Boris Vuji: One year with the euro
Speech by Mr Boris Vuji, Governor of the Croatian National Bank, at the conference
"One year with the euro", Zagreb, 30 January 2024.
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Today, one year after the introduction of the euro, we can look back at this historical
event and its effect on Croatian economy and society as a whole. If I were to sum up in
one sentence what the euro has brought to Croatia, I would say it has brought all the
benefits that we expected and announced, making the Croatian economy stronger and
more resilient, which was particularly evident amid the specific circumstances of the
crisis in which it was introduced.
We entered the euro area in circumstances we could have hardly envisaged at the time
when we started our journey towards the euro six, seven years ago. It was at the peak
of the COVID-19 pandemic in the summer of 2020 that we launched our operational
preparations for the euro and we introduced the euro at the time when inflation soared
at levels unseen in the Western world since the end of the 1970s. In that regard, it is
clear that no other EU member state has introduced the common currency against such
a background. Also, the transition to the euro took place at the time of the strongest
monetary policy tightening ever. And lastly, the pronounced geopolitical tensions and
uncertainties provided an additional dimension, both economic and political, to the
achieved economic and monetary integration of our country.
All these specific circumstances notwithstanding, the project of the introduction of the
euro was completed successfully in the shortest possible time and the expected
economic benefits of the transition to the euro were fully achieved. I would also venture
to say that it is exactly such circumstances that made some of the positive effects of the
introduction of the euro even greater and more significant.
We have always stressed the elimination of the currency risk as one of the main
expected positive effects of the introduction of the euro. And this objective was fully
achieved. Today, the debt of all the sectors in foreign currency is less than 1% of the
total debt, in contrast with some 70% previously. This is a big leap for Croatia, which
helped lower the county's risk premium and also restricted the transfer of higher interest
rates globally to the domestic financial system.
In line with expectations, borrowing costs in Croatia are currently lower than they would
have been had we remained outside the euro area. Namely, we have foreseen that the
changeover to euro would lead to the relative reduction in interest rates, via two
channels: due to lower sovereign risk premiums and lower regulatory costs for banks
resulting from the harmonisation with the Eurosystem monetary policy framework. This,
fully achieved, positive effect of the euro introduction is quite tangible and easily
quantifiable. Today, interest rates in Croatia, both on housing loans to households and
on corporate loans, are entirely comparable, or, in certain segments, even lower, in
absolute terms, than the euro area average interest rates, and much lower than in
comparable non-euro area countries. For instance, while the average current interest
rate on housing loans in Croatia is 3.64%, in Germany it stands at 4.22%, and in the
euro area averages at 4.05%. At the same time, the interest rate on housing loans in
Hungary is 8.76%. The situation is similar when it comes to interest rates on corporate
loans. When taking out loans up to EUR 1m, enterprises in Croatia borrow at the
interest rate of 4.74%, in Germany at the interest rate of 6.27%, while the average
interest rate for comparable loans in the euro area is 5.65%. On the other hand, in the
EU member states which have not yet introduced the euro enterprises sometimes
borrow at as high as two-digit interest rates (Hungary 13.86%). I need not remind you
that only a few years ago interest rates in Croatia exceeded average euro area interest
rates by some 1-2 percentage points. This means that currently, for the first time in
history, lending rates in Croatia are completely comparable to those in the euro area,
which has undoubtedly favourably impacted the competitiveness of Croatian
enterprises.
In addition, the introduction of the euro has considerably reduced transaction costs,
since the kuna no longer needs to be exchanged for the euro and vice versa. This has
spurred Croatia's additional trade and financial integration into the euro area and has
made Croatia more attractive to investments.
Finally, we have expected that the euro would increase the economy's resilience to
shocks and financial crises. This has certainly been one of the positive effects that we
have already experienced, but also the one whose importance rises amid uncertainties
and insecurities like those mentioned earlier.
When referring to the positive effects of the euro, we should look beyond the period
since 1 January 2023. The clear perspective of euro introduction alone helped Croatia
to overcome two crises from the recent past. The consequences of the 2020 pandemic
crisis and the Russian invasion of Ukraine in 2022 were borne with much less
disturbance and stress due to the fact that Croatia was at the time a serious candidate
for euro area accession, which helped anchor exchange rate expectations, thus making
it easier for the CNB to maintain the stability of the kuna exchange rate against the euro
and focus on countercyclical monetary policy measures, and contributed to alleviating
pressures on the public debt market. In the period preceding the introduction of the
euro, markets recognised the continued improvement of macroeconomic fundamentals
that were closely linked to the process of introducing the common currency. This
process developed in parallel with the (already mentioned) convergence of interest
rates in Croatia with those in euro area countries as well as with the gradual
improvement of credit rating, today literally on the verge of A1 investment grade rating,
which has never been the case before. Let me remind you that Croatia's rating in 2017
was BB, two notches below investment grade. In the years that followed, credit rating
agencies increased the rating and outlook for the Croatian economy. In 2019 Croatia
reached the minimum investment grade rating (BBB-) and in 2022, against the
background of the EU Council Decision on the adoption by Croatia of the euro, the
credit rating was raised to BBB+ (by two notches), coming close to A investment grade
rating.
Let me briefly refer to one aspect of euro introduction that raised concerns with part of
the general public: inflation, that is, the effect of euro introduction on prices. I am glad to
be able to confirm, on the basis of analyses and assessments made by CNB and ECB
experts, and subsequently Eurostat, that the impact of euro introduction on prices has
been very mild. According to the CNB's analysis (and that of the ECB), the euro's
impact on prices was 0.4 percentage points, whereas the Eurostat's analysis
established that this impact was at the maximum 0.2 percentage points. This level of
the euro's impact on prices was within expectations and completely in line with the
experience of other countries that had introduced the euro before Croatia, despite the
circumstances of historically high global inflation under which Croatia introduced the
euro. It was precisely this context that gave rise to sporadic comments stating that the
timing for euro introduction was inappropriate owing to high inflation and the strong
tightening of monetary policy. However, the comparison of inflation trends in Croatia
and those in the peer countries that have not adopted the euro (e.g. Hungary, the
Czech Republic and Poland) shows that inflation in Croatia was in fact lower. This fact,
coupled with the already mentioned relatively lower borrowing costs, is a strong
argument confirming that the decision to introduce the euro was good and timely and
that the euro has contributed to the resilience of the Croatian economy in such turbulent
circumstances.
It is not only our observation that the euro has had a positive effect on the Croatian
economy. Last week I participated in a conference in Riga, which marked the 10th
anniversary of Latvia's euro area membership. A great deal of discussion was devoted
to resilience and the shield provided by the euro to a country in uncertain and insecure
circumstances. This is certainly a common experience. I was glad to be able to share
Croatia's success story about euro adoption and confirm the same benefits of euro area
membership as well as to show that the common currency, marking the 25th
anniversary this year, was still very attractive.
To conclude, the introduction of the euro has not been accompanied by any negative
surprises. As I have elaborated in detail, the expected benefits have materialised and
will continue to materialise given their permanent character. I would like to thank
everyone involved in the euro introduction process, many of whom are present today.
With this successful project Croatia made a historical step in joining the group of the
most advanced European countries and establishing (financial) conditions that will
facilitate addressing numerous challenges waiting ahead, both those from the economic
area and from the wider context.