Published: 03.10.2022

Miķelis Zondaks, Economist, Latvijas Banka

On 12 July 2022, the Council of the European Union (EU) adopted a historical decision on the admission of Croatia to the euro area on 1 January 2023. Croatia will become the 20th Member State of the euro area (Latvia joined the euro area as the 18th Member State and introduced the euro on 1 January 2014, followed by Lithuania a year later).

Taking account of Croatia's timely and long-lasting preparation, it is quite safe to say that the introduction of the euro will not turn the daily life of the country's population upside down which in fact is to be welcomed. The key benefits are the ones people do not even see in their everyday lives; these include much lower costs of transactions with other euro area Member States, a reduced currency risk and a strengthened economic resilience to crises. Over almost nine years, we have witnessed it all in Latvia where there are no concerns about the stability of currency despite several economic shocks experienced during this period, for instance, the pandemic and two attacks on Ukraine by Russia.

Hrvatska narodna banka has pursued for a long time a policy of maintaining a relatively stable exchange rate of the Croatian national currency – the kuna – against the euro. Moreover, even before the introduction of the European single currency, most household deposits (87%) and nearly all external debt (90%) are in euro which means that the reduced currency risk will be a great benefit. Businesses find themselves in a similar situation: they not only borrow in euro but quite often also indicate the prices of goods and services in euro (for instance, in the fields of real estate, vehicles, accommodation, etc.).

Seeing how widely the euro is currently being used in the Croatian economy, a question about the not-so-strong support by the population for the introduction of the euro may arise; however, these statistics should be examined in conjunction with Croatia's situation as a whole. According to the Eurobarometer survey conducted in summer 2022, 52% of Croatia's citizens support a single currency in the EU – a lower level than the average in the EU (72%). At the same time, this indicator can be viewed as relatively high among the countries that have not yet introduced the euro (for instance, 33% in the Czech Republic). Moreover, since the beginning of the year, the number of respondents against the single currency has decreased by 4 percentage points (to 40%). It should also be taken into account that Croats are rather sceptical about many things, including the EU as a whole: according to the Eurobarometer survey, only 42% of the respondents have expressed trust in the EU (which is still twice as high as the indicator of trust in their own government and parliament). Thus, it can be concluded that the accession of Croatia to the euro area will be quite smooth and the scepticism can most likely be explained by the overall low level of the population's trust in various national and international institutions.

This enlargement of the euro area will not result in significant changes in the daily lives of Latvia's population, mostly due to the geographical distance. The impact will become apparent in several areas. Firstly, we will directly witness the above mentioned reduced transaction costs during tourist trips, as in future all prices will only be indicated in euro and there will be no concern over currency exchange and exchange rate. A small, yet pleasant matter. Furthermore, as a continued integration in the EU, Croatia also plans to join the Schengen area which over time would make travelling even more comfortable. Secondly, every new euro area Member State adds to the significance and role of the euro in the international economy. This, in turn, strengthens the euro as a whole and thus increases the economic resilience of Latvia, Croatia and the whole euro area to crises.

Meanwhile, the people captivated by coin collection will find a new area of work: to obtain the new Croatian euro coins that are currently being minted by the local mint. The reverse of the 2 euro coin will feature the map of Croatia, while the reverse of the 1 euro coin will depict a marten. A marten was chosen to honour the existing national currency, the kuna (the word kuna means "marten" in Croatian), whose name is, in turn, connected with the fact that historically, during the Middle Ages, marten skins were used as a means of settlement. The euro cent coins will display the portrait of Nikola Tesla and letters HR in the Glagolitic script.

It is expected that Bulgaria, already preparing for the introduction of the euro, will be the next to follow Croatia's example. This will further strengthen the positions of the euro as the second most significant global currency (alongside the US dollar).