Economic crisis and banking sector: Croatian experiences

During the previous ten years in the Republic of Croatia, economic policy has been based on the expansion of the aggregate demand which is largely debt financed. Such economic policy has resulted in high twin deficits – both current account deficit and budget deficit – and, in the end, high external and internal debt. In addition, this policy has caused problems in the real sector which, additionaly augmented by the global financial crisis, has turned into an economic crisis. This paper investigates how the banking sector, especially the central bank – the Croatian National Bank, has reacted to this complicated situation. At the total financial sector level, monetary policy was efficient. The spillover of the global financial crisis to the financial sector has stopped. However, the problems remain in the real sector. Even if the economic crisis finishes, it will continously be a threat until its cause – twin deficits – have been eliminated. The long run solution to this situation is not possible without structural economic changes that will comprise export stimulation, that is, the strengthening of the exportoriented sector. It is illusory to expect that the central bank can do it alone, without cooperation with other decision makers in economic policy, particularly the Government.