A decade ago, the eurozone was facing a deep economic crisis. The biggest challenge since the creation of the single currency at the turn of the millennium, the crisis revealed a number of deficiencies on the economic side — not to mention a fair amount of undemocratic proclivities.
Since then, the eurozone has gone through a series of reforms, including the establishment of the European Stability Mechanism set to mitigate risks related to the sovereign bond market and offer (conditional) support for member states facing financial difficulties. Mechanisms have also been introduced with the idea of creating a common banking space and increasing the supervisory power of the European Central Bank (ECB) to address contradictions that could threaten the stability of the European banking system. On the fiscal front, various rules and mechanisms have been incorporated into the existing Stability and Growth Pact, pushing eurozone member states — at least nominally — into an even tighter macroeconomic straitjacket.
Even these measures have not resolved the underlying contradictions and tensions clearly visible during the first eurozone crisis of 2010–15. On the back of the COVID-19 pandemic and the war in Ukraine, a fragile economic situation has emerged, characterized by the disruption of global production chains and rising energy prices. This has, in turn, produced inflationary pressures in the eurozone and the European Union as a whole. In the current context — basically a stagflation in the making — the ECB is predictably moving in the direction of a tighter monetary policy, while asset purchase programs are also under revision.
Thus, with economic growth in jeopardy and prices rising, the “old divisions” between creditor and debtor countries are becoming visible again — this time with possibly even more explosive effects. It remains to be seen how the peripheral countries within the eurozone will be able to cope with the anti-inflationary policies prepared at the top European political level, dominated by Germany. Safe to say, the euro area remains an incomplete project, even if viewed solely in narrow technical terms.
Given all the structural defects and contingent risks, it would be reasonable to expect that the enlargement of the European Monetary Union would be halted, at least temporarily. Yet the enlargement process persists. On July 12, it was announced that Croatia had become the twentieth member, adopting the currency on January 1 of next year, with Bulgaria to follow in the near future. Nor is it sure to stop there. A number of Central and Eastern European countries — including Poland, Hungary, and the Czech Republic — have been pursuing a wait-and-see strategy on accepting the common currency for many years, citing, among other things, inadequate levels of price and wage convergence and the difficulties of protecting and advancing the interests of domestic manufacturing industries.
The fact that some post-socialist countries remain quite reluctant to enter the eurozone, while others have been actively preparing to introduce the euro, points to the multilayered and shifting nature of the European periphery. Croatia, the eurozone’s newest member, in some aspects bears more resemblance to the service-sector economies of Spain and Greece than to the manufacturing-driven economies of the Czech Republic or Poland. Still, this round of eurozone enlargement cannot be reduced to the issue of economic costs and benefits. This is also a story about the political effectiveness of technocracy, the current state of democracy, and the perplexing political conditions of peripheral capitalism.
Not to get ahead of ourselves, let us first explore the economic side in more detail. Croatia’s economic trajectory has been marked by a relatively high degree of both credit and deposit euroization — and thus by the de facto use of the euro alongside its national currency as a means of payment, unit of account, and store of value. This led to a fragmented monetary space and currency mismatch that proved to be perilous, especially for indebted households, including those who took out mortgages in Swiss francs. In search of more affordable housing loans and consumer credits, many households found themselves having to juggle with two or even three currencies as they received their income in the domestic currency, kuna, while making payments on mortgages and other liabilities in euros and other foreign currencies.
The sharp appreciation of the Swiss franc in the aftermath of the Great Recession threw many households in Croatia into financial disarray, as currency clauses and adjustable rates kicked in and turned previous loan arrangements into punishing vehicles of bankruptcy. These effects of monetary fragmentation have made credit and exchange rate risks more palpable. The idea that Croatia joining the Eurozone would eliminate a substantial portion of those risks became a powerful argument, reiterated many times as the regulators prepared the public at large for the change of monetary regime. Indeed, the Croatian National Bank launched a promotional campaign back in 2018 with leading officials playing an openly political role. Throughout this period, joining the eurozone has been presented as a major economic and political success, as well as the guarantee of economic prosperity in the future. The message of the governor Boris Vujčić on the day that euro entry was approved was of the same stuff as across the last five years:
Five years ago, we embarked on this journey towards the eurozone, and today the final decision to this effect has been adopted. I consider today a historic day. . . . Being a member of the eurozone will bring Croatian citizens and Croatian companies many benefits, and more security, and it will make the country more attractive for investments, and, in the long run, this will definitely raise the living standards of citizens in Croatia.
Furthermore, the high degree of de facto euroization of the economy has also been key for countering the competitive devaluation argument. Whereas in the case of a country that has kept its manufacturing base and exhibits only a limited degree of euroization — such as the Czech Republic — one could make an argument for monetary sovereignty (i.e., the use of monetary policy to protect domestic production and improve the balance of trade), in small, open, and highly euroized economies, such a position makes very little sense. Given the structure of the Croatian economy, it is very likely that currency devaluation would have negative effects, jeopardizing financial stability and causing severe problems for nonfinancial firms and households whose liabilities are denominated in foreign currency. The long history of distrust in the domestic currency goes back to 1980s, a period of high inflation in socialist Yugoslavia, during which firms and households used the deutsche mark as a means of payment and an unofficial unit of account. Together with the rise of a deindustrialized Croatian economy built around tourism and the liberalization of financial flows, this created a context in which the pursuit of monetary sovereignty appears obsolete, if not completely ill-advised.
Consequently, issues of money and finance, which are always and everywhere political, have steadily acquired a technocratic gloss, such that the incompleteness of the single currency project and its internal contradictions — including its deep antidemocratic bias — play no role in public discourse. This would not be conceivable, of course, if the regulators — most notably the Croatian National Bank (CNB) — had not displayed complete passivity with regard to the twin problem of trust in the domestic currency and euroization, thereby helping to create an economic reality in which all alternatives appear far-fetched. The other major component facilitating technocracy in the domain of money and finance has been the tacit consensus among leading parties across the political spectrum. In short, there is a political consensus that the policy of full European integration, including accession to the European Monetary Union, must be the bedrock of any realistic and pragmatic political program, implying that only fringe parties can have the luxury of skepticism regarding the nature and direction of the European Union.
This consensus is bolstered by the growing dependency on EU funding programs and an unreflective acceptance of EU governance and surveillance mechanisms, as well as by the general but vague belief that the European Union, notwithstanding its imperfections here and there, remains the engine of peace, prosperity, and solidarity among member states. It is hardly surprising then, given the simplistic beliefs about the EU, which come intertwined with real dependencies formed over the last couple of decades, that critical discussion about the implications of joining the eurozone in light of its turbulent history has largely been replaced by a few promotional campaigns by the CNB and the Ministry of Finance. The only challenge — however weak — to the dominant narrative came from the Croatian Sovereigntists. This small, far-right party, which holds four seats in the 151-member Croatian parliament, tried to force a referendum in 2021, but ultimately failed since it was unable to collect the minimum number of signatures required by law.
On the other hand, a technocratic-led integration into the euro area has more serious implications for the political left and organized labor in Croatia. To put it simply, accepting the case for joining the euro, as it is being presented in the political and media mainstream, means consenting to the narrative that the benefits of the euro will outweigh the costs as a matter of course. For a long time, during the entire preparation period, the financial regulators at the CNB, economic experts, and media pundits have reiterated the view that the elimination of credit and exchange-rate risks, and the reduction of interest rates and transaction costs along with the general mid-to-long-run improvements of competitiveness and resiliency, will have a positive effect on employment and economic growth.
This line of reasoning conveniently neglects the fact that similar claims were made in the case of Greece, Spain, and Portugal before the spillover effects of the Great Recession disclosed these countries’ true place in the eurozone and, indeed, the EU hierarchy. Moreover, in the post-COVID environment, marked by supply shocks, inflationary pressures, and a much more challenging state of public finances in terms of debt-to-GDP ratio in comparison to the previous decade, the institutional incompleteness and uncertainty surrounding the response of the Economic and Monetary Union institutions should be a prime concern of left parties and trade unions.
It needs to be acknowledged that the forces driving the divergence between core and peripheral eurozone members have their origins in relations between capital and labor, starting with the prolonged period of wage freeze in Germany that lasted for almost two decades, and that these forces are still operating today. These developments have, among other things, created a host of dependent market economies in Central and Eastern Europe — a multilayered periphery, as indicated above — exposed to the liberalizing effects of the Maastricht Treaty framework and keen on attracting foreign investments as the means of catching up with the economies of the core. This has meant a deterioration of the position of labor in relation to capital, as costs of labor and poorer working conditions became the adjustment mechanisms needed for attracting capital investment or, alternatively, facilitating the low-cost service economy.
Notwithstanding the specificities of individual countries, across post-socialist Europe we can see a low-wage work regime that emerged as a result of wage competition in the context of an economic and monetary union unfit, by its very design, to manage the divergent forces it has assembled. Croatia’s trajectory has been rather typical in this regard, for what begun as devaluation of labor soon mutated into massive dislocation of the labor force, largely through out-migration, which has been particularly pronounced since the country joined the EU in 2013. Although the estimates of emigration to the EU vary, most of them indicate that around 200,000 people left the country in the period between accession to the EU, in 2013, and the beginning of the COVID-19 pandemic. Further integration via eurozone membership brings no clear exit corridors for Croatia or for any other Eastern European state on a similar trajectory of labor emigration and depopulation. On the contrary, deeper integration clearly implies solidifying the existing core-periphery dynamics with additional uncertainties linked to the looming stagflation that might ignite another eurozone crisis.
Under the prevailing consensus, according to which there is no alternative to the process of full European integration, it would perhaps be naive to expect that the difficult questions concerning the repercussions of the joint monetary policy would appear in any meaningful way in public discourse. The effects of the common currency on capital-labor relations in the EU, the improbable prospect of a radical turn toward convergence at the eurozone level, not to mention the long-run viability of the euro under the assumption of an increasing core-periphery divide — these questions simply are inconceivable within the dominant narrative formed over three decades of post-socialist transition in Croatia.
Under this narrative, issues of European identity and cultural values are interwoven with issues of the political economy of the European Union in a manner that prevents any real public understanding of the mechanisms of the EU and the European Monetary Union. The emergent newspeak that makes all proposals turn out as digital, green, resilient, and sustainable, internalized by government and nongovernment actors, only further blurs and distorts the matter. The result is a half-fatalistic, half-utopian acceptance of the political economy of the European Union as it presently stands, with the dispirited footnote that democratic politics and relative autonomy on developmental issues have never really been on the table for peripheral deindustrialized economies anyway. While there are certainly political positions that can live, or even thrive, under the thumb of the prevailing consensus, the Left cannot — unless it is willing to accept the hollowing of its political content.