Euro adoption: views from the third row

Abstract

Croatia is already much more euroised than any of the first wave accession countries. The paper demonstrates that Croatia has a strong incentive to adopt euro as soon as it becomes feasible. Costs of doing so are smaller because the degrees of freedom for an independent monetary policy-making are already reduced, while the benefits are higher. A special benefit that a heavily euroised economy derives from formally adopting the euro is removal of relatively high costs of prudential regulation connected to the balance sheet risk and a possible run on the foreign exchange liabilities of the banking system. This would in turn substantially reduce costs of financial intermediation and interest rate spreads. Our analysis suggests that in a highly euroised economy, the costs of euro adoption are smaller and the benefits are larger than in a non-euroised economy.