It is clear that Croatian Government has been doing a poor job of managing the economy, given the fact that the country’s real GDP shrunk by 12 percent between 2008 and 2013. High inflation seems to be the culprit and might have probably been triggered by an increase in money supply. To some extent, the current troubles of Croatian economy are also due to the actions of foreign entities such as foreign banks that have wide presence in Croatian and high levels of foreign direct investment in speculative sectors such as real estate before the beginning of the crisis. Croatian economy has also been suffering because of its major reliance on few European neighbors. As a result, economic struggles in any major trading partner would have meant material negative impact on the Croatian economy.
Croatia’s struggles also demonstrate the issues and limited choices available to EU members. Unlike EU members, U.S. policymakers had a wide range of options available to them. In addition, while U.S policymakers didn’t hesitate from increasing government spending as well as deficit in order to boost aggregate spending, EU chose to focus on austerity measures and it seems Croatia also acted in the same manner. This focus on reducing deficit has apparently done more harm than good and it is no surprising that Croatian economy has been suffering from declining aggregate demand. Croatian policymakers are also in an unfortunate situation that they cannot rely on currency depreciation to boost economy through higher levels of exports, just like their other EU neighbors. Just as one would expect in a climate of declining aggregate demand, unemployment level is quite high in Croatia and almost reminds us of the Great Depression while unemployment rates were similar in the U.S.