All those Bulgarian euro doomsayers need to take a chill pill.
At least, that’s the advice from Croatia, the last country to adopt the single currency back in 2023.
Bulgarians have taken to the streets in their thousands since the European Commission approved Bulgaria’s entry into the currency union from next year, ostensibly afraid that life is about to get much more expensive as a result.
Since Croatia joined the eurozone, its inflation has — it’s true — run slightly hotter than it did before accession. But to a large degree, experts say, that reflects other things that have gone right. Its other economic data suggests its transition has largely been a success story — and a model for Bulgaria to emulate.
Growth in Croatia was among the strongest in the EU last year at 3.8 percent, helped by a tourist sector that has held up strongly even as Europe’s industrial problems have multiplied. Unemployment is at its lowest since the country’s current statistics series started in 1996. Grants under the EU’s various funds continue to flow in briskly, thanks to a government that is doing its homework: Ratings company Fitch expects it to have absorbed all €4.5 billion of the funds earmarked under the Recovery and Resilience Facility by the middle of next year. Most importantly, perhaps, wages are up over 30 percent since Croatians swapped their kuna for the euro.
Turbulent euro entry
Croatia and Bulgaria, two of the EU’s poorest countries, officially entered the waiting room to join the euro at the same time in mid-2020 having kept their inflation levels at or even a bit below that of the euro area for most of the preceding decade.
But the succession of shocks that started with the pandemic changed all that: Inflation rose much more than in the euro area, peaking at over 13 percent in Croatia and nearly 19 percent in Bulgaria and leaving consumers in both countries highly sensitized to the risk of more of the same.
Although Croatia’s inflation remains among the worst in the EU, analysts say the causes are largely unrelated to adopting the euro.
“Croatia was the only country that joined the euro area in the conditions of serious inflationary pressures,” said Petar Sorić from the Faculty of Economics and Business at the University of Zagreb, noting that inflation from 2022-2023 was the worst since the 1990s, when the former Yugoslavia was falling apart.
With such conditions at the start of the adoption process, Sorić said, consumers found it hard to pinpoint what was driving inflation — leading to perceptions it was far higher than the official data suggested.
But the fears of rising prices are partly justified, said Fran Galetić, also from the Faculty of Economics and Business at the University of Zagreb, pointing to the experience of neighboring Slovenia, where prices rose by 9 percent within 18 months of its adoption of the euro in January 2007.
“Although official policy sent reassuring messages that this would not happen, many remembered what it looked like,” Galetić said. In order to calm the public, the Croatian government forced supermarkets to display prices in both currencies for four months before the euro replaced the kuna in 2023, and for a year after.
That still didn’t stop opportunistic retailers from squeezing their customers. Many Croatian retailers raised their prices before the rule took effect, allowing them to claim they weren’t raising them during the dual price display period, Galetić said. Consumer prices rose much faster in the 18 months around adoption of the euro than they did in the eurozone.
Bulgaria is set to adopt a similar policy starting in July, and will have to learn from Croatia’s experience.
And resentment over the episode has lingered: Earlier this year, Croats boycotted supermarkets to protest rising prices, forcing the government to expand a raft of price caps it had introduced for some essential goods in 2022 and 2023.
“These packages were presented by the government as part of the response to the energy crisis, but as they partially coincided with the euro changeover, consumers to some extent probably perceived them as euro-inflation buffers,” Sorić said.
Bulgaria, he added, is in a better position today because it “now has a much calmer outlook when it comes to inflation than we had in 2023. In that sense, it will be much easier to track price changes and penalize unfair retail practices.”
Other drivers of inflation are harder to pin on the euro, even indirectly. Take seasonal tourism, which accounts for around one-fifth of Croatia’s economic output: Since Europeans regained their freedom to travel after the pandemic, tourism has been the hottest part of the economy. In the past three years Croatian tourism prices have risen by 50 percent — far more than the 15 percent to 20 percent experienced by Spain or Greece.
Benefits of the euro
Overall, however, experts say switching to a common currency brings far more benefits than drawbacks. Ana Šabić, director of the Croatian National Bank’s European Relations Department, called the country’s adoption of the euro a “complete success story.” Croatia has waved goodbye to currency conversion fees (a big win for businesses and tourists), and its country credit risk premium relative to Germany — as reflected in government bond yields — has all but disappeared.
The Croatian National Bank estimates that the country now saves about €160 million each year in exchange and transaction costs alone.
“Croatia has felt all the expected benefits of euro area membership, despite the fact that we joined the euro area in very challenging times,” Šabić said. But with a subtle word of caution to a country that has seen its share of government dysfunction and scandals over the years, she emphasized that “detailed and timely planning” as well as a “clear division of tasks and responsibilities among the institutions involved are essential.”