Economic convergence conditions for joining the Euro - Convergence Report 2014

SUMMARY OF:

Convergence Report 2014 - COM(2014) 326 final

SUMMARY

The Commission reports to the European Parliament and the Council on progress made by EU countries not yet participating in the euro area (i.e. benefiting from a ‘derogation’) in regard to their fulfilment of the conditions to adopt the single currency. It concludes that Lithuania fulfils these conditions.

WHAT DOES THE 2014 CONVERGENCE REPORT DO?

It assesses the readiness of 8 EU countries - Bulgaria, the Czech Republic, Croatia, Lithuania, Hungary, Poland, Romania and Sweden - to adopt the euro. The Commission's Report was done in parallel with the European Central Bank’s (ECB) Convergence Report, as part of the regular 2-yearly assessment cycle.

All EU countries, except the UK and Denmark, have committed themselves by the Treaty to adopt the euro once they fulfil the necessary conditions. 18 EU countries already belonged to the euro area at the time of reporting. This left 8 EU countries as subject for assessment.

Using the convergence criteria, the Report examines the degree to which these 8 countries have achieved a high degree of sustainable convergence. These criteria relate to:

—	price stability*

—	the state of public finances*

—	exchange rate stability*

—	convergence of long-term interest rates*.

In the course of the evaluation, additional factors (e.g. balance of payments and integration of markets) are also taken into account. These determine whether convergence of a given country is sustainable and its euro area membership would be smooth.

The report also assesses the degree to which legislation on monetary matters in these EU countries is in accordance with the provisions of the EU Treaties on the Economic and Monetary Union.

KEY POINTS

The 2014 Convergence Report reaches the following conclusions:

—

Lithuania fulfils all conditions for adopting the euro. Its economy has reached a high degree of sustainable convergence with that of the euro area and its legislation in the monetary field is fully compatible with EU legislation. For this reason, the Commission proposes that the EU Council take a decision whereby Lithuania adopts the euro on 1 January 2015.

—	The other 7 EU countries, namely Bulgaria, the Czech Republic, Croatia, Hungary, Poland, Romania and Sweden do not meet all the criteria for the adoption of the euro. Their cases will be reviewed in 2 years’ time.

Compliance of 8 countries with the convergence criteria

—

Inflation: Lithuania's average inflation rate was 0.6 % during the review period of 12 months (ending in April 2014), well below the reference value, set at 1.7 % and is projected to remain so in the months ahead. All countries examined, with the exception of Romania, meet the price stability criterion.

—

Public finances: Lithuania is not the subject of an excessive deficit procedure (EDP). Bulgaria, Hungary, Romania and Sweden also meet this criterion. The Czech Republic is on track to meet it if, as proposed by the Commission, the Council decides to end the EDP against it. Croatia and Poland are still subject to EDPs and therefore do not meet this criterion.

—

Exchange rate stability: only Lithuania participates in the European exchange rate mechanism (ERM II). Over the reference period of 2 years, the litas (Lithuania's currency) did not experience any tension or deviate from the ERM II central rate. None of the other countries currently meet this criterion, since they do not participate in ERM II.

—	Long-term interest rates: during the 1-year period ending in April 2014, the long-term interest rate in Lithuania stood at 3.6 %, which is well below the reference value of 6.2 %. The other countries also met this criterion.

It should be noted that since the Convergence Report was adopted, Lithuania became a member of the euro area on 1 January 2015, bringing to 19 the number of participating countries.

BACKGROUND

According to Article 140 (1) of the Treaty on the Functioning of the European Union (TFEU), convergence reports are issued by the European Commission and the European Central Bank every 2 years, or more often if a country wishing to join the euro so requests. These reports form the basis for the decision whether a country may join the euro.

KEY TERMS

* Price stability: the country must show a sustainable degree of price stability and an average inflation rate, observed over a period of 1 year before the examination, which does not exceed by more than 1.5 percentage points that of the 3 best performing EU countries in terms of price stability.

* State of public finances: the country must not be the subject of a Council decision that an excessive budgetary deficit exists.

* Exchange rate stability: the country must respect the normal fluctuation margins provided for by the exchange-rate mechanism without severe tensions for at least 2 years before the examination.

* Convergence of long-term interest rates: the country must have a long-term nominal interest rate which does not exceed by more than 2 percentage points that of the 3 best performing EU countries in terms of price stability.

ACT

Report from the Commission to the European Parliament and the Council: Convergence Report 2014 (prepared in accordance with Article 140(1) of the Treaty on the Functioning of the European Union) (COM(2014) 326 final of 4 June 2014)

Council Decision 2014/509/EU of 23 July 2014 on the adoption by Lithuania of the euro on 1 January 2015 (OJ L 228, 31.7.2014, pp. 29-32)

Council Regulation (EU) No 827/2014 of 23 July 2014 amending Regulation (EC) No 974/98 as regards the introduction of the euro in Lithuania (OJ L 228, 31.7.2014, pp. 3-4)

Council Regulation (EU) No 851/2014 of 23 July 2014 amending Regulation (EC) No 2866/98 as regards the conversion rate to the euro for Lithuania (OJ L 233, 6.8.2014, p. 21)

last update 06.10.2015