Croatia's PM promises reform, growth after power struggle

ZAGREB (Reuters) - Croatia's Prime Minister Zoran Milanovic, fresh from winning a power struggle in his Social Democratic Party, pledged on Monday to pursue reforms and revive the battered economy in the remaining 18 months of his term.

But analysts said his success in expelling former Finance Minister Slavko Linic from the party on Saturday was a Pyrrhic victory and voiced doubt about his ability to enforce reforms in the country, which joined the European Union last July.

Linic, seen as a champion of reforms, was fired in May for approving a property-for-tax deal with a private company that Milanovic said had harmed the budget. Linic insisted he had done nothing wrong and accused Milanovic of plotting against him.

A party convention expelled him on Saturday with a tight 50-47 secret vote.

Addressing an investment conference in Zagreb, Milanovic said his key task was to create economic growth.

Croatia's economy is predicted to shrink again this year, stretching the former Yugoslav republic's recession to six straight years, more than any other EU member in recent history. National output has fallen by 13 percent since 2008, a drop exceeded only by Greece.

"The reforms we are doing or starting are difficult and the results are not seen immediately. I urge the employers and unions, particularly in the public sector, to support the reforms," Milanovic said.

But Ivica Mudrinic, the head of the national employers' association, told the conference that some reforms were only "timidly started" and listed at least seven major objectives that were barely touched.

These include making the administration more efficient and cheaper, reforming the education and health systems, boosting the rule of law, putting a lid on public debt and cutting some of more than 400 municipalities.

Many municipalities are financed from the state budget and offer job sinecures for hundreds of cronies of the two biggest parties, Milanovic's SDP and the conservative opposition HDZ, which leapfrogged the SDP in opinion polls in May.

PUBLIC SECTOR OPPOSES REFORMS

Public sector unions have strongly opposed plans to make the labour law more flexible, saying the government lacked a coherent reform plan and was only enforcing austerity, now with the support of the European Commission.

The Commission has placed Zagreb under monitoring and requested that it gradually cut the budget deficit to three percent of GDP by 2017. So far the government has been on target, largely by raising taxes and cutting state investments.

"As long as that is the case, we can expect no recovery. Public debt will surpass 80 percent of gross domestic product this year and inch up towards 100 percent in the next few years," said Hrvoje Stojic, chief economist at Hypo Bank.

Deputy Prime Minister Branko Grcic, the government's chief economic official, told Reuters there was "no doubt the reforms are being enforced and this was acknowledged by the Commission".

"We can implement most reforms without major problems but some require more time, like improving the investment climate," he said.

Martina Dalic, HDZ's parliament deputy and former finance minister, said the recovery in the EU would indeed help Croatia to meagre growth of up to 1 percent next year, "which is not enough to create jobs and recovery".

"Europe has enough capital, which is moving towards southern Europe, looking for yields, and there is no reason why Croatia should miss out on that," she told Reuters last week.

"But the new government must quickly show it is ready to change everything that has so far deterred investors, which this government did not do," she said.

Analyst Zarko Puhovski said the government was following in the footsteps of successive earlier governments that have ducked painful reforms, preferring to increase spending instead, based mostly on debt.

"They simply hope that things will get better in the EU and that this will spill over into Croatia," he said. "Expelling Linic will further dent their ratings. It shows their weakness and will alienate more voters."

But Puhovski added the ruling bloc's solid majority in parliament makes a snap election unlikely.

(Reporting by Igor Ilic and Zoran Radosavljevic, writing by Zoran Radosavljevic, edited by Ruth Pitchford)