All EU countries are part of the EU's Economic and Monetary Union (EMU), a 3-stage process.
The Treaty on the Functioning of the European Union (Article 140 and an annexed protocol) contains rules on the transition to the third stage of EMU which is when an EU country adopts the euro as its currency. To adopt the euro, a country must meet 4 main criteria (convergence criteria):
- it must not be subject to a Council decision that an excessive budgetary deficit exists;
- it 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;
- it 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;
- it must respect the normal fluctuation margins provided for by the exchange-rate mechanism without severe tensions for at least the last 2 years before the examination.