"What can you do in such a situation? Be a populist, bury your head in the sand and keep on pretending nothing is happening around you, or accept the reality, modify the prices and try to compensate them with development and economic growth?" Milanovic said at a meeting of the main committee of his Social Democratic Party (SDP).
The government decided on Friday to raise the price of natural gas for households by 22% and the price of electricity by 20%.
Milanovic said that some of the decisions made by the government during its first 100 days in office were necessary, and that the reform process in the country had only just begun. "This is just a beginning," he said.
The prime minister drew attention to what was going on in other countries, such as Italy, Spain, Britain, Greece and France, saying that big EU countries, with the exception of Germany, were sliding back into a recession. "For a country, such as Croatia, which is economically exposed to those countries, that is not good news," he said.
Milanovic said that there had been no pay reductions or any serious cuts in Croatia's public sector and that the government would try to keep that way.
"We will try to continue in that way, but in a difficult situation like this there can be no guarantees for anything. We will have to fight on our own," he said, adding that Croatia would have to rely on its own resources as well as on those of international investors who he said saw a chance in Croatia to invest in the development of transport corridors, a lowland railway, the port of Rijeka, and tourism.
Milanovic stressed the importance of fiscal stability. "There can't be a serious economy without it. (...) We cannot work only for international financial circles and for international investors," he said, adding that the preservation of the sovereign credit rating was just a warning as to what more Croatia should do.
Milanovic also warned about growing extremism in neighbouring countries, noting that Croatia had been spared for now. He said he did not like bans, but that Croatia would have to oppose extremist behaviour should there be any.
Milanovic said that the SDP had shown that it could change while at the same time remaining loyal to its fundamental values: justice and equality.
Earlier in the day, Milanovic headed an SDP delegation to Zagreb's Mirogoj Cemetery where they laid bouquets of red roses on the grave of Ivica Racan, the founder of the SDP and prime minister of Croatia from 2000 to 2003, to mark the fifth anniversary of his death.