Why Croatia sees euro membership as a path to security

Placeholder while loading article actions

Croatia, which is the newest member country of the European Union and whose economy is heavily dependent on foreign visitors, is in a hurry to adopt the euro as its national currency. The move, which the government is targeting for 2023, would put it at the heart of the EU, making payments easier and cheaper and giving its financial system a safety net in future crises. The country, whose main tourist attractions include Split and Dubrovnik on its Adriatic coast, is also aiming to join the Schengen zone, which removes barriers to travel across Europe.

1. How close is Croatia to joining the euro?

Croatia wants to swap its national currency, the kuna, for the euro on January 1, 2023, eight years after the Baltic state of Lithuania became the latest addition to the 19-member currency bloc. The former Yugoslav republic of 3.9 million people is close to achieving its goal: it has joined the euro zone waiting room known as MCE-2 in 2020, and hopes to get the approval for membership this summer.

2. Why does Croatia want to join?

Croatia began its push to the euro as soon as it gained EU membership in 2013 – a step that was delayed by the bloody wars of the 1990s sparked by the breakup of Yugoslavia. As elsewhere in the east of the continent, the move is partly intended to cement a Western alignment after roughly half a century of communist rule after World War II.

3. What about economic logic?

It’s probably even more convincing. The country depends more than any other EU state on tourists, who generate a fifth of gross domestic product and find holidays much easier when they don’t have to struggle with exchange rates. Meanwhile, most private bank and corporate deposits are held in euros, along with more than two-thirds of debt totaling around 520 billion kunas ($75 billion). Joining the euro zone would lower interest rates, improve credit ratings and make Croatia more attractive to investors, according to central bank governor Boris Vujcic.

Adopting the euro would formalize some of the economic activity that is already carried out using the common currency – from sales of apartments and cars to short-term rentals for holidaymakers. This would reduce foreign currency costs to tourism by about 1.2 billion kuna per year, according to the central bank. Croatia would have access to liquidity from the European Central Bank and possible bailout funding from the European Stability Mechanism in times of crisis. With Greece’s troubles now largely in the rearview mirror, there is popular support for switching to the euro. Almost all political parties support the decision.

In terms of monetary policy, there is not much to lose by relinquishing control to the ECB since the kuna exchange rate is stuck in a narrow trading band with the euro and, before that, with the German mark since the 1990s. Croatia’s expected adoption of the euro will cost local banks about 1 billion kuna a year in lost conversion fees, but the switch will reduce currency risks and improve stability, according to the national banking association. The adoption of the euro is also expected to cost banks between 80 and 100 million euros in one-time expenses aimed at adapting their IT services and ATM networks.

6. What must he do to join?

In short, it must respect EU limits on public debt and public finances, as well as inflation and exchange rate targets. There is some ambiguity, however, as Brussels considers what its borrowing and budget restrictions should look like in the aftermath of the pandemic. Croatia plans to reduce its budget deficit to the original ceiling, while its debt-to-gross domestic product ratio is expected to fall to just over 80%, which is roughly in line with previous requirements and should be sufficient under the new rules.

7. What is the hardest challenge?

Inflation is the biggest uncertainty. Skyrocketing energy costs in Europe, alongside the Russian invasion of Ukraine and the rebound of the Croatian economy in 2021, have pushed up consumer prices. What matters is how Croatia compares to a one-year average of the three eurozone states with the lowest rates. This calculation will be made once the April data is available. Eurostat data for March, released on April 21, showed Croatia’s annual inflation rate at 7.3%, just below the eurozone average of 7.4%. Croatia’s central bank said in response to a Bloomberg survey that it expects the country’s annual average inflation to be around 5.4% for 2022, adding that “one can with a degree high probability of expecting Croatia to meet the price stability criterion”. The International Monetary Fund predicted in its April World Economic Outlook that Croatian consumer prices would rise by 5.9% in 2022, compared to 5.3% for the euro zone.

8. Are there any other obstacles?

Croatian market watchdog Hanfa launched an investigation in January into deals struck by senior central bank officials, including Vujcic and Deputy Governor Sandra Svaljek, that in some cases date back two decades. Both denied any wrongdoing and confirmed that they owned various stocks and bank bonds at a time when the Croatian monetary authorities were allowed to make such investments. The investigation followed reports from the Zagreb-based portal Index.hr and calls from opposition leaders for Vujcic and Svaljek to step down. Vujcic said the allegations were aimed at sabotaging the Balkan country’s plans to adopt the euro.

9. Are other countries interested in joining us?

One is certainly: Bulgaria. But they pushed their schedule back a year to 2024 after being accepted into MCE-2 along with Croatia. Romania has also expressed a desire to follow its Eastern European counterparts, Estonia, Latvia, Lithuania, Slovakia and Slovenia into the currency bloc. Although they are bound to join themselves at some point, the biggest countries in this region are not rushing. Poland, for its part, attributes its ability to survive the 2008 global financial crisis without recession to maintaining an independent monetary policy.

10. What do the existing euro countries say?

Paschal Donohoe, Ireland’s finance minister who is also leading rallies of his eurozone colleagues, hailed Croatia’s “huge efforts” to prepare for euro adoption, saying he “hopes” that progress can be made. Beyond Brussels, public debate on the expansion has been limited since warnings following a series of money laundering scandals in the Baltic region. Such caution has lately been directed more towards Bulgaria.

11. What would the new Croatian coins look like?

The coins would feature the checkerboard pattern which, found on the coat of arms of Croatia, is considered one of the oldest national symbols in Europe. They will also have images of a kuna, or weasel in the Croatian language, and feature Nikola Tesla, one of the world’s greatest inventors, who was an ethnic Serb born in the present Croatian town of Smiljan. Serbia’s central bank said it would take action if Croatia were allowed to use Tesla’s image.

• Bloomberg articles on Croatia’s central bank urging citizens to transfer their savings to banks and its euro coin projects.

• An analysis by Bruegel on the maturity of the euro.

• A study by the Brookings Institution on whether European integration increases people’s life satisfaction in Croatia and elsewhere.

(Updates with Eurostat’s inflation indicator for March in question 7.)

More stories like this are available at bloomberg.com

Comments are closed.