News 11 Jan 17

Croatia Bank’s Hope of Introducing Euro Questioned

The Croatian National Bank wants to introduce the euro, but an economics expert warned that the public debt and current state budget are not favourable for such a move at the moment.

Sven Milekic
BIRN
Zagreb
Photo: Pixabay

The Croatian National Bank, HNB, confirmed to BIRN on Tuesday that it is advocating that the country introduce the euro as its currency. The HNB is convinced that entering the Eurozone would eventually be “a cheaper and simpler solution” than continuing with the Croatian kuna and managing its exchange rate.

But it added that nevertheless there was no imperative to introduce the euro “for the sake of financial stability”.

The HNB also noted that first Croatia needs to implement structural reforms that could lead to bigger potential GDP growth rates.

It explained that Croatia would need to lower the public debt to GDP ratio – currently at 85 per cent of GDP – during 2017 and 2018, which the bank sees as possible, since “projections indicate that this trend is sustainable in the medium term”.

Afterwards, Croatia would start negotiations about entering the European Exchange Rate Mechanism – ERM II.

After entering ERM II, Croatia would need to fulfil the so-called Maastricht criteria – inflation rates, long-term interest rates, state budget deficit, public debt and the stability of the Croatia kuna-euro exchange rate – over the following two years, with the public debt being the most important factor.

“But at the same time, it is necessary to know that for switching to the euro it isn’t necessarily to meet the fixed criteria of 60 per cent of public debt to GDP ratio, but it is possible to reduce the public debt to GDP ratio at a credible speed,” the HNB said.

Economics expert Josip Tica agreed that Croatia could fulfil the conditions, but warned that current public spending and debt are not working in the favour of such a move.

“When you look at the current budget, this was an abandonment of the policy of austerity for the first time in eight years. Now they speak of entering the Eurozone; it all looks quite inconsistent to me,” he told BIRN.

“With such a budget that has been passed, we will never enter the Eurozone, unless somebody shows leniency and says, ‘public debt isn’t important, Croatia is very important and we’ll include it in the Eurozone’,” he said.

Tica explained that the government gave concessions to unions and announced it would buy 49 per cent of the Croatian energy company INA that is owned by Hungarian energy company MOL – in both ways contributing to an enlarged public debt, thus showing “discrepancy in their plans”.

The only thing Croatia that would not have problems with in the bank’s plan to introduce the euro is the rather stable exchange rate of the national currency, Tica pointed out – remaining at around 7.5 kunas to the euro since the European currency was introduced.

Croatian daily newspaper Jutarnji list reported on Monday that HNB governor Boris Vujcic and Prime Minister Andrej Plenkovic have talked about introducing the euro as quickly as possible.

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