Why Croatia sees joining the euro as a path to security
1. Why is Croatia joining the euro?
Croatia began its push to join the single currency as soon as it achieved EU accession in 2013, a step delayed by the bloody wars of the 1990s when Yugoslavia broke up. The move is partly aimed at consolidating a western orientation after about half a century of communist rule after World War II.
2. What about economic logic?
This is probably even more convincing. The country relies more than any other EU country on tourists, who generate a fifth of gross domestic product and make a living on holiday much easier when they don’t have to deal with exchange rates. Meanwhile, most private and corporate bank deposits in Croatia are in euros, along with more than two-thirds of debt totaling about 520 billion kuna ($74 billion). Eurozone membership can lower interest rates, improve credit ratings and make Croatia more attractive to investors, central bank governor Boris Vujčić believes.
The adoption of the euro formalizes some of the economic activity that is already carried out using the common currency – from the sale of apartments and cars to short-term rentals for travelers. According to the central bank, it reduces foreign exchange costs outside of tourism to approximately HRK 1.2 billion per year. Croatia gets access to the liquidity of the ECB and possible financing of aid from the European Stability Mechanism in times of crisis. With Greece’s problems now largely in the rear-view mirror, there has been massive support for a move to the euro. This move was supported by almost all political parties.
In terms of monetary policy, there is not much to lose by handing over control to the ECB, as the kuna’s exchange rate has been in a tight trading band with the euro and before that with the Deutsche Mark since the 1990s. The adoption of the euro in Croatia will cost local banks about one billion kuna a year in lost conversion fees, but the transition reduces currency risks and improves stability, according to the national bank association. It is also expected to cost Euro Bank EUR 80-100 million in one-off expenditure to adapt their IT services and ATM networks.
5. What obstacles did he face?
On July 12, EU member states finally approved Croatia’s entry into the euro, following Eastern European peers Estonia, Latvia, Lithuania, Slovakia and Slovenia into the single currency. Inflation has emerged as the biggest challenge after the war in Ukraine sent prices of energy and other commodities skyrocketing. But it’s a problem that’s present everywhere: The inflation rate in the eurozone fell in November, the latest data show, but consumer prices still rose 10.1% from a year earlier.
6. Which other countries want to join the euro?
One for sure: Bulgaria. But it pushed its timetable back by a year to 2024 after being admitted to the euro zone’s waiting room, known as ERM-2, at the same time as Croatia in 2020. Romania also expressed its desire. Despite the fact that they themselves have to join at some point, the largest countries in the region are in no rush. For example, Poland attributes its ability to survive the 2008 global financial crisis without recession to maintaining an independent monetary policy.
8. What do the new Croatian coins look like?
The coins have a map of the country and a national checkerboard motif. They also have mink or weasel images and depict the inventor Nikola Tesla, an ethnic Serb born in the present-day Croatian town of Smiljan. The Serbian Central Bank has announced that it will take action if Croatia is allowed to use Tesla’s image.
• Bloomberg articles on the European Commission’s recommendation on Croatia, the country’s central bank urging citizens to transfer their savings to banks, and its plans for euro coins.
• Bruegel’s analysis of the growth of the euro.
• Brookings Institute study on whether European integration increases people’s life satisfaction in Croatia and elsewhere.
–With help from Zoe Schneeweiss.
More similar stories are available at bloomberg.com