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The introduction of the euro in Croatia from a legal perspective

It took Croatia nearly two decades, from the submission of its request to join the EU, to navigate through the integration process and finally become eligible to join the eurozone. Throughout this period, the Croatian economy underwent substantial changes to meet the requirements for introducing the euro. On January 1, 2023, Croatia switched to the euro, a move preceded by high expectations from Croatians and other economically involved parties. These expectations encompassed reduced vulnerability to risks associated with currency fluctuations, favourable loan terms for the country, and simplified currency usage. This series aims to examine the circumstances and the consequences of introducing the euro in Croatia.

Croatia has been an EU Member State since the 1st of July 2013. It became a member of the eurozone on the 1st of January 2023, when the official currency was switched from the kuna to the euro, it is the second most important global currency, so naturally, it provides several benefits for the country. However, this process has numerous risks as well. This third analysis aims to point out and draw attention to the  legal aspect  of this matter.

Zsanett Gréta Papp

 

The conditions for introducing the euro as a common currency in the European Union were first formalized at the Maastricht Treaty in 1992, initiated by Belgium, Italy, France, Germany, the Netherlands, and Luxembourg.

The „founding fathers” of the euro had a purpose to achieve the Economic and Monetary Union between the Member States. It can be described as the biggest cash exchange in history, when on the 1st of January 1999, and on the 1st of January 2002, euros entered 12 EU Member States.

The convergence criteria assesses whether a state, in this case Croatia, is well-prepared for participation in the Monetary Union, including price stability, which consists of that the inflation rate needs to be lower, than the average inflation rate in the three best-performing Member States.

Another important criteria is the sustainability of public finances, which includes that the Member State can’t be in the process of a disproportionate budget deficit during the observed period.

The exchange rate stability, which states that the country has to participate for at least two years in the ERM (Exchange Rate Mechanism – a set of procedures, which is used to manage a country’s currency exchange rate relative to other currencies.), and it can’t have devaluations of the central parity or huge exchange rate fluctuations during the two-year periods, is also a crucial issue that has to be done before the joining of the EMU (European Monetary Union)

Last but not least,  in connection with the long-term interest rates,in terms of price stability, the yield on long-term government bonds, and the national currency can’t overtake a reference value equal to the average yield on bonds of the three best-performing states.

As for Croatia, it applied for EU membership in 2003, and the negotiations about the matter were held from 2005 until 2011. The accession treaty was signed by the leaders of the EU and Croatia on the 9th of December 2011. Croatia has become officially an EU Member State on the 1st of July 2013.

Before the accession, it had already an observer status in the EU institutions. Due to this status, Croatia was already involved partly in the decision-making process of the EU. As a consequence, the country was completely harmonized in connection with the degree of legal convergence, for instance, the integration into the European System of Central Banks, and the ban on monetary financing and preferential access to state financing. Furthermore, Croatia had one of the highest degrees of deposit euroisation before the accession.

 

BENEFITS AND RISKS OF INTRODUCING THE EURO

There are several advantages when it comes to the introduction of the euro in Croatia.

First and foremost, competitiveness will be more likely to get improved in the economy since the euro will bring the interest rates closer to their levels in the euro area. The CNB’s (Croation National Bank)monetary policy is based on nominal exchange rate stability –it is supposed to compensate the inflation expectations by maintaining the nominal exchange rate stability.

Moreover, the liability of a crisis, connected to the currency will completely disappear. This is highly beneficial since while the population is quite exposed to currency risk,international trade and investments could be rising. The reason for the latest  is that more promising conditions emerged in connection with international trading, for instance, greater transparency, easier price comparison, and reduced transaction costs. Another benefit would be the better integrated financial markets. One of the biggest concerns is that the central bank would lose the ability to manage the exchange rate independently. The CNB will have to cooperate with other national banks.

Another major possible issue is the rise in prices. It is more likely that the increase can be observed in restaurants, dry-cleaning, accommodation, or sports services. These affect mostly those, who have higher incomes since they are the ones who use these kinds of services more frequently.  à forrást kérnék ehhez!

For those, who have lower income, this transition will have a smaller impact, especially for pensioners or unemployed citizens. It should also be taken into consideration, that there will be several one-off costs during the adjustment period. For instance, the expenses of training employees, who work at financial institutions, and legal adjustments that assure contracts, and financial instruments. The estimated conversion cost is HRK 1.8 billion.

 

AFTER THE TRANSITION FROM HRK TO EURO

The official currency went from kuna to euro in Croatia on the 1st of January 2023. The Croatian National Bank has produced 2.8 billion kuna coins, and 1.13 billion-billion of coins are estimated to be returned. These coins will be stored in the MORH (Ministarstvo obrane Republike Hrvatske- Ministry of Defense of the Republic of Croatia). As for the banknotes, it is expected by the national banks that approximately 500 million pieces of kuna will be returned.

The banknotes will be stored in vaults, that have previously been built for specifically this purpose. The coins can be exchanged into euros for up to three years, while the kuna banknotes can be exchanged into euros indefinitely. In the first year of the changeover, it will be free of charge for everyone to exchange the coins and the banknotes at FINA (Financial Agency), and at any Croatian post office. However, after the first year, it will be possible only at the CNB.

A highly important factor, which should be a priority in this process, is that the public needs to be informed adequately about every single price movement that is happening. This is an essential step to avoid any misunderstanding about the conversion in the circle of the consumers.

There will be a “blacklist” of violators on numerous channels, which will include companies that imply to use of the transition process to increase their prices. Individuals can submit their complaints to any authorities that are responsible for the protection of the consumers.

To avoid these inconveniences, the Ministry of Economy and Sustainable Development assists retailers and companies. It invites them to participate in a campaign that promotes fair conversion without rounding up. After the participation, the Ministry will give the right to use the label that ensures consumers the credibility of the companies in connection with the conversion of the euro.

Aliz Golovics

This article was made in cooperation House of European Affairs and Diplomacy – Szeged.

Sources:

https://hrcak.srce.hr/ojs/index.php/eclic/article/view/22414/11941

http://real.mtak.hu/151119/1/1BULGARIA-ES-HORVATORSZAG-UTJA-AZ-EURO-BEVEZETESE-FELE.pdf

https://neighbourhood-enlargement.ec.europa.eu/croatia_en  https://www.econstor.eu/bitstream/10419/264611/1/oenb-op-3.pdf