boris vujcic : croatia's joining the euro area makes it an active participant in defining a common monetary policy speech by mr boris vujcic, governor of the croatian national bank, at the conference " croatia, the 20th member of the euro area ", zagreb, 24 january 2023. * * * your excellencies, esteemed guests, ladies and gentlemen, it is my honour and pleasure to welcome you to the conference that marks an outstanding success of our country, our economy and our society as a whole, to which many of you have directly contributed : the introduction of the euro in croatia. allow me to extend my deepest gratitude to you for all your effort, hard work and dedication to this, in all respects, complex and demanding project. commenced in 2017 with the eurostrategy, a strategic document outlining significant and lasting economic benefits to be brought to the croatian economy by the euro and, in contrast, relatively small and mostly one - off costs, the project involved a lot of stakeholders in croatia and abroad. exposed to a great many risks, it demanded that quite a few goals be achieved and challenges overcome in the process, which was done successfully and in the shortest possible period, notwithstanding all external shocks and requirements that had to be met along the way. some of them are widely known, while only a narrow circle of those involved is familiar with the others. still fresh in our memories are the covid pandemic and the devastating earthquake that hit zagreb in march 2020. both happened in a critical moment, only a few months before our accession to the erm ii, at the time when we were taking the last structural reform measures that we were obligated to implement. additionally, the pandemic caused the eu focus to shift to other pressing issues. it is with great effort that we managed to overcome all these shocks and obstacles that spring. however, just as we thought that everything was under control, we were taken by another surprise : our project was once again subjected to a test. in the second half of 2021, due to an uneven post - pandemic recovery and supply chain disturbances, global inflation picked up and inflation rates became much more dispersed across eu member states. the unfavourable inflationary dynamics was further exacerbated by the russian aggression of ukraine in february 2022, which happened only a few months before croatia's fulfilment of the nominal convergence criteria was to be assessed by the convergence report. given that

increased in euro - area member states. however, the configuration of single monetary policy, coupled with national fiscal sovereignty and the no bail - out clause, has generated suboptimal policies and frictions that threaten the monetary union. with single monetary policy, commitment not to bail - out heavily indebted member states is necessary to eliminate potential for moral hazard. however, the actual euro - area experience demonstrates strong incentives for sovereign fiscal policies to “ trespass ” on the prudent fiscal stance, either in the expectations of non - enforcement of the no bail - out clause, with the implicit assumption that sovereign default will be politically unacceptable, or through a direct support of common monetary authority through special monetary operations. this uneasy triangle is usually referred to as the fiscal trilemma of the monetary union. such a “ holy trinity ” makes impossible the cohabitation of the independent monetary policy of a supranational central bank, national fiscal sovereignty and the no bailout clause 15. in order to ease the frictions stemming from national fiscal policies, the monetary framework of the euro area was reconstructed by implementing the elements of the banking union ( the single supervisory mechanism and the single resolution mechanism ), setting up the european stability mechanism ( esm, previously the european financial stability fund ( efsf ) ) as well as by starting the ecb ’ s quantitative easing program ( qe ). all these mechanisms should help to decouple bank distress and sovereign debt pressures. 16 the described trilemmas in the european economic and monetary framework, with the still absent synchronisation of real and financial cycles, have given birth to a specific quadrilemma that demonstrates difficulties faced by policy makers in the euro area. with supranational monetary policy concerned primarily with the overall price stability objective, symmetric ( global ) shocks transmitted through financial linkages and domestic ( national ) divergent cycles, the burden of adjustment has to be borne by national macroprudential policy. the absence of other adjustments mechanisms, such as a perfect labour mobility or a transfer mechanism in the form of unemployment insurance 17, adds to the burden on fiscal policy, which is already suffering from moral hazard issues. the vice - president of the ecb, vitor constancio, is right to emphasize that “ macroprudential policy is therefore essential in any economy as the business and financial cycles are not synchronised. even more so in a monetary union where vulnerabilities identified in each