P 181450Z JAN 08
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC PRIORITY 8486
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 02 ZAGREB 000035 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ELAB PGOV
SUBJECT: PRICE RISES CONFRONT NEW GOVERNMENT 
 
 
¶1. Summary: Although Croatia's average annual inflation rate 
for 2007 was 2.9%, slightly below 
the 2006 rate, the year-on-year rates in October, November 
and December were the highest since 
2000 and 2001 at 4.3-5.8%. The Croatian National Bank expects 
inflation for 2008 to be as high 
as 4.5%. The price increases have caused concern among 
Croatians, and the trade unions have 
pushed the government to act. The government, unions, and 
employers will form a commission 
to monitor the price increases and propose measures to the 
government. The government's ability 
to influence prices is limited, but economists are concerned 
that this pressure could lead to 
public sector wage and pension hikes.  Given Croatia's high 
levels of state employment and the 
large number of pensioners, such moves could affect the rest 
of the economy and further 
reinforce already strong inflationary expectations. End 
summary. 
 
¶2. Croatia's annual inflation rate dropped to 2.9% for 2007 
from a rate of 3.2% for 2006. In the last 
quarter of 2007, however, Croatia experienced its highest 
inflation in the last seven years. 
According to Croatia's Central Bureau of Statistics, prices 
were 4.3% higher in October, 4.6% 
higher in November, and 5.8% higher in December as compared 
to the same months in 2006. 
Rises in the prices of food and fuel drove much of the 
overall rise. Comparing November 2007 to 
November 2006, food prices rose 8.2% while the price of fuel 
for automobiles rose 10.5%. 
Comparing December 2007 to December 2006, food prices were 
11.4% higher and auto fuel 
prices, 9.7% higher. On top of these hikes, for Zagreb 
residents, January 1st brought an increase 
in the price of water (22% over January 2007), public 
transportation (38%), and utilities (50%). 
 
¶3. Given the acceleration of inflation at the end of 2007, 
Croatian National Bank Governor Zeljko 
Rohatinski described as unrealistic the estimates of some 
analysts that inflation would be 3.0- 
3.5% for 2008. At a news conference in late December, he said 
he expected an inflation rate of 
4.5% for 2008, and that this was neither a catastrophe nor a 
cause for panic. He also cautioned 
against using the price increases at the end of 2007 and the 
projections for 2008 as a reason for 
indexing wages, prices, or interest rates. 
 
¶4. According to a survey conducted the first week of January, 
many Croatians regard these actual 
and expected price increases as the top issue of concern for 
the government. The trade unions 
also are focused on the price increases, and the lack of 
commensurate salary increases. By union 
calculations, price levels in Croatia are 70% of those in the 
EU, while the average salary in 
Croatia is 26% that of the EU. The unions have pressed 
employers to increase wages, but with 
little success. They also warned the government they would 
organize protest rallies if the 
government did not act to increase the minimum wage and 
pensions and otherwise take measures 
"to protect living standards." On occasion, union leaders 
individually called for specific 
measures such as indexing all salaries to inflation, setting 
limits on price increases, and returning 
recently raised prices to their old levels. 
 
¶5. In response, PM Sanader and other government 
representatives met with representatives of the 
unions and the Croatian Employers Association on January 15. 
Sanader said the economic 
situation in Croatia was "difficult but not alarming." He 
said the government, employers, and 
trade unions would establish a commission to monitor price 
increases and their effect on living 
standards and to propose measures for the government to 
consider. Sanader also announced the 
government would host a meeting with the unions and employers 
to raise the level of social 
dialog on matters such as the minimum wage, the privatization 
process, social and employment 
policy, fighting the grey economy, and increasing economic 
competitiveness. As a third step, he 
said the government would meet with cities and municipalities 
and encourage them to consider 
the effect on residents before they raise the price of 
utilities and municipal services. 
 
¶6. Croatia's largest union, the Union of Autonomous Trade 
Unions of Croatia (UATUC), announced 
they would organize a protest rally on April 12, giving the 
government three months to raise the 
minimum wage. Leaders of the other unions said they would 
wait to see if the measures proposed 
at the meeting with Sanader produced results before joining 
the UATUC in organizing the protest. 
 
¶7. Comment: The unions' efforts succeeded in making inflation 
one of the first topics 
Sanader's new government had had to publicly address. 
Despite some of the unions' calls for 
government intervention, Sanader's response was measured, 
essentially promising only further 
dialog and the continuation of economic reforms. However, 
indications are that Croatia will face 
higher inflation and slower growth for 2008, beginning 
already in the first quarter of 
the year. As Croatians feel the effects of this worsening 
situation, it may become more difficult 
for Sanader's new coalition government to resist pressure for 
intervention on wages and 
pensions. End comment. 
BRADTKE