June 25th, 2021 - Croatia expects to join the eurozone in early 2023 and plans to meet all the requirements by then, Prime Minister Andrej Plenković said in Brussels on Friday.

He is attending a two-day EU summit which today will include a eurozone summit.

"That's an opportunity for me to state once again our willingness to meet all the criteria and, after entering the Exchange Rate Mechanism last year, to meet the action plan and create the prerequisites for Croatia to become a member of the eurozone during 2023, hopefully at the beginning," Plenković told reporters.

At the eurozone summit, he said, he will present the timetable Croatia expects regarding accession "given all the achievements in implementing the euro introduction strategy since 2018."

Member states' leaders began the second day of the EU summit by discussing economic recovery from the effects of the pandemic.

Plenković said he expected the Commission to approve Croatia's recovery and resilience plan in July, after which Commission President Ursula von der Leyen would come to Zagreb to personally give the Commission's the green light for the 6.3 billion worth grant plan.

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June the 10th, 2021 - Croatian Eurozone membership depends on numerous factors, and the sorting out of the mess that is the portfolio of state owned companies is just one of the pressing ones.

As Poslovni Dnevnik/Ana Blaskovic writes, although some strides have been made, state-owned companies remain synonymous with political flattery, corruption scandals and, in general, just bad business. However, if Croatian Eurozone membership is to become a reality, and if the country wishes to join the Organisation for Economic Co-operation and Development (OECD), which are two strategic foreign policy goals of the government, Croatia will have to make serious efforts to sort out the mess in the portfolio of state-owned companies.

To this end, in the form of the OECD team, in cooperation with the European Commission and the Croatian authorities, a comprehensive diagnosis was made and the government was provided with a number of recommendations for improving corporate governance.

Three are key to a significant turnaround: centralising state ownership, professionalising governance, and harmonising the legal and regulatory framework through a new law on state-owned companies, the OECD said.

"The owners of these companies are taxpayers. The idea is that they should be accountable to the public as private companies are to their shareholders,'' said Charles Donald of the working group on state-owned companies and OECD privatisation.

"Although these recommendations aren't mandatory, they're the ''acquis'' for joining the OECD," Donald said.

Sanja Bosnjak, State Secretary of the Ministry of Physical Planning, Construction and State Property, assessed the guidelines as a benchmark and made sure to state that Croatia has committed itself to reforms in the state-owned enterprise sector in the action plan for joining the exchange rate mechanism.

"This is a symbolic start to work on reforms in this area that involve the entire administration," she said.

The value of state-owned companies is estimated at a massive 190 billion kuna, making up a whopping 47.2 percent of Croatian GDP in 2019. The (central) state owns 59 of them, of which 39 have special status. 19 are wholly or majority owned by the Centre for Restructuring and Sales (CERP), and two more companies are outside that umbrella. Beyond them is a constellation of 938 local state-owned companies. Most of them operate in the segment of transport, energy, construction, finance, telecoms, manufacturing, tourism and property/real estate.

While with about 260 state-owned companies per million inhabitants, Croatia can ''boast'' of being one of the record holders in the EU, as well as in the rest of Southeastern Europe where a similar phenomenon reigns, the problem is, in typical Croatian fashion - total and utter inefficiency.

The return on capital and revenue growth is lower than it is in the private sector, and with the exception of strategic companies, more than 80 percent of non-strategic ones have failed to reach even the median return on capital of the sector in which they operate, the OECD found.

With fragmented competencies, from ministries, the CERP to various agencies, the OECD recommends the establishment of a single body with adequate mandate and resources to coordinate stakeholders and end the current practice of unclear roles and, more importantly, blurry responsibilities.

The second recommendation for Croatian Eurozone membership is aimed at professionalising management through strengthening the role and powers of the supervisory board. The current election of members of supervisory boards is open to political staffing, varies by company, and the prescribed fees are typically not very attractive to professionals.

The recommendation is to establish professional and independent committees, as well as independent auditors, and to enable supervisory boards to set their own strategies and oversee management. In doing so, the OECD emphasises in particular that government officials and policy-appointed persons cannot by any means ever be considered independent experts.

Finally, a new law is needed that should harmonise the current legal framework and underpin reforms in the state-owned enterprise sector.

In addition, the list of recommendations for Croatian Eurozone membership includes increasing transparency, strengthening internal controls, setting clear financial and non-financial targets, and simplifying the legal framework and corporate structure of companies so that state-owned companies compete evenly with private ones in the same market.

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May the 5th, 2021 - The Croatian public has always had a very suspicious view of the entry of the country into the formerly deeply troubled Eurozone, but it seems that although it's only very slight, that opinion is beginning to alter. Skepticism, however, remains as strong as it was when the country's very EU referendum took place.

As Poslovni Dnevnik/Jadranka Dozan writes, the positive image of the European Union (EU) held by the Croatian public today is slightly better than it was around half a year ago, according to the national report of the Standard Eurobarometer for Croatia, which was published recently by the European Commission (EC).

When compared to the previous Croatian public opinion poll on the EU, the positive perception of surveyed Croatian citizens increased by one percentage point (from 47 to 48 percent), while at the same time the negative perception decreased by two points, from 13 down to 11 percent.

According to the latest Eurobarometer results, Croatian respondents in the latest survey also showed slightly higher support for the country's planned entry into the Eurozone than they did half a year ago. However, although this support has increased by one percentage point, up to 48 percent, and the number of those who oppose Eurozone entry has decreased by the same amount, Croatia still deviates considerably from the EU average. In the rest of the bloc, the single currency is supported by as much as 70 percent of the population of its member states, or three percent more than was recorded just half a year ago.

As the European Commission points out, European respondents, as well as the Croatian public, are at the forefront of the EU's achievements in the free movement of people, goods and services within the territory of the bloc. They consider peace among the EU's member states to be the second most important plus, and solidarity among the EU member states is in the third place.

The aforementioned survey was commissioned by the European Commission's Directorate General for Communication, and the survey in Croatia, on a representative sample of 1,028 citizens over the age of fifteen through direct interviews with respondents in their own homes, was conducted by the Hendal agency from February the 15th to March the 7th this year. The Standard Eurobarometer survey is otherwise conducted twice a year, and of the 94 such surveys conducted so far, the most recent is the 33rd, which also covers Croatia.

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ZAGREB, 15 March, 2021 - Prime Minister Andrej Plenković said in an interview with the Politico news website published on Monday that it was reasonable to expect that Croatia would enter the eurozone and the Schengen area by the second half of 2024.

"The idea is to do both — accession to Schengen and the eurozone — by the end of this government’s term, so the second half of 2024," Plenković said. "It’s tough, but reasonable."

The European Commission said in 2019 that Croatia had fulfilled all the technical requirements for entry into the Schengen passport-free travel zone, and this should now be endorsed by other member states. Romania and Bulgaria have been waiting for this to happen for years.

In mid-2020 Croatia was admitted to the European Exchange Rate Mechanism (ERM II), a key step towards eurozone membership.

Plenković said that because of the coronavirus crisis the eurozone members could be expected to continue suspending their own rules for fiscal discipline, while those on the path to join the euro could not rely on "such easy self-help tricks."

He expressed regret that Croatia had "stepped away from consolidation and sound public finances" to limit the economic damage of the crisis.

Plenković said that his government would pursue two goals: "Using the recovery fund, the EU budget and private investment to generate growth. And the other one: Go back to the framework of 2017-2019, when my government achieved a budget surplus."

The prime minister said he believed Croatia would be able to spend the first euro from the EU recovery fund at the beginning of next year, adding that it was a complicated process. "Unless it’s helicopter money, it’s very difficult and complex. You need a plan, a project, verification, tender, implementation, documentation. If it goes faster, we’ll gladly spend it, but if I’m realistic …"

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December the 10th, 2020 - The new law on the deposit insurance system will significantly strengthen Croatian banks and the Croatian banking system, the State Agency for Deposit Insurance and Bank Rehabilitation (DAB) said.

As Poslovni Dnevnik wrires, as of January the 1st next year, a new law on the deposit insurance system and on the compulsory liquidation of credit institutions will enter into force. It was recently properly harmonised with European directives, which, among other things, will shorten the duration of bankruptcy proceedings of credit institutions and additionally protect citizens and depositors.

Further reform

This new law continues to further reform the banking system of Croatia and the entire European Union, strengthens the ability of banks to withstand financial shocks, which will also include Croatian banks, minimises the cost that taxpayers will bear in the event of problems with banks, and represents a single financial fund that is filled by the payment of credit institutions, not citizens, as was pointed out from the DAB. They also believe that the law will further facilitate the lives of Croatia's residents and offer security when it comes to savings deposits as well as a general increase the stability of the financial system, which is becoming much more resilient to possible financial crises.

The new law, which combines the provisions of the current law on deposit insurance and the law on DAB, seeks to anticipate and regulate situations when a credit institution fails as much as possible, as such a scenario may lead to legal uncertainty regarding the protection of depositors.

In order to protect the financial stability of the system, the new law prescribes the activation of the deposit insurance system when opening a compulsory liquidation procedure against a credit institution.

Additional replenishment

In order to ensure the more efficient use of funds from the deposit insurance system, the new law stipulates that the deposit insurance fund consists of two parts - the basic deposit insurance fund and the additional deposit insurance fund. The purpose of the basic deposit insurance fund, which at any time has 1 percent of insured deposits, is the payment of insured deposits, while the purpose of the additional fund is to replenish the basic fund if its available funds fall below 1 percent of insured deposits.

Furthermore, its task is to support the collection of ex-post premiums, use its funds to take measures to reduce the risk of an insured event, and support the financing of the rehabilitation of credit institutions and the financing of forced liquidation of credit institutions.

Additionally, the new law will harmonise the source of financing according to the acquis communautaire by explicitly stating that the deposit insurance system cannot be financed at the expense of taxpayers, but exclusively at the expense of credit institutions. The entire system is harmonised with European directives and will help to make Croatian banks more resilient to potential future challenges on the country's path to th Eurozone.

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As Ljubica Gataric/VL/Poslovni Dnevnik writes on the 14th of November, 2020, back in July this year, Croatia joined the European Exchange Rate Mechanism (ERM II) and the Banking Union, which is one of the last formal steps towards Eurozone entry.

The positive response from Frankfurt and Brussels was waited on for about a year, and it came during an extremely difficult period in which the coronavirus pandemic dominated, acting as an important signal that Croatia will not have to fight the consequences of this unprecedented crisis alone.

Three months earlier, the decision was preceded by an agreement between the European and Croatian central banks, according to which Croatia received two billion euros to have at its disposal to keep the national exchange rate stable. The validity of the currency swap was extended until the middle of next year, which effectively accepted the Croatian kuna as part of the European monetary system.

So far, the CNB hasn't used this lever, ie, it didn't have to exchange Croatian kuna for euros with the European Central Bank in order to defend the exchange rate. Despite the fact that such a move ended up not being necessary, this reserve was psychologically extremely important when, due to quarantine measures and the spread of the novel coronavirus, SARS-CoV-2, things went downhill. The CNB's foreign exchange reserves were more than enough to alleviate initial exchange rate pressures and allow for the unhindered financing of the state budget, and after their reduction of approximately 2.5 billion euros, the amount of reserves returned to the levels we had before the coronavirus pandemic struck. If the economy recovered at that speed, there would be less fear and uncertainty about the arrival of the second wave.

The Croatian authorities hope that Eurozone entry will see the kuna replaced by the euro as Croatia's official national currency by the year 2023, and in line with this intention, a budget proposal for next year has been prepared, which envisages reducing the budget deficit below 3 percent and gradually lowering public debt, which has increased significantly this year.

In the coming days, the last strategic document related to Croatian Eurozone entry should be presented to the public - the National Plan for the Exchange of the Croatian Kuna with the Euro, which will provide numerous technical details related to the exchange of currencies.

"Consultations with stakeholders involved in this process have already been carried out, and after its drafting, which is nearing completion, the adoption of this plan will follow at the level of the Croatian Government," said Zvonimir Savic, the Prime Minister's advisor.

CNB Governor Boris Vujcic believes that "on the way to the euro, a dynamic recovery of the economy and the keeping hold of fiscal indicators within the reference framework from next year is crucial."

The national exchange plan should state how the procurement and distribution of cash will be organised, and this should include numerous things, such as where and within what period citizens will be able to exchange kuna cash for euros, how to convert kuna deposits and loans, but also other financial instruments, such as how interest rates will be adjusted, how prices will be recalculated, how the government will protect consumers from incorrect price recalculations and how the Croatian legal framework will be adjusted for the needs of Eurozone entry.

As citizens fear that Croatia's Eurozone entry will negatively effect living standards, a special emphasis will be placed on measures to curb rising prices. A survey related to the introduction of the euro showed that citizens are mostly worried about possible price increases. "We must now work on talking more about the examples of other countries, where the exact opposite happened - the standard of living of citizens has risen after the introduction of the euro," said Vujcic. The central parity for replacement is set at the level of 1 euro = 7.53450 kuna, and the general opinion is that in the following period the exchange rate will be held around that same established parity.

Croatia and Bulgaria are also the first candidates for entry into the banking union before the formal adoption of the single currency, and the ECB recently announced the results of the first ''stress test'' of five Croatian banks, which showed they all meet Eurozone and European Banking Union criteria. Every new member that joins the European Union has legally committed itself to adopting the euro, but there is no deadline within which it must do so, nor is the adoption of a common currency a unilateral decision. Only the United Kingdom successfully secured an opt out.

Of the new EU members, the Czech Republic, Poland, Hungary, Romania, Bulgaria and Croatia still haven't adopted the euro as their currency.

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As Ana Blaskovic/Poslovni Dnevnik writes on the 29th of September, 2020, with Croatia's entry into the Eurozone, currency and credit risks will be significantly reduced, and pension fund assets will become significantly more liquid. This is the message taken from the third ''Financial Brunch'' of the Association of Pension Fund Management Companies and Pension Insurance Companies (UMFO) on the subject of the euro.

''The assets of mandatory pension funds are slowly outgrowing the domestic capital market, especially in terms of limiting currency exposure. The assets of mandatory pension funds have grown by 216 percent since 2010, while GDP has cumulatively grown by 11 percent,'' illustrated the head of asset management at Raiffeisen Pension Company Ivan Grbac.

"In 2021 alone, we'll be above the market capitalisation of traded shares on the Zagreb Stock Exchange," he said, adding that the activities of pension funds have contributed to the development of the domestic bond market, which was one of their tasks. The next phase is the introduction of the common European currency. Croatia's entry into the Eurozone, a society of 19 EU countries with the euro as their official currencies, is a broader story than the mere reduction of currency risk, although it is certainly one of the biggest advantages.

From the perspective of asset management managers in pension funds, joining the Eurozone also means significantly more liquid assets. "The introduction of the euro doesn't mean that pension funds will reduce investment in Croatia, but it opens the door for the surplus, ie the growth of pension fund assets above the growth of domestic capital and markets to be invested in foreign markets, which achieves diversification," said Grbac. Only the time of entry into the Eurozone, he says, is important, because the date of entry into the exchange rate mechanism was very favourable.

"If we have to assess whether the credit risk decreases or increases with joining the Eurozone, I think the answer has already been offered by Fitch, who wrote in the last revision of their rating that joining the Eurozone would increase Croatia's rating by two levels," he concluded. Pension fund investments will be tomorrow's pensions for today's workers who save in the second pillar (and even smaller part in the third pillar). This means that the long-term liabilities of the funds (for the payment of pensions) will be settled in euros, of course, if Croatia introduces the currency within the planned deadlines, which is theoretically as early as 2023.

"As for the internationalisation of the portfolio, that's largely already underway, and that has been especially the case over the last two years," said Gordan Sumanovic, a member of the Management Board of the Raiffeisen Pension Company. Economist Velimir Sonje pointed out that everything is clear about the currency risk in the long run, because this variable will be eliminated, but he raises the question of what it means to enter the exchange rate mechanism. Considering that the central parity (set at 7.5345 kuna for 1 euro with a standard fluctuation band of ± 15 percent, op.a.) may change after Croatia's ERMII entry and before the actual introduction of the euro, although he warns that this has so far only happened in Slovakia.

Sonje believes that in the medium term, Croatia will be under enormous pressure in the direction of strengthening the kuna due to billions of euros that could begin to flow into the financial system from next year on and last until the introduction of the euro itself. "Regarding credit risk in the medium and long term, the introduction of the euro is positive in terms of reducing credit risk and convergence of risk premiums. Occasional oscillations are possible in the short term,'' explained Sonje.

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Full-scale reforms and deep cuts from the public and the state to local government units are the last chance for Croatia's prosperity, and 22 billion euros of coronavirus aid and entry into the Eurozone are not so much a gift but a concrete demand for Croatia to finally put its house in order.

As Poslovni Dnevnik/Vladimir Nisevic writes on the 21st of July, 2020, we're now in the coronavirus-dominated "new normal" and the fact that Prime Minister Andrej Plenkovic is returning from Brussels with 22 billion euros in aid has reactivated idea that we can all just sit back and relax because the European Union with its money sack is coming. It's reminiscent of the times when it was the norm to live with debt, stabilis it a little, play around a bit geopolitically, and then the dollars and marks came whenever they were needed.

This and such a mentality, at least subconsciously if not on a tangible level, has misled us many times in thinking that the state will simply manage to solve everything and that these much-needed euros will arrive from somewhere.

What will the situation be now? 22 billion euros are coming as part of a coronavirus aid package, and the question of all questions is - does Croatia even what to do with that sum? It isn't really a question of does Croatia know how to spend it all, launch various meaningless projects or increase the number of bureaucrats needed for the most simple of decisions, but rather whether we ourselves know, with or without the European Union or anyone, else what we want?

Whoever thinks that money from the European Union comes as a gift because of the gorgeous Croatian coast or the green fields of Slavonia, is very wrong indeed. This coronavirus aid money comes with clear and precise requirements that many will certainly not like.

Politically, it will be much easier to hide behind the European Commission in terms of requests for grants, but also the introduction of the euro, than to say clearly and loudly that reforms, and proper onesm are the last chance for this country.

Plenković really has a unique opportunity to put the country in order, but whether he will succeed remains to be seen. The cuts needed should be many and they should be very extensive - from the healthcare sector to the public one, and from the state down to local government units.

There will have to be clear guidelines for agriculture to tourism because the coronavirus crisis in Croatia didn't cause the collapse of the economy but it did bring the fact that the Croatian economic 'system' is well and truly unsustainable to light.

Through 30 years of Croatian independence, the country has slowly but surely become a country of rentiers and buyers. The responsibility is on everyone regardless of their political colours. Export and production didn't appear according to some sort of in depth plan but by chance, through the efforts of individuals, and for that, those individuals should be honoured because they didn't only succeed in their efforts, but they also overcame Croatia's loathsome, masochistic love of red tape.

Let's just look at the beginning of the coronavirus crisis in Croatia and the cries of those in the hospitality industry at the moment of closure. Did anyone then wonder why the ones from the service industries were the loudest in the media when compared to others? Of course, Croatia relies heavily on tourism and hospitality, but there's a bit more to it than 'just' that.

While the efforts of the IT sector-led UGP (Voice of the Entrepreneurs) seemed to make sense, their members are largely renters and business owners. They can't be a pillar of the economy, they can only be a nice, shiny ornament at the top of very firmly developed economic bases - and that base doesn't exist at all here in Croatia.

Innovation and development and production and agriculture receded long ago, living in the long shadows of apartments and shops for one simple reason - in a society without a plan, it is far easier to make quick and easy money than to invest and lose out on it for years and often profit when it is too late.

This is not only a disease of Croatia, but of all post-communist countries, because it isn't possible to instill a capitalist way of thinking into someone's brain overnight, and it seems to be a struggle even after decades since the end of the indoctrination of Croatia's former regime.

However, the great crime of all political structures so far remains the fact that even in the free Western society to which we now belong, they have not shown more effort in educating and changing the mentality of those who come after us. There is no entrepreneurship or advanced mindset in schools, at least not in most schools. Raising children in the "semi-capitalist" system we have created is the worst thing that could have happened to Croatia.

Why? For the simple reason that if we have not taught the country's children to start thinking entrepreneurially, through the development of work ethic and innovation, then we remain little more than a country of waiters and taxi drivers.

Yes, we need waiters, but the coronavirus crisis has shown that we certainly don't need them in such numbers. It is similar with agriculture or any other branch - we need young, educated and above all innovative people who will take risks in a country with clear rules and who. when profiting off their efforts, will not feel the need to hide away because of the shame of their own well-earned success, but instead proudly and publicly set an example to all children. These 22 billion euros and entry into the Eurozone are an opportunity for Croatian society to step up to the mark once and for all.

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Croatia has made significant progress on its journey to Eurozone entry, but only Romania and Bulgaria have worse institutions than those operating here...

As Poslovni Dnevnik/Ana Blaskovic writes on the 10th of June, 2020, Croatia continues to receive informal signals about joining the European Exchange Rate Mechanism in July, commonly known as the ''Eurozone waiting room'', the European Central Bank (ECB) praised Croatia's progress in bringing the domestic economy closer to the European average, but the problem remains in its very poor institutional quality.

Of all of the European Union's member states, only Romania, Greece (but under the umbrella of the euro) and Bulgaria have institutions which are worse than those here in the Republic of Croatia.

''The strength of the institutional environment remains an important factor in the sustainability of convergence in the future. The quality of institutions and governance is relatively weak in all observed countries except Sweden, especially in Bulgaria, Romania, Croatia and Hungary,'' they warn from the German city of Frankfurt, adding that this poses a risk to economic resilience and sustainable convergence.

Therefore, Croatia (as well as any other EU member state with its own national currency) doesn't currently meet the conditions for Eurozone entry/the introduction of the euro, which is not the case when it comes to entering the exchange rate mechanism for which the political green light still remains on.

"None of the observed countries participate in the ERM II, but Bulgaria and Croatia have both submitted official requests to join the mechanism. Bulgaria did so back in 2018, and Croatia did the same in 2019. By taking on policy commitments, the two countries have taken some important steps towards joining the mechanism soon,'' it said.

Given the plan for the rapid implementation of the euro, the next convergence report will be crucial, as it will provide a true assessment of the country's readiness to replace the national currency - the Croatian kuna.

Obstacles, however, can realistically be expected on two fronts. The first is the quality of institutions where Croatia is at the tail end of the EU because it requires substantial (and indeed painful) reforms of the business environment for which there is a complete and utter lack of political will present at the moment. The second is the country's fiscal plan, because due to the coronavirus crisis, public debt and deficit is set to explode, so sooner or later, government expenditures will have to be put on the table.

However, the debt boom will affect all member states, so it remains to be seen whether the European Union will stick to Maastricht's nominal criteria or whether they will be revised in the "new normal".

The report points out that seven countries have made uneven progress in convergence since 2018, and Croatia is in the minority, which is recording improvements. The ECB assesses price stability, budget balance and public debt, long-term interest rates, exchange rate stability, and the quality of institutions and governance.

When it comes to the inflation criterion, the compliance of most countries has deteriorated, but Croatia's hasn't. Bulgaria, Poland, Romania, the Czech Republic and Hungary recorded inflation rates well above the reference 1.8 percent, while they are lower in Sweden and are significantly lower here in Croatia. Due to deflationary pressures in the coming period, inflation is expected to decline due to a sharp drop in oil prices.

On the wings of pre-epidemic growth, most have made progress in reducing fiscal imbalances, including Croatia. Croatia and others are doing well in estimating their budget balances, back in 2019, it was lower than the set 3 percent of GDP. Only Romania had an overdraft, which led to an excessive deficit procedure in April 2020. Although the debt ratio in Croatia and Hungary was above the 60 percent of GDP threshold, it was declining until the end of last year. Due to the ongoing pandemic, the budget deficit and debt ratio are expected to grow in all seven countries due to the slowdown in the economy and fiscal aid packages.

There is no problem in the field of exchange rate convergence either; the kuna has shown little volatility, while the Bulgarian lev was fixed against the euro within the currency board (1.95583 lev for 1 euro). Other currencies were traded under flexible exchange rate regimes where the exchange rate of most was very volatile, especially during the tensions in the financial markets in March 2020, they note from Frankfurt.

The ECB's historically low interest rate policy spills over beyond the Eurozone, a benefit that countries without the euro can also feel. In Romania alone, long-term interest rates are higher than the 2.9 percent reference value, while the lowest long-term interest rates are recorded in Bulgaria and Sweden.

Although the report notes that the existing CNB Act is not in line with central bank independence regulations, this part of the document was completed before the legislative changes which came about in April, which were subsequently assessed positively.

It's worth mentioning that the convergence report is a two-year document that is not related to the process of entering the exchange rate mechanism, and it assesses the gap between the member state economies that don't yet have the euro with an average of nineteen Eurozone countries.

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As Marina Klepo/Novac writes on the 8th of June, 2020, although two months ago it indicated the possibility of Croatia postponing its entry into the ERM II exchange rate mechanism, Fitch now believes that the process of the country's entry into the Eurozone, a prerequisite to which Croatia had to agree in order to gain EU membership, will proceed as planned, despite the disruption caused by the ongoing coronavirus crisis.

In the latest report on the state of the Croatian economy, Fitch expresses its expectations that institutions will continue with the process of joining the exchange rate mechanism and the banking union. According to the rating agency, Croatia will formally request entry into the banking union and ERM II, a waiting room for entry into the Eurozone, in the third quarter of 2020's summer months, where it must spend at least two and a half years.

Nineteen reforms

As for Croatia, it has done its homework in full: the government reported a month ago that it had fulfilled the action plans of nineteen reform measures, and recently the CNB also reported that five banks have successfully passed the control tests carried out by the European Central Bank. According to Croatian leaders, the government will soon inform the competent European institutions about the implementation of all of the requested measures, and the ECB should inform the Eurozone member states about the results of the assessment of the quality of the assets of five Croatian banks.

Their positive response is expected by mid-July, after which the procedure requires the sending of a formal request to join the ERM II and the establishment of close cooperation between the CNB and the ECB. According to unofficial information, this process should be completed in the coming months.

When Croatia enters the ERM II, it primarily regards the determination of the exchange rate at which the domestic currency (kuna) will be replaced by the euro in the future, as well as the range of permissible fluctuations around the central parity.

The range of fluctuations should not exceed plus-minus fifteen percent. In the past two decades, the kuna has fluctuated plus or minus five percent around an average of 7.42 kuna per euro, so it is expected that the central exchange parity will be determined approximately around that market level. When it comes to joining the banking union, this means that the ECB will decide on the beginning of close cooperation with the Croatian central bank and over which banks it will conduct direct supervision. The remaining, less significant banks will be supervised by the CNB on behalf of the ECB.

Healthy banks

Given the long-term decent health of Croatian banks, the ECB's assessment that they are well-capitalised and that they can withstand a very strong negative economic shock is not particularly surprising. The assessment included Zagrebacka banka, PBZ, Erste bank, OTP and HPB, and consisted of asset quality control (AQR) and a stress test, ie, shock resistance testing in a scenario involving a recession, unfavourable interest rate movements and other risks.

Shock resistance testing has shown that even in the worst case scenario, the rate of regular capital would not fall below the prescribed minimums and regulatory requirements.

The Maastricht criteria

If Croatia successfully takes the first step on the road to Eurozone entry, a new question that will arise is how long it will remain in the exchange rate mechanism and when will the euro will really come into everyday use here. The experience of other countries shows that this period can vary from two and a half years, as was the case with neighbouring Slovenia, to 11 years, as experienced by Lithuania, which remained in the ''waiting room'' from 2004 to 2015.

In the case of Croatia, Fitch notes that the issue of deadlines for Eurozone entry remains open given its difficulties in meeting the Maastricht criteria, especially the one related to weak economic growth and the medium-term outlook for public debt. This year, Fitch estimates, public debt will reach 86.2 percent of GDP.

With economic recovery, it is believed that it will be possible to achieve the prescribed pace of public debt reduction, which is one twentieth of the difference between the actual amount of public debt and the limit of 60 percent of GDP, which means just over one percentage point per year.

However, the very prospect of joining the Eurozone is an important positive signal that also affects Croatia's credit rating. If everything goes according to plan, Fitch states in its report that in the time since entering the exchange rate mechanism and switching to the euro, it intends to increase Croatia's long-term rating by two notches.

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