Vujčić: The possibility of introducing the euro depends on the readiness to fulfill reforms

Croatia will not enter the European Monetary Union by 2020, but it could enter the Exchange Rate Mechanism (ERM II), which would be an effective start of preparations for the introduction of the euro, said the governor of the Croatian National Bank (HNB) Boris Vujčić on Wednesday.

Prime Minister Tihomir Orešković stated in Berlin on Tuesday that he discussed with Governor Vujčić the initiation of the euro introduction process in two years, “and in four years it would be fully implemented.”

In response to a question about the conversation with Orešković regarding the introduction of the euro, the central bank governor reminds that “the possibility of introducing the euro depends on the readiness to seriously approach the process of fulfilling the National Convergence Plan and the National Reform Program, which would realize the prerequisites for switching to the euro, primarily the structural changes that would enable an increase in the potential growth rate of the economy.”

“In order to even be in a position to switch to the euro, we would first need to significantly reduce the share of public debt in GDP over the next two years, with projections showing that such a trend is sustainable in the medium term, and then proceed to discussions about entering the Exchange Rate Mechanism (ERM II). After entering ERM II, during the next two years we must meet the so-called Maastricht criteria related to the inflation rate, long-term interest rates, budget deficit, public debt, and the stability of the kuna exchange rate against the euro. Our biggest problem in meeting the five necessary criteria for switching to the euro is reducing the share of public debt in GDP, which is currently at around 85 percent, as it should be significantly reduced in the next two years (2017 and 2018),” says Vujčić.

However, the governor adds, it is necessary to know that it is not mandatory to meet the fixed criterion of reducing the share of public debt in GDP to 60 percent for the transition to the euro, but it is also possible to reduce the share of public debt at a sufficient pace, following which the European Commission can decide that we are credible in this regard and ‘approve’ our transition to the euro.

“By 2020, we will not yet enter the European Monetary Union, but we could enter ERM II, which would indeed mean an effective start of preparations for the introduction of the euro, which the Prime Minister and I discussed,” emphasizes Vujčić.

“Overall, the National Convergence Plan and the National Reform Program must emphasize sustainable reduction of the share of public debt in GDP, or structural reforms aimed at increasing the competitiveness of the economy and increasing the productivity growth rate, which are key prerequisites for sustainable reduction of the share of public debt in GDP. In this way, these documents can and, in my opinion, should become the backbone of medium-term economic policy, which is, regardless of the introduction of the euro, which depends, it should not be forgotten, on the state of the eurozone, a desirable goal,” concludes the governor of the HNB.

Introducing the euro is a bad idea for Lovrinović

Member of Parliament Ivan Lovrinović from the Most party assessed on Wednesday that introducing the euro in a few years would be “a fast track to a Greek scenario” and that we should not rush into it. He reminded that some countries that have been in the European Union for a long time, such as Denmark, Sweden, Poland, or the Czech Republic, have not decided on this step.

“Denmark will not introduce (the euro) because it has that clause, Poland has announced a postponement indefinitely, the Czech Republic as well. We should not rush into this, as it is one of the key tools within the overall European policy for maintaining the competitiveness of the national economy,” said Lovrinović, commenting on Prime Minister Orešković’s statement.

According to Lovrinović, Croatia “will not be ready to discuss the euro in ten years, let alone introduce it.” He also pointed out that the rapid introduction of the euro is “the strategy of the previous and current leadership of the HNB, as they encouraged rapid and comprehensive euroization of the financial system and the entire economy, thus exposing the country to unprecedented currency risk.”

“The rapid introduction of the euro would only benefit banks and importers, while the entire economy would end up in a Greek scenario,” concludes Lovrinović.

Five criteria must be met for the introduction of the euro

To enter the European Monetary Union, or the eurozone, a member of the European Union must meet five criteria. Inflation must not be more than 1.5 percent above the inflation rate in the three member states with the lowest inflation, the budget deficit must be below 3 percent of GDP, public debt below 60 percent of GDP, long-term interest rates must not be more than two percent above the rates of the three member states with the lowest interest rates, and the country must also meet the exchange rate stability criterion, which involves participation in the European Exchange Rate Mechanism.

The latest available data shows that Croatia has been recording stagnation or a decline in consumer prices, or deflation, for more than two years, with an annual rate of 0.8 percent in January this year. The budget deficit for the previous year is estimated at around 4 percent, and the government recently estimated it at 3 percent of GDP in the guidelines for this year’s budget preparation. Croatia’s public debt is at around 85.5 percent of GDP.

Maras: separate the logical from the desirable

Gordan Maras from the SDP believes it is necessary to separate what is logical from what is desirable, and that a rapid entry of Croatia into the eurozone does not seem realistic, as it will take us longer to meet the criteria for that. He added that he would “like the Prime Minister to explain how he intends to achieve this, if he wants to.”

However, on the other hand, Maras says that Croatia is already a highly euroized country and that “we do not need to rush into the euro and the eurozone because the exchange rate risk, market risk, and everything related to the euro is very low here.” At the same time, Maras raises the question of whether the introduction of the euro, as in some other countries, would lead to inflation or price increases.

“Most countries that have entered the eurozone have also experienced inflation or European prices. The question is whether this is necessary for Croatia and why we should rush into it. We do not need to rush; Croatia will not have any excessive benefits. I think what Orešković is saying is not realistic. I would not want to lecture, but let his advisors clarify how things stand regarding entry into the eurozone,” concluded Maras.

Šuker: everything is already tied to the euro

Ivan Šuker from the HDZ emphasizes that Croatia is already a highly euroized country and that “everything is tied to the euro.” He also believes that it is in Croatia’s interest to enter the eurozone and thus solve a number of problems, especially as a country with a very developed tourism sector.

When asked whether it is realistic for Croatia to meet all the criteria for entering the eurozone in four years, Šuker replied that “it is easiest to say that something cannot be done.”

“The European Commission has clearly sent a message to those who thought they had done something, and it is evident that nothing has been done. This is also a message that these structural reforms must finally be made,” said Šuker, adding that he does not understand “why over 80 percent of Croatian citizens have savings tied to the euro.”

“You see that there is a big debate about the currency clause. All those stories disappear at that moment. Frankly speaking, it is easy to say we do not need this, we do not need that, but the question arises what would be the cost of capital and what would be the interest rate if there were no such safeguards and protection mechanisms. After all, you can see that the increased exports that have occurred in the last year are a consequence of us becoming part of the common market, where entrepreneurs go out and sell their goods themselves,” said Šuker.