The European Central Bank (ECB) has stated in its Convergence Report that Croatia is not fulfilling the Maastricht Criteria, the criteria which European Union member states are required to meet to enter the third stage of the Economic and Monetary Union (EMU) and adopt the euro as their currency.
The Convergence Report reads that Croatia's general government deficit and public debt in 2015 were not in compliance with the Maastricht Criteria which insist on a deficit below 3 percent of Gross Domestic Product and on a public debt below 60% of GDP.
Last year, Croatia's general government deficit was 3.2% of GDP, which was by 2.3 percentage points lower than a year before. The debt came to 86.7% of GDPat the end of 2015, rising by 0.2 percentage points year-on-year.
"Croatia has been subject to the corrective arm of the Stability and Growth Pact since 2014, with the deadline for correcting the excessive deficit being 2016. The European Commission’s Spring 2016 Economic Forecast foresees a timely correction of the excessive deficit but points to the risk that Croatia will not comply with the provisions of the Stability and Growth Pact," the ECB report reads.
"Overall, it is essential that Croatia follows a determined, growth-friendly consolidation strategy that addresses the high risks to medium-term debt sustainability."
"This will need to be coupled with an overhaul of the fiscal governance framework that is geared towards improving public spending efficiency in order to create the conditions for a lasting improvement in the conduct of fiscal policies."
"In the two-year reference period from 19 May 2014 to 18 May 2016, the Croatian kuna did not participate in ERM II, but traded under a flexible exchange rate regime involving a tightly managed floating of the currency’s exchange rate. The exchange rate of the Croatian kuna against the euro exhibited, on average, a low degree of volatility over the reference period. On 18 May 2016 the exchange rate stood at 7.488 kuna per euro, i.e. 1.4% stronger than its average level in May 2014," according to the ECB report.
As for the recent government's intervention regarding the conversion of the Swiss franc-denominated loans, the report reads that this "intervention in existing loan agreements to allow the conversion of loans denominated in, or linked to, Swiss francs into loans denominated in, or linked to, euro, highlights the need for a more predictable legal system."
"Moreover, when the recent Swiss franc loan conversion was designed, due consideration should have been given to fair burden sharing among all stakeholders in order to avoid moral hazard."
"With regard to macroeconomic imbalances, the European Commission selected Croatia for an in-depth review in its Alert Mechanism Report 2016 and concluded that Croatia is experiencing excessive macroeconomic imbalances."
The report notes that the legislation on the Croatian National Bank, whose abbreviation in English is CNB, does not comply with all standards for ensuring the independence of central bank.
"The Law on CNB and the Law on competences do not comply with all the requirements for central bank independence, the monetary financing prohibition and legal integration into the Eurosystem."
The latest Convergence Report covers also Bulgaria, the Czech Republic, Hungary, Poland, Romania and Sweden, apart from Croatia. Those seven countries have not yet adopted the euro and are planning that move.