Dombrovskis: With the euro, prices can only rise slightly

With Croatia’s entry into the eurozone, prices may rise, but only once and slightly, said European Commission Vice-President Valdis Dombrovskis in an interview with a group of Croatian journalists in Brussels.

The benefits of adopting the euro are numerous, while the drawbacks are few, emphasized Dombrovskis, who is responsible for the common currency at the EC.

Among the ‘negatives’, he cites the possible one-time effect of introducing a new currency on price increases.

“The experience of countries that recently joined the euro shows that there is a one-time effect on price increases ranging from 0.1 to 0.3 percentage points,” says Dombrovskis, adding immediately: “But in the medium term, this is offset by lower currency conversion costs and lower interest rates.”

He emphasizes that efforts should be made to change the public perception that the introduction of the euro leads to significant price increases.

“Therefore, it is good that Croatia is already paying attention to this through dual pricing and through a campaign for the fair introduction of the euro, so that businesses do not use the currency change as an excuse to raise prices,” said Dombrovskis.

Croatia will therefore have multiple benefits from membership in the euro area, which, among other things, eliminates conversion costs, contributes to lower borrowing costs, strengthens financial markets and the stability of the financial system, and ensures greater price transparency in member countries.

“All of this is extremely important for Croatia as a country with a very large and important tourism sector. We can say that joining the euro and Schengen gives a double boost to this sector, and the euro as the second largest currency provides protection against exchange rate shocks.

Croatia at the ‘euro table’

He pointed out that joining the euro area brings concrete benefits for citizens, businesses, and all countries that use the common currency.

The euro also represents an “anchor of stability” in the currently very complicated geopolitical and economic situation, he asserted.

“The expansion of the euro area is good for Croatia, but it is also good news for the euro area and for the EU as a whole, especially in this complicated geopolitical context,” says Dombrovskis, a former Latvian prime minister.

His country met the criteria for the euro during his term and joined the eurozone on January 1, 2014.

From now on, Croatia will be able to participate in the creation of European monetary policy. The Croatian National Bank (HNB) enters the Eurosystem, which consists of the European Central Bank (ECB) and the national central banks of those countries that have adopted the euro.

The Croatian Minister of Finance, on the other hand, becomes part of the Eurogroup, which consists of the ministers of the euro area member states, and the governor of the HNB enters the ECB’s governing council.

Inflation has nothing to do with the euro

High inflation rates in the eurozone and elsewhere in the world coincide with Croatia’s entry into the euro area, but there is no connection between the two, emphasizes Dombrovskis.

“We know what the main drivers of price increases are – high energy prices and disruptions in supply chains – which are a result of Russian aggression against Ukraine. These are factors that are not related to the euro area,” he said.

It has happened that record-high inflation in Croatia overlaps with joining the euro area, but there is no causal link, and this needs to be explained to the Croatian public, notes the EC Vice-President.

Croatia is growing faster than the Union

Speaking about economic expectations for this year and the next two years, Dombrovskis says that the Croatian economy will grow faster than the EU average.

According to the European Commission’s autumn economic forecasts, GDP growth of 3.3 percent is expected in the EU27 this year, and 3.2 percent in the euro area, while Croatia is expected to have a growth of six percent.

Next year, the economy in the euro area and in the EU27 is expected to grow by 0.3 percent, while in Croatia, it is expected to grow by one percent.

In 2024, growth of 1.6 percent is projected in the EU27, 1.5 percent in the euro area, and 1.7 percent in Croatia.

“Thus, the Croatian economy will grow above the EU and euro area averages, and regarding inflation, there are signs that it has already peaked, so we expect it to gradually decline, and this trend is also present in the euro area and in Croatia,” said Dombrovskis.

Energy crisis

Dombrovskis claims that certain improvements in the energy crisis are already visible thanks to a series of proactive EU measures.

He stated that the Commission is working on a structural reform to separate the price of gas from the price of electricity and that measures have been agreed to reduce gas and electricity demand during peak loads, and that the development of renewable energy sources is being accelerated.

– We expect that all these moves will help stabilize the situation and lower prices – says Dombrovskis, but warns about the next winter.

– This winter we can say that we have enough natural gas supplies, the storage facilities are full, but they are largely filled with Russian gas, and that will not be the case next year – he added.

In the meantime, says the EC Vice-President, ‘we need to work on alternative routes to ensure that the storage facilities are full before next winter’.

Measures are not well-targeted

Dombrovskis says that the measures that Croatia and all other EU member states have taken to support the population and the economy in dealing with high energy prices are not well-targeted.

– We conducted an analysis in the EU, and the conclusion is that 70 percent of these supports are not well-targeted – said Dombrovskis.

He cited three reasons why the Commission insists that support measures be better targeted towards those who need them most.

The first is that poorly targeted measures are fiscally expensive and do not provide sufficient protection to those who need it most.

The second is that they do not provide an incentive for energy savings, and the third – they lead to situations where monetary and fiscal policy act contradictorily. He cites the example of how the ECB is working to reduce inflation with monetary policy tools, while at the same time large fiscal incentives are being sought that could further fuel inflation.

Dombrovskis reminds that the Commission has recommended as an effective measure a system in which energy consumption up to a certain level would be subsidized for citizens and businesses that need it most, and above that level, they would pay at market prices. This, he claims, creates an incentive for energy savings.

– If this is appropriately calibrated for each country, such a solution can help better target supports as it encourages reduced consumption, is fiscally more sustainable, and does not fuel inflation – said Dombrovskis.