At the Vrata Jadrana gas station near Rijeka, a line of impatient people has quickly formed at the bar counter. Some are holding a 10-euro note, some a 50-kuna note, while the cashier puts her hands in her hair and repeats regularly “take it easy, take it easy!”, perhaps speaking more to herself than to the customers. On 1 January 2023, Croatia introduced the single currency, the euro, but for the first two weeks of the new year, you can continue to pay with the old currency, the kuna. According to government regulations, merchants are required to give change only in euros, but in practice things are a bit more complicated. At the Vrata Jadrana bar, those who pay by credit card are greeted with a smile.

The year of goals achieved

“2022 was the year of goals achieved,” declared Croatian Prime Minister Andrej Plenković at the end of last year, celebrating Croatia’s entry into the Schengen area and the eurozone starting from 1 January this year. For the youngest member state of the European Union, independent for just over thirty years, this is indeed a great success. Ten years after its entry into the EU, Croatia enters the exclusive club of 15 countries that are simultaneously part of the European Union, NATO, the Schengen area and the eurozone. If we add to this the completion of the long-awaited Pelješac Bridge (which since last summer has united the national territory, reconnecting Dubrovnik to the rest of the country), it is easy to understand Zagreb’s enthusiasm.

But if the Croatian authorities are celebrating the triplet euro-Schengen-bridge, the population is looking with concern at the arrival of the single currency, which is taking place in an economic context already marked by high inflation that will exceed 2022% in 10. “I fear that there will be an even greater increase in prices with the arrival of the euro. Prices are already high and salaries have barely increased…”, says Katarina, a 39-year-old woman who works in a cleaning company in the town of Novska, 100 km south of Zagreb. Near the Zagreb train station, Liljana, a pensioner, shares the same lack of enthusiasm for the currency change. “I think there won’t be any major increases in prices because the purchasing power of Croatians is already very low,” says the woman. “If there really are significant changes, then sales will drop. In short, traders will have to adapt to the new purchasing power of Croatians, which will be even lower with the euro”.

Long-term benefits

Surveys conducted by the Croatian National Bank  (HNB) have consistently confirmed Croatians' reluctance - not to say their opposition - to the single currency in recent years. In 2020, for example, only 41% of citizens were in favor of the euro, while 39% had a "negative" or "very negative" opinion of it. The main risk cited by respondents was indeed rising prices, mentioned in 42,8% of cases. Economics experts do admit that "there is a risk of further inflation in the short term", as economist Vedrana Pribičević, who teaches at the Zagreb School of Economics and Management (ZSEM), says. However, in the long term, joining the single currency will bring more benefits than harm to the Croatian economy.

“Whoever buys a car or an apartment already thinks in euros, and the Croatian economy closely follows the economic cycles of the eurozone,” explains Vedrana Pribičević. When the eurozone grows, so does the Croatian economy; when it is in recession, Zagreb is also in the red. Furthermore, the kuna and the euro have been linked for a long time, and the exchange rate has been practically fixed in recent years. “Starting on 1 January 2023, all conversion costs between the euro and kuna will disappear in Croatia. We are talking about approximately 0,5% of Croatian GDP that banks earned from conversions until the end of 2022,” continues Pribičević. Another positive effect is that Croatian pension funds will be able to invest in all financial assets in the eurozone without currency risk. Finally, the economist also expects wages to rise, because with the euro, Croatians will be able to compare their salaries more easily with those of other eurozone countries (the race for comparisons has already begun  ).

New goals

With the “year of goals achieved,” to use the words of Andrej Plenković, over, the time has now come for the Croatian government to make new resolutions. And it will not be difficult to find new priorities, starting with an issue that should have alarmed the authorities for years: the demographic decline. In recent years, while Croatia's European integration process has been progressing rapidly, the country's population has been shrinking just as quickly. The latest census conducted in 2021 revealed a dramatic result: the young republic no longer has 4,2 million inhabitants as was the case in 2011, but just 3,8 million. According to demographer Stjepan Šterc, improving the country's demographic situation should be the new strategic goal of the Croatian government.

“In the space of two censuses, Croatia has lost around 400 thousand citizens, or almost 10% of its population. Part of it is lost due to emigration, part due to the fact that there are more deaths than births in Croatia every year,” explains Stjepan Šterc, who adds “if we make a projection from here to ten years, continuing with this trend, all the basic services of the state will be at risk. In short, the demographic issue must become central.” According to the demographer, the Croatian pension system, for example, has 8 years before it becomes economically unsustainable.

So far, the measures introduced by the Croatian government have not met with great success. The latest initiative is the “I Choose Croatia” program, which provides bonuses of up to almost 30 thousand euros for Croatians who decide to return to their homeland. But almost a year after the launch of the program, only 78 people have accepted the government's offer. At this rate, by the end of the century, Croatia will have just over 2 million inhabitants. “The situation is such that we can no longer stand by and watch,” says Stjepan Šterc. In short, if the demographic trend does not reverse quickly in Croatia, the triplet of the Plenković government will have served little purpose.

John Vale
Source: Osservatorio Balcani e Caucaso Transeuropa – 09/01/2023