Croatia Bank's Hope of Introducing Euro Questioned

The Croatian National Bank, HNB, confirmed to BIRN on Tuesday that it is advocating that the country introduce the euro as its currency. The HNB is convinced that entering the Eurozone would eventually be "a cheaper and simpler solution" than continuing with the Croatian kuna and managing its exchange rate.

But it added that nevertheless there was no imperative to introduce the euro "for the sake of financial stability".

The HNB also noted that first Croatia needs to implement structural reforms that could lead to bigger potential GDP growth rates.

It explained that Croatia would need to lower the public debt to GDP ratio - currently at 85 per cent of GDP - during 2017 and 2018, which the bank sees as possible, since "projections indicate that this trend is sustainable in the medium term".

Afterwards, Croatia would start negotiations about entering the European Exchange Rate Mechanism - ERM II.

After entering ERM II, Croatia would need to fulfil the so-called Maastricht criteria - inflation rates, long-term interest rates, state budget deficit, public debt and the stability of the Croatia kuna-euro exchange rate - over the following two years, with the public debt being the most important factor.

"But at the same time, it is necessary to know that for switching to the euro it isn't necessarily to meet the fixed criteria of 60 per cent of public debt to GDP ratio, but it is possible to reduce the public debt to GDP ratio at a credible speed," the HNB said.

Economics expert Josip Tica agreed that Croatia could fulfil the conditions, but warned that current public spending and debt are not working in the favour of such a move.

"When you look at the current budget, this was an abandonment of the policy of austerity for...