On Croatia’s Entry to the Eurozone

On Croatia’s Entry to the Eurozone

Croatia joined the European Union as its 28th member state on July 1, 2013. Today, there is a heated — but rather one-sided — debate on whether it should join the Eurozone.
Our position is clear: Croatia should not join the Eurozone. Not yet.
Our case is simple: the promise of euro-led growth is a false one. Entry to the EZ would only keep Croatia at Europe’s periphery, but with diminished control over its economic future. Croatia should therefore reject the invitation to join the EZ until its decisions are meaningfully democratic. DiEM25 is dedicated to delivering these democratic reforms.
Below we present both: the arguments making the case for Croatia joining the European single currency — from the Croatian National Bank to the ruling Croatian Democratic Union (HDZ) and its opposition, the Social Democratic Party (SDP) — as collected by DiEM25’s local group in Rijeka (DSC-Rijeka), as well as the arguments against it, as developed by Croatian DiEM25 members and leading DiEM25 economists.

  1. If Croatia enters the Eurozone… “the Euro will cause credit ratings to rise”, “simpler refinancing of debts”, “lower borrowing rates”

In other words, debt will rise much faster under the euro, as more German capital will flow into the country from the Frankfurt banks. A looming disaster portrayed as a lure! Of course, they will say that cheaper investment funding is always a good thing (“Easier access to capital for entrepreneurs” – “Rise in foreign investment”). But will the capital inflows go into real investment? Or will they simply bid up asset prices, while German companies continue to strip down what is left of the country’s industry? The latter of course. Just like in Spain, Greece, Ireland etc.

  1. If Croatia enters the Eurozone…Credit ratings will rise”

Well, this is not what happened to those hit in the crisis boosted by EMU, is it? Instead, ratings fell significantly, credit spreads rose — in some cases astronomically — and liquidity available for refinancing dried up. But traders in the Eurozone investment banks never let a good crisis go to waste: they profited handsomely, deepening the crisis in the process.
Here is the bottom line: without the institutions to make the EZ work for real, none of these arguments are more than standard EMU marketing 101 — debunked long ago.

  1. If Croatia enters the Eurozone, it will reach… “Financial and political stability” – “Economic openness” – “Growth of export” – “Better integration of Croatian economy within the EU” – “The Euro will boost trade with the eurozone countries by eliminating exchange rate risk”

This is totally unfounded. If you look at Poland, Hungary and the Czech Republic — other countries with the strongest foreign direct investment (FDI) and deepest integration with German, Dutch, French and Austrian industry over the last 20 years — you will see that they all retained their currency! In contrast, the countries that entered the euro (Portugal, Greece, even Slovakia) had far less FDI and next to no integration with central European industry. In other words, entering the euro was pointless from the perspective of FDI, integration, and even capital accumulation.

  1. If Croatia enters the Eurozone, this will have with prices: “Benefit of national monetary policy is limited anyway because of a high level of euroisation and of indebtedness in all sectors” – “Prices are equal to those of Germany, Austria etc so no significant rise in prices”

If indebtedness is a problem, and too many debts are already in euros, the thing to do is to reduce the % of debt that is euro-denominated – not make it 100%! Yes, prices may not be different from Germany’s etc. BUT,
(1) Prices will almost certainly rise further if the euro is adopted (as local oligopolies take advantage of the redenomination to forge greater collusion between their members), and
(2) If wages become euro-denominated, any future recession (and, believe me, it will come) will not be possible to absorb through higher inflation and a devaluation of the currency – it will, instead, give rise to nominal wage reductions, which turn a recession into a depression.

  1. If Croatia enters the Eurozone, we will have… “Growth in tourism”

Why? Does anyone really think that more tourists will come because they do not have to change money— at a time when everyone pays by credit card, anyway? The opposite will hold: The rise in prices (see above) will, if anything, reduce tourist arrivals!

  1. If Croatia enters the Eurozone, it will become part of… “Eurozone as a guarantor of financial stability”?

Really? This simply does not square with recent history. As a matter of fact, the EZ and concomitant financial deregulation played a major role in transmitting the US credit crisis to the eurozone and compounding it by bidding up European asset prices and boosting indebtedness. To take just one example, Spain went into the EZ with negative real interest rate, causing household indebtedness to soar while the construction sector boomed into a bubble. So there are very serious arguments for saying that EZ membership has been a destabilising factor, especially for countries that came into it with a significant relative interest rate. The debt crisis started to build up from that point, triggering the banking crisis and — in turn — the sovereign crisis.

  1. If Croatia enters the Eurozone… “it will escape the EU periphery in a political sense”

Just like Greece and Portugal!

Click here for the Croatian version of this post.


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