Croatia, the youngest member of the European Union, appears to be the best student in the integration class. It will be part of the Schengen open border area from 2023 before Romania and Bulgaria. In addition, the euro will replace the kuna as the official currency on January 1, something that even Poland and the Czech Republic, which joined the EU six years earlier, are not ready for. “For us, joining the eurozone is a completely logical, natural step,” says Ana Sabic from Zagreb.
Within the Croatian Central Bank, Sabic is responsible for European cooperation, with the aim of introducing the euro. That is something that Croatia has been steadily working towards since joining the EU in 2013: with government debt curbs, moderate inflation and a stable exchange rate of the kuna against the euro.
“Croatia is a small, open economy with a lot of trade and financial integration with the Eurozone. In addition, adopting the euro is an obligation for Member States following the Maastricht Treaty [1992] have joined the EU,” explains Sabic. Although she immediately adds that it is no longer self-evident that membership of the EU would also lead to the introduction of the euro. “A country that [de euro] don’t want to, can slow down endlessly. In addition, it has become more difficult to join since the euro crisis.”
The fact that Croatia is adopting the euro, some ten years after the European sovereign debt crisis in which the currency union almost collapsed, proves that the currency is still attractive. Christine Lagarde, president of the European Central Bank, called the addition of the 20th member “a vote of confidence for the eurozone”.
Bulgaria in the waiting room
At the same time, there is currently only one other Member State, Bulgaria, in the waiting room for the euro. Six other EU members with their own currency are currently not preparing to exchange it. Denmark is the only one to have stipulated an exception before the creation of the monetary union, and therefore does not need to join the eurozone. Sweden (EU member since 1995), Poland (2004), Hungary (2004), the Czech Republic (2004) and Romania (2007) simply do not take any political steps to get closer to the euro. Sometimes against the wishes of their own people. And that also in times of economic uncertainty and impending crisis with the necessary risks.
Zsolt Darvas, a Hungarian economist associated with the Brussels think tank Bruegel, sees how governments in those countries “let political motives prevail over economic ones”. Under ‘the slogan of sovereignty’, politicians and (politically appointed) bosses of central banks determine that they are better off without the euro: because they can then make their own monetary policy, set interest rates themselves and take crisis measures. Darvas: “These are generally governments that do not like further European integration anyway.”
According to him, the alleged advantages of a currency of their own hardly exist, since the economies of the countries concerned are already firmly linked to Western Europe, where their main trading partners are located. “They can hardly make independent policy that positively distinguishes them.”
In many countries where the euro has been introduced, there is a perception that this will lead to price increases. But that is only 0.2 percent, according to research
In times of economic prosperity, it makes little difference to those countries whether they fall within or outside the eurozone. “With the euro there are small benefits, such as price transparency and lower transaction costs for companies, which benefit the competitive position. But it doesn’t matter very much,” says Darvas.
For example, Slovakia (5.4 million inhabitants) has not done much better with the euro in recent years than comparable neighboring countries such as the Czech Republic (10.7 million inhabitants) and Hungary (9.7 million inhabitants) without it.
For German automakers it appears to make little difference where in Europe their factories are located. Darvas: “It only becomes really crucial in times of crisis, as we are seeing now. Then the euro will bring stability.” Hungary is therefore currently experiencing shocks that Slovakia is spared.
Better credit rating
Crisis resilience during “financial turbulence” is also the main benefit for Croatia, according to Ana Sabic. With four million inhabitants, collective debts (of government, businesses and households combined) in euros amounting to 130 percent of gross domestic product and a heavy dependence on tourism, the country is vulnerable to large exchange rate fluctuations and possible speculation against the kuna.
Due to the rapprochement with the eurozone, Croatia has already received a better credit rating from international rating agencies Fitch, Moody’s and Standard & Poor’s and borrowing on the international capital market has become cheaper. Sabic: “The euro will bring significant and permanent benefits and small and one-off costs.”
These costs are related to the introduction of the currency and the expectation of slight price increases. In most countries where the euro was introduced, there is a perception that this has led to significant price increases – including in the Netherlands.
According to research by the European Commission, the increase was specifically due to the euro only 0.2 percent. But with inflation in Croatia already approaching 14 percent, there is a risk that citizens will blame the euro.
“That fear is quite prominent in the public debate,” says Sabic of the Croatian Central Bank. “The existing inflation also makes it difficult to check whether producers and sellers are raising their prices because it is necessary, or whether they are abusing the introduction of the euro.”
Electorate wants euro
Despite the high inflation, Sabic expects Croatians to quickly embrace the euro. Politically, the accession is uncontested. Both the right-wing government and the left-wing opposition are in favour. Polls show that at least 55 percent of citizens are in favour. And we know from the Baltic States that support has only increased after the introduction of the currency.”
Surprisingly enough – according to Eurobarometer, which gauges public opinion in the EU – including in Romania, Hungary and Poland a majority of the population in favor of abolishing their own currency. And that while the governments of the latter two countries strongly oppose it.
“This Polish government will probably always be against it, no matter how many rational arguments there are,” said former finance minister Jan Rostowski. As a representative of the current center-right opposition party Civic Platform, he himself was against joining the eurozone when he was in charge from 2007 to 2013.
But unlike the current rulers of the conservative PiS party, he has changed his mind. “The euro crisis and the time it took to get it under control damaged confidence both inside and outside the eurozone. That is still not fully recovered, but great progress has been made.”
This Polish government will probably always be against it, no matter how many rational arguments there are
John Rostowski former Polish minister
Rostowski, like Sabic and Darvas, now sees more advantages than disadvantages. Especially as a shield against speculators and high interest rates on the international capital market. “Especially since the eurozone dared to take on joint debts during the corona pandemic, I am converted.”
Despite the willingness of the opposition, the euro is unlikely to become a major electoral issue in the parliamentary elections due next autumn. Rostowski: “Poland has a major obstacle to accession that other countries do not have. Our constitution states that the zloty is our legal tender. To change that, an – impossible – two-thirds majority is needed [van het parlement].”
The urgency for Poland, with a population of 38 million and a large domestic market, is also less urgent than for smaller countries. This also makes the country less vulnerable. At the same time, Poland does have higher-than-average inflation (17.5 percent) and deposit rates (6.25 percent).
Hungary in trouble
Meanwhile, Hungary, the home country of economist Zsolt Darvas, is “in huge economic trouble,” he says. At 22.5 percent, inflation is the highest in the EU. The deposit rate has risen to 18 percent (in the eurozone it is 2 percent). And before the central bank intervened with a rate hike in early December – and was extremely critical of its own government – the forint lost 11 percent of its value against the euro.
In his annual press conference, populist Hungarian Prime Minister Viktor Orbán admitted that there are arguments for joining the eurozone, but the arguments against joining are stronger. According to him, “joining the euro slows down economic growth”. According to Darvas, the opposite is true, although the direct economic benefits of the euro will be modest.
Darvas and Rostowski are concerned about the impending recession in Europe, but do not believe that the Polish and Hungarian economies would be ‘saved’ by rapid entry into the euro – if that were possible at all.
“Countries such as Poland, Hungary and the Czech Republic saw during the euro crisis the problems Greece and Spain, among others, had, and then decided that they would be better off outside.
Politics decides
That may sound logical to someone with no background in economics, but ultimately it’s about proper monetary and fiscal policy,” says Darvas. „[Het ontbreken daarvan] was the problem in Greece and Spain then and it is now in Poland and especially Hungary. In the Czech Republic, the government is pursuing a better policy and the crisis there is now less severe.”
Ultimately, national politics will determine accession to the euro. In the Czech Republic, even the otherwise pro-European government does not seek rapprochement. Polls clearly show that the Czechs are the most eurosceptic of all EU citizens: 67 percent are against the introduction of the currency.
And then there is the willingness of the existing members of the eurozone, who admit Croatia and not Bulgaria in their midst. The debt crisis in Greece in particular has made the eurozone more cautious. “Our process of joining has been much more complicated and demanding than in the past,” says Ana Sabic, with audible relief in her voice that that process has finally been completed.
Also read the second part of this diptych about Croatia’s accession: The eurozone now has twenty countries – but it is still unfinished