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Ivo Božić, a stall owner selling trinkets at a Christmas market in the Croatian capital Zagreb, is used to working with multiple currencies and believes the transition will be smooth when the country adopts the euro on January 1.

“If you’re dealing with tourists, there’s definitely some currency in your head,” says Bozic, whose products include dolls in colorful dresses, Christmas-themed refrigerator magnets and handmade jewelry. “I have bank accounts in multiple currencies and I guess I’ll just merge them next year,” he added. “I bought some of my stuff in Euros anyway.”

When Croatia becomes the 20th country to use the euro next week, it will be a milestone for the nation of 4 million, which has long sought closer integration with the rest of the EU. Croatia will also join the Schengen zone free from European borders.

The switch from the kuna should bring benefits, economists say, as Croatia relies on the single currency area for more than half of its foreign trade, two-thirds of foreign direct investment and roughly 70 percent of its tourists.

It would also be a symbolic boost to European unity, just as Russia seeks to undermine the bloc’s opposition to its war in Ukraine. European Central Bank President Christine Lagarde called the addition “a vote of confidence for the euro zone” and said Croatia would benefit from a “euro shield.”

Adopting the euro is in some ways a natural progression for a country where the single currency already accounts for half of its total bank deposits and 60 percent of its total loans, more than any country outside the eurozone.

“Croatia is the country that benefits the most from joining the Eurozone” because it will eliminate the foreign exchange risk, said the Governor of the Croatian Central Bank, Boris Vujicic. “Foreign exchange risk is the highest in Croatia”.

“When your currency depreciates against the euro, it means your debt is worth more,” Vujicic told the Financial Times. “So your borrowing costs as a country are higher to reflect this risk.”

Zagreb supermarket already displays prices in both local kuna and euro © Denis Lovrovic/AFP/Getty Images

Croatia has 27 billion euros in foreign reserves, 40 percent of its gross domestic product, to cover that, he said, although joining the euro means “it won’t need as much.”

The euro’s benefits are “most visible during a crisis,” Vujicic stressed, pointing to recent selling pressure on the Hungarian forint, Polish zloty and Czech koruna. “They had to step in and raise interest rates a lot, and their 10-year government bond yields are now between 5 and 8.5 percent,” he said.

By contrast, Croatia’s 10-year bond yield was around 3.5 percent, lower than Italy and Greece and slightly higher than Spain, even though it has yet to join the euro. “There is a big credibility effect,” said Vujicic, who will vote on ECB policy decisions from January after already joining meetings as an observer.

Vujicic recalled how prices spiraled out of control in the former Yugoslavia and then Croatia in the late 1980s and early 1990s, suggesting he would take a tough stance to aggressively moderate the price hikes that have worried European policymakers.

“I have seen the beast and I know how the beast behaves if not checked at the right time,” he said.

He acknowledged the risk that Croatian consumers could blame the introduction of the euro for high inflation, which reached 13.5 percent last month. However, on average, countries that have adopted the euro have seen inflation rise by only 0.2 to 0.4 percentage points, albeit during periods of lower price growth.

In order to improve pricing transparency, Croatian shops have been forced to display the price of goods in both kuna and euro since September and will continue to do so until the end of 2023. Businesses have been threatened with fines as they try to use the switch. to raise prices.

“The handover is taking place at a time when inflation is already high, so the starting position is that Croatian consumers are very price sensitive,” said Michal Senčuk, CEO of Studenac, one of Croatia’s leading grocery chains. “It makes it harder for any merchant to charge unreasonable prices, because if you do, buyers will go to your competitors.”

The shutdown has been a logistical challenge for retailers and authorities. Studenac had to print and display 5 million new price tags, while its staff had to explain to confused customers that it could not accept euros until January 1, after which the two currencies would be used side by side for two weeks.

As well as boosting tourism, having the euro will make Croatia “more attractive to foreign buyers looking for a second home, either for summer holidays or the milder winters we have here,” Senčuk predicted.

Meanwhile, the central bank has brought in an army to hold and guard about 40 percent of the kuna coins it expects to exchange for euros.

“It’s almost the weight of the Eiffel Tower,” Vujicic said. “After three years we will sell it as metal, then the army can put tanks or armored vehicles [back] storage space”.


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