Croatia, which next month becomes the newest member of the European Union, wants to join the eurozone as soon as possible despite the problems that have plagued the currency area in recent years, the country’s central bank governor said recently.
Photo: Guy Moberly
Croatian National Bank Governor Boris Vujcic said there were few drawbacks to Croatia joining the euro because the country’s monetary policy already lacks independence as it is constrained by the high level of euros already used in the country, particularly by banks.
“I always quote the Bob Dylan song ‘When you ain’t got nothing, you got nothing to lose’. If you don’t have independent monetary policy what are you going to lose by entering into the monetary union?” Vujcic said in a speech in central London.
Vujcic described the problems that have gripped the single currency as “definitely something that is not encouraging”, but he said he still believes it remained in Croatia’s best interests to join the euro.
His comments come as Latvia, which joined the EU in 2004, prepares to become the 18th member of the eurozone next January. In June, the European Commission and the European Central Bank gave the small Baltic nation the green light to join the single currency—making it the first new entrant since Estonia joined in January 2011.
All members of the EU—except the U.K. and Denmark, which negotiated ‘opt-outs’ from joining—are required to eventually adopt the euro and join the eurozone. However, in practice there many exceptions—Sweden isn’t in the single currency despite joining the EU almost 20 years ago, while numerous other countries, including Poland, Lithuania, Czech Republic, and Hungary, have also yet to adopt it.
Late last year Bulgaria indefinitely froze long-held plans to adopt the common currency, blaming deteriorating economic conditions and rising uncertainty over the prospects of the bloc.
Vujcic said Croatia would gain a clearer idea of when it could expect to join the single currency once it becomes a member of the EU on July 1. The country’s first step would be to enter the European Exchange Rate Mechanism, a semi-pegged currency-trading regime, which is a precondition for joining the eurozone. It would have to participate in the ERM for at least two years before it could join the eurozone.
“I think it is very important to put the fiscal trajectory in terms of the public debt to gross domestic product on a stabilizing or declining trajectory in order to have a good position to talk about ERM and the eurozone entry one day,” Vujcic said. “But we have no date [to join the single currency] in mind at the moment”.
The European Commission forecasts Croatia’s budget deficit will be 5.6% of GDP in 2014/2015, well above the 3% maximum normally allowed under the EU’s stability and growth pact. This means the country could be placed in the commission’s Excessive Deficit Procedure, which can result in members being fined if they don’t take action to meet their fiscal goals, though no such fines have ever been imposed.
Vujcic said he wasn’t concerned about prospect of Croatia being placed in the EDP.
“This is something we would have to do one way or another—the fiscal consolidation. So the Excessive Deficit Procedure just streamlines that,” he said. “I don’t think it creates much of a worry because it’s something we would have done anyway.”
Vujcic, who took-up the post of central bank governor in July last year after more than a decade as deputy governor, said he believes Croatia and other European countries should continue to implement austerity measures, rather than ease-back on spending cuts.
“Most of Europe has not actually gone through austerity, so the calls to end the austerity in that sense are a bit strange,” he said.
Croatia’s economy, which is heavily dependent on tourism on its Adriatic coast, has either been in recession or stagnating since 2009. The country’s economy contracted 1.5% in the first quarter from a year earlier—the sixth consecutive quarterly contraction for the former Yugoslav republic.
The commission expects Croatia’s economy will contract by 1% this year.
Vujcic said the country is hoping its EU membership will lead to a boost in exports and foreign direct investment, although he conceded that trade is unlikely to pickup in the near future because of bleak growth forecasts in its two main trading partners Germany and Italy.
The country is also hoping that its new status as member of the EU will give it access to around €10 billion (US$13 billion) of funds from the bloc to invest in the country’s infrastructure and tourism.
