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EU demands budget cuts from Croatia to bring deficit under control

European Commissioner for Economic Affairs Olli Rehn, left, speaks with Greek Finance Minister Yannis Stournaras during a meeting of eurogroup finance ministers at the European Council building in Brussels on Monday, Jan. 27, 2014. Eurozone finance ministers on Monday were to discuss Greece's economic issues and the frustrating pace of negotiations. (AP Photo/Virginia Mayo)

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European Commissioner for Economic Affairs Olli Rehn, left, speaks with Greek Finance Minister Yannis Stournaras during a meeting of eurogroup finance ministers at the European Council building in Brussels on Monday, Jan. 27, 2014. Eurozone finance ministers on Monday were to discuss Greece's economic issues and the frustrating pace of negotiations. (AP Photo/Virginia Mayo)

BRUSSELS - European Union officials on Tuesday demanded Croatia slash its budget shortfall and reduce spending to bring the country's deficit back under the bloc's allowed ceiling.

The Balkan nation, which only joined the EU last year, must more than halve this year's expected deficit from 6.4 per cent of economic output to 3 per cent by 2016.

"It will be essential for Croatia to take decisive action," said the EU's top economic official, Commissioner Olli Rehn. "A clear path is set out for restoring sustainability."

Croatia's economy has shrunk by 12 per cent since its peak in 2008, according to EU figures. Analysts fear the inevitable budget cuts will further weaken growth. The unemployment rate in Croatia, a country of 4.3 million, currently stands at almost 19 per cent — trailing only Greece and Spain in the EU.

Croatia's centre-left government is facing public anger over declining living standards and is viewed by some economists as either unable or unwilling to push forward radical economic reforms, including of the labour market and public sector. Presidential elections will be held this year.

The 28 finance ministers on Tuesday endorsed a so-called excessive deficit procedure that spells out how quickly Croatia is expected to cut its budget shortfall.

Under the agreement, Croatia must reach a deficit of 4.6 per cent of GDP this year, 3.5 per cent in 2015 and 2.7 per cent a year later.

Croatian Prime Minister Zoran Milanovic said in Zagreb the measures demanded by the EU aren't a "punishment" but will facilitate pushing through the necessary tough measures by reducing domestic political bickering.

They are "a mechanism that will help us to carry out the reforms without political calculation," he said.

Croatia must present the EU with clear policy proposals on this by late April.

Rating agency Standard & Poor's downgraded Croatia this month by one notch to BB, citing a "lack of internal growth drivers stemming from ongoing policy inertia and policy constraints to fiscal and structural reforms" as well as high debt in the public and private sector.

Austrian Finance Minister Michael Spindelegger said Croatia's weak economy could not serve as a pretext to fall behind on deficit reduction.

"The same rules are valid for everybody; that cannot be changed. Therefore Croatia, too, must live with this step and improve" its performance, he said.

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Dusan Stojanovic in Belgrade contributed reporting.

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Follow Juergen Baetz on Twitter at http://www.twitter.com/jbaetz

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