Entry into the Eurozone – No Matter How Hard We Try, We Can No Longer Go Bankrupt

Due to the introduction of the euro in 2023, rating agencies have rewarded Croatia for the first time in history with an investment credit rating. It was sufficient for the confirmation from the Council of Europe that we will abolish the kuna in six months for Croatian bonds to transform from insecure to investment-attractive, making Croatia more credible in financial markets. Lower risk, stability, cheaper borrowing, we have adorned ourselves with all these epithets thanks to the magic word eurozone, whose shelter should protect us from potential future financial and economic shocks. What kind of assistance can we expect in the event of a new crisis due to the adoption of the euro as a payment currency?

– Small countries like Croatia become more resilient to crises by entering the eurozone because it eliminates the risk of their currency being targeted by speculative attacks, and in addition, the state gains access to additional sources of financing, including monetary operations of the European Central Bank, which are available only to member states that have adopted the euro – say the Croatian Banking Association.

By embracing the euro, the Croatian National Bank will not have to, as it has many times before, react in the foreign exchange market to save the kuna from depreciation pressures. Namely, each time Croatia was hit by a crisis, some citizens and investors, fearing that the kuna could weaken significantly, converted their kuna assets into euros, thereby producing a weakening effect on the kuna. And then the CNB would intervene in the foreign exchange market to maintain exchange rate stability.

– The CNB has successfully preserved the stability of the kuna exchange rate every time despite strong depreciation pressures, including during two recent severe crises. However, only with the introduction of the euro will currency stability in Croatia be permanently guaranteed – citizens and other investors will have no reason to fear exchange rate depreciation because the exchange rate will be irrevocably fixed, and the CNB will not be forced to spend international reserves to keep the exchange rate stable – they say at the CNB.

Rescue Under the Umbrella of the Eurozone

And for serious financial problems, in case of difficulties in repaying public debt, there is the European Stability Mechanism. Although we should hope that we will never need to use the benefits of the ESM, 'European IMF', it is good to know that in case of greater financial difficulties we can count on long-term and cheap placements from that source. Just in case.

The most famous example of the ESM’s operation was certainly the Greek debt crisis. However, even that prodigal son of Europe, thanks to the ESM, stabilized its finances after 12 years. Namely, Greece will finally no longer be under enhanced supervision from Europe in a month.

At the moment when Greece was on the brink of bankruptcy, during the last major economic crisis, Croatia was not in the best position either. Eleven years ago, Croatia had a 30 percent chance of bankruptcy and ranked high at 12th place on the list of infamous record holders according to that criterion. Today, Croatia’s macroeconomic fundamentals are much more favorable, and there is a low probability that we will need ESM assistance in the near future. However, it is good to know that thanks to the embrace of the European Union, our chances of bankruptcy have been reduced to a minimum and that in the event of an economic crisis or the worst-case scenario – inability to repay debts, we will be saved by the umbrella of the eurozone. 

Read more about what we can count on in the event of an economic crisis or the worst-case scenario – inability to repay debts, in the next printed or digital edition of Lider.