Valdis Dombrovskis: The introduction of the euro does not increase prices but rather the standard of citizens

Valdis Dombrovskis, Executive Vice-President of the Commission responsible for Economy in the Interest of Citizens, participated in the conference  Croatia: On the Path to the Euro, held at the International Hotel in Zagreb, organized by the European Commission and Lider.

Dombrovskis stated in the introduction of his presentation that, from an economic perspective, Croatia’s recovery, despite the earthquake and the pandemic, is going very well, as evidenced by the growth in investments and the large number of newly opened jobs.

He emphasized that Croatia now faces two main tasks that must not be neglected: recovery from the crisis and preparing the economy for the introduction of the euro.

– The first task is to fully recover from the crisis, and signs indicate that this will happen very soon, and I believe that next year we should reach the level of GDP before the crisis – said Dombrovskis, adding that a growth of 16 percent is expected in the second quarter, which is significant compared to the 8 percent decline in GDP last year.

The risk, says Dombrovskis, is the health situation, which, if it worsens, could affect the pace of recovery.

Dombrovskis emphasizes that participation in the European Exchange Rate Mechanism is an important step to ensure currency and exchange rate stability and that this is one of the main criteria for the introduction of the euro. Since the kuna has been stable against the euro for a long time, there should be no problems regarding this criterion. He also added that the public deficit must be controlled and should be below three percent next year.

In his presentation, he also mentioned some advantages of introducing the euro in Croatia. First of all, it sends a positive signal to investors as the euro is a reliable monetary community and the second largest currency in the world. It removes barriers to business as well as additional costs related to exchange rate differences, which will lead to cheaper loans for citizens and businesses, which in turn will benefit the market for goods and services and increase competition as well as the standard of citizens.

He added that the euro limits risks in times of crisis and that by joining the eurozone, Croatia will reduce risks to financial stability and increase resilience to ‘shocks’.

Citizen Concerns

The biggest concern regarding the introduction of the euro is that many citizens believe that the introduction of a new currency will lead to price increases, to which Dombrovskis says that this must not be an excuse for price increases and that both before and after the introduction of the euro, dual prices must be displayed on products to reduce the possibility of deceiving citizens. 

To avoid this, a fair and transparent campaign is needed, says Dombrovskis, citing the example of Latvia, where campaigns informed citizens and companies about all possible problems related to the euro and prices.

At the end of his presentation, Dombrovskis also reflected on the National Recovery Plan, which he said would enable Croatia’s short-term recovery from the consequences of the pandemic, but that the long-term goal of these funds is to transform the Croatian economy and move towards a green and digital transition.

– If the reforms are implemented correctly, Croatia’s GDP will grow by 9.2 percent, and the positive effects of financing will be felt even earlier – said Dombrovskis, adding that reforms are essential for recovery as well as for investments.

How Croatia Stands on the Path to the Euro

How Croatia stands on the path to the euro was explained by Minister Zdravko Marić, who also participated in the conference. He presented a sort of retrospective on the introduction of the euro and emphasized that, parallel to the process of meeting the criteria for the introduction of the euro, efforts must also be made to inform citizens.

Marić also reiterated Dombrovskis’s words and emphasized that the introduction of the euro must not be used to increase prices and the necessity of dual prices before and after the introduction of the euro.

– Regarding price increases, the average increase was about 0.2 percent in countries that introduced the euro – said Marić.

He added that the positive effects are of a longer-term and structural nature, such as the elimination of exchange rate risk, and that the introduction of the euro will increase the credit rating by ‘two notches’.

Marić also reflected on the pandemic and stated that it could not slow down the activities that had to be completed before the deadline for introducing the new currency, and that he sees no reason why other activities could not be completed within the set deadlines, such as the convergence criteria and Maastricht criteria.

Marić added that the focus is on fiscal criteria given the decline that occurred due to Covid, which reflected in the drop in tax revenues, while expenditures increased during the same period.

– All of this cost us more than 35 billion kuna, and all of this had an impact on GDP – said Marić, adding that the intention this year is to do everything to ensure that the recovery is in the shape of a V, meaning that after the decline, recovery goes at the same pace.

Marić also predicts GDP growth this year of 5.2 percent and hints at a revision of macro projections, provided that there is no worsening of the pandemic. 

– We are now in a growth zone of about 7 percent, and we expect full recovery even before the end of 2022, which is an excellent result – believes Marić, adding that due to the last crisis, recovery took ten years, while now we will recover in just two.

In the end, he said that 2023 is a realistic year for the introduction of the euro and that we have strategically decided on this, but that everything is still in our hands as we must meet all criteria.

Boris Vujčić, the governor of HNB, emphasized in his presentation at the conference that HNB is already one step into the eurozone as we have already entered the exchange rate mechanism two and that HNB already has close cooperation with the European Central Bank.

– This means that we have already entered a part called the banking union in which EU countries participate, which has allowed us a year of experience from the banking side – noted Vujčić.

He said that this first part of integration went very well, that it was smooth and fast, and that we went through the process of assessing the quality of banks, which showed that the quality of the Croatian banking system is high and that despite the crisis, the banking system is healthy and that excess liquidity has increased to 66 billion kuna.

– The best-capitalized banking system within the eurozone means that we have entered a part of integration with very good liquidity and a profitable and capitalized banking system – added Vujčić.

He also reflected on the exchange rate mechanism that helped us during the crisis last year, so that at the peak of the crisis, when there were strong pressures on the foreign exchange market, we managed to sell international reserves, which allowed HNB room for intervention in the market, thus stabilizing the price of public debt.

Vujčić concluded his presentation by saying that HNB will spend the next period preparing for entry into the eurozone and once again reiterated that during the conversion, consumers, i.e., citizens, must be protected.

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