Goodbye Kona, welcome to the Eurozone. After two years of testing the solidity of its ties with the European currency, the European Commission announced on Wednesday after the latest convergence report, which assessed progress in the seven member states, that “Croatia is ready to adopt the euro on January 1, 2023”. EU countries are legally obligated to join the single currency but not all of them are necessarily ready to do so or economically and financially mature.
The document states that “Croatia meets the four nominal convergence criteria and that its legislation is in full compliance with the treaty requirements and the laws of the European System of Central Banks and the European Central Bank”. Obviously, this means that Croatian prices have remained relatively prudent over the past two years, that their public finances have not deteriorated, and that their exchange rate with the euro has held up well while their interest rates have developed in line with the best performing countries in the eurozone.
The entry of this country of 4 million people into the less restrictive and less restrictive euro club is not a revolution. It was approved in July 2020 to participate in the Exchange Rate Mechanism (ERM II), opening a test period for its ability to support without devaluing its currency’s central exchange rate against the euro. The central Kuna price is set at 7.53450 Kuna for 1 euro.
These links with the euro are much older since their inception in 1994, the Croatian currency used the euro, and before that the German mark, as a reference currency and the policy of the Croatian Central Bank was to keep the Kuna exchange rate with the European currency in a narrow range.
“For a very small and open country like Croatia, whose economy is already closely linked to the European market, the risks of joining the euro are very low. Explains Olivier de Buisson, chief economist for emerging countries at Société Générale. After the post-war years of hyperinflation, it prevailed Stability in a large monetary area depends on considerations of monetary independence. »
bulwark from crises
Another degree of EU integration could provide this under-industrialized country heavily reliant on tourism, with greater economic and financial security. Christopher Dembek, director of research and strategy at Saxo Bank, stresses that the eurozone is a bulwark against the risks of a financial crisis, which is important in the current context. In the event of significant tension, the European Central Bank could deploy a sovereign debt buyback policy. It is also a bulwark against China, which is showing a growing appetite for Croatian companies. »
For European Commission Vice President Valdis Dombrovskis, the arrival of a new member “also shows that the euro remains an attractive and effective international currency”. it’s time. Lithuania’s last accession dates back to 2015 and apart from Bulgaria, which joined the exchange rate mechanism along with Croatia in 2020, governments are in no rush to ask for their club card.
The best of both worlds
Poland and Hungary, the biggest names in Eastern Europe, have reiterated over the years that they do not want the euro. They prefer to retain “the best of both worlds,” according to Christopher Dembek, particularly the possibility of devaluing their currency if necessary and maintaining oversight of their banks. As for Bulgaria, which is the most enthusiastic about joining the euro since the arrival of the new government, it “does not meet the conditions for adopting the euro,” as stated in the convergence report.
Finance ministers should give the final green light at the beginning of July for Croatia’s membership after discussion within the Eurogroup and the opinion of the European Central Bank and the European Parliament. As Paolo Gentiloni, Commissioner for Economic Affairs said, “This year the eurozone will welcome the celebration of 20e Euro 20 Anniversarye member”.