Croatia set to become the eurozone's 20th member in January 2023

Croatia set to become the eurozone's 20th member in January 2023
By Denitsa Koseva in Sofia June 1, 2022

Croatia has met all conditions to join the eurozone and adopt the euro, the European Commission (EC) and the European Central Bank (ECB) said in two separate reports on June 1, giving the green light for the country to become the 20th member of the eurozone.

Croatia joined the eurozone’s waiting room, the ERM II, in July 2020 along with Bulgaria. However, it has since moved ahead of the other Southeast European country; Bulgaria is yet to meet the requirements for euro adoption though it has set January 1, 2024 as date for switching to the euro.

“In light of the Commission's assessment, and taking into account the additional factors relevant for economic integration and convergence, including balance of payments developments and integration of product, labour and financial markets, the Commission considers that Croatia fulfils the conditions for the adoption of the euro. It has therefore also adopted proposals for a Council Decision and a Council Regulation on euro introduction in Croatia,” the EC said in a statement on June 1.

The EC will make the final decisions on Croatia's euro adoption in the first half of July, after discussions in the Eurogroup and in the European Council, and after the European Parliament and the ECB have given their opinions, it added.

Meeting the convergence criteria 

According to the ECB report, Croatia is within the reference values of convergence criteria.

In April, the 12-month average rate of HICP inflation in Croatia was 4.7%, which is below the reference value of 4.9%. The ECB expects that this rate will increase gradually over the coming months, driven mainly by the higher commodity prices, broadening price pressures and further aggravation of supply bottlenecks as a result of the Russia-Ukraine war.

“Looking ahead, there are concerns about whether inflation convergence is sustainable over the longer term in Croatia. In order to prevent the build-up of excessive price pressures and macroeconomic imbalances, the convergence process must be supported by appropriate policies,” the ECB noted.

It also commented that although Croatia’s debt was above the 60% of GDP reference value in 2021, it has declined from the previous year.

“The debt ratio was 79.8% of GDP in 2021, a decline from the peak of 87.3% of GDP in 2020. This strong decline in the debt ratio ensured fulfillment of the debt criterion,” the ECB noted.

Croatia’s budget deficit remained below the 3% of GDP requirement, at 2.9% of GDP in 2021, which fulfils the deficit criterion.

The Croatian kuna also meets the criteria as it has shown a low degree of volatility since Croatia’s accession to ERM II.

The ECB noted that Croatia would benefit from stability-oriented economic policies and wide-ranging structural reforms.

“Structural reforms would help Croatia improve its institutional and business environment, boost competition and make its public administration and its judicial system more efficient,” the ECB noted.

The switch from kuna to euro 

Government ministers in Zagreb welcomed the news. 

"Croatia will soon become a member of the eurozone, thus achieving one of the strategic goals of the Croatian government,” Prime Minister Andrej Plenkovic wrote on Twitter. 

"With this step, we will further integrate economically and socially with the EU member states, and thus strengthen our economic and social relations with the most developed circle of countries in the world," said Finance Minister Zdravko Maric, according to a ministry statement. 

While Zagreb waited for the reports from the two European institutions, preparations for the switch from the kuna to the euro were underway. 

The Croatian parliament on May 13 adopted a law on switching to the euro on January 1, 2023. 117 MPs supported the law, while 13 voted against it and one did not vote.

The exchange of local currency bills to euro will be carried out in banks, post offices and the state Financial Agency. In the central bank, kuna can be exchanged for euro after 2023 as well.

In September 2021, the Croatian central bank signed a memorandum of understanding with the European Central Bank to start euro coin production once given a green light to join the euro area. The central bank has already approved designs of local euro coins.

Opposition from the right 

Right-wing parties in Croatian parliament – Most and Sovereignists – were against the introduction of the euro, saying it would increase poverty and put pressure on the citizens.

Miro Bulj of Most party said that the law should be withdrawn as there was no estimation how the introduction of the euro would affect the living standard of people and called for a referendum to the adoption of the euro prior to that.

Marijan Pavlicek of the Sovereignists said the party was concerned about how citizens would survive the month upon entering the eurozone. Pavlicek claimed the timing for euro adoption was not right due to the Europe-wide energy crisis and the significant economic uncertainty, as well as the highest inflation since 20 years.

The Sovereignists also were seeking a referendum on the euro adoption, but failed to get enough signatures.