As Novac/Viktor Vresnik writes on the 12th of May, 2020, if Croatia had introduced the euro, it would have been much easier for us to cope with the coronavirus crisis, according to Prime Minister Andrej Plenkovic. Has Croatia been able to adopt the euro so far? No, it hasn’t, so any further discussion of the matter is therefore unnecessary.
The second question, of course, is whether Croatia needs the euro today, or perhaps it is better to be more precise and say, does it need it in three years? When it can join the Eurozone at the earliest, provided the euro survives, which it probably will, and will the kuna really enter the European Exchange Rate Mechanism (ERM II) in July, as was announced on Thursday?
This discussion and these questions are educational only, because Croatia has already committed itself to the introduction of the common European currency in the Treaty of Accession to the European Union. The euro has to be adopted by Croatia in this case, but it hasn’t been defined when it has to happen.
The coronavirus crisis that arrived this year has clearly showcased the clear benefits of Eurozone membership. The European Central Bank’s assistance to Eurozone member states reaches a staggering 750 billion euros (through several types of financial instruments). This makes countries using the common European currency much more resilient to many things, including the coronavirus crisis, than countries that have decided to delay the adoption of the euro because, with the ECB in the background, they are equipped with powerful financial tools to defend them against the economic crisis which has ensued as a result of the pandemic.
Because it is not in the Eurozone, Croatia cannot get a cent of fresh money directly from the ECB. Brussels’ direct aid of 1.16 billion euros (which were in fact redirected funds, previously intended for pre-financing projects from European Structural and Investment Funds) that arrived at the beginning of the coronavirus-induced “lockdown” were mere crumbs that was thrown down from the table. If nothing else, this provides Croatia with a good incentive to think about its own need to ”grow up”, in the political, social and economic senses.
The exchange rate of the kuna, until the moment Croatia joins the European Exchange Rate Mechanism, is subject to changes on the foreign exchange market. Some will say that this is good for exporters and, conditionally speaking, they’re right if the export product doesn’t contain import components that the manufacturer pays for in euros, and such components are built into almost everything Croatia exports, from tourism as the strongest export service sector to parts for cars made by AD Plastika, Končar’s transformers, Podravka’s peas or fabrics from which suits are sewn by Varteks.
Any significant change in the value of the kuna downwards would be a difficult verdict for all debtors paying in euros, which is, in addition to the state itself, most Croatian businesses. The Croatian National Bank, with the help of agreed currency exchanges with the ECB, has so far managed to stop the kuna from slipping too far. Such an arrangement with the ECB has been agreed upon, however, only until the end of the year, and it’s simply illusory to expect the CNB to receive the usual infusion of various currencies earned from tourism over the summer. It will be good if it gets any at all.
The action plan for joining the European Exchange Rate Mechanism and the European Banking Union has been fulfilled on time and in full, the prime minister said on Thursday, the day the Croatian Government also unveiled a crisis budget revision. It is this document, because the rebalance, like the budget itself, has the force of law behind it, that makes the Croatian path to the Eurozone even more difficult and complicated.
To get the Eurozone countries out of the coronavirus pandemic crisis faster, the European Central Bank has decided to flood their financial system with euros. As the presented budget revision shows, Croatia is returning to quite another policy indeed after providing a wave of abundant financial aid to those struggling under current burdens. “It will be difficult,” said Zdravko Maric, the finance minister. And inded it will, but could things have been different?
If Croatia really wants to enter the ERM II in July, this kind of budget policy is the only possible one, because it follows the prescribed set parameters. In this way, the government will show the ECB and Brussels that, despite the high share of debt in Croatia’s GDP (which returned to 86.7 percent) it has not given up on the gradual reduction of that same indebtedness and that the budget deficit is also being kept under control despite the coronavirus pandemic, while price stability and the exchange rate remain intact.
To quickly go back to something that has already been mentioned: had Croatia had Eurozone membership, things would be easier, said Plenkovic. That’s right, but it doesn’t have membership. The CNB may step up its game in regard to the kuna, at least until July and until ERM II entry (if that even happens), but the Croatian National Bank’s capacity, while sufficient to support the government’s policy for some time to come, is nowhere near the ECB’s tightly controlled yet impressive capabilities in such situations.
Order growth is the best generator of employment, and consequently wage growth, and it fills the budget in the best way. All of this can only happen if the coronavirus doesn’t return with a vengeance in autumn, or, if it does return, its influence is so weak that everyone in the EU concludes that a new shutdown of the economy is totally unnecessary.
An additional question is who will lead Croatia’s financial and economic policy after the elections take place, as mistakes can be dangerous.
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