ZAGREB, September 17, 2020 — As a condition of joining the European Union in 2013, Croatia agreed to adopt the Euro as its national currency and join the Eurozone. In July 2020, the country entered the final phase for Euro adoption, which is expected in 2023.
Therefore, The Croatian National Bank (HNB) began harmonising Croatian economic, financial, and fiscal institutions according to the parameters set by the European Central Bank (ECB) for Eurozone countries.
Croatia Entered ERM II Phase in July 2020
This harmonisation process has taken Croatia through several phases. As of July 10, 2020 — Croatia joined the final phase, or ERM II. Their goal is to formally adopt the Euro on January 1, 2023; after they spend just over the required minimum of 2 years within the ERM II phase.
The CNB have been working within the framework of their document, ’Strategy for the adoption of the Euro in the Republic of Croatia’ since its publication in April 2018. In the meantime, Boris Vujčić, assumed the post as Governor of the Bank. First, The CNB strategy lays out the benefits of Croatia joining the Euro.
These benefits include single market harmonisation and reduced risk of extreme currency fluctuations. They also include lowered trade costs and more efficient integration with European banks. The strategy document, along with the ECB (European Central Bank), calls for the changes necessary to join the Euro without undue strain. To achieve convergence, the document also refers to the need to control inflationary trends and to limit artificial interventions. These include money supply interventions and interest rate manipulation without market-required corrections.
CNB Must Maintain Exchange Rate Before Euro Adoption
The CNB has a history of prudent financial management which was evident in the post-recession era of 2008 and onward. They have been generally seen as non-interventionist and have kept the money supply in Croatia relatively tight.
As of July 10, 2020; the exchange rate of the Kuna to the Euro was 7.53450. This includes an acceptable fluctuation of plus or minus 15%, as agreed by the ECB and the CNB. The CNB must maintain these exchange rate parameters while Croatia continues in the ERM II phase before it joins the Euro.
Bulgaria entered the ERM II phase at the same time as Croatia. The two countries will, when joining the Euro, bring the number of countries within the Eurozone up to 21. Following the acceptance of Croatia into the ERM II, the ECB announced that, effective October 2020, it will directly supervise five banks in Bulgaria and eight banks in Croatia. This supervisory alignment will allow commercial banks in Croatia to prepare for the Euro replacing the Kuna (HRK). It will also deal with conversion and exchange issues. Most importantly, it will equip them to function successfully within the Eurozone.
Croatia Economy Shows Resilience Despite COVID-19 Impact
In proceeding with its entry into the ERM II — the CNB noted that June and July were weak months for the Croatian economy compared to past years because of the impact of COVID-19 on tourism. Nevertheless, the Croatian economy has shown unexpected resilience and forecasts for the fourth quarter were acceptable. In terms of financial stability within the EU, the Croatian government will receive, subject to the agreement of all members, 20 million Euro from the European Commission’s COVID-19 recovery package. Once Croatia is part of the Eurozone it can call directly on the ECB. It will also benefit from the ECB’s stability mechanisms in the future.
For Croatia, a relatively small but stable country, the adoption of the Euro should provide for greater opportunities within Europe. It will also offer the country greater financial security within the governance and oversight of the ECB.
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