Croatia entered the euro area with higher prices

On January 1, 2023, Croatia became the 20th country of the euro area – this is the first expansion of the currency bloc since 2015 (when Lithuania joined it). Formally, the country’s entry into the currency bloc was approved in July last year (preparation for this has been carried out since 2013, when the country joined the EU), at the same time the exchange rate was set for the national currency – kuna (7.54 kuna per euro, in the last ten years it fluctuated in the range of 7.3–7.7 kunas per euro).

So far, the most visible effect of joining the eurozone has been to raise the prices of some goods and services — the government has already promised to impose fines, eliminate energy subsidies and raise taxes if sellers do not lower prices. Retailer associations, however, attribute their growth to increased costs: last year, the indicator increased by 10.8% (on average, inflation rose by 9.2% in the euro area countries). The effect of a one-time price increase is typical when countries join currency or trading blocs; in Lithuania, the ECB estimated it at 0.04–0.11 percentage points of inflation.

The main positive effect of the transition to the euro should be the elimination of foreign exchange risk against the backdrop of the already established high “eurosization” of the country’s economy: according to the ECB, in 2022 the share of deposits in euros was about 45%, loans – more than 50%, issued government bonds – 70% . For Bulgaria, Romania, Hungary, the Czech Republic and Poland – the EU countries that keep their own currencies – these shares are significantly lower (see graph). The head of the National Bank of Croatia, Boris Vuychich, also explained the need to join the euro area by the fact that Croatia has the highest currency risks, and therefore it can get the greatest advantage from joining the currency bloc.

The elimination of risk is expected to reduce the cost of financing for Croatian borrowers. However, as the ECB points out, in Croatia and earlier, the main role in the country’s financial sector was played by banks from other euro area countries – this distinguishes the country from Sweden and Denmark, which also did not switch to the euro (in Denmark, 46.8% of citizens opposed the referendum) , but in these countries a significant share of the banking sector is occupied by national banks, and borrowers will not benefit from joining the euro area, since the rates of the Central Bank of Sweden are almost identical to those of the ECB, the rates of the Central Bank of Denmark are lower than those of the ECB.

Tatyana Edovina