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Introducing the Euro: convergence criteria
The convergence criteria are presented in Article 121(1) of the Treaty establishing the European Community (EC Treaty). There are four of them (price stability, government finances, exchange rates and long-term interest rates):
Price stability. The Treaty stipulates: "The achievement of a high degree of price stability … will be apparent from a rate of inflation which is close to that of, at most, the three best-performing Member States in terms of price stability." In practice, the inflation rate of a given Member State must not exceed by more than 1½ percentage points that of the three best-performing Member States in terms of price stability during the year preceding the examination of the situation in that Member State.
Government finances. The Treaty stipulates: "The sustainability of the government financial position … will be apparent from having achieved a government budgetary position without a deficit that is excessive …" In practice, the Commission, when drawing up its annual recommendation to the Council of Finance Ministers, examines compliance with budgetary discipline on the basis of the following two criteria:
- the annual government deficit: the ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3% at the end of the preceding financial year. If this is not the case, the ratio must have declined substantially and continuously and reached a level close to 3% (interpretation in trend terms according to Article 104(2)) or, alternatively, must remain close to 3% while representing only an exceptional and temporary excess;
- government debt: the ratio of gross government debt to GDP must not exceed 60% at the end of the preceding financial year. If this is not the case, the ratio must have sufficiently diminished and must be approaching 60% at a satisfactory pace (interpretation in trend terms according to Article 104(2)).
Exchange Rates. The Treaty stipulates: "the observance of the normal fluctuation margins provided for by the exchange-rate mechanism of the European Monetary System, for at least two years, without devaluing against the currency of any other Member State." The Member State must have participated in the exchange-rate mechanism of the European monetary system without any break during the two years preceding the examination of the situation and without severe tensions. In addition, it must not have devalued its currency (i.e. the bilateral central rate for its currency against any other Member State's currency) on its own initiative during the same period. After transition to stage three of EMU, the European Monetary System was replaced by the new exchange-rate mechanism (ERM II).
Long-term interest rates. The Treaty stipulates: "the durability of convergence achieved by the Member State ... being reflected in the long-term interest-rate levels". In practice, the nominal long-term interest rate must not exceed by more than 2 percentage points that of, at most, the three best-performing Member States in terms of price stability (that is to say, the same Member States as those in the case of the price stability criterion). The period taken into consideration is the year preceding the examination of the situation in the Member State concerned.
Conditions for introducing the euro
Each Member State must meet all of the criteria in order to participate in the third stage of Economic and Monetary Union (EMU). These are specified in the "Protocol on the convergence criteria" referred to in Article 121 of the Treaty establishing the European Community. They reflect the degree of economic convergence which the Member States must attain to be able to introduce the euro.
In accordance with Article 122(2) of the EC Treaty, the Commission and the European Central Bank (ECB) must report to the Council at least once every two years, or at the request of a Member State with a derogation, on progress made by the Member States in fulfilling their obligations regarding the achievement of economic and monetary union. These are the " convergence reports ".