Croatia to launch bid to join Eurozone within two months

The government aims to launch the country’s bid to join the Eurozone within two months and will commit to further modernizing its economy and cutting debt as part of the accession process, FinMin Zdravko Maric has told Reuters in an interview on Tuesday. Maric explained that in a formal letter of intent to the country’s partners in the Eurozone, which he expect to be sent within the next two months, there would be commitments the county will deliver before entering the ERM II. They will include preserving macroeconomic stability and structural reforms, which could drive a cut in the country’s risk premium. Maric said the government projections (for 2.5% GDP growth this year) were always conservative, but that the cabinet will do everything possible to beat its target this year again. The minister also said that the projections also included further potential payments of state guarantees for troubled shipbuilding group Uljanik, noting that HRK1.4bn payment, fully accounted for in the government plans, was still possible. Maric underlined that any fiscal surplus (the government projects a small deficit of 0.3% of GDP this year, but to reverse to surplus in next years) would be used to further cut the public debt, which stood at 74.6% of GDP at the end of 2018, adding that the government has managed to cut annual interest payments on debt to 2.3% of GDP in 2018 from 3.5% of GDP in 2015. The minister also said that the government was eyeing a Eurobond issue maybe even before the summer, adding that a domestic bond would be placed afterwards. Maric said that as investor complaints about excessive red tape and changing regulations have been a common theme, the government would step up efforts to improve the business climate, making public administration and state-owned firms more efficient and user-friendly. Maric also said that in coming months the government would consider options for tax cuts in 2020 after cutting the corporate tax, the income tax and VAT on some products in the past two years.

On a related note, PM Andrej Plenkovic said on Tuesday that entering the Eurozone was a goal that should be achieved as it was in Croatia’s interest, i.e. good for its economy, financial system and international position, and so that Croatia could be a successful EU member. Plenkovic said Croatia’s accession to the Eurozone was one of the main political, economic and financial topics for the next five years and recalled the government and central bank’s strategy for the introduction of the EUR, saying that for more than 18 months now its aim had been to raise public awareness of Croatia’s deeper integration into the Eurozone. The premier underlined that Croatia was in fact already integrated into the Eurozone as the area’s member states are its main trade partners, 77% of Croatian citizens’ savings and 54% of loans are in the EUR, as is 70% of the tourism revenue, 60% of bed nights is generated by citizens from the Eurozone, 66% of foreign tourists’ spending is in the EUR, as is 75% of Croatia’s foreign debt.

Recall that in May 2018 the government adopted EUR introduction strategy that, however, does not fix a date for adopting the EUR currency. In October 2018, HNB Governor Boris Vujcic said that Croatia planned to formally notify Brussels about its intention of joining the ERM II before eventually adopting the EUR currency in Q2 with the central bank and the finance ministry preparing a letter of intent for entering the ERM II and Vujcic expecting the EU to decide on Croatia entering the ERM II sometime in 2020. Maric has previously said that Croatia was not in a rush regarding deadlines to join the ERM II, but to prepare well for the membership in the Eurozone beforehand, including putting its fiscal situation in check. Note that the autumn 2018 Eurobarometer survey showed that most Croats — 56%, are opposed to the euro introduction, up from 48% in the spring Eurobarometer survey, while the support for the EUR has declined by 6 pps to only 40%. A previous HNB poll has shown that only 40% of the respondents are in favor of the EUR introduction and 56% object it. A recent Promocija Plus poll showed that altogether 53.4% of Croats are opposed to the EUR introduction, while only 39.3% support the move.

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