Croatia will become more attractive for investment after the adoption of the Euro

published on 22 July 2020 | reading time approx. 2 minutes

The European Central Bank (ECB) announced that Croatia has been admitted to the Exchange Rate Mechanism 2 (ERM2), which is the prelude to joining the Eurozone. Why did Croatia took this step?

The short answer is provided by key indicators: external balances and public budgets over a relevant series of years. Croatia has been since 2014 with a surplus of about 3 per cent in 2019 (from double-digit deficits before 2009). Regarding the public budget, Croatia it was in balance last year.
 

Croatia will have to spend at least two years in the ERM2 before starting practical preparations to join the Eurozone, a process that will take an extra year, so by 2023 the country will become as soon as possible euro area members. In the two years, Croatia must meet the technical criteria for membership and have a stable exchange rate. The ERM2 mechanism stipulates that the evolution of a candidate country's currency exchange rate must remain within a range of plus/minus 15 per cent against an agreed central level for two years before the adoption of the euro. The ECB informed that during the ERM2 period, the exchange rate of the Croatian kuna was set at 7.53450 kuna for one euro.

 
In Croatia, a political consensus was accompanied by concrete programs, a permanent dialogue with the ECB and the EC on the steps to be taken. Especially since it was increasingly clear that joining MCS2 will also mean joining the Banking Union. But what matters, in the last resort, is that there were economic credentials to admit the request of Croatia to join MCS2.

 
Croatia could join the Eurozone in January 2024, becoming more attractive for investment

Croatia could be ready in 2023, but the tradition is that the euro was introduced in January, which brings us to 1 January 2024. Belonging to the euro will increase confidence among international investors and make the country more attractive for investment.
 
After the European Central Bank and the European Commission informed that the Croatian kuna was included in the Exchange Rate Mechanism (ERM2), the Croatian authorities announce that it was realistic to promise that Croatia would enter the euro area until the end of the four-year term of the new government, which is likely to be inaugurated in next few weeks.
 
For instance, 71 per cent of household savings have been kept in the euro in the last eight years. Also more a than a half of loans are pegged to the euro. Foreign visitors coming from the euro area's member-states generate as many as three fifths of overnight stays in Croatia, and 57 per cent of the value of the commodity exports are to those countries.
 
After entering the ERM II Croatia has to continue meeting the euro convergence criteria, that is the so-called Maastricht criteria, in order to be allowed to join the euro area.  Those criteria include the stability of the exchange rate, stable prices, stable interest rates alongside two important indicators considering the public finances: the budget deficit and the public debt.
 
The Croatian National Bank will also have its representative in the ECB's highest supervisory decision-making body, having equal rights and obligations as other members, as well as a voting right.