Croatian National Bank Launches Study on Introduction of Euro

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Not very many countries are happy with the euro, but Croatia is thinking about joining the eurozone anyway.

Croatian National Bank has started with preparations for a study on the introduction of the euro, which should be completed by this summer and serve as a framework document for public debate. The study will include calculations of benefits and potential risks of entering the eurozone, said Boris Vujčić, the governor of the Croatian National Bank (HNB), at the meeting of central bank governors from the region. The topic of the event was the introduction of the euro, and one of the speakers was Bas Bakker from the International Monetary Fund, reports Večernji List on April 1, 2017.

Vujčić said he was aware that there would never be a consensus over the introduction of the euro, but HNB believes that this is the right way to go. Croatia is exposed to currency risk due to high foreign currency debt of all sectors which exceeds 500 billion kuna, which is substantially more than Croatian GDP. About 220 billion kuna is the state debt, around 200 billion kuna relates to companies, and around 80 billion kuna to citizens. Due to this debt, the monetary policy is focused on maintaining the exchange rate stability as the basic precondition for the maintenance of financial stability.

There are two ways to reduce the currency risk. One is the de-euroization, and the other is using the euro as local currency. The governor pointed out that the demand for kuna loans was far higher than before, and that kuna loans had reached 40 percent of the loan portfolio. However, people still save in the euro which causes imbalances which, if they continue, could lead to exchange rate imbalances as well.

Vujčić explained that de-euroization process would be lengthy, with questionable success and possible negative effects. He is confident that HNB would be able to explain the benefits of the entry into the eurozone and that the introduction of the euro would be the best way for Croatia to develop investments and achieve economic growth.

Bakker said that the countries which allowed changes of the exchange rates had increased their deficits less than those which retained a fixed exchange rate. However, he admitted that changing the exchange rate could be a problem if there is a high exposure to the euro through loans and deposits. States which opt ​​for a fixed exchange rate often experience difficulties in terms of employment and GDP growth.

“Shocks in the future will not be the same as in the past. The euro and free exchange rate fluctuations are not a solution for everything. A crisis can occur under any foreign exchange system,” said Bakker.

The meeting was also attended by central bank governors from Macedonia, Montenegro, Kosovo, Slovenia and Bosnia and Herzegovina.


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