Croatia is expecting an economic boost as it prepares for the introduction of the euro
Ivo Božić, a vendor selling trinkets at the Christmas market in the Croatian capital Zagreb, is used to handling multiple currencies and thinks the transition will go smoothly when the country adopts the euro on January 1.
“If you’re dealing with tourists, you definitely have a few currencies in your head,” said Bozic, whose wares include dolls in colorful costumes, Christmas-themed fridge magnets and handmade jewelry. “I have bank accounts in multiple currencies and I guess I’ll just merge them next year,” he added. “I bought some of my things for euros anyway.”
When Croatia becomes the 20th country to use the euro next week, it will be a milestone for a nation of 4 million people that has long sought closer integration with the rest of the EU. Croatia will also join the European borderless Schengen zone.
Switching from the kuna should bring benefits, economists say, because Croatia relies on the single currency area for more than half of its foreign trade, two-thirds of its foreign direct investment and roughly 70 percent of its tourists.
It will also be a symbolic boost to European unity at a time when Russia is trying to disrupt the bloc’s opposition to its war in Ukraine. European Central Bank President Christine Lagarde called the addition “a vote of confidence for the euro area” and said Croatia would benefit from the “euro shield”.
The introduction of the euro is in some ways a natural progression for a country where the single currency already accounts for half of its total bank deposits and 60 percent of its total loans — more than any country outside the eurozone.
“Croatia is the country that will benefit the most from joining the eurozone,” as it would eliminate the currency risk, said Boris Vujčić, governor of the Croatian Central Bank. The foreign exchange risk in Croatia is the highest.
“When your currency depreciates against the euro, it means your debt is worth more,” said Vujcic in an interview with the Financial Times. “So your borrowing costs as a country are higher to reflect this risk.”
Croatia has 27 billion euros in foreign exchange reserves – 40 percent of its gross domestic product – to cover that, he said, although joining the euro means it “won’t need nearly as much.”
The advantages of the euro “are most visible during the crisis”, emphasized Vujčić, pointing to the recent pressure to sell the Hungarian forint, the Polish zloty and the Czech crown. “They had to intervene and raise interest rates very much, and the yields on their 10-year government bonds are now 5 to 8.5 percent,” he said.
In contrast, Croatia’s yield on 10-year bonds was around 3.5 percent, lower than Italy and Greece and slightly above Spain, although it has yet to join the euro. “There is a huge credibility effect,” said Vujcic, who will be able to vote on the ECB’s policy decisions from January after already joining the meetings as an observer.
Vujčić recalled how prices soared out of control in the former Yugoslavia and then in Croatia during the late 1980s and early 1990s, suggesting he would take a hawkish stance to aggressively tame the rising prices that are worrying European policymakers.
“I have seen the beast and I know how the beast behaves if it is not checked in the right way at the right time,” he said.
He acknowledged the risk that Croatian consumers will blame the introduction of the euro for high inflation, which reached 13.5 percent last month. However, on average, countries that adopted the euro experienced inflation growth of only 0.2 to 0.4 percentage points, albeit in periods of lower price growth.
In order to improve price transparency, shops in Croatia have had to display the price of goods in both kuna and euros since September and will continue to do so until the end of 2023. Companies have been threatened with fines if they try to take advantage of the transition. raise prices.
“The handover comes at a time when inflation is already high, so the starting position is that Croatian consumers are very sensitive to prices,” said Michał Seńczuk, CEO of Studenac, one of the leading Croatian grocery chains. “That’s why it’s not difficult for any retailer to impose an unjustified price increase because if you do, customers will go to your competitors.”
The change was a logistical challenge for traders and authorities. Studenac had to print and display 5 million new price lists, while his employees had to explain to confused customers that he cannot accept euros until January 1, after which both currencies will be used in parallel for two weeks.
Seńczuk predicted that, in addition to boosting tourism, the introduction of the euro would make Croatia “more attractive to foreign buyers looking for a second home, either for a summer vacation or for the milder winters we have here.”
The central bank, meanwhile, has brought in the military to guard and protect about 40 percent of the kuna coins it expects to be exchanged for euros.
“It’s almost the weight of the Eiffel Tower,” said Vujčić. “We will sell it as metal after three years and then the army can put its tanks or armored vehicles [back] to the storage area.”