Questions and answers on the European Commission’s Convergence Report 2022

(Source: European Commission)

What is the Convergence Report 2022?

The European Commission’s Convergence Report 2022 provides an assessment of the progress non-euro area Member States have made towards adopting the euro. It forms the basis for the Council of the EU decision on whether a Member State fulfils the conditions for joining the euro area.

The Convergence Report of the European Commission is separate to, but published in parallel with, the Convergence Report of the ECB.

Convergence reports are issued every two years, or when there is a specific request from a Member State to assess its readiness to join the euro area, e.g. Latvia in 2013.

All Member States, except Denmark, have legally committed to join the euro area. Denmark, which negotiated an opt-out arrangement in the Maastricht Treaty, is therefore not covered by the Report.

What are the convergence criteria?

Member States adopting the euro are required to have achieved a high level of sustainable economic convergence, which is examined in the Convergence Report by reference to the convergence criteria. These criteria (sometimes referred to as the ‘Maastricht criteria’) are set out in Art. 140(1) TFEU.

Sustainability is a key aspect of the assessment of the Maastricht criteria, which means that the progress made with convergence must be grounded on structural elements that guarantee its durability, rather than on temporary factors.

Illustrated in a simplified way, the criteria are as follows:

What is measured How it is measured Convergence criteria
Price stability  

Harmonised consumer price inflation

A price performance that is sustainable and average inflation over one year before the examination not more than 1.5 percentage points above the rate of the three best-performing EU countries
Sound public finances Government deficit and debt Not under excessive deficit procedure at the time of examination
Exchange rate stability Exchange rate developments in ERM II Participation in the Exchange Rate Mechanism (ERM II) for two years without severe tensions
Durability of convergence Long-term interest rate Not more than two percentage points above the rate of the three best-performing EU countries in terms of price stability over one year before the examination

The Treaty also calls for an examination of other factors relevant to economic integration and convergence. These additional factors include the integration of markets and the development of the balance of payments. The assessment of additional factors is seen as an important indication of whether the integration of a Member State into the euro area would proceed smoothly.

What is the process for adopting the euro once the Member State meets all the necessary criteria?

Based on the Convergence Report 2022, the Commission submits a proposal to the ECOFIN Council which – having consulted the European Parliament, and after discussion in the Eurogroup and among the Heads of State or Government – decides whether the country fulfils the necessary conditions and may adopt the euro.

If the decision is favourable, the Economic and Financial Affairs (ECOFIN) Council takes the necessary legal steps and – based on a Commission proposal, having consulted the ECB – adopts the conversion rate at which the national currency will be replaced by the euro, which thereby becomes irrevocably fixed.

Are all non-euro area Member States obliged to join the euro?

In principle, all Member States that do not have an opt-out clause (i.e. Denmark) have legally committed to adopt the euro once they fulfil the necessary conditions. However, it is up to individual countries to calibrate their path towards the euro and no timetable is prescribed.

The Member States that joined the EU in 2004, 2007 and 2013, after the euro was launched, did not meet the conditions for entry to the euro area at the time of their accession. Therefore, their Treaties of Accession allow them time to make the necessary adjustments.

What are the main findings of the Convergence Report?

Bulgaria

In the light of its assessment on legal compatibility and on the fulfilment of the convergence criteria, and taking into account the additional factors relevant for economic integration and convergence, including balance of payments developments and integration of product, labour and financial markets, the Commission considers that Bulgaria does not fulfil the conditions for the adoption of the euro. In particular:

  • Legislation in Bulgaria is not fully compatible with the compliance duty under Article 131 TFEU.
  • Bulgaria does not fulfil the criterion on price stability.
  • Bulgaria fulfils the criterion on public finances.
  • Bulgaria fulfils the exchange rate criterion.
  • Bulgaria fulfils the criterion on the convergence of long-term interest rates.

Czechia

In light of its assessment on legal compatibility and on the fulfilment of the convergence criteria, and taking into account the additional relevant factors, the Commission considers that Czechia does not fulfil the conditions for the adoption of the euro. In particular:

  • Legislation in Czechia is not fully compatible with the compliance duty under Article 131 TFEU.
  • Czechia does not fulfil the criterion on price stability.
  • Czechia fulfils the criterion on public finances.
  • Czechia does not fulfil the exchange rate criterion.
  • Czechia fulfils the criterion on the convergence of long-term interest rates.

Croatia

In light of its assessment on legal compatibility and on the fulfilment of the convergence criteria, and taking into account the additional relevant factors, the Commission considers that Croatia fulfils the conditions for the adoption of the euro.

Hungary

In light of its assessment on legal compatibility and on the fulfilment of the convergence criteria, and taking into account the additional relevant factors, the Commission considers that Hungary does not fulfil the conditions for the adoption of the euro. In particular:

  • Legislation in Hungary is not fully compatible with the compliance duty under Article 131 TFEU.
  • Hungary does not fulfil the criterion on price stability.
  • Hungary fulfils the criterion on public finances.
  • Hungary does not fulfil the exchange rate criterion.
  • Hungary does not fulfil the criterion on the convergence of long-term interest rates.

Poland

In light of its assessment on legal compatibility and on the fulfilment of the convergence criteria, and taking into account the additional relevant factors, the Commission considers that Poland does not fulfil the conditions for the adoption of the euro. In particular:

  • Legislation in Poland is not fully compatible with the compliance duty under Article 131 TFEU.
  • Poland does not fulfil the criterion on price stability.
  • Poland fulfils the criterion on public finances.
  • Poland does not fulfil the exchange rate criterion.
  • Poland does not fulfil the criterion on the convergence of long-term interest rates.

Romania

In light of its assessment on legal compatibility and on the fulfilment of the convergence criteria, and taking into account the additional relevant factors, the Commission considers that Romania does not fulfil the conditions for the adoption of the euro. In particular:

  • Legislation in Romania is not fully compatible with the compliance duty under Article 131 TFEU.
  • Romania does not fulfil the criterion on price stability.
  • Romania does not fulfil the criterion on public finances.
  • Romania does not fulfil the exchange rate criterion.
  • Romania does not fulfil the criterion on the convergence of long-term interest rates.

Sweden

In the light of its assessment on legal compatibility and on the fulfilment of the convergence criteria, and taking into account the additional relevant factors, the Commission considers that Sweden does not fulfil the conditions for the adoption of the euro. In particular:

  • Legislation in Sweden is not fully compatible with the compliance duty under Article 131 TFEU.
  • Sweden fulfils the criterion on price stability.
  • Sweden fulfils the criterion on public finances.
  • Sweden does not fulfil the exchange rate criterion.
  • Sweden fulfils the criterion on the convergence of long-term interest rates.

What are the next steps for Croatia to join the euro?

Croatia fulfils the four nominal convergence criteria and its legislation is fully compatible with the requirements of the Treaty and the Statute of the European System of Central Banks/ECB. In the light of this assessment, and taking into account the additional factors relevant for economic integration and convergence, the Commission considers that Croatia fulfils the conditions for the adoption of the euro. It has therefore also adopted proposals for a Council Decision and a Council Regulation on euro introduction.

The Council is expected to make the final decisions on Croatia’s euro adoption in the first half of July, after discussion in the Eurogroup and in the European Council, and after the European Parliament and the ECB have given their opinions.

Croatia needs then to continue the practical preparations that will allow a smooth changeover to the euro and the euro to be concretely used in Croatia. The Commission’s services are in contact with the stakeholders from the public and private sector involved in such practical preparations and stand ready to provide the Croatian authorities with technical assistance if needed.

Does the Report reflect the impact of Russia’s unprovoked invasion of Ukraine?

The impact of the Russian war of aggression against Ukraine on the historical data used in the 2022 Convergence Report has been limited. This is mainly due to the constraints imposed by its cut-off date (18 May), which together with the Treaty-defined calculation methods of the price stability and long-term interest rate criteria, mean that the corresponding data still largely reflect the situation prior to the invasion.

How does the Convergence Report relate to the process to enter ERM II?

The Exchange Rate Mechanism (ERM II) was set up on 1 January 1999 as a successor to the original ERM to ensure that exchange rate fluctuations between the euro and other EU currencies do not disrupt economic stability within the single market, and to help non-euro area Member States prepare themselves for participation in the euro area. The convergence criterion on exchange rate stability requires participation in ERM II.

Participation in ERM II is voluntary although, as one of the convergence criteria for entry to the euro area, which is assessed in the Convergence Report, a country must participate in the mechanism without severe tensions for at least two years before it can qualify to adopt the euro.

In ERM II, the exchange rate of a non-euro area Member State is fixed against the euro and is only allowed to fluctuate within set limits. Entry into ERM II is decided upon request of a non-euro area Member State by mutual agreement of all ERM II participants (euro-area Member States, ECB, and the ministers and central bank governors of the non-euro area Member States participating in the mechanism, i.e. currently Denmark).

Bulgaria and Croatia announced in July 2018 and July 2019 respectively, their intention to join ERM II and committed to implement a number of measures aimed at ensuring a smooth participation in ERM II (i.e. the so-called prior-commitments) before joining ERM II. The two countries joined ERM II in July 2020 after having fulfilled their prior-commitments. They also committed to a range of additional measures (i.e. the so-called post-entry ERM II commitments) aimed at preserving economic and financial stability and achieving a high degree of sustainable economic convergence. By 10 July 2022, both countries will have been in ERM II for two years.

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