July the 5th, 2021 - Croatian Eurozone entry might seem a far away event, but it is edging ever closer with discussions about what the Croatian design on Euro coins taking place. What will happen if you're making loan payments in Croatian currency? The details so far.

As Poslovni Dnevnik writes, on Thursday, after a session of the National Council for the Introduction of the Euro, Prime Minister Andrej Plenkovic and Croatian National Bank Governor Boris Vujcic stood before the press and talked about Croatian Eurozone entry. Plenkovic said that they were convinced that the country would be ready to enter the Eurozone on January the 1st, 2023, and Vujcic added that until that date, we need to work "at full speed".

The question of how ready Croatia actually is for this step and whether the aforementioned period is long enough to prepare everything was discussed by economic analyst dr. Sc. Petar Vuskovic, who believes that in technical terms, Croatian Eurozone entry can happen relatively quickly.

"Croatia is already highly euroised. This means that the kuna is just a currency model. In that sense, we're ready for the euro. We have to convert the kuna, adjust the ATM system, and harmonise accounting items,'' explained Vuskovic for Net.hr.

When people start talking about Croatian Eurozone entry and the removal of the kuna, what worries people the most is that with the arrival of the euro, everything will become more expensive.

"The rise in prices due to the introduction of the euro will not occur because the rise in prices is predominantly dependent on the movement of raw material and energy prices. If you look at the countries that have already adopted the euro, price growth was at most a mere 0.3 percent. Annual inflation is, for example, one percent,'' explained Vuskovic, before adding:

"The euro will reduce loan installments. Countries that have the euro are considered currency-safe, so the cost of capital is lower. The euro means more than two billion kuna to the market that exchange offices and banks would have taken during exchange operations,'' Vuskovic concluded.

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March the 24th, 2021 - The subject of Croatia joining the Eurozone has been put on the backburner, at least in the public eye, ever since the coronavirus pandemic spread across the globe. Despite other things now taking priority in the media space, the matter of Croatian Eurozone membership is still very much a hot topic.

As Poslovni Dnevnik/Ana Blaskovic writes, Croatian Eurozone membership can officially begin on January the 1st, 2023 at the absolute earliest, and the biggest advantages of the country's adoption of the common European currency could be in the form of export-oriented companies within the area. The above was discussed at a recent conference on the matter organised by the student association Financial Club in Zagreb.

"Whether or not Croatia will enter the Eurozone on January the 1st, 2023 or a year or two later, all depends on when we'll manage to meet the nominal convergence criteria," said Croatian National Bank (HNB/CNB) Governor Boris Vujcic, recalling that Croatia did successfully join the European Exchange Rate Mechanism II (ERMII) last summer. The Governor noted that ERM II membership requires EU member states to spend at least two years within the mechanism, often known as the Eurozone's ''waiting room''.

If Croatia fails to meet the nominal convergence conditions of the so-called Maastricht criteria - a stable exchange rate, stable interest rates, a budget deficit and level of public debt, a country can then end up spending an unlimited period of time in the ERM II, as opposed to just a couple of years.

Vujcic referred to the research which revealed residents of Croatia are most afraid of falling living standards due to rising prices upon the realisation of Croatian Eurozone membership. Research in the countries that have already adopted the euro shows that this isn't actually a justified fear because in the year of the introduction of the euro, prices rose by an average of a mere 0.23 percentage points.

Economy Minister Tomislav Coric said that potentially the biggest winners from the country's introduction of the euro could be Croatia's exporters, given the disappearance of any currency risk. He pointed out that Croatian Eurozone membership is not a mere means to an end in itself, but instead is a very good tool for long-term economic growth, stability and development.

For current information about coronavirus specific to Croatia, including border rules, travel regulations, testing centres and more, click here.

As Marina Klepo/Novac writes on the 19th of July, 2020, when Croatia joins the Eurozone, it is very likely that the conversion rate will be 7.5345 kuna per euro, the level at which the average parity was determined when entering the ERM II, the so-called ''Eurozone waiting room'' in which would-be members spend time. However, changes are possible.

The term central parity means that the country needs to prove that it is able to keep the currency relatively stable, with the range of oscillations set at quite a generous rate, of plus/minus 15 percent.

In the case of the Croatian kuna, this means it can range from 8.6646 to 6.4043. Given the fact that since the very introduction of the kuna, it has never strengthened or weakened by more than five percent when compared to the average exchange rate, there should be no major turbulance. However, the central parity which has now been established doesn't have to be the exchange rate at which the actual conversion will take place: as that will be set six months before the introduction of the euro. The experience of other Eurozone countries shows that most of them did change their currencies at the parity set at the beginning, but not all of them did so. Of the eight countries that joined the Eurozone since its inception in 1999, two have changed their central parity due to appreciation pressures.

For the old Greek drachma, the exchange rate was first set at 353.109 drachma per euro, and finally it was 340.75, while in the case of the Slovak koruna, it changed three times: first to 38.455, then to 35.444, and finally to 30.128, which means that the former Slovakian national currency strengthened by 17.6 percent. Four countries - Malta, Estonia, Latvia and Lithuania - had a fixed exchange rate regime, and the Slovenian tolar and the Cypriot pound managed to maintain central parity after a short stay in the exchange rate mechanism. Bulgaria has also had a fixed exchange rate regime since way back in 1997, with the central parity set at 1.9558 levs per euro.

Analysts of the Dutch financial group ING believe that Bulgaria will maintain this established parity until it does eventually join the Eurozone, and they consider the case of Croatia a little more "nuanced", even though it has a quasi-fixed exchange rate. The Croatian National Bank applies a managed-fluctuating exchange rate regime, but intervenes in the market when pressures are expressed in the direction of weakening or strengthening the currency.

With all that in mind, they believe that maintaining exchange rate stability will not, generally speaking be a major challenge for Croatia, but they estimate that the central parity will be set at 7.55 kuna, given that it is "usually set around the current market level". This suggests that they expect mild depreciation pressures on the Croatian kuna in the coming years. In addition to the kuna and the lev, ERM II currently includes the Danish krone, which has been in the Eurozone's ''lobby'' since 1999.

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If things go according to the plans and wishes of the Government, Croatia should replace the national currency with the euro about a year and a half before its 30th birthday, but as Poslovni Dnevnik/Jadranka Dozan writes on the 13th of July, 2020, there are numerous obstacles to overcome on the path to the Eurozone...

On Friday, Croatia got the green light Brussels for the entry of Croatia (and Bulgaria) into the European Exchange Rate Mechanism (ERM II), and we learned that the central parity between the euro and the kuna with which to enter the Eurozone's proverbial ''lobby'' was set at 7.5345 kuna for one euro, which was the state of the exchange rate on Friday.

At least two years should be spent in the Eurozone's waiting room, which would mean the introduction of a common European currency at the earliest in early 2023. How likely this actually is for Croatia is quite another story.

"Joining the ERM II doesn't mean that the process of adopting the euro is now on autopilot, because both Croatia and Bulgaria are still facing important challenges and will hardly meet all the convergence criteria anytime soon," said ING analysts.

In short, while the Croatian authorities calculate that we are currently on the way to meeting the necessary criteria, the bank's economists predict the introduction of the euro for Croatia (as well as for the Bulgarians) "well after January the 1st, 2023."

In the case of Croatia, they see the challenges primarily in the sphere of the sustainability of public finances (public debt, deficit), and for Bulgaria, the main thorn in the side of that country is its institutional framework and the rule of law.

A ticket to ERM II was actually expected as the Croatian Government managed to comply with the reform points promised in last year's action plan, and the banks have also passed a comprehensive ECB assessment. However, the news received a lot of attention and positive comments, including the reaction of the market through the decline in yields on Croatian government debt - it fell to about 1.1 percent in a ten-year period.

By joining the exchange rate mechanism, which is accompanied by the establishment of very, very close cooperation with the European Central Bank, Croatia will be able to count on more generous ECB support than the recently agreed two billion euro heavy package as an additional source of foreign exchange liquidity.

At the same time, after Brexit and with the current frictions over the adoption of the EU Economic Recovery Plan, this is a welcome message that there is still an appetite among some nations for greater integration within the Union for the bloc itself after all.

Of the EU countries that have not yet adopted the euro, most of them don't yet show any intention of doing so.

The advantages of Croatia's entry into the Eurozone are considered to outweigh the disadvantages. Thus, the Croatian Chamber of Commerce (HGK) points out that the introduction of the euro should facilitate the business of entrepreneurs with more ease.

In addition to the elimination of currency risk and exchange costs, as well as the potential growth of the credit rating and lower financing costs, they also emphasised the advantages of additional financing that Eurozone members have in the current coronavirus crisis.

Entrepreneurs who advocate Croatian Eurozone membership see this as a better chance to implement the reforms that are desperately needed in Croatia, but unfortunately only get done when the country is under significant external pressure.

In addition to the Maastricht criteria, part of the set of measures that Croatia has undertaken to implement within the ERM II application includes administrative, ie the parafiscal relief of the economy and residents, as well as measures related to improving bankruptcy legislation and management in state-owned enterprises.

When it comes to those against the introduction of the euro, the arguments are mainly buffered up by claims that Croatia isn't yet economically ready for this step. People, on the other hand, are most afraid of the potential for rising prices.

They cite examples from other countries that suggest that prices should not increase significantly, and in most countries there has been some increase in wages at the same time to make up for it.

Given the weak industry and large imports, the average price level of consumer goods and services in Croatia is still higher than in some Eurozone countries. Finance Minister Zdravko Maric emphasised that the tax policy is still in our hands, and this also has an impact on prices and the control of them.

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As Novac/Viktor Vresnik writes on the 12th of May, 2020, if Croatia had introduced the euro, it would have been much easier for us to cope with the coronavirus crisis, according to Prime Minister Andrej Plenkovic. Has Croatia been able to adopt the euro so far? No, it hasn't, so any further discussion of the matter is therefore unnecessary.

The second question, of course, is whether Croatia needs the euro today, or perhaps it is better to be more precise and say, does it need it in three years? When it can join the Eurozone at the earliest, provided the euro survives, which it probably will, and will the kuna really enter the European Exchange Rate Mechanism (ERM II) in July, as was announced on Thursday?

This discussion and these questions are educational only, because Croatia has already committed itself to the introduction of the common European currency in the Treaty of Accession to the European Union. The euro has to be adopted by Croatia in this case, but it hasn't been defined when it has to happen.

The coronavirus crisis that arrived this year has clearly showcased the clear benefits of Eurozone membership. The European Central Bank's assistance to Eurozone member states reaches a staggering 750 billion euros (through several types of financial instruments). This makes countries using the common European currency much more resilient to many things, including the coronavirus crisis, than countries that have decided to delay the adoption of the euro because, with the ECB in the background, they are equipped with powerful financial tools to defend them against the economic crisis which has ensued as a result of the pandemic.

Because it is not in the Eurozone, Croatia cannot get a cent of fresh money directly from the ECB. Brussels' direct aid of 1.16 billion euros (which were in fact redirected funds, previously intended for pre-financing projects from European Structural and Investment Funds) that arrived at the beginning of the coronavirus-induced "lockdown" were mere crumbs that was thrown down from the table. If nothing else, this provides Croatia with a good incentive to think about its own need to ''grow up'', in the political, social and economic senses.

The exchange rate of the kuna, until the moment Croatia joins the European Exchange Rate Mechanism, is subject to changes on the foreign exchange market. Some will say that this is good for exporters and, conditionally speaking, they're right if the export product doesn't contain import components that the manufacturer pays for in euros, and such components are built into almost everything Croatia exports, from tourism as the strongest export service sector to parts for cars made by AD Plastika, Končar's transformers, Podravka's peas or fabrics from which suits are sewn by Varteks.

Any significant change in the value of the kuna downwards would be a difficult verdict for all debtors paying in euros, which is, in addition to the state itself, most Croatian businesses. The Croatian National Bank, with the help of agreed currency exchanges with the ECB, has so far managed to stop the kuna from slipping too far. Such an arrangement with the ECB has been agreed upon, however, only until the end of the year, and it's simply illusory to expect the CNB to receive the usual infusion of various currencies earned from tourism over the summer. It will be good if it gets any at all.

The action plan for joining the European Exchange Rate Mechanism and the European Banking Union has been fulfilled on time and in full, the prime minister said on Thursday, the day the Croatian Government also unveiled a crisis budget revision. It is this document, because the rebalance, like the budget itself, has the force of law behind it, that makes the Croatian path to the Eurozone even more difficult and complicated.

To get the Eurozone countries out of the coronavirus pandemic crisis faster, the European Central Bank has decided to flood their financial system with euros. As the presented budget revision shows, Croatia is returning to quite another policy indeed after providing a wave of abundant financial aid to those struggling under current burdens. "It will be difficult," said Zdravko Maric, the finance minister. And inded it will, but could things have been different?

If Croatia really wants to enter the ERM II in July, this kind of budget policy is the only possible one, because it follows the prescribed set parameters. In this way, the government will show the ECB and Brussels that, despite the high share of debt in Croatia's GDP (which returned to 86.7 percent) it has not given up on the gradual reduction of that same indebtedness and that the budget deficit is also being kept under control despite the coronavirus pandemic, while price stability and the exchange rate remain intact.

To quickly go back to something that has already been mentioned: had Croatia had Eurozone membership, things would be easier, said Plenkovic. That's right, but it doesn't have membership. The CNB may step up its game in regard to the kuna, at least until July and until ERM II entry (if that even happens), but the Croatian National Bank's capacity, while sufficient to support the government's policy for some time to come, is nowhere near the ECB's tightly controlled yet impressive capabilities in such situations.

Order growth is the best generator of employment, and consequently wage growth, and it fills the budget in the best way. All of this can only happen if the coronavirus doesn’t return with a vengeance in autumn, or, if it does return, its influence is so weak that everyone in the EU concludes that a new shutdown of the economy is totally unnecessary.

An additional question is who will lead Croatia's financial and economic policy after the elections take place, as mistakes can be dangerous.

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A lecture on two decades of the life of Portugal in the Eurozone was held at the Croatian National Bank (HNB/CNB), and despite the many good things Portugal itself claims to have taken from the euro's introduction, it isn't entirely a bed of roses and there are lessons to be learned by Croatia.

As Ana Blaskovic/Poslovni Dnevnik writes on the 22nd of September, 2019, twenty years since the introduction of the euro, Portugal today regards the introduction of the common currency as very positive, said Banco Portugal's governor, Carlos Da Silva Costa, at a lecture at the Croatian National Bank entitled "Two decades with the euro - a Portuguese perspective". The benefits of the euro were particularly felt by the country during the financial crisis, which was more easily overcome by the availability of cheap money.

"The euro has promoted a shift towards a regime characterised by lower and less unpredictable interest rates, as well as inflation rates, and has led to important structural changes in the Portuguese economy," said Governor Da Silva Costa.

For domestic skeptics concerned about rising prices over the euro, Portuguese experience shows that in the first quarter of 2002, the conversion of the old Portuguese escudo to the euro brought in 0.2 percentage points higher inflation and service prices raised by 0.5 points.

Since joining the exchange rate mechanism, Portugal has virtually halved long-term inflation, from an average of 11.7 down to 4.9 percent, and the economy quickly converged, reaching GDP per capita at 70 percent of the EU average back in 1998.

And now the classic "but" follows.

On the wings of an abundance of money and falling interest rates, real convergence hid the accumulation of macro imbalances, especially in the fiscal domain. Private sector borrowing exploded: from 1995 to 2007, savings halved and debt doubled to (on average) 187.2 percent of GDP. The Portuguese have long financed spending and low-profit investments, and cheap money has not been resisted by the state that pursued pro-cyclical fiscal policy.

The 2010 budget deficit exceeded 11 percent and public debt 100 percent of GDP. But with all that having been said, what is the situation today? The average treasury deficit (2015-2018) is -2.4 percent, public debt is 128.3 percent and private sector debt 216.3 percent of GDP. The economy grew only 2.2 percent in that period (growth potential only 1.2 percent worse than Croatia).

''For the last 25 years of history in Portugal, we've been taught that imbalances have caused excessive borrowing with weak growth potential. It also taught us that the combination of easy access to credit and insufficient quality institutions and policies has curtailed potential growth,'' said the Portuguese governor.

He stated that Portugal's examples and experiences are seriously worth Croatia's consideration on its path to the euro, but the only question is whether or not the message will be heard and actually understood properly by the right people.

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Much has been made, both in a negative and in a positive sense, of Croatia's intent to join the Eurozone and introduce the euro as its official currency. While the move has remained unpopular in the eyes of many residents of Croatia, a proportion of whom desire a referendum on the matter, the Croatian Government insists that it's a done deal and was part of the package Croatia has to agree to in order to join the European Union back in 2013.

Rumour has it that Croatia will not join the Eurozone for a good five years yet, but even so, some members of the government have itchy feet.

As Poslovni Dnevnik writes on the 3rd of July, 2019, Finance Minister Zdravko Marić and Croatian National Bank Governor Boris Vujčić have made it abundantly clear, Croatia has just twelve months to meet the necessary requirements for the country's entrance into the Eurozone, a concrete move planned within the next few years.

Croatia will have just one year to fulfil its promises given in its pledge for entry into the European Exchange Rate Mechanism, a kind of official ''lobby'' on the way to the introduction of the euro as the official currency. As was recently reported, a letter of intent for Croatia's full entrance into the ERM II was sent by Zdravko Marić and Boris Vujčić will be sent by the end of this week, which the Croatian Government is expected to authorise today.

Just what have the pair promised in their letter? It can be revealed that the letter contains promises to fulfil nineteen measures from six key areas. This was confirmed yesterday by Minister Marić after the session of the National Council for the introduction of the euro.

"In the letter, we have expressed our intention to enter the exchange rate mechanism, but at the same time, we put on paper, as an obligation, what we'll make sure is done over the next year. These measures concern the strengthening of the capacity and quality of the Central Bureau of Statistics, the prevention of money laundering and the financing of terrorism, the improvement of the business climate, and the improvement of business conditions in Croatia through the further reduction of parafiscal charges and the area of ​​state property,'' the Finance Minister stated.

He added that Croatia's announcement of entry into the European Exchange Rate Mechanism on Monday should be one of the topics of a regular Eurogroup meeting.

"The better we do our homework, the better and more positive the effects will be for all Croatian citizens," he added.

The finance minister reiterated yesterday that Croatia's entry into the ERM II is a step towards the introduction of the formerly problematic single currency, and Croatia will remain in that exchange rate mechanism for about two years, during which the Maastricht criteria will be tested.

However, not everything lies in Croatia's hands, when it comes to the entrance of a country into the ERM II, the existing members of the Eurozone and the European Central Bank have the final decision.

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When Croatia jointed the European Union back in July 2013, it agreed that it would eventually have to introduce the euro as its main currency as part of its accession to becoming a full member of the bloc. While many are concerned with the eventual introduction of the euro as Croatia's main currency, with a number desiring a referendum on the matter, it seems that Plenković is quite right when he says it's already a done deal.

The first official step in the process of sending the Croatian kuna to the history books has now been taken by the powers that be.

As Poslovni Dnevnik writes on the 30th of May, 2019, Finance Minister Zdravko Marić and Croatian National Bank (HNB/CNB) governor Boris Vujčić have requested that Croatia enter the Single European Banking Supervisory Mechanism, the first pillar of the European Banking Union, the primary duty of which is bank supervision, according to a report from Večernji list.

This is the first step of replacing the Croatian kuna with the euro, which could happen in five years.

The single supervisory mechanism is mandatory for all Eurozone member states. It is one of the last steps that Croatia has now taken before it officially requests the introduction of the euro as its main currency, abandoning the kuna, and entering into the European exchange rate mechanism, Večernji list writes.

Rather morbidly, this event coincides with the celebration of 25 years of the Croatian kuna, one of the few European currencies whose introduction is celebrated as a major historical and national event, yet in which citizens have little real confidence and in a country over which the euro still dominates.

While opposition among some members of the public remains strong, when it comes to savings and other financial practicalities of life, the euro has no competition in Croatia, just as German marks never did either.

If all goes well in not only Croatia but in the wider European Union ''family'', Croatia could introduce the euro during the year of the thirtieth anniversary of the introduction of the kuna - 2024.

If that doesn't occur, anything else could. It's possible that some of the sovereign and populist Croatian parties could seek and even succeed in launching a referendum, binding or otherwise, and convince citizens to reject the euro, which will force the government to stop the Eurozone accession process, but, that seems distant for now.

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