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Croatia anticipates economic boost as it prepares to adopt euro

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Ivo Bozic, a street vendor who sells trinkets at a Christmas market in Croatia’s capital Zagreb, is no stranger to dealing with multiple currencies and believes the transition will go smoothly once the country adopts the euro on January 1.

“If you’re dealing with tourists, you definitely have a few coins in your head,” says the store, which sells items such as dolls in colorful costumes, Christmas-themed fridge magnets, and handcrafted jewelry. Bojić, who was there, said. “I have bank accounts in multiple currencies and I think I’ll just consolidate them next year,” he added.

Croatia will become the 20th country to use the euro next week. Milestone For a country of four million that has long strived for closer integration with the rest of the EU. Croatia also joins the borderless Schengen zone of Europe.

Croatia relies on the single currency area for more than half of its foreign trade, two-thirds of its foreign direct investment and about 70% of its tourists, so economists say a switch from the Kuna should pay off. .

Just as Russia seeks to sabotage bloc opposition to the war in Ukraine, it will also be a symbolic boost to European unity. vote of confidence,” and said Croatia would benefit from the “euro shield”.

Adopting the euro is, in some ways, a natural progression for a country where the single currency already accounts for half of total bank deposits and 60% of all lending, more than any other country outside the Eurozone.

Croatia’s central bank governor, Boris Vujicic, said: “Croatia is the country that will benefit the most from entering the euro zone.” “Croatia’s foreign exchange risk is the best.”

“When your currency depreciates against the euro, it means your debt is worth more,” Vuicic said in an interview with the Financial Times. “The cost of borrowing as a country is therefore higher, reflecting this risk.”

Zagreb supermarkets already display prices in both local kuna and euro © Denis Lovrovic/AFP/Getty Images

Croatia has €27 billion in foreign exchange reserves (40% of gross domestic product) to finance this, he said.

Vujicic emphasized that the euro’s benefits “are most evident in times of crisis”, pointing to recent selling pressure on the Hungarian forint, Polish zloty and Czech krona. “They need to step in and raise interest rates significantly, with 10-year government bonds now yielding between 5% and 8.5%,” he said.

By contrast, Croatia’s 10-year bond yield is around 3.5%, lower than Italy and Greece, and slightly above Spain, which is not yet a member of the euro. “There is a big credibility impact,” said Vujčić, who will be able to vote on ECB policy decisions from January after already attending the meeting as an observer.

Vujicic recalls the skyrocketing prices in the former Yugoslavia and Croatia in the late 1980s and early 1990s, and has taken a hawkish stance to aggressively curb the inflation that has plagued European policymakers. suggested that

“I’ve seen beasts, and I know how they behave if they aren’t checked in the right way at the right time,” he said.

He acknowledged the risk that Croatian consumers would blame the introduction of the euro for high inflation, which reached 13.5% last month. Despite the timing, inflation has only increased by 0.2-0.4%.

To improve price transparency, Croatian shops will have to display the prices of their goods in both Kuna and Euros from September and will continue to do so until the end of 2023. Businesses are threatened with fines if they try to take advantage of the switch. Raise prices.

Michał Seńczuk, CEO of Studenac, one of Croatia’s leading grocery chains, said: “This makes it harder for merchants to impose unwarranted price increases because then shoppers go to their competitors.”

This switch has become a logistical challenge for retailers and authorities. Studenac said he had to print and display 5 million new price labels, but his staff had to explain to bewildered customers that they could not accept euros until January 1st. I did.

Besides boosting tourism, the introduction of the euro will make Croatia “a more attractive country for foreign buyers looking for a second home for summer vacations and mild winters,” said Seńczuk. I am predicting.

Meanwhile, the central bank has sent troops to custody and protect about 40% of the Kuna coins expected to be exchanged for euros.

“It’s about the weight of the Eiffel Tower,” said Vucic. “After 3 years we will sell it as metal and the military can deploy tanks and armored vehicles [back] for storage space. “

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