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Croatia’s Euro-Vision

Croatia’s Euro-Vision

Issue 9.11
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On January 1, 2023, Croatia will finally gain a much-coveted place in the eurozone club. Making the switch is a massive undertaking that will impact every person living and working in the Adriatic country. Eight Croatian legal experts share their insights on how the market will adapt, how the legislative framework will change, and who will stand to gain the most.

Pressing Issues

“Joining the eurozone could have come in some (economically) better times, as it is known that this step had spurred inflation in all the countries that joined earlier,” Divjak Topic Bahtijarevic & Krka Senior Partner Damir Topic begins. “So, on top of high inflation caused by the worldwide crisis, we will face another inflation hit. However, in the long run, we all believe this will be a good move and will bring more benefits than the imminent downsides.”

The massive project necessitates a major legislative overhaul, and Porobija & Spoljaric Managing Partner Marko Porobija feels that the most pressing concerns are related to compliance and regulatory matters. “As much as currency conversion is one of the main topics in Croatia, most people and businesses feel like they don’t have all the relevant information,” he says. “From micro-businesses to large corporations, each has its own ambiguities to settle. Also, the conversion cost is not negligible and presents an additional burden on the budgets already hit with inflation and a crawling recession.”

Speaking of the conversion rate – it poses a different cause for concern. “The applicable conversion rate of HRK 7.53450 for EUR 1 makes foreign goods cheaper and domestic production less attractive,” chimes in Vidan Law Office Partner Hrvoje Vidan. Croatia is facing its highest tracked inflation rate, according to him, “reaching the peak of 12,8% in September this year,” with causes including the imminent eurozone entry, the “current crisis in Ukraine, and the global energy crisis.”

Additionally, there might be issues at the very start of the euro’s life in Croatia. According to CMS Partner Marija Zrno Prosic, one pressing concern is “ensuring sufficient cash in euros during the dual circulation period, from January 1 to January 14, 2023, when both euro and kuna will be used as a means of payment in cash, while change should be made in euros (with certain exceptions, of course).”

On a more everyday level, consumers are concerned about potential price rounding, according to Macesic & Partners Partner Miroljub Macesic and three other experts. “For the commonfolk, a more practical worry may be that of the price rounding likely to occur post-euro implementation,” Vukmir & Associates Partner Ivan Cuk says. “Many vendors could attempt to take this opportunity to round up their converted prices, which will have a direct impact on the average Croatian consumer.”

“The overwhelming concern among the public is that implementing the euro as currency will entail increased prices of products and services due to the round-up effect,” Kovacevic Prpic Simeunovic Partner Ana Novakovic Stipanicev adds. “Most Croatian economists agreed that, according to the experience of other member states” and previously conducted research on the round-up effect, it “should, in general, cause only a marginal increase (approximately 1 to 2%, on average) on the total CPI.” Still, she does caution that this research was “mostly conducted in the pre-pandemic and pre-inflation era of overall low-interest rates, healthy economies, and optimistic business horizons.”

Novakovic Stipanicev explains that “state institutions are actively working” on preventing that outcome, and that their “most effective tool for the purpose is the double-pricing obligation for business subjects,” included in Croatian law. From September 5, 2022, until December 31, 2023, all businesses “must display the prices of their products and services in both kuna and euro in all relations with consumers.” Furthermore, she reports that the Ministry of Economy “designed a special Ethical Code which any business subject may join and thus acquire the Ethical Code seal of approval to display on their premises or websites” to indicate compliance with euro implementation rules. However, only about 1,000 business subjects had enlisted for Ethical Code by November, Novakovic Stipanicev reports.

Ultimately, all still agree that joining the eurozone is a good thing. Specifically, BDV Legal Partner Vladimir Batarelo outlines three benefits, including eliminating the possibility of exchange rate depreciation, Croatian banks having access to the monetary operations of the Eurosystem, and the country having access to financing from the European Stability Mechanism. “Furthermore, the positive effects should be reflected in more favorable borrowing options and less exposure to global shocks. Public finances will no longer be exposed to currency risk, which will mean a lower indirect risk for investors and, thus, a lower volatility risk premium,” he explains.

Accommodating Legislation

“Croatia must change every law in which some provisions, like fines or monetary thresholds, are quoted in kuna and put forward the appropriate euro counter value,” Topic explains. “There is also a very specific issue with the registered capital of all companies in Croatia – each will have to undergo a re-registration procedure, adjust its capital to the euro value, and round it to the amounts divisible into a relevant number of shares,” he reports. Porobija agrees, adding that “changes are all around us – from corporate structuring, capital markets, and commerce all the way to court procedures – there is no aspect of legal work that isn’t impacted by the conversion.”

And legislative changes spell client inquiries: “in the past few months, we have noticed an increase in inquiries regarding the implementation of the euro – most related to the appropriate manner of double-pricing and the criteria for determining the related increase of prices … as (un)justified,” shares Novakovic Stipanicev. “While double pricing is relatively clear in terms of its implications and sanctions, the criteria for assessment of justifiability of price increases remain unclear, so it remains to be seen how the competent authorities will tackle this issue and set the bars for assessment,” she explains.

Overall, the legislation accompanying the switch is so massive that it overshadows that of other member states. “The euro changeover act introduces the main points of the process, including main principles, rounding rules, supply and physical changeover, verification of the authenticity, dual circulation, dual display, continuity of legal instrument, supervision, misdemeanor provisions, etc.,” Batarelo explains. “As the entire process is regulated in more detail than in other member states that had undergone the changeover, it is expected that the process will be carried out with as little uncertainty as possible.”

And Accommodating Investments

However, all this work is expected to result in keen benefits. Topic believes that it will become easier to make investments, seeing as how there will be “no obligation to pay for shares in kuna and some other domestic red-tape matters will cease to apply.” 

Agreeing with Topic, Macesic adds that the switch “should generally cause positive market changes and simplify and attract foreign investments.” Moreover, he states that the “eurozone already increased Croatia’s credit ratings with leading rating agencies,” which should improve the investment climate.

Cuk also agrees, stating that joining the eurozone will make the “Croatian economy more resilient to the external shocks of economic and financial crises.” He believes that “access to different financial markets – such as the market for debt securities and the equity markets” will only improve the agility of the economy and adds that Croatia’s overall more effective participation in the “making of its monetary policy” should increase investor confidence.

Novakovic Stipanicev adds that the switch will “contribute to the strengthening of international exchange and investments through the reduction of transaction costs and currency conversion costs, as well as greater transparency and easier price comparability.” Such a reduction in uncertainties and overall currency risk is also in the minds of Zrno Prosic, Porobija, and Batarelo. “Positioning Croatia as a member of the eurozone, a better credit rating, and other positive consequences of this change are generally expected to make our market more attractive for investment,” Zrno Prosic says.

“The currency fluctuation risk will become a non-issue, especially for investors from the EU,” Porobija says. “Credit risk on a national level is dropping significantly, which will positively impact interest rates, the availability of cross-border financing, etc.” Still, he feels more work is needed: a push for “the policymakers to continue implementing further reforms toward removing administrative barriers and simplifying doing business.”

Vidan concedes the positives on interest rates and foreign investments but shares some causes for concern: “the global crisis may affect the availability of cheap money which will inevitably flow over to Croatia.” Remaining cautious, Vidan explains that the switch “will have a positive psychological impact on foreign investors; however, the major issue of high working costs will remain one of the key obstacles for boosting domestic-based production.”

Winners and Losers

“Around 95% of the business community will gain from the conversion,” Porobija says. He reports that, with Croatia joining the Schengen area in 2023 as well, the country will now “truly become an integral part of the single market. Naturally, some sectors will be negatively impacted, primarily those living off currency exchanges.”

Zeroing in on specific sectors, Topic underlines that “tourism, financial services, IT, and, generally, all services industries will gain the most.” Agreeing with Topic and Porobija, Vidan says that better integration into the single market should be beneficial for foreign investments, primarily in real estate and hospitality. 

Resonating this, Cuk says that benefits for the tourism sector are to be expected, given that it “generates a fifth of Croatia’s GDP. Because of the significance of the tourism industry … any removal of obstructions to holidaying in Croatia – such as the major hindrance of currency exchange for tourists – will spell substantial economic growth for the country,” he explains.

On the other hand, Cuk feels the “national banking sector will most likely bear the brunt of the euro’s adoption. This is because the currency conversion service, estimated to net the banks around HRK 1 billion annually, will no longer be able to rely on the very prevalent exchange between kuna and euro.” Additionally, he says “banks will be forced to invest in various one-time expenditures aimed at adapting to the euro, like adjustments to ATM networks and the IT services offered.” While these short-term expenses may be significant, the banks will still benefit from the “expected lowering of the interest rates and improved credit ratings,” Cuk concludes. 

This article was originally published in Issue 9.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here

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