The 20th nation to join the euro area is Croatia, which is also the newest member of the European Union. The state accepted the euro as its official currency on January 1st.
The decision sent the roughly 4 million-person country into the center of the EU, facilitating and lowering the cost of payments while providing its financial system with a safety net in case of any crises. The nation also entered the Schengen area, which facilitates simpler travel throughout Europe, as its economy is heavily dependent on international tourists.
What prompted Croatia to adopt the euro?
Unity. As soon as Croatia became a member of the EU in 2013, it started to campaign for adoption of the single currency. The action is in part intended to solidify a western alliance after around 50 years of communist control in what was once part of Yugoslavia after World War II.
What about the economic logic behind it?
That could possibly be more of a reason to adopt the euro. Tourists account for a fifth of the nation’s GDP and a common currency makes travel considerably simpler when there are no currency conversion issues. Tourists are the main source of income for the nation, more so than in any other EU member state.
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Meanwhile, more than two-thirds of Croatia’s debt, which amounts to roughly 520 billion kuna ($74 billion), is held in euros. So are the majority of individual and corporate bank deposits. According to Boris Vujcic, governor of the Croatian central bank, inclusion in the eurozone may cut interest rates, boost credit ratings, and make Croatia more appealing to foreign investors.
What are the benefits?
The use of the euro formalizes a significant portion of economic activity that is currently conducted using the common currency, including short-term rentals for tourists as well as the selling of cars and apartments.
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According to the central bank, it reduces foreign exchange costs outside of tourism by around 1.2 billion kuna annually. During times of crisis, Croatia has access to funds from the European Stability Mechanism and the liquidity of the European Central Bank.
With Greece’s problems mostly behind it, there was support in the public for the euro’s adoption. Nearly all political parties supported the action. Estonia, Latvia, Lithuania, Slovakia, and Slovenia, counterparts in Eastern Europe, had already adopted the euro. According to ECB President Christine Lagarde, Croatia’s admission demonstrates the currency’s enduring popularity.
The drawbacks?
There isn’t much to lose by handing over power to the ECB in terms of monetary policy. The kuna’s exchange rate has been fixed in a close trading band to the euro and, before that to the Deutsche Mark since the 1990s.
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According to the national association of banks, the adoption of the euro by Croatia would cost local banks roughly 1 billion kuna per year in missed conversion costs. However, it also lowers currency risks and boosts stability.
Banks’ one-time expenses to switch their IT systems and ATM networks to the euro are also anticipated to have cost them between €80 million and €100 million.
What obstacles did Croatia encounter?
On July 12th, 2022, EU members officially approved Croatia’s adoption of the euro. After the crisis in Ukraine caused the price of oil and other goods rising, inflation has proven to be the largest obstacle. However, it’s an issue everywhere. According to the latest current figures, the euro area’s inflation rate decreased in November, yet consumer prices increased 10.1% from a year earlier.
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