Croatia fulfils all economic criteria to join the euro area in January 2023 despite rising inflation, according to the EU Commission’s biannual convergence report.
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Of all the EU countries that do not use the euro, Croatia is currently the only one to fulfil all convergence criteria, the Commission stated in the report. As such, the Commission proposes the euro be introduced in the country, making it the first euro area enlargement since Lithuania in 2015.
The message was well-received in Croatia. “We are very proud of this success and look forward to all the benefits this will bring to Croatia while also being aware of the responsibility this membership entails,” the governor of the Croatian National Bank, Boris Vujčić, said.
The sustainability of public finances is measured by government deficit and government debt. While debt levels had risen dramatically to 87% of GDP during the pandemic in 2020, they had fallen back to 80% in 2021. The Commission argued that they were on a downward path.
In terms of price stability, Croatia narrowly fulfilled the criterion. For this, Croatia’s average inflation rate over the past year could not exceed the average inflation rate of the three “best performers” in the EU by more than 1.5 percentage points. This reference value stood at 4.9% for the year from April 2021 to April 2022. Croatia’s average inflation rate of 4.7% thus only just remained below the threshold.
Interestingly, the two countries with the lowest inflation rates, Malta and Portugal, were considered outliers and thus not included in the reference value calculation. Had they been included, the Croatian inflation rate might not have been able to fulfil the necessary conditions.
“With outliers, it’s important that they are applied reasonably and consistently,” a senior EU official said, arguing against the suspicion that the numbers might have been engineered to favour a Croatian accession to the euro area.
The official’s argument is supported by the fact that many previous convergence reports also excluded outliers to prevent distortion of the data. Nevertheless, this shows that the Commission has some leeway in how it calculates the data that determines whether a country can join the euro area. ■
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