AN ECONOMY UNDER CONDITIONS OF HIGH INDEBTEDNESS: THE CASE OF CROATIA

The aim of this paper is to gain new knowledge about the cause-and-effect relationship between high indebtedness and economic growth in Croatia. Methodology of the paper is based on applying the indebtedness indicators. In 2015 Croatia got out of the period of economic crisis. Besides Greece, Croatia had the longest period of recession in Europe. The long-lasting recession took the veil off all weaknesses of the present economic model. They have been concealed for years by the increase of foreign indebtedness and abetting of the growth in the domestic demand. With the increase of the indebtedness, Croatia is forced to give a greater part of its production for debt repayment. In terms of fiscal policy it is necessary to follow the basic rule of the public finance sustainability that the real growth rate of the production in the long-term must be higher than real interest rate on government debts. Higher public debt hinders the economic growth because the higher costs of its servicing constrain other fiscal expenses and the ability of the fiscal policy to initiate the economic activity in the country. The obtained results suggest that besides the economic policy measures it is very necessary to start the structural reforms to initiate and realize stronger economic growth.