(Analysis) Croatia, The Long Journey To Eurozone And Schengen Area

Nicholas Zalewski
It has taken 9.5 years for Croatia to become part of the Eurozone and Schengen Area, chiefly due to their strict entry requirements.
Combination of the European Union Flag, the Croatian national flag, and the euro currency. Source: iStock

On July 1st, 2013, Croatia became a member state of the European Union, and 9.5 years later, the country became part of the Eurozone and Schengen Area. At the same time.
While Croatia gained a lot of advantages immediately after becoming an EU member state, accession to the Eurozone and Schengen Area is not automatic. Currently, all member states except for Denmark are required to join the eurozone as Denmark negotiated to opt out of the bloc’s currency. All member states who were already part of the bloc when the Maastricht Treaty was passed agreed to join the eurozone or agreed to join as a condition of their accession.

What It Takes To Join The Eurozone

In order to use the euro currency, Croatia had to demonstrate economic preparation. Considering there is no way for EU member states to stop using the euro once they officially adopt it (apart from leaving the bloc), member states must meet several requirements to demonstrate economic readiness. The European Central Bank controls the monetary policy of the bloc, whereas member states that do not use the euro control their monetary policies through national central banks.

To use the euro, a member state must meet requirements regarding price stability, sound and sustainable public finances, exchange-rate stability, and long-term interest rates. To demonstrate price stability, the member state must not have an inflation rate 1.5% higher than the interest rate of the three best-performing member states in the Eurozone. For sound and sustainable public finances, the member state cannot be a part of the European Union’s Excessive Deficit Procedure. Member states risk becoming subject to the Excessive Deficit Procedure if their annual deficit exceeds 3 percent of their GDP and/or the total government deficit exceeds 60%. Currently, only Romania is under the Excessive Deficit Procedure.

To date, every single member state has been a part of the procedure at some point, including the United Kingdom before leaving the European Union. Next, the member state must participate in the Exchange Rate Mechanism (ERM II) for at least two years. In this mechanism, the member state establishes a currency bilateral central rate with the euro, in which devaluation is not possible, and the exchange rate cannot be more or less than 15% of the central rate. Finally, the long-term interest rate cannot be more than 2% above the long-term interest rates of the three best-performing member states.

The requirements to join the eurozone ensure that member states can cope without manipulating monetary policy during economic downturns. The European Central Bank has a high level of independence from the influence of member states and other EU institutions. This guides the monetary policy in a way that is designed to benefit EU member states as a group. Votes in the European Central Bank are private, which prevents members of the board from feeling pressured to vote in a way that benefits their own member state. While the final vote outcome is available to the public, how each member voted is not.

Official design for Croatian euro coins. Source: HNB

Higher Prices After The Adoption Of The Euro

Unfortunately, and confirming the concerns of some citizens, inflation has hit Croatia due to switching currencies. Businesses that raised prices have attempted to explain the higher prices by blaming inflation, but the government does not accept this explanation. Inflation occurred as soon as businesses started accepting euros as payment, but stores not using the exchange rate of 7.53 kuna to a euro risk a fine from a government inspector. Despite having lower wages than in Slovenia, some consumers have complained that prices are now higher in Croatia compared to their neighbors in the north. Consumers in Croatia reported price increases as high as 50% when the currency switched. After inspectors spent two weeks conducting price controls, they found that 40% of businesses had unjustifiable price increases.

Due to the price increases, political opposition leaders are upset that the government introduced the euro currency to Croatia during an energy crisis and high inflation. The reality, however, is that when the political opposition attempted to force the government to have a referendum on the Euro, they fell short of the necessary signatures. Instead of 370,000 signatures (10% of the electorate), the opposition received only 336,000 signatures on the petition. In 2021, the Fitch rating agency also predicted that Croatia would seek to join the eurozone in early 2023.

It has taken 9.5 years for Croatia to become part of the Eurozone and Schengen Area, chiefly due to their strict entry requirements.
Map showing which nations are members of the Eurozone and/or Schengen Area.
Source: Schegenvisainfo.com

Defining the Schengen Area

Not all nations in the Schengen Area are European Union member states. Four members of the Schengen Area – Iceland, Liechtenstein, Norway, and Switzerland – have not joined the European Union. After Croatia joined on January 1st of this year, Cyprus, Bulgaria, and Romania are the remaining EU member states that still have restrictions as part of the Schengen Area, whilst Ireland remains entirely excluded from the Schengen Area. The Schengen Area dates back to 1985, the year of its agreement, and its name comes from the village of Schengen in Luxembourg. It had five original members – Belgium, France, Germany, Luxembourg, and the Netherlands.

Despite being agreed upon in 1985, the Schengen Area’s official signing was not until 1990, establishing the abolition of internal borders, a single visa for the entire area, and one database across all member states (called the Schengen Information System). Italy joined only five months after the convention was signed, and the expansion of the Schengen Area took off quickly.

In 1995 with the passage of the Treaty of Amsterdam, the Schengen Area finally became part of the European Union. Before 1995, it was completely separate from the European Union. Iceland, Lichtenstein, Norway, and Switzerland joined the Schengen Area before it became part of the European Union, explaining why they are members of the Schengen Area yet not the EU. The benefits of the Schengen Area are clear, 3.5 million European citizens cross internal national borders daily without going through security checks. To allow for this free movement of everyone in the area and not just citizens, the member states of the Schengen Area have a common visa policy.

Joining The Schengen Area

It has taken 9.5 years for Croatia to become part of the Eurozone and Schengen Area, chiefly due to their strict entry requirements.
Italian community in Rijeka, Croatia celebrating Croatia’s entrance in the Schengen Area. Source: Circolo Istria

Similar to the Eurozone, the Schengen Area has entry requirements. This is why Bulgaria, Cyprus, and Romania have not yet joined as they still do not meet the entry requirements. As part of their European Union membership, all three nations are legally-required to join the Schengen Area when they are prepared to do so. Austria continues to block Romania and Bulgaria from entering the Schengen Area due to a concern about potential illegal immigration to Austria. The Austrian government, in other words, is concerned that Bulgaria and Romania are not yet prepared to protect the Schengen’s area external border from illegal immigration.

Bulgaria borders Turkey, which is not yet a member state. Meanwhile, Romania borders Ukraine and Moldova, nations that are neither part of the European Union nor the Schengen Area. The Netherlands also does not believe Bulgaria is ready, and further actions are needed to confront corruption and organized crime.

Ireland is not part of the Schengen Area and is not legally required to join. Ireland chose not to become a founding member of the Schengen Area due to the Common Travel Agreement between Ireland and the United Kingdom in place since 1922 when Ireland became an independent nation. Had Ireland joined the Schengen Area, it would have resulted in the voiding of the Common Travel Agreement due to the United Kingdom having no interest in joining. Joining the Schengen Area for Ireland would require a border between Ireland and Northern Ireland, and considering the conflictual past between the two nations, it is clear how decision-makers would want to avoid further points of contention.

Internal Border Controls During Exceptional Circumstances

It has taken 9.5 years for Croatia to become part of the Eurozone and Schengen Area, chiefly due to their strict entry requirements.
Austria temporarily reinstated border controls to combat illegal immigration in 2021. Source: commonspace.eu

While being a member state of the Schengen Area means maintaining open internal borders, nations within the Schengen Area can temporarily reintroduce border controls under special circumstances. There must be a threat to internal security or public policy for the temporary reintroduction of internal borders, an example being the COVID-19 pandemic, in which many member states did so due to the widespread introduction of vaccination requirements for the right of entry at national borders. Information on the temporary reintroduction of national border notifications is publicly available on the European Commission website. Below this paragraph is an example of the details included.

“The reason why border controls are being temporarily reintroduced determines the duration of the controls. For foreseeable events such as sports events, border controls can be introduced for 30 days or for how long the event lasts, but the duration can be extended for up to 6 months. For foreseeable events, the European Commission and all member states must be notified a minimum of 4 weeks before the border controls are imposed.”

External Borders of the Schengen Area

While members have to maintain the free movement of people within the Schengen Area, the external borders require protection. For Croatia, this is significant as it borders Serbia, Bosnia and Hercegovina, and Montenegro, all of which are not yet members of the Schengen Area. As previously mentioned, Austria has highlighted the importance of protecting the Schengen Area’s external border to stem the flow of illegal immigration to other member states. This, however, is not always simple, particularly when the Southern Schengen Area member states: France, Greece, Italy, Malta, and Spain, all border the Mediterranean Sea.

While there is a desire to prevent people from illegally entering the Schengen Area, there is also concern over the loss of life. The Mediterranean Sea has been referred to as a ‘graveyard‘ for years now due to the rising number of migrants who have died attempting to make the dangerous voyage.

The Croatian government hopes joining the Schengen Area increases tourism to the nation. Source: iStock

Croatia Aims To Boost Tourism

Croatia hopes it can utilize the free movement of EU citizens throughout the Schengen Area to its benefit and boost tourism to the nation. Tourism is already responsible for 20 percent of Croatia’s economy. Starting from January 1st, Croatia’s land and sea borders come under the freedom of movement exception, but passports were still a requirement for air travel. The air border, however, was abolished on March 26th.

Time will tell whether this will successfully increase Croatia’s tourism and bring economic benefits. Ideally, Croatia’s economy will become more diversified and not so dependent on tourism, but in the meantime, tourism plays a significant role in the economy. From 2013-2018, Croatia’s economy received 200 million dollars from tourism solely from the Game of Thrones series.

Besides becoming a member of the Schengen area making it easier for more tourism, so does joining the Eurozone. It means that tourists using the euro no longer have to worry about exchanging currency or potential currency exchange rate fees if paying by card. It is not a simple matter to join either the Eurozone or the Schengen Area, but it has the potential to bring rewards to member states.

Suggested Readings

“Euro and Schengen: Croatia joins the Euro and Schengen areas”. European Commission. 30 December, 2022.

Reuters. “Croatia’s eurosceptics fail in bid on referendum to block euro”. Thomson Reuters. 16 November, 2021.

Hughes, Rebecca Ann. “Flying into Croatia just got easier: Air border controls dropped for Schengen zone countries”. Euronews. 27 March 2023.

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by Nicholas Zalewski time to read: 8 min