Germany insists Croatia is co-operating with UN's war crimes tribunal - despite international concern at its failure to hand over an indicted former general.
The EU demands that Zagreb hand over General Gotovina
The Croatian Government says it does not know where General Ante Gotovina is, although tribunal officials insist he is hiding in the country.
The issue has hindered Croatia's bid to become a member of the European Union.
German Chancellor Gerhard Schroeder, on a visit to Zagreb, defended Croatia saying it could be a member by 2008.
Mr Schroeder said he was impressed by the government's recent reforms and insisted Croatia's application should not be linked to the case of General Gotovina.
"Croatia is co-operating with the tribunal," he said in the Croatian capital.
"You cannot arrest someone who isn't there... and there should be more understanding for this."
This is the first visit by a German leader to Croatia since the country declared independence from the old Yugoslavia in 1991.
Mr Schroeder took the opportunity to reinforce the strong historical, political and economic links between the two countries, said the BBC's Balkans correspondent Nick Hawton.
He said he was impressed by the reforms carried out by the government of Croatian Prime Minister Ivica Racan.
The country should be in a position to begin negotiations to join the EU next year with membership possible in 2007 or 2008, he added.
He said Croatia had already caught up with Romania and Bulgaria - expected to join the EU in 2007 - "and we support that date for Croatia too".
Mr Schroeder's comments will be seen as a strong endorsement of Mr Racan's government, which faces a general election at the end of November, says our correspondent.
However, the sticking point remains General Gotovina who has been on the run since his indictment was made public in 2001.
General Gotovina is accused of the murder and disappearance of hundreds of Serb civilians during the Croat offensive in the Krajina region in 1995.
But to many Croats, he is a war hero because of his role in defending the ancient port city of Zadar from attack by Serb militias and the Yugoslav National Army.
Germany is one of Croatia's staunchest allies in the west
The tribunal's chief prosecutor, Carla del Ponte, insists the general is hiding in Croatia - but the government says it does not know where he is.
The Netherlands and Britain have refused to ratify an EU associate membership accord with Zagreb until they are convinced of Croatia's full compliance with the tribunal's requests.
The European Commission, which is due to give its opinion in April on whether Croatia can start accession talks, has also said co-operation with the tribunal remains an obstacle.