As Marina Klepo/Novac writes on the 14th of January, 2020, in the second half of this year, with parliamentary elections expected, the Croatian Government hopes to receive a call from the competent European institutions that Croatia can enter the European Exchange Rate Mechanism (ERM2), a so-called ''waiting room'' in which each EU member state must spend at least two years before Eurozone entry and the adoption of the euro as an official currency.

If Croatia implements all of the measures it has committed itself to, at least according to the European Commission Vice-President for the Euro and Social Dialogue, Valdis Dombrovskis, Croatia could achieve this goal "as early as the second half of 2020".

Along with the letter of intent, in July last year, the Croatian Government also sent a detailed follow-up action plan of nineteen measures and activities it intends to implement in order to enter ERM2, and thus be granted Eurozone entry eventually. It seems that the passage of time in fulfilling these obligations is quite solid.

According to Zvonimir Savic, coordinator of activities related to Croatia's Eurozone entry, the pace of implementation of the listed measures is "quite good". Of the nineteen measures that involved nine institutions, just over four have been fully implemented so far. The implementation of twelve of them is underway, ie, they're all at some stage of implementation.

''Given that several of them are related to the passing of legislation in Parliament, it takes a little more time. But if all goes to plan we expect that all measures will be fulfilled in April, and in May at the latest,'' says Savic. He explains that Croatia is expected to inform the European Commission when it fulfills all nineteen measures.

It has been agreed with institutions such as the European Commission (EC), Eurostat and the European Central Bank (ECB) that what the government proposes in the action plan must absolutely be fulfilled for the country's future Eurozone entry. Although these promises don't really seem particularly demanding, because many measures, such as the law on the rights of officials, were already on the agenda, Savic added that some of them were quite complex. In any case, their timely implementation is of paramount importance for the government at this point.

When it has completed its ''homework'', the government will inform the Eurogroup, the representatives of all existing Eurozone member states, and thereby request participation in the exchange rate mechanism. However, the decision is up to them, and they will consider Croatia's application and decide when Croatia can enter ERM2.

''It's realistic to expect a response from the Eurogroup in the second half of next year. They need to confirm that we've fulfilled the measures and that, for example, from January the 1st, 2021, Croatia enters ERM2,'' Savic notes.

Finance Minister Zdravko Maric also stresses that he expects that all measures included in the action plan will be fulfilled on time, and the Croatian National Bank's Governor Boris Vujcic is also satisfied with the way things are going so far when it comes to preparations and fulfilling obligations for this step of Eurozone entry approval.

The action plan consists of six areas: bank rehabilitation, the macroprudential framework, anti-money laundering, statistics, public sector management, and Croatia's business environment. In the past month, many of the laws that need to be passed have come under public scrutiny. Among these are the Law on Official Statistics, the Law on Credit Institutions, the Law on the Recovery of Credit Institutions, the Law on the Croatian National Bank (CNB/HNB), the Law on Confirmation of Agreements and the Unification of Contributions to the Single Resolution Fund, and so on.

Among other things, these legal changes imply that the CNB, for example, will have additional macro-prudential measures and, where necessary, be able to prescribe them to preserve the stability of the financial system.

The amendments to the law on credit institutions also regulate the exchange of information on the creditworthiness of retail clients. The Croatian Registry of Credit Obligations (HROK), established by banks fifteen years ago, ceased to operate in mid-2018 due to the application of a general data protection (GDPR) regulation in the European Union. In line with the new legal provisions, it is now expected that the exchange of data will start again in the middle of this year.

Additionally, the NRS benchmark interest rate, which serves as an index for determining the variable portion of interest rate on consumer loans, will be calculated and published by the CNB in ​​the future, and not by the Croatian Banking Association.

Much like the Ministry of Finance and the CNB, who have been very up-to-date on the work of preparing for Croatia's eventual Eurozone entry, the Ministry of Economy, for example, has introduced an electronic start-up business, and by March it must present a plan to reduce the massive, draconian administrative burdens placed on businesses in Croatia. The government should then adopt it.

Greater activity is also expected from the Ministry of State Property, which by April must define possible fluctuations and announce tenders for the sale of state shares in at least 90 companies. One tender has now been announced and regards the sale of stakes in as many as thirty companies.

If Croatia joins ERM2 early next year, the national currency will be pegged to the euro, a mid-exchange rate will be established and the Maastricht criteria will all be met.

Member states' experiences and length of stay within the ERM2 mechanism have tended to all be very different, ranging from 2.5 years (Slovenia) to over ten years (Lithuania), indicating that joining the ERM2 does not have to lead to the introduction of the euro in the short term. Only the United Kingdom has an opt-out from Eurozone entry.

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The introduction of the euro as Croatia's official currency, thus replacing the Croatian kuna, has been the subject of much talk and heated debate. While some are completely for the move for practical reasons, others are sad to see the kuna go, seeing the introduction of the euro as a loss of Croatia's precious identity, which was so hard-won.

The debate about Croatia's imminent entry into the formerly highly problematic Eurozone continues to go on, with frightening memories of the Greek crisis still fresh in many a mind. Some are even demanding a referendum on the adoption of the euro, but the truth of the matter is that Croatia had to agree to adopt the euro eventually in order to join the European Union, of which it became a full member back in July 2013. Love it or hate it, it's happening - but when?

Croatia has officially sent its letter of intent to the appropriate bodies, as well as a list of promises to reform many key areas in the country's usually draconian national policies. The country's letter was met with a positive reaciton from the powers that be, and Croatia now has a mere twelve months to implement everything asked of it in order to enter the ERM II, a sort of pre-euro waiting room, in which it will remain for around two years.

As Poslovni Dnevnik writes on the 15th of July, 2019, the aforementioned letter of intent that Croatia sent to Brussels regarding Croatia's planned introduction of the euro was assessed by Finance Minister Maric as one of the most important moments in Croatia's recent history. It is possible, as he himself says, that the euro will become Croatia's official currency at the beginning of 2024, as he said to RTL.

"It's difficult to say which year it will be, but I'd say that [the above mentioned date] is possible. We've taken over the obligations to fulfill some of the [prescribed] measures. We have to do this ourselves to boost economic growth. The year you've mentioned is realistic,'' the minister confirmed.

He also announced what many, especially those working in tourism, have been wanting - a lower VAT rate from January the 1st, 2020.

"We have pledged to continue reducing the parafiscal charges. One of the relief measures is the lowering of the VAT rate as of January the 1st, 2020. We're well on track to find space to give a new ''flywheel'' to employers to be able to pay their employees higher salaries. When it comes to what shape that will take and which way it will be done, we'll have to wait a few more weeks. When we do everything, I will first present it all to the President of the Government, the Croatian Government and the parliamentary majority, and then we will go public with it all,'' the minister stated.

The final decision when it comes to Croatia's entry into the Eurozone lies with the Eurozone's member states, and the European Central Bank.

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As Index writes on the 9th of July, 2019, Finance Zdravko Marić and Governor of the Croatian National Bank (CNB/HNB) Boris Vujčić expressed their joint satisfaction on Monday in regard to the reactions they've received after sending a letter of intent on entering the European Exchange Rate Mechanism (ERM II) on behalf of the Republic of Croatia. This move marked the first official step to Croatia's Eurozone entry.

They were also satisfied with the manner in which it was received by the powers that be.

MEPs from nineteen Eurozone countries and Denmark, the president of the European Central Bank and a representative of the Governor of the Central Bank of Denmark, discussed the Croatian letter of intent during a meeting in Brussels, Belgium, on Monday.

Following the meeting, the finance ministers of the Eurozone and Denmark released a statement in which they stated that "they welcome the intention of the Croatian authorities to establish the elements necessary for its successful entry into the ERM II".

Four days ago, Croatia sent a letter of intent on entry into the European Exchange Rate Mechanism (ERM II) to members of the Eurozone, Denmark and the European Union's institutions, which marked the very first formal step towards participating in the ERM II, preceded by the introduction of the euro as Croatia's official currency, replacing the kuna.

In addition to the letter of intent, the EU member states and institutions also received an encouraging ''action plan'' from Croatia, detailing the reforms Croatia promises to finally implement before entering the ERM II.

Minister Marić told reporters after the meeting said that there is still a lot of work ahead of Croatia in order to successfully complete the process of entering the Eurozone.

"We will try to finalise everything in the next twelve months," Marić assured.

In the statement from the Eurozone, it has been stated that the European Central Bank could complete its comprehensive assessment of the fulfillment of the requirements Croatia has promised to meet in its letter of intent in about a year.

In the case of a positive assessment, Croatia would enter the ERM II, in which it would stay for two years. This means that Croatia could introduce the euro as its currency in three years at the very earliest.

At the same time, upon its entry into the ERM II, Croatia would enter the Banking Union.

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As Novac/Martina Klepo/Augustin Palokaj writes on the 7th of July, 2019, a meeting between Eurozone finance ministers took place in the Belgian capital of Brussels, during which the formal request made by the Republic of Croatia for entry into the Eurozone, ie the so-called ERM II exchange rate mechanism, was discussed. This is the first step towards the introduction of the euro.

The letter of intent was sent by the Republic of Croatia to European institutions on Thursday by Finance Minister Zdravko Marić and Governor of the Croatian National Bank Boris Vujčić on behalf of the country. Croatia was in turn provided with numerous reforms it had to ensure were done.

As can be revealed unofficially, it seems that the Eurozone's finance ministers will formally accept the Croatian request, just as they did one year ago for Bulgaria, giving the Balkan country the green light to initiate the introduction of the euro and replace the Bulgarian lev.

If we're judging from the case with Bulgaria, the Eurozone's finance ministers will set a time frame of about one year in which the country will have to take certain steps which we've already reported on and linked above, and carry out the domestic task it has committed itself to in order to enter the ERM2. Each country must remain in this sort of ''waiting room'' for at least two years before actually entering the Eurozone.

Despite the fact that back in January this year, Valdis Dombrovskis said that Bulgaria's upcoming ERM2 entrance was to be expected ''in the middle of this year'', an official call for that has not yet arrived.

The length of this process depends on the country itself, ie, what it will need to engage in to ensure it can fulfil the measures it has committed itself to in order to enter, so it may take longer than a year if needed. The goal of Croatia's authorities, of course, is to enter the ERM2 within one year, and officially enter the Eurozone, thus abandoning the kuna and adopting the euro as its currency, by 2023 at the latest.

During that period, Croatia should also join the banking community, increase measures to prevent money laundering, and take other measures as preparations for entry into the eurozone. Among the most important measures are the need to improve the performance of statistics, greater public administration efficiency, and reduce business barriers. These measures are not only related to the Eurozone, but are also part of the specific recommendations that the European Commission has provided to Croatia in the context of convergence reports.

When asked if there are any political obstacles to entry into the Eurozone, and if any such things are expected, Prime Minister Andrej Plenković said during his stay in Brussels that he didn't expect anything like that "at this stage".

However, this doesn't mean that Slovenia, for example, won't create issues and barriers for political reasons, ie, for Croatia's continued refusal to accept the decision in the dispute over the border. Slovenian politicians have often made it clear that they will not support Croatia's entry into the Eurozone or Schengen because, as they believe, "Croatia violates the principles of the rule of law".

However, the question is how much Slovenia will manage to gain the understanding of other member states in that regard. For the European Union, it was important to prove that the euro as a currency was still attractive and that the Eurozone's expansion continued despite the Greek crisis that seriously jeopardised the eurozone and threw the euro into troubled waters.

Croatia will also be able to count on the technical and financial assistance of the European Union during the process of introducing the euro. The European Commission has also proposed a special fund for this purpose, and Jean Claude Juncker, President of the European Commission, announced that such assistance will be offered during a recent visit to Zagreb.

Entry into the Eurozone is one of two key strategic goals Croatia has had since joining the EU six years ago, in July 2013. For Croatia, joining the Eurozone is much more than just a financial issue.

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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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In conversation with Dnevnik Nova TV, Croatian Finance Minister Zdravko Marić revealed just how much taxpayers in Croatia had to pay out in guarantees for the country's ailing shipbuilding industry and the negative effects of the introduction of the euro as the country's official currency, a move which could happen in five years.

Will citizens and entrepreneurs feel economic growth? For example, will the non-taxable portion of salaries (take home pay) increase?

Entrepreneurs and citizens contribute the most to this economic growth. They create it on the one hand, and when it happens, as a result, we need to strive in the sense of measures, in order to raise the growth rates further.

To increase non-taxable parts of salaries?

It's still early to talk about the details. Salary growth has achieved positive effects. We should continue in that same direction. In terms of how much space there is [to move] on income tax, there's even more [space] in terms of the part of the non-taxable part itself. Remember the measure from December last year. More than 1.2 billion kuna was also paid by employers to their employees.

Is there any room to reduce excise duty on fuel?

You should also look at a comprehensive picture in the segment of indirect taxes. As a rule, there's always something that we have to take into special consideration because of the share of indirect taxes, Croatia is at the very top of the EU. But we should also take that into consideration in a broader context.

When you reduce fuel excise, you know for yourself that the price of everything drops.

Not as a rule always. To the last change in VAT, when we lowered taxes in our history, there's been no price reduction. But in the last couple of months, we've seen lower prices of fruit or meat, while fish and vegetables have even increased.

And in the hospitality industry by 13 percent?

This is the topic we'll also discuss.

Is the end of the issuing of shipbuilding guarantees?

This is unfortunately like in one of those ads when there's something extra at the end. I have to tell Croatian citizens that as of today, 4,420,000,000 kuna has been paid, and in the last couple of days the guarantees for the Jaružela ship, a great ship, have been protested, as well as two additional ones. Only 120.000.000 kuna is left. They're enormous sums of money. You can't be satisfied with the fact that we've paid for the construction of ships that haven't ever even been built as a finance minister or as a taxpayer.

What are the negative effects of the introduction of the euro?

Due to their very good knowledge and their history of experience with hyperinflation, devaluations before the introduction of the kuna, Croatian citizens say that in the first place, they're afraid of price increases. This needs to be taken seriously. It's a topic that doesn't happen overnight. There are several steps to take along that path. All measures must be taken to minimise any dangers and risks. And that all of the positive benefits manifest and come into effect as much as possible.

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Click here for the original article from Poslovni Dnevnik