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Why Croatia Sees Joining the Euro as Path to Security



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

1. Why is Croatia joining the euro?

Croatia began its push to join the single currency as soon as it won accession to the EU in 2013, a step that was delayed by the bloody wars in the 1990s sparked by the breakup of Yugoslavia. The move is partly aimed at cementing a Western alignment after about half a century of communist rule following World War II.   

2. What about the economic logic?

That’s arguably even more compelling. The country relies more than any other EU state on tourists, who generate a fifth of gross domestic product and find holidaying much easier when they don’t have to grapple with exchange rates. Meanwhile, most private and corporate bank deposits in Croatia are held in euros, along with more than two-thirds of debt totaling about 520 billion kuna ($74 billion). Euro-area membership 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 a chunk of economic activity that’s already carried out using the common currency — from apartment and car sales to short-term rentals for vacationers. It would trim foreign-exchange costs outside tourism to the tune of about 1.2 billion kuna a year, according to the central bank. Croatia would gain access to ECB liquidity and potential bailout financing from the European Stability Mechanism during periods of crisis. With Greece’s troubles now largely in the rear-view mirror, there’s popular support to switch to the euro. Almost all political parties back the move.

In terms of monetary policy, there’s not much to lose by relinquishing control to the ECB since the kuna’s exchange rate has been locked in a tight trading band to the euro and, before that, to Germany’s mark since the 1990s. Croatia’s expected euro adoption will cost local banks about 1 billion kuna annually in lost conversion fees, but the switch will reduce currency risks and improve stability, according to the national association of banks. Euro adoption is also expected to cost banks between 80 and 100 million euros (between $80 million and $100 million) in one-time expenditure aimed at adapting their IT services and ATM networks. 

5. What hurdles did it face? 

Croatia joined the euro-area waiting room known as ERM-2 in 2020. Inflation has proved the biggest challenge after the war in Ukraine sent prices of energy and other commodities soaring. But it’s a problem that’s gripping the whole euro area: Consumer prices there jumped by a record 8.6% in June from a year earlier. On June 1, the European Central Bank said Croatia had met euro-zone entry requirements, with inflation remaining sufficiently in line with other euro members over a one-year period. The ECB cautioned, however, that policy makers must remain watchful. EU member states gave their final approval for Croatia to join the single currency on July 12. 

6. What other countries want to join the euro?

One certainly is: Bulgaria. But it has pushed back its timetable by a year to 2024 after being accepted into ERM-2 at the same time as Croatia. Romania has also expressed a desire to follow eastern European peers Estonia, Latvia, Lithuania, Slovakia and Slovenia into the currency bloc. Despite being obligated to join themselves at some point, however, the biggest countries in that region aren’t rushing. Poland, for one, attributes its ability to survive the 2008 global financial crisis without a recession to it retaining an independent monetary policy.

8. What will Croatia’s new coins look like?

The coins are expected to feature the checkerboard pattern found on Croatia’s coat of arms, which is considered one of the oldest national symbols in Europe. They’ll also have images of a kuna, or weasel in the Croat language, and will feature Nikola Tesla, one of the world’s great inventors, who was an ethnic Serb born in the present-day Croatian town of Smiljan. Serbia’s central bank has said it would take action if Croatia was allowed to use Tesla’s image. 

• Bloomberg articles on the European Commission’s recommendation on Croatia, the country’s central bank urging citizens to move their savings into banks, and its plans for euro coins.

• A Bruegel analysis of the euro coming of age.

• A Brookings Institution study on whether European integration increases people’s life satisfaction in Croatia and elsewhere.

More stories like this are available on bloomberg.com



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