How is Croatia adapting to the euro?
On January 1, 2023, Croatia became the 20th country to join the Eurozone. The kuna, the local currency, was replaced by the euro.
With a single currency, the country hopes to strengthen and stabilize its economy and improve the living standards of its residents.
Some regret that they crossed the kuna
At the Zagreb fruit and vegetable market, the reactions are different.
“I’m happy with the change,” says one customer. – That’s something new.
“It’s not true that prices have skyrocketed,” says another. “They may have gone up a few cents, but it’s nothing.”
Others are less convinced.
The prices are a little too high, that’s all, says the older man. “I have no problem with conversion. You just need to have money!”
“We are not happy, we prefer our mink,” says another. “For me, a country that does not have its own currency is not a country.”
Most for a change
45 percent of Croats already had an account in euros for large expenses, but now everyone has to get used to a single currency for everyday purchases.
Ana Knežević, president of the Croatian Association for Consumer Protection.
“It’s hard for old people to count how much it is now that prices are in euros. We have double prices, so it’s very easy to compare,” she says.
While older people are attached to the kuna, 55 percent of Croats are in favor of introducing the euro, according to data Eurobarometer. But more than 80% of them fear price increases.
“Coffee, bread… the prices are higher now than before the New Year,” she continues. “People don’t have a lot of money to spend, food is very expensive, heating, electricity is also expensive, so it’s very difficult to live. Croatia is a small country, pensions are not high, so you can imagine how they live.”
Incentive for tourism and production
It is expected that the transition to the euro and entry into the Schengen area will stimulate sectors such as tourism, 24 percent of Croatian GDP, but also manufacturing, which is an important export sector with over 12 percent of GDP.
The Končar Group operates in the field of energy, infrastructure and electric railway vehicles. The company exports more than 60% of its production, of which 70% goes to Eurozone countries.
“If we look back at the last 21 years when we actually tied our currency, the kuna, to the euro, we cannot say that the change will be huge,” says CEO Gordon Kolak. “But we think that doing business will be much easier because our customers will understand our offer more easily.
When we talk about productivity, when we talk about modernization of production, when we talk about digitalization, all these areas are much more important for us than the euro as a currency.
In 2020, more than 70% of Croatian merchandise exports were traded in euros, only 16% in US dollars.
The introduction of the euro seems natural for a country where the single currency is already well integrated.
Croatian GDP grew by 6% in 2022, but the projection for 2023 is only 1%, partly due to high inflation.
Interview: HBH Governor Boris Vujčić
We spoke with HBH Governor Boris Vujčić to find out his view on the arrival of the euro.
Boris Vujčić, HBH governor: I am happy that we have finished a project that we basically started five years ago. This is something that will bring greater resilience to the economy. This will make the Croatian economy more attractive for foreign direct investment. Transaction costs will be lower. It is also important because we are a tourist country and as a tourist country 70% of our tourists come from the Eurozone countries. So, in many ways, it is a good thing for Croatia.
Fanny Gauret, Euronews: Given the current inflation in the Eurozone, do you think it’s a good time to switch to the Euro?
Boris Vujčić: I think it would have been better if we could have switched earlier. For a small, open economy like Croatia, it is especially important to be in the eurozone in times of crisis. If you look at some of our neighbors who are currently members of the European Union, and not members of the Eurozone, they had quite a lot of pressure on the foreign exchange market this year after the aggression against Ukraine. So if you look at the cost of borrowing, these costs are now between 8% and 11% for companies or 6 to 9% for households. While we were in Croatia, we did not see pressure on the foreign exchange market, nor did we have to react as much by increasing interest rates as was the case in those countries. So, at this moment we are already seeing the advantages because the markets have calculated that we will enter the Eurozone at the beginning of this year.
Fanny Gauret: So how about giving up the ability to set your own interest rates?
Boris Vujčić: Basically, the anchor of our monetary policy was the exchange rate peg to the euro, and it has been like that for the last 30 years. First in German mark and then in euro. When you peg your exchange rate to the euro and have a free flow of capital, you cannot have a truly independent interest rate policy. So it’s about losing something we didn’t have to begin with.
Fanny Gauret: What are the challenges of bringing large amounts of money into the Croatian economy, such as, for example, the real estate market?
Boris Vujčić: We don’t see anything in terms of the economy overheating. What we’re seeing is, as you well said, the housing market is hot, prices are going up now. I think that next year, with the rise in interest rates, the cooling of the real estate sector will follow. The only thing that won’t change is foreign demand, which is expected to actually increase. Now we see that around 20% of real estate purchases come from abroad, we will become even more attractive.
Fanny Gauret: And finally, what are the challenges ahead?
Boris Vujčić: I don’t think it’s a magical thing that will solve the structural economic issues we have. And now we have to focus on implementing the kind of structural reforms that we have yet to do, with the help of the better economic environment created by joining the euro and entering the Schengen area.