Single Currency - Croatia to join the Euro in January 2023

In June 2022, Croatia was given the go-ahead by fellow member nations of the European Union to switch to the single currency from the 1st of January 2023. Croatia stands to become the 20th nation to join the Monetary Union since 1999. The decision came almost a decade on from Croatia joining the single market in 2013.

Fact File on the Croatian Economy

• For years, tourism has been the strongest pillar of Croatia’s economy and accounts for nearly 20% of its GDP.
• Population of 4.1 million – projected to fall to 3.6 million by 2040
• GDP per capita: US$12,986 (PPP) – it has the 46th highest current GDP per capita in the world (one place above Romania)
• Government debt to GDP ratio (2022): 78%
• Unemployment rate in 2021: 8.2% of the labour force
• Inequality in Croatia: In 2021, the richest 20% held 36% of the income, while the lowest 20% only held 10%

Their exchange rate - the Kuna - has been, part of the EU’s exchange rate mechanism (ERM II) since July 2020. It must participate in the mechanism without severe tensions and without devaluing its central rate against the euro for at least two years before it can qualify to adopt the euro

Features of a common currency inside a monetary union

1. Each country uses the same currency as a medium of exchange and store of value.
2. Central bank (ECB) is responsible for administering monetary policy of the member states including setting the Euro Area base rate

Advantages for a country such as Croatia joining the Euro

1. Relatively important tourism industry stands to gain from having a single currency – reduces the conversion costs facing travellers (tourism – example of comparative advantage)
2. Croatia hoping to enjoy a dividend from a more stable currency – lower investor risk for example might bring down yields on government debt – makes debts more serviceable
3. Croatia is experiencing de-population. Plans to join the region’s Schengen border-free travel zone. Should reduce costs for people coming to work.

Drawbacks for a country such as Croatia joining the Euro

1. Joining the Euro means that Croatia gives up the option of running an independent monetary policy - setting their own policy interest rates to meet macro-objectives
2. Croatia also gives up the option of engineering a competitive depreciation of their currency
3. Joining the Euro likely to lead to a one-time increase in consumer prices. Lower interest rates might also cause a boom in house prices / rents which will damage affordability

General background

• Countries in the EU but not part of the single currency are: Bulgaria, Czech Republic, Denmark, Hungary, Poland, Romania and Sweden.
• Croatia joins the Euro Zone in January 2023
• All EU member states are in principle obliged to introduce the euro once they fulfil the convergence criteria which includes low inflation and a debt ceiling.
• But this can take many years to come about.