Progress towards convergence in the Member States

Outline of the Community (European Union) legislation about Progress towards convergence in the Member States

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Economic and monetary affairs > Institutional and economic framework of the euro

Progress towards convergence in the Member States

Document or Iniciative

Report from the Commission: Convergence report 2004 [COM(2004) 690 – Not published in the Official Journal].

Summary

This report, dated 20 October 2004, analyses the progress made towards convergence in the ten countries which became Member States of the European Union (EU) on 1 May 2004 (the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia, Slovakia) and Sweden (a Member State since 1995). Progress towards convergence is assessed by reference to:

• compatibility of legislation;
• price stability;
• the government budgetary position;
• exchange rate stability;
• long-term interest rates.

Assessing progress towards convergence

For all of those countries, the Commission finds that, regrettably, the laws governing their national banks are not compatible with Article 109 of the Treaty establishing the European Communities (EC Treaty) or with the Statute of the European System of Central Banks (ESCB) and the European Central Bank (ECB) as regards the integration of their central bank into the ESCB upon adoption of the euro. The situation regarding progress towards convergence in the Member States is as follows:

The Czech Republic. The average rate of inflation remained around 1.8% in the twelve months to August 2004, thereby fulfilling the criterion on price stability. However, the Czech Republic is the subject of a decision on the existence of an excessive deficit (Council Decision of 5 July 2004). With a general government deficit of 12.6% of GDP and government debt at 37.8% of GDP in 2003, the Czech Republic does not fulfil the criterion on the government budgetary position. The average long-term interest rate in the Czech Republic was 4.7%, which fulfils the criterion on the convergence of long-term interest rates. The Czech koruna is not participating in the exchange rate mechanism (ERM II). The Commission concludes that there should be no change in the status of the Czech Republic as a “Member State with a derogation”.

Estonia. With an average inflation rate of 2%, Estonia fulfils the criterion on price stability. Estonia also fulfils the criterion on the government budgetary position (the general government surplus was 3.1% of GDP in 2003, and government debt was 5.3% of GDP) and meets the criterion on the convergence of long-term interest rates. Estonia has been participating in ERM II since 28 June 2004. The Commission concludes that there should be no change in the status of Estonia as a “Member State with a derogation”.

Cyprus. With an average inflation rate of 2.1%, Cyprus fulfils the criterion on price stability. Cyprus is the subject of a decision on the existence of an excessive deficit (Council Decision of 5 July 2004). With a budget deficit of 6.4% of GDP in 2003 and government debt at 70.9% of GDP, Cyprus does not fulfil the criterion on the government budgetary position. However, it fulfils the criterion on the convergence of long-term interest rates (5.2%). The Cyprus pound is not participating in ERM II. The Commission concludes that there should be no change in the status of Cyprus as a “Member State with a derogation”.

Latvia. Latvia has an average inflation rate of 4.9% and hence does not fulfil the criterion on price stability. It fulfils the criterion on the government budgetary position (general government deficit was 1.5% of GDP in 2003; government debt was 14.4% of GDP). The interest rate in the year to August 2004 was 5%. Latvia therefore fulfils the criterion on the convergence of long-term interest rates. The Latvian lats is not participating in ERM II. Latvia does not fulfil the exchange rate criterion. The Commission concludes that there should be no change in the status of Latvia as a “Member State with a derogation”.

Lithuania. Prices are stable, as the rate of inflation remained around -0.2%. The general government deficit was 1.9% of GDP in 2003, and government debt was 21.4% of GDP. Lithuania therefore fulfils the criterion on the government budgetary position. The interest rate was 4.7%, which means that Lithuania fulfils the criterion on the convergence of long-term interest rates. Lithuania has been participating in ERM II since 28 June 2004, but did not fulfil the exchange rate criterion at the time of drafting of this report (ERM II participation has been less than two years). The Commission concludes that there should be no change in the status of Lithuania as a “Member State with a derogation”.

Hungary. The average rate of inflation was 6.5%. Hungary does not fulfil the criterion on price stability. The country is the subject of a decision on the existence of an excessive deficit (Council Decision of 5 July 2004): the general government deficit was 6.2% of GDP in 2003, while government debt was 59.1% of GDP. Hungary does not fulfil the criterion on the government budgetary position. The average long-term interest rate was 8.1% in 2004, which means that Hungary does not fulfil the criterion on the convergence of long-term interest rates. The Hungarian forint is not participating in ERM II and Hungary does not fulfil the exchange rate criterion. The Commission concludes that there should be no change in the status of Hungary as a “Member State with a derogation”.

Malta. The average rate of inflation was 2.6%. Malta does not fulfil the criterion on price stability. The country is the subject of a decision on the existence of an excessive deficit (Council Decision of 5 July 2004): the general government deficit was 9.7% of GDP in 2003, while government debt was 71.1% of GDP. Malta fulfils the criterion on the convergence of long-term interest rates (an average of 4.7% in 2004). The Maltese lira is not participating in ERM II. Malta does not fulfil the exchange rate criterion. The Commission concludes that there should be no change in the status of Malta as a “Member State with a derogation”.

Poland. Poland had an average inflation rate of 2.5% and does not fulfil the criterion on price stability. The country is the subject of a decision on the existence of an excessive deficit (Council Decision of 5 July 2004): the general government deficit was 3.9% of GDP in 2003, while government debt was 45.4% of GDP. The average long-term interest rate was 6.9%, which means that the criterion on the convergence of long-term interest rates has not been met. The Polish zloty is not participating in ERM II. Poland does not fulfil the exchange rate criterion. The Commission concludes that there should be no change in the status of Poland as a “Member State with a derogation”.

Slovenia. With a rate of inflation of around 4.1%, Slovenia does not fulfil the criterion on price stability. The general government deficit was 2% of GDP in 2003, and government debt was 29.4% of GDP. Slovenia therefore fulfils the criterion on the government budgetary position. The interest rate was 5.2%, which means that the criterion on the convergence of long-term interest rates has been met. The country has been participating in ERM II since 28 June 2004, but did not fulfil the exchange rate criterion at the time of drafting of this report (ERM II participation has been less than two years). The Commission concludes that there should be no change in the status of Slovenia as a “Member State with a derogation”.

Slovakia. With a rate of inflation of around 8.4%, Slovakia does not fulfil the criterion on price stability. The country is the subject of a decision on the existence of an excessive deficit (Council Decision of 5 July 2004): the general government deficit was 3.7% of GDP in 2003, while government debt was 42.6% of GDP. Slovakia does not fulfil the criterion on the government budgetary position. The interest rate was 5.1%, so Slovakia fulfils the criterion on the convergence of long-term interest rates. The Slovak koruna is not participating in ERM II and Slovakia does not fulfil the exchange rate criterion. The Commission concludes that that there should be no change in the status of Slovakia as a “Member State with a derogation”.

Sweden. In the 2002 convergence report, the Commission assessment was that Sweden already fulfilled three of the convergence criteria (on price stability, the government budgetary position and the convergence of interest rates). With an average inflation rate of 1.3%, Sweden continues to fulfil the criterion on price stability. It also fulfils the criterion on the government budgetary position (the general government surplus was 0.3% of GDP in 2003 and government debt was 52% of GDP). Sweden fulfils the criterion on the convergence of long-term interest rates (4.7%). The Swedish krona is not participating in ERM II, and Sweden still does not fulfil the exchange rate criterion. Swedish legislation continues not to be fully compatible with Articles 108 and 109 of the Treaty or with the ESCB/ECB Statute as regards the financial independence of Sweden’s central bank and its integration into the ESCB upon adoption of the euro. The Commission concludes that there should be no change in the status of Sweden as a “Member State with a derogation”.

Background

In accordance with Article 122(2) of the Treaty, the Commission and the European Central Bank (ECB) are required to report to the Council at least once every two years, or at the request of a Member State with a derogation, on the progress made by the Member States in fulfilling their obligations for achieving economic and monetary union.

Related Acts

Report from the Commission of 5 December 2006: Convergence report 2006 [COM(2006) 762 – Not published in the Official Journal].

The European Commission’s review of the progress made by Member States not participating in the single currency towards meeting the convergence criteria for the introduction of the euro.

Report from the Commission of 16 May 2006: Convergence report 2006 on Slovenia [COM(2006) 224 – Not published in the Official Journal].

On the basis of the convergence criteria, the European Commission considers that Slovenia has achieved a high degree of sustainable convergence. The report was prepared in response to a request submitted by Slovenia on 2 March 2006. Slovenia will introduce the euro on 1 January 2007, the Council of the European Union having adopted a decision to that effect on 11 July 2006.

Report from the Commission of 16 May 2006: Convergence report 2006 on Lithuania [COM(2006) 223 – Not published in the Official Journal].

In this report, the European Commission concludes that there should be no change in the status of Lithuania as a “Member State with a derogation”. The European Commission is of the opinion that Lithuania has made significant progress towards achieving a high degree of sustainable convergence. Lithuania meets the convergence criteria on public finances, exchange rate stability and long-term interest rates, but does not, as yet, meet the criterion on price stability. The report was prepared in response to a request submitted by Lithuania on 16 March 2006.