Croatia and the euro

Eurozone participation

  19 European Union member states in the eurozone

  7 European Union member states not in ERM II, but obliged to join the eurozone once convergence criteria are met (Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania and Sweden)

  1 European Union member state in ERM II, with an opt-out (Denmark)

  1 European Union member state not in ERM II, with an opt-out (United Kingdom)

  4 non-European Union member states using the euro with a monetary agreement (Andorra, Monaco, San Marino and Vatican City)

  2 non-European Union member states using the euro unilaterally (Kosovo^{[lower-alpha 1]} and Montenegro)

I always quote the Bob Dylan song ‘When you ain’t got nothing, you got nothing to lose’. If you don’t have independent monetary policy what are you going to lose by entering into the monetary union? —Boris Vujčić, Governor of the Croatian National Bank, makes an analogy about Croatia's long-held euro-focused monetary policy. ^[1]

Croatia's currency, the kuna, has used the euro (and prior to that one of the euro's major predecessors, the Deutsche Mark) as its main reference since its creation in 1994, and a long-held policy of the Croatian National Bank has been to keep the kuna's exchange rate with the euro within a relatively stable range.

Croatia's EU membership obliges it to eventually join the eurozone, as such the country plans to join the European Monetary System, the pathway to euro adoption.^[2][3] Prior to Croatian entry to the EU on 1 July 2013, Boris Vujčić, governor of the Croatian National Bank, stated that he would like the kuna to be replaced by the euro as soon as possible after accession.^[4] This must be at least two years after Croatia joins the ERM2 (in addition to it meeting other criteria). The Croatian National Bank had anticipated euro adoption within two or three years of EU entry.^[3][5] However, the EU's response to the ongoing financial crises in eurozone states may delay Croatia's adoption of the euro.^[6] The country's own contracting economy also poses a major challenge to it meeting the convergence criteria.^[7] While keen on euro adoption, one month before Croatia's EU entry governor Vujčić admitted "...we have no date [to join the single currency] in mind at the moment".^[4] Before Croatia can join ERM II, it must reduce its budget deficit by about 1.5 billion kuna (June 2013 figures). The European Central Bank expects Croatia to be approved for ERM II membership in 2016 at the earliest, with euro adoption in 2019.^[8][9]

Many small businesses in Croatia had debts denominated in Euro before EU accession.^[10] Croatian people already use the euro for most savings and many informal transactions. Real estate, motor vehicle and accommodation prices are mostly quoted in euros.

Public opinion

According to a eurobarometer poll in April 2015, 53% of Croatians are in favour of introducing the euro while 40% are opposed, roughly unchanged from 2014.^[11][12]

Convergence Status

In its first assessment under the convergence criteria in May 2014, the country satisfied the inflation and interest rate criteria, but did not satisfy the public finances and ERM membership criteria.^[13]

Convergence criteria
Assessment month	Country	HICP inflation rate[14][nb 1]	Excessive deficit procedure[15]		Exchange rate		Long-term interest rate[16][nb 2]	Compatibility of legislation
			Budget deficit to GDP[17]	Debt-to-GDP ratio	ERM II member[18]	Change in rate[19][20][nb 3]
2014 ECB Report[nb 4]	Reference values	Max. 1.7%[nb 5]	Max. 60% (Fiscal year 2013)[23]
			Croatia	1.1%	Open		No	-0.8%	4.8%	Yes
	4.9%	67.1%

  Criterion fulfilled

  Criterion potentially fulfilled: If the budget deficit exceeds the 3% limit, but is "close" to this value (the European Commission has deemed 3.5% to be close by in the past),^[24] then the criteria can still potentially be fulfilled if either the deficits in the previous two years are significantly declining towards the 3% limit, or if the excessive deficit is the result of exceptional circumstances which are temporary in nature (i.e. one-off expenditures triggered by a significant economic downturn, or by the implementation of economic reforms that are expected to deliver a significant positive impact on the government's future fiscal budgets). However, even if such "special circumstances" are found to exist, additional criteria must also be met to comply with the fiscal budget criterion.^[25][26] Additionally, if the debt-to-GDP ratio exceeds 60% but is "sufficiently diminishing and approaching the reference value at a satisfactory pace" it can be deemed to be in compliance.^[27]

  Criterion not fulfilled

Notes

1. The 12-month average for the annual HICP inflation rate must be no more than 1.5% larger than the unweighted arithmetic average of the similar HICP inflation rates in the 3 EU member states with the lowest HICP inflation. If any of these 3 states have a HICP rate significantly below the similarly averaged HICP rate for the eurozone (which according to ECB practice means more than 2% below), and if this low HICP rate has been primarily caused by exceptional circumstances (i.e. severe wage cuts or a strong recession), then such a state is not included in the calculation of the reference value and is replaced by the EU state with the fourth lowest HICP rate.
2. The annual average for the yield of 10-year government bonds must be no more than 2.0% larger than the unweighted arithmetic average of the bond yields in the 3 EU member states with the lowest HICP inflation. If any of these states have bond yields which are significantly larger than the similarly averaged yield for the eurozone (which according to previous ECB reports means more than 2% above) and at the same time does not have complete funding access to financial markets (which is the case for as long as a government receives bailout funds), then such a state is not be included in the calculation of the reference value.
3. The change in the annual average exchange rate against the euro.
4. Reference values from the ECB convergence report of June 2014.^[21]
5. Latvia, Portugal and Ireland were the reference states.^[21]</ref>
   (as of 30 Apr 2014) Croatia]]'s currency, the [[C None open (as of 30 Apr 2014) that one of the euro's major Min. 2 years
   (as of 30 Apr 2014) e since its creation in 1994, Max. ±15%^{[nb 6]}
   (for 2013) . Croatia's EU membership o Max. 6.2%^{[nb 5]}
   (as of 30 Apr 2014) netary System]], the pathway Yes^[22]
   (as of 30 Apr 2014) om c conference, in [[Dubrovnik] Max. 3.0%
   (Fiscal year 2013)<ref name='EC Spring Forecast 2014'>"European economic forecast - spring 2014" (PDF). European Commission. March 2014. Retrieved 5 July 2014.
6. The maximum allowed change in rate is ± 2.25% for Denmark.

Target date for euro adoption

In April 2015, President Kolinda Grabar-Kitarović stated in a Bloomberg interview she was "confident that Croatia would introduce the euro by 2020", while Prime Minister Zoran Milanović said at the government session that "some occasional announcements when Croatia will introduce the euro shouldn't be taken seriously. We'll try to make it as soon as possible, but I distance myself from any dates and ask that you don't comment on it. When the country is ready, it will enter the euro area. The criteria are very clear."^[28]

See also

• Accession of Croatia to the European Union
• Enlargement of the eurozone

Notes

1. Kosovo is the subject of a territorial dispute between the Republic of Kosovo and the Republic of Serbia. The Republic of Kosovo unilaterally declared independence on 17 February 2008, but Serbia continues to claim it as part of its own sovereign territory. The two governments began to normalise relations in 2013, as part of the Brussels Agreement. Kosovo has been recognised as an independent state by 108 out of 193 United Nations member states.

References

1. "Bank Governor Determined For Croatia To Adopt Euro Currency ASAP". http://www.croatiaweek.c. Retrieved 7 September 2013.
2. "Monetary policy and ERM II participation on the path to the euro". Speech by Lucas Papademos, Vice President of the ECB at the tenth Dubrovnik economic conference, in Dubrovnik. European Central Bank. 2004-06-25.
3. "Vujčić: uvođenje eura dvije, tri godine nakon ulaska u EU". Poslovni dnevnik (in Croatian). HINA. 1 July 2006. Retrieved 2011-01-01. statements made by Boris Vujčić, deputy governor of the Croatian National Bank (now governor (2013)), at the Dubrovnik economic conference, June 2006
4. THOMSON, AINSLEY. "Croatia Aims for Speedy Adoption of Euro". Wall Street Journal. Retrieved 7 September 2013.
5. "Croatia ready to join EU in 2013 – official". reuters.com. 10 June 2011.
6. "No Euro for Croatia before 2017". Croatian Times. 2010-05-31.
7. "Approaching storm. Report on transformation" (PDF). http://www.pwc.pl. Retrieved 7 September 2013. External link in |publisher= (help)
8. "Konferencija HNB-a u Dubrovniku: Hrvatska može uvesti euro najranije 2019." (in Croatian). http://www.banka.hr. Retrieved 7 September 2013. External link in |publisher= (help)
9. "Croatia country report" (PDF). http://www.rbinternational.com. June 2013. Retrieved 7 September 2013. External link in |publisher= (help)
10. Joy, Oliver (21 January 2013). "Did Croatia get lucky on EU membership?". CNN.
11. http://ec.europa.eu/public_opinion/flash/fl_400_en.pdf
12. http://ec.europa.eu/public_opinion/flash/fl_418_en.pdf
13. "Convergence Report - 2014" (PDF). European Commission. April 2014. Retrieved 2014-09-26.
14. "HICP (2005=100): Monthly data (12-month average rate of annual change)". Eurostat. 16 August 2012. Retrieved 6 September 2012.
15. "The corrective arm". European Commission. Retrieved 2014-07-05.
16. "Long-term interest rate statistics for EU Member States (monthly data for the average of the past year)". Eurostat. Retrieved 18 December 2012.
17. "Government deficit/surplus data". Eurostat. 22 April 2013. Retrieved 22 April 2013.
18. "What is ERM II?". European Commission. 31 July 2012. Retrieved 8 September 2012.
19. "Euro/ECU exchange rates - annual data (average)". Eurostat. Retrieved 5 July 2014.
20. "Former euro area national currencies vs. euro/ECU - annual data (average)". Eurostat. Retrieved 5 July 2014.
21. "Convergence Report" (PDF). European Central Bank. June 2014. Retrieved 2014-07-05.
22. "Convergence Report - 2014" (PDF). European Commission. April 2014. Retrieved 2014-09-26.
24. "Luxembourg Report prepared in accordance with Article 126(3) of the Treaty" (PDF). European Commission. 12 May 2010. Retrieved 18 November 2012.
25. "EMI Annual Report 1994" (PDF). European Monetary Institute (EMI). April 1995. Retrieved 22 November 2012.
26. "Progress towards convergence - Nov. 1995 (report prepared in accordance with article 7 of the EMI statute)" (PDF). European Monetary Institute (EMI). November 1995. Retrieved 22 November 2012.
27. "Progress towards convergence - November 1995 (report prepared in accordance with article 7 of the EMI statute)" (PDF). European Monetary Institute (EMI). November 1995. Retrieved 17 March 2013.
28. "Deficit to fall below 3 pct of GDP, public debt to stop rising by 2017". Government of the Republic of Croatia. 30 April 2015.