Why Croatia sees euro membership as a path to security

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Croatia, the newest member of the European Union, is expected to adopt the euro as its currency early next year. The move will plunge the nation of around 4 million into the core of the EU, making payments easier and cheaper and giving its financial system a safety net in future crises. The country, whose economy is heavily dependent on foreign tourists, also aims to join the Schengen area, allowing Croatians to travel more easily across Europe.

1. Why is Croatia joining the euro?

Croatia began its push to join the single currency as soon as it secured EU membership in 2013, a step that was delayed by the bloody wars of the 1990s sparked by the breakup of Yugoslavia. The move is partly intended to cement a Western alignment after roughly half a century of communist rule after World War II.

2. 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 in Croatia are held in euros, along with more than two-thirds of debt totaling around 520 billion kuna ($74 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 ECB liquidity and possible rescue 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. Adopting the euro is also expected to cost banks between €80 million and €100 million ($80 million to $100 million) in one-time expenses to adapt their IT services and ATM networks.

5. What obstacles did he encounter?

Croatia joined the Eurozone waiting room known as ERM-2 in 2020. Inflation has proven to be the biggest challenge after the war in Ukraine which sent oil prices skyrocketing. energy and other raw materials. But it is a problem that affects the entire euro zone: consumer prices there jumped by a record 8.6% in June compared to the previous year. On June 1, the European Central Bank declared that Croatia had met the conditions for entry into the euro zone, with inflation remaining sufficiently in line with that of other members of the euro zone over a period of one year. The ECB, however, warned that policymakers should remain vigilant. EU member states gave their final agreement to Croatia joining the single currency on 12 July.

6. Which other countries want to join the euro?

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.

8. What will the new Croatian coins look like?

The coins should feature the checkerboard pattern found on the coat of arms of Croatia, considered one of the oldest national symbols in Europe. They will also have images of a kuna, or weasel in the Croatian language, and will 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 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.

• 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.

More stories like this are available at bloomberg.com


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