The euro was not the cause of inflation, and joining the eurozone provides us with a strong lever for economic development – these are the key points from the speech of Prime Minister Andrej Plenković at the conference ‘One Year with the Euro in Croatia’ held on Tuesday at the Croatian National Bank (HNB). As the Prime Minister emphasized, the decision for Croatia to join the eurozone was made by his first government in January 2017, and the process began under less than favorable circumstances.
The Shortest in the Waiting Room
– The largest company in the country, Agrokor, collapsed, then problems arose in shipyards, and then the pandemic came, which caused the largest state intervention ever – Plenković listed.
Despite this, the foundation of this project has been preserved, which is political stability. Confirmation of this is that Croatia was admitted to the ERM II exchange rate mechanism – the ‘waiting room for the eurozone’ – just five days after the parliamentary elections held in July 2020. Croatia spent only 906 days in the exchange rate mechanism, the shortest of all countries that have gone through this process. The importance of political stability in this process is also demonstrated by the example of Bulgaria, which started its journey to the eurozone at the same time as Croatia, but Bulgarians still do not have euros in their wallets.
– In two years, Bulgaria held five elections – the Prime Minister emphasized.
In public, the introduction of the euro is most often associated with rising inflation, and Plenković claims that according to European Commission data, the introduction of the euro contributed to inflation in Croatia by only 0.4 percentage points. This is, as the Prime Minister stated, a small and one-time inflationary pressure. Otherwise, regarding price growth, from 2016 to the end of 2023, inflation has increased by a total of 28.6 percent. At the same time, pensions have increased by 56 percent, average wages by 61 percent, and the minimum wage by 103 percent.
Plenković divided the ‘era of inflation’ into three periods. The first is from 2016 to mid-2021 when the cumulative rate increased by 5.3 percent. In the next 15 months, until October 2022, inflation jumped by 15.6 percent, primarily due to a huge spike in energy prices. Finally, from October 2022 to December 2023, inflation increased by 5.1 percent. Regarding the euro as a development lever, the Prime Minister emphasized that foreign consultants advising investors highlight that Croatia is a member of the eurozone and Schengen and has a decent corporate tax rate.
– For this year, the nominal GDP value will be 75 billion euros, which is almost 20,000 euros per capita. For comparison, in 2016, GDP per capita was at 12 thousand euros – said Plenković.
For the First Time in History
The Governor of HNB, Boris Vujčić, in his address emphasized that Croatia introduced the euro at a time of the highest inflation in Europe since the 1970s.
– No country has introduced the euro in such times – Vujčić emphasized.
Despite this, Eurostat data shows that the introduction of the euro increased inflation in Croatia by only 0.2 percentage points, which, as the governor assessed, is within the expected limits.
– Inflation in Croatia was lower than in EU countries that do not have the euro – Vujčić emphasized.
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On the other hand, the benefits of entering the eurozone for the financial system are numerous. The first and most important is the elimination of currency risk, followed by a decrease in borrowing costs.
– For the first time in our history, our interest rates are comparable to those of the eurozone, and even lower. Thus, the average interest rate on housing loans in Croatia is at 3.64 percent, in Germany at 4.22 percent, while the eurozone average is four percent. Likewise, interest rates on loans to companies above one million euros in Croatia are 4.74 percent, in Germany 6.27 percent, and in the eurozone 5.65 percent – said Vujčić. For comparison, Hungarian companies pay 13.86 percent.
That the euro has made Croatia stronger was also assessed by Philip Lane, a member of the Executive Board of the European Central Bank. According to him, Croatia’s experience in introducing the euro is a good example for other countries wishing to join. Lane emphasized the importance of the euro as a currency with which one can trade with the rest of the world and enter into financial transactions. However, to maintain its stability, it is necessary to maintain responsible fiscal policy, he said.
The conference also featured a panel discussion on the topic ‘Has the euro met expectations’ moderated by Vice Governor Michael Faulend. From the banks’ perspective, entering the eurozone has certainly succeeded in this regard. According to Dinko Lucić, CEO of Privredna banka Zagreb (PBZ), during the kuna era, banks had an open foreign exchange position, which incurred costs.
– The reduction of the mandatory reserve released four billion euros into the system, which increased credit potential – Lucić recalled.
According to him, this enabled cheap lending in Croatia. Namely, in 2020, interest rates in Croatia were at the level of those in Hungary and the Czech Republic. Today, interest rates in Hungary are three times higher than ours, and in the Czech Republic, two times higher, emphasized the head of PBZ.
– The quality of the introduction of the euro in Croatia was extremely high – Lucić believes.
The Question of Perception
The concrete benefits of the euro have also been felt in the real sector. Before the introduction of the euro, the company HF Group, being export-oriented, lost 200 thousand euros annually due to exchange rate differences, said director Zoran Uranjek.
– In 10 years, exchange rate differences cost us two million euros – added Uranjek.
When asked whether traders increased prices using the transition to the new currency, Zoran Mitreski, CEO of Konzum, said that this retail chain did not raise prices on its shelves due to the euro.
Regarding the perception that prices here are higher than in neighboring countries, Mitreski emphasized that traders are last in the price formation chain.
– Moreover, VAT is not the same in all countries. There are also logistical costs, which are quite high in Croatia, and we have extremely high seasonality. In principle, some products are cheaper here, while others are not – stated the head of Konzum.
This is confirmed by the fact that increased traffic is noticed in Konzum’s border stores, such as the one in Ilok.
When asked why there is a perception that the euro has increased prices, part of the explanation was offered by Andrijana Mušura Gabor, a senior lecturer and behavioral scientist at the Zagreb School of Economics and Management. In the definition of perception, the key word is the interpretation of facts, she emphasized.
– In times of inflation, there is also ‘confusion about prices’. Asymmetrical perception of value also has an impact when we are more inclined to spend in euros due to the lower nominal amount of the price – said Mušura Gabor.
In her opinion, abolishing dual price display will accelerate the adaptation to the euro.
