The Fight Against Inflation: Croatia Sees Salvation in the Eurozone, Regional Countries Believe in the Stability of Domestic Currencies

'Our great fortune is that we find ourselves here where we are' are the words of the Deputy Governor of the Croatian National Bank Michaela Faulanda regarding Croatia’s entry into the euro area during the worst inflation in the last few decades.

Fauland, along with the governors of the central banks of Montenegro, Albania, Slovenia, North Macedonia, and Bosnia and Herzegovina, as well as the chairwoman of the Executive Board of AIK Bank from Serbia, participated in a panel titled 'Monetary Policy in an Inflationary Environment'.

On the second and final day of the ninth summit of finance ministers, governors, and directors of tax administrations in Montenegro, representatives of the countries discussed the current situation in the Western Balkans, what they have done so far regarding mitigating inflationary shocks, and what monetary policy they plan for the future.

While everyone expects that inflation will continue its upward trajectory until the end of 2023, there are high expectations for a decline in inflation and a return to some 'old normal' that everyone briefly felt at the end of last year in the year after, 2024.

Fauland described inflation as an extremely severe disease, but he stated that Croatia finds itself in a fortunate situation considering that, just a few months after the declaration of the pandemic, in July 2020, it entered the European Exchange Rate Mechanism (ERM II), which was a significant step forward in the process of joining the eurozone, and that the Croatian National Bank thereby established close cooperation with the European Central Bank.

Into the Eurozone Without Worry

The Deputy Governor of the Croatian National Bank also reminded that at the beginning of the corona crisis, the foreign exchange markets in Croatia experienced tremendous movements, but that by the time of entering ERM II, the situation calmed down, so Croatia can today say without any problems that there are no shocks in the foreign exchange markets and that we are entering the euro area without any 'tremors in the foreign exchange markets'.

The panelists also touched on the very current topic of interest rates. An interesting fact was presented by the Governor of the Bank of Albania Gent Sejko, stating that 'Albania has lower inflation than other countries in the Western Balkans' and that, as he said, because the government has not raised energy prices. However, the Albanian governor also mentioned that measures to increase prices will likely have to be introduced soon, but for now, they have been trying to 'tame' inflation without raising prices. According to data presented by state officials during these two days of the summit, inflation in Albania currently stands at 7.5 percent, while the goal is to reduce that figure to three percent by 2024.

– We have good examples from past crises, so we are cautious and believe that our fight against inflation will be successful – said Sejko.

Optimistic and Cautious

And while all representatives of countries that are not part of the euro area stated that they plan to remain so as long as local currencies are stable, the governors also touched on other countries, commenting on the current situation during the 'crisis of all crises'.

– The whole world is in a delicate situation; you have global growth slowing down, technical recession is pervasive, and two years ago there was also the COVID crisis that left a mark on public finances – said Fauland.

According to Fauland, fiscal space has been lost in the world, public debt has 'gone up' by more than 15 points, and central banks in these circumstances cannot 'stand by and watch' because once inflation exceeds about five percent, it starts to feed itself, so it is crucial to raise interest rates.

However, the conclusion of the panel could still be 'optimistic and cautious' because as long as monetary policy makers like to say, the whole situation will calm down in a few months, caution in setting monetary and fiscal policy must be present because, according to the interlocutors, fiscal policy must not be 'too loose' as interest rates are significantly influenced by it.

And while existing measures to combat inflation and budget formation were discussed, plans for the future remain variable because in times of economic uncertainty, rampant inflation, and energy supply problems, everyone hopes for a 'better tomorrow'.