The adoption of the euro will benefit Croatian businesses, but it alone will not resolve the structural problems plaguing the country's economy, head of the largest local business association, the Croatian Chamber of Economy, Luka Burilovic, said on Thursday.

In his statement, Burilovic called for more effort to reduce what he called “structural weaknesses” of the economy before Croatia joins the euro zone.

“It is in our own best interest to join the euro zone as strong and stable as possible,” Burilovic said, commenting on the advantages and disadvantages of replacing the local currency kuna with the euro.

Burilovic noted that Croatia’s economy is already closely tied to the much larger euro zone economy because EU countries already using the euro are its most important trade partners.

Around two thirds of Croatia’s foreign trade and two thirds of its direct foreign investments are done with the 19 countries which make up the euro zone.

Euro would bring benefits to Croatian businesses

Croatia’s tourism industry is highly dependent on visitors from euro zone countries, who generate about 70 percent of all tourist revenue, and account for some 60 percent of all bed-night stays in Croatia, Burilovic said, and added that the Croatian financial system is also highly euroised, i.e. a large percentage of loans is indexed in euros.

He said that it would be much easier to do business and reduce risks in a system in which both revenue and spendings are using the same currency.

“That’s why the main benefit of adopting the euro for the Croatian economy is that it would mean removing the currency risk,” Burilovic said, noting that at present the main instrument of the central bank’s monetary policy is maintaining the stability of the kuna-euro exchange rate.

For years, the central bank maintains the exchange rate in a narrow band, allowing it to fluctuate from roughly 7.3 to 7.5 kuna per euro.

Another positive effect felt by Croatians would be lower interest rates and more favourable borrowing conditions. Interest rates would drop closer to levels in the euro zone. Burilovic said that adopting the euro would also provide a boost to exports and as a consequence, growth in employment levels.

“Lower capital costs and export risks, and the removal of exchange rate differences would make exporters more competitive,” he said.

Switch to euro in 2022 at the earliest

In 2017, Croatia’s government and the central bank prepared a document describing the strategy for country’s adoption of the euro, which it is obliged to do as part of its EU membership, provided that the so-called Maastricht criteria which list five economic benchmarks, including a government debt-to-GDP ratio of no more than 60 percent.

According to latest figures, Croatia’s public debt-to-GDP ratio was at 74.5 percent in September 2018, a six-year low.

Prime Minister Plenkovic said in 2017 that his cabinet’s two important goals included Croatia joining the EU’s passport-free travel Schengen zone, and adopting the euro. He said that the target was for Croatia to enter the Exchange Rate Mechanism II (ERM) in 2020, when Croatia would be holding the rotating six-month EU presidency.

Countries must spend at least two years in the ERM before switching to the euro, meaning Croatia might switch to the euro in 2022 at the earliest, provided that its debt-to-GDP ratio continues falling.

Follow N1 via mobile apps for Android | iPhone/iPad | Windows| and social media on Twitter | Facebook.