Croatia Defence and Security Report Q3 2009

Croatia's progress towards EU accession was dealt a significant blow following the decision by Slovenia to veto the opening and concluding of several negotiating chapters on December 19 2008. The EU called off talks with Croatia on April 23 2009 due to a border dispute with Slovenia over the Bay of Piran.

Without a settlement between the two nations, Slovenia could potentially hold up Croatia's application indefinitely. Two other major issues need to be resolved before EU accession: corruption and Croatia’s loss-making shipbuilding sector. Corruption, graft and organised crime issues are particularly crucial.

Croatia's defence force will be conscript-free by the end of 2009, and steady force modernisation and downsizing continue despite structural and financial difficulties. Defence spending increased slightly in 2008. It is expected to continue rising through to the end of 2012. The spending trends are a general reduction of defence spending as a percentage of total government spending and a continuing reduction – from what used to be a fairly high level – of defence spending as a percentage of GDP. The political nature of this military downsizing will probably slow the modernisation process. Nonetheless, the large majority of the defence budget will be personnel costs and compensation for those included in army cutbacks. Internal stability remains good, and external security is improving as a result of strengthened relationships with NATO and the EU. Beyond its problems with Slovenia, there is little threat of conflict for Croatia. A high priority for Croatia is overcoming the challenges related to border control, as this influences its drive for EU membership. Improved regional co-operation and border security are therefore policy priorities.

Despite the relative stability of the domestic banking system, as well as the limited exposure to defunct subprime mortgages, Croatia is nonetheless expected to endure recession this year. Aside from weakening domestic demand, we note that the tourism industry is set to suffer significantly this year as key tourist groups from the eurozone tighten their belts, and as such this underpins our forecast for a 3.2% contraction for this year.

This quarter, we have introduced a significant new aspect to BMI's defence reports, which is the City Terrorism Rating (CTR). This assesses the risk of a terrorist attack. The CTR takes into account the overall BMI Terrorism Rating for the country in question. It also incorporates the 'prevalence' of terrorism, which recognises the frequency of attacks, and whether the city is a target for terrorists. The CTR also recognises the 'threat' of terrorism in terms of the likely numbers of victims and the ability of groups to launch sustained campaigns. In Croatia we assess the CTR for Zagreb as 70.0. This is a middle ranking among cities in the Central and Eastern European and Central Asian region.