Croatia in the Eurozone
As like many Year 13’s, I looked to bury post-exam woes on a blistering trip abroad. But while my compatriots were dallying it up in Magaluf and Ibiza, I was restricted to an anaemic Croatian resort. So for entertainment I did as any self-respecting eighteen year old would – look into the national currency of my European excursion.
It was surprising to learn that the legal tender of Croatia is the ‘Kuna’. This is not because their national currency sounds better placed on the menu of an exotic takeaway, but instead because adopting the Euro would prove greatly advantageous for this small central European state.
Indeed, it was clear that many others felt the same. Currency exchange kiosks were positioned every 100 metres in both cities of Dubrovnik and Split, enabling the predominantly European tourists to convert their beloved Euros. Equally clear is how this sentiment is shared by higher powers. The Croatian Government has spent nearly a decade trying to join the Eurozone, but were fired down by their contracting economy and ballooning debt:GDP rate violating the convergence criteria. However, with the macroeconomic indicators back in check, this is set to change over the next few months.
From the surface, it seems certain that Croatia will benefit from joining the Euro. It would lead to greater price transparency overnight, seeping into increased revenues from tourism. With this sector accounting for around a fifth of GDP, as well as being dominated by people from Eurozone nations, an economic expansion would be expected. The behaviour of street vendors is telling, already accepting Euros to cover for the dramatic fall in sales if they didn’t. The comparatively weak national currency (1 Euro is around 7.5 Kunas), also enables a valid excuse for petty entrepreneurs to overcharge. In my travels I came across a particularly unscrupulous magnet dealer whose product was advertised as 5 Kunas but was persistent on charging me 2 Euros. This rounding left me – a poor, exploited magnet consumer – 2.5 Kunas worse off.
The biggest concern for Croatia is their spiralling inflation. Price level rises currently stand at 12.1%, considerably higher than the Eurozone’s 8.9% average. However, this should prove as a relatively minor hindrance in Croatia’s bid to adopt the single currency as flexibility in the convergence criteria is to be expected post-Covid. Croatia's economic conditions are set to tighten broadly in line with the wider Eurozone, with interest rates being recently hiked to 2.5%, in tune with the European Central Bank (ECB) hiking lending base rates to 0.75%.
The Euro will offer Croatia a golden ticket to get inflation under control. The comparatively stronger single currency will make imports cheaper and largely offset rising price levels. Better still, it will eliminate nearly all barriers of trade with Eurozone nations — Croatia’s largest trading partners.
Concerns regarding Croatia’s surrender of monetary policy have naturally arisen. As with all Eurozone countries, the Croatian Central Bank will be forced to yield control over their ability to dictate monetary terms to the ECB. Croatia’s dependency on tourism is similar to that of Greece and Spain, who both experienced the damage of not having monetary policy set independently. As a fairly homogenous sector, tourism is largely guided by price competition. Locked into a high-currency straight jacket, Croatia will lose the ability to devalue their currency in order to give their tourism industry a needed boost. With this is an increased risk of a sovereign debt crisis. With Croatia’s Debt:GDP already standing at 79.8% there is a pitiful amount of wiggle room for the Government should they need to equalise their reduced price competitiveness through central spending. As with Greece, this price could only be paid through severe and prolonged austerity.
But such pessimism is not appropriate — yet. With Croatia’s Central Bank already heavily influenced by the ECB through their deep economic ties, independent monetary policy is largely a myth. Governor of Croatia’s Central Bank often satirises this by quoting a Bob Dylan line: 'When you ain’t got nothing, you got nothing to lose'. The Euro focused monetary policy of Croatia already places the nation in a Central Banking straightjacket. With the country already experiencing all the negatives of being part of the single currency, they may as well reap its benefits as well.