Croatia adopts euro and becomes part of the Schengen zone

The Adriatic country bid goodbye to its kuna currency and became the first EU member to join both the Schengen area and the eurozone on the same day

Ursula von der Leyen, President of the European Commission, with a euro coin at a cafe in Zagreb. AP

Croatia marked the beginning of the new year by switching to the euro on Sunday and entering Europe's passport-free zone — two major milestones for the country after joining the EU nearly a decade ago.

At midnight, the Balkan nation bid farewell to its kuna currency and became the 20th member of the eurozone.

It is now the 27th nation in the passport-free Schengen zone, the world's largest, which enables more than 400 million people to move freely around its members.

Croatia is first EU member to join both the Schengen area and the eurozone on the same day.

EU chief Ursula von der Leyen visited Croatia later on Sunday to mark the momentous occasion.

“Being able to cross internal borders without controls is one important achievement, being able to pay cross-borders using the same EU currency is another,” Ms von der Leyen said at a news conference.

European Central Bank President Christine Lagarde said the currency union’s newest member proves that the euro has lasting appeal.

“Croatia worked hard to become the 20th member of the euro area, and it succeeded,” Ms Lagarde said. “It shows the euro is an attractive currency, which brings stability to its members.”

While experts say the adoption of the euro will help shield Croatia's economy at a time when inflation is soaring worldwide after Russia's invasion of Ukraine pushed food and fuel prices sharply higher, feelings among Croatians are mixed.

Some are worried about the euro switch, even as they welcome the end of border controls.

Many Croatians fear that the introduction of the euro will lead to a higher prices — in particular that businesses will round up price points when they convert.

“We will cry for our kuna, prices will soar,” said Drazen Golemac, 63, from Zagreb.

Croatia, a former Yugoslav republic of 3.9 million people that fought a war of independence in the 1990s, joined the EU in 2013.

The kuna was adopted in 1994, during the independence war. Kuna means marten, a weasel-like carnivore whose fur was used as currency in the Middle Ages.

The adoption of the euro will lower borrowing conditions amid economic hardship, analysts say.

The country's inflation rate reached 13.5 per cent in November compared to 10 per cent in the eurozone.

In recent days, customers have queued at banks and ATMs to withdraw cash, fearing payment problems during the immediate aftermath of the transition period.

Echoing some Croatians who have lamented the demise of the national currency, the Croatian National Bank's governor Boris Vujcic said the switch away from the kuna was a sentimental moment for him.

But he said doing so was the “only reasonable politics” for economic reasons. Early on Sunday, Mr Vujcic made a point of withdrawing euros from a cash machine in Zagreb.

Use of the euro is already widespread in Croatia. About 80 per cent of bank deposits are denominated in euros and Zagreb's main trading partners are in the eurozone.

Officials have defended the decision to join the eurozone and Schengen, with Prime Minister Andrej Plenkovic saying on Wednesday that they were “two strategic goals of a deeper EU integration”.

“The euro certainly brings [economic] stability and safety,” said Ana Sabic of the HNB.

Croatia's entry into the Schengen borderless area will also provide a boost to the nation's tourism industry, which accounts for about 20 per cent of its gross domestic product.

“Croatia joins an elite club,” said tourist agency employee Marko Pavic. “The euro was already a value measure — psychologically it's nothing new — while entry into Schengen is fantastic news for tourism.”

Previously long queues at the 73 land border crossings with Slovenia and Hungary will become history.

Border checks will only end on March 26 at airports due to technical issues.

Meanwhile, two other euro hopefuls have not been as fortunate. Romania’s bid for membership has been hampered by internal squabbling, evidenced by the highest turnover of governments in the EU.

Bulgaria, the bloc’s poorest country, wants to join in 2024, but wary European officials are not convinced that its economy and scandal-plagued banking system is ready for currency prime time.

Ultimately adopting the euro is actually a condition of signing up to the EU, though the Czech Republic, Hungary, Poland and Sweden do not seem interested. Denmark, which clinched an opt-out on acceding before the dawn of the currency, is not budging either.

Bloomberg and AFP contributed to this article