Saturday, 7 May 2022

Eurozone Entry Will Mean Additional Improvement of Credit Rating, Says FinMin

ZAGREB, 7 May 2022 - Finance Minister Zdravko Marić said on Saturday he was pleased with Fitch's latest credit rating of Croatia, adding that accession to the eurozone will mean that the rating will additionally improve.

Fitch Ratings yesterday reaffirmed Croatia's investment rating at BBB with a positive outlook, estimating that the recovery of the country's tourism industry will support the economy at a time of slowing exports and that eurozone entry will mitigate financing risks.

Speaking to the press, Marić said citizens, enterprises and the government could be satisfied because the credit rating was maintained.

A very positive assessment, a very welcome report in these circumstances which gives us an incentive to continue all that we are doing, with a very likely positive unfolding of events in the remainder of the year as regards Croatia's credit rating, he said.

Fitch revised down its projection of Croatian growth for 2022 from 4.4% to 3.3%, citing base effects, a sharp slowdown in household consumption as high inflation affects consumer spending, as well as the effects of Russia's aggression on Ukraine.

Marić said that was understandable given that about ten days ago the government revised down its GDP growth forecast for this year to 3%.

In the fiscal part, Fitch's report is in line with the government's efforts, achievements and projections, the minister said, underlining that last year the deficit was reduced much more than expected and that this trend would continue this and in the years ahead.

As for potential risks for the rating's trend, Fitch mentioned an increase of the government debt and a significant delay in Croatia's eurozone accession.

"I'm deeply confident that none of that will happen. Actually, I'm sure of that," said Marić.

He recalled that since 2016, the public debt-to-GDP ratio has been decreasing every year except in 2020. "That's one of the basic characteristics and traits of this government's fiscal policy and it will continue."

Speaking of Croatia's eurozone journey, Marić said convergence reports by the European Central Bank and the European Commission were expected early next month. He also mentioned the Maastricht criteria - exchange rate, price and interest rate stability, budget deficit and government debt.

Marić said the deficit and the government debt were the fiscal indicators which opened the prospect of introducing the euro to the greatest extent. "If we hadn't consolidated public finance and done all that we have... we would have waited much longer."

Inflation in April expected to accelerate further

Speaking of inflation, Marić said the data for April would likely show an additional acceleration of the average price rise rate, but without a significant deviation from the average.

In March, inflation in Croatia went up 7.3% and the government has forecast its growth for this year at 7.8%.

Under the Maastricht criteria, Croatia's inflation over the past year should not exceed 1.5 percentage points in relation to the average inflation in three EU member states with the lowest inflation.

Marić said there were clear signals that the lower inflation rates in some member states, for example Greece, would be treated as deviation variables and that Croatia would meet this criterion, too.

He reiterated that Croatia planned to enter the eurozone on 1 January 2023 and that the final decision was expected by the first half of July this year.

At the moment, the introduction of the euro has a virtually negligible impact on inflation, he said, reiterating that in the last seven states which introduced the euro, the inflationary effect in the first year was between 0.2 and 0.4 pp on average.

Reforms as prerequisite for tax relief

Marić was also asked about a reform package proposed by the Croatian Employers Association  which is aimed at raising the net pay and includes raising the non-taxable income and reducing pension and healthcare contributions as well as income tax.

In order to further reduce the tax burden on labour, it is necessary to create the prerequisites by reforming the pension system and especially healthcare, he said, adding that the basic intention of the government's tak reform has been to reduce the tax burden on labour and profit.

For more, check out our politics section.

Tuesday, 3 May 2022

Bridge MP Says Euro Introduction Should Be Postponed

ZAGREB, 3 May 2022 - Opposition Bridge party MP Zvonomir Troskot said on Tuesday that Croatia should postpone the introduction of the euro, warning that its introduction would cause an additional rise in prices.

"The national economy is not ready yet for euro introduction, that decision should be postponed during this time with the war current in Ukraine, armament in Europe and high inflation. It would not be a prudent move," he told a news conference.

Troskot warned that the introduction of the euro would cause additional inflation, recalling in that context the introduction of the euro in Slovenia and noting that it would cause a drop in the standard of living and a new wave of emigration.

Tuesday, 26 April 2022

Central Bank Sets Aside €3.6m For Euro Introduction Campaign

ZAGREB, 26 April 2022 - The Croatian National Bank (HNB) will soon embark on a campaign for the euro replacing the kuna as the national currency which will be very extensive, as befits such an important event as Croatia's accession to the euro area on 1 January 2023, Večernji List daily said on Tuesday.

To raise public awareness of the introduction of the euro, the HNB has prepared a tender for the creation and implementation of a national information campaign, estimated at HRK 27 million, for carrying out the national plan of replacing the kuna with the euro.

As part of the campaign, HRK 6.8 million is envisaged for designing the promotional campaign, HRK 14.5 million for a media advertising strategy, HRK 1.55 million for PR and organising public events, HRK 800,000 for a call centre, HRK 400,000 for a public opinion poll, and HRK 2.95 million for the Euro on Wheels travelling exhibition.

The campaign is aimed at acquainting citizens with all the advantages of introducing the euro, informing them about the date of the introduction, the fixed exchange rate and trends in consumer prices, and at sending the message that the euro will not result in price rises that would undermine living standards.

Citizens will also be informed about how the government will protect them from unjustified price rises. A public opinion poll has shown that a considerable percentage are concerned that the euro might result in major price prices.

Another aim of the campaign is to increase public support for the euro, reducing citizens' insecurity and the feeling that they will be cheated in the process of switching to the euro.

It will be stressed that introducing the euro as the national currency leads to faster, more favourable and safer doing business, bigger investment, economic growth and higher living standards.

For more, make sure to check out our dedicated politics section.

 

Saturday, 19 March 2022

U.S. Economist Stiglitz Believes Croatia Should Take More Time Before Euro Adoption

ZAGREB, 19 March 2022 - US economist Joseph Stiglitz, who won the Nobel Memorial Prize in Economic Sciences in 2001, has said that Croatia should take some more time before the changeover to the euro, assessing that disadvantages could be higher than benefits due to the ongoing geopolitical risks.

This is an open issue, said this 79-year-old researcher in his address to Croatian reporters in Brussels where he attended the 8th Cohesion Forum.

The 8th Cohesion forum is a large-scale political event held every three years, bringing together high-level representatives from European institutions, central governments, regional and local representatives, economic and social partners, NGOs and academics to focus on the major challenges of European cohesion policy.

Commenting on Croatia's plans to adopt the euro as sole legal tender, Stiglitz said on Friday that from the economic point of view, potential benefits are more restricted than potential costs.

There are arguments in favour of taking some more time before the country's entry into the eurozone. However, it is a political decision, he said.

Croatia is making preparations for the changeover to the euro in 2023, and the country's top officials, including Prime Minister Andrej Plenković, highlight Croatia's readiness to adopt the euro.

Stiglitz, who is the author of the book entitled "The Euro: How a Common Currency Threatens the Future of Europe" said during the European Forum Alpbach  in 2020 that the euro, as sole legal tender, deprived a country of two important instruments which the researcher deems to be essential in adjusting a national economy to shocks. One of those instruments is the possibility of adjusting the exchange arrangements, that is its capacity of using monetary policies and consequently changing interest rates, he explained then.

The euro area currently has 19 members. All EU countries, except Denmark, have the obligation to introduce the euro. Denmark participates in ERM II.

In July 2020, Croatia and Bulgaria entered the the Exchange Rate Mechanism II (ERM II), the key step to entry into the euro area. Until then Croatia had met all criteria to join the euro area except for membership in ERM II.

Upon Croatia's admission to ERM II, Prime Minister Plenković said that the admission to the ERM II meant a lot for the country's financial stability and strengthened its reputation, and also pointed out a high euroisation in Croatia.

For instance, 71% of household savings have been kept in the euro in the last eight years. Also more a than a half of loans are pegged to the euro. Foreign visitors coming from the euro area's member-states generate as many as three fifths of overnight stays in Croatia, and 57% of the value of the commodity exports are to those countries.

Tuesday, 1 March 2022

FinMin: Euro Introduction Must Not Be Detrimental to Consumers

ZAGREB, 1 March 2022 - After the euro is introduced in Croatia, consumers must not be in a less favourable position than before the common European currency was introduced, Finance Minister Zdravo Marić said at the conference "Croatia as part of the euro area" in Varaždin on Tuesday.

The conference was organised by the Večerjni List daily and the Vindija food processor. Marić said that regardless of the current situation and challenges Croatia is faced with, it has to see the priorities that have been worked on for many years, and one of those is introducing the euro currency. 

Introducing the euro is considered to be positive for the economy and society.

"I consider that Croatia has more benefit from introducing the euro than any possible lack or fault. The changes and adaptations that are required to be implemented need to emphasise and realise all those benefits while fear and faults have to be brought to the least possible measure," said Marić.

Marić recalled that loans and deposits would be converted to the euro automatically on 1 January 2023 while cash would be exchanged without any fee in the first year in commercial banks, the FINA agency and post offices. After that, it will be possible to exchange coins at the Croatian National Bank (HNB) for a period of three years and banknotes for an unlimited time.

Vindija food company CEO Nenad Klepač said that he mostly expected Croatia to benefit from joining the euro area.

"It will contribute to the long-term improvement of living standards for the Croatian population. We see a lot of new opportunities, primarily on the markets of the euro area, in 19 countries with a population of 340 million," said Klepač.

Erste Bank CEO Christoph Schoefboeck said that the introduction of the euro would be exceptionally demanding and expensive for Croatia's banking system and that the one-off cost was estimated at 80-100 million euros. Schoefboeck nevertheless believes that euro introduction will have a positive effect on the Croatian economy and society.

Tuesday, 8 February 2022

Central Bank to Hold New Competition for Design of €1 Coin With Marten Motif

ZAGREB, 8 Feb 2022 - The Croatian National Bank (HNB) said on Tuesday that in the coming days its Currency Committee would invite new proposals for the design of the national side of the €1 coin with the marten as the motif.

The HNB said that late on 6 February, the Currency Committee, as the expert body of the HNB Council in charge of the competition for the designs of the national side of euro coins, received a statement from Stjepan Pranjković whereby he withdrew his design for the marten motif and waived all rights stemming from having participated in the competition.

Today, the Currency Committee accepted Pranjković's decision and, in order to eliminate any further uncertainty, suspicion or doubt concerning the selection of the design for the marten motif, decided to invite new proposals for the design.

The HNB said that during the competition all authors were required to sign statements whereby they confirmed that their designs were original intellectual creations made solely for the needs of the competition.

The new competition for the design of the back of the €1 coin with the marten motif will not bring into question the timely manufacture of Croatian euro coins, the HNB said.

The selected designs for the national side of euro and cent coins were presented last Friday, including the marten motif for the €1 coin by Pranjković, who has a master's degree in applied arts.

Shortly thereafter, however, media reported that his design was almost identical to a marten photo by Scottish photographer Iain H. Leach, which raised the question of intellectual property infringement.

In a letter to the HNB Currency Committee on 6 February, Pranjković said that, "spurred by the unpleasant atmosphere in the media and on social networks as well as the pressures" he was exposed to, he had decided to withdraw his design for the €1 coin with the marten motif as well as waive all rights stemming from having participated in the design competition.

Tuesday, 8 February 2022

SDP Proposes Inflation Bonus for Pensioners

ZAGREB, 8 Feb 2022 - Social Democratic Party leader Peđa Grbin on Tuesday presented a proposal designed to help alleviate the impact of growing inflation on pensioners in the form of a pension allowance bonus for allowances amounting to less than HRK 4,000, proposing also adjustment of pensions to wage and inflation growth.

"Croatian pensions are low and at a time of growing inflation they become even lower, which requires action. The government is late with responding, it first capped fuel prices for two months, which was insufficient, and now it has to cap them again at a higher amount," the SDP leader told a news conference.

Long and short-term measures for pensioners

Other countries introduced measures to alleviate the inflationary effects of euro adoption a year before adopting the euro, while in Croatia a bill on euro adoption is still under public consultation, Grbin said.

"We cannot expect its entry into force before April, and neither can we expect before that date measures that should cushion the inflationary blow to citizens," he said, proposing two measures to help pensioners.

One is a long-term measure envisaging a change of the model of adjusting pensions to wage and inflation growth, and the other is a short-term measure in the form of an inflation bonus.

SDP MP Branko Grčić said the current adjustment of pensions did not follow wage growth. Five years ago, when the incumbent government took over, the average pension accounted for around 40% of the average wage while now it accounts for less than 37%, he said.

Grčić said that if inflation growth was higher than the growth of wages, pensions should be adjusted 100% to the inflation rate, and if the wage growth was higher, pensions should be adjusted to the wage growth rate.

Average pension could drop below 30% of average wage

Had this model been used over the past five years, the average pension, which now amounts to HRK 2,645, would have been HRK 200 higher, Grčić said, warning that if the current model of pension indexation was not changed, the average pension would fall below 30% of the average wage in the next 10-15 years.

SDP MP Boris Lalovac believes that the parliament can introduce the inflation bonus already this month so that pensioners can receive it in April.

"The government has said it will give a HRK 200 bonus only to pensioners with guaranteed minimum allowances, and there are around 60,000 such pensioners. We believe that the scheme should be expanded... to cover around 850,000 pensioners whose pension allowance is below HRK 4,000, which would cost up to HRK 700 million," said Lalovac.

The SDP proposes that pensioners whose allowance is below HRK 1,500 should receive a one-off bonus in the amount of HRK 1,200, those whose pension amounts to HRK 1,500-2,000 should get a HRK 1,000 bonus, those with pensions ranging from HRK 2,000 to 3,000 should receive a HRK 600 bonus, and those with pensions ranging from HRK 3,000 to 4,000 a bonus of HRK 400.

Lalovac said that the state budget was the biggest winner at a time of inflation growth, which was why there should be no problems in securing funds for the inflation bonus for pensioners.

Everything supposed to be creative turns into corruption in Croatia

Grbin also commented on a scandal involving the falsification of the motif on the national side of the €1 coin, saying that "everything that is supposed to be creative turns into corruption in Croatia."

If the process of selecting the best designs for the national sides of euro coins had been conducted by professionals, if the profession had been consulted, this whole affair would not have happened, Grbin said, adding that not only the central bank but the government, too, was responsible, as it was quite late with the process of euro introduction.

Grbin believes the call for applications for the design of the national sides of euro coins should be repeated despite the lack of time.

Saturday, 5 February 2022

Minister: Those Fishing in Troubled Waters During Euro Changeover to be Exposed

ZAGREB, 5 Feb 2022 - Economy and Sustainable Development Minister Tomislav Ćorić said on Saturday that anyone trying to fish in troubled waters by unjustifiably increasing prices during the euro changeover would be exposed.

"There will be continual monitoring by the state, and, I'm confident, by consumer associations as well. Those who fish in troubled waters and possibly increase prices without justification must be exposed," the minister told reporters during a visit to Split.

Speaking of inflation, he said that global markets had unfortunately started raising gas, electricity and oil prices and that the state could not influence it more significantly except by cutting taxes to alleviate the impact as much as possible after electricity and gas prices go up on 1 April.

"As of 1 April we will do our best so that the electricity and gas price increase is as small as possible," he said.

The minister also noted that this year's inflation would be slightly higher than last year's rate of 2.8%.

Ćorić said that he believed that if the situation on the energy market calmed down, Croatia would not experience the impact of price hikes as experienced by some other EU members.

Asked if inflation would have an impact on this year's tourist season, Ćorić said that if commodity prices increased by a few percentage points in the first half of the year, a likely rise in energy prices could lead to a rise in prices of services.

"I think it will have an effect (on this year's booking prices) but I hope that it will be reasonable and that we will not fish in troubled waters because that makes us less competitive," the minister said.

Asked if the government would cap fuel prices, Ćorić said the government would respond if the prices escalated.

Thursday, 27 January 2022

Student Financial Club Informs President of its Educational Euro Changeover Programme

ZAGREB, 27 Jan 2022 - President Zoran Milanović on Thursday received representatives of the Financial Club, a specialised university student association, who presented their "Simply about the euro" project, the president's office said.

The project was carried out between October 2019 and April 2021 and is the first project dedicated to the introduction of the euro in Croatia, launched by university students to educate their colleagues and the public.

The aim of the project was to explain in a simple and comprehensible way all the doubts concerning the euro, the club's representatives told the president.

The project, which received the Rector's Award, included the publication of expert articles on the effects of joining the euro area, the organisation of panels and other activities.

They told the president the Financial Club was established in 2005 at the Zagreb Faculty of Economics and Business.

Besides the "Simply about the euro" project, the club has launched many other programmes aimed at increasing financial literacy in Croatia, notably among youth, including a seminar on the financial literacy of students in many Zagreb schools.

The president supported their idea and activities, his office said.

The Financial Club has received more than 30 Dean's and Rector's awards for various projects and conferences. In 2013, the Zagreb Stock Exchange awarded them for outstanding contribution to market capital education.

Tuesday, 25 January 2022

Adopting the Euro and Everyday Prices: What Can Consumers Expect?

January 25, 2022 - This year will mark the introduction of the Euro (€) in Croatia, two years after participating in the exchange rate mechanism since 10 July 2020. This set the exchange rate at 1 euro = 7.543450 kuna, with a band of fluctuation of 15%.

From September 5 onwards, retailers throughout the country should display dual prices with both kuna and euros. This measure will extend until the end of 2023.

According to the Croatian media, reactions from the general public surrounding the adoption of the Euro is one of hesitancy. Many fearing the adoption of the Euro may bring on additional inflationary prices.

This sentiment is understandable considering the country is also facing one of the highest year-on-year inflation of 5.5% (DZS).

The same fears were also expressed when 12 countries adopted the Euro in 1999. As many as 80-90% of consumers in Austria, Finland, Portugal, Netherlands, Greece, Germany, and Spain believed that prices were higher after the adoption.

But what could have led to these beliefs in euro-related inflation?

One reason is that consumers use approximated exchange rates for ease of conversions. For example, it can be more intuitive to use a rate of 8 kuna to 1 euro compared to the real rate, distorting inflation by about 6%.

Another, perhaps more calculable concern, is due to something called the rounding effect. This occurs when prices are replaced with more attractive, higher price points that frequently end with numbers 0, 5, or 9.

But are these fears justified, especially for the consumption of everyday goods? Responses from experts have so far has been encouraging.

Leading Croatian economists and even the European Commission have repeatedly assured the introduction of the Euro will not have significant effects on aggregate price levels. Researchers have also supported these claims, showing Euro-related inflation has a larger perceived (as opposed to actual) inflation on consumer prices, particularly for cheap, frequently purchased goods.

Two common sectors that can be used as examples to determine if, and how, the rounding effect may lead to an increase in average spending for consumers are: the restaurants and cafes sector, and the food and produce sector.

Food and Produce

Table 1 outlines the average price of 10 common everyday household items bought on a weekly basis. Conservative estimates are made based on prices averaged from figures at Numbeo and Prices World.

These figures are based on the assumption that Euro prices are rounded to the nearest attractive price ending with 0, 5, or 9.

Table 1table_1_small.jpg

When 12 countries adopted the Euro in 1999, consumer prices saw an increase of 0.12% to 0.29%. Although the increase in the rounding effect in Croatia may be slightly higher in the hypothetical scenario above, in real terms, this is almost negligible. Based on these estimates, the total cost of these weekly goods is currently 265.18 kuna. After the adoption of the Euro, the conservative estimate for the same goods is €35.29 or 266.01 kuna. A difference of 0.83 kuna or a 0.31% increase. While the euro-related inflation for everyday groceries may not burn a hole in consumers’ pockets, what about a common leisure activity, enjoying a drink or meal at a restaurant or cafe bar?

This is likely where consumers would feel more of a pinch.

Restaurants and cafes

Back in January 2002, inflation for the restaurant and cafe industry in countries that adopted the Euro averaged a jump of 15.63%. In the following 3 months, these prices continued to increase at a rate of 5%. This was in contrast to countries that chose not to adopt the Euro, namely Denmark, Sweden, and the U.K. that only saw price increases of 1.01-2.18%.

Although the Euro was adopted by these countries in 1999 as outlined earlier, Euro notes and coins were only introduced 1 January 2002 which explains this trend. Until then, the old notes and coins of each country were still legal tender.

In neighboring Slovenia when the Euro was adopted in 2007, then governor of the central bank, Mitja Gaspari also shared a similar anecdote regarding the increase in coffee prices.

What might consumers expect from restaurants and cafes in Croatia? The following table uses similar predictions based on countries that previously adopted the Euro and includes a rounding effect.

Table 2

Table_2_cropped.jpg

Using numbers from Numbeo and Price World, a meal at an affordable restaurant would average 59 kuna/person. With euro-related inflation, this could go up to 68.22 kuna/person.

The biggest jump is in mid-priced restaurants where an average meal increases from 220 kuna/person to 253.51 kuna/person.

There are a couple of explanations for this large increase in prices for restaurants and cafes, compared to food and produce.

The first scenario may be due to the switch acting as a motivator and coordination device for most, if not all, restaurant and cafe owners to switch to higher prices. This is also made possible through the widespread availability of menu prices online, leading to the rapid diffusion and adoption of a new Euro price point.

A secondary explanation for high inflationary prices can simply be attributed to the increase in anticipated menu costs due to the increase in marginal costs from raw ingredients. Since restaurants and cafes purchase these in bulk, costs accumulate relatively quickly and are passed down to the consumer.

Will these effects last?

The good news is for most euro-adopters in the long run, these spikes were largely temporary as people adjust to the new currency. The Croatian central bank is also giving inhabitants a longer time horizon of over a year to make this adjustment with dual prices lasting through 2023.

For more, check out our dedicated lifestyle section.

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