A weaker kuna when Croatia joins the eurozone could cause problems

January 30, 2022 – A weaker Croatian national currency (kuna) when Croatia joins the Eurozone could cause more problems than it solves.

As Poslovni Dnevnik/Ana Blaskovic writes, with Croatia’s rapid approach to joining the Eurozone, which is expected to take place at the very beginning of 2023, one of the main issues will be the rate at which the kuna will be exchanged against the single currency of the euro zone. There isn’t really much wiggle room as the rules dictate aiming around a central parity of 7.5345.

For years, critics have made negative remarks about the Croatian kuna for being too strong, arguing that it makes the currency uncompetitive when it comes to exports, and the idea of ​​depreciation was once supported by the old President Kolinda Grabar-Kitarovic.

The Croatian National Bank (CNB) once calculated that a 10% depreciation of the kuna would currently increase the debts felt by residents, businesses and even the state, whose contracts include a monetary clause of 50 billion kunas. All of the above now comes a detailed examination of the likely repercussions.

“The negative effect of kuna depreciation on the balance sheets of Croatian sectors outweighs the positive effect of depreciation on foreign trade,” concluded research author Ozana Nadoveza Jelic, senior management advisor modeling, and Rafael Ravnik, economic analyst at Macrode.

In their article “Dependent on the Euro: The Macroeconomic Effects of Exchange Rate Changes in Croatia”, the duo concluded that in the medium term, net exports would benefit relatively slightly from the depreciation of the kuna, but that all domestic sectors would end up paying a much higher price.

The change in the kuna exchange rate against the euro would be reflected through the commercial channel, i.e. foreign trade, in which a short-term decline would occur first, followed by a increase in net exports.

The second effect is on the balance sheet of the corporate sector which, thanks to their open foreign exchange position (where debt relief also depends on the exchange rate) are faced with an increased loan repayment burden. Consequently, they will reduce investment, which affects the rest of the economy, causing a reduction in capital accumulation in the medium and long term, and therefore an effect on potential GDP.

At the same time, households will also face the burden of repayment, in addition to seeing their financial wealth denominated in euros, and there will be a further reduction in real disposable income due to rising market basket prices.

The state does not suffer quite the same effect thanks to the possibility of borrowing in foreign currencies, but the burden of repayment will increase for it as much as for ordinary citizens (because in the end it is entirely the burden taxpayers), and the higher debt burden will therefore increase the country’s overall risk premium.

In this vicious circle as Croatia’s Eurozone membership knocks on the door, the next step would be the growth of all interest rates in the country, one of the factors of which is the riskiness of the currency. ‘State.

To find out more about Croatia joining the Eurozone, see our politics section.

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