Discussing about Euro adoption in Croatia

CPAG co-founder Laurian Lungu was a panel speaker at the “Moy glas u EU” conference organised in Zagreb, Croatia on 24 April 2019. The focus of the panel discussion was the effects of Euro adoption in Croatia. It was an absorbing debate, especially given some existing similarities between the economies of Croatia and Romania, such as a relatively high euroisation rate, the managed float exchange rate regime, the strong trade integration with the Eurozone or the revival of the political will to adopt the euro.

Croatia has taken large strides towards adopting the euro. Among the six remaining EU countries which need to adopt the euro in the future, it is the only one which currently fulfils the legal compatibility criterion regarding central bank legislation – although some steps still need to be done in order to join the Banking Union. In April 2018 the Croatian National Bank and the Croatian Government jointly published the “Strategy for the Adoption of the Euro in Croatia”, a document outlining the risks and benefits of the euro adoption. It concluded that ‘’Croatia is ready to start the process of euro adoption”. Croatia plans to enter the ERM II mechanism in 2020, if the reduction in the public debt to GDP ratio continues as envisaged.

As a small open economy, where a relatively large share of debt is already denominated in euros, and which is strongly integrated with the Eurozone trade flows, the benefits of euro adoption tend to outweigh the costs. However, some concerns remain. If GDP/capita (expressed in PPS, EU-28 =100) is taken as a rough guide for setting the timing of euro adoption (because it is a broad measure of economic development), Croatia’s track record shows a cause for concern. With the exception of the three Baltic countries, which had, for years, currency board arrangements and still had a figure close to 70, the economic performance of other countries which adopted the euro recently, was pretty high. Their unweighted average GDP/capita ratio was over 83: Slovenia 88, Cyprus 94, Slovakia 72 and Malta 78. In contrast, Croatia’s GDP/capita (in PPS) has stagnated for more than a decade now (see graph below) and is forecast to remain around this level in the near future. Croatia was overtaken even by Romania in 2017, despite the large gap existing since 2000 (when Romania started the EU accession talks). From an economic policy point of view, the question is how would the Croatian economy perform within the Eurozone, when it loses its control over monetary policy, if it performed so poorly over the last decade in circumstances where it had control over both fiscal and monetary policies (currently, domestic monetary policy is constrained by the exchange rate objective but it is still independent when compared to the situation where it was run by the European Central Bank). The resulting low wage (and productivity) growth – Croatia had the lowest wage growth among the six EU, non-Eurozone countries, between 2008 and 2018, averaging only 2.2%/year (compared to Romania’s 11.5%, Poland’s 3.5%, Czech Republic’s 3.4% or Hungary’s 5% for instance) and high unemployment rate are other causes of concern.