Croatian President Urges 2020 Euro Entry as Cabinet Wavers

Croatian President Kolinda Grabar-Kitarovic said she sees her country adopting the euro by 2020 after emerging from a six-year recession, even as the government refuses to set a date.

“I do believe that in the next five years we will introduce the euro,” Kitarovic, a former NATO official and ambassador to the U.S., said in an interview on Tuesday in the capital, Zagreb. “It’s important for the Croatian economy because it’s so connected to European Union economies.”

While Greece may be at risk of an unplanned exit, policy makers in the 28-nation European Union’s former communist east are debating whether to adopt the euro. Countries in the region agreed to eventually switch currencies when they joined the bloc and five of them -- Slovenia, Slovakia, Estonia, Latvia and Lithuania -- have already done so.

Euro adoption is one of several points of disagreement between Grabar-Kitarovic, who came from the main opposition party, and Prime Minister Zoran Milanovic, a Social-Democrat. With a general election expected within the next year, the two have been in tense cohabitation, with the president calling on Milanovic to resign for failing to fix the economy. They’ve met only on formal occasions.

Euro aspirations have been set back in Croatia, which in 2013 became the newest EU member, as the nation struggles to emerge from a record-long recession and meet the trading bloc’s demands to narrow the budget shortfall. The slump has wiped out 12 percent of economic output since 2008, the third-worst contraction in the EU after Greece and Cyprus.

Euro Wedge

Croatia’s cabinet is less enthusiastic about the euro than the president, whose power is largely ceremonial, a dynamic that echoes developments in other eastern EU members where the common currency has become a wedge issue between rival political forces.

In Poland, presidential contender Andrzej Duda has taken a stance against incumbent Bronislaw Komorowski before the May 10 presidential election by questioning whether the region’s biggest economy should abandon the zloty. And in the Czech Republic, Prime Minister Bohuslav Sobotka said this month that adoption would help the economy, even as his ruling partner, the ANO party, refuses to set a date.

‘Fiscal Pressure’

The yield on the Croatian government’s euro-denominated bonds maturing in 2025 was little changed at 3.346 at 9:50 a.m. in Zagreb. The cost to insure the country’s debt against non-payment for five years using credit-default swaps was 263 basis points, compared to 135 basis points for similarly rated neighbor Hungary, according to data compiled by Bloomberg.

Deputy Prime Minister Branko Grcic said in an interview on Tuesday that the government isn’t prepared to set a date for euro entry and the country still faces “downward fiscal pressure” on its economic forecasts.

While the economy is set to return to growth this year, expansion may be 0.2 percentage points lower than the official forecast of 0.5 percent, Grcic said. Output may advance as much as 1 percent in 2016, he said. The deficit last year widened to 5.7 percent of gross domestic product, compared with the EU’s 3 percent limit.

Kitarovic, 47, said the key to preparing the economy for future challenges, including the euro, lies in more cooperation between employers and employees, and in investors willing to set up businesses in the country’s interior, away from the tourism-dominated Adriatic coast.

‘Structural Problems’

“That’s how to resolve the structural problems that we have in the economy,” she said, speaking in the library of the glass-concrete presidential residence built by the late Yugoslav strongman Josip Broz Tito. “We have great natural resources. We have educated people, so we need to concentrate right now on managing these resources.”

Three months into her five-year term, Kitarovic said she has met with executives, union leaders and investors to rebuild trust in the economy, battered first by the global crisis and later by a bloated public sector and regulatory uncertainties that have kept investors at arms length.

The country of 4.2 million people is at risk of becoming the bloc’s first member to be penalized under the union’s economic imbalance procedure and the government is preparing a new convergence program that will outline austerity plans.

“I’ve learned a lot from living abroad, and I want to share that knowledge here; I want to modernize Croatia in every sense, including politics,” said Kitarovic, who previously served as an assistant secretary general in the North Atlantic Treaty Organization, said. “We need to change the mindset and create conditions for doing business more easily.”

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