Euro convergence criteria

The EU Member States in 1992 by the Treaty of Maastricht each other for the first time to the EU convergence criteria (usually called Maastricht criteria ) committed. These criteria consist of fiscal and monetary default values.

Among other things, the criteria have the goal in the EU and especially in the emerging euro zone to convey an approximation of the performance capabilities of the individual national economies in the EU and thus to ensure a fundamental economic stability and soundness of the EU. Today, the majority of the convergence criteria mentioned in Article 126 and Article 140 TFEU is. Within the framework of the Stability and Growth Pact, some of the criteria remain in force even after joining the monetary union. The rules for this are set out in Article 126 TFEU.

Specifically, these are the following criteria:

• Price stability: The inflation rate must be no more than 1.5 percentage points above that of the three best-performing Member States.

• The government financial position: (Art. 126 TFEU) The government debt must not be more than 60 % of the gross domestic product
• The annual budget deficit must not exceed 3% of gross domestic product

• Exchange rate stability: the state must have participated in at least two years, without devaluing the exchange rate mechanism II. The currency of the country may differ from the Euro exchange rate only in a specific band exchange rate ( usually 15% ); for larger deviations, the country's central bank must intervene.

• Long-term interest rates: the interest rate of long-term government bonds can not be more than 2 percentage points above the average of the three best-performing Member States.

Among economists it is debatable to what extent the convergence criteria are in fact likely to ensure the economic cohesion of the euro countries. How does the theory of optimum currency areas other criteria, such as the intensity of trade between the different States in the view. There is also criticism that the convergence criteria aimed exclusively on stability and provide no common economic policy.

Before the entry into force of the European Monetary Union in early 1999 was controversial, how closely the convergence criteria should be interpreted, as in the definition of the treaty text not all the Member States met the criteria. In particular, the participation of Greece and Italy was initially uncertain. Ultimately, the criteria were, however, met by all Member States that wish to do so. Great Britain and Denmark take an exemption not participate in the monetary union; Sweden decided after a negative referendum on the euro 's introduction, one of the convergence criteria, namely the exchange rate stability, specifically to hurt, not to have to comply with its contractual obligation to euro adoption. From that joined since the 2004 EU enlargement countries meet the convergence criteria previously only Malta, Cyprus, Slovenia, Slovakia and Estonia, all of which have since introduced the euro. The remaining countries are committed to an approach to the convergence criteria.

• 4.1 Bulgaria
• 4.2 Czech Republic
• 4.3 Lithuania
• 4.4 Hungary
• 4.5 Poland
• 4.6 Romania
• 4.7 Sweden

The criteria before accession

The convergence criteria are 1 TFEU generally formulated in article 140, paragraph and further defined in the associated Protocol No. 13. In detail you include the stability of the price level, the public finances, exchange rates with other European countries and the long -term nominal interest rate. This is measured either relative to each performing Member States or certain fixed criteria. The criterion of budgetary stability is divided into two sub-criteria, namely, the annual borrowing, on the other, the total public debt. The more detailed explanation can be found in Protocol No. 12 to the TFEU.

Price level stability

"The achievement of a high degree of price stability, apparent from a rate of inflation which - is as close as Member States that have achieved in the area of price stability, the best result - a maximum of three "

First, convergence criterion, the inflation rate is used, which must not exceed 1.5 percentage points above that of the three best-performing member states of the previous year. The inflation rate is measured by the consumer price index, taking into account that the indices of different Member States are partly based on different baskets of goods.

In 2010, the reference value was 1 %. It was the unweighted arithmetic average of the inflation rates of EU countries Portugal (-0.8 %), Estonia (-0.7 %) and Belgium taken (-0.1 %), which is an average value of -0.5 % respectively. If the addition of 1.5 percentage points results in a reference value of 1.0%. Ireland's price development was seen as an exception. There, the average inflation rate during the observation period (April 2009 - March 2010) at -2.3 %. The reason for this were country-specific factors, such as the exceptionally strong economic downturn called with the associated strong decline in wages. This inflation would thus distort the calculation of the reference value. Even earlier such exemptions have been applied. An exception applies, according to ECB then, if the average is significantly lower than comparable rates in other Member States and the price development was influenced by exceptional factors. [ 1 KB ]

In the graphs 1 and 2, one can clearly see that inflation was especially high in the non-euro countries, particularly in Bulgaria, Latvia, Lithuania and Estonia by 2008. In the wake of the financial crisis, the rates then declined. Also visible is the negative inflation of the euro countries Spain, Portugal and Ireland. These three countries are hit particularly hard by the financial crisis.

Budgetary stability

" The sustainability of the government financial, seen from a government budgetary position without excessive deficit '

The second criterion, the budgetary stability, is based on two sub-criteria, both of which are calculated as a percentage of the national Gross Domestic Product: First, the annual government deficit ( net borrowing ) must not be more than 3% of gross domestic product, on the other hand, government debt must not total more than 60 % of the gross domestic product account - unless there is a clear downward trend can be seen. The limits arising from certain model considerations on the links between economic growth, deficit ratio, interest rates and debt that have been shown theoretically in a general form in 1944 by Evsey D. Domar. In addition, the 3% also corresponded approximately to the average level of the then 12 Member States in 1990. [ KS 1]

The criterion of budgetary stability is considered in the framework of the Stability and Growth Pact, even after the introduction of the euro on. It is formally required not only for the participants of the monetary union, but for all EU Member States. Compliance with the budget or the deficit criterion in the framework of the Stability and Growth Pact is governed by Article 126 TFEU. Thus is reviewed annually by the European Commission, whether Member States comply with the two sub-criteria ( deficit of more than 3%, debt of a maximum of 60 % of GDP). To this end, States shall transmit the data in the form of its financial national accounts to the European Commission. A significant weak point here, however, the leeway caused by the narrow definition of the government sector in the EU system. Public companies that produce for the market, are allocated to the corporate sector. Thus, it is possible that state-guaranteed loans in public companies are listed. At a later time, these loans must be operated by the state but without they are first reflected in the deficit ratio. By refining the statistical rules of this freedom was, however, already restricted. [ KS 2 ]

The Commission will create a report based on the data submitted. Is there a risk of an excessive deficit, it comes to opinion and recommendation by the European Commission and an opinion of the Economic and Financial Committee to make the necessary budgetary adjustment measures (early warning). Due to a new report and the Commission's recommendation and the comment of the Member State finally decides the Council of the European Union by a qualified majority, is how to proceed. [ KS 2 ]

If a deficit exists, followed by another of the Council Recommendation with two deadlines. First, the Member State should take effective measures to eliminate the deficit within four months. Another limit is set for the elimination of the deficit. If there are no special circumstances, this period is usually one year. The further course of the process now depends on the behavior of the state. If no government decisions to improve the deficit adopted, the Council will make its recommendations public. Undertakes the state continues to nothing, it is placed within one month in arrears. If then still no consolidation measures initiated by the State, it will arrive within two months to sanctions by the Council. Is the planned deficit opinion of the Council excessively high, the process is accelerated. Directs the Member State measures, the method rests first. The Council and the European Commission monitor the measures then until the excessive deficit has been corrected. [ KS 2 ]

The penalties are usually made ​​of a non-interest -bearing deposit, which is converted into a fine after a two year anniversary of the deficit. Every single sanction may not exceed a maximum value of GDP of 0.5%. Critics high discretions of the Council on the existence of a deficit and length and course of the proceedings, and that the exceptions to the sanctions are not specified. [ KS 2 ] According to Article 139 TFEU, however, this means of coercion can only Member States the monetary union are applied. In states that have not adopted the euro, the Council can only make recommendations.

From the graphs 3 and 4 it can be seen that many countries have the convergence criteria for budgetary stability not observed. Especially Ireland, Greece, Spain, but also the non -euro countries Latvia and the UK are much higher deficits than the required 3%. The debt ratio ( graphs 5 and 6 ) is significantly exceeded in many countries. In the euro zone, Greece and Italy have values ​​of over 100%.

Exchange rate stability

" Observance of the normal fluctuation margins of the exchange rate mechanism of the European Monetary System, for at least two years, without devaluing against the euro "

Before a State may adopt the euro as its currency, it must be a member of the so-called Exchange Rate Mechanism II (ERM II) have been. ERM II is an exchange rate agreement, which provides a certain amount of bandwidth for exchange rate fluctuations between the currency of a country and the euro. For a given central parity is determined by the exchange rate may differ only by a certain percentage (usually 15%); otherwise, the central bank of the country concerned must intervene. If the central bank is not in a position, a new ( higher or lower ) central parity can be defined.

To fulfill the third convergence criterion, a State must have completed at least two years the criteria of ERM II. Moreover, it must not have devalued from the central rate of the domestic currency against the euro in the same period. A convergence test of the currency be refused under Article 140 TFEU only after two years of participation in the ERM II take place.

The ERM II was introduced with the introduction of the euro in 1999. He took the place of the European Monetary System (EMS), which has previously been used for the calculation of the exchange rate stability. In EWS similar rules within the ERM II, which ( at that time not yet existing ) as a reserve currency is not the euro, but the art currency ECU was used were considered. However, the two-year mandatory participation in the EMS was designed as a less stringent convergence criterion for the founding members of the monetary union for the acceding States.

Devalued [ 2 KB ] - Currently, Latvia and Lithuania, members of ERM II in any of these currencies was the central rate in the examined period ( April 23, 2010 April 24, 2008 ).

Stability of long -term interest rates

"The durability of achieved by the Member State [ ... ] State and of its participation in the exchange rate mechanism, being reflected in the long- term interest-rate "

The fourth criterion is the average nominal long-term interest rate, which may not be by more than 2 percentage points that of the three best performers in the last year. For this purpose, the interest rates of long-term government bonds or comparable securities are used, where national differences are taken into account in the definition of government bonds.

The criterion of long -term interest rates is used indirectly to measure the creditworthiness of the countries concerned. This is to prevent the fulfillment of the other criteria, such as exchange rate stability is achieved by a rogue economic policy unsustainable measures. It is expected that in this case the long -term interest rates for the country concerned would rise because of the higher credit risk, making the fourth criterion would not be met.

In 2010 the same countries were used for the calculation of the reference value, as for the calculation of the reference value for the price level stability. Since no data on long- term interest rates for Estonia, Estonia was left out of the calculation. The results of the best countries in terms of price level stability in Belgium amounted to 3.8% and 4.2% in Portugal. This gives an average result of 4.0 %, which is reached by adding the account of 2 percentage points, a reference value of 6%. In the euro area the average was 3.8%. [ 3 KB ]

Criteria after accession

The convergence criteria, as described above, must be only upon entry into the third stage of European Monetary Union, ie the introduction of the euro, met. To later within the monetary union but to ensure a fiscal stability, the criterion of budgetary stability was also written after accession in the Stability and Growth Pact, especially on German initiative.

The other criteria are, however, after the euro - accession of a country no longer applicable: For the stability of the price level rather than the individual countries but the European Central Bank are responsible within the monetary union, and with the abolition of the national currency, this can of course be no stable exchange rate have the euro. In addition, changes in the level of long -term interest rates are no longer relevant after the euro accession. Although the Greek sovereign debt crisis and the subsequent euro crisis was discussed from 2009, whether countries that can refinance in the capital market is no longer itself, should be excluded from the monetary union. Ultimately, but the proposal was rejected and instead introduced the European stabilization mechanism, which provides financial assistance to the State in question in this case.

Interpretation of the criteria

The question of how strictly the fulfillment of the convergence criteria should be handled, has been controversial since its introduction in the Treaty of Maastricht. While some countries insisted on a tough fiscal and monetary policy line, others stressed above all the political benefits of the monetary union, which should not be jeopardized by too strict membership rules. So a quick symbolic equality of the new and old Member States was after the 2004 EU enlargement desired, and raised the question of whether the monetary union actually a burden would result if some of the small Central and Eastern European countries adopted the euro, without to meet all the criteria exactly. Nevertheless, the European Commission recommended in 2006 to postpone the recording of Lithuania due to a 0.06 percentage points to high inflation.

With the establishment of the Monetary Union convergence criteria, however, were designed partly less strict. Having to 1997 nor individual countries had difficulties with the fulfillment of the criteria considered at the time of euro adoption, most Member States this formally. The total debt was in Italy, Greece and Belgium in Euro introduction to the limit of 60% of GDP.

A report published in November 2004 Eurostat report showed, however, that prior to 2004 Greece notified to the Commission in the years deficit figures were not calculated according to the European rules. After recalculating the Greek deficit figures for the years 1997 to 2000 were above the convergence criterion of 3% of GDP, so that Greece monetary union actually would not be allowed to join. A method of the Commission against Greece in 2007 but was discontinued after Greece had implemented the correct calculation method. However, 2010 was revealed that Greece had also later covered up violations of the Stability and Growth Pact by statistical euphemisms.

Apart from such open fakes some States used just before the introduction of the euro on certain measures to reduce the deficit in the short term without to have a lasting impact in mind. So Italy raised under the then Prime Minister Romano Prodi in 1997 a largely Euro - refundable tax that pushed the budget deficit from 3.6% to just 3.0% in convergence relevant year. France took over the privatized France Telecom 's pension obligations and received in return 37.5 billion francs ( 5.72 billion euros ), whereby the government deficit was reduced once by about 0.6 percentage points. Germany also be manipulative methods accused because the then Finance Minister Theo Waigel of the Deutsche Bundesbank demanded a revaluation of its gold reserves. The profit should be distributed as a capital gain to the federal government and thus lead to a reduction in net borrowing by the will of the minister. There were also additional budgetary structures: For example, the German Federal Government sold shares in Deutsche Telekom and Deutsche Post to the state-owned bank KfW to reduce their debt. In fact, there was the risk of falling prices as well as dividend income, however, the federal government. It was a pure transfer that led to computationally high payments to the state budget.

Even after the introduction of the euro, the criteria of the Stability and Growth Pact in some jurisdictions ( including Germany ) are not always respected. However, the Council of the European Union waived thereon, respectively, to impose sanctions. Due to the financial crisis starting in 2007, the criteria have ever met in mid-2010 only Estonia and Sweden; However, the European Commission announced that it would proceed generous in assessing deficits during this exceptional situation.

Convergence state of the EU Member States without Euro

The following is the current economic state of convergence of the EU Member States is to be listed that are not yet participating in the third stage of European Monetary Union, have therefore not yet adopted the euro as payment. The data refer to the current ECB Convergence Report in April 2010 with the reference period from April 2009 to March 2010.

Bulgaria

The HICP inflation rate during the reference period, at 1.7% above the required reference value of 1%. In the long-term average from 2000 to 2009, the rate was even higher at an average of 6.7 % and in 2008 at 12 %. The catch-up Bulgaria should affect inflation in the coming years upwards, since the per capita GDP and the price level are significantly lower than in the euro area. There is currently not a decision of the Board on an excessive deficit before, but the European Commission is launching a one, since the deficit relative to GDP over the maximum of 3% with a value of 3.7 % by 0.7 percentage points exceeds. The public debt ratio is 14.8%, well below the maximum of 60%. The Bulgarian lev is not participating in ERM II, but is under a currency board pegged to the euro. There was no deviation in the reference period of the course. The long- term interest rates were 6.9% above the reference value, but recovered to March 2010 to 5.8% reference- compatible. In order to create a converged environment in Bulgaria, it requires a designed for price stability economic policy. The state should avoid exceeding the spending targets consistently. [ 4 KB ]

Czech Republic

The twelve- month average rate of HICP inflation was 0.3 %. Czech so was lower than the required reference value of 1%. Looking back over a longer period, the country shows a clear downward trend, with inflation rates between 1-3 %. The negative in the second half of 2009 inflation rate is due to the lower energy prices and returns each year due to rising crude oil prices back to. Whether these low rates of inflation are stable in the coming years due to the catching-up process remains to be seen. A decision of the Board on an excessive deficit exists. The deficit ratio in 2009 was 5.9%, significantly higher than the required 3%. The debt ratio at a moderate 35.4%. The Czech crown did not participate in ERM II and traded under a flexible exchange rates. From mid- 2008 to early 2009, she experienced a sharp depreciation against the euro, but then recovered. The long -term interest rates at 4.7 %, the value has moved closer to the euro area since 2004. If the Czech Republic is to achieve the required by the Stability Pact medium-term budgetary objective, comprehensive consolidation measures should be initiated. [ 5 KB ]

Lithuania

The inflation rate as measured by the HICP rate in Lithuania at 2%. In 2008, this rate stood at 11.1% and then weakened in the wake of the financial crisis in 2009 to 4.2% from. This decrease was primarily the economic overheating ( due to excessive demand growth and labor shortages ). This overheating in 2008 led to a major economic decline, which has been favored by the poor competitive situation and the decline in external demand. But also in Lithuania, inflation will rise again because the per capita GDP and the price level, which is significantly less compared to the euro area, leading to a catching-up process. The deficit is at 8.9 %, well above the required 3%, the debt ratio, however, at 23.3 %, well below the maximum possible 60%. The Lithuanian litas has since 2004 participated in ERM II and is stable at the agreed central rate. The long-term interest rates are at 12.1 %, that is almost twice as high as required. This is due to the financial crisis, the tight market, the downgrading of credit ratings and decreasing liquidity. Lithuania also has to initiate consolidation steps to reach the middle -term objective of the Stability and Growth Pact. [ 6 KB ]

Hungary

The inflation rate in Hungary during the reference period was 4.8 %. Inflation is seen since the end of 2006 against the backdrop of a major downturn. Real GDP even in 2006 was 4%, in 2008, only 0.8%. That has occurred in spite of the economic slump inflation increase is due to the short-term impact of changes in indirect taxes, excise taxes and price increases in the energy sector. There is a decision of the Council, since both the deficit by 4%, and the debt ratio at 78.3 % well above the convergence criteria. The EU Commission expects 2010 even with a further increase. The deficit ratio is higher in Hungary than the public investment in terms of GDP and we want it to remain so in 2010. The Hungarian Forint is not participating in ERM II and traded under a flexible exchange rates. He evaluated from mid 2008 to early 2009, compared to € sharply. One of the EU and the IMF financing package reduced the downward pressure. The long -term interest rates were 8.4 %. The reason for the high value is the reduced risk appetite of investors in the wake of the financial crisis, but also the higher risk premium, the lower market liquidity, as well as the domestic inflation and budgetary problem. For a convergence of the forint and Hungarian consolidation of public finances is urgently needed. [ 7 KB ]

Poland

The inflation rate in Poland is high 3.9%. From 2000 to 2003, a downward trend was evident, but since 2006, the price pressure rises. The overall economic performance of Poland in the last 10 years is reflected in the rates of inflation. The deficit amounted to 7.1 % and the debt ratio is 51 %, so that a decision of the Council is present. Poland does not participate in ERM II, but has flexible exchange rates. 2009 there was a sharp depreciation of the Polish zloty pressure, he recovered but then again. The reason for this is certainly to be seen in the fact that the IMF Poland conceded a flexible credit line, thus reducing the pressure on the exchange rate. The long -term interest rates thus amounted to 6.1% only slightly above the reference value of 6%, they are due to the economic crisis but also higher in Poland. Poland must take sustainable consolidation measures to comply with the Stability and Growth Pact and to have a chance to join the ERM II. [ 8 KB ]

Romania

In Romania, the inflation rate measured by the HICP during the reference period significantly contributes to high 5%. However, this inflation was accompanied by a robust GDP growth. But again exceeded wage growth, productivity growth, which boosted the growth of unit labor costs and thus led to a superheating effect with loss of competitiveness. In Romania, will affect the Euro - countries, inflation in the future of the catching-up process. The deficit was 8.3 % and the debt ratio at a moderate 23.7%. The sustainability of public finances is loud sustainability report exposed to very high risks, which is why further consolidation measures must be taken. The Romanian leu is not participating in ERM II and is subject to flexible mechanisms on the market. The sharp depreciation between mid-2008 and early 2009 led to financing aid from the EU and the IMF, which helped counteract this trend. The long -term interest rates at 9.4 %, well above the required 6%. The reason for this is the risk aversion and the uncertainty of the financial situation of the Romanian state. [ 9 KB ]

Sweden

Sweden is in this view a special status, since a referendum in 2003 ensured that the euro was not introduced, although Sweden has committed to it. The date of introduction, however, was not specified. The Convergence Report shows that the inflation rate in Sweden, although 2.1% is too high, the inflation but over a longer period is stable. This is a sound economic development, due wage moderation and a credible monetary policy. There is no excessive deficit ( 0.5%) and the debt ratio is 42.3 % in the frame. According sustainability report, the sustainability of public finances is exposed only to low risk. The Swedish krona is not participating in ERM II and is subject to flexible exchange rates. Even the crown learned during the financial crisis, a sharp depreciation against the euro, but is now stable again. The long-term interest rates are at 3.3 %, well below the reference criteria. [ 9 KB ]

According to a survey 47% of Sweden for introduction, 45% against and 8% were still uncertain in April 2009, was in July 2010, but again 61% against the euro. When Sweden joined the ERM II, however, is still uncertain candidate.

Criticism of the convergence criteria

Many economists criticize the criteria because they do not provide optimum currency area. Weaker European partners with a strong inflationary psychology are exposed to a common currency stronger competitive pressure. Despite the criterion of inflation convergence, there are between members of the monetary union country-specific differences, so that evolve price and wage levels divergent, resulting in competition shifts.

Countries with high debt ratios are not as hard hit by sanctions in the financial markets. Since the country can no longer make independent monetary policy more, the interest rate premium that is demanded by creditors as compensation for the national inflation and devaluation risk is eliminated. The effects may not apply the individual country but the whole euro area. [ KS 1]

It is a high price and wage flexibility necessary if the compensation mechanism of flexible exchange rates is to be abandoned. Shifts in demand between two countries within a currency area are only without problem when factor movements of the regions will be held, in particular on labor. But if this is not the case, different currencies with exchange rate flexibility would be more efficient. Although Ireland, Italy, Spain, Portugal and Greece were able to reduce exchange rate-related risk premiums and thereby achieve lower interest rates. This advantage is, however, more than offset by the reduction in their price competitiveness, which can be compensated in a monetary union, not by a devaluation. However, it is also to say that exchange rate changes affect heavily on the domestic economy. So many tradable goods, a common currency area is quite beneficial, because there is no more price changes, exchange rate changes disappear and drop the transaction costs.

The current divergence in the returns on long -term interest rates shows that the EMU members from investors are considered to be heterogeneous and are therefore subject to various risks. The differences concern the individual states was exacerbated by the financial crisis, Greece, Spain and Ireland are particularly affected by country-specific real estate crises. But Austria's risk premium increases, as many investments have been made in the ailing Soviet bloc.

The measures provided for in the Maastricht criteria deficit and debt criteria have an inner professional context. According to Article 126 TFEU of government debt must not be more than 60 % of gross domestic product, while the annual budget deficit must not exceed 3 % of gross domestic product. These two limits imply a long-term achievable growth rate of 5 % according to the formula

.

If this equation is solved for the unknown nominal growth rate, resulting in a long-term nominal growth of gross domestic product by 5 %, that is

Such a high nominal growth of gross domestic product is unrealistic for the euro countries. Assuming a growth rate of only 2% at a deficit ratio of 3%, the debt ratio is accordingly when not allowed 150%. As a result, the deficit ratio must be lowered at a growth rate of 2 % to 1.2 % in order to meet both the Maastricht criteria. If the interest on debt is higher than the nominal growth, government budgets have even achieve a primary surplus in order to prevent an increase in the government debt ratio; the interest burden is then that can not be financed from the growth.