Croatia’s plan to become the 20th country to join Europe’s single currency cleared an important hurdle on Wednesday after EU officials said it met the economic criteria to adopt the euro in January.
The European Central Bank said in a report that Croatia’s economy had remained sufficiently in sync with the rest of the eurozone, despite its inflation and public debt soaring because of the fallout from the pandemic and Russia’s invasion of Ukraine.
The thumbs-up from the ECB for Croatia’s economic convergence mirrors similar conclusions from the European Commission and is expected to prompt EU leaders next month to approve the Adriatic country’s plan to join the euro at the start of next year.
The decision was based on an assessment of Croatia’s convergence in areas ranging from inflation to public debt and marks a success for the country, which has aimed to adopt the euro since being admitted into the EU in 2013.
Several other EU countries aim to join the euro, including Bulgaria and Romania, but they are further behind in the process. Croatia hopes to benefit from a more stable exchange rate and an improved credit rating after adopting the single currency.
Some central and eastern European countries, such as Poland, credit their independent monetary policy with helping them to avoid a recession after the 2008 financial crisis.
But Croatia stands to benefit more than most from euro membership. Its tourism sector makes up about a fifth of its economy and the country also plans to join the region’s Schengen border-free travel zone.
However, the ECB said Bulgaria could face a tougher challenge to achieve its goal of joining the euro in 2024. The country’s inflation rate, which averaged 5.8 per cent over the past 12 months, is above the maximum level allowed and it also fell short on legal governance and institutional quality.
Croatia would be the first new member of the eurozone since Lithuania in 2015. It has a population of almost 4mn and would be the poorest country in the bloc, with gross domestic product per capita of just over $14,000 in 2020, according to the World Bank.
That is almost two-thirds less than the eurozone average and below the bloc’s poorest economies of Greece and Latvia, which both have GDP per capita above $17,500. However, Croatia’s economy is more dynamic than the overall eurozone and it rebounded more quickly from the pandemic than most countries in the bloc.
Overall, the ECB said Croatia’s average monthly inflation of 4.7 per cent in the year to April had remained narrowly below a “reference rate” of 4.9 per cent, calculated by averaging price growth in a selection of eurozone countries where it is lowest.
The country’s government debt, equal to 79.8 per cent of its GDP last year, was above the limit in the EU’s fiscal rules, but these have been suspended since the Covid-19 crisis until at least 2024. The ECB said the decline in Croatia’s debt to GDP level from 87.3 per cent the previous year “ensured fulfilment of the debt criterion”.
“Looking ahead, there are concerns about whether inflation convergence is sustainable over the longer term in Croatia,” the ECB said. “In order to prevent the build-up of excessive price pressures and macroeconomic imbalances, the convergence process must be supported by appropriate policies.”
For the past two years, Croatia and Bulgaria have been part of the European Exchange Rate Mechanism II, a system for managing exchange rate fluctuations and smoothing the path of entry into the single currency, which included ECB supervision of their main banks.
To meet the criteria for eurozone membership, both countries also had to adopt measures against money laundering, reforms to insolvency laws and new rules on the governance of state-owned enterprises.
Additional reporting by Sam Fleming in Brussels