The 2016 Convergence Report: Assessment of Member States regarding the conditions for euro adoption

Source: European Commission (EC) i, published on Tuesday, June 7 2016.

The Convergence Report forms the basis for the Council of the EU decision on whether a Member State fulfils the conditions for joining the euro area. The report assesses the degree of sustainable economic convergence Member States that have not yet fulfilled the necessary conditions for the adoption of the euro (so-called Member States with a derogation) have achieved. The degree of sustainable economic convergence is measured in terms of price stability, sound public finances, exchange rate stability and convergence in long-term interest rates. The report also assesses the compatibility of their national legislation with Economic and Monetary Union (EMU) rules set out in the Treaty on the Functioning of the European Union (TFEU) related to the independence of national central banks, the prohibition on monetary financing, and compatibility with the statutes of the European System of Central Banks (ESCB) and of the European Central Bank (ECB). The Convergence Report by the European Commission is complemented by the Convergence Report by the ECB. The two reports are prepared and published in parallel.

Convergence Reports are issued every two years, or when there is a specific request from a Member State to assess its readiness to join the euro area, e.g. Latvia in 2013.

What does "Member State with a derogation" mean?

The Member States that have not yet fulfilled the necessary conditions for the adoption of the euro are referred to in the Treaty on the Functioning of the European Union (TFEU) as “Member States with a derogation”. They differ from Denmark and the UK, which negotiated opt-out arrangements in the Maastricht Treaty.

The 2016 Convergence Report covers the seven Member States with a derogation: Bulgaria, the Czech Republic, Croatia, Hungary, Poland, Romania and Sweden.

What are the main findings of the report?

Bulgaria

The report concludes that Bulgaria currently fulfils three out of the five criteria necessary for adopting the euro: the criteria relating to price stability, public finances and long-term interest rates. Legislation in Bulgaria is not fully compatible with the Treaty and Bulgaria does not fulfil the exchange rate criterion.

The Czech Republic

The report concludes that the Czech Republic currently fulfils three out of the five criteria necessary for adopting the euro: the criteria relating to price stability, public finances and long-term interest rates. Legislation in the Czech Republic is not fully compatible with the Treaty and the Czech Republic does not fulfil the exchange rate criterion.

Croatia

The report concludes that Croatia currently fulfils three out of the five criteria necessary for adopting the euro: the criteria relating to legal compatibility, price stability and long-term interest rates. Croatia does not fulfil the criteria related to public finances or the exchange rate.

Hungary

The report concludes that Hungary currently fulfils three out of the five criteria necessary for adopting the euro: the criteria relating to price stability, public finances and long-term interest rates. Legislation in Hungary is not fully compatible with the Treaty and Hungary does not fulfil the exchange rate criterion.

Poland

The report concludes that Poland currently fulfils three out of the five criteria necessary for adopting the euro: the criteria relating to price stability, public finances and long-term interest rates. Legislation in Poland is not fully compatible with the Treaty and Poland does not fulfil the exchange rate criterion.

Romania

The report concludes that Romania currently fulfils three out of the five criteria necessary for adopting the euro: the criteria relating to price stability, public finances and long-term interest rates. Legislation in Romania is not fully compatible with the Treaty and Romania does not fulfil the exchange rate criterion.

Sweden

The report concludes that Sweden currently fulfils two out of the five criteria necessary for adopting the euro: the criteria relating to public finances and long-term interest rates. Legislation in Sweden is not fully compatible with the Treaty and Sweden does not fulfil the criteria related to price stability or the exchange rate.

GENERAL QUESTIONS ABOUT EURO ADOPTION

What are the convergence criteria?

The convergence criteria (sometimes referred to as the ‘Maastricht criteria’) are set out in Art. 140(1) TFEU. Sustainability is a key aspect of the assessment of the Maastricht criteria.

Illustrated in a simplified way, the criteria are as follows:

WHAT IS MEASURED

HOW IT IS

MEASURED

CONVERGENCE CRITERIA

Price stability

Harmonised consumer prices inflation over

12 months

Not more than 1.5 percentage points

above the rate of the three

best-performing EU countries

Sound public finances

Government deficit

and debt

Not under excessive deficit procedure

Sound public finances

Long-term interest

rate over 12 months

Not more than two percentage points

above the rate of the three

best-performing EU countries in terms

of price stability

Durability of convergence

Stability in ERM II

Participation in the European Exchange

Rate Mechanism (ERM II) for two years without severe tensions

Overall

Legal compatibility

Price stability

Public finances

Exchange rate stability

Long-term interest rates

Bulgaria

No

No

Yes

Yes

No

Yes

Czech Republic

No

No

Yes

Yes

No

Yes

Croatia

No

Yes

Yes

No

No

Yes

Hungary

No

No

Yes

Yes

No

Yes

Poland

No

No

Yes

Yes

No

Yes

Romania

No

No

Yes

Yes

No

Yes

Sweden

No

No

No

Yes

No

Yes

Which of the countries that joined the EU in 2004 or 2007 have already adopted the euro?

So far, seven of the 12 Member States that joined the EU in 2004 or 2007 have already adopted the euro. Slovenia did so in 2007, Cyprus and Malta in 2008, Slovakia in 2009, Estonia in 2011, Latvia in 2014 and Lithuania in 2015. Currently, more than 338 million people in 19 EU Member States use the euro. The euro area Member States are: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

What about the other countries?

In principle, all Member States that do not have an opt-out clause (i.e. United Kingdom and Denmark) have committed to adopt the euro once they fulfil the necessary conditions. The Member States that acceded to the EU in 2004, 2007 and 2013, after the euro was launched, did not meet the conditions for entry to the euro area at the time of their accession. Therefore, their Treaties of Accession allow them time to make the necessary adjustments. It is up to individual countries to calibrate their path towards the euro and no timetable is prescribed. However, it is important not to underestimate the significance of euro adoption as a medium-term policy anchor and the risks to credibility and confidence of derailing the convergence process.

What are the benefits of adopting the euro?

The benefits of the euro are diverse and are felt on different scales, from individuals and businesses to whole economies. They include:

  • - 
    Stable prices: In the 1970s and 1980s many EU countries had very high inflation rates, some of 20% or more. Inflation fell as they started preparing for the euro and, since its introduction, inflation has averaged just below 2% in the euro area. Price stability means that citizens’ purchasing power and the value of their savings are better protected.
  • - 
    A more transparent and competitive market: The euro brings price transparency to the single market. Consumers can easily compare prices across borders and find the best price for a product or service. Greater price transparency also increases competition between shops and suppliers, keeping downward pressure on prices.
  • - 
    Lower travel costs: The cost of exchanging money at borders has disappeared in the euro area. This makes it cheaper and easier to travel.
  • - 
    More cross-border trade: Within the euro area, there is no need for businesses to work in different currencies. Before the euro, a company would need to take account of the risk of fluctuating exchange rates and currency exchange costs alone were estimated at €20 to €25 billion per year in the EU. The lack of exchange risks or costs facilitates cross-border trade within the euro area. Not only can companies sell into a much larger ‘home market’, but they can also more easily find new suppliers offering better services or lower costs.
  • - 
    More international trade: The euro area is also a large and open trading bloc. This makes doing business in euros an attractive proposition for other trading nations, which can access a large market using one currency. Euro area companies also benefit because they can export and import in the global economy using the euro. This reduces the risk of losses caused by global currency fluctuations.
  • - 
    Better access to capital: The euro gave a large boost to the integration of financial markets across the euro area. Capital flows more easily because exchange rate risks have disappeared. This allows investors to move capital to those parts of the euro area where it can be used most effectively.

But belonging to the euro area is much more than sharing a currency. It is about belonging to a community based on responsibility, solidarity and mutual benefits. It should also be stressed that the benefits of the euro are not unconditional and depend on the Member State's capacity to operate smoothly inside the monetary union, based on sound policies. Thorough preparation for euro area membership is essential.

For further information:

MEMO/16/2117

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