VZCZCXRO9131
PP RUEHIK
DE RUEHVB #0086/01 0391553
ZNR UUUUU ZZH
P 081553Z FEB 10
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC PRIORITY 9887
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 ZAGREB 000086 
 
SIPDIS 
SENSITIVE 
 
DEPARTMENT FOR EUR/SCE AND EEB/IFD (LAITINEN) 
 
E.O. 12958: N/A 
TAGS: PREL ECON PGOV HR
SUBJECT: AMBASSADOR'S MEETING WITH FINANCE MINISTER SUKER 
 
REF: A. ZAGREB 0066 
     ¶B. ZAGREB 52 
 
ZAGREB 00000086  001.2 OF 002 
 
 
¶1. (SBU) SUMMARY: Finance Minister Ivan Suker is relatively 
upbeat about Croatia's economic prospects, feeling that the 
government has managed its fiscal situation fairly well. 
While acknowledging that some further reforms, such as 
improving labor participation rates, are needed, he appears 
unwilling to accept that Croatia's economy is a high cost and 
high tax environment that remains unfriendly to investment. 
END SUMMARY. 
 
¶2. (SBU) In a February 5 meeting with the Ambassador, Finance 
Minister Suker was relatively upbeat about Croatia's economic 
situation.  He said the financial crisis had been "less 
painful" for Croatia than for many European countries, in 
large part because Croatian banks had not been overexposed, 
and had been able to maintain liquidity.  He also argued that 
the government had successfully responded to the crisis and 
managed to keep the fiscal deficit under control with a 
series of budget revisions in 2009.  The GoC had been 
prepared to cut costs, particularly by controlling the 
government payroll.  But when faced with union resistance, 
the government had accepted an across-the-board "crisis tax" 
as a means of keeping the deficit relatively low.  Suker 
noted his success in selling a bond issue in autumn 2009 as 
evidence that Croatia's macro-economic management was 
maintaining international confidence.  Having completed these 
tasks, the government was now rolling out measures to boost 
growth and inject more liquidity into the markets, 
particularly via a new "bailout fund" for firms negatively 
affected by the crisis (ref A). 
 
¶3. (SBU) The Ambassador congratulated Minister Suker on his 
success in raising funds via the bond issue and meeting 
Croatia's immediate financing requirements.  He expressed 
concern, however, about the sustainability of Croatia's 
economic performance.  Croatia's business environment and 
investment climate are not friendly.  Taxes, social 
contributions, and parafiscal fees are high, and not always 
predictable, particularly those imposed at the local level. 
Permits and other procedures take too long.  Labor 
regulations are inflexible, and costs too high.  Croatia's 
ranking of 107 out of 180 in the World Bank's "Doing 
Business" report was a indicator of the need to enact more 
reforms. 
 
¶4. (SBU) Suker responded that he did not see the situation so 
bleakly.  He claimed that Croatia was a relatively low tax 
economy, with no capital gains tax, and with income taxes 
topping out at 45 percent, but only 2000 taxpayers in the 
entire country reached that level.  He acknowledged that 
further reforms, such as encouraging longer working lives and 
lowering pension costs, were still needed, but noted that two 
years ago Croatia had been among the World Bank's "Top Ten 
Reformers."  The Ambassador replied that, regardless of the 
tax figures, it was a fact that American companies regarded 
Croatia as one of the costliest business environments in 
Europe. 
 
¶5. (SBU) Given that there were still tough reforms ahead for 
Croatia, the Ambassador inquired whether the government 
thought it could reach agreement with the opposition on key 
measures, especially given the main SDP opposition party's 
recent declaration that it was prepared to cooperate with the 
government (ref B).  Suker noted that the SDP had supported 
the bailout fund proposals, at least in general principles. 
But he was not optimistic that any greater degree of 
cooperation was likely. 
 
¶6. (SBU) The Ambassador also raised the issue of a possible 
arrangement with the IMF.  Many needed reforms, such as 
pension reform, reduction of the state payroll, or 
privatization of the state's stake in companies, would seem 
to be easier if there were additional financing available, 
such as might be found in an IMF deal.  Suker said he was 
strongly opposed to an IMF deal.  "We know what we need to 
do," he said.  "We don't need the IMF to tell us.  We can 
make the tough decisions for ourselves."  Furthermore, he 
added, as an EU candidate country, Croatia is more vulnerable 
to the political consequences of an IMF deal.  Despite the 
fact that several EU members have gone to the IMF during the 
crisis, he feared that if Croatia sought an IMF arrangement, 
then some EU Member States who are lukewarm on enlargement 
would argue that Croatia should not be admitted "until we can 
manage our economy on our own." 
 
¶7. (SBU) COMMENT:  Suker had a genuinely pro-American 
attitude, thanking the Ambassador several times during the 
 
ZAGREB 00000086  002.2 OF 002 
 
 
meeting for the help the U.S. has given to Croatia on getting 
into NATO and in trying to resolve EU accession issues, such 
as ICTY cooperation and the border dispute with Slovenia. 
Therefore, he took no offense at the Ambassador's pointed 
critique of Croatia's economic policies.  But he was not 
giving much credence to the criticisms.  At least in the 
short term, he is so focused on meeting his deficit and 
borrowing targets, that he has no vision (or perhaps 
understanding) of how to achieve the more fundamental changes 
needed to create conditions for organic economic growth.  To 
get this message through will require a coordinated effort 
with other major economic partners, something Post will 
strive to develop further over the coming months.  END 
COMMENT. 
FOLEY