with a plan to sanitize 
these companies and wean them off public life support, no 
effort so far has resulted in a credible plan.  Previous 
efforts to privatize some of the companies have met fierce 
resistance from unions and local politicians, invariably 
leading to a hasty retreat and yet another year of state 
support. 
 
¶5.  (SBU) As the popularity of Croatia as a tourist 
destination has increased over the last few years, so have 
fears that the country will lose control of what it views as 
its most valuable resource, its coast.  Although foreign 
nationals can already purchase property in Croatia, they are 
not able to do so freely.  Only nationals of those countries 
that have a reciprocal agreement with Croatia can purchase 
property and then only with the concurrence of the 
government.  In most cases, such approval is forthcoming, 
but is slow and does not apply to all countries in the EU, 
most notably Italy.  Certain types of property, such as 
"agricultural land" and many smaller islands are off limits 
altogether.  Nevertheless, even with the limited supply of 
property available for purchase by foreigners, prices have 
soared in the last few years.  Croats fear that a complete 
liberalization of property sales to other EU member state 
nationals with their much greater purchasing power will 
price them out of their own coast. 
 
ZAGREB 00000192  002 OF 002 
 
 
 
¶6.  (SBU) Politicians have already begun to tap into fears 
of how EU membership will affect Croatia.  Neven Mimica, 
opposition parliamentarian, former Minister for European 
Integration and member of the multi-party parliamentary 
committee supervising EU negotiations told us with a note of 
irony that his own Social Democratic Party was now taking a 
much more nationalistic position on property sales than when 
it was in power just a few years ago.  President Mesic has 
spoken out frequently on this issue as well, suggesting that 
coastal property remain in state hands and be given out only 
as lease concessions.  Possibly acting in anticipation of 
this debate, the Sanader government recently announced 
proposals for the state to have the right of first refusal 
on the purchase of Croatia's many islands. 
 
¶7.  (SBU) Industrial policy and land sales are likely to be 
some of the most protracted aspects of Croatia's 
negotiations.  Should they prove to be as inflammatory as 
most observers predict, it could not come at a worse time 
for the government.  Not only will Croatia face 
parliamentary elections in 2007, but any final bid for EU 
membership will have to be put to a national referendum. 
Under current law, a referendum must win a majority of all 
eligible voters in order to pass.  Already concerned that a 
vote on EU membership under those conditions could fail, the 
government has talked of introducing legislation to require 
only a majority of voters who turn out. 
 
¶8.  (SBU) These and other potential pitfalls of EU accession 
have the government nervous.  Compounding this anxiety are 
calls from some EU members for a cooling off period on 
enlargement and fears that, if Bulgaria and Romania do not 
make their Jan 1, 2007 targets, Croatia will be delayed as 
well.  Finally, there is the ever-present suspicion that 
other EU countries want to link Croatia's accession to that 
of the other states of the former Yugoslavia, a paranoia 
that was further stoked by calls for a free trade area in 
the Western Balkans (reftel). 
 
FRANK