The European Commission published on 10 June the 2020 convergence report in which it provides its assessment of the progress non-euro area Member States have made towards adopting the euro.
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What is the convergence report?
The European Commission’s convergence report provides an assessment of the progress non-euro area Member States have made towards adopting the euro. It forms the basis for the Council of the EU decision on whether a Member State fulfils the conditions for joining the euro area.
The convergence report of the European Commission is separate to, but published in parallel with, the convergence report of the ECB.
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.
All Member States, except Denmark, are required to join the euro area. Denmark, which negotiated an opt-out arrangement in the Maastricht Treaty, is therefore not covered by the report.
Are all non-euro area Member States obliged to join the euro?
In principle, all Member States that do not have an opt-out clause (i.e. Denmark) have legally committed to adopt the euro once they fulfil the necessary conditions. However, it is up to individual countries to calibrate their path towards the euro and no timetable is prescribed.
The Member States that joined 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.
What are the convergence criteria?
Member States adopting the euro are required to have achieved a high level of sustainable economic convergence, which is examined in the Convergence Report by reference to the convergence criteria. These 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, which means that the progress made with convergence must be grounded on structural elements that guarantee its durability, rather than on temporary factors.
Illustrated in a simplified way, the criteria are as follows:
WHAT IS MEASURED |
HOW IT IS MEASURED |
CONVERGENCE CRITERIA |
|
Price stability |
Harmonised consumer price inflation |
A price performance that is sustainable and average inflation over one year before the examination 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 at the time of examination |
|
Exchange rate stability |
Exchange rate developments in ERM II |
Participation in the Exchange Rate Mechanism (ERM II) for two years without severe tensions |
|
Durability of convergence |
Long-term interest rate |
Not more than two percentage points above the rate of the three best-performing EU countries in terms of price stability over one year before the examination |
The Treaty also calls for an examination of other factors relevant to economic integration and convergence. These additional factors include the integration of markets and the development of the balance of payments. The assessment of additional factors is seen as an important indication of whether the integration of a Member State into the euro area would proceed smoothly.
What are the main findings of the convergence report?
Bulgaria
The report concludes that Bulgaria currently fulfils two out of the four economic criteria necessary for adopting the euro: the criteria relating to public finances and long-term interest rates.
Bulgaria does not fulfil the price stability and the exchange rate criteria and legislation in Bulgaria is not fully compatible with the Treaty.
Czechia
The report concludes that Czechia currently fulfils two out of the four economic criteria necessary for adopting the euro: the criteria relating to public finances and long-term interest rates.
Czechia does not fulfil the price stability and exchange rate criteria and legislation in Czechia is not fully compatible with the Treaty.
Croatia
The report concludes that Croatia currently fulfils three out of the four economic criteria necessary for adopting the euro: the criteria relating to price stability, public finances and long-term interest rates. Croatia does not fulfil the exchange rate criterion. Legislation in Croatia is fully compatible with the Treaty.
Hungary
The report concludes that Hungary currently fulfils two out of the four economic criteria necessary for adopting the euro: the criteria relating to public finances and long-term interest rates.
Hungary does not fulfil the price stability and exchange rate criteria and legislation in Hungary is not fully compatible with the Treaty.
Poland
The report concludes that Poland currently fulfils two out of the four economic criteria necessary for adopting the euro: the criteria relating to public finances and long-term interest rates.
Poland does not fulfil the price stability and exchange rate criteria. Legislation in Poland is not fully compatible with the Treaty.
Romania
The report concludes that Romania currently fulfils none of the four economic criteria necessary for adopting the euro: it does not fulfil the price stability, public finances, exchange rate and long-term interest rate criteria. Legislation in Romania is not fully compatible with the Treaty.
Sweden
The report concludes that Sweden currently fulfils three out of the four economic criteria necessary for adopting the euro: the criteria relating to price stability, public finances and long-term interest rates.
Sweden does not fulfil the criteria related to the exchange rate and legislation in Sweden is not fully compatible with the Treaty.
In addition, the assessment of other factors shows that the countries concerned are overall well integrated economically and financially in the EU. Nevertheless, some of them still display macroeconomic vulnerabilities and/or face challenges related to their business environment and institutional framework need to be further addressed to ensure the sustainability of the convergence process.
What is the process for adopting the euro once the Member State meets all the necessary criteria?
Based on the Convergence report, the Commission submits a proposal to the ECOFIN Council which having consulted the European Parliament, and after discussion among the Heads of State or Government decides whether the country fulfils the necessary conditions and may adopt the euro. If the decision is favourable, the ECOFIN Council takes the necessary legal steps and based on a Commission proposal, having consulted the ECB adopts the conversion rate at which the national currency will be replaced by the euro, which thereby becomes irrevocably fixed.
How does the convergence report relate to the process to enter ERM II?
The Exchange Rate Mechanism (ERM II) was set up on 1 January 1999 as a successor to the original ERM to ensure that exchange rate fluctuations between the euro and other EU currencies do not disrupt economic stability within the single market, and to help non euro-area countries prepare themselves for participation in the euro area. The convergence criterion on exchange rate stability requires participation in ERM II.
Participation in ERM II is voluntary although, as one of the convergence criteria for entry to the euro area, which is assessed in the convergence report, a country must participate in the mechanism without severe tensions for at least two years before it can qualify to adopt the euro.
In ERM II, the exchange rate of a non-euro area Member State is fixed against the euro and is only allowed to fluctuate within set limits. Entry into ERM II is decided upon request of a non-euro area Member State by mutual agreement of all ERM II participants (euro-area Member States, ECB, and the ministers and central bank governors of the non-euro area Member States participating in the mechanism, i.e. currently Denmark).
Bulgaria and Croatia announced in July 2018 and July 2019 respectively, their intention to join ERM II and committed to implement a number of measures aimed at ensuring a smooth participation in ERM II (i.e. prior-commitments) before joining ERM II.
The 2020 Convergence Report is not related to the ERM II entry process and it does not provide an assessment of a Member State’s capacity to enter into ERM II. Nevertheless, the Staff Working Document part of the 2020 Convergence Report contains a box (Box 1.4.) with an explanation of the ERM II entry process.
Does the report reflect the impact of the coronavirus pandemic?
The impact of the coronavirus pandemic on the historical data used to prepare the report has been limited. This is mainly due to the constraints imposed by the report’s cut-off date (23 April), which together with the Treaty-defined calculation methods of the price stability and long-term interest rate criteria (i.e. one year averages have to be used), mean that the corresponding data still largely reflect the situation prior to the pandemic.
European Commission convergence report 2020
Source: European Commission
