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Croatia on track to adopt the euro

Croatia is on course to adopt the single currency starting in 2023 after fulfilling a number of set criteria, the European Commission and the European Central Bank announced Wednesday.

“Today marks a historic milestone on Croatia’s European journey, reflecting the determined efforts the Croatian authorities have made to meet the criteria for entry into the euro area,” Economy Commissioner Paolo Gentiloni said in a statement.

“Croatia is within the reference values of the convergence criteria,” the ECB wrote in its own report as it issued a “positive assessment of Croatia in view of possible euro adoption on 1 January 2023.”

Croatia would become the 20th EU member to adopt the single currency. The decision is expected to be formalized by EU capitals on July 12, after EU leaders give their political nod at a June summit and the European Parliament signs off in early July. 

Getting in the club

The Commission and the ECB are jointly tasked with assessing EU countries’ preparedness to join the eurozone against a number of legal and economic criteria. The assessment also looks at countries’ integration with the euro area.

Countries must have a 12-month average inflation rate below that of the three best EU performers, plus a margin of 1.5 percentage points. In its assessment, the Commission used Finland, France and Greece, giving a reference value of 4.9 percent. Countries with 1.5 percentage points below the 12-month EU average inflation rate are considered outliers and excluded from this benchmark. Malta and Portugal, which have a rate 2.2 and 1.7 percentage points lower than the EU average of 4.4 percent, respectively, were excluded. 

Moreover, countries must have long-term interest rates below the same best performers, plus a margin of 2 percentage points, giving a benchmark of 2.6 percent. They also have to show relative exchange rate stability and observe the bloc’s European Exchange Rate Mechanism II for two years while staying clear of a so-called excessive deficit procedure.

Finally, countries must legally guarantee the independence of their central bank and outlaw monetary financing. 

Lingering worries

While the Commission still has some concerns regarding the country’s business environment and corruption, a senior EU official said that “commitments have been taken and implemented by Croatia to improve the business environment.”

Despite the green light, the ECB called for continued efforts by Zagreb to prepare for its membership of the club. In particular, it cited concerns about whether the country’s inflation rate convergence is sustainable over the longer term, and noted that “to prevent the build-up of excessive price pressures and macroeconomic imbalances, the convergence process must be supported by appropriate policies.”

To put the debt-GDP ratio onto a long-lasting downward path, Croatia must implement the fiscal reforms called for under the EU’s recovery plan, the ECB wrote, while calling for “stability-oriented economic policies and wide-ranging structural reforms.”

“We’re fairly comfortable about the fiscal position of Croatia not only because deficits would be below 3 percent but also because we’re reasonably comfortable about the long term evolution of debt,” the senior EU official said.

Rest of the class

Other eurozone hopefuls didn’t meet the required criteria, with Bulgaria falling short of the price stability requirement — due to an average inflation rate of 5.9 percent — and Romania meeting none.

The ECB report also assessed progress made by the six other EU countries that haven’t yet adopted the single currency. It concluded that Bulgaria, the Czech Republic, Hungary, Poland, Romania and Sweden had made limited progress since the last converge report in 2020.

“This is mainly due to challenging economic conditions,” the ECB concluded. While Russia’s war on Ukraine is weighing on growth and pushing up inflation in all member states, “it is too early to draw any firm conclusions about how the convergence paths will be affected.”

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