Croatia's entry into the eurozone has proven to be more turbulent than expected. However, the real problems will be long-term. Should we have joined? Of course, the question is largely rhetorical since the choice has already been made. On the one hand, political elites in Croatia, elected politicians as well as the country's monetary authorities, never really tried to articulate an alternative. Arguments for such an alternative have been with us for a long time (see Stiglitz, 2017; Varoufakis, 2015, 2018), but they are never taken seriously. On the other hand, the euro is like Hotel California: you can check in any time you like, but you can never leave. Croatia's entry became possible only when the Maastricht rules were interpreted loosely. Strictly speaking, Croatia did not satisfy the required conditions, but it was in the interest of the European Commission that another country wants to join. As with earlier members, the primary reasons are political, not economic.
In Croatia the primary reasons are also political. Politicians care most about "returning to Europe" and joining "prestigious" international clubs. These are symbolic reasons, i.e. the goal is to finish the long process of escaping the Balkans into Mitteleuropa. The other reason, a little more practical, is the possibility that membership may provide additional security in case of a bigger crisis in Europe. However, recent experience suggests the opposite: eurozone membership had certain benefits in good times, but after the 2008 crisis weaker member states were forced into a punitive and destructive form of austerity. This austerity does not only refer to cutting this or that fiscal program but also to a policy of "internal devaluation" in which a country tries to achieve international competitiveness by lowering the domestic level of wages and removing various "rigidities" on the labor market (this took place in Croatia as well, see Galgoczi, 2017). It is even harder to escape this type of policy once a country joins the monetary union.
Countries like Greece thought about leaving, but were again faced with the fact that the eurozone is like Hotel California. Nobody leaves unless Germany says so. Since the crisis, the German example of a frugal and export-oriented economy has been even more strongly consolidated as a model (see Baccaro, Blyth and Pontusson, 2022). Plainly speaking, this model has become difficult to achieve even for a country like France. That is why some observers suggest that the best thing for the eurozone would be for Germany to leave (Heise, 2015). As a matter of fact, it seems today that not even Germany can sustain its growth model. As Wolfgang Streeck predicts, the era of German hegemony in Europe may be coming to an end (Streeck, 2022).
However, some lessons have been learned. The eurozone has adopted a large bailout fund (European Stability Mechanism) which should guarantee security in case of a similar crisis. However, no one is sure if the fund is large enough should problems strike one of the larger member states (such as Italy, which has been tiptoeing on the edge of the abyss for a long time). Besides, the ESM must first raise its funds on financial markets, which means that the capricious power of financial markets still imposes constraints. Moreover, this money would be transferred to member states with strings attached, which means that the frugal northern countries may yet again have a veto. In other words, Germany could again force austerity on countries in trouble.
So, we are currently in uncharted waters where answers to future crises still have to be found. In the short run, there is rising inflation due to the war in the Ukraine and the energy crisis, while in the long run the main issue will most certainly be climate change. In this regard, the European Central Bank has made some welcome announcements, but more ambitious action would be even better. As the initiative Positive Money argues, monetary policy has so far led to various financial bubbles which are disastrous for a variety of reasons, including ecological ones. "Green central banking" has since gone mainstream, but action has lagged behind words (Eames, 2022). Of course, the Croatian National Bank could have pursued some of these goals too, but they never opened themselves to initiatives coming from society. They have been and still remain a technocratic institution, whose members would at times shyly admit that central banks elsewhere are going through "major reconstructions" (Šošić, 2019).
Could we have done something different? Since independence, Croatia has been in a difficult position. If monetary policy pursed devaluation, this would be beneficial for the international competitiveness of those firms that sell something to foreigners, at least for a while. However, imported goods would become more expensive. Since many of our needs, from food to energy, are met through imports, this would be very unpopular. However, the real obstacle for autonomous monetary policy has always been debt denominated in foreign currency, both of the state and Croatian citizens. Devaluation would worsen the real burden of this debt. In this context, the options are to either to pursue a policy of "de-euroization" or to join the eurozone. The first option was harder, so the latter was chosen. Or rather, we spontaneously ended up in the latter. The first and only strategic moment in domestic economic policy was the stabilization program of 1993, when hyperinflation was successfully brought under control. Unfortunately, the exchange rate adopted at the time probably overvalued the domestic currency and policy has not managed to correct this ever since.
So, where can we locate the sources of economic growth which would make it easier to achieve fiscal stability and avoid distributive conflict? Politicians hope that membership in the eurozone will attract investment, but at this point this is just hope. It is fairly certain that tourism will continue to attract investment, but the downsides of this model are well known: too much construction on the coast, exodus of local people from urban centers and pressure on local resources such as water. However, the siren call of tourism is strong and it is very difficult to resist. Another problem with tourism is that it cannot lead to high wages for local workers. So, the absence of real industrial policy continues to be a stubborn problem, with or without the euro. Politicians do not really worry about trying to create a favorable sectoral structure (so that we have more profitable manufacturing), or more competition where we need it (so that prices do not increase so much), or sectors with high wages (less waiters and hotel cleaning staff). The operating assumption is that such things are not really something that politicians should worry about, they will happen by themselves. Domestic economists also continue to distrust the state since they tend to see corruption and inefficiency in any and all state interventions. As if such things appear only in the public sector.
In other words, the euro will not fix our problems. They will continue to be here even when we adjust to the fact that burek now costs 2.20 euro instead of 16 kuna.
References
Baccaro, L., Blyth, M., i Pontusson, J., 2022. Diminishing Returns: The New Politics of Growth and Stagnation. Oxford: Oxford University Press.
Eames, N. 2022. "Green central banking goes mainstream, but words aren't yet matched by actions", Positive Money, https://positivemoney.org/2022/11/green-central-banking-goes-mainstream-but-words-arent-yet-matched-by-actions
Galgoczi, B., 2017. "2008: The year that East-West wage convergence came to a standstill", Social Europe, https://www.socialeurope.eu/2008-year-east-west-wage-convergence-came-standstill
Heise, M., 2015. "Should Germany leave the Euro", World Economic Forum, https://www.weforum.org/agenda/2015/09/should-germany-leave-the-euro
Stiglitz, J., 2017. Euro: kako zajednička valuta prijeti budućnosti Europe. Zagreb: Profil.
Streeck, W., 2022. "The age of German dominance is over", The Post, https://unherd.com/thepost/wolfgang-streeck-the-age-of-german-dominance-is-over
Šošić, V. 2019. "Vedran Šošić reagira: Mjesto Hrvatske u kontinuumu tečajnih režima relativno je napučeno, ali uglavnom nije radosno", Ideje.hr, https://ideje.hr/vedran-sosic-reagira-mjesto-hrvatske-u-kontinuumu-tecajnih-rezima-relativno-je-napuceno-ali-uglavnom-nije-radosno
Varoufakis, Y., 2015. Globalni Minotaur. Zagreb: Profil.
Varoufakis, Y., 2018. Ima li ovdje odraslih? Borba s europskim establišmentom. Zagreb: Sandorf.
