Eurozone gains new member and top student

The currency area’s first new country for eight years pursues fiscally conservative policies.

On January 1, Croatia joins the eurozone, becoming the 20th member of the single-currency bloc — with somewhat awkward timing.

It's not a great moment to be joining the club: the euro slid to parity against the U.S. dollar in July and remains weak despite regaining some ground in recent months. The European Central Bank is on a crusade against inflation, which is causing the economy to slow. A winter recession is now the base-case scenario.

Croatian Finance Minister Marko Primorac is optimistic. "We are certain that the interest rates and the borrowing costs in general will increase in due time," he told POLITICO in an interview. "However, we are certain that the increase for Croatia would be much lower than if we didn't join the eurozone."

There are other benefits, too: Fitch, Moody's and Standard & Poor's all hiked their credit rating for Croatia when Zagreb got the green light from the Commission and eurozone finance ministers in July after fulfilling a set of criteria including price, exchange rate and interest rate stability, as well as budgetary discipline and a ban on monetary financing.

"We also anticipate and expect this to be positively reflected on borrowing costs," Primorac said.

Croatia, the last country to join the EU almost a decade ago, is becoming the eurozone's first new member since the three Baltic nations, Estonia, Latvia and Lithuania, ditched their national currencies in 2011, 2014 and 2015.

The switch has been a long time coming, and Croatians are prepared: The Croatian Kuna has been stable at around €0.13 for months; since September, all prices have been displayed in both currencies; vending machines are being adapted; and new eurocoins are being minted, each with a map of Croatia (€2), a silhouette of a pine marten, or Kuna, the national animal (€1), and electricity inventor Nikola Tesla (for €0.50, €0.20 and €0.10). Starter packs with euro coins are available to those wishing to familiarize themselves with the new currency.

Croatia will also gain a seat at the table of the European Central Bank’s Governing Council, and is in the process of ratifying the European Stability Mechanism treaty, hopefully by January, Primorac said.

"When it comes to the additional shield, which will be there by joining the European Stability Mechanism, we also see this as the additional benefit for the Croatian economy," he said.

If for the country the list of pluses is long, then for the eurozone itself it gets the benefit of gaining a top student. Even though it's a Mediterranean country like Italy and Greece, the bloc's most indebted members, Croatia has held a fiscally conservative policy for years.

Its debt-to-GDP ratio, after ballooning during the COVID-19 pandemic as in all other EU countries, is on a steep downward trajectory, standing at 74.3 percent in the second quarter of this year, compared with 86.3 percent in the same period last year — a 12 percentage-point drop.

"Mediterranean countries tend to be more flexible in this regard," Primorac said. "However, we also have and understand and support the more conservative approach." He added that he expects the debt-to-GDP ratio to fall below 65 percent by 2025.

When it comes to the country's take on the Commission's proposals to revamp fiscal rules, Primorac held back from criticism, instead praising what he called "a good step forward." He added that he understood countries' need to invest more in defense or green projects.