Eurozone – Croatia, the War, and the Future

Croatia: Full Steam Ahead Towards Eurozone!

July 29, 2022 by inavukic 17 Comments

It is official: On January 1, 2023, the Euro will be Croatia’s legal tender and payments with the existing Kuna is to be phased out completely within two weeks that will follow.

The European Union has July 12, 2022, removed the final obstacles to Croatia adopting the euro, enabling the first expansion of the currency bloc in almost a decade as the exchange rate fell to its weakest level against the dollar in 20 years.

The European Union (EU) finance ministers, in the presence of Croatia’s outgoing finance minister Zdravko Maric, approved July 13, 2022, three laws that paved the way for Croatia to become the 20th member of the eurozone on January 1, 2023.

Created in 1999 among 11 countries including Germany and France, the euro has gone through seven previous enlargements starting with Greece in 2001. The appeal of euro membership is reflected by the last three expansions, which brought in Baltic states between 2011 and 2015. The last EU member country to join the European single-currency area was Lithuania in 2015.

Croatia’s acceptance into the European Union on the 1st of July 2013 evidently marked the beginning of the end of the Kuna as Croatia’s currency ever since its proud introduction amidst the ravages of Homeland War during which Croatia defended itself from brutal Serbian aggression on 30th May 1994. Entering the European Union in 2013 brought with it many changes be they for better or for worse and one of the most significant is upon Croatians with Croatia entering the Eurozone in 2023.

Many predict that the effect of this transition will make life even harder for ordinary people especially pensioners while others continue convincing the people that bringing in the euro will be better than “the invention of sliced bread”. Preparations are underway to ensure that everything is ready for the new currency. The production of coins and monetary paper notes has commenced full speed ahead during the past two weeks.

Despite the “very strong challenges” of high inflation and dented economic growth, Croatian outgoing finance minister Zdravko Maric said he is pleased to see his country switch to the euro. At this time when the Eurozone itself is facing rising levels of inflation and stagnating growth, the decision for Croatia to join the EU’s common currency may come as a surprise to quite a few. A lot of economists in Germany, however, see things differently. Especially as the next candidate after Croatia is Bulgaria, which has already applied for membership and aims to become the 21st country to introduce the common currency in 2024. Croatia is the third poorest country in the EU, Bulgaria with a gross domestic product of less than 10,000 euros per capita ranks last in economic power.

Croatia is not giving up a stable currency, but rather hopes to benefit from the more favourable debt conditions in the monetary union. The country relies more than any other EU state on tourists, who generate a fifth of gross domestic product and find holidaying much easier when they needn’t grapple with exchange rates. Meanwhile, most private and corporate bank deposits are held in euros, along with more than two-thirds of debt totalling about 520 billion kuna ($75 billion). Euro-area membership will lower interest rates, improve credit ratings, and make Croatia more attractive to investors, according to Croatian National Bank Governor Boris Vujcic.

The European Central Bank has already announced that it will use a new monetary policy instrument to ensure that interest rate differentials within the monetary union remain low during the crisis. The Germany based Kiel Institute for the World Economy worries that because of years of misguided developments in the Eurozone with ultra-loose monetary policy and lax debt rules, the monetary union is only attracting the wrong people. Brussels was desperate to give the signal that the Eurozone is growing, especially since Brexit. And it is noted that Croatia’s entry into the Eurozone represents a most significant event for the EU since Brexit. It is suggestive of concern that strong EU member states of Sweden and Denmark still do not want to introduce the euro or enter the Eurozone. The Kiel Institute has also expressed the opinion that as long as the major problems of the Eurozone monetary union have not been solved, the circle should not be widened: “As long as you haven’t stabilised your house, you shouldn’t grow.”

The Euro has been the currency of the European union since 1999 and with Croatia joining the Eurozone, changes will be visible in the upcoming period from small households to large companies. The question on everyone’s mind is will life be more costly with the Euro?

Joining the euro requires a country to meet a set of economic conditions. These relate to low inflation, sound public finances, a stable exchange rate and limited borrowing costs.

“It’s a wonderful club to be a member of, but it requires commitment, dedication, continued respect of the rules, and I know that we can expect no less from Croatia,” European Central Bank President Christine Lagarde said.

For Croatia to be able to switch to Euro many conditions had to be met. As stated in the Maastricht Treaty, there are four conditions for entering the Eurozone:

Price stability – inflation rate cannot be over the average inflation rate of 3 member states with the best price stability enlarged by 1,5 percentage points;

Sustainability of public finance – the general country deficit to GDP ratio must not be over 3% and the general country debt to GDP ratio must not be over 60%;

Currency stability – at least 2 years must be spent in ERM II (European Exchange Rate Mechanism) without significant oscillations or devaluation to central rate;

Convergence of long-term interest rates – interest on long-term government bonds may not supersede referent values of interest on bonds of the 3 member states with the best price stability enlarged by 2 percentage points.

Croatia’s government adopted a national plan to replace the Croatian Kuna with the Euro in December 2020. The main goal of the plan is to ensure a seamless transition to Euro. One of the key factors in achieving this, lies in the hands of the IT sector that will need to adapt all systems to the new currency. Also, the new currency must be physically distributed among the private, corporate, and public sector. Even though everything will be paid in Euros from the 1st of January 2023 there will be a transition period of two weeks in which people may pay with Kunas but must receive Euros back. Non-cash transactions will be exclusively in Euros. Banks will exchange up to 100 bills or 100 coins of Kunas to Euros in one transaction free of additional fees which will also ease the way to fully integrating the Euro in the economy.

To better prepare for Euro all prices will be listed dually in Kunas and Euros from the 5th of September 2022, as the first Monday in September, and will be displayed as such until December 31st, 2023. Aside from the price being listed in both currencies, the fixed exchange rate will also be displayed.

This will ensure people getting used to the change of prices before the Euro is implemented. Salaries will also be displayed in dual currency and converted to Euros according to the fixed exchange rate so there shouldn’t be a negative financial impact to people’s lives in general. Getting used to the new prices will however take a while to get used to even if the prices do not rise. The government will also try to regulate sellers so that prices do not rise significantly though surely everyone will feel the differences due to the currency change.

Whether the introduction of the Euro will bring Croatia more benefits or more difficulties remains to be seen in the New Year but as with any change it is up to all of Croatians to make the whole process unfold as easily as possible and move forward into the future with the hope of it being a better one for Croatians and for future generations to come. Hopes as they go are intangible and real living brings them to life either in the positive or negative sense from everyone’s perspective. Almost half of the right-wing parliamentary opposition in Croatia consider the introduction of the euro at this time as unadvisable and damaging to the already lowered living standards that are under enormous downward pressure with increasing inflation, energy crisis and war in Ukraine. Ina Vukic

Filed Under: Uncategorized Tagged With: Croaia to join Eurozone, Croatia, Croatian Kuna to be phased out, EU, Eurozone

Croatia: Price Rise Despair On The Final Stretch To Eurozone

February 27, 2022 by inavukic 7 Comments

_{Food market Dolac, Zagreb Croatia. Photo: visitzagreb.hr}

Croatian residents and companies and organisations have faced a rude shock when recently their new gas/energy bills arrived with sharp and unexpected spikes compared to the previous ones, many expressing absolute inability to pay the new energy costs with the government finding itself in the position of having to subsidise some organisations so they could survive their energy bills. It has all been put down to some generalised energy crisis in EU and the world that is sure to cause price increases in all goods and services. Prime Minister Andrej Plenkovic noted during the past month that vulnerable energy consumers, about 91,000 of them, are currently receiving vouchers of EUR 27 each to pay electricity bills. The program will be expanded to 5,700 beneficiaries of the national compensation for the elderly. Also, a voucher for gas will be introduced, and the amount doubled to EUR 54. A special one-time fee is envisaged for 721,000 pensioners with pensions lower than EUR 531, which will require a total payment of EUR 62 million. Not much help when one hears that energy bills have risen by double or triple amount from previous ones!

Prime Minister Andrej Plenkovic has also during the past month presented a plan for households, businesses, and farmers that would mitigate the rise in prices and pointed out that without the package the electricity bills would rise by 23 percent from April 1, compared to 79 percent for gas. The measures will become operational on April 1 and will be valid until March 31, 2023. Plenkovic pointed to the wave of rising prices in Europe caused by the global energy crisis as the main reason for the adoption of the package. Still, the rise of energy costs in Croatia appears much higher than in other countries, especially the West. He did not refer to any possible correlation between prices increases and Croatia’s transitioning into the Eurozone, that is, swapping its kuna currency with the euro in 2023!

According to the government’s plan the increase of electricity costs will be limited to lower the expected price increase. Goods and Services TAX (PDV) on natural gas will be reduced from 23 percent to 5 percent and a subsidy of 1.3-euro cents per kWh will be introduced. The Ministry of Economy will reimburse power suppliers from April 1 until March 31, 2023. There will be PDV tax reduction on many food items or products. Micro, small, and medium entrepreneurs with an average annual consumption of up to 10 GWh are eligible for subsidies. The amount of aid is 2-euro cents. It will be paid through vouchers.

General price rises have been known to occur in countries of the European Union as they approached admission into the Eurozone and the introduction of euro as their official currency. Croatia is set to introduce the euro in 2023 and while the current astronomic rises in energy prices are said to be associated with world energy crisis the increases in all prices may indeed be at least partially due to possible fallout from exchange rate fluctuations between the kuna and the euro; to achieve a softer fall of purchase power so to speak once entering the euro monetary climate.

For Croatia to meet its goal to be admitted into Eurozone in January 2023, it needs a positive assessment by the European Commission in spring 2022 and a subsequent decision by the EU Council in summer 2022.

The Croatian National Bank has been optimistic that Croatia, whose economy relies largely on tourism and services, will meet the EU’s criteria to join. The country relies more than any other EU state on tourists, who generate a fifth of gross domestic product and find holidaying much easier when they needn’t grapple with exchange rates. Meanwhile, most private and corporate bank deposits are held in euros, along with more than two-thirds of debt totalling about 520 billion kuna (US$78 billion). Eurozone membership would lower interest rates, improve credit ratings and make Croatia more attractive to investors, according to central bank Governor Boris Vujcic last month.

Adopting the euro would reportedly formalise a large piece of economic activity that’s already carried out using the common currency — from apartment and car sales to short-term rentals for vacationers. It would trim foreign-exchange costs outside tourism to the tune of about 1.2 billion kuna a year, according to the central bank. Croatia would gain access to European Central Bank liquidity and potential bailout financing from the European Stability Mechanism during periods of crisis.

Inflation is the biggest uncertainty. Europe’s spike in energy costs alongside the Croatian economy’s rebound in 2021 have sent consumer prices surging. Inflation is set to come in at 3.5% in 2022, but what counts is how Croatia stacks up against a one-year average of the three euro-area states with the lowest rates. That calculation will be made once data for April are in.

Due to the recent surge in inflation, Croatia might breach the price stability criterion. However, as the price rises are also observable in the eurozone, the Croatian National Bank argued that Croatia should be considered as fulfilling the criterion, nevertheless.

Croatia’s Central Bureau of Statistics (CBS) released last Thursday Croatian inflation data for the month of January 2022, which went unnoticed due to the horrendous Russian attack on Ukraine, although prices did continue to rise significantly. In January 2022, prices were 5.7 percent higher than in the same month back in 2021.

There are solid indicators that the key cause of rising prices across Croatia is now not only the global energy prices but also transport prices (growth in January +10.8 percent), food and non-alcoholic beverages (+9.4 percent), alcoholic beverages and tobacco (+6.2 percent), furniture, household equipment and household maintenance costs (+5.0 percent) and at restaurants and hotels (+ 4.7 percent).

Whether global energy crisis or not, most Croatians believe the introduction of the euro will have positive consequences for the country, according to a 2021 Eurobarometer poll. However, 70% believe it could and will lead to price increases. Perhaps this is where much of price increases come from during this year that leads to Eurozone for Croatia. And, by the way, the past year has seen about 13,000 newly poor in Croatia as standard of living continues to drop for many and indications are that multitudes in Croatia will step into the Eurozone with their feet far below the poverty line. Prices growth usually do affect the poorest and Croatia is one of the poorest countries in the EU. Bumping up economic activity, apart from tourism, has been and remains the biggest stumbling block for Croatia, euro, or no euro. Work and employment culture and practices are still heavily founded on corrupt nepotism and largely irresponsible work habits inherited from communist Yugoslavia, where accountability had been the weak point undermining economic and living standard progress. Regretfully. Ina Vukic

Filed Under: Uncategorized Tagged With: Andrej Plenković, Boris Vujcic, Croatia, Croatia inflation, Croatia to join eurozone, Energy crisis, Eurozone, Price rises in Croatia

Croatia: To Euro Or Not To Euro

October 3, 2021 by inavukic 14 Comments

Since Croatia set on the path of independence from communist Yugoslavia in 1990 its citizens have held only three referendums: independence referendum in May 1991, referendum to join (or not) the European Union as member state in 2012 and the referendum for the definition of marriage (between a man and a woman) in 2013.

In 2013/2014, 650,000 signatures were collected in Croatia for the initiative introduced by the Headquarters for the Defence of Vukovar Association to hold a referendum regarding the Cyrillic (Serbian) script in Vukovar. That is, a referendum seeking the exclusion of the Cyrillic script as a second official script/language on public buildings and institutions etc in Vukovar. The referendum was abandoned due to Constitutional Court’s ruling that such a referendum question could not asked as it would severely compromise the rights of minorities under the Croatian Constitution living in Croatia.

In 2018 a referendum was planned, and signatures collected in Croatia on three questions related to changes in electoral legislation and the cancellation of the Istanbul Convention, but this pre-referendum signature collection ended in agony and scandal with claims from the government agency engaged in counting the votes, APIS, that over 40,000 signatures were invalid, including double signatures. The referendum initiating and organising group “People Decide” complained and demanded an independent recount of votes, however this process did not eventuate as claims of ballot papers’ being destroyed arose besides apparent resistance from authorities to permit a recount.

Come 2021 and the socio-economic surrounds for another referendum of key significance for Croatia emerge, with politics hotting up just as they did in 2011 and 2012 ahead of the European Union membership referendum. This new referendum would seek to clarify whether Croatia should abandon its beloved monetary currency unit Kuna and adopt the Euro.

Since 2004 Croatia had a bumpy ride to its 2013 achieved status as EU member state. This bumpy ride particularly saw parts the international community collaborating with some ex-communist Yugoslavia Croatian operatives fabricate evidence to attempt a criminalisation of Croatia’s Homeland War in defence from brutal Serb aggression. This bumpy ride included the equating of victim with the aggressor. This bumpy ride included an increased stacking of Croatia’s public service posts and positions of power with former communists and/or their descendants. Hence, an anti-EU membership mood that became visibly prevalent in by 2010 and the government, obviously fearing that the EU Membership referendum would fail if the Constitution was not changed went on to change the Constitutional law governing referendums.

That is, the section dealing with Referendums in 1990 stated that the referendum is decided upon by the majority of votes but under the condition that a majority of the total voter numbers vote in the referendum and this was changed in 2010 whereby majority of total voters were no longer required to turn up at voting but the question asked in the referendum is decided on the basis of majority vote out of the total number of people who turned up to vote. And so, we had the situation that in 2012 the majority vote out of the dismal 28% of total voters turnout decided that Croatia should become an EU member.

Having been through the process of public consultations/submissions since the beginning of this year the government of Croatia is currently bringing before the parliament its proposal for changes to the Constitutional law governing referendums. The government claims that its proposed changes will being an improvement in the vague legislative framework of the referendum institute. That the new legislation will be harmonised with the Constitution and ensure transparency and openness of its implementation. Citizens should have a more effective influence in the political decision-making process, the government claims.

The changes proposed include that Local self-government units are obliged to provide places for collecting signatures for referendum initiatives, depending on the number of inhabitants in that local self-government unit. Parliament also undertakes to call a referendum within 30 days (instead of the current 15) after the Electoral Commission determines that enough signatures have been collected.

Whether, if passed into law, limiting referendum polling places to government offices only (not city squares, schools, or parks also) is the most voter-friendly part of the referendum process is a moot point and its clarification is bound to appear if a referendum is held after the parliament passes the proposed changes to the legislation. Certainly, experience would suggest that limiting polling places to government-controlled venues will always deter many voters from turning up at the polls in fear of government control and corruption.

Conspicuously missing from the proposed changes to law governing referendums is the fact that the proposal does not include any possibility of scrutinising or observing the counting of votes in the referendum voting processes despite the bitter experiences of the 2018 referendum attempts that were often described as corruption and manipulation of public votes.

Croatia’s Prime Minister Andrej Plenkovic has announced that his government will introduce Euro as Croatia’s official monetary currency during 2023. He has also reminded the public this month that the process of joining the EU in Croatia enjoyed the support of all participants in the political scene and made it clear that there would be no referendum on the Euro.

“It was seen in the process of EU accession negotiations and in the referendum,” said the Prime Minister, adding that 150 MPs voted in favour of joining the Union at the time and that he believed that the issue was resolved by referendum and vote in Parliament. “Croatia then legally and politically undertook to join the eurozone,” he said. Plenkovic also stated that those against introducing the Euro to Croatia had done nothing for the process of Croatia achieving membership in the EU.

Let’s keep it real, Prime Minister!

Plenkovic’s statement that those against the Euro had done nothing for Croatia’s membership in the EU appears scandalous and certainly not true because Croatia became a member of the EU as an independent state created and fought for in a bloody war by multitudes of those who do not want to give up the Kuna and embrace the Euro. The people who fought for and sacrificed their own lives and for an independent Croatia have an absolute right to fight to retain a potent symbol of their suffering for freedom from communism – the Kuna!

Hence, the Prime Minister Plenkovic is wrong in insisting that there would be no referendum regarding the Euro. Not all EU member countries are also members of the Eurozone and therefore, this evidences the option that membership in the EU does not oblige its members to also become members of the Eurozone.

As the date of the apparently imminent introduction of the new currency approaches, such a possibility is gaining more and more public attention, which, as with EU membership for example, is divided. Some are in favour of the introduction of the Euro because they believe that it will stabilise Croatia and help its further development and investments. At the same time, others strongly oppose the announcement because they fear an increase in the prices of everyday necessities and an additional drop in citizens’ standards.

Croatian Sovereighnists party, headed by Hrvoje Zekanovic MP, which is part of conservative opposition parties in the Croatian Parliament, has launched the organising of a referendum on the adoption of the Euro in Croatia and they are against the Euro and against Croatia being a part of the Eurozone. They state that their main reason for wanting to protect the Kuna, to keep it is in the fact that national currency and the management of its exchange rate is one of the key parameters of influencing the economic development of the country, so this parameter should remain in the hands of the Republic of Croatia and its citizens, for whom Croatian interests are a priority.

No date is in sight as to when the referendum process will commence but one may safely say it will be during 2022. Furthermore, it is anticipated that it will take several months for the new legislation regarding referendum changes to come out the other end as passed. Hence, the initiative for a referendum and the government’s insistence that there will be none, is surely to bring in a great deal more of political unrest and disagreements in Croatia, including bitter clashes between citizens who tend to see the adoption of the Euro as the hated last straw that will break the back of the pride rightly held for the glorious victory over the Serb and communist aggressor during the 1990’s.

Prime Minister Plenkovic keeps telling the Croatian public that the adoption of the Euro will increase the standard of living at a greater rate than any increases in prices. The opponents of the Euro in Croatia state that this is not the time to adopt the Euro in Croatia as that currency is good only for the wealthy countries, those in the EU with a much higher standard of living, that the rounding off of prices is bound to occur with the introduction of the Euro and thus be detrimental for Croatian citizens. Also, on the side against the Euro many say that the Eurozone is an unsafe conglomerate and if it falls apart the poor Croatia will be placed in the situation of having to contribute to the repair and bailing other countries, such as Greece and Italy, out of a debt crisis, as their losses in this event could surface after the Coronavirus pandemic as being astronomical. The greatest complaint against the Euro appears to be the widespread belief that by losing its national currency Kuna, Croatia will lose a great deal of its hard-earned sovereignty, paying for it with rivers of blood and devastation.

And at the end of the day a referendum regarding the Euro should be held in Croatia if because of nothing else then because only 28% of total Croatian voted at the EU referendum in 2012 and barely 67% of those voted Yes to Croatia’s EU membership. A referendum on the Euro could indeed be a great test for the Croatian citizens regarding their experiences and trust as members of the EU as opposed to national sovereignty and retention of values from the Homeland War. Ina Vukic