How the Euro Will Help the Croatian Economy
Not only was welcoming the euro a good move for Croatia, but it will be good for the euro as well. The latter will now have an additional 4 million users, which will strengthen the currency and bolster the Eurozone in international markets.
On the first day of 2023, Croatia welcomed a new year and a new currency. After a decade of membership in the European Union, Croatia joined the Schengen, the world’s largest passport-free area and the Eurozone. This makes it the 20th country to welcome the euro and the first EU member state in 8 years to expand the euro area. For some Croatians, saying farewell to the Kuna means saying goodbye to a symbol of national identity, but to many accepting the change is a first step towards a stronger economy.
Currently, the exchange rate is fixed at 7.5345 Kuna per euro, according to the Central Bank of Europe.
Croatia is the baby of the European Union, officially becoming a member in the summer of 2013. Even before the adoption of the euro, a significant portion of Croatia’s economic activity was already being performed using the European single currency. In other words, Croatia’s economy was already in-tune with that of the Eurozone. Effectively, Croatia’s decision to implement the use of the euro is a natural next step for the Adriatic nation.
But why adopt the euro now?
The decision to adopt the currency coincides with the American dollar and the euro reaching parity which may cause some concerns. Nonetheless, welcoming the euro will still be beneficial for Croatia in the medium to long term, specifically in terms of economic security. Joining the euro will also allow Croatia to have a greater say in European monetary decision-making processes. In the short term, joining this single market will offer some shelter from the ensuing effects of the Russian war in Ukraine, namely high inflation levels. Countries that remain outside of the Eurozone, like Poland and Hungary, have been and will continue to be more susceptible to the surge in prices.
Certainly, being part of the euro area will lead Croatia toward more economic stability. Croatian banks will now be integrated into the European banking union. This means that the European Central Bank can provide relevant financial supervision to Croatia’s eight major monetary institutions. Eurozone members must also follow rules and respect policies designed to foster growth and security. These include the Stability and Growth Pact, a core component of the Economic and Monetary Union. Additionally, Croatia can enjoy access to the European Central Bank’s reserves and can receive help from the European Stability Mechanism during periods of economic distress. This creates a safety net and a reliable support system for Croatia.
The euro will also facilitate trade relations and incentivize investment in Croatia. The governor of the Croatian National Bank, Boris Vujcic, predicted that “the currency risk will disappear to the greatest extent, and Croatia will be more attractive to investments”. The Croatian economy is heavily dependent on trade with the surrounding eurozone members. Over 50% of Croatian exports are destined to euro-area countries and most Croatian goods come from the euro area as well. Abandoning the Kuna will allow Croatian companies to carry out business endeavors without worrying about exchange risks. They will also be able to further incorporate themselves into the European single market since there are lower trade barriers. The integration of Croatian businesses will also vault Croatia into a stronger financial position, allowing its economy to catch up with other Eurozone members as a result. Ever since the EU Council’s 2022 announcement that Croatia would be a euro user, Croatia has watched its credit ratings increase. This helps Croatia look more attractive to foreign investors.
Tourism is another sector that will massively benefit from Croatia introducing the euro. Despite being a smaller country compared to other Member States, Croatia has a large tourism industry that accounts for nearly 20% of its GDP. The conjunction of the euro adoption and entry into the Schengen will further stimulate Croatia’s booming tourism industry. Visitors coming from within the EU will find traveling to the coastal destination much easier without the stress of converting currencies.
Not only was welcoming the euro a good move for Croatia, but it will be good for the euro as well. The latter will now have an additional 4 million users, which will strengthen the currency and bolster the Eurozone in international markets.
Croatia is already looking forward to the economic benefits that will ensue from adopting the euro. Will this inspire other countries to follow suit?