Ivo Božić, a stallholder selling trinkets at the Christmas market in the Croatian capital Zagreb, is used to dealing with multiple currencies and believes the transition will be smooth when the country adopts the euro on January 1.
“When you’re dealing with tourists, you certainly have multiple currencies in mind,” said Božić, whose merchandise includes dolls in colorful costumes, fridge magnets with Christmas patterns, and handmade jewelry. “I have bank accounts in multiple currencies and I think I’ll just merge them next year,” he added. “I bought some of my stuff for euros anyway.”
When Croatia next week becomes the 20th country to use the euro, it will be a milestone for a nation of 4 million that has long sought closer integration with the rest of the EU. Croatia will also join Europe’s border-free Schengen zone.
Switching from the kuna should bring benefits, economists say, as Croatia relies on the single currency area for more than half of its foreign trade, two-thirds of its foreign direct investment and about 70 percent of its tourists.
It will also be a symbolic boost for European unity as Russia seeks to crush the bloc’s opposition to its war in Ukraine. European Central Bank President Christine Lagarde called the addition “a vote of confidence in the eurozone” and said Croatia would benefit from the “euro’s protective shield”.
In a way, adopting the euro is a natural progression for a country where the single currency already accounts for half of its total bank deposits and 60 percent of its total lending – more than any other country outside the eurozone.
“Croatia is the country that will benefit the most from joining the eurozone” as it would eliminate foreign currency risk, said Boris Vujčić, governor of the Croatian central bank. “The exchange rate risk is highest in Croatia.”
“If your currency depreciates against the euro, it means your debt is worth more,” Vujčić said in an interview with the Financial Times. “So your borrowing costs as a country are higher to reflect that risk.”
A supermarket in Zagreb already displays prices in both kuna and euros © Denis Lovrovic/AFP/Getty Images
Croatia has 27 billion euros in foreign exchange reserves – 40 percent of its gross domestic product – to cover this, he said, although joining the euro means it “wouldn’t need anywhere near that much”.
The benefits of the euro are “most evident during a crisis,” stressed Vujčić, citing recent selling pressure on the Hungarian forint, Polish zloty and Czech koruna. “They had to step in and raise interest rates a lot, and their 10-year Treasury yields are now 5 to 8.5 percent,” he said.
In contrast, the 10-year Croatian bond yield was around 3.5 percent, lower than Italy and Greece and just above that of Spain despite not having joined the euro yet. “There is a huge credibility effect,” said Vujčić, who will be able to vote on ECB policy decisions from January, having already attended the meetings as an observer.
Recalling how prices in the former Yugoslavia and then Croatia spiraled out of control in the late 1980s and early 1990s, Vujčić indicated he would take an aggressive stance to aggressively curb the price hikes worrying Europe’s politicians .
“I’ve seen the beast and I know what the beast does when it’s not controlled in the right way at the right moment,” he said.
He acknowledged the risk that Croatian consumers would blame the introduction of the euro for high inflation, which reached 13.5 percent last month. Nonetheless, countries that adopted the euro saw inflation increase by only 0.2 to 0.4 percentage points on average, albeit during periods of lower price growth.
In order to improve price transparency, since September and until the end of 2023, shops in Croatia must show the cost of goods in both kuna and euros. Businesses have been threatened with fines if they try to take advantage of the changeover to raise prices.
“The handover comes at a time when inflation is already high, so the starting point is that Croatian consumers are very price-sensitive,” said Michał Seńczuk, managing director of Studenac, one of Croatia’s leading grocery chains. “This makes it difficult for any retailer to impose unjustified price increases because if you do that, buyers will go to your competitors.”
The change was a logistical challenge for retailers and authorities. Studenac had to print and hang up 5 million new price tags while its staff had to explain to confused customers that euros will not be accepted until January 1st, after which both currencies will be used in parallel for two weeks.
Seńczuk predicted that the euro would not only boost tourism, but would make Croatia “more attractive to foreign buyers looking for second homes, either for summer vacations or for the milder winters we have here”.
The central bank, meanwhile, has ordered the army to store and guard around 40 percent of the kuna coins that it expects will be exchanged for euros.
“That’s almost the weight of the Eiffel Tower,” Vujčić said. “We will sell it as metal after three years, and then the army can use their tanks or armored vehicles [back] into storage space.”
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