Croatia meets all five criteria for joining the euro area from 1 January 2023, the European Commission said in its convergence report adopted on Wednesday 1 June.
“Having celebrated the twentieth anniversary of euro notes and coins at the start of this year, today the euro area can look forward to welcoming its twentieth member”, said EU Economy Commissioner Paolo Gentiloni.
“Croatia will soon become a member of the euro area, thus achieving one of the government’s strategic goals”, Croatian Prime Minister Andrej Plenković welcomed on Twitter.
Croatia meets all the criteria imposed by the European treaties for a Member State to adopt the single currency: (1) calculated at 4.7%, the average 1-year rate of inflation in the country is below the reference rate calculated at 4.9% (= average 1-year rate of the three best performing euro area countries in terms of inflation - Finland, France, Greece - plus 1.5 percentage points); (2) Zagreb is not subject to an excessive deficit procedure, with a general government deficit of 2.9% in 2021 and an estimated 2.3% in 2022 and 1.9% in 2023; (3) Croatia has been participating in the ERM II exchange-rate mechanism since July 2020 (see EUROPE 12525/4); (4) the average long-term interest rate over 1 year, calculated at 0.8%, is below the reference rate, calculated at 2.6% (= average rate over 1 year for the three euro area countries with the lowest inflation, plus 2 percentage points).
In addition, Croatian legislation on the country’s Central Bank is aligned with EU legislation governing the European System of Central Banks and the European Central Bank (ECB) (Article 131 TFEU).
It should be noted that for the calculation of the reference rate for the inflation criterion, the performance of Malta and Portugal was not taken into account, as they deviated significantly from the euro area average (being more than 1.5 percentage points below the reference rate of 4.4%).
The impact of the post-Covid-19 recovery on inflation has been heterogeneous across countries, and the temporary fiscal measures taken to smooth the impact of energy prices differ. Due to the freezing of the Stability Pact, the European Commission has also decided not to open an excessive deficit procedure at this stage. As for the economic impact of the Russian invasion on the euro area, it is expected to be marginal due to the 1-year reference period (April 2021-April 2022).
According to Mr Gentiloni, the practical preparations for the changeover from the kuna to the euro are already well advanced. By September 2021, the Croatian authorities, the European Commission, and the euro area countries had signed a Memorandum of Understanding describing the different steps for the production of euro coins and banknotes by January 2023 (see EUROPE 12788/2).
The Commissioner also listed the “benefits” for the Croatian economy of joining the euro area: lower financing and transaction costs, increased capital flows, elimination of a significant part of the exchange risks in the banking system, integration into the banking union, “which is already a reality”, and increased price transparency.
On citizens’ concerns about a rise in the cost of living as a result of the changeover to the euro, especially at a time of economic crisis caused by the Russian invasion of Ukraine, Mr Gentiloni said it was “essential” that the Croatian authorities act to reduce the risk of possible abuses, inform citizens and economic operators, and enforce competition rules.
After the presentation of the European Commission and ECB convergence reports on Wednesday, the Eurogroup is expected to adopt a favourable recommendation on Thursday 16 June in Luxembourg, paving the way for a political agreement at the Ecofin Council the following day. This agreement is expected to be confirmed by the European Council at the end of June, before a final decision by the Ecofin Council on Tuesday 12 July.
Speaking to the European Parliament’s Committee on Economic and Monetary Affairs, European Commission Vice-President Valdis Dombrovskis said that Croatia’s forthcoming accession to the euro area sends a clear signal that “the euro area remains attractive”. A larger euro area will strengthen Europe’s international influence, he added.
Encouragement of Bulgaria
All EU countries outside the euro area are expected to adopt the euro, except for Denmark, which has an ‘opt out’. The European Commission’s convergence report therefore also covers Bulgaria, Hungary, Poland, Romania and Sweden.
“While none of these Member States currently fulfils all of the criteria, Bulgaria aspires to enter the euro area as of 2024”, Mr Gentiloni noted. He promised that the European Commission would continue to support the efforts of the Bulgarian authorities to achieve this goal which is “within reach, provided all the criteria are met”.
Bulgaria entered the ERM II mechanism at the same time as Croatia. Due to high average inflation, calculated at 5.9%, it does not fulfil the inflation criterion or the criterion on the alignment of the legislation governing the Bulgarian Central Bank with the rules governing the status of the European System of Central Banks.
This is due to a “surge in energy prices”, noted a European Commission expert.
See the European Commission’s convergence report: https://aeur.eu/f/1wg
See the ECB’s convergence report: https://aeur.eu/f/1wh (Original version in French by Mathieu Bion)