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Introducing the Euro: convergence criteria
In order to be able to adopt the euro as single currency, a Member State must fulfil a number of economic and financial conditions also called “convergence criteria”. There are four conditions:
- price stability;
- government finances;
- participation in the exchange rate mechanism of the European Monetary System;
- convergence of interest rates.
Consequently, when a Member State applies to adopt the euro, the Council of the European Union (EU) assesses whether that Member State fulfils each of these four criteria. If it does, the Council adopts a decision authorising the Member State to adopt the euro and gives details of the Member State’s results as regards the convergence criteria.
Member States must demonstrate sustainable price stability. In order to fulfil this criterion, the Council observes the inflation rate of the Member State for the period of one year. It then compares this rate with the inflation rates of the three best performing Member States in terms of price stability. If the rate of the candidate Member State does not exceed that of the best Member States by more than 1.5%, the criterion of price stability is fulfilled.
The candidate Member State must have sustainable government finances. In other words, the Member State’s budgetary position must be without a deficit that is excessive.
Participation in the exchange rate mechanism of the European Monetary System
The European exchange rate mechanism is a mechanism covering rates of exchange between the euro and the currencies of Member States which have not adopted the euro. Its main objective is to stabilise European currency rates by avoiding excessive fluctuations between the value of the euro and those of national currencies.
A Member State applying to introduce the euro must have participated in the European exchange rate mechanism for at least two years. In addition, it must not have experienced serious tensions in its currency rate during those two years.
Convergence of long-term interest rates
Long-term interest rates are calculated on the basis of Member States’ loans – i.e. when they issue bonds or equivalent instruments.
The long-term interest rates of the Member State applying to introduce the euro are then compared to a reference value. This reference value is obtained by calculating the average of the long-term interest rates of the three best performing EU Member States in terms of price stability. In order to fulfil this criterion, the interest rate of the candidate Member State must not exceed the reference value by more than 2 %.
Member States which do not fulfil the convergence criteria are subject to derogation from the third phase of Economic and Monetary Union. At least every two years, the European Commission and the European Central Bank produce convergence reports on these Member States. The reports examine the progress made by the Member States as regards compliance with the convergence criteria.
Denmark and the United Kingdom have opted out of the third phase of Economic and Monetary Union. These two Member States do not intend to adopt the euro for the moment. They are therefore not concerned by the requirements relating to convergence criteria.
The legal foundation for the convergence criteria is Article 140 of the Treaty on the Functioning of the European Union (EU) and they are subject to Protocol No 13 annexed to the founding Treaties of the EU.