Tucked inside the medieval city walls in the Croatian port of Dubrovnik, Mara Pezo’s leather bag store is perfectly placed for the thousands of tourists disembarking from cruise ships every day. Now all she needs is their euros.
The European Union’s newest member aims to transition to what’s called ERM-2 – effectively a waiting room for membership of the common currency – as soon as next year. For businesses like Pezo’s, efforts by the government and central bank to prepare can’t come quick enough.
Tourism accounts for about a fifth of the economy, making Croatia as dependent on foreigners spending their cash as places like Greece and Malta, but small retailers risk fines if they accept euros. Ditching the local money, the kuna, is vital, said Pezo, especially as Dubrovnik cashes in from its role as a filming location for “Game of Thrones.”
“Visitors, especially those who come for a short visit from cruise ships, don’t know we aren’t allowed to take euros,” said the 32-year-old. “We do accept credit cards, but often people want to pay with cash, and they expect to be able to pay with euros in a European Union country.”
Croatia’s embrace of all things euro, both in commerce and politics, contrasts with an attitude that ranges from lukewarm to downright hostile in countries not far away.
The populist government in neighboring Italy, a core euro member, has sought to challenge the European hierarchy over limits to its budget spending. Around the coast in crisis-hit Greece, remaining in the euro region came with a huge political and financial bill. Meanwhile, the more nationalist leaderships in Hungary, Poland and the Czech Republic are in no rush to follow other former communist countries Slovakia, Slovenia and the Baltic states in adopting the single European currency.
For Croatia, the switch makes sense because the economy in the former Yugoslav state is highly geared to the euro while the relative value of the kuna is tightly managed by the central bank.
“We have kept the exchange rate stable for 25 years, we can continue to do it for the next 25 years, but what’s the point?” said central bank Governor Boris Vujcic. “It’s easier to get into the euro zone to have that risk premium removed. Risks will further be compressed, interest rates will further come down, and this is the road on which we have now embarked.”
That road has been a long one since Croatia gained independence following the bloody break-up of Yugoslavia 25 years ago. It dropped the dinar for the kuna, a currency it first pegged to the German mark and then to the euro. EU membership came in 2013.
The journey is evident in Dubrovnik, a place that’s been battered by the tug-of-war between east and west for centuries, not to mention an earthquake in 1667 that all but leveled the city. More recently, it was shelled by the Yugoslav army in the 1990s Balkan wars.
Most of that destruction has been fixed, though some scars are visible in the polished sandstone sidewalks. What’s more striking is that the war is mentioned only as an afterthought in Dubrovnik, while elsewhere in the Balkans the violence remains a cause of many a conversation. Pezo, who manages her family’s leather bag business, was four during the shelling. All she remembers is being given candy in the shelter her family used because she was the youngest.
Vujcic, the governor of the central bank, is convinced the nation will be absorbed into the eurozone, a goal that enjoys rare support across the political spectrum and is backed by 52% of the public. The only difference among parties is the timing of when to join.
The last thing that stands in the way is removing fears among Croatia’s 4.2 million population that prices will shoot up after the switch, he said.
“The fear is not that we will lose monetary policy tools, or kuna, or sovereignty, or our emblem,” he said. “The main worry is that it may negatively affect our standard of living. Available evidence, however, shows that surge in prices because of euro entry is a myth, not reality. We will have to continue to explain that.”
While some are wary of the effect the euro will have on the cost of their daily lives, there’s no question about what the future should look like in Modni Kantun clothing store, where Senka Kusovac sells colorful shirts and dresses made by Croatian designers for as much as 2,000 kuna ($310).
“We live on tourism,” she said. “The euro would make life easier for everyone.”
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