Croatia is geographically diverse, but in terms of public finance and local self-government it is one of the most centralised countries in Europe, Josipovic said.
For instance, local government units participate in the general government's revenues and expenses with only 11 per cent.
In order to achieve better decentralisation it is necessary to reform the tax system and reduce the number of local government units, the president said.
The criteria for reducing the number of local government units should be geographical, financial, functional, historical and political, he added.
Describing decentralisation as a politically sensitive process, Josipovic said that political parties should reach consensus and that the authorities "should grit their teeth and do it".
Council member Emil Tedeschi said that the business community regarded the current system of local government as unviable and too expensive.