Why Croatia sees euro membership as a path to security

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Croatia, which is the newest member 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 and which the EU is treating favourably, 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 well on its way to achieving its goal: in 2020 it joined the euro zone waiting room known as MCE-2, and the 1st June, the European Central Bank declared that Croatia met the conditions for entry into the euro zone. The European Commission, the executive body of the European Union, has recommended that Croatia join the euro next year, and that decision now needs to be approved by EU governments.

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 ($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 ($85 million to $106 million) in one-time expenses to adapt their IT services and ATM networks.

6. What obstacles did he have to face?

For Croatia, which was the last country to join the EU in 2013, inflation has proven to be the biggest challenge after the war in Ukraine which drove up the prices of energy and other raw materials . This is a problem that affects the entire euro zone: consumer prices there jumped by a record 8.1% in May. The Commission and the ECB confirmed in separate reports that Croatia met the price stability requirement, with inflation remaining sufficiently in line with other eurozone members over a one-year period. The ECB, however, warned that policymakers should remain vigilant.

7. 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.

8. 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 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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