Boris Vujčić, Governor of Croatian National Bank : Adoption of the Euro – for the Benefit of All

Croatia initiated the euro adoption process motivated by significant permanent benefits it will get by joining the Eurozone.

One of the criteria for the adoption of the euro is the price stability criterion. The inflation acceleration in 2021 was mainly influenced by the increase in energy prices, i.e. higher prices of crude oil and other energy materials on the global market, which are responsible for approximately half of the inflation in Croatia, and the situation is similar in other EU members as well, states NBS Governor Boris Vujčić for Diplomacy&Commerce.

  1. You stated that you don’t expect a particularly high inflation rate this year. What is your estimate
    regarding the inflation, and what is causing it? Are the factors affecting the inflation growth temporary or are they last longer?
    — With the increase in energy prices, inflation growth was also affected by the increase in food prices, which is tied to severe weather conditions that have led to rising prices of certain raw food products on global markets, as well as the rising commodity prices and disruptions in supply chains that have limited the availability of certain goods, such as cars. For now, it is estimated that
    the factors inciting the inflation are temporary, and that the elevated inflation rates are primarily the result of the opening of the economy, i.e. increase in demand for goods and services compared
    to the peak of the pandemic. If the prices of energy and commodities stabilize, which is what markets currently expect, inflation could slow down slightly from 2.3% this year to 2.1% next year. However, the uncertainty is still high, so this projection is also exposed to significant risks. Major risk is the spill-over of higher energy and commodity prices into prices of other goods and services, as well as the risk that these indirect effects energy price increase could be embedded in inflation expectations and trigger an inflationary spiral. If this risk starts to materialize, central banks of the biggest developed economies will also react by expedient tightening of the monetary policy so as to stop the forming of an inflationary spiral, just like the central banks in a number of countries in emerging markets have already begun to do. Monetary policy normalization proceed in a gradual manner even in case the inflationary pressures prove to be temporary. However, in that case, monetary incentives will be withdrawn more slowly, therefore the tightening of financing conditions will be very gradual. HNB is also prepared to act if we deem necessary and justified to adjust some instruments, although at this moment inflation is primarily due to rising import prices. Also, at this stage of joining the Eurozone, during which we are in the Exchange Rate Mechanism, monetary policy is somewhat more constrained than it is usually the case for a small, open, highly euroised country on the edge of a large monetary area. However, the other side of this limitation is that due to accession to the Eurozone, we are more protected from deterioration of financing conditions, to which some emerging markets are already exposed.
    2. How much can the  affect the euro adoption process? What is left to be done in this process and remind us again of all the positive consequences of the adoption of the euro, and what might be potentially negative consequences for the citizens and the economy?
    — One of the criteria for the adoption of the euro is the price stability criterion, i.e. inflation in the reference year should be below the average of three EU member- countries with the best inflation performance plus 1.5 percentage points. This year, inflation rate in the Eurozone increased at a similar pace and intensity as in Croatia, but the recovery is not symmetric across countries, so the dispersion of inflation rates among EU members has greatly increased. Therefore, we will most likely have to wait until May for assessment of compliance with this criterion, when the inflation performance of each EU member state will be known, as well as the way European Commission’s selected the three countries with the best inflation performance. The adoption of the euro eliminates currency risk, and thus introduces greater resilience to external shocks and financial crises, lower interest rates and more favorable access to financial markets. At the same time, it facilitates further trade and financial integration with other Eurozone members. Citizens are most concerned about the possibility of rising prices that would undermine their standard of living. However, living standard has not declined due to the adoption of the in any of the new member states that have adopted the euro in the past fifteen years. The experience of these countries shows that prices have increased only mildly and in a one-off manner due to the adoption of the euro, with annual inflation rate elevated by only 0.23 percentage points per in average. This was a consequence of rounding of prices during the prices changeover from the national currency into the euro, and such an increase in prices did not affect the citizens’ standard of living.