Pandemic puts focus on EU countries outside Schengen

The closure of national borders has helped limit the spread of the novel coronavirus, but it’s also dealt a devastating blow to tourism, travel and trade. That’s especially true across the EU, where the bloc’s Home Affairs Commissioner Ylva Johansson has called for a return to open borders as soon as possible.

Indeed, Johansson even went as far as to suggest member states which are currently outside the Schengen zone– namely Bulgaria, Croatia and Romania – should be allowed admittance as a means of bolstering their national economies. The lengthy delays and oppressive bureaucracy which coronavirus has foisted onto the 26 members of the Schengen zone have been common practice for well over a decade for the EU outposts outside the free transit area.

But while the European Commission (EC) has itself expressed enthusiasm for those countries’ accession to both the Schengen area and the eurozone, concerns remain over their readiness to integrate more deeply with the European bloc. In particular, there are economic, legislative and political issues in Bulgaria and Croatia which have made certain member states wary of approving their application. Those obstacles must be overcome before the EU can be sure that its newest member states are ready for deeper integration.

Zagreb and Sofia pushing for greater integration

The three countries’ exclusion from the benefits which come with Schengen membership has been a point of contention for many years now, but the upheaval caused by COVID-19 and the shuttering of national borders have brought those concerns into sharp focus.

Croatia is particularly vulnerable due to its over-reliance on the tourism industry, with an estimated 20% of its GDP generated from that sector. This has led the International Monetary Fund (IMF) to predict it will become the hardest hit country in south-eastern Europe, facing a 9% contraction of its economy in comparison to the 3-5% average slump predicted elsewhere in the Balkans. As a result, the Croatian government is understandably keen to minimize that economic damage by joining the Schengen zone and opening its borders as soon as possible.

The pandemic and the ensuing economic damage have also strengthened Croatia and Bulgaria’s determination to adopt the common currency. It’s undeniable that being in the eurozone would have helped these countries weather the current storm—the Croatian Central Bank has had to burn through billons of euros in foreign reserves to keep the kuna stable. It’s not surprising, then, that even as their economies stutter to a halt, both Zagreb and Sofia are targeting a summer accession to the Exchange Rate Mechanism (ERM II), an essential prerequisite to adopting the euro.

But while the EC has consistently lent its support to both Bulgaria’s and Croatia’s greater integration into the bloc, not everyone is so keen on fast-tracking their progress. In particular, there are significant question marks over the two countries’ fiscal and judicial integrity, a matter which should not be taken lightly by those at the helm of the world’s largest and most lucrative single market.

Doubts remain over readiness

The major stumbling block regarding Croatia’s financial situation centers on a row over its 2015 conversion of Swiss franc loans into euro-based ones. Taking advantage of the attractive rates which Swiss franc loans offered during the 2000s, an estimated 55,000 borrowers took out loans to the tune of a cumulative €3.3 billion. However, once the Swiss government uncapped its currency in January 2015, the franc’s value soared, meaning countless Croats became liable for far greater repayment sums than before.

The outgoing Croatian government’s response was to forcibly convert all such loans into euros, using the currency conversion rate at the date of the initial loan disbursement. The discrepancy – a cool €1.15 billion – fell on the shoulders of the local lenders, over 90% of which are owned by parent companies elsewhere in the EU. The decision was unpopular both with the banks—costing them the equivalent of three years of profits— and with European officials. The European Commission asked Croatia to reconsider the measure, and the ECB questioned whether the retroactive conversion was compatible with European law.

As if those monetary concerns weren’t troubling enough, Croatia’s track record on graft is similarly patchy. In fact, the country has actively regressed on corruption since joining the EU. Former president Ivo Sanader has been convicted for bribery and corruption; ex-Health Minister Milan Kujundžić was recently sacked over his involvement in a real estate scandal and Zagreb’s mayor Milan Bandić – who has served in his position for over 15 years – has been fighting charges of abuse of power, embezzlement and other malfeasance for more than a third of his time in power.

Depressingly, corruption appears to be even more entrenched in Bulgaria. It boasts the lowest Transparency International rating in the EU, while both its chief prosecutor Ivan Geshev and the head of its anti-graft body, Sotir Tsatarov, have faced recent allegations of wrongdoing. Despite the startling fact that Sofia has made virtually zero progress since its accession to the EU, former Commission President Jean-Claude Juncker inexplicably announced that Sofia was ready for the eurozone as far back as 2017.

Compliance ahead of convenience

While Juncker’s comments were clearly rooted in enthusiasm for all EU members to adopt the common currency, his willingness to turn a blind eye to the country’s dismal track record on graft has alienated both individual member states and everyday Bulgarians as well, sowing the seeds for Euroscepticism within the country.

It’s a similar situation in Croatia, where endemic corruption and financial instability complicate its bid for a closer union with the rest of the European bloc. While accelerating its integration might ease some of those fiscal woes, compliance with the rule of law and the EU’s fundamental principles should not be sacrificed at the altar of convenience, for either Zagreb or Sofia. Only once both countries have satisfactorily overcome their domestic issues will they be ready to fully embrace the rule of EU common law.

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