Miodrag Šajatović: Entry into the Eurozone – a New Bait After Joining NATO and the EU

In the midst of events related to Agrokor (surprising PwC audit findings and the establishment of a parliamentary investigative committee), leaders of the Government and the central bank are trying to engage the public on the topic of Croatia’s entry into the European Exchange Rate Mechanism (ERM 2), which would lead to the replacement of the kuna with the euro in 2022. This was first mentioned as a project for public discussion by Prime Minister Andrej Plenković at the recent Lider conference ‘Day of Big Plans’.

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The initiative deserves attention. At least due to the monetary effects of introducing the euro. More importantly, it is an attempt for society as a whole to gain a new common goal that would at least somewhat homogenize the increasingly divided ideological and social community.

Entry into Schengen

The key word is ENTRY. At the beginning of the century, the justification for any reforms was the process of ENTRY into NATO. Once that was completed, all unpopular government moves were justified by stating that ‘this and that’ is a condition for ENTRY into the European Union membership. Once that entry was completed in 2013, ideas on how to galvanize society ran out. Until the innovation prepared by the HNB regarding ENTRY into the European exchange rate mechanism. Without delving into whose idea it was to start the innovation of introducing the euro in the second year of Plenković’s government (the second goal is ‘TO INTRODUCE Croatia into Schengen’). It can be assumed that the Prime Minister, the Governor, Deputy Prime Minister Dalić, and Finance Minister Marić easily agreed that this is a winning combination.

First, the process should successfully or unsuccessfully conclude no earlier than 2022. Thus, after the parliamentary elections in 2020. In the event of a rejection like the one Bulgaria received, electoral results would not suffer. The risk of failure is therefore minimized.

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Second, for the broad masses, which have proven to be easily misled, the idea that the danger of changing the kuna exchange rate against the euro would cease for many when it comes to taken but still unpaid loans would sound attractive. Especially when the possibility is added that entering the eurozone would further lower interest rates… You offer the locals a mirror, a few colorful necklaces, and you’ve solved the issue! Third, and perhaps most importantly for the ruling party, the criteria that need to be met in the process of entering ERM 2 could be a good argument for all those who have begun to claim their share of budget revenues. Union representatives from the public and state sectors come to Minister of Labor Pavić, and he nicely tells them: ‘I understand your demands, but, due to this entry into the eurozone, please be patient until 2022. We need to reduce deficits.’

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The same answer would apply to retirees. And to anyone not strong enough to dare to ask for a raise. Here, Governor Vujčić already says that if the budget for 2018 is good, ‘we will be able to ask to enter ERM 2’. And fourth, the transition, when it comes to the sensitive issue of the exchange rate, could anyway be extremely (currently) painless. The cemented exchange rate from 1993 until now has caused damage that can no longer be repaired. Even net exporters have given up convincing HNB leaders that exchange rate policy should serve exports as it does in many countries that, thanks to this, have much higher growth rates and are more resilient to recessions than Croatia.

The Appeal and Problematic Nature of the Euro

Resigned entrepreneurs, some at this week’s scientific forum held at the Faculty of Economics in Osijek, say: ‘Whatever it is, just don’t keep changing it by a few percentage points. If you won’t weaken the kuna, then please strengthen it forever.’ Of course, it matters with which exchange rate Croatia will enter the procedure, but I bet that they will not touch what was incorrectly determined as the initial exchange rate of the then HRD in 1993, precisely at this time, in an otherwise well-designed anti-inflation program.

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Of course, it can be expected that during the announced public discussion, arguments against the attempt to replace the kuna with the euro by 2022 will also be heard. Perhaps some of the ‘locals’ will fear that after the introduction of the euro, as in some other countries, prices will rise all at once. It is attractive to receive a salary in euros, but psychologically it may be problematic when instead of 4000 of something (kuna) you receive 500 of something else (euros). And the key criterion in this monetary operation? We ask the team from the HNB to state how much the introduction of the euro will raise GDP growth rates. If they have a model according to which they calculated that Agrokor’s collapse would result in a 0.3 percentage point lower GDP, then surely their model can also calculate the benefits of entering ERM 2.