Category : institutions

Croatia & EU: a vicious circle of bureaucracy?

I was thinking of writing something about future Croatia – EU relationship, but I dont really have lots of time lately. I have some 10 drafts waiting to finish. Anyways, Vuk Vukovic did write a post which I recommend, and I wrote a lengthy comment to his post. He proposed to use it as a post here, so, here it is (changed a bit).
There is one problem that could affect Croatia-EU relationship. I believe it will manifest itself in a form of stronger government involvement into lives of ordinary citizens in the long run. The effects will be mostly negative in my view. Let me explain.
I read a lot about Croatia and its problems (corruption, unemployment etc) – obviously there are many. Most of the commenters seem to consider the “debt” crisis EU’s biggest issue forgetting that badly set up institutions on EU/Eurozone level are partly to blame for the crisis. Even though I believe there is mainly a demand side problem in the Eurozone at the moment, I am worried about the long run prospects for the common european economic space Croatia has joined. Even though I welcomed Croatia’s accesion into the bloc – the reason I worry is the push toward more harmonization in taxes and regulation across the continent, especially following the misconception that 2008 crisis was a failure of “free market” capitalism.
Other problem are, in my opinion, democratically weak institutions of the European Union and possibility of different “equilibriums” when considering interplay of eurocrats and national institutions (political elites). The interplay could result in outsourcing part of accountability to European institutions which arent directly accountable to the people of Europe (I doubt that much will change in the future). I am afraid that, Croatia will have a tendency to develop a sort of a negative feedback loop that will restrain supply side (potential growth) due to various regulatory and tax policies that will be created in Brussels and adopted EU wide. Offcourse, this was clear from the start – one of SEM properties is a push toward more equalized rules accross the member states. I feel that more important questions are – where is the limit to the regulation done from Brussels, who should decide on it, and what are the control mechanisms?
Vuk asks this an excellent question on the behaviour of Croatian institutions after 1st of July:

“Croatia’s problems are more structural not financial, and are linked to poor public management, corruption and expensive political concessions to various interest groups. Some attempt to reform domestic legal institutions was made thanks to outside pressure from the EU, but it remains to be seen how these institutions will interact in the new European environment. “

If the push from the outside wanes – and I believe it will, Croatian, already weak, (primarily political) institutions will adopt to the EU institutional setting in such way that they will silently reap the rents of thousands of unelected eurocrats creating rules for the SEM.

New regulations are costly and ,meanwhile , insane too. Along with other EU equivalents of central planing (fisheries, agriculture, cohesion/structural funds, energy, transport…etc) they are creating serious barriers to growth in my view. Tax harmonization is destroying one of last defenses against rampant government – tax competition. This way, EU is creating a sort of regulatory/ tax prison which even strengthens the bad “aspects” of Croatian institutiuons since it gives the political elite even more power and rent seeking opportunities, but less democratic accountability since decisions are made in Brussels.

You can see a part of the picture if you think of Vuk’s post about a paper that linked low trust and “demand” for increasing regulation – that can reinforce the aforementioned negative loop that chokes incentives to improve anything in such way that large public funds won’t become misallocated capital and a huge opportunity cost (even more so than now).

If we put this case in a picture it would look something like this

Same concept can be mirrored to management of EU funds – countries are responsible for this management, so there will be a lot of corruption going on in that area as well (think of Greece that created a whole industry for extracting these funds). One thing that will make it harder to reap these funds is that they are “projectŽ” based while whe ways of extracting rents in Croatia untill now mainly went trough different subsidies fopr special interests. On the other side, available funds will be larger now.

One thing that EU politicians forget is that, even though its a big bloc, EU is not the global economy (its share is getting smaller by the day), and the regulatory/tax prison they are building, along with weakening control of rampant government/EU power, will keep most citizens “locked”, but it will not stop capital from eventually fleeing, to places where it is more welcome and more productive.

Maybe I’m too pesimistic, but seeing how people who are responsible for these things here in Croatia, and in EU as well, are grapling with serious issues that affect future of millions, its just hard to be optimistic.

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