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Background information on the convergence reports on Malta and Cyprus

European Commission - MEMO/07/193   16/05/2007

Other available languages: none

MEMO/07/193
Brussels, 16 May 2007

Background information on the convergence reports on Malta and Cyprus

What are Convergence Reports?

The Convergence Reports examine whether Malta and Cyprus satisfy the conditions for adopting the single currency, namely:

  • the economic criteria (price stability, sound public finances, exchange rate stability and convergence in long-term interest rates)
  • compatibility of national legislation with Economic and Monetary Union rules (independence of the national bank)

Article 122(2) of the European Union Treaty requires the Commission to assess the fulfilment of the conditions for the adoption of the euro by Member States with a derogation[1] at least every two years or at the request of a Member State.

The Commission last assessed the convergence progress of all countries concerned in December 2006[2]. The next general report will be prepared in 2008.

What are the Maastricht criteria?

The Maastricht criteria aim at ensuring that a Member State has achieved a high degree of economic convergence before joining the euro area. They cover price stability, public finances, exchange rate stability and long-term interest rates. This economic convergence is essential for a smooth functioning of the European Monetary Union (EMU). The Maastricht criteria are named after the Dutch town where the revision of the European Union Treaty comprising the Economic and Monetary Union was signed in 1992.

Is this a final decision for Malta and Cyprus's entry in the euro area?

On the basis of the economic assessment of the Reports, the Commission is formally proposing to the Council that both countries adopt the euro on 1 January 2008. The formal decision is expected to be adopted by EU finance ministers on 10 July.

What are the next steps?

The Convergence Reports are first discussed by finance ministers, at their next meeting on June 4-5, and then by Heads of State and Governments at their Summit on 21 to 22 June. The formal decision is taken by EU finance ministers on 10 July. At the same meeting, ministers will also decide the rate at which the Cyprus pound and the Maltese lira will be converted into the euro.

Who decides the conversion rate – and how?

The Commission plans to propose a conversion rate for the Cypriot pound and the Maltese Lira in June. The formal decision would be taken on 10 July, by the finance ministers of the thirteen countries of the euro zone and the Member State concerned. The decision is taken by unanimity vote, meaning that all ministers and Malta/Cyprus have to agree to the conversion rate to be adopted.

Once the Council takes the formal decision, what must still be done until €-day?

Both countries must careful prepare the changeover to the euro by implementing the national changeover plan, which provides in great detail when the euro cash is shipped to commercial banks, retailers and even consumers in the form of euro kits that they can procure themselves in December to familiarise themselves with the single currency. Importantly, they must also carefully put in place campaigns for safeguarding price stability during the changeover period and to try and prevent price abuses.

What happens if and when Cyprus is reunited?

In case a reunification occurs after the Republic of Cyprus has adopted the euro, the areas currently not under the effective control of the government of the Republic would automatically shift to the euro as part of a united, single, state of Cyprus. Cyprus would simply expand its jurisdiction or territory, together with its legal system and its international obligations, both of which include the Community acquis. The adaptation of the legal framework and the practical aspects of the changeover will have to be worked out as part of the reunification process.

Which countries are likely to adopt the euro next?

Euro adoption is dependent on the respect of the economic and legal criteria spelt out in the Treaty. The Commission does not endorse national target dates for euro adoption or pronounce itself on their credibility.

That being said, Slovakia, whose currency joined ERM II in November 2005, aims at adopting the euro in 2009. The Baltic countries have had to revise their initial euro adoption targets in view of high inflation, in a context of strong growth and overheating pressures. Although new dates have been mentioned, none of them has yet formally announced a new target date. The Czech Republic, Poland and Hungary are giving themselves more time to move towards sustainable convergence. They are forecast to maintain budget deficits above 3% of GDP at least until 2008, according to the Commission's spring forecasts, and they are not yet participating in ERM II. Romania and Bulgaria joined the EU only in 2007. The first regular assessment of convergence in these two countries will be undertaken in 2008.

What is the ERMII?

The ERM II is a mechanism for the currencies of EU countries which have not yet adopted the euro. It is based on stable but adjustable central rates to the euro, with standard fluctuation bands of +/-15% around the central rate. Exchange rate policy co-operation may be further strengthened, as is presently the case with Denmark, which has an agreed fluctuation band of +/- 2.25%.

Which countries are currently part of ERM II?

Estonia, Lithuania joined ERM II on 28 June 2004. Cyprus, Malta and Latvia joined on 2 May 2005 and Slovakia on 28 November 2005. Together with Denmark, there are presently seven participants in ERM II.

Does the euro increase prices?

Before the euro, inflation had never been so low in so many countries and for such a long period of time. The changeover process in 2002 and more recently, this year, when Slovenia became member of the euro area is estimated to have increased prices by an additional 0.1 to 0.3 percentage points. So if the average price rise was € 2.30 for a € 100 basket of purchases, then no more than thirty euro cents of this increase was due to the euro.

When the Maastricht Treaty was politically approved by the Heads of State or Government at the European Council in Maastricht in 1991, the average inflation rate in the euro area was around 4%. Since the start of the third stage of EMU on 1 January 1999, annual inflation in the euro area – as measured by the harmonised index of consumer prices (HICP) – averaged 2.2%.


[1] The 10 countries that became EU members in May 2004 were given a derogation from euro area membership since they were not fulfilling the necessary conditions. Rumania and Bulgaria, which joined the EU in January 2007, also have a derogation.

[2] See 2006 Convergence Report on:
http://ec.europa.eu/economy_finance/publications/convergence/report2006_en.htm


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