The first anniversary of euro introduction in Croatia is near, with the government, the central bank and analysts underlining its lasting benefits while a portion of citizens, in addition to partially blaming price growth on the euro, have still not entirely got used to the new currency. Pročitaj više

Finance Minister Marko Primorac recently said that all the anticipated positive effects of euro area accession have materialised – the country’s credit rating has gone up, the foreign exchange risk has decreased significantly and transaction costs have been eliminated, with savings for the economy amounting to around €160 million.

“I believe the effects will be fully visible over a longer period of time, but what we did on the path to adopting the euro will yield lasting transformative effects for the Croatian economy,” Primorac said.

Croatian National Bank (HNB) Governor Boris Vujcic thinks likewise, pointing to the removal of the exchange rate risk, which has resulted in a lower risk premium for the country, which has led to interest rates being significantly lower than they would be without euro introduction.

“The cost of borrowing for the state, companies and households would be much higher. And not only that, the inflation rate would be higher than it is, and Croatia has a lower inflation rate than all the countries that did not introduce the euro,” Vujcic said recently.

Euro area entry amidst high inflation, rounding of prices

In November 2022 inflation reached a record high 13.5%, after which it started gradually slowing down, with two-digit rates having been recorded also in the first three months of 2023.

Croatia’s entry to the European monetary union at a time of high inflation was a specificity and a challenge other euro area member countries did not have to face in previous euro area enlargement rounds.

In the first days of 2023 there were numerous reports of an unjustified rounding of prices in the conversion of kuna to euros, with Prime Minister Andrej Plenkovic warning that price rounding must not be used for making “unjustifiably high profits” and inspection teams going out into the field. In February, the Economy Ministry launched an application for the comparison of prices in retail chains to those on the last day of 2022.

The preliminary estimate of inflation for January 2023 was published at the end of that month, showing that year on year inflation had slowed down to 12.7% while compared to December 2022, prices remained the same on average.

Commenting on these figures, HNB Governor Vujcic said that as expected, euro introduction did not have a significant effect on the total price growth, citing recently surveys by the HNB, ECB and Eurostat which show that euro introduction impacted inflation by up to 0.4 percentage points, that the impact referred entirely to services, in January, while in February and March the impact was already insignificant.

Speaking of the rise in the prices of services in the summer months, Vujcic said it was primarily due to the tourist season and tourist demand, and not the adoption of the euro. Some citizens have the perception that prices increased due to the adoption of the euro, but now it is clear that that was not the case, Vujcic added.

Euro introduction insignificant for total inflation, but…

An associate professor at the Zagreb Faculty of Economics, Petar Soric, analysed the impact of euro introduction in his research paper “The Euro and Croatian inflation: much ado about nothing?”

The work analyses the impact of euro introduction in Croatia on changes in the aggregate price level. Its findings suggest that euro introduction has had a relatively small impact on total inflation, but that it has had a more significant effect on the prices of food and beverages, hospitality services and clothing.

Soric has told Hina that the countries that joined the euro area before Croatia had very similar experiences.

He made his first analysis three months after euro introduction, noticing that the impact on price growth was gradually waning with the passage of time, however, when he collected data for the following months, when the tourist season was beginning, all the way to July, the effect started to intensify.

“That probably means that some retailers used the situation to unjustifiably raise prices and increase margins,” he said.

Soric found that the euro was to “blame” for as much as 62% of price inflation for clothing in June 2023. As for the growth of prices of food and beverages, the effect ranged from 0.36% in January to 33.03% in June.

The effect of euro introduction was particularly significant in the hospitality sector, where in June half the inflation, or 48.08%, could be ascribed to euro introduction.

Sorić underlines that this is the impact of the euro on inflation and on the percentage change in prices and not on the absolute price levels for individual goods and services. In other words, the analysis shows that the prices of food and beverages would have gone up even without euro introduction, but in June the price growth would have amounted to two-thirds of the price growth that occurred.

Soric believes that price growth probably also has to do with competition, which in Croatia, which is a small country, is not as in the USA, which makes it more difficult to punish those who unjustifiably raise prices.

He also pointed to the government’s aid packages for households and the business sector, which have contributed to preventing the inflation of prices of basic foodstuffs and energy from “growing dramatically” due to euro introduction.

Survey: A large portion of citizens still convert euro prices to kuna

Since September 2022 until the end of this year retailers are under the obligation of dual price display.

Even though many citizens complain about still not having got used to the new currency and consumer associations call for extending that regime, Finance Minister Primorac recently repeated that that is not necessary.

Prolonging the dual display of prices would confuse consumers, and it is also not in line with recommendations by the European Commission, Primorac said.

A survey conducted by the Psychology Department of the Zagreb Faculty of Humanities and Social Sciences in cooperation with the Hendal market research agency shows that in November 47% of the respondents said they always convert euro prices to kuna prices, 46% said they do it sometimes and only 6% said they do not do it at all.

The survey is conducted on a monthly basis and it covers a representative sample of 500 citizens. The first survey, conducted in February 2023, showed that 60% of citizens always converted euro prices to kuna prices, 36% did it sometimes and 4% never did it.

The percentages can be interpreted as an indicator of adjustment, and even though there has been a change in relation to the beginning of the year, the fact remains that roughly half the citizens still convert euro prices to kuna prices.

A senior teaching assistant at the Psychology Department of the Zagreb Faculty of Humanities and Social Sciences, Nikola Erceg, believes the findings lead to the conclusion that citizens have still not adapted to the euro.

“I assume conversion helps people as a form of protection against unwanted spending and a safeguard in terms of more rational management of money. The euro has the characteristic of being nominally ‘weaker’ than the kuna, and people are sensitive to nominal value, so €20 sounds to be less money than HRK 150. Only when we convert those prices to kuna do we get the feeling of how much something really costs,” Erceg told Hina.

End of dual price display to reflect on price growth?

Erceg believes that the end of the dual price display would probably contribute to making citizens get used to the euro faster, but that on the other hand, it could make decisions on consumption and purchase more difficult or lead to unwanted spending, which is why he believes that it would not be bad if the dual price display was prolonged.

Zagreb Faculty of Economics professor Marijana Ivanov fears the cancellation of the dual display of prices in January could have an effect on price growth.

“It creates room for the lack of price transparency, which will probably be taken advantage of by some market stakeholders,” she said, noting that the dual display of prices, in force from September 2022 to the end of 2023, should have been shorter.

Significant drop in number of currency exchange offices

One of the effects of Croatia’s accession to the euro area has also been a large drop in the number of currency exchange offices and foreign cash turnover.

The latest HNB data, released in mid-December, show that currently 293 exchange offices operate in Croatia, 787 fewer than in December 2022, when there were 1,080 exchange offices. Their turnover has dropped 14 times.

In the first ten months of 2023, currency exchange offices bought from natural persons foreign cash in the amount of €241.6 million, while in the same period of 2022, their turnover amounted to €3.4 billion, around 14 times more.