The Replacement of the Kuna with the Euro – Neither Euphoria nor Resentment

The historic day has arrived. The Council for Economic and Financial Affairs of the European Union (Ecofin) approved on Tuesday three final legal acts necessary for Croatia to adopt the euro on January 1, 2023. It was decided that the conversion of the kuna to the euro will be carried out at a central parity of 1 euro = 7.5345 kuna.

Historic days and events should evoke some emotion. But, here, I apologize, there is none! Neither euphoria nor resentment. Neither happiness nor sadness. Neither hope nor despair. A flat line.

One of the reasons for the indifference towards the replacement of the kuna with the euro is the dozens and dozens of columns written from 1993 until a few years ago warning how the exchange rate policy established on October 3, 1993, by determining the overvalued value of the then Croatian dinar against the German mark, and later the kuna against the euro, harmed Croatian industry and exports, while aiding imports and state indebtedness. The policy of using the kuna as an anchor of stability (rather than for development) has stubbornly persisted. At one point, even Croatian exporters resignedly threw their spears into the thorns with the message: ‘Just introduce that euro. Since you are not using the national currency for development, at least remove the currency risk.’

Obsession with Stability

It is interesting, and also absurd, that the strictly controlled exchange rate of the kuna, as the most far-reaching form of state intervention in independent Croatia, was introduced and later defended by declared advocates of the free market. They wrote hundreds of papers proving that blatant state intervention (maintaining the kuna exchange rate within set limits) does not affect the free market. Many countries have stimulated faster development of their national economies through both exchange rate and broader monetary policies. Governments in Croatia over the last quarter-century have not had a formulated idea of what kind of economy they want. Thus, the team from the monetary state authority actually ‘did not want to interfere’.

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Even when the monetary authority in 2011 offered the government a solution on how to stop the recession by printing several billion kunas and in agreement with the forty largest entrepreneurs, the Ban’s Court cut the attempt with blackmail within 24 hours. After that, the central bank, instead of focusing on development, settled for the role of guardian of macroeconomic stability. And here we are, on the EU member tables, we are in a stable second-to-last place. And so, here comes the euro. And just at the moment when it is recording disgraceful records against the dollar or the Swiss franc. The crisis caused by the war in Ukraine on the Old Continent, expressed, among other things, in long-unrecorded inflation rates, is increasingly weakening the euro. Now we all have to adjust our heads differently. The exchange rate at which the kuna will be exchanged for euros from January 1 is no longer important. We should remember this Tuesday when the kuna on its way out was fixed to the euro and note the euro/dollar exchange rate. Thus, on July 12, 2022, one euro was worth 1.0098 US dollars.

All those who have been fleeing from the kuna to the euro for years can now try to protect themselves from the weakening euro by purchasing dollars, ‘Swiss francs’, yen, or some fourth currency. When it comes to exporters, who are on average seventy percent oriented towards the European Union market, it is now truly becoming their internal market.

Still for EU Values

Unfortunately, the messages from the state leadership regarding the fixing of the kuna to the euro again lack a developmental tone. It used to be said that the kuna was our guarantee of stability. Now it is said that the euro will be ‘security in a crisis’. So who can be comforted, well.

As much as the public fears additional inflation due to the conversion of the kuna to the euro, it should accept the argument that this is still a one-time occurrence. It should also be accepted that ‘the euro is a key value of European unity’. In times when the always dubious American democracy is clashing with Russian (and Chinese) autocracy over European backs, European values, however chaotic their alignment may be, somehow seem the least unacceptable. Therefore, Croatia’s accession as the twentieth country to introduce the euro within the EU does have significance. It will be interesting to follow the future coordination of the European Commission and the European Central Bank. In the short term, in alleviating the crisis that is spreading across Europe, and in the medium term in the coordinated development policies of EU member states, primarily those that have adopted the euro.

For societies, countries, and their elites that fail to devise a serious vision of their future, relinquishing economic levers of independence to EU institutions is a logical move. This includes the replacement of the national currency with the euro.