Euro convergence criteria


The euro convergence criteria are the criteria which European Union member states are required to meet to enter the third stage of the Economic and Monetary Union and adopt the euro as their currency. The four main criteria, which actually comprise five criteria as the "fiscal criterion" consists of both a "debt criterion" and a "deficit criterion", are based on of the Treaty on the Functioning of the European Union.
Full EMU membership is only open to EU member states. However, the European microstates of Andorra, Monaco, San Marino and the Vatican City, which are not members of the EU, have signed monetary agreements with EU which allow them officially to adopt the euro and issue their own variant of euro coins. These states had all previously used one of the eurozone currencies replaced by the euro, or a currency pegged to one of them. These states are not members of the eurozone and do not get a seat in the European Central Bank or the Eurogroup.
As part of the EU treaty, all of the EU Member States are obliged to adhere to the Stability and Growth Pact, which serves as a framework to ensure price stability and fiscal responsibility, has adopted identical limits for governments budget deficit and debt as the convergence criteria. Due to the fact that several countries did not exercise a sufficient level of fiscal responsibility during the first 10 years of the euro's lifetime, two major SGP reforms were recently introduced. The first reform was the Sixpack which entered into force in December 2011, and it was followed in January 2013 by the even more ambitious Fiscal Compact, which was signed by 25 out of the then-27 EU member states.
Countries are expected to participate in the second version of the European Exchange Rate Mechanism for two years before joining the Euro.

Criteria

The Maastricht Treaty, which was signed in February 1992 and entered into force on 1 November 1993, outlined the 5 convergence criteria EU member states are required to comply with to adopt the new currency the euro. The purpose of setting the criteria was to achieve price stability within the eurozone and ensure it wasn't negatively impacted when new member states accede. The framework of the five criteria was outlined by of the Maastricht Treaty, and the attached and. The original treaty article was later renumbered to become article 121.1 of the Amsterdam Treaty, and later renumbered again to of the Treaty on the Functioning of the European Union. Aside from the renumbering, no significant change have happened to the content of the "convergence criteria article" and its referred to and. The precise definition and method of measuring compliance was subsequently further developed by the EMI in their first three reports published in April 1995, November 1995 and November 1996. The full definition of the five criteria are summarised below.
  1. HICP inflation : Shall not exceed the HICP reference value, which is calculated by the end of the last month with available data as the unweighted arithmetic average of the similar HICP inflation rates in the 3 EU member states with the lowest HICP inflation plus 1.5 percentage points. However, EU member states with a HICP rate significantly below the eurozone average, do not qualify as a benchmark country for the reference value and will be ignored, if it can be established its price developments have been strongly affected by exceptional factors. In example, at the April 2014 assessment: Greece, Bulgaria and Cyprus with HICP values respectively 2.2, 1.8 and 1.4 percentage points below the eurozone average, were all found to have suffered from exceptional factors, and hence concluded to be outliers, causing the reference limit instead to be calculated based on the HICP values from the three states with the 4th to 6th lowest HICP values in EU.
  2. Government budget deficit: The ratio of the annual general government deficit relative to gross domestic product at market prices, must not exceed 3% at the end of the preceding fiscal year and neither for any of the two subsequent years. Deficits being "slightly above the limit" The deficit ratio has declined substantially and continuously before reaching the level close to the 3% limit" or "2) The small deficit ratio excess above the 3% limit has been caused by exceptional circumstances and has a temporary nature ". If a state is found by the Commission to have breached the deficit criteria, they will recommend the Council of the European Union to open up a deficit-breached EDP against the state in accordance with, which only will be abrogated again when the state simultaneously comply with both the deficit and debt criteria.
  3. Government debt-to-GDP ratio: The ratio of gross government debt relative to GDP at market prices, must not exceed 60% at the end of the preceding fiscal year. Or if the debt-to-GDP ratio exceeds the 60% limit, the ratio shall at least be found to have "sufficiently diminished and must be approaching the reference value at a satisfactory pace". This "satisfactory pace" was defined and operationalized by a specific calculation formula, with the entry into force of the new debt reduction benchmark rule in December 2011, requiring the states in breach of the 60% limit to deliver – either for the backward- or forward-looking 3-year period – an annual debt-to-GDP ratio reduction of at least 5% of the part of the benchmark value being in excess of the 60% limit. If both the 60% limit and "debt reduction benchmark rule" is breached, the Commission will finally check if the breach has been caused only by certain special exempted causes – because if this is the case they will then rule an "exempted compliance". If a state is found by the Commission to have breached the debt criteria, they will recommend the Council of the European Union to open up a debt-breached EDP against the state in accordance with, which only will be abrogated again when the state simultaneously comply with both the deficit and debt criteria.
  4. Exchange rate stability: Applicant countries should not have devalued the central rate of their euro pegged currency during the previous two years, and for the same period the currency stability shall be deemed to have been stable without "severe tensions". As a third requirement, participation in the exchange-rate mechanism under the European Monetary System for two consecutive years is expected, though according to the Commission "exchange rate stability during a period of non-participation before entering ERM II can be taken into account." For example, Italy was deemed to have converged with only 15 months as an ERM-member, as measured on the last day in the review period of the convergence report. Meanwhile, the European Commission concluded that for Cyprus, Malta and Latvia, their 18 months of membership in the review period ending on 31 October 2006 was insufficient. As of 2014, all 29 times the subcriteria for ERM-membership length was found complied with by the Commission, these cases had the particular observation in common, that the state had surpassed minimum two full years of ERM-membership either ahead of the "final approval date where their currency exchange rate would be irrevocably fixed by the Council of the European Union" or by the "first possible euro adoption date following the publication of the convergence report"''.
  5. Long-term interest rates : Shall be no more than 2.0 percentage points higher, than the unweighted arithmetic average of the similar 10-year government bond yields in the 3 EU member states with the lowest HICP inflation. If any of the 3 EU member states in concern are suffering from interest rates significantly higher than the "GDP-weighted eurozone average interest rate", and at the same time by the end of the assessment period have no complete funding access to the financial lending markets, then such a country will not qualify as a benchmark country for the reference value; which then only will be calculated upon data from fewer than 3 EU member states. In example, Ireland was found to be an interest rate outlier not qualifying for the reference value calculation in the assessment month March 2012, when it was measured to have a long-term interest rate average being 4.71 percentage points above the eurozone average – while at the same time having no complete access to the financial lending markets. When Ireland was assessed again in April 2013, it was, however, deemed no longer to be an outlier, due to posting a long-term interest rate average only 1.59 percentage points above the eurozone average – while also having regained complete access to the financial lending markets for the last 1.5 month of the assessment period. A final relevant example appeared in April 2014, when Portugal likewise was found not to be an interest rate outlier, due to posting a long-term interest rate average being 2.89 percentage points above the eurozone average – while having regained complete access to the financial lending markets for the last 12 months of the assessment period.
The ECB publishes a Convergence Report at least every two years to check how well the EU members aspiring for euro adoption comply with the criteria. The first full convergence report was published in November 1996, and concluded that only 3 out of 15 EU member states were completely compliant with the criteria at that point in time. As a majority of states were not in compliance, the Council decided to delay the introduction of the euro by two years to 1 January 1999. In March 1998 a more positive second convergence report concluded that 11 out of 12 applying countries were prepared for the electronic introduction of the euro on 1 January 1999, with only Greece failing to qualify by the deadline. Subsequent convergence reports have so far resulted in an additional 8 EU member states complying with all criteria and adopting the euro. The latest convergence report was published in June 2014, and checked for compliance in the reference year from May 2012 – April 2014, where Lithuania managed to fully comply – thus becoming the next 19th eurozone member. As the reference values for HICP inflation and long-term interest rates change on a monthly basis, any member state with a euro derogation has the right to ask the ECB for an updated compliance check, whenever they believe they have met all both economic and legal convergence criteria. For example, Latvia asked for such an extraordinary compliance check in March 2013.
In 2009, the authors of a confidential International Monetary Fund report suggested that in light of the ongoing global financial crisis, the EU Council should consider granting new EU member states which are having difficulty complying with all five convergence criteria the option to "partially adopt" the euro, along the lines of the monetary agreements signed with the European microstates outside the EU. These states would gain the right to adopt the euro and issue a national variant of euro coins, but would not get a seat in ECB or the Eurogroup until they met all the convergence criteria. However, the EU has not made use of this alternative accession process.

Fulfillment of criteria