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Why Croatia Sees Joining the Euro as Path to Security

A Euro symbol at a currency exchange bureau in Moscow, Russia, on Tuesday, Dec. 7, 2021. Russian markets brushed off reports that the U.S. and its allies are considering sanctions targeting the country’s banking sector should President Vladimir Putin invade Ukraine. Photographer: Andrey Rudakov/Bloomberg (Bloomberg)

Croatia, the European Union’s newest member, adopted the euro as its currency on Jan. 1, making it the 20th country to join the euro area. The move vaulted the nation of around 4 million people into the EU’s core, making payments easier and cheaper and giving its financial system a safety net in future crises. The country, with an economy highly dependent on foreign tourists, also joined the Schengen zone, which allows easier travel around Europe. 

1. Why did Croatia join the euro?

Croatia began its push to join the single currency as soon as it won membership in the EU in 2013. The move is partly aimed at cementing a Western alignment after about half a century of communist rule following World War II as part of Yugoslavia. (Its accession had been delayed by the bloody wars in the 1990s around the disintegration of that country.)    

2. What about the economic logic?

That’s arguably even more compelling. The country relies more than any other EU state on tourists, who generate a fifth of gross domestic product and find vacationing much easier when they don’t have to grapple with exchange rates. Meanwhile, most private and corporate bank deposits in Croatia are held in euros, along with more than two-thirds of debt totaling about 520 billion kuna ($74 billion). Euro-area membership can lower interest rates, improve credit ratings and make Croatia more attractive to investors, according to central bank Governor Boris Vujcic.

3. What are the pros?

Adopting the euro formalizes a chunk of economic activity that’s already carried out using the common currency — from apartment and car sales to short-term rentals for vacationers. It trims foreign-exchange costs outside tourism to the tune of about 1.2 billion kuna a year, according to the central bank. Croatia gains access to European Central Bank liquidity and potential bailout financing from the European Stability Mechanism during periods of crisis. With Greece’s troubles now largely in the rear-view mirror, there was popular support to switch to the euro. Almost all political parties backed the move. Eastern European peers Estonia, Latvia, Lithuania, Slovakia and Slovenia had already joined the single currency. ECB President Christine Lagarde said Croatia’s access proves that the euro has lasting appeal.

4. And the cons?

In terms of monetary policy, there’s not much to lose by relinquishing control to the ECB since the kuna’s exchange rate has been locked in a tight trading band to the euro and, before that, to the Deutsche Mark since the 1990s. Croatia’s euro adoption will cost local banks about 1 billion kuna annually in lost conversion fees, but the switch reduces currency risks and improves stability, according to the national association of banks. The euro is also expected to have cost banks €80 million to 100 million in one-time expenditure to adapt their IT services and ATM networks. 

5. What hurdles did it face? 

EU member states gave their final approval for Croatia to join the euro on July 12, 2022. Inflation has proved the biggest challenge after the war in Ukraine sent prices of energy and other commodities soaring. But that’s a problem everywhere: The pace of inflation in the euro area dropped in November, the most recent data, but consumer prices still soared 10.1% from a year earlier. 

6. What other countries want to join the euro?

One certainly does: Bulgaria. But it has pushed back its timetable by a year to 2024 after being accepted into the euro-area waiting room known as ERM-2 in 2020, the same time as Croatia. Romania has also expressed a desire. However, the biggest countries in the region aren’t rushing to join, despite their obligations under EU treaties. Poland, for example, attributes its ability to survive the 2008 global financial crisis without a recession to it having retained an independent monetary policy.

7. What do Croatia’s new coins look like?

The coins feature a map of the country and the national checkerboard motif. They also have images of a kuna, or weasel, and feature inventor Nikola Tesla, an ethnic Serb born in the present-day Croatian town of Smiljan. Serbia’s central bank had said it would take action if Croatia was allowed to use Tesla’s image. 

8. What’s the Schengen area?

The Schengen area allows people to travel between member countries without needing to show passports or go through border controls. It started in 1985 with five countries — France, Germany, Belgium the Netherlands and Luxembourg — and with the addition of Croatia now numbers 27 countries, most of which are also EU members. The European Commission calls it a common “area of values, freedom, security and justice.”

• Bloomberg articles on the European Commission’s recommendation on Croatia, the country’s central bank urging citizens to move their savings into banks, and its plans for euro coins.

• A Bruegel analysis of the euro coming of age.

• A Brookings Institution study on whether European integration increases people’s life satisfaction in Croatia and elsewhere.

--With assistance from Zoe Schneeweiss.

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