Croatia sets heart on the euro despite wider accession fears
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Emerging Markets

Croatia sets heart on the euro despite wider accession fears

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Euro adoption would be in Croatia’s “clear interest”, central bank governor Boris Vujcic tells Emerging Markets

In a rare statement of support for the European single currency within an increasingly eurosceptic region, central bank governor Boris Vujcic told Emerging Markets on Wednesday that Croatia was determined to join the exchange rate mechanism (ERM II) ahead of ultimate euro entry.

“The key thing is public debt, which has to be brought on a downward path and at a pace which would take Croatia out of the Excessive Deficit Procedure,” he said.

Croatia has been in the EDP since joining the European Union in January 2014 and exit is not expected to be imminent. Despite an expected reduction in the budget deficit to below 3% this year, government debt remains at 86.7% of GDP, well above the EDP’s target of 60%.

“We will need to reduce the debt to GDP ratio by around 1.5pp a year for several years,” said Vujcic. “Only then will Croatia be able to get into ERM II and eventually the euro.”

Croatia’s economic outlook has already improved significantly over the past two years, with growth returning in 2015 after six years of recession. GDP is tipped to expand by a further 1.5% this year and in 2017, according to the EBRD’s latest forecasts.

The recovery has been primarily driven by exports. Tourist revenues reached a record high last year, partly due to instability in competing Mediterranean destinations but also as a result of the resumption of investment in the sector, said Vujcic. “This investment has been continuing and we are expecting another record year this year.”

Exports across a range of sectors have been growing even faster, posting double digit increases over the past two years. “What is really encouraging is that this has been primarily driven by medium-sized enterprises,” said Vujcic. “We see this trend continuing over the next couple of years.”

The main driver of the recovery, he added, has been EU accession. “It is clear that EU entry has kick-started the process,” he said. To reach its full growth potential, however, Vujcic said Croatia would need significant structural reforms. “Croatia still lags the EU and its peer group in terms of the business climate,” he said.

STRUCTURAL REFORM

A package of 61 measures was announced late last month by the country’s new government but Vujcic said execution of the proposals would be key. “We will have a better idea of how they are progressing in six months,” he said.

Improving the business climate will be key to boosting foreign direct investment, he added. Unlike other new EU members, Croatia has not seen an increase in FDI following EU accession.

“This is largely due to the fact that FDI overall in Europe hasn’t recovered since the crisis,” said Vujcic. “We expect inward flows to resume this year on the back of the economic recovery and increasing uptake of EU structural funds.”

Structural reform will also be key to preparing Croatia for early euro entry, he added. Vujcic was adamant that euro adoption would be a benefit for Croatia, given the country’s highly euro-ised economy.



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