site.btaGoran Saravanja of the Croatian Chamber of Economy: Croatia Joined the Euro Area at the Right Time

Interviewed by BTA, Goran Saravanja, Chief Economist at the Croatian Chamber of Economy, said that his country adopted the euro as its official currency at the ideal moment and that keeping the national currency is not a guarantee against inflation.

On January 1, Croatia, whose population is about four million, became the 20th member of the euro area and the 27th Schengen country. This is the first time an EU Member State has become a member of both areas on the same day.

"We introduced the euro at the perfect time because the currency risk that always exists while a country is not in the euro area has now been removed," Saravanja said.

He noted that at a time of global turmoil "it is important to be part of the club of the big countries", so that "being a small, open economy you are actually protected".

Asked about the rise in the prices of goods and services in Croatia and whether it is related to the adoption of the euro, Saravanja said food prices had risen across Europe due to Russia's war against Ukraine. In his view, the most important factors are the impact of the pandemic and the as yet incomplete recovery of supply chains.

"Inflation in Croatia is high, but I think it is clear that this is unrelated to the euro," Saravanja stressed.

The annual inflation rate in December 2022 slowed down to 13.1%, compared to a record high 13.5% in November, mostly due to the depreciation of oil derivatives, while for the whole of 2022, inflation was 10.8%. The average wage in Croatia is around EUR 1,000, with annual wage growth of 5% in the third quarter of 2022, according to the MojaPlaca website.

"I would say that last year is proof that having your own currency is no guarantee that you can prevent inflation," the chief economist of the Croatian Chamber of Economy stressed, citing inflation and currency depreciation in Hungary, Czechia and Poland.

Saravanja noted that prices increased somewhat in the first days after the euro changeover in Croatia.

The increase felt by the public immediately after the introduction of the euro on January 1, when traders rounded up prices in euro, prompted the Croatian government to take measures to protect consumers.

Prime Minister Andrej Plenkovic urged retailers to return prices to their December 31 level, or else unjustified price hikes would lead to fines, electricity subsidies could be cancelled or there could be tax changes.

Checks made last week found that about 30% of retailers had raised prices unjustifiably. The fines are up to around EUR 26,500 for companies and EUR 1,990 for sole traders.

"But we are talking about 30%, not 50% or 75%, let alone 100%," Saravanja said.

In his view, it is still early days to say whether the government's mechanisms to protect consumers from unjustified price hikes are working, this could be done after the first quarter of 2023 at the earliest. If a price freeze is put in place for some goods, it should be stressed that it will be a temporary measure.

"Since we are a market economy, we would not want such a mechanism to last too long," Saravanja said.

He stressed it is very important that the country is in the "institutional core" of the EU, recalling that in July, when Croatia got the green light to join the euro area, rating agencies upgraded its credit rating.

"We are now seeing these benefits (of euro area and Schengen membership, Ed.) in the lending rates on the international markets," Saravanja noted.

He said the changeover to the euro in Croatia is quite natural, as Croats had been saving in German marks since the 1960s and in euro later on.

"It was quite logical to take this step, to have access to all the mechanisms of the European Central Bank," Saravanja noted.

He sees some Croats' nostalgia for the national currency, the kuna, as a kind of patriotism, an expression of the Croats' love for their homeland.

Commenting on the medium- and long-term implications of Croatia's membership of the euro area and Schengen, Saravanja focused on the greater investment opportunities that are opening up.

"In the medium and long term, I expect more investments, more opportunities, more cooperation with both Slovenia and Hungary. Joining the euro area and Schengen will open an opportunity for Croatia in the context of the Western Balkans, as we border three out of five Western Balkan countries," Saravanja said.

He recalled that since Croatia joined the EU in 2013, exports of goods have doubled, and "now with the euro and Schengen we have even greater opportunities to integrate the Croatian economy into the European economy, into the supply chain".

According to the chief economist of the Croatian Chamber of Economy, the success achieved with the country's entry into both the euro area and Schengen is due to the consensus on these issues in Croatian society.

"There has always been a high degree of agreement in this society on all the important issues: first it was NATO membership, then the EU, the euro area, Schengen, the OECD… On these matters, the majority of the people, not just the political parties, but also the electorate in Croatia, have always been of one mind. This is in our interest, that is why we succeeded," Saravanja said.