Ana Šabić : Euro-Step to a Completed EU Integration

European Commission will prepare a Convergence Report in the spring, where they will give their estimate on whether Croatia and other EU members who still haven’t adopted the euro meet the convergence criteria.

Croatia has initiated the process of introducing the euro motivated by significant benefits it will gain from joining the eurozone, Ana Sabic, Director of the European Relations Department at the Croatian National Bank, told Diplomacy & Commerce. The economic benefits of the introduction of euro are significant and lasting, unlike the costs, which are small and one-off.

1.Prime Minister Andrej Plenkovic, together with Deputy Prime Minister and Minister of Finance, Minister of Economy and Sustainable Development, and HNB Governor Mr Vujcic, presented a draft act on introducing the euro as the official currency in the Republic of Croatia and guidelines for adjusting the economy in the process of replacing the Croatian kuna with the euro. What specifically does this law provide for?
— The recently presented draft act on the euro as the official currency in the Republic of Croatia contains main determinants for the transition to a new currency, such as the rules for converting and rounding prices and for the conversion of deposits, loans and securities, the rules related to the two-week period in which the kuna and euro will be in circulation at the same time, and the method and deadlines for cash exchange to be carried out free of charge and by applying a fixed conversion rate. The draft act also provides for a series of measures aimed at consumer protection, such as the obligation of dual display of prices and other monetary statements of value to be applied four months prior to and 12 months after the euro introduction date. This umbrella law provides a legal framework for transition to the new currency and ensures legal certainty. It is worth noting that, in addition to the principle of consumer protection, it also contains the principle of continuity of contracts and other legal instruments, which means that existing contracts and other legal instruments stating the kuna are still valid.

2.Which guidelines are most important to the citizens?
— We should point out several important elements from the citizens’ perspective. When it comes to exchange of cash, it’s important to note that the citizens will be able to exchange their kuna for euro in branch offices of banks, Fina and Croatian Post, free of charge and at the fixed conversion rate. Exchange will be possible over the course of 12 months from the date of introduction of euro, after which kuna can be exchanged for euro at the Croatian National Bank, where banknotes have no time limit, while coins must be replaced within three years from the date of the introduction of euro. This will also be possible free of charge and at the fixed conversion rate. Citizens will not have to worry about deposits and loans in banks because their conversion into euros will be done automatically on the day of the introduction of euro, free of charge and at the fixed conversion rate. The loan and deposit account contracts will continue to be valid. For kuna-denominated loans, the principal will be converted into euros at the fixed conversion rate. If it is a loan agreement with a fixed interest rate, it remains unchanged. On the other hand, if a loan is contracted at a variable interest rate, the interest rate remains variable. Any necessary adjustments will be made in a way that will ensure that the total interest rate paid by the citizen must not increase. In other words, after the conversion, interest rate on the loan will be equal to or lower than that paid by the citizen in the period before the introduction of the euro. All these and other important information and guidelines will be included in the activities aimed at informing citizens about all practical aspects of the introduction of the euro, which will be intensified in the months before the introduction of the euro.

3. Which guidelines are most important for the economy?
— Adjustment of the economy to the euro changeover involves a series of activities that need to be carried out in time for businesses to be ready to adopt the euro. Some of these activities include preparations for dual display of prices, timely adjustment of information systems to operate in the new currency, timely supply of euro cash and training for handling euro cash, as well as preparations for operations during the dual circulation period. These obligations for businesses, including the relevant deadlines, will be regulated by the legal framework for the introduction of the euro. In addition, the Coordination Committee for Adjustment of Economy and Consumer Protection, chaired by the Ministry of the Economy and Sustainable Development and in whose operations representatives of the business community actively participate, has developed Guidelines for the adjustment of the economy in the process of replacing the Croatian kuna with the euro. The aim of this document is to inform businesses in a timely manner about the preparations that need to be made in the process of introducing the euro as the national currency.

4- Whether Croatia will enter the eurozone, we will know with certainty in the summer when this decision should be made. What that decision depends on and do you expect any surprises?
— European Commission will prepare a Convergence Report in the spring, where they will give their estimate on whether Croatia and other EU members who still haven’t adopted the euro meet the convergence criteria. They will assess the compliance with the criteria relating to price stability, exchange rate stability, sustainability of public finances and convergence of long-term interest rates. In the event of a positive assessment by the European Commission, the Council of the European Union will decide then, in July, on the introduction of euro and set a fixed conversion rate. Croatia has been de facto meeting the convergence criteria since 2016. Despite the stable exchange rate of the kuna against the euro, it could not meet the criterion of exchange rate stability because it has only been participating in the exchange rate mechanism (ERM II) since July 2020, and it has to be a part of it for at least two years. When it comes to the criterion of price stability where – due to the manner in which the benchmark is determined and due to the increase in inflation that we are witnessing  in Croatia and globally – there is some uncertainty. However, it is worth noting that Croatia has met this condition in all the previous Convergence Reports. Also, so far the benchmark for the inflation criterion has never been set at a level lower than the average inflation rate in the eurozone. Given that inflation developments in Croatia are generally highly in line with developments in the eurozone, which also applies to the recent period when both the eurozone and Croatia are experiencing somewhat more pronounced inflationary pressures, it is likely that Croatia will manage to meet the inflation criterion.

5. We are also facing a number of logistic preparations for HNB, but also for the others – the banking sector, enterprises. What exactly do we still have to do?
— Switching to a new currency is a complex and demanding task, and since the beginning of last year, efforts have been made to implement the National Euro Changeover Plan. This document foresaw a series of logistical, legal and administrative adjustment activities that require the involvement of a large number of stakeholders from the public and private sectors. These include legislative adjustments, preparations for the cash changeover, financial sector adjustments, general government adjustments, preparation of the economy, consumer protection and information. Over the coming months, a number of activities which were previously defined within the relevant coordination committees will be carried out. Some of them are campaigns for accession of businesses to the Code of Ethics, which will oblige retailers and other businesses to correctly recalculate and not use the moment of euro changeover to raise prices, then adjustment of information systems, both in private and public sectors, for functioning in the new currency and for adjusting the official statistics. I would like to mention just a few of the main adaptation activities that lie ahead. It is certainly a logistically demanding job to exchange kuna cash for euro cash, which involves procuring the required amount of euro banknotes and producing euro coins, then withdrawing kuna banknotes and coins from circulation and putting euro banknotes and coins
into circulation. In that sense, an important part of the work that has already been done, specifically the recently adopted decision on the design of the Croatian side of euro coins.

6. The citizens are concerned the most about the inflation and price growth after the euro changeover. However, there are other unknown aspects, for example, what happens to the foreign currency accounts of citizens, will the money be transferred to normal (current) accounts?
— We believe that after the euro changeover, citizens will realize that this fear was unjustified. Namely, we expect the price growth due to euro changeover to be insignificant; specifically, the effect of the introduction of euro on the inflation rate should be lower than 0.3 percentage points. We expect that the use of mechanisms to prevent price increases due to the introduction of the euro, which proved to be effective in the new Member States that have already adopted the euro, will achieve the goal of consumer protection in this segment. When it comes to other unknowns that might concern the citizens, there are fewer and fewer of them, especially now that all relevant issues are defined in the draft act on the introduction of euro presented to the public. For example, related to the situation where citizens today have kuna and foreign currency (euro) accounts, on the date of the euro changeover foreign currency current account in euros will become a current account in local currency because the euro will become the official currency in Croatia. The legal solution will enable citizens, if they had a kuna current account and a foreign currency account, euro-denominated, at the same bank in the period prior to the euro changeover, after the euro changeover they will be able to close one of these accounts without charge and to transfer the funds recorded in that account to another account. The euro changeover will not cause any changes in foreign currency accounts denominated in other currencies (e.g. Swiss francs, US
dollars, etc.).

7. There are many votes against the introduction of euro, but there are many more in favor. Croatia has committed itself to this in its accession treaty with the EU. In your opinion, what are the advantages and disadvantages of the euro changeover in Croatia?
— In short, the greatest benefit or the Croatian economy is undoubtedly the elimination of currency risk to which many citizens and companies, as well as the governement itself, are now exposed. The importance of eliminating this risk is evidenced by the fact that the total gross foreign currency debt of all domestic sectors, including the debt denominated in kuna with a currency clause, amounts to HRK 533 billion (almost 130% of GDP). More than 90% of that debt is tied to euro, which means that a stronger depreciation of the kuna against the euro would significantly increase the debt repayment burden for domestic debtors. With the introduction of euro, currency risk disappears, and debt denominated in euros becomes debt in domestic currency. Furthermore, after the euro changeover, there will be no need for transactions for the exchange of kuna for euros and vice versa, and transaction costs will be significantly reduced. This will benefit companies that participate intensively in international trade, but also the citizens who travel to eurozone member- countries. Eliminating the costs of foreign exchange operations will also benefit the tourism sector. Also, interest rates will be lower than they would be if Croatia remained outside the eurozone. When a country adopts the euro, its vulnerability decreases and its credit rating increases, which provides it with more favourable borrowing conditions in international financial markets. An additional reason is the fact that the cost of bank regulation will be significantly reduced with the introduction of euro. Thanks to lower costs, banks will be able to offer loans at lower interest rates. Finally, after the euro changeover, Croatia will be more resilient to financial crises. Namely, with the introduction of euro, banks and countries will gain access to additional sources of financing from the European Central Bank, and the European Stability Mechanism, which will make it easier for Croatia to deal with financial and economic crises in the future. When it comes to costs, it is worth noting that for Croatia, the loss of independent monetary policy will not be a significant cost, due to the fact that autonomy is already effectively limited, and also due to the fact that business cycles of Croatia and the Eurozone are highly harmonized and the common monetary policy of the European Central Bank will suit Croatia. Regarding the potential effect of the euro changeover on price increase, based on the experience of other countries, it is expected that in Croatia, the effect of the introduction of euro on consumer prices will be one-off and very weak. Finally, there are the one-off costs of adapting the private and public sectors to the euro. These include costs related to the purchase of banknotes and the production of euro coins, the withdrawal of kuna from circulation and the release of euro banknotes and coins, the adjustment of ATMs and other adjustments in the financial sector, IT and administrative adjustments in the government and private sector and activities for providing information to citizens and businesses. Finally, among the costs is the one-off payment into the capital of the relevant institutions of the European Union.