Europe: good student, Croatia joins the eurozone

Posted on December 28, 2022 at 12:00 pmUpdated December 28. 2022 at 13:26

It is a blessing for Croatia, which gained its independence from the former Yugoslavia almost thirty years ago. Less than a decade after joining the European Union, this small republic with a population of 3.9 million between 1er January in both the euro zone and the Schengen zone at the same time.

“Croatia’s policy has always been to integrate into the European Union as much as possible,” explains Finance Minister Marko Primorac. Entry into the Eurozone is the culmination of this. “Euro, Schengen, NATO… the country is now part of the “hard core” club of 15 countries that are part of these three spaces at the same time.

In 2020, Croatia joined the European Monetary Mechanism, the front chamber of the euro. To enter this “waiting room” it was already necessary to fulfill most of the criteria required by the Maastricht Treaty: public debt should be less than 60% of GDP or rapidly approaching it, the budget deficit should be less than 3%, and inflation should be under control. ..

A destructive war

The center-right government of Prime Minister Andrej Plenkovic, in power since 2016, proudly rejects milestones that led to the final green light of Twenty-seven last summer.

“We have only 906 days left in the European Exchange Rate Mechanism, which is a record! Prime Minister’s chief of staff Zvonimir Frka-Petesic emphasizes. Another good pupil of the Union, Slovenia, stayed there for another ten days, smiling. Others, like Lithuania, have spent more than a decade there.

Croats are more than satisfied with their trip because they were still in the middle of the war in the early 1990s: “We are the only country in the European Union that is experiencing a conflict on its territory, recalls Zvonimir Frka-Petesic. . The war cost us fifteen years.” In addition to the 20,000 deaths in Croatia, the fighting that followed the breakup of Yugoslavia reduced GDP by a third. The country recovered its pre-war level only in 2004. The destruction accounted for 160% of the national wealth and destroyed 15% of the housing stock.

Better than Greece and Slovakia

This devastating episode temporarily slowed Croatia’s relationship with Western Europe. Since the 1990s, a large part of the national economy has been strongly tied to the deutsche mark, then the euro, more so than in other central European states. Today, 53% of Croatian exports go to the euro zone. In the other direction, 59% of imports fall on the share of currency union countries.

Three quarters of depositors’ deposits are already denominated in euros. The banking sector is mainly controlled by Austrian and Italian banks. And in a country heavily dependent on tourism, two-thirds of foreigners staying in Croatia are citizens of a eurozone country.

In the home game, Croatia continued to overcome all obstacles despite the pandemic. The health crisis has certainly temporarily increased the budget deficit, but the latter has already fallen below 2% of GDP. As for the debt, it has grown from more than 85% of national wealth to 70% in two years, faster than the pace required by Brussels. GDP per capita – which is not a formally considered measure – is higher than that of eurozone members Greece or Slovakia.

Recognition of rating agencies

The virtuous circle set in motion in Croatia has been officially recognized by rating agencies in recent months. The country has moved into the “investment grade” category, excluding the world, since the war in Ukraine began this year. It is highly rated by seven EU countries, including the founding nation Italy. “We are only one step away from the A rating,” says the finance minister.

Interest rates reflect increasing convergence with the euro zone. “Three or four years ago they were close to Hungary or Romania,” recalls Alen Kovac, an economist at Erste Bank in Zagreb. The spread with German rates has narrowed sharply: it is now just 130 basis points. “This will be reflected in the borrowing costs of both the state and all companies and households in the country,” the minister welcomes.

It is more resistant to crises

Alen Kovac continues: “Joining the euro zone is a logical conclusion.” With such a “Euroized” economy, the maneuverability of monetary policy was in any case very limited. He believes that by joining the monetary union, “Croatia will be more resilient against future crises.” And foreign investors “will be reassured by the elimination of exchange risk, which is always a topic for them.”

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