Euro convergence criteria

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"Convergence criteria" redirects here. For the mathematical term, see Series (mathematics)#Convergence criteria.
Euro adoption by EU member states
Currency Code Entry ERM II[1] Central rate[1] Official
target date[2]
Bulgaria Bulgarian lev BGN — 1.95583[nb 1] —
Croatia Croatian kuna HRK — — —
Czech Republic Czech koruna CZK — — —
Denmark Danish krone DKK 1 January 1999 7.46038 Formal opt-out[nb 2]
Hungary Hungarian forint HUF — — —
Lithuania Lithuanian litas LTL 28 June 2004 3.45280 1 January 2015
Poland Polish złoty PLN — — —
Romania Romanian leu RON — — —[3]
Sweden Swedish krona SEK ——Not considered ——— De facto opt-out[nb 3]
United Kingdom British pound sterling

Gibraltar Gibraltar pound

 GBP

GIP

 ——Not considered ——— Formal opt-out [nb 4]

The euro convergence criteria (also known as the Maastricht criteria) are the criteria which European Union member states are required to meet to enter the third stage of the Economic and Monetary Union (EMU) and adopt the euro as their currency. The four main criteria, which actually comprise five criteria as the "fiscal criterion" consist of both a "debt criterion" and a "deficit criterion", are based on Article 140 (ex article 121.1) of the Treaty on the Functioning of the European Union.

Full EMU membership is only open to EU member states. However, the European microstates of Andorra, Monaco, San Marino and the Vatican City, which due to their small size are not members of EU, have signed monetary agreements with EU which allow them officially to adopt the euro and issue their own variant of euro coins. These states had all previously used one of the eurozone currencies replaced by the euro, or a currency pegged to one of them. These states are not members of the eurozone and do not get a seat in the European Central Bank (ECB) or the Eurogroup.

As part of the EU treaty, all of the EU Member States are obliged to adhere to the Stability and Growth Pact (SGP), which as a framework to ensure price stability and fiscal responsibility, has adopted identical limits for governments budget deficit and debt as the convergence criteria. Due to the fact that several countries did not exercise a sufficient level of fiscal responsibility during the first 10 years of the euro's lifetime, two major SGP reforms were recently introduced. The first reform was the Sixpack which entered into force in December 2011, and it was followed in January 2013 by the even more ambitious Fiscal Compact, which was signed by 25 out of the then-27 EU member states.

Criteria[edit]

The Maastricht Treaty established the Maastricht criteria and the EU single market which ensures the free movement of goods, capital, people and services. (2003 German stamp commemorating the tenth anniversary of the enforcement of the Maastricht Treaty in 1993)

The Maastricht Treaty, which was signed in February 1992 and entered into force on 1 November 1993, outlined the 5 convergence criteria EU member states are required to comply with to adopt the new currency the euro. The purpose of setting the criteria was to achieve price stability within the eurozone and ensure it wasn't negatively impacted when new member states accede. The framework of the five criteria was outlined by article 109j.1 of the Maastricht Treaty, and the attached Protocol on the Convergence Criteria and Protocol on the Excessive Deficit Procedure. The original treaty article was later renumbered to become article 121.1 of the Amsterdam Treaty,[4] and later renumbered again to Article 140 of the Treaty on the Functioning of the European Union. Aside from the renumbering, no significant change have happened to the content of the "convergence criteria article" and its referred to Protocol on the Convergence Criteria and Protocol on the Excessive Deficit Procedure. The precise definition and method of measuring compliance was subsequently further developed by the EMI (later known as ECB) in their first three reports published in April 1995, November 1995 and November 1996.[5][6][7] The full definition of the five criteria are summarised below.

  1. HICP inflation (12-months average of yearly rates): Shall be no more than 1.5% higher, than the unweighted arithmetic average of the similar HICP inflation rates in the 3 EU member states with the lowest HICP inflation. EU member states with a HICP rate significantly below the comparable rates in other Member States, do not qualify as a benchmark country for the reference value and will be ignored, if it can be established its price developments have been strongly affected by exceptional factors (i.e. severe wage cuts and/or a strong recession).[8]
  2. Government budget deficit: The ratio of the annual general government deficit relative to gross domestic product (GDP) at market prices, must not exceed 3% at the end of the preceding fiscal year. Deficits being "slightly above the limit" (previously outlined by the evaluation practise to mean deficits in the range from 3.0–3.5%),[9] will as a standard rule not be accepted, unless it can be established that either: "1) The deficit ratio has declined substantially and continuously before reaching the level close to the 3%-limit" or "2) The small deficit ratio excess above the 3%-limit has been caused by exceptional circumstances and has a temporary nature (i.e. expenditure one-offs triggered by a significant economic downturn, or expenditure one-offs triggered by the implementation of economic reforms with a positive mid/long-term effect)".[5][6]
  3. Government debt-to-GDP ratio: The ratio of gross government debt (measured at its nominal value outstanding at the end of the year and consolidated between and within the sectors of general government) relative to GDP at market prices, must not exceed 60% at the end of the preceding fiscal year. Or if the debt-to-GDP ratio exceeds the 60% limit, the ratio shall at least be found to have "sufficiently diminished and must be approaching the reference value at a satisfactory pace".[6]
  4. Exchange rate: Applicant countries should have joined the exchange-rate mechanism (ERM / ERM II) under the European Monetary System (EMS) for two consecutive years, and should not have devalued its currency during the last two years, meaning that the country shall have succeeded to keep its monetary exchange-rate within a ±15% range from an unchanged central rate.
  5. Long-term interest rates (average yields for 10yr government bonds in the past year): Shall be no more than 2.0% higher, than the unweighted arithmetic average of the similar 10-year government bond yields in the 3 EU member states with the lowest HICP inflation (having qualified as benchmark countries for the calculation of the HICP reference value). If any of the 3 EU member states in concern are suffering from interest rates significantly higher than the "GDP-weighted Eurozone average interest rate", and at the same time have no complete funding access to financial markets (which will be the case for as long as a country receives disbursements from a sovereign state bailout program), then such a country will not qualify as a benchmark country for the reference value; which then only will be calculated upon data from fewer than 3 EU member states.[10]

The ECB publishes a Convergence Report at least every two years to check how well the EU members aspiring for euro adoption comply with the criteria. The first full convergence report was published in November 1996, and concluded that only 3 out of 15 EU member states (Denmark, Luxembourg and Ireland) were completely compliant with the criteria at that point in time.[11] As a majority of states were not in compliance, the Council decided to delay the introduction of the euro by two years to 1 January 1999.[12] In March 1998 a more positive second convergence report concluded that 11 out of 12 applying countries were prepared for the electronic introduction of the euro on 1 January 1999, with only Greece failing to qualify by the deadline.[13] Subsequent convergence reports have so far resulted in an additional 6 EU member states complying with all criteria and adopting the euro (Greece, Slovenia, Cyprus, Malta, Slovakia and Estonia). The latest convergence report was published in May 2012, and checked for compliance in the reference year from April 2011 – March 2012, where none of the current 7 applicants were found to fully comply.[10] As the reference values for HICP inflation and long-term interest rates change on a monthly basis, any non-euro member state has the right to ask the ECB for an updated compliance check whenever they believe they have met all the criteria. For example, Latvia asked for a compliance check in March 2013.[14]

In 2009 the authors of a confidential International Monetary Fund (IMF) report suggested that in light of the ongoing global financial crisis, the EU Council should consider granting new EU member states which are having difficulty complying with all five convergence criteria the option to "partially adopt" the euro, along the lines of the monetary agreements signed with the European microstates outside the EU. These states would gain the right to adopt the euro and issue a national variant of euro coins, but would not get a seat in ECB or the Eurogroup until they met all the convergence criteria.[15] However, the EU has not made use of this alternative accession process.

Fulfillment of criteria[edit]

Convergence criteria (valid for April 2013)
Country HICP inflation rate[16]
(12-months average
of annual rates)[nb 5]		 Budget deficit to GDP Debt-to-GDP ratio ERM II member[17] Long-term interest rate[18]
(12-months average
of 10yr bond yields)[nb 6]
Reference values max. 2.5%[nb 7][nb 8]
(as of 31 Mar 2013)		 max. 3.0%
(Fiscal year 2012)[20]		 max. 60%, or decreasing
(Fiscal year 2012)[21]		 min. 2 years
(as of 31 Mar 2013)		 max. 4.81%[nb 7][nb 9]
(as of 31 Mar 2013)
EU members (outside the eurozone)
 Bulgaria 2.5% 0.8% 18.5% No 4.03%
 Croatia 4.0% 4.6%[22] 53.6%[22] No 5.73% [23]
 Czech Republic 2.9% 4.4% 45.8% No 2.44%
 Denmark 1.9% 4.0% 45.8% 1 January 1999 1.36%
 Hungary 1.7% 1.9% 79.2% (decreasing) No 5.92% (2013.12)
 Lithuania 2.8% 3.2% 40.7% 28 June 2004 4.53%
 Poland 3.0% 3.9% 55.6% No 4.61%
 Romania 3.9% 2.9% 37.8% No 6.43%
 Sweden 0.8% 0.5% 38.2% No 1.61%
 United Kingdom 2.6%[24] 6.3% 90.0% (increasing) No 1.67%
Candidates for EU membership
 Iceland 5.7% 1.7%[22] 96.2% (decreasing)[22] No 6.70% (21.Aug-31.Mar 2013)[25]
 Macedonia 3.6%[26] 3.8%[22] 31.0%[22] No No data
 Montenegro 4.1% (2012)[22] 4.0%[22] 52.0%[22] No[nb 10] No data
 Serbia 7.3% (2012)[22] 6.4%[22] 59.2%[22] No No data
 Turkey 8.2% 1.9%[22] 36.3%[22] No 7.90% [28]
Potential candidates for EU membership
 Albania 2.0% (2012)[29] 3.5%[29] 63.8% (increasing)[29] No No data
 Bosnia and Herzegovina 2.2% (2012)[29] 2.8%[29] 43.7%[29] No No data
 Kosovo[nb 11] 0.6% (2012)[29] 2.8%[29] 17.6% (estimated)[nb 12][30] No[nb 13] No data


  Criterion fulfilled
  Criterion potentially fulfilled: If the budget deficit exceeds the 3% limit, but is "close" to this value (the European Commission has deemed 3.5% to be close by in the past),[32] then the criteria can still potentially be fulfilled if either the deficits in the previous two years are significantly declining towards the 3% limit, or if the excessive deficit is the result of exceptional circumstances which are temporary in nature (i.e. one-off expenditures triggered by a significant economic downturn, or by the implementation of economic reforms that are expected to deliver a significant positive impact on the government's future fiscal budgets). However, even if such "special circumstances" are found to exist, additional criteria must also be met to comply with the fiscal budget criterion.[5][6] Additionally, if the debt-to-GDP ratio exceeds 60% but is "sufficiently diminishing and approaching the reference value at a satisfactory pace" it can be deemed to be in compliance.[33]
  Criterion not fulfilled


Notes
  1. ^ As of March 2014, Bulgaria is not officially part of ERM II. But as the lev was originally pegged to the German mark, it is currently pegged to the euro at the rate shown.
  2. ^ Denmark negotiated an opt-out from the Maastricht Treaty and is not obliged to join the euro. However, the Danish government has pledged to hold a referendum on the opt-outs after the next Parliamentary elections.
  3. ^ Sweden, while obliged to join the euro under its Treaty of Accession, has chosen not to join ERM II, meaning that Sweden fails the convergence criteria. Swedish political parties have pledged not to join without a referendum.
  4. ^ The UK negotiated an opt-out from the Maastricht Treaty and is not obliged to join the euro.
  5. ^ The 12-months average for the annual HICP inflation rate must be no more than 1.5% larger than the unweighted arithmetic average of the similar HICP inflation rates in the 3 EU member states with the lowest HICP inflation. If any of these 3 states have a HICP rate significantly below the similarly averaged HICP rate for the eurozone (which according to ECB practice means more than 2% below), and if this low HICP rate has been primarily caused by exceptional circumstances (i.e. severe wage cuts or a strong recession), then such a state is not included in the calculation of the reference value and is replaced by the EU state with the fourth lowest HICP rate.
  6. ^ The annual average for the yield of 10-year government bonds must be no more than 2.0% larger than the unweighted arithmetic average of the bond yields in the 3 EU member states with the lowest HICP inflation. If any of these states have bond yields which are significantly larger than the similarly averaged yield for the eurozone (which according to previous ECB reports means more than 2% above) and at the same time does not have complete funding access to financial markets (which is the case for as long as a government receives bailout funds), then such a state is not be included in the calculation of the reference value.
  7. ^ a b The reference values for HICP inflation and long-term interest rates are calculated based on the "calculation principle" outlined in the 2012 ECB Convergence Report,[19] with the input of forecasted data for the sliding assessment year 1 April 2012 - 31 March 2013.
  8. ^ The 3 best performing countries in regards to HICP inflation were Greece (0.614%), Sweden (0.843%) and Latvia (1.567%), with no outliers detected.
  9. ^ As Greece is part of a bailout programme, and suffered from elevated interest rates significantly above the eurozone average (15.40% above), this country was excluded from the calculation of the reference limit for long term interest rates, leaving just Sweden (1.61%) and Latvia (4.00%) as benchmark countries.
  10. ^ Montenegro has not had a currency of its own since it decided to abandon the use of Serbian Dinar in November 1999 and make the Deutsche Mark its de facto currency. When Germany yielded the Mark for the Euro on 1 January 2002, Montenegro unilaterally adopted the Euro as its currency. However, as they are not a member of the eurozone they do not have a seat at the ECB or the right to mint euro coins. It's undecided whether Montenegro will be required to reintroduce its own currency to comply with the ERM II criteria for official euro adoption.[27]
  11. ^ Kosovo is the subject of a territorial dispute between the Republic of Serbia and the Republic of Kosovo. The latter declared independence on 17 February 2008, but Serbia continues to claim it as part of its own sovereign territory. Kosovo's independence has been recognised by 107 out of 193 United Nations member states.
  12. ^ The debt level for Kosovo can currently only be estimated because no deal has been finalized to settle the Kosovo's share of the Serbian national debt.[citation needed]
  13. ^ The Republic of Kosovo adopted the Deutsche Mark in 1999 to replace the Serbian dinar.[31] The euro is currently the official currency of Kosovo.[citation needed] However, as they are not a member of the eurozone they do not have a seat at the ECB or the right to mint euro coins. It's undecided whether Kosovo will be required to reintroduce its own currency to comply with the ERM II criteria for official euro adoption.[27]

Reference values[edit]

The compliance check above was conducted in January 2013. As reference values for HICP and interest rates are subject for monthly changes, any EU member state has the right to ask for a renewed compliance check at any time during the year. For this potential extra assessment, the table below feature Eurostat's monthly recalculation of reference values fixing the upper limit for HICP inflation and long term interest rates, being calculated on basis of the moving yearly average for the three EU Member States with the lowest HICP figures (ignoring states classified as "outliers").

Reference
values[nb 1]		 Benchmark countries with
lowest HICP inflation rate
(12-months average of
yearly HICP rates)[22][34][16]		 HICP inflation
reference value
(12-months average of
yearly HICP rates)[nb 2]		 Interest rate
reference value[18]
(12-months average of
10yr bond yields)[nb 3]		 Note about
HICP inflation
Benchmark Outliers		 Note about
Interest rate
Benchmark Outliers
31 Dec 2012 Sweden (0.939%)[35]
Greece (1.043%)[36]
Ireland (1.922%)[37]		 2.8% 3.59% No outliers Ireland is an outlier (2.15% above average)
Greece is an outlier (18.48% above average)
31 Jan 2013 Greece (0.875%)[38]
Sweden (0.931%)[35]
Ireland (1.936%)[39]		 2.7% 5.74% No outliers Ireland is not an outlier (1.99% above average)
Greece is an outlier (17.37% above average)
28 Feb 2013 Greece (0.748%)[40]
Sweden (0.887%)[35]
Latvia (1.810%)[41]		 2.6% 4.89% No outliers Greece is an outlier (15.96% above average)
31 Mar 2013 Greece (0.614%)[42]
Sweden (0.843%)[35]
Latvia (1.567%)[41]		 2.5% 4.81% No outliers Greece is an outlier (15.40% above average)
30 Jun 2013
(forecast)		 Sweden (0.93%)
Latvia (1.60%)
Portugal (1.60%)		 2.9% - Greece is outside benchmark
(due to a HICP 2.2% below EU-average)		 -
30 Sep 2013
(forecast)		 Portugal (0.95%)
Sweden (1.00%)
Ireland (1.53%)		 2.7% - Greece is outside benchmark
(due to a HICP 2.4% below EU-average)		 -
31 Dec 2013
(forecast)		 Portugal (0.58%)
Sweden (1.10%)
Ireland (1.30%)		 2.5% - Greece is outside benchmark
(due to a HICP 2.7% below EU-average)		 -

As of 2014, Lithuania is the only non-eurozone country belonging to the category of being ERM-II compliant without a Euro opt-out, and thus actively attempting to comply with all five convergence criteria for Euro adoption. If Lithuania can comply with the reference limits just in one of the months during the first half of 2014, they will have qualified for a Euro adoption per 1 January 2015, provided that they remember to apply for ECB to conduct this extra compliance check, for the specific month in concern.

See also[edit]

Notes[edit]

  1. ^ Reference values were last time published in the ECB convergence report in May 2012. This report will be updated every second year normally in May, or subsequently updated at any time on the request of a non-euro member state. The table has recalculated the constantly moving reference values for HICP inflation and Long-term interest rates, based on the calculation principle outlined in the 2012 Convergence report, with input of data for the past 12 months by the end of the given assessment month.
  2. ^ Reference value limit for HICP inflation rates: The 12-months average for the yearly HICP inflation rate shall be no more than 1.5% higher, than the unweighted arithmetic average of the similar HICP inflation rates in the 3 EU member states with the lowest HICP inflation. EU member states with an extremely low HICP being caused by exceptional circumstances (i.e. severe wage cuts and/or a strong recession), do not qualify as a benchmark country for the reference value and will be ignored.
  3. ^ Reference value limit for long-term interest rates: The average rate during the past year of 10-year government bonds shall be no more than 2.0% higher, than the unweighted arithmetic average of the similar 10-year government bond rates in the 3 EU member states with the lowest HICP inflation. If any of the 3 EU member states in concern, both have an interest rate "significantly above" the GDP-weighted average for the eurozone (normally meaning more than 2% above), and at the same time is without "complete market access" (which is the case for as long as a government receives bailout disbursements), then such a country will not qualify as a benchmark country for the calculation of the reference value; meaning that it will then only be calculated upon data from fewer than 3 EU member states.

References[edit]

  1. ^ a b "Euro central rates in ERM2". ECB. 
  2. ^ "Adopting the euro: Who can join and when". Retrieved 2013-03-31. 
  3. ^ "Government of Romania - Convergence Programme - 2013-2016". Government of Romania. April 2013. 
  4. ^ "Full text of the Treaty of Amsterdam". Eur-Lex. 2 October 1997. Retrieved 9 March 2013. 
  5. ^ a b c "EMI Annual Report 1994" (PDF). European Monetary Institute (EMI). April 1995. Retrieved 22 November 2012. 
  6. ^ a b c d "Progress towards convergence – Nov. 1995 (report prepared in accordance with article 7 of the EMI statute)" (PDF). European Monetary Institute (EMI). November 1995. Retrieved 22 November 2012. 
  7. ^ "Progress towards convergence (Nov 1996)" (PDF). EMI. Nov 1996. Retrieved 18 November 2012. 
  8. ^ "Convergence Report (May 2010)" (PDF). ECB. May 2010. Retrieved 18 November 2012. 
  9. ^ "Luxembourg Report prepared in accordance with Article 126(3) of the Treaty" (PDF). European Commission. 12 May 2010. Retrieved 18 November 2012. 
  10. ^ a b "Convergence Report (May 2012)" (PDF). ECB. May 2012. Retrieved 18 November 2012. 
  11. ^ "Report on convergence in the European Union in 1996 (COM.96 560 final)" (PDF). Commission of the European Communities. 6 November 1996. Retrieved 21 November 2012. 
  12. ^ "Council Decision 96/736/EC (13 December 1996)" (PDF). CVCE. 13 December 1996. Retrieved 21 November 2001. 
  13. ^ "European Economy no.65 (three reports): 1) Commission's recommendation concerning the third stage of economic and monetary union. 2) Convergence Report 1998. 3) Growth and employment in the stability-oriented framework of EMU" (PDF). European Commission. 16 March 1998. Retrieved 21 November 2012. 
  14. ^ "Latvia formally applies for eurozone membership". Euractiv.com. 4 March 2013. Retrieved 4 March 2013. 
  15. ^ "Lithuanian PM keen on fast-track euro idea". London South East. 7 April 2007. 
  16. ^ a b "HICP (2005=100): Monthly data (12-month average rate of annual change)". Eurostat. 16 August 2012. Retrieved 6 September 2012. 
  17. ^ "What is ERM II?". European Commission. 31 July 2012. Retrieved 8 September 2012. 
  18. ^ a b "Long-term interest rate statistics for EU Member States (monthly data for the average of the past year)". Eurostat. Retrieved 18 December 2012. 
  19. ^ "Convergence report 2012". European Central Bank. May 2012. Retrieved 2013-01-15. 
  20. ^ "Government deficit/surplus data". Eurostat. 22 April 2013. Retrieved 22 April 2013. 
  21. ^ "Government debt data". Eurostat. 22 April 2013. Retrieved 22 April 2013. 
  22. ^ a b c d e f g h i j k l m n o "European economic forecast - Winter 2013" (PDF). European Commission. 22 February 2013. Retrieved 22 February 2013. 
  23. ^ Croatia 10-Year Bond Yield - Historical Data
  24. ^ United Kingdom's official 12m average HICP statistic (reflected by development of HICP index values in table 60 - as per 31 March 2013)
  25. ^ Iceland 10-Year Bond Yield - Historical Data
  26. ^ Macedonia's official 12m average CPI statistic (reflected by development of its monthly CPI index values as per 31 March 2013)
  27. ^ a b "Montenegro's peculiar path to EU membership". 2013-02-07. Retrieved 2013-02-19. 
  28. ^ Turkey 10-Year Bond Yield - Historical Data
  29. ^ a b c d e f g h "World Economic Outlook Database, October 2012". IMF. October 2012. 
  30. ^ "IMF Country Report No.11/210 - Republic of Kosovo: 2011 Article IV Consultation and the Initiation of a Staff-Monitored Program" (PDF). IMF. 6 July 2011. Retrieved 9 September 2012. 
  31. ^ "Kosovo adopts Deutschmark". BBC News. 1999-09-03. Retrieved 2013-01-15. 
  32. ^ "Luxembourg Report prepared in accordance with Article 126(3) of the Treaty" (PDF). European Commission. 12 May 2010. Retrieved 18 November 2012. 
  33. ^ "Progress towards convergence - November 1995 (report prepared in accordance with article 7 of the EMI statute)" (PDF). European Monetary Institute (EMI). November 1995. Retrieved 17 March 2013. 
  34. ^ "HICP (2005=100): Monthly data (annual rate of change)". Eurostat. 16 January 2013. Retrieved 17 January 2013. 
  35. ^ a b c d Swedish database with HICP raw data
  36. ^ Greek 12m-average HICP statistic (as reported per 31 December 2012)
  37. ^ Irish 12m-average HICP statistic (as reported per 31 December 2012)
  38. ^ Greek 12m-average HICP statistic (as reported per 31 January 2013)
  39. ^ Irish 12m-average HICP statistic (as reported per 31 January 2013)
  40. ^ Greek 12m-average HICP statistic (as reported per 28 February 2013)
  41. ^ a b Latvian database with HICP raw data
  42. ^ Greek 12m-average HICP statistic (as reported per 31 March 2013)

External links[edit]

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