Under shellfire on Christmas Eve 1991, 13-year-old Maja Biloglav fled Zadar by boat at night, sent away by her parents as the Yugoslav army surrounded the Adriatic town following Croatia’s declaration of independence.

Now 34 and back in Zadar, the administrator for a rental company says she hopes Croatia’s July 1 entry into the European Union will keep nationalism across the former Yugoslavia from festering into violence again.

“It was an ugly war,” said Biloglav as she sipped a glass of Croatian red wine in a cafe near the white Renaissance church of St. Anastasia. “The European Union isn’t perfect, but it seems to be the only realistic option for us.”

European integration is taking a deeper step into the Balkans with Croatian entry as political leaders seek to stamp out still-smoldering resentments left from the Yugoslav civil wars. Croatia, which lost more than 20,000 people during its fight for independence, plans to use EU funds to complete its reconstruction as it leaves behind its conflicted past.

“Croatia’s entry shows that the European Union’s expansion continues despite the crisis, and the bloc needs to expand to compete with Asia and the BRIC countries,” Tvrtko Jakovina, a history professor at the University of Zagreb, said in a phone interview. Membership also brings “the potential of stabilizing one of the most precarious regions in Europe.”

Incoming Funds

Croatia, whose economic development was stifled by Europe’s bloodiest fighting since World War II, is trying to revive growth after four years of recession or stagnation. As much as 10 billion euros ($13 billion) in EU funds may flow in through 2020 to modernize communist-era rails, sewers and bridges; diversify a domestic industry dominated by tourism and services; and bring living standards up to those of eastern EU members such as the Czech Republic, Slovakia and Poland.

The only remaining EU member needed to approve accession is Germany, whose lower house has scheduled a final vote this week. Chancellor Angela Merkel favors membership.

The prospects of EU membership have pushed investors into Croatian government bonds, lowering the yield on dollar notes maturing in March 2021 to 4.28 percent yesterday. It had been about 8 percent in December 2011, the month the country signed the accession treaty with the 27-nation bloc.

The 16-month-old Social-Democrat-led government of Prime Minister Zoran Milanovic is trying to attract investors. Europe’s sovereign debt crisis caused 2012 foreign direct investment in Croatia to plummet to almost one-fifth of the $4.2 billion registered in 2008, according to the central bank.

Airport Arrival

The country of 4.2 million is seeking to boost investment in infrastructure and energy and boost exploration of its gas and oil supplies in the Adriatic. The government repeatedly has said it is close to finding a strategic partner to build a liquefied natural gas terminal on the island of Krk.

Low-cost carrier Ryanair Holdings Plc (RYA) in April opened a base in Zemunik, Zadar’s airport, and Austria’s Falkensteiner Tourism Group AG last year opened its second resort in Zadar. Still, the pace has slowed since the late 1990s, when Germany’s Deutsche Telekom AG (DTE) and Siemens AG, along with Sweden’s Ericsson AB (ERICB), made investments.

Centered on Croatia’s 5,800-kilometer-long (3,600-mile) long coast, tourism accounts for one-fifth of the country’s economy as visitors flock to craggy cliffs, national parks and islands in azure bays. The rest of the economy is composed of retail, food processing, agriculture, timber and pharmaceutical.

The government in February reduced its 2013 growth forecast to 0.7 percent from an earlier estimate of 1.8 percent, citing low foreign investment. Retail trade declined 2.1 percent in March from a year ago.

Rating Cut

The country’s credit rating was cut to junk by Standard & Poor’s in December, followed by a similar reduction by Moody’s Investors Services in February. Both credit rating companies cited the stalled recovery, a lack of budget discipline and vulnerability to external shocks.

Public debt will increase to 55 percent of gross domestic product this year, while state borrowing will total 27 billion kuna ($4.7 billion), according to the government’s forecast in November. The government on March 21 said it would reduce the total public deficit this year to 3.4 percent of GDP from an earlier forecast of 3.9 percent.

“We invested here based on the hope that this country would one day join the EU,” Andreas Treichl, chief executive officer of Erste Group Bank AG (EBS), told Swedish investors in Zagreb in April. “But the EU membership doesn’t solve problems, and if Croatia doesn’t attract investors, it will lose out.”

Poorest Neighbor

Last year’s per-capita GDP in Croatia, at $12,971 compares with $18,579 in the Czech Republic, $22,192 in Slovenia and $41,512 in Germany, according to the International Monetary Fund’s website.

“The key is that Croatia uses the accession to speed up the recovery by attracting greenfield investments to enlarge the country’s export base and by using the maximum amount of EU funds,” said Vladimir Gligorov, an economist at the Vienna Institute for International Economic Studies. “Ultimately, this is up to Croatia.”

As a by-product of entry, many Croatian companies will start paying new or higher customs to Balkans neighbors, with which they had enjoyed a free-trade agreement. And in the newly duty-free EU market, they will confront greater competition.

That concerns Vandri Montabelo, chairman of the management board of Maraska d.d. Zadar. The company is named for the more than 2,000-year-old town, and produces a cherry liqueur called Zadarski Maraschino from a recipe dating back to 1768.

‘Saturated’ Market

“The EU market represents a great potential, but it is also the most saturated, most demanding market,” Montabelo said. “I lose sleep at night thinking how to make someone buy just our product.”

Sipping wine in the cafe, Biloglav recalled that she feared she’d never see her parents again when she sat in the fleeing speedboat in 1991. Serb-led Yugoslav army troops advanced as far as Zadar’s suburbs, virtually disconnecting the southern coast from the rest of the country. She returned a year before the city was reopened in 1993.

“This is all in the past,” she said. “After what we’ve been through, the future looks bright.”

— With assistance from Krystof Chamonikolas in Prague, Gordana Filipovic in Belgrade and Tony Czuczka in Berlin. Editors: James M. Gomez, Anne Swardson

To contact the reporter on this story: Jasmina Kuzmanovic in Zagreb at jkuzmanovic@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net