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Croatia’s Short-Lived Political Experiment

Croatia is embarking on a political experiment: a coalition government comprising the conservative Croatian Democratic Party (HDZ) and the insurgent Most party, led by a non-partisan prime minister, Tihomir Oreskovic, a businessman who has spent much of his life in Canada.

The country has arrived at this point following an indecisive election result in November, in which neither the ruling Social Democratic Party (SDP) nor the opposition HDZ gained a sufficient number of seats to form a majority government. Instead, both were reliant on the third-placed Most which held the balance of power.

Most exploited its position of kingmaker to the full, making far-reaching demands of its potential coalition partner, including the right to decide the prime minister. At first, neither of the large parties was willing to accept these terms. Only after weeks of tortuous negotiations did HDZ eventually agree.

If all now goes according to Most’s plan, a reformist leader with a track record of success in business will start to extricate Croatia from its long-standing economic malaise, marked by slow growth, high unemployment and dangerous levels of both public and private indebtedness.

This will involve far-reaching market reforms, including the privatization of inefficient state-owned industries and the deregulation of the labor market. Meanwhile, the government will get a grip on public finances by cutting government spending, above all by shedding excess labor in the public sector.

In the process, Most hopes to appeal to the part of HDZ’s conservatism which accepts free market economics.

However, things may not turn out in the way that Most hopes. For one thing, Oreskovic will struggle to impose his authority. Not only is he a political unknown, but the party he represents is already losing its power base. Many of Most’s supporters voted to change Croatian politics and have instead seen Most put one of the establishment parties into power. If social media is a reliable guide, these supporters are already abandoning the party.

In this context, Oreskovic will struggle to control a cabinet comprised mainly of HDZ ministers and a parliament in which Most has just 18 (out of 151) seats.

Another problem Most faces is the inherent difficulty in charting a course between the European Commission and Croatia’s international creditors who are demanding austerity and structural reform; Croatia’s powerful trade unions, which are resistant to any kind of cutbacks; and an angry population which demands that government fix the economy without inflicting further pain.

Neighboring Slovenia has struggled to reconcile these competing interests for much of the last five years, and successive governments have paid the price for failure.

But perhaps most seriously, Most will have to work with a coalition partner, HDZ, which never wanted this coalition and will undoubtedly use its shot at government to prepare for fresh elections in which it hopes to emerge the clear winner.

It’s a fair bet that, instead of investing in the coalition, HDZ will spend the next few months picking squabbles with Most, distancing itself from controversial policies and reaching out to the key constituencies whose support it must win over ahead of the next ballot.

In this respect, 2016 is likely to be a dismal period in Croatian politics, characterized by ineffective government and an incoherent policy agenda as the different parts of the coalition pull in different directions.

How sustainable this proves to be will depend mainly on the direction of opinion polls. If HDZ’s ratings go up and SDP’s go down, HDZ will press for early elections, and hope that, if it quits government, Most will not form a new coalition with SDP. Conversely, if HDZ’s ratings go down and SDP’s go up, HDZ will try to hold onto power in the hope of reversing the trend and trust that Most does not quit the coalition in the meantime.

However events unfold, the probability is that, by the next elections, most will have disappeared as a political force and the contest for government will revert to a traditional two-horse race between SDP and HDZ, perhaps with some small parties in the mix, and a large number of alienated voters with nowhere to go.

We can speculate what happens after that.

Whichever party wins power will face the same competing pressures as the current one. On the one side, the EU and Croatia’s creditors which demand austerity and reform; on the other, a resistant population. The difference next time is that the reformists in Most would not be in government to pull Croatia in a free market direction.

The overwhelming temptation for such an administration would be to try to square the circle and find a policy mix that restores some balance to public finances while avoiding the liberal reforms to which Croatian society is so hostile.

For a solution, it will inevitably take note of what is happening in Hungary, Slovakia and now Poland, where governments are experimenting, so far successfully, with a new form of hybrid state capitalism, in which foreign investors are made to pay for the revival of the economy.

In fact, both parties are already on board with this new anti-market politics if comments ahead of the election about malevolent foreign banks and the need to protect traditional sectors of economy (especially farmers) are any guide.

We must see how events play out. But if either SDP or HDZ leads Croatia down this road a year or two from now, then Most’s fleeting attempt at leadership will eventually be seen as the last hurrah for economic liberalism, before Croatia joins the new ideological bandwagon which is advancing across Eastern Europe.