The Euro and Inflation in Croatia: Analysis with Conclusions for Bulgaria

• Two years after the official introduction of the euro in the country, Croatia continues to have problems with rising retail prices;
• Before the introduction of the euro in Croatia, prices there were on average higher than in Bulgaria. After the adoption of the euro, this difference not only persisted, but prices in Croatia began to grow faster than prices in Bulgaria;
• Prices in Croatia after the euro are increasing faster than those in Bulgaria at the following rate:
  2.63 percentage points in the overall inflation index
  3.52 percentage points in core inflation
  9.03 percentage points in services;
• From 1 billion to 6.7 billion leva would have been the losses for Bulgaria from inflation if it had adopted the euro together with Croatia (calculated as of August 2024).

The analysis reveals the true structural trends in the price effects of the euro in Croatia. The detailed results go beyond those of previous studies, going deeper and beyond previous analyses of general inflation indices over short time periods.

One of the first striking conclusions is that the effects of the euro begin to manifest themselves several months before its actual introduction, and not only from the day of Croatia's official entry into the eurozone. Specific public signals shape relevant attitudes and motives, which outlines a complex picture over a long time horizon, and not simply in the first month or early months of 2023 (the latter is unfortunately a standard approach in other studies on the topic).

Another telling observation comes from a direct comparison with Bulgaria over the period since the introduction of the euro in Croatia – it turns out that prices on average in Croatia not only remain higher than in Bulgaria, but also grow relatively faster. After Croatia adopted the euro, inflation rates there have regularly been higher than inflation rates in Bulgaria.

Similar conclusions are drawn when decomposing the overall inflation picture into sub-indices related separately to goods, services and core inflation . Especially for the group of services, accelerated inflation is seen, related to the process of introducing the euro - something that has traditionally been observed in other countries that have adopted the euro.

Calculations show that so far prices in Croatia have increased more than in Bulgaria – by 1.47 and 2.63 percentage points respectively in terms of the overall inflation index. In core inflation, the difference reaches 3.52 percentage points, and in services, the difference reaches as much as 9.03 percentage points (these are the higher prices accumulated so far in Croatia compared to Bulgaria).

Finally, the relative inflation “price” (i.e. loss) that the population and companies in Bulgaria would have paid to date if Bulgaria had adopted the euro together with Croatia has been quantified. Even a very conservative estimate reveals that the corresponding savings losses would reach as much as BGN 6.7 billion for the period until August 2024 alone.

All other things being equal, taking into account differences in the institutional and market environment, inflationary effects in Bulgaria may exceed those in Croatia even if only the general and official inflation indices are compared.

You can learn more in the full text of the analysis at this link.

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