Those Bulgarian doomsayers regarding the introduction of the euro can take a breather.

That’s the advice coming from Croatia, the final nation to embrace the single currency in 2023.

Following the European Commission’s approval for Bulgaria to join the currency union next year, thousands of Bulgarians have taken to the streets, concerned about potential increases in living costs.

Since adopting the euro, Croatia has seen a slight uptick in inflation—yet experts suggest this reflects other positive economic trends. Various indicators point to a successful transition, presenting a potential roadmap for Bulgaria.

Croatia registered one of the strongest growth rates in the European Union last year at 3.8 percent, buoyed by a robust tourism sector despite industrial downturns elsewhere. Unemployment has reached the lowest levels since records began in 1996. Regular inflow of EU funds is expected, with ratings agency Fitch predicting Croatia will utilize all of the €4.5 billion set aside for the Recovery and Resilience Instrument by mid-next year. Worth noting, wages have surged by over 30 percent since Croatians exchanged the kuna for the euro.

Turbulent entry into the eurozone

In mid-2020, Croatia and Bulgaria, the EU’s poorest members, both stepped into the eurozone’s waiting room, maintaining inflation rates at or below the eurozone average for most of the prior decade.

However, the onset of the pandemic triggered a series of economic shocks: inflation in Croatia peaked at over 13 percent, while Bulgaria faced nearly 19 percent, leaving consumers in both nations wary of a repeat of these trends.

While Croatia’s inflation remains among the EU’s highest, analysts assert that its causes are not primarily tied to adopting the euro.

“Croatia was the only nation to join the eurozone amid severe inflationary pressures,” notes Petar Sorić from the Faculty of Economics in Zagreb, highlighting that inflation during 2022–2023 was the worst since the 1990s collapse of Yugoslavia.

According to Sorić, early euro adoption conditions made it hard for consumers to pinpoint inflation drivers, fostering the perception that it was significantly higher than reported.

Prices have increased since Croatia adopted the euro, but this doesn’t negate the benefits felt by many.

Nonetheless, concerns about rising prices have a basis, says Fran Galetić from the Faculty of Economics in Zagreb, emphasizing Slovenia’s experience, where prices spiked by nine percent within 18 months post-euro adoption in January 2007.

“Despite official assurances that this wouldn’t happen, memories of past experiences lingered,” Galetić remarked. The Croatian government mandated that supermarkets display prices in both currencies four months prior to the euro replacing the kuna and for one year thereafter.

However, opportunistic retailers exploited the situation. Many raised prices before the dual pricing rule took effect, allowing them to claim prices hadn’t changed during the transition period, stated Galetić. Consumer prices surged more rapidly in the 18 months surrounding the euro adoption than in the broader eurozone.

Bulgaria seeks to implement a similar policy starting in July, learning from Croatia’s experience.

Bulgaria is better off as it currently has a much steadier inflation rate than Croatia in 2023. This will facilitate closer monitoring of price adjustments and accountability for unfair market practices.

Resentment from the past is still palpable: earlier this year, Croatians protested by boycotting supermarkets over price hikes, prompting the government to prolong a series of price control measures enacted for essential products in 2022 and 2023.

“The government framed these packages as a response to the energy crisis, yet consumers likely view them as a safeguard against euro-induced inflation,” Sorić explained.

He added that Bulgaria enjoys a more favorable inflation landscape than Croatia this year, making it easier to oversee price changes and address unfair trading practices.

Other inflation drivers exist, less directly linked to the euro. For instance, tourism, which represents around 20% of Croatia’s GDP, has rebounded since pandemic restrictions lifted, becoming a dynamic sector. Over the past three years, tourist prices in Croatia have risen by 50%, significantly higher than increases in Spain or Greece (15-20%).

Advantages of the euro

Regardless of these challenges, experts maintain that transitioning to a common currency offers numerous benefits. Ana Šabić, director of the Department for European Affairs at the Croatian National Bank, hailed euro adoption in Croatia as “a complete success story.”

Bidding farewell to currency conversion costs has substantially benefitted both the economy and tourists, with the risk premium compared to Germany—calculated through government bond yields—almost vanishing.

The Croatian National Bank estimates savings of approximately €160 million annually on exchange and transaction costs post-euro adoption.

“Despite the challenging context, Croatia has reaped all the expected advantages of eurozone membership,” stated Šabić. However, she highlighted the importance of “detailed and timely planning” along with a “clear division of responsibilities” among involved institutions to avoid pitfalls.

Translation: A. Š.

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