Who Will Feel the Benefits of Introducing the Euro?

Although Croatia has not yet officially received a decision on joining the eurozone, all indications suggest that this is practically a formality that needs to be completed in the upcoming period and that nothing will stand in the way of Croatia introducing the euro as its official currency on January 1, 2023.  However, it is necessary to point out the remaining procedure that is essential for Croatia to ultimately receive the green light on this matter.

Namely, after consulting with the European Parliament and after discussions in the European Council, the EU Council, at the proposal of the Commission, makes a decision on the country’s accession to the eurozone (the final decision is expected to be made in July 2022). This is preceded by a convergence report prepared by the European Commission, which is expected in June this year. Finally, the EU Council (ECOFIN) makes the decision after receiving a recommendation from a qualified majority of eurozone member states, which must issue this recommendation within six months after the Council receives the EC’s proposal for the introduction of the euro.

In short, after we receive a positive convergence report in June, there remains practically only a formal decision, and according to current indicators, both the mentioned report and the decision should be positive. Anything contrary would represent a significant surprise, especially considering the impression of the finalization of the process as presented to us by the Government and the Croatian National Bank.

The introduction of the euro should be welcomed and considered a positive step in the context of Croatia’s advancement. Namely, the introduction of the euro will be beneficial for the majority of citizens and businesses in the Republic of Croatia, as well as for public finances in terms of greater stability and the possibility of easier and cheaper access to capital markets. It should be clearly stated that not all benefits will be felt immediately, and the increase in the standard of living will be visible in the medium and long term. Therefore, short-term costs should not discourage us or cast doubt on the correctness of the decision made. 

SHORT-TERM BENEFITS

Regarding direct short-term benefits, they primarily relate to the elimination of transaction costs or currency conversion costs. This advantage is particularly excellent for all companies that do business abroad, as well as for individuals who enjoy traveling. Since Croatia is a small and open economy and its exports and imports of goods and services from 2017 to 2019 accounted for approximately one hundred percent of GDP (90 percent in 2020), with a significant portion of trade occurring precisely with euro area countries (the three largest trading partners are Germany, Italy, and Slovenia), certain rough estimates suggest that based on the elimination of transaction costs, savings of approximately 0.4 percent of GDP or around 1.5 billion kuna annually should remain in the pockets of businesses and citizens.

In addition, companies will have reduced obligations for managing foreign currencies, accounting obligations related to gains/losses due to exchange rate changes will decrease, additional reports will be reduced, and ultimately costs related to hedging exchange rate risk will be reduced for those rare companies in Croatia that have used such banking services. The cost of doing business with other currencies will still remain.

The second direct benefit for consumers is easier price comparability in Croatia and other eurozone countries. This will create pressure and greater competition for interchangeable products, so such products should see a decrease in prices, which positively affects the consumer standard, especially in the context of current inflation rates.

The third benefit should be lower interest rates, which will facilitate the repayment of loans tied to variable interest rates, but also stimulate more investments, which should trigger additional economic activity and result in employment (it should be noted that we are in a period of record low interest rates, so the possibility of rising interest rates due to a more restrictive monetary policy of the central bank in the upcoming period should not be overlooked, but entering the eurozone could mitigate that increase).

In addition to this, the structure of investments is also important, namely whether they are investments in real estate that could further create a bubble in this market or whether they are long-term investments primarily focused on education, new technologies, research, and development. The latter increases the competitiveness of the economy, which is the basis for export-based growth, ultimately leading to an increase in the standard of living for citizens. The state should clearly send a message of preference for the latter investments through its strategy. The absence of such a strategic orientation could ultimately result in an unfavorable investment structure and increased debt burden. Finally, the fourth benefit relates to the elimination of exchange rate risk for all debtors in euros and the inability to plan costs due to exchange rate fluctuations, and thus monthly annuities.

COSTS FOR BUSINESSES

Regarding direct costs for most businesses, they relate to the costs of adjusting price lists and information systems, conversion, and dual price display, employee training, and similar expenses. The largest direct cost will be felt by exchange offices and banks in the form of lost income from currency conversion. However, banks will also feel certain direct regulatory relief, which will allow them more free capital, as well as long-term and indirect improvement of the credit portfolio, which should be a result of stable economic growth. Aggregately, businesses will profit from the introduction of the euro already in the first year primarily due to cost benefits in the form of reduced transaction costs and the elimination of currency risk, and lower costs also mean higher profits. In addition, businesses will feel benefits in the longer term due to the expected increase in economic activity and lower interest rates, which should also result in higher profits. Thus, the benefits for businesses will be expressed in both the short and long term. It should be clearly stated that this will not apply to all businesses, as some of them may be exposed to greater competition after the introduction of the euro and may lose part of their market.

COSTS FOR CITIZENS

As for citizens, they will benefit in the short term from the elimination of transaction costs, easier price comparability, and the elimination of currency risk, while the loss will relate to higher prices. In addition, citizens should feel an increase in their standard of living as a result of higher economic growth rates, but this benefit is indirect and of a long-term nature, and it also depends on decision-makers in other policies in Croatia. Namely, it should be understood that entering the eurozone does not imply putting the economy on “autopilot” that will automatically lead us to higher growth rates. The introduction of the euro represents a springboard that should enable faster real convergence of Croatia towards the EU average, primarily through enabling export-based growth. However, domestic policymakers still need to work on structural reforms and strengthening institutional quality, which has been proven to affect economic growth. Therefore, to achieve resilient long-term growth that will allow Croatia to converge with eurozone countries, good governance and continuous efforts and work to improve institutional quality are necessary.

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