UDC: 336.744/.746
336.76(497-15)
COBISS.SR-ID 252604940

SCIENTIFIC REVIEW

Assessing a Currency Substitution Persistency in the Western
Balkan Region

Mehmed Ganić1* | Alina Dizdarević1 | Agim Mamuti2
1 Faculty of Business Administration, International University of Sarajevo, Bosnia and Herzegovina
2 American University in the Emirates (AUE) Dubai, United Arab Emirates

ABSTRACT
The study aims to examine the euroization phenomenon in seven Western Balkan countries (Albania,
Bosnia and Herzegovina, Bulgaria, Croatia, Romania, Serbia and Macedonia) between 2000 and 2015
and a number of –specific challenges faced by the region. More precisely, the paper analyzes the
impact of the latest global financial crisis on the extent of currency substitution persistency by
exploring the trends before, in wake of the financial crisis, and after the financial crisis. The study
employed several indicators as a proxy variable for measuring of the overall level of currency
substitution or euroization and cross country analysis in selected countries (liability euroization,
credit euroization and deposit euroization and asset substitution- overall euroization index). Finally,
the study found that deposit euroisation, credit euroization, and liabilities euroization in seven
Western Balkan countries is still high with relatively high degree of heterogeneity. In some countries
of the Western Balkan region the process of euroisation was further intensified in spite of the
consequences of the latest global financial crises, while in the other ones the crisis years were
marked by the trend of de-euroisation. In overall, this study does not find any significant evidence on
significantly increases or decreases in currency substitution at the region sub-samples. Finally,
Student t-test results indicate that there is no significant difference in means of before, in wake and
after the financial crises at level of Western Balkan region.

Key words: credit euroization, deposit euroization, liability euroization, Western Balkan region

JEL Classification: F41, G01, E52

INTRODUCTION

The question of euroisation has been on the forefront of the economic debate. It is very
natural that this debate intensifies and leads the economic analysis process during and after
crisis. The Western Balkan economies are known as the highly euroised countries. It seems
impracticable to report all available leadership definitions within the scope of this paper. Due to
this, it will be contented with definitions which are distinguishable and relevant to approach in
question. The terms euroisation and dollarization are used interchangeably to describe a
situation when residents of a country hold foreign currency and when the assets and liabilities,
including bank loans, deposits, as well as non-banking assets are denominated in foreign
currency (Izeand Levi Yeyati, 2003).

Euroisation is especially a widespread phenomenon in transitioning economies which needs
to be carefully considered and comprehended. Among the transitioning economies the Western

* E-mail: mganic@ius.edu.ba

Economic Analysis (2017, Vol. 50, No. 3-4, 43-54)

Balkans is one of the most euroised regions in Europe characterized by a history of political
uncertainty, macroeconomic instability, conflicts as well as by the hyperinflation (Bechmannand
Scheiber, 2012).

The study explores the dynamics of euroization as a widespread phenomenon in the Western
Balkans, by focusing on seven countries in the region (Albania, Bosnia and Herzegovina,
Bulgaria, Croatia, Macedonia, Romania and Serbia). Post-socialist development characterized by
disparities in levels of economic development across the region is the main reason for selecting
the Western Balkan region for this research. In order to define variables needed to conduct the
analysis, a detail research on previous writings on this topic has to be made. The findings of
number studies are shown in literature review section.

This paper first of all aims to discuss the concept of euroisation and make a twofold
contribution to the current debate. Firstly, is to examine the impact of latest global financial
crises on the trends of euroisation of deposits, loans, and liabilities in selected countries.
Secondly, it evaluate if there is consistency in the impact of euroisation over the years across
countries.

In this study, the main research question is to investigate whether the latest financial crisis
caused any changes in euroization level in the Western Balkan region?

There are no many researches on analysis trend of euroisation in post crises period in
Western Balkan region. Main reason may be found in the lack of data especially in long term.
Most of the researches were conducted in pre crises period. Consequently, the significance of
this paper is to provide more information about trends of euroization in selected transition
countries in post crises period.

This paper consist of the following sections: The second section of this paper contains
literature review, and followed by methodology. The fourth section contains cross-country
analysis, and paper ends with conclusion and recommendations.

LITERATURE REVIEW

In the literature on monetary theory and system, there exist many works on
dollarization/euroization and its advantages and weaknesses, but very limited number of
academic work has been carried out about trend of euroization in crises and post crises period.
The term euroisation is described by Winkler, et al. (2004) as a term which refers to the
situation when a country uses the currency of another country. The term is used
interchangeably with the term dollarization. However, the term dollarization is used more
frequently than the term euroisation, and suggests the replacement of the national currency in
general.

A large number of indicators of euroisation can be found in research literature. The choice of a
concrete indicator to analyze the quantitative data depends on the characteristics of the
economy and its purpose to be used. Traditional approaches to the measurement of euroisation
are mainly based on foreign currency deposits. Reinhart, et al. (2003) describes the dollarized
economy as one in which economic entities hold a part of a foreign currency portfolio, and / or
the one in which the private and public sector borrow in foreign currency. Thus, financial
euroisation implies the euroisation of deposits and / or loans. On the side of banking assets, the
level of euroization is most often measured by the ratio of FX loans or FX indexed loans to total
loans.

Financial euroisation is actually asset and liability euroisation, while the term real euroisation
is used for the situation when the foreign currency is set for the local prices and wages (Winkler
et al., 2004).

Fischer (1982) suggests that the country which adopts foreign currency benefits from the
elimination of costs related to the exchange of domestic currency for the foreign one. Moreover,

Mehmed Ganić, Alina Dizdarević, Agim Mamuti 45

dollarization can lead to improvement in a country's economic integration with the economy
whose currency is adopted (Dallas and Tavlas, 2001; Frankel and Rose, 1998). As a result of
higher integration, the GDP levels and business cycles may converge with the issuing country
(Dallas and Tavlas, 2001). Also, shocks between euroized and the foreign country become more
symmetrical, business cycles become more synchronized, and the integration further improves
(Winkler et al., 2004).

Barro and Gordon (1983) argue that the financial euroisation can benefit the country since it
is fostering macroeconomic stability by solving the problem with credibility that arises when a
domestic central bank is not able to pre-commit itself to a low rate of inflation. By adopting the
monetary policy of the foreign country with a high degree of credibility, the level of inflation and
interest rates in the domestic economy is expected to converge to the level in the foreign country
(Winkler et al., 2004). If the convergence works, the output costs associated with disinflation in
the low environment should be avoided (Országhová, 2015).

Ize and Levi Yeyati (2003) describe financial euroisation as the situation when assets and
liabilities are held in foreign currency; while Calvo and Veigh (1992) discuss that the process of
euroization begins with substitution function of money as a store of value, which is the most
vulnerable function in the periods of inflation. Within the balance sheets of households, asset
euroisation is referred as the situation when households hold deposits in foreign currency,
whereas the liability euroisation represents their obtained loans in foreign currency (Calvo and
Veigh, 1992).

When it comes to the banks' balance sheets, the asset euroisation refers to the situation when
banks are lending in foreign currency, while raising deposits in foreign currency refers to
liability euroisation (Calvo and Veigh, 1992).

Ivanov, et al. (2011) defines the deposit euroisation as the tendency of households,
enterprises, and even governments, to hold deposits in foreign currency.

The Western Balkans region is an area characterized by a long history of political uncertainty,
macroeconomic instability, and distrust in the quality of institutions (Bechmann & Scheiber,
2012). The region as whole has a long history of hyperinflation, which is one of the driving
forces for euroisation (Bechmann & Scheiber, 2012). However, the countries of Western
Balkanswere characterized by the abundant supply of foreign capital inflows, which made
foreign currency lending easily accessible at low interest rates. The easy access to foreign
currency lending caused the liability side of banks’ balance sheets to become heavily dominated
in foreign currency (Országhová, 2015). Also, the countries’ economic and financial links with
the countries in Eurozone as well as the overall EU integration process intensified the process of
euroisation (Fabris et al., 2004). Luci et al., (2006) investigated the level of euroisation in
Albania, by taking into account foreign deposits and foreign currency in circulation. They found
very high level of euroisationin Albania (45%). Merollari and Mosko (2015) investigated the
level of euroisation in Albania between 2007 and 2014 and suggested that the level of
euroisation is relatively high, even though the official euroisation did not take place yet. The
results of the study indicate that the ratio of the foreign currency deposits to the total is over
30% and therefore the tendency towards euroisation is high.

As it is argued by Galac (2012), euroisation in Croatia is a consequence of a set of
historical events in both economic and financial spheres. Besides the events, it is influenced also
by the monetary and prudential measures of the Croatian National Bank and by the attempts by
banks to minimize their financing costs (Galac, 2012).

Madzova et al. (2014) discuss that the process of intense euroisation in Macedonia started in
2002 when the euro was adopted as the exchange rate anchor. However, they found the
extensive use of euro in the banking system of Macedonia was followed by the process of de-
euroisation, which implies the decrease in the level of liquid assets, deposits, and loans in
foreign currency.

Economic Analysis (2017, Vol. 50, No. 3-4, 43-54)

Euroisation in Serbia was investigated by Chailloux et al. (2010) who claim that the
phenomenon is rooted in a history of instability in macroeconomic terms. Chailloux et al. (2010)
also argue that after the process of intense euroisation, the process of de-euroisation has started,
so that the borrowers have become more interested in the local currency borrowing.

METHODOLOGY

The paper examines the trend of currency substitution persistency seen through the case of
the selected Western Balkan countries. It analyzes qualitatively pre-determinants of the latest
financial crisis and statistically describes selected countries’ indicators sourced from the World
Bank data, National Central banks annual reports and IMF database.

The study has divided the years into three different sub periods: 2000-2007 (pre-recession
period), 2008-2009 (recession period) and 2010-2015 (post-recession). Data for all variables
used in the study are sourced an annual basis. The rationale behind this division is to compare
the countries’ trend of currency substitutions before, during and after the crisis and to explore
whether the trend of currency substitution is influenced by the global financial crises.

The analysis involved the manipulation of data with an aim of getting the results which would
answer the research question. Due to data consistency problems, a relatively short time series of
annual data was employed in order to measure changes in the level of currency substitution. In
much of the existing professional literature, we encounter various variables for measuring the
degree of dollarization / euroization.

In order to examine how the latest financial crisis influences on the changes in the degree of
currency substitutions of the Western Balkan countries, a set of certain variables need to be
determined and tested. By examining of previous researches on measuring euroisation it is
possible to note that some authors employed a whole range of variables to measure the level of
euroisation of a particular national economy (Ize and Levi Yeyati, 2003; Calvo and Veigh, 1992;
Ivanov, et al. 2011).

Accordingly, some variables as deposits, loans and liabilities, between 2000 and 2015, are
employed to estimate the extent of currency substitution in the selected transition countries hit
by latest financial crises. Credit euroization is measured as the ratio of foreign currency
denominated loans to total loans; liability euroization is measured as the ratio of foreign
currency denominated liabilities to total liabilities; and deposit euroization is measured as ratio
of foreign currency denominated deposits to total deposits. Furthermore, euroization index
(Roeinhart, et al., 2003 and IMF) as the ratio of foreign currency bank deposits to M3 (broad
money) is used to measure the level of asset substitution and represents proxy variable for
euroization. For the sake of our analysis , the study employs a descriptive statistical analysis
(mean) to assess certainty level of currency substitutions across the Western Balkan region
while for the purposes of estimating the significance of the difference in means between
numerical variables, a parameter t-Test: Two-Sample with unequal variances is used.

The first indicator used in many studies is deposit dollarization (Ize and Levy Yeyati, 2003).
Another important point that we can speak about is liability euroization. Also as a measure of
euroisation is increasingly used by indicator of liability euroization(Barajas and Morales, 2003).
This indicator is calculated as the ratio of foreign currency denominated liabilities as percentage
of total liabilities. The inclusion of this indicator is based on recent experiences from the recent
financial crisis as the private and public sector liabilities in developing countries were largely
denominated in foreign currency.

Based on an overview of research problem, and the aims of the study, this paper set out the
main hypotheses as follows.

H1: There is no significant difference in means of before, in wake and after the financial crises
for our variables

Mehmed Ganić, Alina Dizdarević, Agim Mamuti 47

H0: There is significant difference in means of before, in wake and after the financial crises for
our variables.

CROSS-COUNTRY COMPARISON ANALYSIS

Financial Sector development

The degree of financial intermediation, as measured by the ratio of banking sector assets' to
GDP, is one of the most representative indicators of the maturity of the banking sector. As shown
in Figure 1, the Western Balkan region is characterized by a relatively high degree of
heterogeneity. Between 2000 and 2015, the average percentage of bank assets to GDP ranges
between 55.69% (Romania) and 111.6% (Croatia).

With the exception of Croatia (121.6% of GDP) and Bulgaria (106.2% of GDP) where the size
of the banking system in relation to GDP is predominantly above 100% of GDP, the level of
financial intermediation in other Western Balkan countries is predominantly below 90%. If we
neglect the banking sector of Romania, in other analyzed EU member states (i.e. Bulgaria, and
Croatia), the banking sector made the progress in its development showing greater saturation in
comparison to the other countries in the region. Analyzed as a percentage of GDP, it was found
that Croatia has the most developed banking sector (121.6% of GDP) measured by total assets of
banks while the least development was observed in Romania (75% of GDP).

Figure 1. Total assets of banks as % of GDP (2000-2015)
Source: The authors’ elaborations on Global Financial Development Database (GFDD), National CBs

Furthermore, the ratio of private sector credit to GDP provided by the banking sector to
measure of financial development reveal significant differences between the Western Balkan
countries (figure 2). In our case it varies widely across the countries.

In the three new EU member states the ratio has grown slowly in the range between 45.00%
(Romania), 73.25% (Croatia) and 75.50% (Bulgaria). Bulgaria’s standard deviation is high
showing us that the country has experienced significant fluctuations in evolution of its banking
sector.

0.00

50.00

100.00

150.00

average stdeviation min max

Economic Analysis (2017, Vol. 50, No. 3-4, 43-54)

Figure 2. Bank private credit to GDP (%), 2000-2015
Source: The authors’ elaborations on Global Financial Development Database (GFDD), National CBs

Among the other countries of the Western Balkan region out of EU the highest ratio was found

in B&H (56.37%) and it doubled several times between 2000 and 2015. The highest value in
relative terms for this ratio was found in Bulgaria, (75.50%), while the lowest one was recorded
in Albania (38.26%) and Romania (45%).

Moreover, the highest share of deposits in GDP (Figure 3) was recorded in Albania (71.7%)
and Slovenia (69%), with the lowest in Romania (34.4%) and Serbia (47.15 %). The reason for
lower ratio in Romania and Serbia may be found in excessive of hyperinflation in the middle of
1990s.

Figure 3. Bank Deposits to GDP (%) for Selected Western Balkan Countries (2000-2015)
Source: The authors’ elaborations on Global Financial Development Database (GFDD), National CBs

Our cross-country comparisons of average total deposits to GDP ratio indicates that Serbia
(47.15%) and Romania (34.4%) with their ratio are lagging significantly behind other analyzed
countries.

The demand for loans has been steadily increasing over the period 2000-2015. The positive
trends in terms of economic growth, privatization revenues, as well as restored confidence in the
banking system have created a basis for the creation of deposits potential.

(De) Euroization in Western Balkan countries

During the period of transition only few Western Balkan countries established financial
system similar to the ones in advanced transition countries. The level of euroization significant
varies among countries in the region. Cross-country comparisons of euroization deposits as
measured by FX deposits to Total deposits show some differences in terms of euroization

0.00

20.00

40.00

60.00

80.00

Albania B&H Croatia Macedonia Serbia Romania Bulgaria
average stdeviation min max

0.00

20.00

40.00

60.00

80.00

average stdeviation min max

Mehmed Ganić, Alina Dizdarević, Agim Mamuti 49

deposits across region in the years before the crisis, in the wake of crisis and after the crisis
(Figure 4).

As it can be seen from Figure 4, the growth of euroization deposits is generally found in
Albania and Serbia as a notable exception. More specifically, in pre-crisis period, FX deposits
amounted to the 63.21% of the total deposits, which increased to 72.25% in the wake of crisis,
and 75% in post-crisis period. As presents, Croatia is among the countries with the highest
extent of euroization deposits.

In the pre-crisis period the ratio amounted to 68.23%, while the period of de-euroisation was
experienced during the crisis as result deposit withdrawals. After the crisis, however, there was
high degree of euroisation deposits when compared to the one in the pre-crisis period. On the
other side, Macedonia recorded fall of the deposit euroisation and the ratio had declined
significantly compared to pre crises period. In the meantime, when pre crisis and crisis periods
are compared, it can be seen that there was a slight decline in deposit euroisation during the
crisis.

Figure 4. Deposit euroization, between 2000 and 2015
Source: IMF Country Reports, different issues

After the crisis, a trend of further deposit euroisation was found in Albania, Croatia Serbia and
Bosnia and Herzegovina. The data for Macedonia, Romania and Bulgaria shows the decline in
deposit euroisation. In case of Romania, the crisis period was marked by the 7.54% decline in
deposit euroisation, while in the post-crisis period there was only 1.92% decline. In Bulgaria, the
data indicates that the trend in de-euroisation deposit before, during, and after the crisis was
similar. However, in the case of Bosnia and Herzegovina, the crisis period was marked by
deposit de-euroisation, while in the post crisis-period the ratio of foreign-currency denominated
deposits in total deposits increased to 44.47%, which is lower than 46.65% as experienced in
pre-crises period.

When the comparison is made across countries, it can be said that the tendency towards
holding euroization deposits in Albania and Serbia increased during the financial crisis while in
the case of Romania, Bulgaria, Serbia, Croatia, Bosnia and Herzegovina, and Macedonia recorded
de-euroisation of deposits in the wake of crises. Moreover, in the post-crisis period, the data on
Albania, Croatia, and Serbia shows the trend of growth euroisation deposit. However, the data
on Macedonia, Romania, and Bulgaria show that deposit de-euroisation occurred in the years
following the financial crisis.

Further, considering Western Balkan countries the differences in the extent of credit
euroization in Serbia, Albania, Croatia, Macedonia, Romania, Bulgaria, and Bosnia and
Herzegovina, in pre-crisis, in the wake of crises, and post-crisis period are given in Figure 5. As it

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

Albania Croatia Macedonia Serbia Romania Bulgaria Bosnia and
Herzegovina

before in wake after

Economic Analysis (2017, Vol. 50, No. 3-4, 43-54)

can be seen from Figure 5, the post-crisis period was affected by decline of credit euroization in
Albania and Macedonia.

On the other side, in the post-crisis period the credit euroisation has slightly risen in Romania
and Bulgaria. However, Croatia and Bosnia and Herzegovina experienced the opposite trends.
Additionally, in Croatia the ratio decreased (68.85%) in the wake of crisis, and increase in post-
crisis period (73.86%). Interestingly, in case of Bosnia and Herzegovina there was recorded rise
of credit euroization in the wake of crisis (73.6%) and decline in post crises period (64.61%).
However, the trend of credit de-euroisation occurred in post-crisis years, with the number of FX
loans being lower than the one in pre-crisis years. The similar trend was occurred in Macedonia.
Specifically, credit euroization increased by 1.45% in the wake of crisis and a decline of 7.13% in
post-crisis period.

Figure 5. Credit euroization, between 2000 and 2015
Source: IMF Country Reports, different issues

Figure 6 shows some interesting differences in the percentage of liabilities euroization in

selected countries in pre-crisis, crisis, and post-crisis period. Serbia (77.5%) and Croatia
(77.5%) are considered countries with very high euroization ratios across the years, while the
data on Albania (41.4%) and Romania (43.25%) shows the lowest values when compared to the
other countries.

Figure 6. Liabilities euroizations, between 2000 and 2015

Source: IMF Country Reports, different issues

0
10
20
30
40
50
60
70
80

pre crises in wake after crises

Mehmed Ganić, Alina Dizdarević, Agim Mamuti 51

The overall euroisation trend in Serbia was high, with a sharper increase in post-crisis years
in comparison with the pre-crisis period.

The rise of euroisation liabilities was also experienced in the economy of Albania, reaching
41.4% in pre-crisis period, 48.7% in the wake of crisis, and 52.13% in post crises period. In case
of Croatia, the increase in liabilities’ euroisation was recorded during the financial crisis
(77.55%), to slightly decline in post-crisis period to the value lower than the one in pre-crisis
years (72.58%). Macedonia, Bosnia and Herzegovina, and Bulgaria experienced the same trend
in liabilities’ euroisation. Thus, there was an increase in liabilities’ euroisation during the crises,
with de-euroisation trend in post-crisis period. However, the number of foreign currency
denominated liabilities remained higher than the one in pre-crisis period.

In the case of Romania there was a different trend when compared to other countries
considered in the study. As Figure 6 reveals, there was liabilities’ de-euroisation in Romania in
the wake of financial crisis (43.25%). After the crisis, the euroisation trend occurred again, but
the value remained lower than the one before the crisis (44.13%).

Finally, we included an indicator euroization index (EI) used by Roeinhart, Rogoff and
Savastano, 2003 and IMF in our study to measure overall level of euroization or asset
substitution. Figure 7 presents average EI across countries between 2000 and 2015. Most
countries of Western Balkans are high-euroization countries with notable exception of Romania.

A closer look at the data reveals that all countries of the Western Balkan (with exception of
Romania, Macedonia and Bosnia and Herzegovina) increased its euroization ratio from pre
crises to post crises period.

Figure 7. Euroization index (EI), between 2000 and 2015
Source: IMF Country Reports, different issues

Although the phases of the euroization are similar by countries there are some striking

differences among them. First, while the euroization ratio is increasing continuously as of pre
crises period until post crises period (in Albania, Croatia, Serbia and Bulgaria), the decline of the
extent of euroization (in Romania, Macedonia and Bosnia and Herzegovina) starts in post crises
period. Second, the euroization ratio has recovered significantly better in Albania (9.29%) and
Croatia (6.9%) from the crisis than in Serbia (3.72%) and Bulgaria (1.72%). Third, while the
trend of euroization slowed during the global crisis, its level is still high in some countries as
follows: Croatia (60.67%), Serbia (67.08%), Bulgaria (42.57%) and Macedonia (41.19%).

Student’s t-test is employed to explore the variations in the level of de euroization the
countries of the Western Balkan region over the three sub periods. It examines statistically

Albania Croatia Macedonia Serbia Romania Bulgaria Bosnia
and Herz.

pre crises crises post crises

Economic Analysis (2017, Vol. 50, No. 3-4, 43-54)

different from one to another sub periods (before of the financial crisis, in wake of the financial
crisis, and after the financial crisis).The means for the three sub periods are the same for
selected variables is tested as the main hypothesis.

The following hypothesis is tested:

H0: μ1 =μ2= μ3

Where μ1 is the mean for pre-crisis period (2000-2007), μ2 is the mean for post-crisis period
(2008-2009) and μ3 is the mean for (2010-2015). It compares the average Deposit euroization,
credit euroization, liability euroization and euroization index calculated for pre-crisis period
with the average the ratios calculated for crises and post crises period. A hypothesis test
examines critical values associated the mean with test statistics. Our basic assumption: if p-value
is less than or equal to the significance level (P≤ α = 95% confidence interval for the mean of a
group), the null hypothesis is rejected. And vice versa if P-value ≥ α, the null hypothesis is not
rejected.

Table 1 below provides a summary of a Student’s t- test results for the three sub periods
under review.

Table 1. Student’s t- Test Results

Pre-crisis
(2000-
2007)

Crisis
(2008-
2009)

p-value*
Crisis

(2008-
2009)

Post Crisis
(2010-
2015)

p-value*
Pre-crisis

(2000-
2007)

Post crises
(2010-2015)

p-value

Deposit
euroizatio
n

50.86% 51.07% 0.95 51.07% 51.86% 0.84 50.86% 51.86% 0.71

Credit
euroizatio
n

62.98% 66.08% 0.22 66.08% 63.73% 0.31 62.98% 63.73% 0.71

Liability
euroizatio
n

57.39% 61.60% 0.27 61.60% 60.59% 0.79 57.39% 60.59% 0.20

Euroizatio
n index

41.51% 45.10% 0.30 45.1% 45.8% 0.84 45.51 45.8% 0.09

*α =95%,p=0.05

Source: Author`s elaborations on data from IMF Country Reports, different issues

Analysis of the results by Student's t-test for dependent samples has shown that there is no
significant difference in means of before, in wake and after the financial crises for our variables.
Analyzing the average values for our variables, before, during the crisis and after the crisis, a
statistically significant difference is not found (p> 0.05) and mean values has remained almost
unchanged over time. Accordingly, our main hypothesis is accepted.

CONCLUSION

The study aimed at investigating the changes in the extent of deposit, credit, liability and asset
substitution before, in the wake of crises, and after the latest financial crisis in seven Western
Balkan countries. Findings our study indicates that overall the deposit euroization in the post-
crisis period are higher than their pre-crisis levels in three countries (Albania, Croatia and
Serbia). While this decrease is more pronounced from the crisis to post-crisis period for
Macedonia and Romania, the deposit euroization for Bosnia and Herzegovina has increased from
crisis to post crises period. The trend with deposit euroisation was quite different in Croatia,
where the increase in FX deposits occurred in the wake of the crisis, which was preceded by the
sharp decrease in crises period.

Mehmed Ganić, Alina Dizdarević, Agim Mamuti 53

Also, overall credit euroization has increased in the post-crisis period in Croatia, Romania and
Bulgaria over crisis period levels. The study found that the credit euroisation of Bosnia and
Herzegovina was affected by the financial crisis in the way that the number of FX denominated
credits increased in the wake of crisis, while after the crisis there was a trend of decline of
credits held in foreign currency. In Macedonia, the crisis influenced on the fall of credits held in
foreign currency in post crises period in comparison to crises period.

When the liability euroisation is taken into consideration, Macedonia and Croatia had the
situation of the sharp decrease of the FX liabilities in post-crisis period, while in Albania the
euroisation of liabilities sharply increased during and after the crises.

The level of overall euroisation measured by euroization index in all four countries was high
over the years and it is still sizeable in some of selected countries with exception of Romania,
Macedonia and Bosnia and Herzegovina.

Furthermore, Student t-test results indicate that there is no significant difference in means of
before, in wake and after the financial crises at level of Western Balkan region. In overall, this
study does not find any significant evidence on significantly increases or decreases in currency
substitution for the region sub-samples.

REFERENCES

Barajas, A. and Bueno, A. M. (2003). Dollarization of Liabilities: Beyond the Usual Suspects IMF
Working Paper No. 03/11 42.

Barro, R. J., & Gordon, D. (1983). Rules, Discretion and Reputation in a Model of Monetary
Policy. Journal of Monetary Economics, 12, pp. 101-121.

Bechmann, E., & Scheiber, T. (2012). The Impact of Memories of High Inflation on Households'
Trust in Currencies. Focus on European Economic Integration, 4(12), 80-93. OeNB.

Calvo, G., & Veigh, C. (1992). Currency Substitution in Developing Countries - An Introduction.
International Monetary Fund, Working Papers, No. 40.

Chailloux, A., Ohnsorge, F., & Vavra, D. (2010). Euroisation in Serbia. European Bank for
Reconstruction and Development, Working Paper No. 120.

Dallas, H., & Tavlas, G. S. (2001). Lessons of the Euro for Dollarization: Analytic and Political
Economy Perspectives. Journal of Policy Modeling, 23, pp. 333-345.

Fabris, N., Vukajlovic-Grba, D., Radunovic, T., & Jankovic, J. (2004). Economic Policy in
Dollarized Economies with a Special Review of Montenegro. Central Bank of Montenegro,
Working Paper No. 1.

Fischer, S. (1982). Seigniorage and the Case for a National Money. Journal of Political Economy,
90 (2), pp. 295-313.

Frankel, J. A., & Rose, A. K. (1998). The Endogeneity of the Optimum Currency Area Criteria.
The Economic Journal, 108 (7), pp. 1009-1025.

Galac, T. (2012). Global Crisis and Credit Euroisation in Croatia. Croatian National Bank,
Working Papers No. 33.

IMF (2014) Bosnia and Herzegovina: Sixth and Seventh Reviews Under the Stand-By
Arrangement and Requests for Augmentation of Access and Modification of Performance
Criteria-Staff Report, IMF Country Report.

IMF (2014) Republic of Croatia: 2014 Article IV Consultation-Staff Report, IMF Country Report.
IMF (2014). Republic of Serbia: Staff Report for the 2014 Article IV Consultation and Request for

Stand-By Arrangement
IMF (2015) Bosnia and Herzegovina: 2015 Article IV Consultation-Press Release; Staff Report;

and Statement by the Executive Director for Bosnia and Herzegovina
IMF (2015) Albania: Second and Third Reviews under the Extended Arrangement and Request

for Waiver for the Nonobservance of Performance Criterion, Waiver of Applicability of

Economic Analysis (2017, Vol. 50, No. 3-4, 43-54)

Performance Criteria, and Rephasing of Future Disbursements-Staff Report, IMF Country
Report.

IMF (2016). Albania : Staff Report for the 2016 Article IV Consultation, Seventh Review Under
the Extended Arrangement, and Request for Waiver of Applicability and Modification of
Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for
Albania

IMF (2016). Bulgaria: 2016 Article IV Consultation-Press Release; Staff Report; and Statement by
the Executive Director for Bulgaria

IMF (2015). Bulgaria: 2015 Article IV Consultation-Staff Report; Press Release; and Statement by
the Executive Director for Bulgaria

IMF (2015) Former Yugoslav Republic of Macedonia: Staff Report for the Fourth Review Under
the Post Program Monitoring Discussions, IMF Country Report.

IMF (2015) Romania: 2015 Article IV Consultation-Staff Report, IMF Country Report.
IMF (2017) Republic of Serbia : 2017 Article IV Consultation, Seventh Review Under the Stand-

by Arrangement and Modification of Performance Criteria-Press Release; Staff Report; and
Statement by the Executive Director for the Republic of Serbia.

Ize, A., & Levi Yeyati, E. (2003). Financial Dollarization. Journal of International Economics, 59
(2), pp. 323-347.

Ivanov, M., Tkalec, M., & Vizek, M. (2011). The Determinants of Financial Euroisation in a Post-
Transition Country: Do Threshold Effect Matter? Czech Journal of Economics and Finance, 61
(3).

Luci, E., Muco, M., & Sojli, E. (2006). Euroisation in Albania: From Spontaneous to Consensual.
Balkan Observatory Working Paper 71.

Madzova, V., Sajnoski, K., Davcev, L., & Delcev, G. (2014). The Process of De-Euroisation in the
Macedonian Banking Sector in the Period of Sovereign Debt Crisis. Journal of Social Studies, 89,
116-121.

Merollari, K., Mosko, A. (2015). The Level of Euroization of Albanian Economy.” Academic
Journal of Interdisciplinary Studies, Part I Vol. 4.

Országhová, L. (2015). EU Enlargement: Euroisation in the Western Balkans. BIATEC, 23 (2), 2-
6.

Reinhart, C. M., Rogoff, K. S., Savastano, M. A. (2003). Debt Intolerance. Brookings Papers on
Economic Activity, Vol 34.

Winkler, A., Mazzaferro, F., Nerlich, C., & Thimann, C. (2004). Official
Dollarisation/Euroisation: Motives, Features and Policy Implications of Current Cases.
Frankfurt: European Central Bank.

World Bank (2017). Global Financial Development Database (GFDD), Wahington D.C.

Article history: Received: October 12, 2017
Accepted: November 10, 2017