Professional paper
https://doi.org/10.15179/pkiep.27.1.1
Is the Euro the Optimum Currency for Croatia: An Assessment Using the Optimum Currency Area Theory
Mislav Brkić
orcid.org/0000-0003-3872-4824
; Croatian National Bank
Ana Šabić
; Croatian National Bank
Abstract
Using the optimum currency area theory, this paper analyzes whether Croatia is ready for euro adoption. The theory proposes several criteria a country should meet to be able to function successfully in a setting of common monetary policy. Most of the criteria refer to the establishment of the degree of economic integration between a country and a monetary union, in view of the fact that close economic integration implies lower risk of asymmetric shocks. The analysis shows that the Croatian economy is highly integrated with the euro area in terms of trade and finances, its business cycle is synchronized with the business cycles of the major euro area member states, while EU accession raised the degree of political integration between Croatia and other member states. Under these criteria, it may be concluded that Croatia will function efficiently in a setting of common monetary policy. By contrast, Croatia’s performance regarding the economic diversification criterion is relatively poor. In addition to favorable results under most criteria of the optimum currency area theory, there are other important arguments in favor of euro adoption in Croatia. More specifically, the adoption of the euro would eliminate the problem of the high euroization of the Croatian economy, as well as a number of other risks and constraints arising from that problem. By adopting the euro, Croatia would therefore make an important step towards maintaining macroeconomic and financial stability in the long run.
Keywords
optimum currency area theory; monetary policy; euro; Croatia
Hrčak ID:
208242
URI
Publication date:
14.11.2018.
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