Croatia’s Vujcic Sees Euro Path Re-Opening as Debt Falls Faster

  • Central bank governor speaks in interview with Bloomberg
  • EU excessive-deficit procedure could be closed in 2017 or 2018

Croatia should be able to kickstart the process of joining the euro in 2017 or 2018 as its debt falls faster than anticipated, the head of the Adriatic nation’s central bank said.

The European Union’s youngest member is struggling to keep an overhaul of its economy on track after a six-year recession wiped 12 percent off the economy and pushed Croatia into violating the bloc’s rule that requires members to work to keep public debt below 60 percent of gross domestic product. Croatia is now on the brink of exiting the so-called Excessive Deficit Procedure, opening the way for it to apply for entry in the European Rate Mechanism II, the two-year-long antechamber to euro membership.

“We see the potential for Croatia to even get out of the excessive-deficit procedure due to the decline of the debt-to-GDP ratio by the end of next year or the beginning of 2018,” central bank Governor Boris Vujcic said in an interview in Washington. “In this way, Croatia shows that it is capable of controlling the fiscal situation, which was the main problem in the past.”

After months of uncertainty that included a government collapse and snap elections, political parties agreed last week to create a new coalition cabinet and continue a program of cutting the budget deficit. The country of 4.2 million has already made some progress, with the shortfall seen coming in lower than the planned 2.6 percent of GDP this year -- and compared with more than 5 percent from 2009-2014 -- according to Finance Minister Zdravko Maric. Public debt, which was 87 percent of GDP last year, is also declining, according to Vujcic.

“The foreign debt-to-GDP ratio is declining quite regularly already and it will continue in the next couple of years,” he said. “The public debt-to-GDP ratio should only now start to move downwards.”

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Vujcic said political turmoil since the collapse of the government in June hasn’t hurt the recovery. One of the parties that has agreed to form a new government, Bridge, has called for more oversight of the central bank, drawing criticism from the European Central Bank and, on Wednesday, Croatian President Kolinda Grabar Kitarovic.

The central bank has raised its growth forecast and now sees the economy expanding by about 2.5 percent in 2016, Vujcic said in the interview. That compares with the European Commission’s prediction of 1.8 percent growth.

“Looking again forward, one would need to have a good government to do structural reforms, because the potential rate of growth remains slow,” said Vujcic, who was in Washington for the annual meetings of the International Monetary Fund and the World Bank.

The economic recovery remains at risk from a backlash against integration that is gaining ground across Europe. While the impact from the U.K.’s vote to leave the EU will probably be limited, even a minor step toward limiting freedom of movement and reinstating borders would harm trade and have an “immediate negative impact” on the economy, Vujcic said.

The governor also said the central bank still has scope to lower the rate for its long-term repurchase operations, now at 1.4 percent, although he sees no need to do so at the moment.

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