Next week finally decision on Croatia’s entry into the euro area

Next week The Council for Economic and Financial Affairs (Ecofin) will adopt the last three legal acts regarding Croatia’s accession to the euro area from January 1, 2023.

The Council will adopt the decision on the acceptance of the euro in Croatia on Tuesday, followed by an amendment to the regulation that will add Croatia as the 20th member to the list of 19 euro area member states. The third legal act is a regulation that establishes the definitive conversion rate of the kuna to the euro. This will be the last meeting of Finance Minister Zdravko Marić, who resigned last week.

With this, Croatia will fulfill one of the two remaining strategic goals regarding deeper integration within the EU. The other is entry into the Schengen area, about which a decision is likely to be made in the fall, and Croatia could simultaneously enter both the euro area and Schengen in its tenth year of membership.

The key documents for the decision on entering the euro area were the convergence reports of the Commission and the European Central Bank (ECB), which were published on June 1.

They confirmed that Croatia meets all four nominal convergence criteria and that its legislation is fully aligned with the requirements of the EU Treaty and the Statute of the European System of Central Banks/European Central Bank.

With the decisions of Ecofin, Croatia joins the euro area, which today has more than 340 million inhabitants and is the second largest economy in the world, accounting for 15 percent of global GDP.

By joining the euro area, the Croatian National Bank (HNB) enters the Eurosystem, which consists of the ECB and the national central banks of those countries that have adopted the euro. The Croatian Finance Minister becomes part of the Eurogroup, which consists of the finance ministers of the euro area member states. Although it is an informal body, the role of the Eurogroup is very important. Its main task is to ensure good coordination of economic policies among the euro area member states and to promote conditions for stronger economic growth. The Eurogroup meets once a month, before each Ecofin meeting.

The ECB has a central role in the Eurosystem, is one of the official EU institutions, and is headquartered in Frankfurt am Main. The main body of the ECB is the Governing Council, which consists of six members of the Executive Board and the governors of the national central banks of the euro area countries, to which the governor of the HNB, Boris Vujčić, will join from January 1.

Structure of the Governing Council

The Governing Council sets guidelines and shapes the monetary policy of the euro area, which includes making decisions related to monetary objectives, key interest rates, and ensuring reserves in the Eurosystem, as well as establishing the guidelines necessary for the implementation of those decisions. The Governing Council meets twice a month at the ECB building in Frankfurt, and every six weeks evaluates economic and monetary developments and makes decisions on monetary policy.

The meetings of the Governing Council are prepared by the Executive Board of the ECB, which has six members, elected by the European Council, i.e., the heads of state or government of the EU member states. The current president of the Executive Board is Frenchwoman Christine Lagarde, and the vice president is Spaniard Luis de Guindos. The mandate of the members of the Executive Board lasts for eight years and cannot be renewed. Members are proposed by the euro area member states, which are then discussed by the finance ministers of the euro area. Proposed candidates must have sufficient professional experience in the monetary or banking field. When the finance ministers agree on a candidate, they send an official recommendation to the heads of state or government who make the final decision. Before the final decision, the European Parliament and the Governing Council of the ECB give their opinion on the candidate.

In decision-making within the Governing Council, a rotation system is applied in which the governors of the national central banks who vote alternate, meaning that not all governors vote at every meeting.

The rotation system was introduced so that the Governing Council could fulfill its role alongside the gradual increase in the number of euro area countries, and thus the number of members of the Governing Council. According to the EU Treaties, a rotation system must be introduced when the number of governors exceeds 18, which happened when Lithuania joined the euro area on January 1, 2015.

The governors of the five largest countries – Germany, France, Italy, Spain, and the Netherlands – together have four votes, meaning that each of them skips every fifth meeting. The other governors, of which there will be 15 with Croatia’s entry, share 11 votes, meaning that the Croatian governor will not vote in four out of 15 meetings. All six members of the Executive Board have permanent voting rights.

A governor who does not participate in voting at a meeting can participate and discuss at the Governing Council meeting. Although voting is provided for, the Governing Council strives to make all decisions by consensus.

Supply of euro banknotes and coins

Four months before the arrival of the euro, in early September, Croatia will begin mandatory dual pricing in kunas and euros, which is one of the key measures to protect consumers and prevent ‘fishing in troubled waters’ where currency exchange is used for unjustified price increases. The obligation of dual pricing will last for the entire following year.

The withdrawal of kunas and the introduction of euro banknotes and coins into circulation is a very complex operation as it will be necessary to withdraw more than 500 million kuna banknotes and more than 1.1 billion kuna and lipa coins in a very short time. At the same time, comparable quantities of euro banknotes and coins will need to be introduced into circulation.

In the first two weeks after entering the euro area, dual circulation will be in effect, allowing the use of both kunas and euros.

After that, in banks, kunas can be exchanged for euros free of charge in the first six months, and in the next six months for a fee. After 12 months from the introduction of the euro, cash can only be exchanged at the HNB. Coins can be exchanged for up to three years after the introduction of the euro, while banknotes can be exchanged permanently.

Four months before the introduction of the euro, banks, Fina, and the Croatian Post will need to be supplied with euro banknotes and coins. Stores and other businesses will also need to be timely supplied with cash so that they can carry out cash transactions in the new currency from day one.

The earlier supply of euro banknotes and coins differs. Banknotes are borrowed from the European Central Bank, while coins will be produced in Croatia, since, unlike banknotes that are the same in all countries, euro and cent coins display national symbols of member states on the reverse side.

All Croatian coins will have a chessboard background, and then on the two-euro coin, there will be a map of Croatia, kuna on one euro, Nikola Tesla on 50, 20, and 10 cents, while on 5, 2, and 1 cent coins, it will be written HR in Glagolitic.