VZCZCXRO6821
PP RUEHPOD
DE RUEHVB #0522/01 2401050
ZNR UUUUU ZZH
P 281050Z AUG 09 ZDS
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC PRIORITY 9484
INFO RUEHBW/AMEMBASSY BELGRADE 0048
RUEHLJ/AMEMBASSY LJUBLJANA 6461
RUEHPOD/AMEMBASSY PODGORICA
RUEHPS/AMEMBASSY PRISTINA 0615
RUEHVJ/AMEMBASSY SARAJEVO 0329
RUEHTI/AMEMBASSY TIRANA 0856
RUEHBS/USEU BRUSSELS

UNCLAS SECTION 01 OF 02 ZAGREB 000522 
 
C O R R E C T E D  C O P Y (ADDED CAPTION) 
 
SENSITIVE 
SIPDIS 
 
TO EUR DAS STU JONES FROM CDA VIVIAN WALKER 
 
E.O. 12958: N/A 
TAGS: PREL ECON HR SI
SUBJECT: SCENESETTER FOR EUR DAS JONES' VISIT TO ZAGREB 
 
ZAGREB 00000522  001.2 OF 002 
 
 
¶1. (SBU) Summary.  Your visit to Zagreb comes at a time of renewed 
optimism on the Slovenia border dispute, but also political and 
economic uncertainty for the young Kosor government.  As the 
vacation season winds down, Croatian government leaders return to 
Zagreb with major challenges looming before them.  If Kosor's team 
can successfully agree on a way forward with the Slovenes that 
allows Croatia's EU accession negotiations to re-start, perhaps even 
as early as mid-September, it would be a major accomplishment.  A 
decisive factor in achieving this success, however, will be whether 
Ljubljana will truly be willing to lift its blockade on 14 accession 
chapters even in advance of a final agreement on arbitration 
arrangements for the border.  Kosor's government will also face an 
economic crisis that now affects the average Croatian in a way that 
presents the potential for real political unrest this fall.  Prime 
Minister Kosor's handling of these problems will do much to 
determine the longevity of her government.  But she has the 
advantage of low expectations.  Should she successfully break the 
border impasse, and simultaneously perform the difficult political 
dance of solidifying the budget, she will have scored major 
victories in two areas that her predecessor, for all his political 
skills, could not manage to tackle.  Her HDZ party would then be on 
much sounder footing as Croatia approaches presidential elections in 
December.  End Summary. 
 
¶2. (SBU) Prime Minister Kosor's less combative approach with 
Ljubljana contributed to the better than expected meeting with Prime 
Minister Pahor on July 31, and the subsequent weeks of "silent 
diplomacy" at the senior advisor level.  The Croatians and 
Slovenians now appear to be working in good faith to finalize the 
text of the first part of the Kosor-Pahor framework - the letter 
affirming that no documents produced since June 1991 should have any 
impact in prejudging the dispute nor relevance to any potential 
arbitration, and stating that the parties are ready to continue 
discussions on an arbitration process for the border based on the 
previous talks hosted by EU Commissioner Rehn and the EU Troika. 
We've been told both sides are close to agreement on this issue. 
Immediately after that, Croatia will expect Slovenia to ante up and 
remove their blockade of negotiations.  An optimistic date for a new 
Intergovernmental Conference (i.e., round of accession talks) would 
be September 16.  We believe October is a more realistic timeframe. 
 
 
¶3. (SBU) The positive mood created by a re-start of EU accession 
talks would then set the stage for a serious return to talks on an 
Arbitration Agreement.  Croatia would drop its insistence that the 
April document it accepted was "take it or leave it", and 
acknowledge that further modifications are possible.  Our talks with 
Kosor's foreign policy advisor indicate that Zagreb now believes the 
two sides are not that far apart, which is a significant change of 
mood since the beginning of the summer.  Croatia may be prepared to 
accept something based on Rehn's June draft.  But key issues for 
discussion will be: i) inclusion of some sort of "neutrality" 
language that makes clear it is not predetermined whether or not 
Slovenia will have direct contact with international waters, and ii) 
discussion of the timing of the award, where Croatia believes it 
would be in both sides' interest to have the binding arbitration 
decision issued only after Croatia's EU accession process is 
complete.  It is important to note, however, that the Croatians are 
not yet ready to discuss specific changes to Rehn with Slovenia now 
- their focus is on getting Slovenia to lift its blockade on the 
accession negotiations, so that specific talks on the arbitration 
process can then re-commence. 
 
¶4. (SBU) On economic questions, Prime Minister Kosor earned no 
credit from Croatians for her  efforts earlier this summer to shore 
up the economy and the state budget.  The rapid series of budget 
negotiations, and re-renegotiations, did little to resolve the 
thorny issues plaguing the economy.  The major result of the several 
rounds of negotiations was increased taxes, both income and VAT. 
The only important spending cut was a decision to end free 
textbooks, pushing the expense of buying the texts onto parents. 
These measures only served to convince many Croatians of the 
government's unwillingness, or incompetence, to make difficult 
choices, and that the burden of covering the budget gap would fall 
on the general public, rather than any vested interests or 
privileged groups.  Unions are now gearing up for nationwide strikes 
to begin the week of September 7, protesting (somewhat 
paradoxically) both the government austerity measures and the higher 
taxes.  If the government continues to fail to form a realistic 
budget, Kosor will take fire from all sides.  Even worse, she would 
probably face the prospect of going, hat in hand, to the IMF for 
assistance.  This would sound a death knell for the HDZ government 
and make it very difficult to avoid early elections. 
 
 
ZAGREB 00000522  002.2 OF 002 
 
 
¶5. (SBU) Undoubtedly Ms. Kosor is hoping to discover opportunity in 
crisis.  If she could take credit for an unblocked EU process, she 
would instantly bank significant political capital that she could 
bring to the economic negotiating table.  This would certainly help 
her in the monumental task of mollifying, cajoling, threatening, and 
dealing with the long line of farmers, pensioners, industries, and 
unions who were made lavish financial promises over the years, and 
which the government simply can no longer live up to.  An IMF $471 
line-of-credit that has been all but delivered may give Kosor some 
extra breathing room in dealing with these groups, but tough choices 
and some level of unrest from some special interest groups are 
unavoidable. 
 
¶6. (SBU) Regarding your schedule, your meeting with Foreign Minister 
Jandrokovic will be a good opportunity to discuss relations with 
Slovenia, hear his read-out of his meetings in Bled, and prognosis 
for the coming weeks.  He will be pleased to hear of our continuing 
support for the effort to re-start Croatia's accession process.  In 
particular we should praise both sides' discipline in pursuing 
"silent" diplomacy, emphasize that an early re-start to accession 
talks would be a fantastic confidence-builder, and note our belief 
that they should be able to find common ground on an Arbitration 
Agreement as long as both sides are genuinely willing to agree to a 
process that leaves it up to the arbitrators to determine whether or 
not any sort of direct contact between Slovenia and international 
waters is justified.  With the President's foreign policy advisor, 
we should also express our hope that President Mesic will be 
supportive of the government's engagement with Ljubljana.  Both the 
FM and foreign policy advisor will also likely be interested in 
hearing the latest on our views regarding Croatia's other neighbors, 
and particularly Bosnia. 
 
¶7. (SBU) Your other scheduled events, at the National Bank and over 
lunch with a mixture of local economic experts and businesspeople, 
will provide a chance to hear first-hand their forecasts of how the 
next several months will go for Croatia's economy.  A specific topic 
of interest will be their views on whether or not Croatia will need 
to go to the IMF for assistance this fall. 
 
WALKER