To Euro or not to Euro: A Progress Report on Croatia’s Accession to the Euro Area

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The beginning of 2023 saw the EU welcome Croatia into the euro area. Croatia joined the EU in 2013 and since then has made rapid macroeconomic developments in order to catch up with the GDP per capita of other eurozone countries. Croatia made significant progress in addressing macroeconomic imbalances and achieving convergence with regional standards. The introduction of the euro increased scepticism as a result of high inflation, however, it also boosted Croatia's economy.

Leading up to the accession

Even before its accession to the euro area, Croatia had strong ties with the European Central Bank. The euro area was Croatia’s main trading and financial partner (more than 70% of Croatian exports were in euros in 2020) and a high share of public and private debt were issued in Euros due to the existing high integration of European banks in the country. Therefore, the European Council's July 2022 approval of the accession seemed to be beneficial to reduce the transaction costs and consolidate further integration.

At the time of the accession, the main benefits identified by the European Central Bank included the elimination of currency risk vis-à-vis the euro, a positive impact on foreign trade (including tourism) and increased investment as a result of lower transaction costs, and greater transparency (price comparability). Croatia's accession came at a period of high instability in the European continent following the COVID-19 crisis and the war in Ukraine. Although these crises hardly limited Croatia’s accession,  COVID-19 did bring a reduction in GDP of 8.6% in 2020, due to the economy's high dependence on tourism. The shocks of emerging crises raise concerns for the sustainability of economic convergence. The European Central Bank stresses the need to support potential growth and resilience through policy to prevent further macroeconomic imbalances.

Scepticism and rising prices

A Eurobarometer survey from early 2023 showed that 55% of Croatians favour adopting the euro but around 80% fear a rise in prices. The fear of inflation has grappled the country, with consumers experiencing an increase in the price of basic goods and services since October 2022. Even though Croatia has significantly lower salaries compared to other euro countries, inflation in some months was three percentage points higher than in the rest of the eurozone. Increase in price levels of everyday items led to an influx in cross-border shopping with Croatians heading to Slovenia to buy basic goods. This is also partially contingent on malpractice from supermarket chains. Just three weeks after the adoption of the euro, the State Inspectorate found 25.2% unjustified price increases out of a total of 1,145 cases. European Commission investigations have been initiated to bring justice to the foul play of supermarket chain price hikes. According to Goran Jungvirth, an economics and policy analyst, the inflation coupled by an insufficient growth of wages in Croatia has reduced the purchasing power of citizens and impacted the most vulnerable members, widening inequality in the country. 

The majority of Croatians are in favour of the adoption of the Euro, however, there is public debate about the timing of the adoption. The already existing high inflation for socio-political reasons created an unfavourable period for the adoption of the euro and an easy target to blame for the increasing inflation.

A boost for the economy

The accession into the eurozone realised the expected benefits to the Croatian economy with a boost in the tourism and manufacturing sector. The most significant beneficiary of the accession into the eurozone are banks. The banking sector saw huge profits from the growth in interest income. Citizens were able to see growth in nominal wages and the recovery of real wages towards the third quarter of 2023. October 2023 experienced a change in the course of the rising inflation in Croatia. Growing inflation has slowed down since October and is projected to decrease to 2.4 percent from the current 3 percent in 2024.

The Croatian government claims that the eurozone accession did not have an impact on price levels and instead, was an estimated and predicted outcome even without the introduction of the euro. Indeed, European countries without the euro saw on average a larger increase in inflation in the past year.

The government claims that through the introduction of the euro, after almost a year since its introduction, there has been a decrease in the threat of currency risk and lower transaction costs. Moreover, the greater resistance to financial crises and improvements in Croatia’s credit rating from the introduction of the euro all build hope for full confidence in the euro in the general population and further integration into the European market.

Adopting the euro: the right choice?

Contexts, history, and policies can all play a role in determining a country's successfulness in a monetary union accession. Every country has their own story and scenario that can push or refrain them from adopting the euro. The economic benefits of joining the euro area can be seen in Croatia's case through increased exports, harmonisation, and international relevance. If we are moving towards a period of further economic instability with high inflation and increasing emergencies, it could be beneficial to be part of a centralised monetary block capable of harmonising monetary policy. Having to bear the monetary policy costs of rising inflation on a national level can prove to be a big challenge for countries with their own currency. However, as in the case of Croatia, economic instability based on external factors can lead to adverse effects for the effectiveness of the implementation of the euro. The following years will be crucial in understanding the true impact of the introduction of the euro in Croatia. An understanding of the possible effects can lead other countries with similar contexts to better analyse the possibility of joining the euro area in the future.

References:

Anđelković, Katarina. “Inflation in Croatia Forecast Not Bad, GDP Growing.” Total Croatia, 11 Dec. 2023, total-croatia-news.com/news/inflation-in-croatia-forecast/. Accessed 13 Dec. 2023.

Falagiarda, Matteo, et al. “Has the Euro Changeover Really Caused Extra Inflation in Croatia?” European Central Bank, 7 Mar. 2023, www.ecb.europa.eu/press/blog/date/2023/html/ecb.blog.230307~1669dec988.en.html.

Falagiarda, Matteo, and Christine Gartner. “Croatia Adopts the Euro.” European Central Bank, 12 Jan. 2023, www.ecb.europa.eu/pub/economic-bulletin/focus/2023/html/ecb.ebbox202208_02~15fd36600a.en.html.

Gauret, Fanny . “How Is Croatia Adapting to the Euro?” EuroNews.Business, 11 Jan. 2023, www.euronews.com/business/2023/01/11/how-is-croatia-adapting-to-the-euro.

Hajdari, Una . “Croatians Flock to Slovenia for Grocery Shopping after Euro Introduced.” EuroNews.Business, 9 Mar. 2023, www.euronews.com/business/2023/03/09/you-save-at-least-20-croatians-flock-to-slovenia-for-grocery-shopping-after-euro-introduce. Accessed 13 Dec. 2023.