Croatia on Thursday sent a letter to the euro area member states, Denmark and EU institutions expressing its intent to enter the European Exchange Rate Mechanism (ERM II), the Finance Ministry and the Croatian National Bank (HNB) announced in a statement.
Membership in the ERM II precedes the adoption of the euro as legal tender.
The letter of intent was accompanied by an action plan detailing reforms that Croatia will implement before entering ERM II. The euro area member states and Denmark are expected to discuss the letter of intent at the next meeting of the Eurogroup.
The letter of intent was signed by Finance Minister Zdravko Maric and HNB Governor Boris Vujcic.
The letter expresses Croatia’s readiness to implement reforms as part of further preparations for participation in ERM II. By successfully participating in ERM II for at least two years, Croatia should formally meet the exchange rate criterion of nominal convergence. Croatia has been meeting the other criteria for a while, namely price stability, public finance sustainability and interest rate convergence, while the prudent monetary and fiscal policy should ensure that it stays that way, the statement said.
It said that the application for ERM II entry was enabled by marked progress in reducing macroeconomic imbalances. Economic recovery, growing exports, decreasing unemployment, steady fiscal adjustment and a sharp decline in external debt had reduced the vulnerability of the Croatian economy and made it possible for the country to exit the Excessive Deficit Procedure in June 2017, after which, in May 2019, the Council of Finance Ministers, acting on a proposal by the European Commission, confirmed that excessive macroeconomic imbalances were no longer present in Croatia.
In consultation with the EU institutions, in the letter of intent, Croatia has undertaken to implement reforms in six areas: to further strengthen the supervision of the banking system by establishing close cooperation between the Croatian National Bank and the European Central Bank; strengthen the macroprudential policy framework by introducing an explicit mandate for borrower-based measures; strengthen the anti-money laundering framework; upgrade the system of statistical data collection, processing and publication; improve public-sector management; and reduce the administrative and financial burden on the economy.
Croatia has already begun implementing some of these measures. On May 27, it sent a request to the European Central Bank for establishing close cooperation between the Croatian National Bank and the European Central Bank.
Croatia intends to implement the measures listed in the letter of intent and the action plan by mid-2020, after which the EU institutions will assess whether the measures have been adequately implemented. After receiving a positive response, Croatia will formally enter ERM II.
