Croatia’s ERM II Exchange Rate to Be Known Soon

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ZAGREB, December 1, 2018 – Croatian National Bank Governor Boris Vujčić said on Friday that Croatian citizens would not have conversion costs when the country entered the euro area and that the ERM II exchange rate with which Croatia was expected to enter the Exchange Rate Mechanism could be known as early as next year.

He was responding to questions from the press at the government after the first meeting of the national council for the introduction of the euro in Croatia.

As part of ERM II, the national currency of a member state is tied to the euro and a median exchange rate is established. It is the result of a balanced exchange rate, which means the currency must not be either undervalued or overvalued.

“There will be no conversion cost. It will be automatic, based on the exchange rate to be established earlier,” Vujčić said, adding that the rate might be known as early as next year. “That will be the rate with which we will enter the Exchange Rate Mechanism and which we will de facto have to maintain while in the Mechanism, which essentially means that this will be, possibly with very small oscillations, the conversion rate.”

He said there would be no cost for citizens and that their deposits and loans denominated in euro would have to be changed based on that exchange rate.

Asked if this meant that the exchange rate with which Croatia would enter ERM II would be very close to the current exchange rate given that it would not be able to vary markedly as of next year, Vujčić said the rate would be close to the one Croatia had over the past 25 years, which “didn’t oscillate much.”

He recalled that the government and the central bank presented a joint euro strategy late last year, which underwent public consultation and which the government adopted in May.

Vujčić said talks about the next steps were being held with European partners and that the first step was entering ERM II, which envisages close cooperation with the euro area and joining the banking union.

He added that the European Commission and the European Central Bank were conducting due diligence of Croatia’s economy as a prerequisite for continuing the talks.

Vujčić said he would soon resume talks on the contents of a letter which he and Finance Minister Zdravko Marić would send about membership of ERM II and in which Croatia would commit to certain things. By entering ERM II, Croatia must meet five convergence criteria which the Commission evaluates and if Croatia meets them, it enters the euro area, he added.

Addressing the same press conference, Minister Marić said that a country was invited to ERM II if it had a stable economy, sustainable growth rates and no imbalances.

Asked about the date of entering the euro area, he said the government’s euro strategy did not specify formal deadlines for entering either ERM II or the euro area, and that one must also keep in mind that European partners would follow the whole process and make decisions about Croatia.

Marić recalled that 2005 was the last year when an EU member state entered ERM II and said Croatia must do all that was necessary so that, when certain steps intensified, it was as prepared as possible.

Asked about the previously mentioned five to 7-year deadline for entering the euro area, he said it was realistic.

The first meeting of the national council for the introduction of the euro was chaired by Prime Minister Andrej Plenković. It was attended by several ministers and representatives of employers and unions.

Marić called the meeting very constructive, saying employer and union representatives would not have attended had they anything against Croatia’s entering the euro area.

Asked about employers’ claims that they had not been sufficiently consulted about a minimum pay rise, he said Labour Minister Marko Pavić had announced that the government would correct the minimum pay by the end of the year but that the actual amount was not made public until the very end.

Marić said he was pleased that, even before VAT on fresh meat and fish, fruit, vegetables, eggs and nappies was due to be slashed on January 1, some retail chains had started to correct their prices.

For more on the Croatian National Bank, click here.


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