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IP/00/422

Brussels, 3 May 2000

Commission proposes Greece to become the twelfth member of the euro-zone

The European Commission adopted today its convergence report 2000 in which it concludes that Greece fulfils the necessary conditions to adopt the single currency, the euro. On the basis of this report and the convergence report issued by the European Central Bank (also published today) the Commission is proposing to the Council to abrogate the derogation of Greece as from 1 January 2001. The final decision is expected to be taken by the Ecofin Council after consulting the European Parliament, and following a discussion by the Heads of State or Government in Santa Maria da Feira on 19-20 June. The convergence report 2000 concludes that there should be no change in the status of Sweden as a Member State with a derogation. The convergence process in Denmark and the United Kingdom has not been assessed as according to their opt-out arrangements these countries have not notified their intention to adopt the euro.

The Commission adopted the convergence report 2000 and the proposal for a Council decision relating to Greece on the initiative of Pedro SOLBES, EU Commissioner for economic and monetary affairs.

The convergence report 2000 is adopted two years after the first convergence reports of the Commission and the European Monetary Institute (EMI) on 25 March 1998 and the Council decision of 3 May 1998 on the Member States that would adopt the euro as of 1 January 1999. To qualify for joining the euro zone a Member State's national legislation must be compatible with the Treaty and the Statute of the European System of Central Banks (ESCB) and it must have attained a high degree of sustainable economic convergence. In line with Article 121(1) economic convergence is measured against criteria dealing with price stability, government budgetary position, exchange rate stability and the long-term interest rates.

The convergence report 2000 is governed by the principle of equal treatment which implies that Member States with a derogation are assessed in the same way as the first wave of euro area participants. The introduction of the euro and the replacement of the original exchange rate mechanism (ERM) by the new ERM II at the beginning of 1999 have been taken into account.

Greece

In the 1998 convergence report the Commission assessment was that Greece did not fulfil any of the four convergence criteria. Legislation in Greece was however considered to be compatible with the Treaty and the ESCB Statute.

During the last two years Greece has achieved striking progress towards convergence. In its convergence report 2000 the Commission concludes that Greece has achieved a high degree of sustainable economic convergence. Having regard also to ECB's convergence report the Commission is proposing that Greece adopts the single currency from 1 January 2001. Greece intends to introduce euro notes and coins on 1 January 2002 at the same time as the current 11 members of the euro-zone.

    Inflation

The average inflation rate in Greece during the 12 months to March 2000 was 2.0%, i.e. below the reference value of 2.4%. The inflation rate in Greece has been equal to or below the reference value since December 1999. The improvement in price stability is based on sound foundations. There are however risks associated with the reduction in short-term interest rates and movement of the exchange rate to its conversion rate in the approach to adoption of the euro. In this regard it will be necessary for the Greek government to maintain its stability-oriented strategy, in particular a tight budgetary policy stance and a continuation of wage moderation, in order to prevent a possible resurgence of inflationary pressures in the medium term. Greece fulfils the criterion on price stability.

    Government budgetary situation

The Council decision of 26 September 1994 on the existence of an excessive deficit in Greece was abrogated on 17 December 1999. According to the latest available figures, the government deficit was reduced from 10.2% of GDP in 1995 to 1.6% of GDP in 1999, below the 3% reference value. According to the 1999 update of the Greek convergence programme, budgetary consolidation is expected to reduce the deficit further to 0.2 % of GDP in 2001 and to achieve a surplus of 0.2 % of GDP in 2002. The government debt reached its peak level in 1996 at 111.3% of GDP and has since declined at a steady annual pace to 104.4% of GDP in 1999; the debt ratio is expected to continue declining and to fall below 100% of GDP in 2001. Greece fulfils the criterion on the government budgetary position.

    Exchange rate

The Greek drachma participated in the ERM from March 1998 and in the ERM II since January 1999, a total period which is longer than two years at the time of this examination. The central rate of the Greek drachma was revalued against the euro in January 2000. During the review period the Greek drachma traded above its central rate, reflecting, inter alia, the higher interest rates in Greece and has not experienced severe tensions. Greece fulfils the exchange rate criterion.

    Long-term interest rates

In the year to March 2000 the average long-term interest rate in Greece was 6.4%, below the reference value of 7.2%. The narrowing of interest differential in 1998 and 1999 brought the average rate in Greece down gradually and it fell below the reference value from October 1999 onwards. Greece fulfils the criterion on the convergence of interest rates.

    Independent Central Banks legal convergence

Legislation in Greece is compatible with the Treaty and the ESCB Statute.

On the basis of this report and the convergence report issued by the European Central Bank (also published today) the Commission is proposing to the Council to abrogate the derogation of Greece as from 1 January 2001.

Sweden

In the 1998 convergence report the Commission assessment was that Sweden already fulfilled three of the convergence criteria (on price stability, the government budgetary position and the convergence of interest rates) but that it did not fulfil the exchange rate criterion. Furthermore, legislation in Sweden was considered not compatible with the Treaty and the ESCB Statute.

In its convergence report 2000 the Commission concludes that there should be no change in the status of Sweden as a Member State with a derogation.

    Inflation

Inflation continues to be low and Sweden has been one of the three best-performing Member States since February 1999. The average inflation rate in Sweden during the 12 months to March 2000 was 0.8%, well below the reference value of 2.4%. Sweden continues to fulfil the criterion on price stability.

    Government budgetary position

The Council decision of 10 July 1995 on the existence of an excessive deficit in Sweden was abrogated in 1998. The government finances have improved substantially and a deficit of 11.9% of GDP in 1993 had been turned around to a surplus of 1.9% of GDP in 1998 and 1999. Having peaked at 77.7% of GDP in 1994, government debt ratio has fallen steadily and reached 65.5% of GDP in 1999. Further reductions in the debt-to-GDP ratio are expected in 2000 and beyond. Sweden fulfils the criterion on the government budgetary position.

    Exchange rate stability

The Swedish Krona has never participated in ERM nor ERM II and, over the last two years, has fluctuated against the ERM currencies and the euro. Sweden does not fulfil the exchange rate criterion.

    Long-term interest rates

In the year to March 2000, the average long-term interest rate in Sweden was 5.4%, below the reference value of 7.2%. Sweden continues to fulfil the criterion on convergence of interest rates.

    Legal convergence

Legislation in Sweden was not compatible with the Treaty and the ESCB Statute in 1998. Legislation applicable since 1 January 1999 does not ensure full integration of the Riksbank in the ESCB in that provisions regarding the Riksbank's competence in the monetary field do not recognise the ESCB's competence in this field. Therefore, legislation in Sweden is still not compatible with the Treaty and the ESCB Statute.

The convergence report 2000 will be available on the internet on:

http://ec.europa.eu/economy_finance/document/econeur/conv/conv_rep_2000_en.htm

Performance of Greece and Sweden against the convergence criteria

Inflation

Government budgetary positionExchange

rates

Long-term

interest rates

HICP

(a)

Existence

of

an excessive deficit

Government

Balance

(% of GDP)

(b)

Government

Debt

(% of GDP)

ERM / ERM II

participation

(c)

March

2000

March

2000

1999

1999

Change from

Previous year

March

2000

March

2000

199919981997
Reference

value

2.4 (d) -3.0607.2 (e)
Greece2.0no -1.6104.4-1.0-3.1-2.8yes(f)6.4
Sweden0.8no 1.965.5-6.9-2.6-1.0no5.4

    (a) Percentage change in arithmetic average of the latest 12 monthly harmonized indices of consumer prices (HICP) relative to the arithmetic average of the 12 HICP of the previous period.

    (b) General government net lending (+) / net borrowing (-)

    (c) Average maturity 10 years; average of the last 12 months.

    (d) Definition adopted in this report: simple arithmetic average of the inflation rates of the three best performing Member States in terms of price stability plus 1.5 percentage points.

    (e) Definition adopted in this report: simple arithmetic average of the 12-month average of interest rates of the three best performing Member States in terms of price stability plus 2 percentage points.

    (f) Since March 1998.

    Source: Commission services.


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