Convergence in the European Union in 1997

1) OBJECTIVE

To determine whether a high degree of sustainable convergence has been achieved, by examining whether each Member State fulfils each of the four criteria laid down in Article 121(1) of the Treaty.

2) ACT

Commission report of 25 March 1998 on progress towards convergence [COM (98) 1999 final - Not published in the Official Journal].

3) SUMMARY

Remarkable progress towards the achievement of a high degree of sustainable convergence has been made in all Member States since the beginning of the second stage of economic and monetary union (EMU). This progress gathered momentum during 1996 and 1997, when efforts to achieve convergence (especially in the budgetary field) were intensified in many Member States.

Compatibility of national legislation

National legislation, including the statutes of national central banks, must be compatible with Articles 108 and 109 of the Treaty and with the Statute of the European System of Central Banks (ESCB) set out in Protocol No 3 annexed to the Treaty. The compatibility requirement relates to the independence of national central banks, their objectives (price stability), their integration into the ESCB and other monetary matters. Member States must ensure the compatibility of their legislation at the latest at the date of establishment of the European Central Bank (ECB).

As of March 1998, the situation in eight Member States (Belgium, Germany, Greece, Ireland, Italy, the Netherlands, Portugal and Finland) can be regarded as compatible with the Treaty requirements.

In a further four Member States compatibility will be ensured provided that current government proposals are enacted (in Spain, France, Luxembourg and Austria).

In the case of Sweden, since the government's proposals with a view to EMU include amendments to the constitution, they cannot be adopted before the end of 1998. Neither do they guarantee full integration of the Riksbank into the ESCB.

Denmark having given notification of its decision not to take part in the third stage of EMU, it will be treated, in accordance with Protocol No 12 attached to the Treaty, as a country with a derogation. As such, it is merely required to ensure the independence of its central bank, something which it has done.

By virtue of its opt-out, the United Kingdom is under no obligation to make its legislation compatible.

Price stability

The reference value for price stability (calculated as the arithmetic average of the inflation rates in the three best performing Member States, namely France, Ireland and Austria, plus 1.5 percentage points) was 2.7%.

In January 1998 fourteen Member States (Belgium, Denmark, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal, Finland, Sweden and the United Kingdom) had average inflation rates below this reference value. In view of the institutional and behavioural changes brought about by the EMU process, there are strong reasons for believing that the current inflation performance of these fourteen Member States is sustainable.

Greece has achieved regular and significant progress in bringing the inflation rate down but, with an average inflation rate of 5.2% in January 1998, it still remains well above the reference value.

Government budgetary position

The assessment of this criterion is directly linked to decisions taken under the excessive deficit procedure.

As of March 1998, five Member States (Denmark, Ireland, Luxembourg, the Netherlands and Finland) are not the subject of a Council decision on the existence of an excessive deficit and so already fulfil this criterion.

On the basis of the results for 1997, the Commission recommends that the Council abrogate the excessive deficit decisions for Belgium, Germany, Spain, France, Italy, Austria, Portugal, Sweden and the United Kingdom.

In all, therefore, the deficits in fourteen Member States in 1997 were either below or equal to the 3% of gross domestic product (GDP) reference value.

While the government debt ratio was below the 60% of GDP reference value in 1997 in only four Member States (France, Luxembourg, Finland and the United Kingdom), almost all the other Member States have succeeded in reversing the earlier upward trend. Only in Germany, where the debt ratio is just above 60% of GDP and the exceptional costs of unification continue to bear heavily, was there a further small rise in the debt ratio in 1997.

Conditions are in place in all Member States for a sustained decline in debt ratios in future years.

Greece has made substantial progress in recent years in reducing the imbalances in its public finances: it has reduced the government deficit from almost 14% of GDP in 1993 to 4.0% in 1997 and is expected to reach 2.2% in 1998; the government debt ratio has been stabilised and a first reduction took place in 1997 when the debt ratio fell by 2.9 percentage points to 108.7% of GDP. It must keep up its budgetary correction efforts if the Commission is to recommend abrogation of the excessive deficit decision for Greece.

Exchange rates

In practical terms, a country fulfils this criterion if its currency has participated in the exchange-rate mechanism (ERM) of the European Monetary System (EMS) for at least two years while remaining within the ±2.25% fluctuation margin around its central rate.

As of March 1998, ten currencies (the Belgian franc, the Danish krone, the German mark, the Spanish peseta, the French franc, the Irish pound, the Luxembourg franc, the Dutch guilder, the Austrian schilling and the Portuguese escudo) comply strictly with this criterion.

The vast majority of participating countries remained clustered close to their ERM central rates in the period under review (March 1996 to February 1998); only the Irish pound remained far above its central rate for an extended period of time. It was revalued by 3% against the other ERM currencies in March 1998.

The Finnish markka joined the ERM in October 1996 and the Italian lira re-entered the mechanism in November 1996, i.e. less than two years ago. However, they did not experience severe tensions in the two years under review.

The Greek drachma, the Swedish krona and the pound sterling did not participate in the ERM during the review period. However, the Greek drachma entered the ERM in March 1998.

Long-term interest rates

Long-term interest rates can be seen as forward-looking indicators which reflect the financial markets' assessment of underlying economic conditions and cannot be directly influenced by national authorities. In January 1998 the reference value (calculated as the arithmetic average of the long-term interest rates of the three best performing Member States in terms of price stability plus two percentage points) worked out at 7.8%.

Fourteen Member States (Belgium, Denmark, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal, Finland, Sweden and the United Kingdom) had average long-term interest rates below the reference value.

Greece has also experienced declining interest rates over recent years, but at 9.8% the level of the long-term interest rate still remains well above the reference value.

Summary table

Do the Member States fulfil the convergence criteria?

1 Abrogation of the Council Decision on the existence of an excessive deficit is recommended by the Commission.

2 The Greek drachma only joined the exchange-rate mechanism in March 1998.

3 Although the Italian lira only re-entered the exchange-rate mechanism in November 1996, it has demonstrated sufficient stability over the last two years.

4 Although the Finnish markka only joined the exchange-rate mechanism in October 1996, it has demonstrated sufficient stability over the last two years.

Last updated: 12.02.2003