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Croatia clears final hurdle to adopting the euro next year

Croatia clears final hurdle to adopting the euro next year

The European Union on Tuesday removed the final obstacles to Croatia adopting the euro, enabling the first expansion of the currency bloc in almost a decade as the exchange rate fell to its weakest level against the dollar in 20 years.
EU finance ministers approved three laws that pave the way for Croatia to become the 20th member of the eurozone on Jan. 1. The last EU country to join the European single-currency area was Lithuania in 2015.

“It’s a big day for Croatia, I dare say historic,” Croatian Finance Minister Zdravko Maric told reporters in Brussels.

Adopting the euro offers economic benefits stemming from deeper financial ties with the currency bloc’s other members and the European Central Bank’s monetary authority.

More tangibly, it means that any of the current eurozone’s 340 million inhabitants who visit Croatia will no longer need to exchange their cash for Croatian kuna.

Euro entry also has political rewards because the shared currency is Europe’s most ambitious project to integrate nations, giving them a place in the EU core. That means a seat at the EU’s top decision-making tables.

Croatia’s accession to the monetary bloc is “an important moment for the European Union” and “confirms that the euro is an attractive, resilient and successful global currency,” EU Commission Executive Vice-President Valdis Dombrovskis said.

However, the euro’s exchange rate very briefly touched $1 for the first time in two decades Tuesday before immediately going back up. A worsening energy crisis in Europe tied to Russia’s war in Ukraine has stoked fears of the economy going into a tailspin.

“The crucial factor for a possible adverse scenario is exactly the supply of energy,” European Economy Commissioner Paolo Gentiloni said. “This risk did not diminish in the weeks that we have behind us. It’s still there and increasing.”

While political elites in Croatia view euro membership as a success, citizens who are already coping with double-digit inflation are concerned that the introduction of the European single currency will cause further price increases.

“They are constantly comforting us on the radio that prices will be fine, but I don’t believe it,” Zagreb resident Visnja Gacic said. “I have a friend in Slovenia, and when they introduced the euro, prices went sky-high.”

In May, inflation in Croatia reached a 14-year high of 10.8%. In the eurozone, it was a record 8.6% in June, with the ECB planning to raise interest rates for the first time in 11 years this month to combat soaring consumer prices.

Created in 1999 among 11 countries including Germany and France, the euro has gone through seven previous enlargements starting with Greece in 2001.

The appeal of euro membership is reflected by the last three expansions, which brought in Baltic states between 2011 and 2015. During that period, the eurozone was scrambling to contain a debt crisis that Greece had triggered and that was threatening to break apart the currency alliance.

A combination of European emergency loans to five financially vulnerable member countries and an ECB pledge to do “whatever it takes” to save the euro enabled the currency bloc to weather the turbulence and emerge stronger.

Joining the euro requires a country to meet a set of economic conditions. These relate to low inflation, sound public finances, a stable exchange rate and limited borrowing costs.

“It’s a wonderful club to be a member of, but it requires commitment, dedication, continued respect of the rules, and I know that we can expect no less from Croatia,” ECB President Christine Lagarde said. “Together we are stronger.”

Croatia is relatively small and poor, so its euro entry will have limited international economic implications. The country has a population of around 4 million and per-capita wealth that, at 13,460 euros ($13,500) last year, was less than half of the euro-area average.

Nonetheless, against the backdrop of the Russian war in Ukraine and Kyiv’s hasty application for EU membership, Croatia’s imminent adoption of the euro sends a potentially significant political signal.

Croatia was itself at war in the early 1990s during the violent breakup of Yugoslavia. The country applied for EU membership in 2003 and joined the bloc in 2013. That was the last time the EU expanded.

“What an amazing journey it was for Croatia,” Gentiloni said. “There is a lot to celebrate.”
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