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Euro Zone Set to Get 20th Member as Croatia Given Crucial Nod

The headquarters of the largest Russian credit institution, Sberbank, in Moscow, Russia, on 31 May 2022. The European Union agreed to a partial embargo on the import of Russian oil and the disconnection of Sberbank from the Swift international interbank system as part of a new package of sanctions against Russia. (Photo: EPA-EFE / YURI KOCHETKOV)

The euro zone is moving closer to adding its 20th member after Croatia was ruled to be in good enough shape to join the club next year.

The European Commission on Wednesday recommended that the Adriatic nation of 3.9 million people should be allowed to adopt the common currency after finding that it fulfills the necessary requirements on issues including inflation and public debt.

“Less than a decade after joining the EU, Croatia is now ready to join the euro area,” Commission President Ursula von der Leyen said in a statement. “This will make Croatia’s economy stronger, bringing benefits to its citizens, businesses and society at large.”

Other European Union governments are expected to take a final decision on the country’s bid in the first half of July, the commission said. They must still consult the European Parliament and the European Central Bank.

Euro Aspirations

A final thumbs-up would make Croatia the first newcomer since Lithuania in 2015. Like the Baltic country, its bid is aimed in part at cementing a Western alignment following decades of communist rule after World War II. But there’d be economic gains as well, such as lower interest rates and better credit ratings.

The currency switch “will bring benefits for citizens, businesses and state and make economy more resilient to shocks,” Croatian central bank Governor Boris Vujcic said.

Other eastern EU members — including Bulgaria and Romania — are seeking to follow suit. But some in the region are less eager, having seen the benefit of independent monetary policy in the wake of the 2008 global financial crisis.

“Apart from Croatia, none of the other countries under review complies with all economic convergence criteria,” ECB Executive Board member Fabio Panetta told EU lawmakers on Wednesday. “This lack of progress is mainly due to challenging economic conditions. While the countries rebounded strongly from a longer than initially expected COVID-19 shock, the Russian invasion of Ukraine has darkened economic prospects.”

For Croatia, which was the last country to join the EU — in 2013, inflation has proved the biggest challenge after the war in Ukraine sent the prices of energy and other commodities soaring. It’s a problem gripping the whole euro area: Consumer prices there jumped by a record 8.1% in May.

The commission and the ECB confirmed in separate reports on Wednesday that Croatia fulfilled the requirement for price stability, with inflation remaining sufficiently in line with other euro members over a one-year period. The ECB cautioned, however, that policy makers must remain watchful.

Euro area, Croatia are facing similar price pressures

“Looking ahead, there are concerns about whether inflation convergence is sustainable over the longer term,” the ECB said. With price levels and GDP per capita still lower in Croatia than in the rest of the currency bloc, “the catching-up process must be supported by appropriate policies” to prevent the build-up of excessive price pressures.

Croatia’s central bank has pursued a stable kuna exchange rate against the euro for decades, and it’s been locked in a tight trading band since the country joined the waiting room to adopt the single currency, dubbed ERM-2, with Bulgaria in 2020.

As this means limited room for maneuver on monetary policy, the ECB urged Croatia to enact other measures to catch up economically with the rest of the euro area.

“Croatia needs to implement structural policies aimed at raising potential growth and enhancing the competitiveness of its economy,” according to the report. Officials should boost competition in product markets, enhance the efficiency of public administration and reduce labor mismatches, it said.


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