Volume 11 Number 3

Summer 2002

Constitutional Watch
     A country-by-country update on constitutional politics in Eastern Europe and the ex-USSR

Croatia - The spring and summer brought various turbulent developments, particularly on the political and economic fronts. At the end of March 2002, the parliament (Sabor) discussed and adopted the new Strategy of National Security, a set of documents and doctrines that acknowledges, following the war and postwar period of the 1990s, the region's new security situation. The new strategy, which is oriented toward integration into NATO and the EU, recognizes all the neighboring states, including the Federal Republic of Yugoslavia, as partners in development, not as sources of destabilization. In addition to the new strategy, the five-party coalition government has also adopted two laws on national security and defense. These laws form the basis for reform of the army and intelligence services.

During the Tudjman period, and especially after the war, the regime used the intelligence agencies for political purposes-not only to harass the opposition but also-in the case of certain high-ranking members of the Tudjman regime-as a means of shoring up their own power against that of others within the inner circle. These services, chiefly the Service for Protection of Constitutional Order, the Security and Intelligence Service, and the Croatian Intelligence Service (headed by Tudjman's son), were used for political manipulation, blackmail, and by insiders to facilitate lining their own pockets through insider knowledge of privatization deals. At one point, there were even allegations that the services were misused in a Croatian soccer championship to help the team favored by Tudjman, an ardent soccer fan. Scores of people were also employed through the Ministry of Defense and the Croatian Army, both of which were the recipients of huge sums from the budget. The number of individuals employed by these organizations was considerable during the war, as one might expect, but the numbers did not drop after the war. Extensive public funds went into these institutions, not only for procurement of military equipment but also to aid war victims, war veterans, and to underwrite Croatian parastate structures in Bosnia and Herzegovina. In short, all of these institutions were very powerful and created large clienteles naturally averse to their reform.

Under the recent legislation, the Service for Protection of Constitutional Order (within the Ministry for Interior); the Security and Intelligence Service (within the Ministry of Defense); the Croatian Intelligence Service (which works in foreign countries); and the Office for National Security, which served as the central coordinating service, were all abolished. A new service called the Intelligence Agency has replaced the Croatian Intelligence Service; similarly, the Counterintelligence Agency has replaced the Service for Protection of Constitutional Order and was removed from the Ministry of Interior and made an independent body directly subordinate to the government. And, finally, the Military Intelligence Agency has taken the place of the Security and Information Service. The Ministry of Foreign Affairs has retained its own department charged with security work, but now it only provides for security and the flow of information to Croatia's diplomatic offices abroad.

These changes have not resolved fully the problems of the agencies, and many suspect that they remain susceptible to political machinations. After the new services were established, President Stipe Mesic proposed appointments for the chairmanships of the various departments, yet Prime Minister Ivica Racan has still refused-almost four months after the agencies were established-to cosign the appointments. The new services are now functioning with acting heads, basically due to the fact that the coalition parties could not agree on any candidates, and the government did not want to accept the president's nominees.

Additional problems were caused by a lack of coordination, since documents and files had to be transferred to the new agencies. Several days before the Office for National Security ceased to exist (on March 31), its outgoing head ordered all such materials to be moved to the State Archives. He claimed he had to do this because the chair of the Intelligence Agency, the new agency that was to inherit the materials from the soon-to-be-defunct National Security office, had not been appointed yet, and there was no one to assume control of the documents. This gesture was, clearly, a protest against the reorganization of the security and intelligence services. It also turned out to be a major scandal since the sensitive and confidential documents were not guarded at the archives, where they languished for several days before being taken to the Intelligence Agency.

The new law on defense reorganized the Croatian Army and its headquarters. This law follows the army reform, adopted in 2002, according to which several thousand now-active soldiers should have been retired, dismissed, or put into active reserve. Even though these personnel cuts were incorporated in the 2002 budget, they have not been implemented yet. The still-rising unemployment rate and the political repercussions of retiring or sacking the employees of the ministries of defense and interior, who remain a powerful political group viewed by the public as the protectors of the Croatian state, were simply too much for the coalition government, which has struggled to hold itself together since coming to power. As a result, in the first half of the 2002 budget year, the ministries of defense and interior have spent far more than was originally planned. The new defense strategy and the accompanying law attempt to deal with this issue, gradually decreasing the high number of employees in the defense sector and introducing alternatives for their employment. The goal is to have defense employment and general defense spending reorganized within a framework that would follow the Partnership for Peace and NATO standards and guidelines for transition states.

In accordance with the constitutional amendments of 2000 and 2001, the new defense law narrowed the scope of peacetime presidential prerogatives as commander in chief of the military. These prerogatives have now been shifted to the government and Ministry of Defense, where the majority of defense-related policies are decided.

Croatia's agreement with the International Monetary Fund (IMF), concluded at the end of 2001, requires that the government reform its labor markets to provide for employment flexibility and to reduce the unemployment rate, which currently exceeds 20 percent. In an effort to fulfill this obligation, in April 2002, the government initiated negotiations with unions and employers' organizations. A tripartite work group was formed to review the proposed amendments to the Labor Law, especially those regarding severance pay, notice period and notice reasons, and nontraditional forms of labor. It immediately became clear that the trade unions, which had not been involved in the initial negotiations, were completely opposed to what the government had agreed to with the IMF. The first round of consultations was fruitless, so the group met again in May, again with no result.

The unions hold a strong hand in the negotiations and enjoy much support with the public. The talks have pitted the unions and the government against each other and, for the first time ever, the May First parade was closed to government representatives. Antigovernment sentiments have also managed to unite the previously competitive and quite disparate trade unions. In the present situation, without agreement from its social partners, the government is lagging behind on the reforms agreed to with the IMF.

The recent accounting lapses by a number of multinational corporations have also shaken the Croatian economy. The Rijecka Bank, which was restructured
by the state in the late 1990s and sold to a German bank in 2000, has found itself near bankruptcy. Recent reports by the official auditor, KPMG Croatia, had shown the bank to be safe and profitable, yet the institution saw a major solvency problem after debts, brought about by rogue trading, were identified. The German stakeholder has not shown any sign of stabilizing the bank, which is quite important regionally. This has induced a wave of economic instability in the Istria and Primorje coastal region, just before the crucial tourist season. The state was forced to step into stabilize the bank with a loan after the German stakeholder sold its shares to the State Agency for Banks for the symbolic price of $1. Several weeks later, the state, now a 100 percent shareholder, sold the bank to the Austrian-owned Croatian Erste and Steiermarkische Bank.

The bank crisis touches on several issues. It is still unclear if the crisis came about because of improper accounting, prior to privatization, or if it happened with the blessing-or negligence-of the new owner. The crisis also brought to the fore the lack of transparency in banking regulations and the national bank's poor control of the banking sector. As a result, and in advance of the privatization of the remaining state-owned companies, many now question whether foreign ownership is truly the guarantor of the economy's development and stability. This is especially under debate in the banking sector, where over 90 percent of all banks are in the hands of foreign entities; some observers now believe that a stronger state-owned banking sector would be preferable to putting the banks in private hands.

In July, another conflict between the Croatian Social Liberal Party (CSLP) and its coalition partners transpired. This latest round-which almost brought down the government-was the culmination of an earlier conflict, from the summer of 2001, when a CSLP faction, led by Drazen Budisa, wanted the government to take a stronger position against transferring alleged war criminals to The Hague Tribunal. Budisa and his wing were only partially silenced after CSLP was given a stronger role in the government, in early 2002.

The trigger for the latest stage in the conflict was the ratification of the agreement between Croatia and Slovenia on the nuclear power plant in Krsko; not surprisingly, the actual political reasons ran much deeper. The issue of Krsko-along with the contested border between the two countries and the deposits of Croatian nationals in the now-defunct Ljubljanska Bank in Slovenia-is one of the main points of contention between Croatia and Slovenia. CSLP opposed the agreement regarding the Krsko plant, and Budisa, who is both CSLP chairman and a deputy prime minister, forbade CSLP government ministers to vote on the measure proposing that parliament ratify the agreement. The nuclear power plant is the least-politicized issue between Croatia and Slovenia, and its resolution seemed the logical starting point for a final resolution of the other more-contentious issues just mentioned. The plant agreement involves only parity of ownership shares and governance and the distribution of electricity to both countries. Ignoring Budisa's attempt to block the agreement, most CSLP government members, on July 3, voted for the ratification; only Budisa, Minister of Economy Hrvoje Vojkovic, and Minister of Maritime Transport, Transportation, and Communications Mario Kovac voted against it.

This issue, which in reality is quite minor, has revealed not only strong tensions and divisions within CSLP (with most CSLP ministers supporting the government rather than party line) but it also suggests that the political compromise, brokered earlier this year, between CSLP and the Social Democratic Party (SDP) is no longer tenable. Immediately after the ratification of the Krsko agreement, Budisa and those CSLP party organizations loyal to him initiated the expulsion of CSLP members of the government and parliament who had voted against Budisa's position. At the same time, the party leadership-which is controlled by Budisa and those loyal to him-decided that CSLP should withdraw from the five-party coalition government.

In addition to the rebellious ministers, almost half of CSLP's deputies were expelled from the party. The errant deputies banded together to form a parliamentary group, known as the Independent Croatian Liberals (ICL), which will become the third liberal party in the country. According to the relevant law, these former CSLP deputies retain their mandates, even after leaving the party on whose list they were elected. Until the new party is formed, which is to happen in the fall of 2002, these deputies will function informally as the ICL parliamentary group.

With the resignation of the CSLP ministers and the withdrawal of the second largest party from the coalition, the government either had to disband and call new parliamentary elections or form a new government. To do so, would require approval by parliament. The government chose the latter course.

Prime Minister Racan, therefore, turned to the other parties in the coalition-the Croatian Peasants Party (CPeP), the Croatian People's Party (CPP), and the Liberal Party (LP)-as well as the parliamentary representatives of national minorities, the Istrian Democratic Forum (IDF, formerly a member of the coalition that may now rejoin the government), and the new ICL members. Together with Racan's SDP, this constellation of parties mustered enough signatures among the parliamentary deputies to support Racan's candidacy as prime minister and to enable him to form a new coalition government of SDP, CPeP, CPP, LP, and ICL (Art. 112 of the Constitution).

Although the public had demanded smaller and more efficient governments (which Racan also promised), during the consultations on the new government formation no party would give up its demands for portfolios. Everyone wanted one of the former CSLP-held ministries (defense; economy; health; science and technology; and maritime transport, transportation, and communications). Finally, after much back-and-forth, negotiations concluded on July 30. Croatia now has the largest government in Europe, with a prime minister, 4 vice prime ministers, and 19 ministers. SDP, the largest and most powerful party in the government, has the premiership, 2 vice prime ministers, and 11 ministers; CPeP, second in line, has 1 vice prime minister and 4 ministers; ICL, 1 vice prime minister and 3 ministers; CPP and LP 1 minister each; and there are 4 unaffiliated ministers, all of whom were proposed by Racan and are thought to be close to SDP.

In recent months, there have also been numerous border incidents, indicating that there are still some contentious issues among the former Yugoslav republics. Slovenia wants to gain control of the Gulf of Piran, giving it a corridor to international waters (a sea border in the Piran Bay was never established between the republics in the former Yugoslavia). In July 2001, Prime Minister Racan and the Slovenian prime minister, Janez Drnovsek, reached an agreement that granted control of the gulf to the Slovenes. The agreement, however, was never ratified by the Croatian parliament, and thus-according to some on the Croatian side-has no legal authority. (It was ratified by Slovenia.) Agreement on the matter was Racan's concession to the Slovenes so the two sides could reach further agreements, for example, on repayments to Croatians who had deposits in the Slovenian Ljubljanska Bank, or to broker the Krsko deal and resolve other minor issues. (See Croatia Update, EECR, Vol. 10, No. 4, Fall 2001.)

Apparently, most of Croatia was not behind him on this matter and views it as too large a concession. Croatia now applies the UN convention, which states that until a border is set, the "line of equal distance" shall apply. Yet the Slovenes insist that an agreement is in place, and, on a daily basis, Slovenian fishing ships enter Croatian territorial waters, accompanied by Slovenian police boats to protect them from the Croatian counterparts, which try to expel them. For the time being, protests from the Croatian Ministry of Foreign Affairs have not been effective, and meetings between Croatian and Slovenian officials have come up empty-handed. Slovenia seems to be pushing for a better opening position in case the matter goes to international arbitration. Some in Croatia have suggested that it position its navy at this border, but the government appears to want to settle the issue without further escalation.

There was another border incident, at the end of July, on the Danube between Croatia and Yugoslavia. The local governments of Ilok, a city in Croatia, and Backa Palanka, a city in Yugoslavia, had agreed to meet on Sarengradska Ada, a river island. Although the island is Croatian territory, it is still controlled by Yugoslavia as a result of the war. This is, in fact, the case with other elements of Croatian territory on the east side of the Danube. On this occasion, the representatives of Ilok were going to the island in a boat when a Yugoslav military patrol boat fired at them, stopped them, and took them to a nearby barracks where they were held for several hours before being released. This was the most serious incident between Croatia and Yugoslavia since the end of war in 1995, and Croatia still has not received an explanation for the incident.

Yet another incident occurred on the border with Bosnia and Herzegovina, near the divided town of Kostajnica, half of which is in Croatia, the other
half in the Serbian-dominated part of Bosnia and Herzegovina. Again, Croatian territory has remained in the hands of the Republika Srpska in spite of the Dayton agreements ending the war and even though a Bosnian-Croatian commission agreed that this territory should be returned to Croatia. Nonetheless, the local community and the Republika Srpska are unwilling to restore the territory to Croatia and are prohibiting Croatian authorities and citizens to approach their territory and land. Ever since a new bridge was built over the Sava River in Kostajnica, Croatia has wanted to open the border-crossing to its territory, but the local Bosnian Serb authorities have continued to bar passage.

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