Still no change in the exchange rate, but the strong kuna has at least reached the public

The overvalued exchange rate is finally being seriously introduced to the public by the IMF, the IFO Institute, a number of foreign experts, exporters, several younger economists, and two parliamentary parties – Most and Živi zid.

For the past three years, I have tried several times at this place to remind of the simple truth about the exchange rate. That the exchange rate is the most important individual price in the entire economy as it determines the level of export revenues and import costs, thereby affecting the number of employed in the country, and then the well-being of the nation. I also reminded that the formation of the exchange rate is an economic law and that every intervention in the exchange rate has its price. If you have an overvalued kuna, imports will rise, exports will weaken, and there will be fewer and fewer jobs (and companies, crafts, family farms) in the country. If, despite lower economic activity, you want to maintain the same standard, you must go into debt. I reminded that ‘internal devaluation’ cannot be a substitute for the real exchange rate because by reducing domestic costs (tax pressure, parafiscal levies…) you equally favor everyone, do not penalize imports, and do not enable domestic production and exports. Moreover, the longer this imbalance lasts, the more expensive and painful the correction will be. The issue of an unrealistic exchange rate will eventually come to the fore, depending on the amount and pressure of the accumulated debt in the meantime. This cannot be avoided, and the greater the problems in the economy, the more the issue of the exchange rate comes to light.

With an overvalued kuna, everyone loses.

In this regard, a logical question arises. How is it that Croatia has persistently and successfully pursued a policy of an overvalued kuna for about 20 years? The answer is simple. Because it would suit the main stakeholders of our economic scene. Importers, obviously. Also the state and banks. And a large number of households that have been enabled a higher standard than objectively possible by the offer of relatively cheap imported goods, which in turn favored politicians. Thus, there were many interested parties for the Croatian National Bank to conduct the policy it does. Of course, as there is no free lunch in economics, someone is losing. Obviously, these are exporters and domestic producers whose cheap imports destroy domestic production. (How many times in recent years have we heard that nothing is worth producing in Croatia?) But in the long run, everyone is a loser. Because the performance of the economy is deteriorating, public debt is rising, unemployment is increasing, poverty is rising, and more and more people are forced to seek their fortune abroad, with bankruptcy being mentioned. There are six years of recession, there are EU controls (fiscal sustainability, macroeconomic imbalances). And this concerns everyone.

The empire strikes back.

It has been interesting over time to follow the presence of the question of the reality of the exchange rate. Since the mid-90s when it was fixed for about 15 years, it was hardly spoken of. Only now and then the voice of some old expert and a few exporters. But they were looked at with derision. The chief economists of banks, who predominantly influence the economic public opinion of the nation together with the Croatian National Bank, supported by commentators in leading media, ensured that such eccentric and controversial thoughts were trivialized. However, as the economic situation in the country has seriously deteriorated in recent years, the issue of the overvalued exchange rate is increasingly coming to the fore.

Now the IMF, the IFO Institute, a number of foreign experts, the Croatian Exporters Association, several younger economists, Željko Lovrenović, and Marijana Ivanov, for example, are talking about it. And finally, the issue of the overvalued exchange rate is being raised in the electoral programs of two new parliamentary parties, Živi zid and Most. The two largest coalitions, understandably, have avoided this issue or, when it was unavoidable, claimed that the exchange rate remains firm. Indeed, Karamarko carelessly mentioned devaluation at the beginning of the campaign, which was suggested to him by the German institute, and for Milanović’s PR, it was an excellent ball for a volley – that it means painful cuts and a valley of tears.

What will happen next? Will whoever gains power have the strength to fundamentally change the paradigm of economic policy, where the primary goals will be to increase the number of jobs in the country and GDP growth, rather than a firm, overvalued kuna? A policy that will mean the end of favoring the interests of those for whom the overvalued exchange rate is convenient, and respecting the interests of the overall national economy and society. Will there be the will to say the emperor has no clothes and the knowledge to design, dose, and implement such measures, including resolving the issue of loans with currency clauses? Experience teaches us that there will not be. The stance and reach of Most’s influence are currently unclear, and Živi zid does not have the strength of the number of mandates. And we are already witnessing that the empire strikes back. The front page of an influential daily newspaper recently dominated the headline ‘Most has given up on the devaluation of the kuna and the ban on currency clauses (although Most never explicitly mentioned devaluation). But the issue of the exchange rate will inevitably come to the fore sooner or later. If we do not deal with it ourselves, others will do so, the IMF for example.