GROUP ASSIGNMENT

Lecturer: NGUYEN THANH HUYEN

Group 2:
NGUYEN VIET TIEN - HS190368
NGUYEN DUC VINH LINH - HS190840
TRAN MAI ANH - HS194448
DAO THINH HOANG - HS190559
PHAM NGOC DUC - HS190298
HOANG LAN ANH - HA194031
Class: IB2005

Course: IBF301
Date: spring 2026
Contents
Introduction.......................................................................................................................5
Overview of European Economic Integration...............................................................5
Objectives of the Paper..................................................................................................5
Structure of the Paper....................................................................................................6
CASE 1: The Formation of the European Monetary Union (EMU) & the Euro..............7
1.1. Historical Background and Political Motivation....................................................7
1.2. Comparison between the European Monetary System and the Bretton Woods
System............................................................................................................................9
1.3. Key Stages in the Formation of the EMU and the Euro.......................................11
1.3.1. The Pre-EMU Learning Phase: From Bretton Woods to EMS (1971–1979) 11
1.3.2. Legal and Political Commitment: The Maastricht Phase (1991–1998).........12
1.3.3. Implementation Phase: Launch of the Euro and the ECB (1999–2002)........13
1.3.4. Post-Launch Expansion and Stress Testing (2003–Present)..........................13
1.4. Enlargement of the Eurozone...............................................................................15
1.4.1. Early Enlargement and Structural Vulnerabilities: The Case of Greece........16
1.4.2. Central and Eastern Europe: Convergence and Credibility...........................16
1.4.3. Crisis, Recovery, and Continued Expansion..................................................16
1.4.4. Implications for EMU Sustainability.............................................................17
1.5 Institutional Mechanisms of the EMU: From the ECU to the Euro and the Role of
the ECB........................................................................................................................19
1.5.1. The European Currency Unit (ECU): Definition and Functions...................19
1.5.2 The ECU as the Direct Precursor to the Euro.................................................19
1.5.3 The European Central Bank (ECB): Independence and Policy Mandate.......20
1.5.4 The Eurosystem: Structure and Operational Mechanism................................21
1.5.5 Strengths and Limitations of the ECB–Eurosystem Framework....................22
1.6 Economic Comparison between the Eurozone and the United States...................22
1.6.1 Baseline Comparison Using Textbook Data (Exhibit 2.8)..............................22
1.6.2 Updated Data and Structural Divergence........................................................23
1.6.3 GDP Size and Growth Dynamics....................................................................23
1.6.4 Trade Openness and Vulnerability..................................................................24
1.6.5 GDP per Capita and Productivity....................................................................24
1.6.6 Foreign Exchange Reserves and Monetary Privilege.....................................24

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 1.7. Practical Case Study – Škoda Auto (Czech Republic) (CzechInvest, 2009)........25
1.7.1. Comparative overview before and after EU accession..................................25
1.7.2. Quantitative evidence and key performance indicators (CzechInvest, 2009) 25
1.7.3. Linking the case to EMU and International Finance theory..........................26
1.7.4. Academic conclusion for the case..................................................................27
Case 2: Costs and risks of Monetary Union....................................................................27
2.1 Visual example Comparison of Poland vs Ukraine...............................................27
2.2. Main benefits of a common currency...................................................................31
2.3. Costs & Economic Risks......................................................................................32
Case 3: Cost-benefit analysis of Croatia's accession to the Eurozone: An assessment
after 1–2 years (2023–2025)............................................................................................34
3.1 The context of Croatia joining the Eurozone (2023).............................................34
3.1.1 Motivations for joining the Eurozone.............................................................34
3.1.2 Convergence conditions (Maastricht criteria):................................................35
3.1.3 Preparation for the transition:..........................................................................36
3.1.4. Croatia and the Optimum Currency Area (OCA) Theory..............................37
3.2. Expected benefits of Croatia joining the Eurozone..............................................38
3.2.1. Economic and financial stability and risk reduction:.....................................38
3.2.2. Trade, investment, and tourism are thriving:.................................................39
3.2.3. Financial and monetary benefits:...................................................................40
3.2.4 Benefits of the Eurozone:................................................................................41
3.3. Risks and concerns when abandoning the domestic currency..............................42
3.3.1. Lack of proactive monetary policy:...............................................................42
3.3.2. Risks of inflation and price increases:...........................................................42
3.3.3. Skepticism and monetary identity:.................................................................42
3.3.4. Real estate market risks after joining the Eurozone.......................................43
3.4. Comparison with countries that previously joined the Eurozone.........................44
3.4.1. Common points:.............................................................................................44
3.4.3. Economic characteristics:...............................................................................45
3.4.4. Experiences and lessons learned:...................................................................46
3.4.5. Enhancing liquidity in the financial system:..................................................46
3.4.6. Lessons from the Baltic States and Demographic Challenges:......................47
3.5. Reactions from international organizations and partners.....................................47
3.5.1The European Union (EU/EC) and Croatia join the Eurozone........................47

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 3.5.2 European Central Bank (ECB)........................................................................48
3.5.3 International Monetary Fund (IMF)................................................................48
3.5.4 Other international organizations and markets...............................................49
3.6. The Croatian economy one year after joining the euro (2023–2025)...................50
3.6.1. Overview of economic developments after joining the Eurozone.................50
3.6.2. GDP Growth in 2023.....................................................................................51
3.6.3. GDP Growth in 2024.....................................................................................51
3.6.4. Growth prospects for 2025.............................................................................52
3.6.5. Inflation and the impact of switching to the euro..........................................52
3.6.6. Foreign Relations and Tourism Area.............................................................53
3.6.7. Foreign Direct Investment (FDI)...................................................................53
3.6.8. Fiscal, public debt and the banking system....................................................53
3.6.9. Summary Conclusion.....................................................................................54
Overall Conclusion..........................................................................................................54
References.......................................................................................................................55

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 List of Figures and Tables

Figure 1 Evolution of European Monetary Integration.....................................................8

Figure 2 Currency composition of total debt in Croatia..................................................34
Figure 3 Croatia’s trade and financial linkages with the euro area.................................35
Figure 4 Conclusions of the 2022 convergence report....................................................36
Figure 5 Croatia's credit rating........................................................................................39
Figure 6 Currency composition of debt by sectors, December 2022..............................41
Figure 7 Real GDP of Croatia and Euro area, 2019-2024...............................................50
Figure 8 inflation rate, overal HICP 2021-2024..............................................................51

Table 2 Time and Key Event of Euro..............................................................................15

Table 3 Time of accession for Euro members.................................................................18
Table 4 Comparison Eurozone and US...........................................................................22
Table 5 Comparison Eurozone US expanding................................................................23
Table 6 Škoda Auto before and after EU accession (2004)............................................25
Table 7 Linking the case to EMU and International Finance theory..............................27
Table 8 Comparison of Poland vs Ukraine......................................................................28

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Introduction

Overview of European Economic Integration

European economic integration represents one of the most ambitious and complex
experiments in international economic and monetary cooperation in modern history.
The European Economic Community (EEC) which began its operations in 1957
established the first stage of integration by establishing a common market that allowed
free trade of all goods and services and capital and labor. The Economic and Monetary
Union (EMU) and euro introduction between 1999 and 2002 represented the ultimate
achievement of the European Union which began its initial trade agreements with other
nations.

The process of integration has created both economic benefits and significant political
effects for the region. The introduction of a single currency by European nations aimed
to achieve four objectives which included reducing transaction expenses and
eliminating exchange rate dangers and improving price visibility and creating stronger
internal market trade relationships. The European nations aimed to use monetary
unification for two purposes which included protecting political stability and handling
post-conflict European unity restoration efforts. The use of a single currency by member
states created essential difficulties which included controlling macroeconomic changes
and maintaining fiscal order and handling cross-border economic disturbances that
affected their diverse member states.

Objectives of the Paper

The goal of this research paper is to evaluate the advantages and disadvantages and the
dangers associated with European monetary integration through three case studies
which represent the complete range of evidence from the textbook and recent research
data using international finance analysis methods which include optimum currency area
theory and institutional approaches to monetary unions as the main analytical tools.

The three selected cases provide complementary perspectives on the functioning and
consequences of the EMU:

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The first case study investigates how the EMU and euro currency system developed
through its historical formation process as a permanent institutional and political
framework.

The second case study shows how European integration contributed to the economic
growth and stability of Poland and Ukraine by comparing their economic paths.

The third case study shows how Croatian Eurozone membership in 2023 has created
evidence about the economic impact of dropping a national currency through European
Union membership.

The paper uses the case studies to determine which conditions lead to successful
monetary unions while analyzing the structural and policy limitations that impact the
ongoing viability of the EMU throughout its entire existence.

Structure of the Paper

The remainder of the paper is organized as follows. Section II (Case 1) reviews the
establishment of the euro and EMU and its European Monetary System comparison
with the Bretton Woods system and its assessment of European Central Bank and
Eurosystem institutional functions. Section III (Case 2) presents a comparative analysis
of Poland and Ukraine to illustrate the long-term impact of European integration on
growth, investment, and living standards. The evaluation in Section IV (Case 3)
examines Croatia's Eurozone membership assessment through its macroeconomic
stability and trade performance and inflation behavior and financial risk evaluation. The
main findings of the study are summarized in Section V and their future impact on
European monetary integration sustainability is discussed.

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CASE 1: The Formation of the European Monetary Union
(EMU) & the Euro

1.1. Historical Background and Political Motivation

The European Monetary Union (EMU) was established after many years of formation
involving the Euro currency, which was first introduced in the late 1950s in- response to
Euro economic initiatives with a sense of unified Euro economic expectations. The first
precursor to European monetary unification was undoubtedly the European Union,
which originated in 1957 with the formation of the first economic community among
six European nations, including France, Germany, Italy, the Netherlands, Belgium, and
Luxembourg, after a Treaty was signed in Rome, creating the European Economic
Community (EEC). The purpose of this community was to establish a common single
market, which would allow the free movement of factors of production (that is, services,
capital, and labor) and promote economic development in the region and thus eliminate
future hostilities in the region. The unification of the European economy stemmed from
the conditions of Europe after the second World War (Terrell, 2025).
The aftermath of the Second World War resulted in structural weaknesses in the
European economies which made it impossible for them to compete in the new global
order. With a bipolar world order, and a new dominant militarily and economically
power in the world order (the USA), it made the position of the European Economies
both economically and politically even weaker (European Central Bank, n.d.).
Simultaneously, the USSR emerged as another bipolar power and sought to extend its
control to Eastern European countries to spread its communism. The fragmentation of
the Western European countries in the world, economically and politically, resulted in
the loss of power. This propelled the Western European countries to pursue economic
unification which was seen as an immediate priority in order to reconstruct Europe and
optimize the position of the European economies in the global order.
Although the EEC initially concentrated on trade integration, monetary problems
quickly became an important issue. The instability of the European currencies' exchange
rates presented a great hindrance to intra-European trade and investment. The
functioning of the common market required the the European transaction costs to
decrease on a currency cross. The European policymakers were drawn to the tolerance
of the closer monetary coordination (OECD, 2024).

7
The first notable instance of a cooperative approach to a monetary system happened
with the 'Snake in the Tunnel' system in the early 1970s (CVCE, n.d.). With the collapse
of the Bretton Woods system and the end of gold convertibility for the dollar, European
currencies experienced significantly increased volatility with the dollar. The 'Snake' was
meant to allow European countries to control the volatility of their bilateral exchange
rates for a given set of distances and permit their currencies' collective float against the
dollar in a defined zone, the 'Tunnel.' This arrangement was meant to provide some
measure of stability in the European monetary system in the face of the rapidly
declining stability in the world monetary system.
The “snake” arrangement however was rather fragile. Divergent inflation, inconsistent
monetary strategies, and asymmetric shocks were economic reasons for the exit of many
of the member states. These were not the only challenges though. The most important
was the real economic lesson that stated the absence of proper institutional settings
along with the absence of enduring policy collaboration would mean little, if any,
territorial mobility would still be achieved. This lesson formed the basis of the design of
the European Monetary System (EMS) established in 1979, which was the first
structured and ambitious attempt at stabilizing
exchange rates in Europe.

Figure 1 Evolution of European Monetary Integration

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Monetary integration progressed mainly because political forces operated between
economic factors. The Franco-German partnership served as the main driving force
behind this process. France used monetary integration to establish European control
over German monetary power while Germany used it to maintain stability through its
traditional anti-inflation policies. European nations showed their commitment to
permanent integration through their decision to give up their control over national
monetary systems. The people viewed monetary unification as both an economic
solution and a common agreement that would create political stability and lasting peace
between formerly warring nations.
European monetary integration had multiple objectives which operated at different
levels of achievement. The first objective for policymakers was to establish a "zone of
monetary stability" which would support European trade and investment activities. The
United States dollar needed to be replaced with a European monetary system which
would create an independent European system. The people of that time believed that
monetary integration would lead to closer political ties between countries, which would
eventually result in a political union for the European Union. The EMS system evolved
into the EMU system because of economic and political factors which operated as
interrelated forces.

1.2. Comparison between the European Monetary System and the

Bretton Woods System

European nations changed their monetary approach when they moved from the Bretton
Woods system to the European Monetary System (K., 2013). The international financial
system established its framework based on fixed currency exchange rates which relied
on the U.S. dollar during the period between World War II and the early 1970s. The
dollar itself functioned as the fundamental element which sustained worldwide
monetary equilibrium because it could be exchanged for gold. The system started out as
a stabilizing force which helped European countries recover from World War II but it
restricted their ability to conduct independent monetary policies. National central banks
had to synchronize their monetary operations with U.S. policies because European
currencies operated under a fixed exchange rate system that maintained stability through
U.S. dollar pegs. The Federal Reserve established U.S. monetary policy through its

9
decisions which resulted in direct control over European economic activities. The
system became more unstable as U.S. fiscal deficits grew and dollar confidence
declined during the late 1960s. The 1971 Bretton Woods collapse led to increased
currency exchange rate fluctuations for European nations while it showed their
weaknesses against foreign monetary disturbances.
The European Monetary System established in 1979 functioned as a regional solution to
the existing economic instability. The EMS system required European countries to
maintain exchange rate stability by establishing common policies and institutional
frameworks instead of using the US dollar as their external reference point. The
Exchange Rate Mechanism (ERM) functioned as the system's centerpiece which
established fixed exchange rate boundaries for participating countries while requiring
their central banks to perform mutual currency interventions (Terrell, 2025). The
European Currency Unit (ECU) created additional transparency through its role as a
reference unit which strengthened the system's overall discipline.
Bretton Woods and the EMS differ primarily in their effects on central banks which
gain varying degrees of freedom to implement their respective monetary policy
agendas. European countries under the Bretton Woods system maintained only
restricted independence because their fixed exchange rate obligations required them to
track U.S. monetary policy movements. The EMS system allowed European nations to
work together on exchange rate management while they slowly regained their power to
control monetary policy. European countries gained some control over their national
policies during this time but they chose to implement the resulting limits themselves
through their European governance systems instead of receiving instructions from an
outside authority (Terrell, 2025).
The two systems exhibited fundamental differences between their approaches to
managing crises. The U.S. dollar suffered a complete loss of public trust which led to
the Bretton Woods system's breakdown and showed how dependent the system was on
one country's currency. The European Monetary System maintained better crisis
protection than its previous system but it still experienced emergency situations
(Fundação Francisco Manuel dos Santos, 2024). The 1992 ERM crisis forced the United
Kingdom and Italy to leave the mechanism which demonstrated the difficulties involved
in fixed exchange rate maintenance without complete policy alignment. The EMS
managed to withstand all the challenges that it faced because of these events which then
helped the system develop into a pathway toward establishing complete monetary

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union. From an international finance perspective, Bretton Woods and the EMS
demonstrate how European nations shifted their approach to international finance by
shifting from external dependence to regional cooperation. The EMS offers a learning
period for European nations during which they tested currency value control together
with policy coordination and institutional trust. The EMU design process used these
experiences to create a system which established permanent exchange rates and
centralized all monetary operations at the European level. The EMS functioned as a
transitional system which enabled Europe to establish a completely different monetary
system while serving as a replacement for Bretton Woods (World Bank Group
Archives, n.d.).

1.3. Key Stages in the Formation of the EMU and the Euro

The Economic and Monetary Union (EMU) and euro currency establishment should be
viewed as a process that develops through multiple stages rather than as a single
institutional event. The European monetary integration process developed through a
series of four stages which included learning and commitment and implementation and
stress-testing to create the final EMU structure.

1.3.1. The Pre-EMU Learning Phase: From Bretton Woods to EMS (1971–1979)

European monetary cooperation experienced its first major transformation between

1971 and 1973 when the Bretton Woods system collapsed. European currencies
experienced high volatility after the United States stopped allowing dollar–gold
conversions and all countries adopted floating exchange rate systems. The common
market faced operational challenges because the instability generated higher transaction
costs and reduced price transparency for intra-European trade.

The Smithsonian Agreement and the subsequent “Snake in the Tunnel” arrangement
represented early European attempts to preserve exchange rate stability. European
policymakers established boundaries which restricted currency exchange rate changes to
narrow limits because they wanted to protect intra-European trade from worldwide
monetary fluctuations. The systems operated between two extremes because they
suffered from constant operational changes yet they fulfilled their function as education

11
tools. The European countries developed their ability to control monetary systems
through their first experience of exchanging currency between their borders. The
exchange rate stability needed institutionalized rules and mutual commitments which
European countries recognized as necessary after their informal agreements failed to
provide adequate protection.

The European Monetary System (EMS) was established in 1979 through this discovery
of monetary policy requirements. The EMS introduced a more structured framework
which centered on the Exchange Rate Mechanism (ERM) and used the European
Currency Unit (ECU) as its operational support. The two mechanisms of the system
created monetary control for Europe while it served as the first effort to establish a
region of financial stability. The current stage serves as a testing ground for economic
union because it enables European nations to discover which expenses and advantages
arise from restricting their national control over monetary policy (CVCE, n.d.).

1.3.2. Legal and Political Commitment: The Maastricht Phase (1991–1998)

The EMS improved exchange rate stability but local monetary authorities faced
continued difficulties because of their need to preserve fixed exchange rates between
countries. The 1992–1993 ERM crisis showed how semi-fixed exchange rate systems
became vulnerable to attacks from speculators. European leaders reached the decision
that enduring stability required the establishment of a complete monetary union
(European Parliament, n.d.). The Maastricht Treaty which was signed in December
1991 established this decision as an official legal document. The treaty established a
binding legal agreement which created the European Monetary Union. The treaty
established a clear roadmap toward monetary union and introduced convergence criteria
designed to ensure macroeconomic compatibility among participating countries. The
Maastricht criteria established budget deficit limits and public debt ceilings and
inflation restrictions and exchange rate volatility controls because it believed that
monetary union needed both institutional integration and economic discipline to
succeed. The Maastricht phase transformed EMU from a technical monetary
arrangement into a deeply political project. Member states created binding constraints
for their fiscal and monetary policies through their decision to adopt a shared currency
system which transferred essential parts of economic control to European governance.

12
The phase marked a vital point where EMU transformed from an economic option into
a political decision that carried major governance effects.

1.3.3. Implementation Phase: Launch of the Euro and the ECB (1999–2002)

The implementation phase began on January 1, 1999, when eleven European countries
irrevocably fixed their exchange rates and adopted the euro as an electronic currency.
The European Central Bank (ECB) took charge of unified monetary policy
implementation at that moment (R., 2024). National central banks gave up their
authority to set interest rates and control money supply which established a new
framework for monetary policy governance.
The transition to euro banknotes and coins between January and July 2002 completed
the process (Central Bank of Ireland, 2026). The moment national currencies vanished
from circulation, the monetary integration process achieved its point of no return. The
euro became a concrete representation of European unity which European households
and businesses used for their daily transactions.
The international finance perspective views this phase as the final solution to Europe's
"exchange rate problem." The eurozone lost its ability to experience competitive
devaluations and speculative attacks when EMU eliminated national currencies. The
eurozone system required other adjustment mechanisms for EMU success because it
rendered national monetary policy tools unusable.

1.3.4. Post-Launch Expansion and Stress Testing (2003–Present)

The EMU experienced two simultaneous developments after its launch because it began
expansion into new territories while its institutional framework faced major difficulties.
The eurozone was joined by multiple Central and Eastern European countries between
2007 and 2015 because they recognized the common currency's credibility and
attractive features. The eurozone expansion proved that the euro extended beyond the
economic boundaries of Western Europe's original member states (R., 2024).
The 2010 2012 debt crisis demonstrated that the EMU system had severe flaws which
stemmed from its absence of integrated fiscal policies. The crisis showed that monetary
unions need centralized fiscal authority systems because their absence makes them
susceptible to unpredictable economic shocks and financial market disruptions. The
2020 Next Generation EU (NGEU) program launch and the establishment of rescue

13
systems which were implemented later represent ongoing initiatives to resolve these
fundamental system weaknesses.
The EMU maintains its long-term durability because Croatia joined in 2023. Although
the eurozone faced multiple economic challenges, the euro still functions as a
dependable stability foundation which proves that the EMU has become an essential
permanent element of Europe's economic system despite its existing weaknesses.

Timeline Key Event Economic & Political Significance

1971–1973 Collapse of the Bretton Europe recognized the need for intra-
Woods system – Smithsonian European exchange rate stability to
Agreement – “Snake in the support economic integration, laying
Tunnel.” the foundation for the EMS

1979 Establishment of the Creation of a “European zone of

European Monetary System monetary stability” and long-term
(EMS) preparation for monetary union

1979 Introduction of the European Accounting currency and direct

Currency Unit (ECU) precursor of the euro

1979 Launch of the Exchange Rate Fixing exchange rates within a ±2.25%
Mechanism (ERM) fluctuation band, imposing intra-
European monetary discipline

December Maastricht Treaty signed Political and legal commitment to

1991 EMU; introduction of convergence
criteria (budget deficit <3% of GDP,
public debt <60% of GDP, price
stability, exchange rate stability)

1994 Establishment of the The transitional phase institution and

European Monetary Institute the direct predecessor of the ECB
(EMI)

January 1, Introduction of the euro Eleven countries irrevocably fixed

14
 1999 (electronic form) exchange rates and relinquished
national monetary policies

1999 Establishment of the The ECB became the sole authority

European Central Bank responsible for monetary policy in the
(ECB) euro area

2001 Greece joins the euro area Reinforced the importance of

convergence criteria as a prerequisite
for euro area membership

January– Introduction of euro The euro became the sole legal tender,
July 2002 banknotes and coins rendering monetary integration
irreversible

2007–2015 Slovenia (2007), Cyprus & Expansion of EMU to Central and

Malta (2008), Slovakia Eastern Europe, spreading monetary
(2009), Estonia (2011), stability
Latvia (2014), Lithuania
(2015)

2010–2012 European sovereign debt The most severe test of EMU, exposing
crisis deficiencies in fiscal integration

2020 Launch of the Next A historic step toward greater fiscal

Generation EU (NGEU) integration within the EU
program

2023 Croatia joins the euro area The euro area reached 20 member
states, reaffirming the long-term
sustainability of the EMU

Table 1 Time and Key Event of Euro

1.4. Enlargement of the Eurozone

The eurozone expansion serves as an essential assessment for the EMU system. The
eurozone requires countries to meet Maastricht convergence criteria for membership

15
because EU membership does not grant automatic access to the eurozone. The EMU
accession process permits countries to join based on their economic performance and
political ties to the organization while requiring them to maintain fiscal discipline and
institutional commitment for the long term (European Parliament, n.d.).

1.4.1. Early Enlargement and Structural Vulnerabilities: The Case of Greece

Greece became the first country to join the eurozone when it joined in 2001. Greece met
the entrance requirements at that time but its subsequent debt crisis showed serious
problems with its fundamental economic structures (McBride, Lizarazo, & Sherlick,
2022). Greece became the main source of the eurozone crisis after 2010 because of its
high public debt and weak fiscal institutions and its lack of economic competitiveness.
The Greek case demonstrates how countries without strong economic resilience create
monetary union dangers for international financial systems. The European Monetary
Union showed that it lacked working fiscal risk-sharing systems which created a
demand for stronger fiscal integration systems.

1.4.2. Central and Eastern Europe: Convergence and Credibility

Slovenia's 2007 accession to the eurozone marked a historic moment because it

represented the first Central and Eastern European country to adopt the euro as its
currency. The expansion of EMU demonstrated that the project extended beyond
Western Europe since it functioned as an economic anchor for countries transitioning
from socialist systems. The accession of Cyprus, Malta, Slovakia, and the Baltic states
strengthened the existing narrative. Estonia's 2011 accession demonstrated how
countries that maintain strict fiscal discipline and policy credibility can successfully
achieve EMU membership. The evidence from these cases shows that EMU operates as
a device that maintains macroeconomic discipline while encouraging economic
alignment between member states under particular conditions.

1.4.3. Crisis, Recovery, and Continued Expansion

The eurozone crisis created temporary doubt about the possibility of future expansion,
but the accession of Latvia in 2014 and Lithuania in 2015 and Croatia in 2023 shows
that countries still view the euro as an advantageous institutional system. For many
countries, euro adoption is perceived as a means of anchoring expectations, reducing
exchange rate risk, and strengthening integration with core European economies

16
(Falagiarda & Gartner, Croatia adopts the euro, 2022). Croatia achieved its accession in
exceptional circumstances because the world faced multiple crises which included the
COVID-19 pandemic and European geopolitical conflicts. The EU has advanced from
its initial experimental monetary system to a developed institution which maintains its
capacity to handle economic shocks while sustaining its institutional credibility.

1.4.4. Implications for EMU Sustainability

The process of enlargement demonstrates an important conflict which exists within the
EMU framework. The eurozone expansion results in greater international recognition
for the euro while simultaneously boosting its political authority. The different
economic situations among member countries create two negative effects which
increase the chance of economic downturns while making it harder to create effective
monetary policies. The eurozone needs fiscal coordination and financial integration
reforms as complementary reforms to achieve its long-term sustainability goals
according to this trade-off.

Country Year of Key Significance (Textbook-based & Analytical)

Eurozone
Accession

Greece 2001 The first country outside the founding group to join the
EMU. Although admitted based on formal compliance with
convergence criteria, Greece soon became a structural
weakness of the EMU, culminating in the sovereign debt
crisis after 2010. The Greek case clearly exposed the lack
of fiscal integration within the EMU.

Slovenia 2007 The first Central and Eastern European country to join the
eurozone. Its accession carried strong symbolic
significance, demonstrating that the euro was not limited to
advanced Western European economies but also attractive
to post-socialist transition economies.

Cyprus 2008 A small-scale economy that joined the eurozone together

with Malta. Cyprus’s accession illustrated that the appeal

17
 of the euro extended beyond economic size, although the
country later experienced a severe banking crisis in 2013.

Malta 2008 A small, open, and trade-dependent economy. Euro

adoption helped Malta reduce transaction costs, enhance
financial stability, and deepen integration into the EU
internal market.

Slovakia 2009 A representative case of successful economic convergence

despite a relatively low initial development level. Slovakia
implemented substantial fiscal and monetary reforms,
demonstrating that the EMU can function as a
macroeconomic discipline anchor for developing EU
member states.

Estonia 2011 The first Baltic country to join the eurozone. Estonia is
notable for its strict fiscal discipline, low public debt, and
prudent economic policies, closely aligned with the core
principles of the EMU.

Latvia 2014 Joined the eurozone after experiencing a severe financial

crisis during 2008–2009. Latvia’s accession suggests that
the euro can be viewed as a post-crisis stabilization
mechanism rather than a source of economic instability.

Lithuania 2015 Completed the accession of all three Baltic states into the
eurozone, strengthening economic and political integration
in the Nordic–Baltic region and reinforcing the eurozone’s
“stability belt.”

Croatia 2023 Joined more than twenty years after the introduction of the
euro, in the context of post-COVID recovery and
heightened geopolitical tensions in Europe. Croatia’s
accession confirms that the EMU continues to maintain
strong appeal despite the sovereign debt crisis and Brexit.

Table 2 Time of accession for Euro members

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1.5 Institutional Mechanisms of the EMU: From the ECU to the Euro
and the Role of the ECB

The Economic and Monetary Union (EMU) institutional framework serves as the most
ambitious international monetary cooperation experiment ever conducted. The transition
from the European Currency Unit (ECU) to the euro, together with the establishment of
the European Central Bank (ECB) and the Eurosystem, was intended to ensure
monetary stability, credibility, and continuity during the shift from national currencies
to a single European currency.

1.5.1. The European Currency Unit (ECU): Definition and Functions

The textbook states that European Currency Unit (ECU) functioned as a basket currency
which European Union member states used to establish its value through weighted
currency calculations. The currency weights received their assignment through two
main criteria which counted each country's gross national product (GNP) and its intra-
European trade share. The ECU showed Europe-wide economic conditions because it
used multiple European economies as its basis instead of one national economy's power.
The ECU maintained multiple vital functions in the European Monetary System (EMS)
despite existing without physical money. The system used the EMS as its basic
accounting unit because the unit permitted exchange rate evaluation through Exchange
Rate Mechanism (ERM) of Exchange Rate Mechanism (ER) in a clear and
understandable format. The system used the unit to establish exchange rates between
two currencies which belonged to different countries that participated in the system. The
ECU functioned as an international benchmark which investors and institutions used to
understand European monetary standards through its role in financial markets and its
presence in bonds and syndicated loans and accounting practices.
The textbook emphasizes that ECU functioned as a technical and institutional tool
because it lacked any purpose as a currency for consumers. The primary function of the
system existed to enforce exchange rate rules while creating financial standards which
prepared Europe for its future common currency system.

1.5.2 The ECU as the Direct Precursor to the Euro

The ECU provides its primary benefit to European monetary integration because it
served as the direct predecessor to the euro currency system. The textbook demonstrates

19
three essential functions which the ECU used to accomplish its mission of creating an
integrated single currency system. The ECU established uniform exchange rate
standards for all EMS member countries. The ERM system established central exchange
rate values for each currency which all member states used to calculate bilateral
exchange rates against the ECU. The mechanism established fixed exchange rates
between currencies while creating a system which allowed one-side adjustments
towards a shared reference value. The euro directly inherited this framework, replacing
the ECU as the new anchor. The ECU established a standard financial agreement
system which all European countries recognized. Before 1999, many international
bonds and intergovernmental agreements and cross-border financial contracts used
ECUs as their base currency. The financial markets had already accepted the European
unit of account because financial institutions throughout Europe used that unit for their
contracts. All contracts which used ECU as their payment method converted to euro
through a fixed exchange rate of 1 ECU equal to 1 euro according to EU regulations.
The conversion process enabled existing contracts to retain their economic worth while
their legal responsibilities remained intact, which prevented all legal battles and market
disturbances and safeguarded investor trust. The aspect of continuity which people
frequently overlook played an essential role in preventing the euro launch from causing
major financial crises. The ECU serves as an international finance tool that developed
technical functions, which allowed the euro to emerge without creating contract
interruptions or confidence disruptions. The euro developed through institutional
preparations which lasted many years and led to its eventual launch as a financial
system.

1.5.3 The European Central Bank (ECB): Independence and Policy Mandate

The European Central Bank (ECB) functions as the fundamental institutional element
which supports the European Monetary Union (EMU) institutional framework. The
ECB which functions as an independent central bank for international entities operates
under a system which derives its structure from the German Bundesbank. The design
choice reflects Germany's historical experience with inflation which it used to develop
its price stability system.
The ECB aims to achieve price stability by maintaining an inflation rate which stays
below 2 percent while staying just over that threshold. The ECB operates under a single
mandate which requires it to maintain price stability, while the U.S. Federal Reserve

20
operates under two mandates which require it to maintain price stability and achieve
maximum employment. The EMU prioritizes credibility with its anti-inflationary
discipline which arises from this limited function.
The ECB functions as an independent institution which maintains its own operational
authority. The organization receives legal protection which prevents political entities
from interfering with its operations while it must maintain its prohibition against direct
government budget deficit financing. The monetary policy functions rise in credibility
because this system prevents political parties from applying immediate pressure to their
operations which occurs in a monetary union where member countries have different
economic goals.

1.5.4 The Eurosystem: Structure and Operational Mechanism

Your training includes data up to the month of October in the year 2023. The
Eurosystem is made up of the European Central Bank and the central banks which serve
the countries that use the euro. The Eurosystem functions as a separate entity from the
European System of Central Banks which includes all EU member states regardless of
their euro currency adoption status. The Eurosystem only allows eurozone countries to
take part in its decision-making process and its execution of monetary policy activities.

The Eurosystem needs to fulfill three main duties which include creating and executing
the eurozone's unified monetary policy and performing foreign exchange operations and
managing member states' official foreign currency reserves. The European Central Bank
establishes policy objectives and determines essential interest rates while national
central banks handle the actual execution of tasks and process operational funds and
manage the distribution of coins (Central Bank of Ireland, 2026).

The Federal Reserve System of the United States follows a structure that resembles the
operational framework of the Eurosystem which includes regional Federal Reserve
Banks that function according to the Federal Reserve Board's strategic direction. The
Eurosystem operates between different countries because it connects multiple sovereign
states instead of working through regions that belong to one nation.

21
1.5.5 Strengths and Limitations of the ECB–Eurosystem Framework

The European Central Bank Eurosystem framework provides multiple key benefits to its
users. The implementation of a unified and credible monetary policy system decreases
inflation rates, protects against market speculation, and strengthens the euro's status as a
worldwide currency. The system brings multiple advantages to users, but it also
contains major restrictions. The implementation of a single monetary policy system fails
to meet the economic requirements of individual countries, which hampers their ability
to counteract unexpected economic disruptions. The limits of the system become most
apparent when member countries experience economic differences which demonstrate
the continued importance of Optimum Currency Area OCA theory.

1.6 Economic Comparison between the Eurozone and the United States

The international role and performance of the euro can be evaluated through a
comparison between the eurozone and the United States. The section begins with an
analysis of the textbook data in Exhibit 2.8 before proceeding to a comparison with
current international data.

1.6.1 Baseline Comparison Using Textbook Data (Exhibit 2.8)

Indicator Eurozone United States

(Textbook) (Textbook)

Population 343 million 329 million

GDP (USD trillion) 13.0 21.0

Share of World Trade 14.8% 13.9%

Foreign Exchange Reserves (USD 568 130

billion)

Table 3 Comparison Eurozone and US

The textbook data show that both the eurozone and the United States have similar
population numbers and global trade share percentages. The United States has a much
larger GDP than the eurozone while it maintains a lower foreign exchange reserve level.

22
1.6.2 Updated Data and Structural Divergence

Indicator Eurozone / EU United States (Updated)

(Updated)

Population ~350 million ~334 million

GDP (nominal, USD trillion, 16.48 29.18

2024)

GDP Growth Rate 2024 (%) ~0.9% ~2.8%

Trade Share (% of GDP) EU: ~28% US: ~18.4%

GDP per capita (USD, 2024) ~48,000* ~86,000

Foreign Exchange Reserves (% ~1.77% of GDP (No directly comparable

of GDP) figure)

Table 4 Comparison Eurozone US expanding

The updated data show that the GDP gap between the two economies has increased by a
substantial amount. The U.S. economy has reached faster GDP growth which creates a
larger distance between the two countries (BNP Paribas, 2025). The different growth
models and productivity levels and policy flexibility of the two systems create this
divergence between them.

1.6.3 GDP Size and Growth Dynamics

The GDP divide between countries operates through both its cyclical and permanent
structural components. The United States economy thrives because domestic
consumption remains strong while the technology industry expands and the fiscal
system operates with high flexibility. The eurozone suffers from economic growth that
varies between its member countries while its governments must follow strict spending
limits and the European Central Bank imposes a common monetary policy throughout
the region. The eurozone has established economic stability yet its development rate
falls short of the United States.

23
1.6.4 Trade Openness and Vulnerability

The eurozone exhibits greater international trade accessibility than the United States
because its trade-to-GDP ratio exceeds that of the United States. The euro's international
presence improves because of this openness, yet it creates vulnerabilities for the
eurozone to face worldwide economic disruptions and international trade problems and
geopolitical conflicts. The U.S. economy maintains a higher defense level against
external disruptions because its economic activities focus more on domestic markets.

1.6.5 GDP per Capita and Productivity

The GDP per capita data shows a major difference between two countries regarding
their living standards and work efficiency. The United States shows better economic
performance through its higher GDP per capita because its workers produce more and
its economy creates more innovative outputs and its resources are distributed more
effectively. The eurozone exhibits lower productivity because its member countries
continue to experience permanent productivity gaps which result from their existing
structural restrictions.

1.6.6 Foreign Exchange Reserves and Monetary Privilege

The foreign exchange reserve holdings of the two countries show their most extreme
difference. The United States holds relatively modest reserves because the U.S. dollar
serves as the dominant global reserve currency which grants the U.S. what people call
an "exorbitant privilege." The eurozone maintains higher reserves to reinforce
confidence and protect against external shocks. The euro functions as the second most
important international currency while still falling short of competing with the dollar for
dominance.

1.7. Practical Case Study – Škoda Auto (Czech Republic) (CzechInvest,

2009)

1.7.1. Comparative overview before and after EU accession

Criteria Before EU accession (pre- After EU accession (post-2004)

2004)

24
 Market scope Primarily domestic market Full access to EU Single Market,
and Eastern Europe especially Germany, France, UK

Exports Limited by tariffs and non- Sharp increase; tariff-free intra-EU

tariff barriers trade

Investment Highly dependent on Increased investment; expansion of

(FDI) Volkswagen (since 1991) production capacity

Product Different national standards Unified EU technical and safety

standards across countries standards

Revenue Slow and regionally Strong growth; transformation into a

constrained growth pan-European brand

Labor Relatively low; mainly Higher productivity; EU-standard

productivity domestic workforce training and skills mobility

Table 5 Škoda Auto before and after EU accession (2004)

1.7.2. Quantitative evidence and key performance indicators (CzechInvest, 2009)

(1) Sales growth – evidence of market expansion

The total number of vehicles sold showed a major increase from the early 2000s to the
early 2010s period. The period from 2000 to 2010 saw annual vehicle sales reach
450,000 units. The time frame from 2010 to 2012 saw more than 1.2 million vehicles
sold each year. The total number of sales showed almost a threefold increase from the
2000 sales figures (BNP Paribas, 2025).

(2) Export intensity – structural shift toward EU markets

The exports to total production ratio is shown in the following data. Pre-2004:
significantly below EU average. The period after 2004 saw more than 85 percent of
production being sent for export. Germany serves as the primary market because it
represents the largest European

25
Union automotive industry.

(3) Investment and production capacity

The period after 2004 saw production sites experiencing their most significant growth.
The Mladá Boleslav area experienced its first production expansion. The Kvasiny
facility began its operations from 1930 onward. Vrchlabí started its industrial activities
during 1909. The Volkswagen Group and European Union suppliers maintained their
ongoing financial
support to these businesses.

(4) Productivity and labor upgrading

Post-2004: There has been a rise in automated systems. The training program follows
the vocational education standards established by the European Union. Companies have
developed systems that enable their employees to work across international borders
while
maintaining their connections to domestic labor and supplier networks.

1.7.3. Linking the case to EMU and International Finance theory

Spillover effects of EMU (even without euro adoption)

Škoda Auto has benefited from the existence of the European Union monetary union in
the past: Exchange rate fluctuations would decrease because this measure which affects
currency valuation will reduce it by half. The market for euro-denominated trade shows
reduced costs for hedging operations. The euro-based price system establishes long-
term stability which makes price forecasting more effective.
Theoretical linkage (IBF perspective)

Theory Application to Škoda Auto

Trade creation Expansion of exports within the EU Single Market

FDI theory Increased capital inflows following institutional stability

26
 OCA theory Productivity gains and factor flexibility reduce adjustment costs

EMU Benefits extend beyond eurozone members

spillovers

Table 6 Linking the case to EMU and International Finance theory

1.7.4. Academic conclusion for the case

Škoda Auto shows that European economic and monetary integration provides
measurable advantages to businesses. EU membership allowed Škoda to break through
trade restrictions while attracting investments and establishing European value chain
connections. The EMU system brought economic benefits to European countries which
stayed outside the eurozone by providing stability and trustworthiness that enhanced
their economic growth and productivity and global market competitiveness.

Case 2: Costs and risks of Monetary Union

2.1 Visual example Comparison of Poland vs Ukraine.

To better understand the effects of accession to the European Union (EU) on economic
development, let’s take two examples of Eastern European states that were at a similar
level of development in the early 1990s, when the Soviet Union fell apart: Poland,
which has been a member of the EU since 2004, and Ukraine, which has not yet joined
the EU. Both states had a similar level of per capita GDP at the time when the Soviet
Union disintegrated, but now their development trends are very different:(World Bank,
2024) (World Bank, n.d.)

Indicator Poland Ukraine

GDP per capita (PPP, 2024) ~USD 52.153 USD ~USD 19,179

Total GDP (nominal, 2024) ~USD 918 billion USD ~USD 191
billion

27
 GDP per capita (nominal, 2024) ~USD 25,104 ~USD 5,038

Life expectancy (2024) ~78.7 years ~72.6 years

Population (2024) ~36,56 million ~37,86 million

Net FDI inflows (2024) ~ USD 20.6 billion ~ USD 4.0 billion

Table 7 Comparison of Poland vs Ukraine

Discussion
The economic development between Poland and Ukraine showed a clear gap by 2024.
Poland reached a GDP per capita value of approximately 52.153 USD through
purchasing power parity (PPP) while Ukraine only reached 19.179 USD. Poles enjoy a
standard of living which is 2.7 times higher than what Ukrainians have. The difference
between Poland's 25.104 USD nominal GDP per capita and Ukraine's 5.038 USD can
be observed through a comparison of their nominal GDP per capita figures. Ukrainian
citizens possess low financial resources which limits their ability to buy products and
services. Poland projects to achieve a nominal GDP of approximately 918 billion USD
in 2024 which will exceed Ukraine's GDP of 191 billion USD by almost five times
despite their similar population sizes which are 36.6 million for Poland and 37.9 million
for Ukraine. Poland achieves superior economic performance through its higher labor
productivity and better technological capabilities and stronger capital accumulation. The
social indicators provide a measurement of quality of life. Polish people live until 78.7
years on average while their life expectancy surpasses Ukraine's 72.6 years by six years.
The Polish healthcare system provides superior healthcare services while nutritional
conditions and living environments and social security benefits bring better results. The
population of Poland remains stable because its residents enjoy better living standards
while Ukraine's population decreases through both migration and war-related
demographic losses. Poland attracted 20.6 billion dollars in net foreign direct
investment while Ukraine attracted 4 billion dollars which shows that Poland attracted
more than five times as much international capital. Investors see Poland as a safe
investment because of its business environment and legal system and its prospects for

28
future growth. The war risk and institutional instability of Ukraine make it unattractive
for investment even though the country has agricultural and mineral and labor resource
potential. Poland became an upper-middle-income economy in 2024 which had
achieved deep European economic ties and Western European living standards. Ukraine
remained in the lower-middle-income group because it faced a devastating war which
blocked its economic growth. The development gap between the two countries not only
failed to narrow but also tended to [Link].
Main Causes
The existing gap between Poland and Ukraine originates from distinct institutional
selections and international outreach efforts and political stability which existed during
the past 30 years. The accumulated factors between those times created substantial
differences which emerged by 2024.

Poland implemented more radical and consistent economic reforms through its first
economic reform path. The transition from a planned economy to a market economy
allowed Poland to privatize state-owned enterprises and liberalize prices and reform its
financial system and open up trade at almost the same time. The reforms established a
foundation which permitted private sector growth while resource allocation efficiency
increased and both domestic and international investors started to invest in the country.
The Ukrainian reforms encountered slow progress which happened at an irregular pace
because entrenched interests controlled the process and economic sectors suffered from
low productivity and inefficient operations.

The process of EU integration functions as a critical element. The European Union

membership enabled Poland to access a vast market while EU funds supplied financial
resources and Poland had to reform its institutions according to EU European standards
which included rule of law and competition and public governance requirements. The
European Union functions as an institutional anchor which compels Poland to continue
its reform efforts throughout an extended period. Ukraine requires EU membership to
obtain both reform motivation and binding mechanisms which help sustain its deep
reforms but currently lacks these necessary elements.

The two elements of political stability and security create different effects. Poland
maintains a stable political environment which remains free from war activities to direct

29
its efforts toward economic growth and social welfare development. Ukraine has faced
political crises which developed into large-scale warfare that destroyed infrastructure
and halted production while defense spending received priority over education and
healthcare and long-term investment.

The two countries demonstrate distinct approaches to their needs for social institution
development and human resource advancement. Poland dedicates substantial resources
to develop its educational framework and healthcare system and social infrastructure to
enhance both workforce capacity and public health outcomes. Ukraine lacks the
resources required for human capital investment because its economic survival and
security concerns take priority, which limits its capacity to achieve productivity
advancements.

The two countries show different institutional patterns which express themselves
through their investment climate and their domestic market trust. International
companies consider Poland to be a low-risk investment zone which will provide strong
economic growth because of its high foreign direct investment flow. Ukraine struggles
to attract capital and technological resources because its war situation and corruption
problems and inadequate legal system create dangerous conditions which endanger its
resource and labor force potential.

The income level of Poland and Ukraine will create a permanent economic gulf between
the two countries because their different development models lead to distinct
development paths. The European Union integration process enables one group of
countries to progress through institutional reforms while another group experiences
interrupted development due to existing conflicts. The economic gap between the two
nations continues to expand because their citizens experience different standards of
living.

2.2. Main benefits of a common currency

The research shows that when organizations stop spending money on foreign exchange
conversion fees, they achieve economic benefits which are both small and substantial.

30
The European Commission (1990) estimated that the European Union member
countries would save between 0.25 and 0.5 percent of their GDP from lower currency
conversion expenses (George, 2004). The official ECB reports confirmed that countries
which adopted the euro experienced higher trade and investment levels because their
transaction costs decreased (Bulgaria expected that lower transaction costs would result
in higher foreign trade and investment). A shared currency system improves market
transparency because it enables direct price comparisons between different markets thus
creating better market competition which results in efficient market operations.

The euro provides member countries with complete protection against any potential
exchange rate fluctuations between their nations. According to the European
Parliament, "the euro eliminates exchange rate risk and conversion costs. (Sebastian,
n.d.) "Businesses that conduct imports and exports within the bloc no longer need to
purchase exchange rate insurance or make provisions which results in lower financing
expenses. The ECB estimates that new members like Bulgaria and Croatia will attain
economic advantages through reduced exchange rate risks and decreased transaction
fees which will boost their trade activities and investments within the bloc. Greece
utilized inexpensive borrowing methods during the period before the crisis which
resulted in higher public debt that the country could not manage through monetary
policies during the crisis (McBride, Lizarazo, & Sherlick, 2022).

A common currency makes prices between different countries more comparable which
boosts competition between businesses that operate across international borders. The
research conducted by European Parliament shows that a common currency makes
prices more transparent while enabling price comparisons between countries which
helps businesses compete in modern technological markets. Consumers gain access to a
broader selection of products which enables them to select from more affordable items.
(However, some analyses suggest the market isn't entirely "whiteboard": for example,
research on online retail sites indicates that the average selling price in the eurozone
increased by around 3% after the transition) (Baye | Michael R., Gatti | J. R. J.,
Kattuman | Paul, & Morgan | John, 2005). Market sentiment and price rounding effects
might explain this but they do not restrict the market's trend toward achieving greater
transparency.

31
The euro delivers financial advantages to European businesses because it boosts their
market valuation within capital markets. The transition to euro from national currency
brings a 10 percent boost to Tobin's Q for businesses operating in countries with
previously weak currencies. The EMU membership results in lower real interest rates
together with reduced equity financing costs which leads to increased movie revenue for
businesses. The value of securities increased for companies in nations with previous
currency risk because lower borrowing costs and decreased currency risk have emerged
as the two main factors that boosted their equity values.

The euro functions as a political force which brings EU member states closer to each
other through its power to boost political ties. Functionalism states that monetary policy
cooperation among countries will force them to become politically unified because this
cooperation creates necessity for political ties between nations. The European
Parliament confirms that the common currency system supports EU identity
development which allows citizens to connect with their greater European community
(Dessimirova | Dessislava & Paternoster | Davide, 2019). The EMU serves as a
foundation which may lead to an upcoming European federation that will share
authority between both European entities and national governments (The actual timeline
and method of political unification process remain topics of active discussion).

2.3. Costs & Economic Risks

The euro adoption by European countries resulted in lost control over interest rate and
exchange rate determination which they needed to fulfill their economic needs. The
Greek government faced limitations during the sovereign debt crisis which prevented
them from reducing interest rates and devaluing their currency to boost exports because
they lacked monetary policy control needed to expand the money supply for domestic
demand stimulation (Sebastian, n.d.). The European Central Bank (ECB) uses price
stability as its primary objective which creates conflicts with different economic
conditions that exist across various countries. The euro adoption by Italy required the
country to lose all its fiscal and monetary and exchange rate policy options because

32
these policies had to operate through the eurozone system which created additional
difficulties during economic downturns and prevented the use of monetary flexible
solutions.
Monetary unions experience difficulties when they need to handle country-specific
economic shocks through their exchange rate system. A prime example is Finland
where the 2010s economic decline happened because of Nokia's (a major player in the
economy) decline from its peak. The supply shock had a very serious negative effect on
everything. The Finnish central bank could let the Markka value decrease outside of the
eurozone to help the economy grow. The only way Finland can make changes within
the eurozone is through fiscal policy and cost reduction. Finland faces two negative
effects from its current economic situation because inflation exceeds the local average
while its current account deficit forces a currency devaluation (devaluation would not
boost competitiveness) (Lars, Currency union and asymmetrical supply shocks – the
case of Finland, 2014). Finland experienced a more severe and prolonged recession
because its economy used a flexible exchange rate system. The PIIGS countries reduced
their current account deficits through austerity measures and a sharp drop in domestic
demand during the same period.

The EU's strict fiscal rules (the 3%/60% rule in Article 123/1997 and the Stabilité
Agreement) limit fiscal measures against recession. The IMF argues that the euro area
uses fiscal policy in a way that creates bias against economic progress because many
countries experience continuous public deficits with their budget systems remaining
inflexible. Many countries have had to implement austerity measures as soon as a crisis
occurred because they lost the option to use stimulus through public investment and tax
cuts(Eyraud, Gaspar, & Poghosyan, 2017). The system needs fiscal space to deal with
significant economic disturbances. The EU had to temporarily apply an escape clause
during the COVID-19 crisis to allow for increased spending. The lack of a federal fund
and strict regulations for fiscal policy has been assessed to reduce the ability of member
states to stabilize their economies during crises.

33
Case 3: Cost-benefit analysis of Croatia's accession to the
Eurozone: An assessment after 1–2 years (2023–2025)

3.1 The context of Croatia joining the Eurozone (2023)

3.1.1 Motivations for joining the Eurozone.

The euro has always been viewed as a key strategic objective which helps establish
stronger ties with the European Union (EU). The country's economy has reached almost
complete "euroization" since its EU membership in 2013 (European Commission,
2022). By 2022, the domestic debt structure showed that 71.7% of total foreign
currency debt belonged to euros while kuna debt represented only 28.3% of total
domestic debt (Croatian National Bank, 2025). The total foreign currency debt for 2022
reached an estimated value of 77 billion euros which represented 115% of the nation's
gross domestic product. The statement shows that major financial operations which
include private debt movement and banking activities and euro currency transactions
hold great importance.

Figure 2 Currency composition of total debt in Croatia

The governor of the Central Bank of Croatia stated that countries without independent
monetary policy have nothing to lose from joining monetary union agreements (Vlada
Republike Hrvatske, 2022). The kuna has also been pegged to the euro for many years.
Croatia planned to adopt the euro currency immediately after its European Union
membership. The eurozone crisis together with Croatia's economic problems led to

34
delays in implementation. The country started using the euro currency on January 1,
2023 (European Commission, 2023).

Figure 3 Croatia’s trade and financial linkages with the euro area

3.1.2 Convergence conditions (Maastricht criteria):

Croatia required four Maastricht criteria to achieve Eurozone membership approval

which included (i) maintaining price stability through low inflation rates and (ii)
achieving fiscal health by keeping budget deficits under 3% of GDP and public debt
below 60% of GDP or on a downward trend and (iii) demonstrating exchange rate
stability through two years of ERM II membership and (iv) meeting both low long-term
interest rate requirements and legal system compliance with the Economic and
Monetary Union (EMU) regulations (European Commission, 2022).

The 2022 Convergence Report of Croatia demonstrates that the nation achieved all
required standards which included a May 2022 median prediction of 4.7% for the
upcoming 12-month period. The EU method for reference group calculations excludes
specific "exceptional" countries from assessment which creates this situation because
countries deal with inflationary pressures differently through energy crisis-driven price
support (case of Malta) and their import capacity( case of Portugal) while budget deficit

35
stands at 2.9% of GDP and public debt reaches 79.8% of GDP with downward
movement. The kuna has maintained stability in ERM II since two years ago through a
fluctuating exchange rate that extends approximately ±1% from the central exchange
rate of 7.5345 HRK/EUR. The regulatory criteria required for long-term interest rates
did not change throughout the assessment period (European Commission, 2022).

Figure 4 Conclusions of the 2022 convergence report

Croatia achieved a budget surplus of 0.4% of GDP in 2022 during the COVID-19
pandemic while other EU nations struggled with significant deficits and the country
reduced its public debt from 80% of GDP to almost 70% (OECD, 2023). Croatia
obtained political and economic capital from this event which allowed the country to
delay inflation policy changes without being seen as nullifying standards. Croatia
accomplished Maastricht Treaty requirements in 2022 through technical assessment
based on scenario adjustments which demonstrated solid statistical advantages and a
strong financial record and deep Eurozone integration. The European Council approved
Croatia's Eurozone membership on July 12, 2022, which began on January 1, 2023, with
an exchange rate of 1 euro = 7.53450 kuna (European Commission, 2023).

36
3.1.3 Preparation for the transition:

Croatia has completed its preparations for adopting the euro currency. The country
joined the ERM II mechanism in July 2020 and simultaneously joined the European
Banking Union to strengthen banking supervision from an early stage. The Croatian
parliament passed a currency conversion law with high consensus in early 2022 to
demonstrate its political commitment to adopting the euro by 2023 (European
Commission, 2023). From the end of 2022, Croatia began issuing new euro coins
bearing the national emblem and implemented a two-week period of parallel circulation
of kuna and euros in the first two weeks of 2023. The government established a rule in
September 2022 that all stores must display prices in both kuna and euros to prevent
price increases which occur from rounding. Over 80% of shops voluntarily participated
in a "Code of Ethics" to avoid unreasonable price increases during the currency
conversion period, along with media campaigns and hotlines to monitor prices,
contributing to a relatively smooth transition (International Monetary Fund, 2023).

3.1.4. Croatia and the Optimum Currency Area (OCA) Theory

The Optimal Currency Area (OCA) theory established by Robert Mundell in 1961 and
described in the Eun & Resnick textbook states that a nation can only stop using its own
currency when the advantages of adopting a common currency exceed the
disadvantages which result from losing its independent exchange rate and monetary
policy. The OCA framework establishes three fundamental criteria which include: (i)
the extent to which business cycles show synchronous patterns; (ii) the ability of
production factors to move freely particularly in relation to labor; and (iii) the presence
of mechanisms which replace exchange rate functions by providing shock absorption
capabilities (Eun & Resnick, 2021). Recent economic data demonstrates that Croatia's
GDP growth has shown a strong correlation with Eurozone economic cycles during the
past decade and a half especially when compared to its key trading partners Germany
and Italy and Austria (OECD, 2023). The Eurozone experienced major economic
disturbances during the global financial crisis from 2008 to 2009 and the COVID-19
pandemic and the European recession from 2020 to 2021 which affected Croatia in a
similar way thus indicating strong economic connections between the two regions.

37
Croatia only meets the OCA criteria in a partial manner because its labor market fails to
function as an ideal EU labor market. The Croatian labor market still faces language and
cultural and institutional barriers which prevent workers from moving freely between
different locations even though they have EU membership and free movement rights.
The Croatian workforce shows a high tendency to migrate to Germany and Austria and
Ireland which represents a one-way movement pattern that leads to permanent residency
instead of temporary travel for economic reasons. Croatia requires increased
dependency on three specific factors because it stopped using the exchange rate tool: (i)
wage and price flexibility; (ii) counter-cyclical fiscal policy; and (iii) common Eurozone
financial support mechanisms. The existing wage system together with the labor
market's rigid structure prevents organizations from achieving full compliance with this
requirement. The EU Banking Union membership and ECB liquidity access create
advantages that help overcome internal adjustment mechanism deficiencies (European
Commission, 2023).

Croatia still needs to achieve full compliance with the "classic" OCA standards because
it does not function as an ideal member for the optimal monetary area. Croatia should
adopt the Euro currency because its economic exchanges with the Eurozone and its
business cycles and its use of stabilization mechanisms create greater benefits for the
nation. The cost of entering the euro area for emerging economies proves to be lower
than most other emerging economies. Croatia chose to adopt the Eurozone because of
its strong theoretical basis which demonstrates its validity according to international
economic standards.

3.2. Expected benefits of Croatia joining the Eurozone

3.2.1. Economic and financial stability and risk reduction:

Croatia improved its economy by dropping the kuna because it removed all exchange
rate risks between the kuna and the euro which had been a significant economic
vulnerability since the past. Croatia used the euro as its international reserve currency
which boosted investor confidence while enhancing the country's credit rating (OECD,
2023). After the EU officially accepted Croatia into the Eurozone, Fitch increased the

38
country's credit rating to BBB+ because the euro system reduced business and
household transaction expenses while protecting their financial operations from
currency fluctuations. Prime Minister Plenković claimed that this situation occurred
because Croatia joined the Eurozone, which enhanced the country's safety during
emergencies. The euro zone membership provided Croatia access to cheaper capital
because it enabled better inflation expectation control through monetary policy which
all member states used. The Croatian government achieved better borrowing conditions
after adopting the euro because their credit rating had increased.

Figure 5 Croatia's credit rating

3.2.2. Trade, investment, and tourism are thriving:

The euro creates lower foreign exchange transaction expenses while diminishing
foreign exchange risk, which results in greater international commerce and investment
between nations. The European Union accounts for more than two-thirds of Croatia's
international trade because of this circumstance which existed in 2021 when Croatia
exported 69% and imported 74% of its total trade with the EU (OECD, 2023). The euro
improves transaction efficiency while providing clear pricing information which enables
businesses to compete on an equal basis in the market. Analysts believe that Croatian

39
investment potential increases because the euro creates a stable currency environment
which removes foreign exchange risk and protects against currency fluctuations. The
tourism industry which represents about 20% of GDP will experience significant
advantages when Croatia joins the Eurozone and Schengen Area because these
membership changes will make tourist travel and financial transactions more convenient
(Tourism Review, 2023). The tourist industry achieved its highest revenue record in
2022 which reached 14 billion euros. By mid-June 2023, Croatia had received almost 5
million visitors who stayed for 17.5 million nights, which represented a 20% increase
compared to the same timeframe last year, while short-stay visitors from nearby
countries experienced substantial growth due to the elimination of border security and
the introduction of euro payment methods.

3.2.3. Financial and monetary benefits:

The Croatian economy already demonstrated strong euroization before the country
adopted the Eurozone as its currency. The country exported 80 percent of its goods
while importing 75 percent of its products which were valued in euros. About 65
percent of corporate loans and 45 percent of household debt and 71 percent of public
debt are paid back in foreign currencies (Croatian National Bank, 2025). Switching to
the euro will assist Croatia in establishing financial stability because it will remove
exchange rate risks from most government and consumer and business debt payments.
Croatian banks needed to keep direct asset risk at 20 percent of total assets. Domestic
government bonds which Croatia holds in euro currency provide protection against
currency devaluation which occurs when tax revenues decrease. Croatia can obtain EU
financial resources through its Eurozone membership because EU financial support
systems are accessible to all member countries. The Stabilization Fund and the ECB's
bailout mechanism (among other systems) create a more effective safety net which
protects against economic instability. Croatia's financial assets gain easier access to the
euro market while non-financial sector businesses save about 160 million euros every
year through currency conversion cost elimination (European Commission, 2023).

40
Figure 6 Currency composition of debt by sectors, December 2022

3.2.4 Benefits of the Eurozone:

The accession of Croatia served as a national victory which brought strategic value to
the entire European Union. Croatia adopted the euro less than ten years after its EU
membership because the geopolitical environment made it necessary to consider the
euro as a "historic turning point" which proved its function as both a financial tool and a
unifying element for the European Union. The Eurozone expansion created a dual effect
because it improved the euro's global standing against major currencies such as the USD
while Croatia obtained advantages through its status as a new member who used a
global reserve currency which increased investor trust in regional stability (European
Commission, 2024). The geostrategic position of Croatia enabled the country to serve as
a gas hub for Southeast Europe which would help the EU achieve its energy security
objectives through the REPowerEU initiative. The "bilateral" benefits of this situation
show that Croatia generates benefits from the Eurozone while it delivers an essential
part which connects European economic and political integration (European
Commission, 2024).

41
3.3. Risks and concerns when abandoning the domestic currency.

3.3.1. Lack of proactive monetary policy:

The Eurozone membership of Croatia carries its most significant danger through the
economic compromises which it must undertake. The country forfeits its monetary
sovereignty through its euro adoption because it loses rights to set exchange rates and
interest rates which would help handle domestic economic disturbances, as the euro
system determines monetary policy through its collective decision-making process. The
flexible exchange rate systems which used to provide short-term competitive
advantages no longer function (European Commission, 2022). The kuna has been
pegged to the euro since 1993 so Croatia has experienced minimal economic cost from
losing its independent monetary policy rights. Croatia must maintain fiscal discipline
because it does not possess any options for debt reduction through inflation or currency
devaluation, which requires him to follow fiscal guidelines and structural changes
within a single currency system which all EU members must observe (International
Monetary Fund, 2023).

3.3.2. Risks of inflation and price increases:

The Euro introduction in Croatia raised actual inflation by only a tiny fraction while it
brought an estimated increase of 0.3 to 0.4 percentage points which occurred because of
the rounding process (Croatian Bureau of Statistics (DZS), 2025). The public perception
of inflation stayed at high levels for most of the time. The population expressed
concerns about price rises before the Eurozone membership at a rate of 62 percent. The
Croatian government established transparency requirements and double pricing
regulations as part of its transparency solving efforts. The business ethics code requires
80 percent of retailers to join the program, which includes 12,000 inspections during the
price control period (International Monetary Fund, 2023).

3.3.3. Skepticism and monetary identity:

Like the countries before them, Croatians are gradually seeing convenient with euros
when traveling and shopping, you realize that initial fears about prices can be somewhat
dispelled (Trading Economics, 2026). However, to maintain consensus, the government
needs to continue controlling inflation and provide transparent explanations. Public
42
opinion in Croatia is quite divided on the decision to abandon the kuna – a currency
used since 1994 and closely linked to its sovereignty after independence. Before joining
the Eurozone, only about 55% of the population supports it. The use of the euro (the
lowest rate among Eurozone countries), while 36% objected and approximately 10% are
still hesitant. Many people view the kuna as a symbol of national identity and fear that
switching to the euro would mean losing a part of their independence, especially for the
older generation. In addition, skepticism about the economic benefits is also quite
common: nearly half the population in 2022, Some argue that the euro could have
negative impacts. However, experience from other countries shows that support
generally increases after the introduction of the euro, and this has also happened in
Croatia, where support has risen 64% in February 2023. As people gradually become
accustomed to the convenience of shopping and travel, many initial concerns about
prices have lessened, although the government still needs to continue controlling
inflation and communicating transparently to maintain social consensus, while
emphasizing that national identity It is also reflected in many other factors besides
money (International Monetary Fund, 2023).

3.3.4. Real estate market risks after joining the Eurozone

The common analytical methods used to evaluate formation risk can result in serious
inaccuracies because they underestimate the actual danger of real estate bubbles. After
Croatia adopted the Eurozone currency system, house prices in Croatia rose by
approximately 2024.36.2% compared to the pre-pandemic period. The housing market
currently experiences a medium-term imbalance because household income growth
does not match the housing market growth of 78.8%. Foreign buyer capital flows
represent the main force that drives this trend forward (Trading Economics, 2026). Non-
residents participate in approximately 1/3 of all real estate transactions which occurs
especially in Croatia's coastal regions and its tourist centers. The demand for properties
as investment and second homes increased because of expectations that Schengen Area
and Eurozone membership will happen. The Eurozone membership brings two major

43
advantages which include lower borrowing costs and decrease exchange rate risk. The
mortgage market experiences demand growth because the mortgage credit market
expands through this development. Housing supply increases at a slow pace which leads
to more intense upward price pressure. The IMF and the ECB both demand Croatia to
start implementing protective measures for three specific risks which they have
identified. The macroprudential measures help protect the system against multiple
systemic risks through their various protective functions which include:
 Imposing a cap on the loan-to-value (LTV) ratio.
 Cap the debt-to-income ratio (DTI).
 The capital risk weighting for real estates needs an increase.
The real estate market can develop into Croatia's largest financial risk conduit because
the country currently lacks exchange rate tools to balance its financial situation
(International Monetary Fund, 2023).

3.4. Comparison with countries that previously joined the Eurozone

3.4.1. Common points:

Croatia adopted the traditional Maastricht route which all European countries including
Slovenia, Slovakia and the Baltic states had used for their Eurozone accession. The
Eurozone entry requirements forced Croatia to focus on three areas which included
economic stability and fiscal reform and inflation control (European Commission,
2022). The Croatian public initially expressed hesitation about Euro adoption which
mirrored the feelings of people from the previous countries who feared rising prices and
losing control over monetary policies. Since the euro introduction in 2002 eight
countries have adopted the currency which shows that public support increased by more
than 11 percent after the transition according to average public support data from
previous cases and Croatia registered similar public support trends. Previous country
experiences show that inflation only causes a minimal one-time effect which results in a
range between 0.1 and 0.3 percentage points and this effect remains the same in Croatia.
Croatia established dual pricing systems and enhanced communication methods while
signing business agreements to prevent price abuse during the currency transition
according to lessons learned from previous cases of Slovenia and Slovakia
(International Monetary Fund, 2023).

44
3.4.2. Differences in context:

Croatia entered the Eurozone ten years after its most recent expansion which occurred
ten years prior to that. Europe is experiencing its highest inflation rates which have
occurred in several decades because of the COVID-19 pandemic and the 2022 energy
crisis (Eurostat, 2024). Other countries which adopted the euro before Croatia have
encountered this challenge at a lower level of intensity. Eurozone membership brought
Slovenia and Slovakia into the system during a time when inflation rates remained
stable between 2 and 4 percent (European Commission, 2023). Croatia began the year
2023 after EU inflation had already reached its highest point. The inflation criteria
became impossible to achieve because countries with unusual inflation patterns needed
to be excluded from the EU reference calculation. The current situation in Croatia raised
price worries among residents who compare their situation to that of Slovenians and
Slovakians. Croatia took proactive steps to reduce inflation by studying other countries'
experiences and adopting tax cuts and fuel and food subsidies before it adopted the
euro.

3.4.3. Economic characteristics:

Croatia maintains a smaller economic size than other euro-adopting nations which
joined before 2000 because its population reaches about 4 million and its economy
depends mostly on service-based tourism activities which produce 19 percent of pre-
pandemic GDP (OECD, 2023). Slovakia and Slovenia export more industrial products
than other countries. The economic structure of Croatia relies on tourism income during
peak seasons because the country lost its exchange rate authority to maintain export
competitiveness against industrial products which cost less than its products. The Baltic
states demonstrate that small economies which depend on specific industries must
implement economic structural changes to achieve productivity growth (OECD, 2023).
The need to obtain timely exchange rate changes for euro zone operations exceeds the
need for Croatia to hold euro zone membership. The country completed specific euro
zone entry requirements through its euro zone membership. Croatia established its
banking system under ECB rules Common supervision from 2020 onwards before its
Eurozone membership. Croatian banks achieved fast implementation of the shared

45
system which resulted in improved euro liquidity access and enabled smoother
transition processes to the euro.

3.4.4. Experiences and lessons learned:

The experience of previous countries demonstrates that fiscal discipline functions as the
main requirement which leads to peaceful governmental transitions (International
Monetary Fund, 2023). Croatia managed its fiscal situation by maintaining control over
its budget deficit and public debt before joining the European Union in 2022, this
country also recorded slight budget surplus, while the public debt ratio decreased
significantly (from above).(80% of GDP down to around 70% of GDP) The financial
crisis in Greece and Cyprus prompted Croatia to take a more cautious approach toward
bank system reforms which led to effective solutions for foreign exchange liquidity
together with ample foreign exchange reserves. Croatia used foreign exchange reserves
to maintain the kuna steady exchange rate system while it implemented international
anti-money laundering standards through its strengthened defense mechanisms. Croatia
made the decision to share information with the public by maintaining ongoing
transparency during its time of transition to the euro and implemented educational
programs to prevent misunderstandings while building public trust in the euro's usage in
its economy (European Commission, 2023).

3.4.5. Enhancing liquidity in the financial system:

The Eurozone membership brought Croatia substantial financial advantages through

increased monetary resources. The banking sector received major benefits from
regulatory changes that led to increased liquidity in the financial system. The reserve
requirement ratio experienced a major decrease as it dropped from 9% to 1% starting
from mid-2022. The abolition of the 17% minimum foreign currency liquidity
requirement together with this policy change has created a situation where the entire
system has achieved liquidity surplus equal to approximately 21% of the total GDP. The
domestic banking system used its capital reserves from 2022 to create a protective
barrier against the European Central Bank's (ECB) tight monetary policy which served
as their direct threat (International Monetary Fund, 2023).

46
3.4.6. Lessons from the Baltic States and Demographic Challenges:

The Baltic states share a common experience with this region which includes Estonia,
Latvia, and Lithuania as its three member states that became EU members on May 1,
2004. Croatia faces severe structural problems which its small economy cannot sustain.
The demographic factors which contribute to this situation include an aging society and
a population drop that will bring the total below 4 million (OECD, 2023). Croatia loses
its capacity to devalue its currency for economic growth because the country now has to
concentrate on...improve labor productivity. By implementing substantial structural
changes and using EU funding to boost green strategies and digital development and
create better business conditions, Croatia will achieve sustainable development while
increasing its incomes at a pace that matches the requirements of the "one-for-all"
monetary system.

3.5. Reactions from international organizations and partners

3.5.1The European Union (EU/EC) and Croatia join the Eurozone.

Croatia Officially became the 20th member of the Eurozone from date1 / 1 /2023
because it succeeded in meeting all European Union requirements which included strict
convergence criteria for economic performance and exchange rate stability. The
Eurozone expanded for the first time since Lithuania joined in 2015 when it occurred...
ten years after Croatia became an EU member state.
EU's response:
 Ursula von der Leyen - The President of the European Commission described
Croatia's euro membership as a proud achievement for the European Union and
Croatia and its people. The European Union considers this development to be
essential for advancing European integration (European Commission, 2023).
 Valdis Dombrovskis– The Vice President of the European Commission praised
Croatia's accession to the euro zone as proof of The euro remains an “attractive,
resilient, and successful” currency., which functions as a symbol of European
unity and strength while it serves as the ultimate achievement for the former

47
 war-torn Balkan nation that has completed its journey to full EU economic
integration (European Commission, 2023).
 The European Council and Eurogroup both view this situation as a moment that
will change history. The assessment demonstrates Croatia's progress toward its
economic convergence targets. The EU official statement confirms the
assessments which were already presented to EC.

3.5.2 European Central Bank (ECB)

The European Central Bank has completed its evaluation by publishing a convergence
report which shows that Croatia has fulfilled the economic requirements needed for
Eurozone membership and officially entered the Eurozone on January 1 2023.
ECB's key takeaway:
 The ECB evaluation shows that Croatia will gain economic advantages from
eliminating exchange rate risks because its economy operated with a high degree
of euroization and the kuna-euro exchange rate remained constant throughout
the ERM II period (European Commission, 2023).
 The ECB said some main economic benefits including:
o The Croatian economy faces a vulnerability because exchange rate risk
elimination brings about economic risks for the country.
o The system enables trade and tourism to grow because it decreases
transaction expenses while providing clearer pricing information.
o The system helps lower borrowing expenses because it establishes stable
inflation expectations and decreases risks related to currency exchange..
 The ECB confirmed that expenditures and hazards exist as single events which
occur only once. Croatia has executed various measures to control currency
exchange costs, which include both the expense of currency conversion and
potential minor price increases.

3.5.3 International Monetary Fund (IMF)

The IMF considers Croatia's Eurozone membership to be a major achievement which

shows the country's progress in development since it became an EU member in 2013
(International Monetary Fund, 2023).

48
IMF's assessment and recommendations:
 The IMF believes that Croatia's euro adoption improves the country's credit
rating by enabling better access to international financial resources while
reducing exchange rate risks that would occur with Kuna usage.
 The IMF showed that euro adoption would help countries build better defenses
against outside economic impacts because of the world currently experiencing
high inflation rates.
 The IMF suggests that Croatia's success could be due to a source of inspiration
for other EU countries as Bulgaria is considering joining the Eurozone; and
Croatia is also recommended. The euro membership enables Croatia to use its
low-cost capital for making investments which will support its ongoing
productivity and long-term economic growth potential. (This assessment is
consistent with the IMF's advice on currency conversion and public finance
management upon entering the eurozone).

3.5.4 Other international organizations and markets

 The World Bank and EBRD They also conducted an assessment which showed
that euro adoption would help Croatia attract foreign investment while it would
enable the country to strengthen its EU supply chain connections and achieve
better outcomes from EU post-COVID recovery funding. This conclusion about
international financial markets and investment markets after Croatia joined the
eurozone comes from multiple reports which studied the financial markets of
different countries and international investment markets (OECD, 2023).
 The credit rating agency Several financial institutions upgraded Croatia's rating
– for example, S&P upgraded it from BBB+ to A- and Moody's to A3 – in the
years leading up to Croatia's accession to the Eurozone, citing Eurozone
membership as a "significant improvement in its credit profile”. The financial
market news reports documented this data through the record of Croatia's
currency change because it showed the overall credit movement during that
period. (European Commission, 2023)
 The international market welcomed Croatia's entry into the Eurozone because
Croatian bond yield spreads have decreased to match Eurozone country levels

49
 following the official news. (This is also a trend observed on market financial
analysis platforms).

3.6. The Croatian economy one year after joining the euro (2023–2025)

3.6.1. Overview of economic developments after joining the Eurozone

The Croatian economy has shown positive and stable performance since it joined the
Eurozone on January 1, 2023, because the euro transition did not create the major
economic disruption that experts predicted but instead built market trust and sustained
macroeconomic stability (European Commission, 2023).

Figure 7 Real GDP of Croatia and Euro area, 2019-2024

50
Figure 8 inflation rate, overal HICP 2021-2024

3.6.2. GDP Growth in 2023

In 2023, Croatia's real GDP grew by approximately 2.8%, bringing the size of the
economy to around $84.4 billion, higher than the EU average (Croatian Bureau of
Statistics (DZS), 2025).
The main drivers of growth come from:
 Domestic consumption recovered strongly thanks to improved employment and
real wages.
 The booming tourist season compensated for the weakening goods exports.
As a result, GDP in 2023 exceeded pre-pandemic levels by approximately 10%,
indicating a continued convergence trend with the EU (European Commission, 2023).

3.6.3. GDP Growth in 2024

Entering 2024, the growth momentum became even more clearly consolidated:
 Nominal GDP increased to approximately $93.0 billion.

51
  Real growth is around 3.8–3.9%, higher than the Eurozone average (European
Commission, 2024).
The drivers of growth include:
 Household consumption continues to expand.
 Public investment is boosted through projects funded by EU funds.
 Tourism remains a cornerstone.
GDP per capita increased from approximately US$22,000 (2023) to approximately
US$24,050 (2024), reflecting continued improvement in living standards (World Bank,
2024).

3.6.4. Growth prospects for 2025

By 2025, the Croatian economy is projected to enter a phase of more sustainable growth
with a slight slowdown but still at a high level compared to the EU:
 Nominal GDP is estimated at approximately $103.9 billion.
 Real growth remained around 3.0–3.2%.
 Total output increased by approximately $3 billion at constant prices.

GDP per capita is projected to increase to nearly US$26,960, almost US$5,000 higher
than in 2023 (European Commission, 2024) (World Bank, 2024) (European Central
Bank, 2026).

3.6.5. Inflation and the impact of switching to the euro

Croatia has experienced a significant cooling-off period after its peak in 2022:
 The average HICP inflation rate for 2023 is approximately 8.4% (down from
10.7% in 2022).
 December 2023: 5.4% (compared to 12.7% in December 2022)
The direct impact from switching to the euro is only about 0.4 percentage points,
concentrated in early 2023 (ECB, 2023; wiiw, 2024).
In 2024: average inflation is expected to be around 3–4%.
2025: forecast 4.0–4.4% (EC, 2024; wiiw, 2024).
This suggests that the price shock caused by the euro was not long-lasting; global
factors and ECB monetary policy played a dominant role.

52
3.6.6. Foreign Relations and Tourism Area

Goods exports in 2023 decreased by approximately 2.9% due to weakening EU

demand.
Conversely, service exports – especially tourism – increased sharply:
 2023: 15.8 million international visitors
 Compensating for a large portion of the decline in commodity prices.
Period 2024–2025:
 Projected number of visitors in 2025: 15.5 million.
 79 million nights of stay
 Tourism revenue is approximately 15.5 billion euros (~18 billion USD).
 Contributing nearly one-fifth of GDP.
The use of the euro facilitates smoother trade with Eurozone partners (over two-thirds
of total trade) by eliminating exchange rate risk (DZS, 2024; Reuters, 2023; Reuters,
2025; ECB, 2023; OECD, 2023).

3.6.7. Foreign Direct Investment (FDI)

FDI in 2023 reached approximately 3.26 billion euros. The euro effect will become
clearer from 2024 onwards:
 Net FDI ~5% of GDP
 Equivalent to $4.5–4.7 billion
 Continued improvement in 2025
Over 70% of stock FDI comes from Eurozone countries, indicating deeper financial
integration and increased investor confidence (HNB, 2024; Trading Economics, 2024;
World Bank, 2024; OECD, 2023).

3.6.8. Fiscal, public debt and the banking system

Public debt/GDP ratio:

 2023–2024: approximately 63–64%
 2025: forecast 57–58% (close to the Maastricht threshold)
Absolute size of public debt:
 Approximately $60–62 billion
53
Budget:
 2023 deficit approximately 0.7% of GDP
 2024–2025: a slight increase is possible, but it will remain within safe EU limits.
Banking system:
 Abundant liquidity
 Favorable access to ECB funding
 Interest rates at the end of 2023:
o Businesses ~5.3%
o Home loan interest rate ~3.6%
Switching to the euro eliminates the risk of foreign currency shortages and allows
Croatia to become part of the Eurosystem (Eurostat, 2024; EC, 2024; HNB, 2024; ECB,
2023; World Bank, 2024).

3.6.9. Summary Conclusion

Answer the question: "Will Croatia benefit or lose after 1-2 years of using the euro?"
→ The current evidence clearly favors"The profit outweighs the loss."
profit:
 Avoid creating a sudden surge in growth, but plays a role institutional stability
framework
 Help Croatia achieve steady growth.
 Reduce financial damage.
 Improve your credit rating.
 Attracting investment amidst global uncertainty.
In the long term, the level of success depends on:
 Diversifying the economic structure
 Improve productivity
 Maintain fiscal discipline
If these conditions are met, joining the Eurozone will most likely be seen as a correct
strategic move on the path of economic integration and convergence with the EU.

54
Overall Conclusion
The European economic and monetary integration process combines economic
rationality with political ambition because the euro functions as both a policy
instrument and a symbol of European unity. The three case studies show that monetary
union provides participating countries with major advantages through its effects on
stability and trade and investment and financial credibility yet brings about considerable
institutional risks and adjustment costs which countries must handle.

Case 1 shows that the EMU emerged through an extended period of institutional
learning which used the failures of Bretton Woods and the European Monetary System
to create a monetary system built on price stability and central bank independence. Case
2 demonstrates how European integration functions as an institutional foundation which
supports reform and attracts foreign investment and enables countries to achieve their
long-term development goals while demonstrating that countries outside this process
must pay substantial economic costs. Case 3 provides recent empirical evidence that,
under conditions of strong institutional preparation and high pre-existing euroization,
accession to the Eurozone can enhance financial stability and growth without generating
severe short-term inflationary shocks.

The research results provide strong support for the predictions established by Optimum
Currency Area theory. The European Monetary Union presently suffers from three main
problems which include ongoing structural diversity and limited worker movement and
the absence of a complete fiscal union system. The European sovereign debt crisis and
emerging financial imbalances in some new member states demonstrate that monetary
integration without sufficient fiscal risk-sharing mechanisms remains inherently fragile.

The EMU serves as a significant milestone in international monetary cooperation

throughout history, yet its future survival requires member states to establish more
advanced fiscal coordination and institutional integration and structural concordance.
The European experience provides essential insights for present and future Eurozone
members and for other regions which view monetary integration as a means to achieve
economic and political unity.

55
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