Complaint in Croatia about converting to the euro

Since the beginning of this year, the European monetary union has 20 participating countries. At 1:00 on 00 January, Croatia adopted the euro. 'Is Croatia doing well to introduce the euro?' is a question I have been getting a lot in the last few days.

Maybe because people think I'm from Croatia based on my last name. Not so, but I do come from nearby, namely neighboring Bosnia and Herzegovina (where the national currency, the Bosnian mark, has been firmly pegged to the euro since its introduction in the XNUMXs and the exchange rate does not change a penny) . I understand the question, but I would like to point out that the question actually makes no sense. The EU rules prescribe that every EU country is obliged to adopt the euro as soon as it meets the five criteria.

These criteria relate to the level of inflation (may not be more than 1,5% above the average of the three best-performing member states), public finances (the country may not be on the budgetary penalty bench of the EU and the debt and budget deficit must be a acceptable), the long-term interest rate (may not be more than 2% higher than the average long-term interest rate in the three Member States with the lowest inflation) and the exchange rate (the national currency must spend two years in the European Exchange Rate Mechanism II, a kind of monetary waiting room in other words, the exchange rate against the euro had to be within the prescribed bandwidth for two years). The fifth condition is that it must be regulated by law that the central bank is independent.

Choice euro not a right but a duty
Every year, the European Commission checks how the EU countries without the euro score in these areas. As soon as Brussels concludes that you meet the above conditions as a euro-free EU country, the introduction of the euro is not a choice or a right, but an obligation. Only Denmark has negotiated for itself the right not to participate in that case either.

However, as so often, there are ways around those EU rules. As an EU country you are therefore obliged to introduce the euro as soon as you meet all five criteria, but if, for whatever reason, you do not like the euro, then as a country you can of course ensure that you deliberately do not meets all criteria. And that is what Poland and Sweden, for example, are doing.

Both countries refuse to allow their national currencies to sit in the aforementioned monetary waiting room. Strictly speaking, the question is whether that is allowed, but it is such a gray area that Brussels tolerates it. The result is that as a country, in this case Poland or Sweden, you naturally do not meet the criteria by definition. In the case of Sweden, it is also the case that the law on the central bank contains some provisions, which mean that the central bank is not explicitly independent.

National pride of a euro country
Croatia did not make use of this de facto escape route. On the one hand because it is more attractive for a small country to integrate into a larger whole. On the other hand, because it is also a kind of national pride to show that within a few decades, after you have exchanged a centrally controlled economy for a free market economy, you meet all the conditions to become a euro country. Croatia became an EU country only ten years ago.

How the Croats themselves assess this new monetary chapter of the country remains to be seen. When I leaf through the local media there in the first days since the introduction, I see a well-known lament: when converting prices to the euro, it is very often rounded up too much.

Edin Mujagic

Edin Mujagić is an economist and manager at Beleggingsfonds Hoofbosch. He focuses on global central banks, and in his blogs he writes mainly about developments in interest rates and inflation. He has also written several books.

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