Republic of Croatia sends letter of intent to enter European Exchange Rate Mechanism (ERM II)

Published: 4/7/2019

The Republic of Croatia sent today a letter of intent to the euro area member states, Denmark and EU institutions expressing its intent to enter the European Exchange Rate Mechanism (ERM II). This move marked the first formal step towards Croatia's joining the ERM II, which precedes the introduction of the euro as a country's official currency. The letter of intent sent to the member states and EU institutions was accompanied by an Action Plan detailing the reforms the Republic of Croatia will implement before entering the ERM II. It is expected that the euro area member states and Denmark will discuss the letter of intent at the forthcoming Eurogroup meeting.

The letter of intent was signed by Finance Minister Zdravko Marić and Governor of the Croatian National Bank Boris Vujčić on behalf of the Republic of Croatia.

letter expresses Croatia's readiness to implement reforms aimed at further preparations for participation in the ERM II exchange rate mechanism. After having been in the exchange rate mechanism successfully for at least two years, the Republic of Croatia should formally meet the exchange rate criterion of nominal convergence. Croatia has actually satisfied other remaining criteria – price stability, public finance sustainability and interest rate convergence – for some time now, and a prudent monetary and fiscal policy should ensure that those conditions remain the same.

The possibility to express the intent to enter the ERM II was enabled by marked progress in reducing macroeconomic imbalances. Economic recovery, growing exports, decreasing unemployment, steady fiscal adjustment and a sharp decline in external debt had reduced the vulnerability of the Croatian economy and made it possible for the country to exit the Excessive Deficit Procedure (EDP) in June 2017, after which, in May 2019, the Council of Finance Ministers, acting on a proposal by the European Commission, confirmed that excessive macroeconomic imbalances were no longer present in Croatia.

In consultation with the EU institutions, in the letter of intent, Croatia has undertaken to implement reforms in six areas: i) to further strengthen the supervision of the banking system by establishing close cooperation between the Croatian National Bank and the European Central Bank; ii) strengthen the macroprudential policy framework by introducing an explicit mandate for borrower-based measures; iii) strengthen the anti-money laundering framework; iv) upgrade the system of statistical data collection, processing and publication; v) improve public-sector management; and vi) reduce the administrative and financial burden on the economy.

Croatia has already begun implementing some of the measures. On 27 May 2019, a request was sent to the European Central Bank for establishing close cooperation between the Croatian National Bank and the European Central Bank.

Croatia intends to implement all of the measures listed in the letter of intent and the Action Plan by mid-2020, after which the EU institutions will assess whether the measures have been adequately implemented. It is expected that after receiving a positive response, Croatia will formally commence its participation in the exchange rate mechanism.