Entry into European Exchange Rate Mechanism II will prompt institutional reforms in Croatia

ZAGREB, Aug 7 (Hina) – By joining the European Exchange Rate Mechanism II, Croatia has pledged to make additional moves to mitigate the risks on its journey to the euro area and create conditions for a more efficient allocation of capital to productive firms instead of rent-seekers, shows a European Central Bank analysis.

The Croatian National Bank (HNB) said on Friday that the ECB published an analysis on its website, on the occasion of Croatia and Bulgaria’s accession to the ERM II, which says, among other things, that Croatia has pledged to implement additional reform measures with the aim of preserving economic and financial stability and achieving a high degree of sustainable economic convergence.

Those reforms should mitigate risks under ERM II with a view to subsequent euro adoption because a key lesson learned from the global financial crisis is that, in the run-up to euro adoption, a high level of institutional quality and good governance help to reduce the risk of a build-up of excessive imbalances, the HNB says in a press release.

The ECB analysis also underlines that the reforms conducted within ERM II create preconditions for allocating capital to productive firms instead of rent-seekers.

The HNB notes that the ECB analysis also stresses that Croatia is catching up in terms of income levels relative to the rest of the European Union and that its price levels relative to the euro area are now well in line with its income levels relative to the euro area. While such levels remain significantly below those of the euro area, this does not in itself constitute an impediment to participation in ERM II, the HNB says quoting the ECB analysis.

In this regard, a more important prerequisite for successful participation in ERM II is that price levels are commensurate with income levels and, more generally, with the economic fundamentals of the country, reads the analysis.