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Croatia will be the 20th member of the euro from January 2023. Approval of entry into the country was completed by European Union on the 12th. The country then has the next few months to prepare for the conversion which will have the conversion rate of one euro for 7.53450 Croatian kunas on January 1st.
Among the advantages and disadvantages of this change, the country should lose autonomy in its economic policy and gain the stability and credibility of one of the most important currencies in the world financial system. For the euro, receiving another country is to reinforce the currency’s importance in an important geopolitical scenario.
Advantages: controls inflation and encourages tourism
Despite the current devaluation of the euro due to gas shortages, the war in Ukraine and the global economic crisis, the euro is still good business, as economist and internationalist Igor Lucena concludes. “The trend now is for European exports to expand,” he points out.
Furthermore, in the last 20 years, the euro has been the second most traded currency and the second most used as an international reserve medium. “Croatia becoming the 20th country to join the currency means that the euro remains attractive, resilient and successful,” emphasizes Lucena.
Countries such as Italy, Portugal and Spain, which had structural inflation, when entering the euro zone had a historic retraction of inflation indices.
“Eurozone countries tend to have a convergence of inflation rates, even if they are more long-term processes”, explains Marcelo Curado, professor of Economics at the Federal University of Paraná (UFPR).
Furthermore, joining the eurozone contributes to the tourism sector, on which the country is dependent and which is growing in the region. “For a small economy like Croatia, which depends on tourism and has seen the tourist flow grow, it can be quite beneficial. It will facilitate the movement of tourists to the country”, points out the professor.
Disadvantages: prevents autonomy
To gain this stability from the euro, however, Croatia gives up its autonomy in economic policy. “When the country has a very low level of economic activity, one way is to reduce the interest rate, to increase this activity. But when you are in a monetary community you cannot do that. The European Central Bank is delegated to execute the monetary policy, so you become more rigid and lose economic policy instruments”, points out Curado.
Also according to the professor, the biggest risk for Croatia within the euro would be in the face of a large appreciation of the currency, if local productivity did not grow at the same speed. “The country could be very expensive for the Croatians themselves”, he concludes.
As João Alfredo Nyegray, coordinator of Foreign Trade and professor of International Business and Geopolitics at Universidade Positivo, points out, a number of countries had problems entering the euro zone, as their economic-financial institutions were not strong enough to align with the European Union.
“It was the case of Greece, which, with the 2008 crisis, ended up causing a devaluation of the currency. The Greeks ended up being worse off than the other countries in the bloc at that time,” recalls Nyegray.
Alignment with the block
The professor reinforces that, after this episode, control and supervision mechanisms were created in the euro zone. In this way, Croatia’s approval reveals that the country complies with the standards set by its European neighbors of price and exchange rate stability, sound public finances and long-term interest rates.
“Today, Croatians have legislation and an economy compatible with European Union standards. It is a country with price stability and a controlled fiscal deficit”, he highlights.
Despite its small size, the Croatian economy is open and is ranked 79th on the Heritage Foundation’s Index of Economic Freedom (in the same ranking, Brazil ranks 143rd).
The southeastern European country has been independent from Yugoslavia since 1991 and joined the EU in 2013. Neighboring Slovenia, also a former Yugoslav Republic, adopted the euro in 2007.
With the entry of Croatia, of the 27 countries of the European Union, only Bulgaria, Poland, Romania, Hungary, the Czech Republic and Sweden have not adopted the currency.
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