POLICY CNB Governor Zeljko Rohatinski is leading a resolute policy of a firm kuna exchange rate towards the euro, and monetary criteria should not be an issue in Croatian accession to the Eurozone — the problems will arise in fiscal policy and in the spendthrift government apparatusIn spite of the Greek debt crisis and the other problems currently shaking the European Monetary Union, a speedy entry into the eurozone, i.e. the introduction of the euro, must remain the basic long-term goal of Croatian economic policy. The introduction of the euro as the official currency in Croatia could create massive economic benefit, while, on the other hand, abiding by the strict conditions it has to meet to gain the right to join the monetary union would very effectively stabilise the situation in Croatia's public finances. Insofar it is clear that the date of Croatian accession to the eurozone depends in greater measure on the fiscal policies led by Croatian Government than it does on trends within the European Union itself, making the reports published by the domestic media to the effect that the European Union will not allow Croatia to introduce the euro before 2017 quite unconvincing.

Economist Damir Novotny feels that these kinds of reports are ungrounded and that Croatia could introduce the euro much sooner if it is disciplined in carrying out all of the requirements. "Regardless of the Greek crisis, nothing has changed in the protocols on accession to the eurozone. It is to be presumed that European institutions will be more rigid and strict in carrying out their monitoring than has been the case to date, but if a country meets the criteria nobody is going to forbid it from introducing the euro. The criteria are public knowledge - inflation must not be 1.5 percent greater over a two-year period than the average of the three eurozone countries with the lowest rates of inflation, the budget deficit must not exceed 3 percent of the GDP, the total public debt must not exceed 60 percent of the GDP, and the exchange rate of its currency against the euro can only fluctuate within the permitted 15 percent limit over a two-year period. Given the fact that Croatia has for years maintained an exceedingly stable rate of exchange for the kuna against the euro, the monetary criteria should not be an issue, and the problems will be rather in the fiscal policy that is within the scope of Government's authorities. Croatian Government shall, therefore, very soon make its decision on whether and when it wishes to introduce the euro, and make the appropriate adjustments to its policies. If you ask me, considering the situation in which Croatia finds itself, the introduction of the euro means a lot of benefit and little damage, and it should happen as soon as possible. For Government, however, it would mean a few years of sacrifices, especially in regard to the budget deficit, and that is a situation in which, with less funds, it is hard to fulfil election campaign promises."

An opinion similar to that voiced by Damir Novotny was expressed in an interview given to the Poslovni dnevnik daily by Croatian National Bank (CNB) Vice Governor Boris Vujcic. He feels that the cost of joining the eurozone in comparison with the benefits are very small, and that it is key that membership in the European Monetary Union be seen as an opportunity to stabilise public finances. In short - it means that with the introduction of the euro, Croatia would be able to take on debt at much more favourable terms than to date. These lower interest rates could be used to reduce the budget deficit and public debt, because Government could reprogram old debt with lower costs. On the other hand, the same effect can be used to increase borrowing, i.e. the rate of public spending. This happened in Greece, where governments did not use the cheap capital that became available to them after joining the eurozone to tidy up public finances and encourage structural changes in the economy, but spent it rather to finance massive welfare programmes and tried thereby to secure political popularity. This ten-year policy has resulted in the massive crisis through which that country is passing today.

It is to be expected that European institutions will in the future introduce more stringent control of compliance with various conditions for membership in the eurozone to prevent a repeat of the Greek scenario, but it can be concluded from this case that the number of benefits from joining the eurozone largely depends on the degree of discipline which every state exercises in adhering to the rules that have been set out. On the other hand, potential costs are also very individual. By introducing the euro countries waive their monetary independence, i.e. the possibility of using monetary policy to influence trends in their own economies. Simply put, this means that countries can no longer improve the competitiveness of their economies by devaluing the national currency exchange rate. Given the power of this measure, many countries do not want to relinquish it and therefore refuse to join the Eurozone.

Poland and the Czech Republic are such countries, and Hungary also rejected accession for years, which proved to be a poor decision when the country was hit by a tough crisis last year it could have overcome much less painfully had it been a member of the eurozone. In that context Croatia has little to lose. Its economy is highly euro-oriented, which means that practically all major values are set in euro anyways, and monetary policy has for almost fifteen years been based on a rigidly firm kuna rate of exchange against the euro. All in all, Croatia would, by joining the eurozone, lose the powers of monetary policy it has not used for years anyways. Estonia could be the best model for Croatia in planning its policy towards the eurozone. The country will join the European Monetary Union on 1 January 2011, which means that the country's leaders have decided to relinquish their power over monetary policy to European institutions, in spite of all the problems that currently exist in the eurozone as a result of the Greek crisis. Estonia did not do so out of necessity, since it is one of the countries with the most orderly finances in all of Europe, but as a result of its judgement that a new cycle of economic growth needed to recover from the fallout of the recession will be more easily encouraged using the cheap capital available to members of the eurozone. Estonia and Croatia are countries similar in their size and population. Their economies are of a similar size, both have been hard hit by the consequences of the global economic recession and both are very much linked to the euro. Insofar the same would be valid for Croatia as is for Estonia, if it could achieve the same level of fiscal responsibility. If it wishes to have the greatest possible benefit from European Union membership, Croatian Government must stabilise the public finances over the coming two years and create the conditions to achieve the possibility of joining the eurozone in as short a period of time as possible. This policy will require significant sacrifices, buts its fruits will be enjoyed by Croatians for decades to come.