September 21, 2021 - Speculation and doubts continue to appear about the future financial scenario in Croatia after the eventual introduction of the euro in the country as an official currency, displacing the kuna, and CNB Governor Boris Vujčić gives some clues about what it would look like in the first weeks.

Pay in kunas, get euros back. At least this is how the first two weeks in Croatia would look after the introduction of the Euro on January 1, 2023, reports Poslovni Dnevnik. The objective is to stop the circulation of what would be the old Croatian currency at that time and to start the circulation of the euro. To provide more information and details, RTL Direkt interviewed CNB Governor Boris Vujčić, who in addition to the introduction of the euro, also talks about inflation and tacit minuses.

Why is the Minister of Finance so tough about not lowering VAT, couldn't the introduction of the euro be used to reduce it?

You have to ask him about VAT. As for inflation, I would say that a good part of inflation really comes from food especially now in the summer while in the first half of the year most of the inflation came from rising energy prices. At the moment, about half of the rise in inflation is energy, and now in the summer, food, vegetables and fruits are practically poor due to partly weather conditions.

Aren't you afraid of rising inflation? In the US it is somewhere around 6 percent…

The US has a higher inflation rate, but the economy is overheated there, they also have strong fiscal stimuli that are stronger than European ones and I do not see that at this time such an inflation rate could happen in Croatia, we expect that year-round inflation rate to be 2.2 percent. This is, in principle, the goal of the European Central Bank, so we should not be concerned about that. The problem is if there is a change in expectations, wage growth, but we do not see that at the moment. A significant part of that inflation comes from the fact that the so-called supply chains in the world at this time were disrupted. The Crown has disrupted all that, now you have continents where there are a lot of containers, some countries where you don't have them. You have a situation that road traffic, air travel, is still at a very low level and everything that flew with passengers on airplanes cannot fly… Then companies formed very large stocks that they never had and that logistically present a problem, say in the car industry you have full car parks that you can’t reach at the moment. It all takes some time to clear up and get back to what we had in 2019, one good mechanism, and then prices will slowly start to fall. I would say it won’t happen in the next 6 months.

Especially rising real estate prices. Housing squares are not in the inflation basket?

They are not. I am in favor of having these prices in the basket and what the European Central Bank, where we are going now, has done, and what will be the standard… that these prices will also start to be included in the basket, however, this will only be through two, three years. At the moment we have only the so-called implicit prices through rents and they do not reflect the fact that real estate prices have risen significantly, and they have risen because there is a lot of liquidity, a lot of money, part of which flows into the real estate sector. For example, interest rates that are at zero, or in the countries around us in the eurozone are even negative on deposits of citizens - some of these citizens take money from banks and carry and buy real estate, which inflates real estate prices.

Aren't you afraid that we will enter the eurozone just when euro inflation starts?

I wouldn't say. I don't see it as a danger. I do not see the inflation we measure through the consumer basket as a medium-term danger when we enter the eurozone, but I see the risks arising from these prices that we see at the moment in the bond market, real estate where much money has flowed and even cryptocurrencies. That bubble can always burst, as you know, financial crises arise, but it can blow out easily, prices can stabilize, which will depend on a lot of things, in my opinion, there is primarily a risk. Not these consumer prices.

What do you think would be the best advice for citizens?

Since I do not see any great risk from inflation itself, then I do not think that it should not be insured by investing in those types of assets for which the price is already too high, said Vujčić.

The Governor on the introduction of the euro

How many kuna, physical, banknotes are in circulation?

You have a billion and one hundred million coins and about half a billion of paper money. It is a demanding logistical operation, it all needs to be pulled.

What will it look like? I go to the store, I pay in kunas, the change is returned to me in euros?

That's right. Until 01.01. is HRK, from 01.01. is either kuna or euro for two weeks, after that it is only euro, with the proviso that when you pay in those two weeks, you pay in kuna, the euro is returned to you. And we collect all the kuna.

And then what about them? Are they going somewhere to catch fire?

Coins are a bigger problem. I already said it’s like 120 ZET trams. We have to store and store it somewhere, because it is money for another three years, as long as it changes. As long as they change, they are money. We agreed with the Croatian Army…

Are you building a safe somewhere?

We will build a safe, but at the same time, we agreed with the Croatian Army. It’s really all together logistically difficult.

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September the 17th, 2021 - One concern for many that comes with Croatian Eurozone accession is price hikes. Just how much will prices rise, and will it be overall or only in regard to certain items?

As Poslovni Dnevnik writes, the controversy over Croatian Eurozone accession, aside from solely political views, boils down to a debate on whether prices will rise, and if so, by how much. According to data obtained by Jutarnji list from the Croarian National Bank (CNB), it can be expected that after the conversion from the kuna to the euro, people will very likely have to slightly higher amounts for some items than they were used to.

This has been shown by the statistics based on the experience of other Eurozone member states that went through the process of introducing the euro at some point in the past, and in which it was shown that the biggest price increases should be expected in the catering sector, more precisely in restaurants and cafes. That said, other service sectors will not be spared a rise in prices either...

As Andrea Pufnik from the CNB explains in her paper “Effects of the introduction of the euro on consumer price movements and the perception of inflation”, the experience of the Netherlands shows that restaurant prices increased by 3.5 percent after the introduction of the euro. In Finland they increased by two percent, while Austria and Greece, slightly smaller increases in the hospitality segment were recorded, from 0.2 to 0.5 percent, as reported by Jutarnji list.

According to experts looking into this, the reason for these price increases has a lot to do with the so-called ''menu-cost model'', more precisely, most restaurants will be forced to print new menus and this cost will spill over to consumers in the shape of price hikes.

Statistics also show how price increases could occur in the segment of cleaning, repairing and renting clothes, as witnessed, for example, by citizens of France, Germany and Estonia. Hair and beauty services in general could also become more expensive following Croatian Eurozone accession, and prices are also expected to rise in the services of IT, audiovisual and photographic equipment.

However, certain products will also become more expensive as a result of the ''rounding up'' of prices, which could be most noticeable in bakery products and newspapers, according to the Pufnik research.

Namely, prices being round up is one of the most common reasons for price increases, which is most pronounced for products that initially had slightly lower prices, which include newspapers and bakery products.

According to CNB projections, it is expected that newspapers and books could become 2.06 percent more expensive in Croatia from 2023, financial services 1.9 percent, accommodation services 1.7 percent, footwear 1.6 percent, sports services 1.5 percent, and catering services 1.2 percent.

Some Eurozone member states, such as Finland, also recorded an increase in fruit prices after the introduction of the euro as its national currency, although it is possible that this also happened due to climatological reasons. In Ireland, the biggest jump in prices was in sports and recreational services, in Slovakia the prices of food and non-alcoholic beverages rose the most, while neighbouring Slovenia recorded higher prices in restaurants and cafes, then in footwear and household appliances, and then in transport services.

In principle, various surveys provide different estimates of the effects of the conversion of national currencies into the euro, and Eurostat finds that growth averaged between 0.1 and 0.3 percent for the Eurozone back in 2000 and 2001, while some other surveys suggest price rises of 0.34 percent.

What is certain is that the effects vary from country to country. For example, the risk of price increases is reduced in countries with subdued consumption growth as well as in those member states that introduce mandatory pricing in both currencies in stores before the introduction of the euro, and then price growth is usually subdued in those markets where competition is higher.

"We don't really expect price increases, but we do expect smaller price increases in accordance with the statistics that were recorded in other then new members of the European Union," said Governor Boris Vujcic in attempt to calm people's worries.

For more on Croatian Eurozone accession, check out our dedicated politics section.

ZAGREB, 15 Sept, 2021 - Prime Minister Andrej Plenković said on Wednesday during the national parliament's Question Time that it was reasonable for Croatia that entered the EU in 2013 to switch to the euro nine and a half years after its admission to the Union.

"It seems a reasonable time frame to me for a country that joined the Union on 1 July 2013 to adopt the euro on 1 January 2023, that is nine and a half years," Prime Minister Andrej Plenković said in response to the question from Marko Milanović Litre (Croatian Sovereignists) whether the citizens should be asked about the adoption of the euro and renunciation of monetary sovereignty.

"You are a new MP. Your predecessors in this same parliament ratified the EU Accession Treaty by 150 votes in favour. Your colleague, Ruža Tomašić, thanks to whom you are sitting here, was a member of the European Parliament in 2013. Your colleague Ilčić has rushed to the EP where he is paid in euro," Plenković said.

The PM said that the strategic goal of his government was to get Croatia into two deeper integrations - the Schengen passport-free travel zone and the euro area.

"We have made sure to fulfil the Maastricht criteria in the present circumstances of a pandemic, earthquakes and crises and have come close to adopting the euro, and now we listen to this initiative of yours. I don't know if we have all slept through this entire period," the prime minister said.

"Is there anyone who still thinks that EU membership is bad for us, after we have absorbed 44 billion more than we have contributed?" he concluded.

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ZAGREB, 10 Sept 2021 - The European Commission and euro area Member States on Friday signed a Memorandum of Understanding (MoU) with Croatia outlining the practical steps that will allow the country to begin producing euro coins when it receives the go ahead to join the euro area.

The memorandum, signed in Brdo pri Kranju, Slovenia, regulates issues related to the necessary preparations ahead of and up to the actual minting of euro coins, including the acquisition and production of minting tools and coin test runs.

The MoU was signed by Executive Vice-President Valdis Dombrovskis, European Commissioner for Economy Paolo Gentiloni, President of the Eurogroup Paschal Donohoe and Croatian National Bank Governor Boris Vujčić.

The HNB said in a statement that based on the document Croatia could launch preparations, that is, start making a detailed scenario for transition to the euro, start arrangements for the distribution of euro coins and the withdrawal of the Croatian kuna during the changeover, and the selection of its euro coin national side designs.

It can also start technical preparations for the common side of the euro coins, begin preparing mints for euro coin production and buying and making tools necessary to make coins as well as start with coin test runs and start making euro coins.

The Memorandum enables the continuation of preparations for the production of euro coins with the national side and marks an important step in our plan to make everything ready for the introduction of the euro in 2023, HNB Governor Vujčić was quoted by the HNB as saying, noting that Croatia remained committed to achieving that goal.

The EC, too, reported about the signing of the document, citing Executive Vice-President Dombrovskis as saying that the EC continued to support Croatia in its efforts to join the euro area, from which, he said, it stands to benefit greatly.

"However, before it can adopt Europe's single currency, Croatia must first meet all Maastricht criteria and continue to make progress on technical preparations," he said.

Commissioner Gentiloni welcomed Croatia's commitment to joining the euro area, stressing that it belonged there.

He said that the EC would continue supporting Croatia in its preparations and efforts to meet the convergence criteria.

Croatia is still not a member of the euro area but the kuna has been part of the exchange rate mechanism (ERM II) since 10 July 2020.

The signing of the MoU is one of the normal preparatory steps when a non-euro area Member State intends to join the euro area.

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ZAGREB, 28 Aug, 2021 - A member of parliament from the Croatian Sovereignists party, Marko Milanović Litre, said on Saturday that his party was launching a campaign for a referendum on the introduction of the euro, criticising the government for ignoring citizens' opinion on the matter.

Prime Minister Andrej Plenković, Croatian National Bank Governor Boris Vujčić and a whole set of Brussels bureaucrats have decided on their own that Croatia should join the euro area, Milanović Litre said in a Facebook post, noting that his party had launched a campaign to protect the national currency, the kuna.

"Referendum is the only way to accomplish that," he said.

Criticising Plenković and his government's attitude to referendum initiatives and what he called disregard for citizens' role in them, Milanović Litre said that that attitude was evidenced by Plenković's recent statement that "from a formal and legal point of view, a referendum on the introduction of the euro was already held in 2012 and a new one is not necessary."

The MP said that ballots for the 2012 referendum on Croatia's accession to the EU, to which Plenković was referring, featured only one question: "Are you in favour of Croatia's accession to the European Union?" and that the referendum campaign made no mention of accession to the euro area.

The Croatian people have the right to state their opinion on all important topics that affect their lives, notably decisions whereby a part of their hard-won sovereignty is ceded to Brussels, said Milanović Litre, adding that Croatia was poorly prepared for EU membership.

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ZAGREB, 19 March, 2021 - The percentage of Croatian citizens who support the adoption of the euro in February this year has reached 45%, up by four percentage points from 41% in a previous survey, conducted in March 2020, the Croatian National Bank (HNB) said on Friday.

The fourth public opinion poll on the adoption of the euro was carried out for the HNB by the Ipsos agency from 23 February 2021 to 1 March 2021.

Nineteen percent of citizens are against the adoption of the euro, while 26% are either against or in favour depending on other factors, and 10% of the respondents do not know, the HNB said.

Also, they said, an increasing number of citizens think that the effect of the euro will be positive. Some of the advantages they see include easier payment and business, as well as the fact that the euro is the common currency in the euro area, which would make Croatia equal to other members of the monetary union.

On the other hand, they see a decline in the standard of living and purchasing power as the main risk, and over a third of citizens think that the adoption of the euro will further increase prices.

To date, the poll has been carried out four times: in August 2018, in February 2019, in March 2020 and in February 2021. The survey is conducted on a nationally representative sample of 1,000 respondents, aged 18 to 79, using computer-assisted telephone interviewing (CATI), and it covers four thematic units: the use of the euro in the Republic of Croatia by foreign citizens, how informed citizens are on the adoption of the euro, citizens' attitudes to the adoption of the euro and their expectations.

The aim of the survey is to determine whether Croatian citizens support the strategic commitment of the government and the HNB to adopting the euro as the official currency in Croatia and whether they are aware of all the benefits that the adoption of the euro will bring to them and the national economy.

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ZAGREB, 19 March, 2021 - Croatia will enter the euro area on 1 January 2023 at the earliest, and introducing the euro has a number of advantages but for those advantages to be greater the economy needs to be more flexible, including with regard to the labour market, a conference heard on Friday.

The conference, focusing on the introduction of the euro as the official currency in Croatia, was organised by the students' association Financial Club.

Croatian National Bank (HNB) Governor Boris Vujčić said in his opening remarks that Croatia cannot enter the euro zone before 1 January 2023.

"Whether Croatia will enter the euro area on 1 January 2023 or a year or two later, depends on when it will meet the nominal convergence criteria," said Vujčić, recalling that in July 2020, Croatia entered the European Exchange Rate Mechanism II (ERM II), a sort of waiting room for the euro.

He explained that the ERM II envisaged a minimum two years of participation in it so that a candidate aspiring to join the euro area can meet the nominal convergence criteria (Maastricht criteria). On the other hand, if it does not satisfy the criteria, which refer to the stability of the exchange rate, prices and interest rates, the budget deficit and the level of foreign debt, a country can remain in the ERM II indefinitely, Vujčić said.

He recalled a survey indicating that citizens fear that with the introduction of the euro the standard of living will deteriorate and prices will increase. However, surveys in countries that have already introduced the euro indicate that prices increased by 0.23 percentage points on average in the year when the euro was introduced, mostly for everyday goods such as coffee. Prices of such products are relatively lower so their increase could have been relatively high due to rounding off.

"That left the impression in public that prices increased more than they did," explained Vujčić, underscoring that the standard of living did not fall in any country that introduced the euro but rather it improved.

Ćorić: Biggest advantage to companies exporting to euro area

Minister of Economy and Sustainable Development Tomislav Ćorić said that it was clear that citizens would not start living better on the first day of introducing the euro, however, what points to better prospects was the fact that the macro environment in the euro area was free of risks that non-member countries were faced with.

The risk premium in all countries that entered the euro area has dropped, said Ćorić, noting that that was something that in normal circumstances should  bring benefits to Croatia, such as reducing yields on long-term security instruments and lower interest rates on commercial and consumer loans.

Considering, however, that we live in "fairly radical economic times," and a period of very low interest rates, the effects which countries that entered the euro area some ten years ago had would be somewhat lower, however, they would still be significant, he said.

The advantages are potentially biggest for export-oriented companies considering that the exchange rate risk will be eliminated, he said.

Ćorić said that the project for euro introduction was not an end in itself but was primarily a very good tool for Croatia's long-term economic growth and development.

Mačkić: Flexibility of labour market, final goods and services market

President Zoran Milanovic's economic adviser, Velibor Mačkić, conveyed the president's message saying that it was necessary to discuss the benefits and potential harm of Croatia joining the euro area.

Mačkić believes that Croatia has not developed its own institutions sufficiently and that that poses a problem. "The country needs a different economy, a much more flexible economy, to be able to benefit more significantly from the monetary union," said Mačkić.

He added that the labour market and the market of final products and services need to be more flexible.

Mačkić underlined the importance of an efficient fiscal policy and of the reform of the tax system which Mačkić believes needs to change from "a consumption-based to income-based tax system."

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August 30, 2020 – Should Croatia join the Euro? No, says Nobel prize-winning economist. And Coronavirus is exactly why.

Should Croatia join the Euro? To be honest, we thought this had already been decided upon. But, new comments made by Nobel prize-winning economist Joseph Stiglitz on Saturday 29 August open the question again within the new perspective of the Coronavirus era.

We say new comments, but that's not exactly true. Stiglitz, who won the Nobel prize for economics in 2001, has long been an opponent of the Euro. He is of the opinion that joining the single currency removes a country's ability to respond to crises. While it is true that joining the single currency removes a country's ability to change the exchange rate and deprives it of monetary policy, and thus of changing interest rates, the rub is that Euro countries get more favourable loan deals.

On 10th July 2020, Croatia and Bulgaria joined the European Exchange Rate Mechanism (ERM II), a necessary step in joining the Euro. Both must spend at least two years in ERM II before joining the single currency. Croatia will be eligible to adopt the Euro in January 2023. But what will be the situation with Coronavirus and its economic fallout at that time? Should Croatia join the Euro?

The Euro is the currency for only 19 of the 27 countries in the EU. Some EU countries, such as Sweden and formerly the UK, have flatly refused to introduce the Euro despite many years of EU membership, believing that having a national currency is absolutely necessary to manage economic policy.

"I think that every country that retains its flexibility is well advised," said Stiglitz, in an online exchange during this year's Alpbach European Forum. Stiglitz, a former World Bank chief economist and former economic adviser to US President Bill Clinton, is of the opinion that grants available to EU member states should instead be used to deal with times of crises, rather than cheaper loans facilitated by being a member of the single currency.

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Croatia will officially adopt the euro as its currency within the next few years, abandoning the Croatian kuna entirely. As we recently reported, Croatia has been given one year exactly to meet all of the rather stringent requirements for Eurozone entry, and the final decision lies with the current member countries of the Eurozone and the European Central Bank.

The move has been met with significant opposition from the general public, but the Croatian Government is continuing to press forward. While some desire a referendum on the matter, the government has stated several times that agreeing to the introduction of the euro was one of the requirements Croatia had to agree to to join the European Union, of which it became a full member back in July 2013.

Countries like the United Kingdom had the ability to opt out of this when it joined the European Community, long before it became the EU, several decades ago, but the rules have since altered, and Croatia had to sign on the dotted line for eventual Eurozone entry.

As Novac/Frenki Lausic writes on the 5th of July, 2019, at yesterday's session, the Croatian Government authorised Finance Minister Zdravko Marić's signing of Croatia's official letter of intent to join the ERM II exchange rate mechanism, after which the Ministry of Finance announced that Croatia had sent the letter of intent to enter the European Exchange Rate Mechanism to the member states of the Eurozone, Denmark, and the European Union institutions (ERM II).

The letter of Intent was signed by Finance Minister Zdravko Marić and Governor of the Croatian National Bank (CNB/HNB) Boris Vujčić on behalf of the Republic of Croatia. This move marked the very first formal step towards Croatia's intention to join the ERM II, which is seen as a sort of ''lobby'' which precedes the introduction of the euro as a country's official, main currency. In addition to the letter of intent, the member states and institutions of the EU were also sent an Action Plan detailing the reforms Croatia will make sure to undertake before entering the ERM II.

In line with what is expected from the competent institutions of the European Union, the aforementioned Croatian ministry emphasised in its letter of intent, the promise to implement reforms in six areas: the strengthening the supervision of the banking system by establishing close cooperation between the Croatian National Bank and the European Central Bank, strengthening the framework for implementing macroprudential policies by introducing an explicit mandate for measures aimed at borrowers, strengthening the anti-money laundering framework, improving the system for collecting, processing and publishing statistical data, improving public sector management, and reducing administrative and financial burdens for the sake of Croatia's economy.

Croatia has already started implementing some of these measures, and on May the 27th, 2019, a request was made to the European Central Bank for the establishment of close cooperation between the Croatian National Bank and the European Central Bank.

The Ministry of Finance argues that Croatia intends to properly implement all of the measures listed in the letter of intent and the action plan by mid-2020, after which the EU institutions will evaluate whether the measures have been adequately implemented.

It is expected that Croatia will begin participating in the ERM 2 exchange rate regime after obtaining a positive assessment. If Croatia enters the ERM 2, after having been in the exchange rate mechanism for at least two years, Croatia should formally meet the exchange rate criterion of so-called nominal convergence.

Croatia has actually been satisfying other remaining criteria, which include price stability, public finance sustainability and interest rate convergence - for some time now, and a prudent monetary and fiscal policy, the Ministry of Finance stressed, should ensure that those conditions remain the same.

Vedran Šošić, the Vice Governor of Croatian National Bank, stated that he hoped that Croatia would be able to implement all of the necessary reforms by that time so as to ensure all the conditions for moving towards adopting the euro are met.

Velimir Šonje stated that Croatia's entry into the ERM 2 involves four procedural steps, the first of which is to send a request for membership in the Eurozone, followed by an in-depth meeting of the ERM 2 Committee, which discusses the central parity (the exchange rate according to which the national currency will be converted into euros) and the fluctuations of the exchange rate of the accession country (which are automatically determined within plus/minus fifteen percent around the central parity).

Subsequently, the ERM 2 Committee will conduct a deep macrofinancial analysis of Croatia's economy to determine whether the existing macroeconomic framework is compatible with that of the ERM 2, the EU's economic policy, and the stability and growth pact.

The next step will take place at a foreign currency exchange meeting, where the final parity and fluctuation margins will be determined, followed by the so-called final communication.

The period of stay in ERM 2 differs considerably among the seven EU member states that have most recently introduced the euro and, as was noted by Šonje, ranges from 2.5 years (Slovenia) to more than ten years (Lithuania). Such a large range therefore indicates that entry into the ERM 2 doesn't have to lead to the automatic introduction of the euro in the short term - ideally, Croatia could adopt the euro by 2023, but it is clear that this period can be extended.

Here's what Croatia has to do in order to be granted entry into the ERM 2 and eventually abandon the kuna for the euro:

1. An application for Eurozone membership

2. The ERM 2 Committee discusses the exchange rate of the kuna to the euro, as well as fluctuation margins

3. The committee "deeply" analyses Croatia's economy in a macro-financial sense

4. The final parity and fluctuation margins are determined

5. Croatia can enter the ERM 2 by 2020 at the very earliest

5. Croatia's ''stay'' in the ERM 2 may be much more than two years. The time varies considerably across countries - Slovenia spent 2.5 years there, whereas Lithuania remained there for more than a decade

6. Ideally, Croatia will introduce the euro as its official currency in 2023

Here are the six reforms Croatia must ensure:

1. Boosting banking system supervision

2. Strengthening the protection of borrowers

3. Strengthening the fight against money laundering

4. Improving the system for collecting, processing and publishing statistical data

5. Improving public sector governance

6. Reducing administrative and financial burdens on Croatia's economy

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