The difference between Croatia’s or Bulgaria’s accession to the eurozone and the one of states prior to the euro crisis is that we not only had to fulfill the Maastricht criteria. Now we have additional requirements which include getting into the so-called close cooperation with the ECB. This basically means to join the European Banking Supervision, SSM, before joining the eurozone. So, a lot of work has to be done for a central bank prior to joining the euro area also regarding technical aspects. It started five and a half years before joining, and was, all in all, a two-year full-time project for us. And in our case, we had on top an additional challenge when introducing the euro.

Croatia was a unique case. We had to fulfill the Maastricht criteria including the inflation criteria in spring 2022. This was the time when inflation in Europe picked up dramatically, and more so in Central and East European member states due to different reasons. Even though Croatia had low inflation for 25 years before this, we were in risk of not passing the inflation criteria. We could have maybe asked for an exception to this rule because of the special circumstances. But it was better not to get into this situation, and we did not.

As we had low inflation for a long time and then introduced the euro in a time of high inflation, many in Croatia started to blame the new currency for the high prices. That was a real difficult challenge in public communication. Unfortunately, most of the people still think this way. Even though there have been several studies on this topic. Depending on the study, the price increase due to the euro introduction was between 0.2 and 0.4 percentage points. That is not a lot in a time when inflation was around 10%. It helped us in communication that we had lower inflation than all non-euro countries in central East Europe, so, it could not have been that inflation was that high because of the euro.

Croatia for sure benefits. The euro eliminated the exchange risks. We were quite euroized before in terms of deposits. Banks were hedging their foreign exchange risks. The level of the exchange risk was quite high. Before the introduction of the euro, a depreciation of our currency by 10% would basically mean an increase in the debt in domestic currency terms by also 10%. As a consequence of that we have significantly lower interest rates in Croatia, and the euro also boosts tourism, which is an important economic sector in Croatia.

This is a theoretical disadvantage. As I mentioned, a high share of deposits and debt was in euro. We therefore pegged the exchange rate. Once we have done that, we could not deviate from the monetary policy of the ECB. Otherwise, the exchange rate would not have been stable. So, theoretically you are right, but in praxis you cannot lose what you never had.

We are all aware that you always will have some divergence. I would say cyclically, we move in the same direction. Yes, the individual inflation rates are different. Over the last few years Croatia, for example, has been growing much faster than eurozone average, wage growth was much higher, but, long run Croatia has very well aligned economic cycle with the eurozone one. Therefore, I think the monetary policy is long run beneficial for all. Certainly better than the counterfactual.

I wouldn't say so. It is a question of how cyclicaly adjusted your economy is to the economic cycle of the eurozone as a whole. And there is a lot of convergence, as the most important trade partner of European countries are other European countries. 

We have done our job in the sense that inflation we have brought the inflation from double-digit level to around 2%, without creating a recession in the eurozone. People take that for granted now, but two years ago most of the people I talked to feared the scenario of monetary tightening leading into the recession. On the other hand, I can also say that the task of a central bank is of course always a continuous job, never done. But for the time being, we are in a good place that we hopefully will stay as long as possible.

I don't have a special scenario in mind for a rate cut or a rate hike. Everything is circumstantial. We have many things we look at to determine the inflation outlook and interest rate action.

Both are in my view balanced. Growth has been stronger than expected. For next year, we forecast healthy growth. Inflation has also been a bit higher than expected but that has only been a notch. We are still good at forecasting inflation. And we have been particularly good at forecasting wage growth, which is important for the service inflation. Wage pressure should continue to be moderate, which should lead to an inflation in the eurozone around our target.

We should not try to micromanage inflation. If we don't see persistent pressure for inflation to come up or down, we should not change interest rates. Doing too much would just create unnecessary volatility. As I said, for the time being we are in a good place.

If you don't see large enough persistent deviation or an increasing downward trend, then it is fine. Thinking two or three years ahead, you always have increasing uncertainty. We better stick to the more visible future and make sure that the data we get is consistent with our projections. If they are, we are fine.

There is still lack of clarity on the exact timing and design. If not too large, this is an example of something that has an one time effect on inflation. If it is not too large and therefore does not propagates into further price increases, I think we should not make too much out it.

That is definitely one of the risks we have to consider very seriously. If there are disappointments in the benefits and revenues of AI, the evaluations at the stock markets could quickly reverse. If you have such high evaluations as now and so much money spent on investments in one sector and such a high concentration of the risks, then we must be very careful. Nobody can say what exactly will happen, but we must make sure that if there will be sharp corrections in the markets, we have a financial system that is resilient enough to withstand the shock. 

It depends on what exactly happens. If it leads to a large shock in the real economy because people lose money and curb their consumption this could lead to much lower growth. In such a scenario a bursting AI bubble would not only be a threat for financial stability but also an issue for monetary policy.

Well, let us see. The process will soon start officially, and then it is up to the governments to nominate their candidates. I have been a deputy governor or governor for 25 years now. I am certainly a central banker in and out, in all aspects of central banking, and I want to stay the central banker in one way or the other.

It is a fact that central East Europe never had a seat in the ECB Board. And it is also true that after Bulgaria’s accession to the eurozone, a third of the euro area members are from central East Europe.