Croatia took a decisive step January 1 towards the mainstream of the European project by adopting the Euro as its currency while at the same time joining the EU’s passport-free “Schengen Zone.” In taking these difficult steps, Croatia was effectively able to leapfrog several older EU member states with similar aspirations, although the reasons for this are actually country specific.
Croatia joined the EU in July 2013, making it the newest EU member state. At the time it entered, the EU actually reached its largest territorial size with 28 member countries and has since shrunk in terms of area and population due to Brexit in 2020. Croatia’s 2013 accession increased the population of the then-EU28 to 506,777 million (0.8 percent), but slightly lowered the EU’s per capita GDP to $31,313 thousand (-0.75 percent).
Eurozone entry long planned
Croatia’s adoption of the Euro on January 1 to replace its national currency, the Kuna, had long been a major government priority and the Euro phase-in had been carefully planned in coordination with the European Central Bank. Croatia becomes the 20th country to formally adopt the Euro. As in several other former Yugoslav republics (notably Montenegro and Kosovo as well as parts of Bosnia) the Euro had been used informally for years in wide swaths of the economy, as had the German Mark (DM) before that.
In July 2020, Croatia entered the European Exchange Rate Mechanism II (ERM II) arrangement. Eurozone rules require ERM II membership for a two-year period along with the fulfillment of other Euro financial convergence criteria (also known as the “Maastricht criteria”) before Euro adoption can be finalized, so the January 1 timing came as no surprise to the population.
A large segment of Croatia’s banking sector had been using the Euro for many years, especially when it came to setting prices, making Euro adoption less painful than seen elsewhere. Nonetheless the Euro’s adoption is certain to simplify trade, boost cross-border investment and especially strengthen tourism which currently accounts for over 20 percent of Croatia’s GDP. Approximately 70 percent of Croatia’s tourist traffic already arrives by car, so having a common currency and now minimal border controls due to the country’s Schengen Zone entry should generate a new surge in recorded visits.
Croatia was able to beat older EU member state Bulgaria to the Euro adoption phase; both had initially set 2023 as their target date for adoption and both joined the ERM II arrangement in July 2020. Due to the Covid crisis and an extended period of domestic political instability, Bulgaria is now targeting its Euro adoption for January 2024.
Croatia now finds itself as the southern border outpost of the core Eurozone group, with the exception of Greece, still essentially an island having no contiguous borders with other Eurozone countries until additional countries are able to adopt the currency.
Schengen Zone also expands with Croatia’s admission
On January 1 Croatia also became the 27th country to join the EU area’s passport-free “Schengen Zone” which allows free movement within participating countries. Admission to the arrangement requires unanimous approval of all other participants due to the nature of the agreement, which is essentially a shared external border among the parties, something that is often quite controversial. Croatia becomes the first new member in 11 years.
The Schengen Zone is not precisely an EU-only arrangement as non-EU members Iceland, Norway, Switzerland and Liechtenstein have joined. EU member states Cyprus, Ireland, Romania and Bulgaria are not part of the arrangement, but the latter two countries have applied to join.
With Croatia’s accession to the Schengen Zone, the Zone’s external border shifts southwards from Slovenia to Croatia. Accordingly, Croatia is now required to fulfill the added responsibilities of securing the EU’s (and now Schengen’s) southern and eastern external frontiers from non-EU neighbors Serbia, Montenegro, and Bosnia and Herzegovina through strict border controls. As with the Eurozone, Greece remains essentially a Schengen Zone “island” further south until other countries can join.
The decision on Schengen Zone expansion generated substantial controversy in the final months of 2022 as Romania and Bulgaria had also requested admission to the arrangement and were judged satisfactory candidates by multiple EU institutions. EU Member states Austria and The Netherlands had different perspectives on this matter knowing that EU institutions have rarely if ever shown the political strength to say “no” to a determined applicant while frequently and inexplicably turning a blind eye towards the important matter of corruption in Southeastern Europe.
In this case it was Austria that vetoed the Schengen admission applications of both Romania and Bulgaria, while The Netherlands cited the need for Bulgaria to do more to tackle corruption and organized crime before it would approve the country’s admission.
Romania in particular reacted angrily to Austria’s decision and for a while a boycott of Austrian products and other tough retaliatory measures were being considered; eventually the temporary withdrawal of the Romanian ambassador from Vienna was chosen to send the appropriate signal. Romanian officials have since stated that once a dialogue on Schengen issues is resumed, their ambassador would return.
It should not be forgotten that the Schengen Zone has been under increased stress due to the migration crisis resulting from instability in the Middle East, Asia, and Africa as well as Covid-19. Especially in the second half of 2022, pressure on the EU and Schengen Zone’s Balkan borders has increased substantially with the arrival of massive numbers of would-be entrants into neighboring countries in order to attempt to enter the EU by any means possible. The EU is now planning to deploy border police into neighboring non-EU countries in order to help them manage the current crisis.