Thursday 20 May 2010

EMU progress: Convergence Report 2010

Is the eurozone falling apart, as some anti-integrationists seem to hope, or is the euro advancing towards becoming the common currency for all but the most “remote” parts of the European Union?

Two years after the previous edition, at a time when the financial crisis and the economic downturn have put severe strain on public finances, leading to a crisis in the eurozone, the Convergence Report 2010 was published 12 May 2010. The 359 page report is available on the ECB website in 21 languages.

The Commission has prepared its own Convergence Report 2010, COM(2010) 238 final (226 pages).

Both the ECB and the Commission report are submitted to the Council.

Yesterday, we mentioned the Commission staff working document accompanying COM(2010) 238:

Commission staff working document (Brussels, 12.5.2010; SEC(2010) 598 final; 197 pages)

In this blog post we recall the main treaty provisions and indicate the scope of the Convergence Report(s).

Article 140(1) TFEU

The Convergence Report is based on the first paragraph of Article 140 of the Treaty on the Functioning of the European Union (TFEU); as in the latest consolidated version of the treaties, OJEU 30.3.2010 C 83/108-110:

Article 140 TFEU
(ex Articles 121(1), 122(2), second sentence, and 123(5) TEC)

1. At least once every two years, or at the request of a Member State with a derogation, the Commission and the European Central Bank shall report to the Council on the progress made by the Member States with a derogation in fulfilling their obligations regarding the achievement of economic and monetary union. These reports shall include an examination of the compatibility between the national legislation of each of these Member States, including the statutes of its national central bank, and Articles 130 and 131 and the Statute of the ESCB and of the ECB. The reports shall also examine the achievement of a high degree of sustainable convergence by reference to the fulfilment by each Member State of the following criteria:

— the achievement of a high degree of price stability; this 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,

— the sustainability of the government financial position; this will be apparent from having achieved a government budgetary position without a deficit that is excessive as determined in accordance with Article 126(6),

— 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 euro,

— the durability of convergence achieved by the Member State with a derogation and of its participation in the exchange-rate mechanism being reflected in the long-term interest-rate levels.

The four criteria mentioned in this paragraph and the relevant periods over which they are to be respected are developed further in a Protocol annexed to the Treaties. The reports of the Commission and the European Central Bank shall also take account of the results of the integration of markets, the situation and development of the balances of payments on current account and an examination of the development of unit labour costs and other price indices.

Member states with a derogation

In EU parlance the countries which do not fulfil the conditions for adoption of the euro are called member states with a derogation (Article 139(1) TFEU).

Of the 27 EU member states, a majority or 16 have introduced the euro. Denmark and the United Kingdom have opted out, so no progress is evaluated for these ‘special status’ members.

Thus, the Convergence Report examines nine non-euro countries: Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Romania and Sweden.

All nine countries ─ including Sweden ─ are committed to adopt the euro, which implies that they must strive to fulfil all the convergence criteria.

The ECB describes the focus of the report in the following way:

… whether a high degree of sustainable economic convergence has been achieved, whether the national legislation is compatible with the Treaty and whether the statutory requirements are fulfilled for NCBs to become an integral part of the Eurosystem.

In this report, Estonia is assessed in somewhat more depth than the other countries under review. This is due to the fact that the Estonian authorities have on various occasions announced their intention to adopt the euro as of 1 January 2011.

Next steps

In treaty terms, the next steps are described in the following way in Article 140(2)─(3) TFEU:

2. After consulting the European Parliament and after discussion in the European Council, the Council shall, on a proposal from the Commission, decide which Member States with a derogation fulfil the necessary conditions on the basis of the criteria set out in paragraph 1, and abrogate the derogations of the Member States concerned.

The Council shall act having received a recommendation of a qualified majority of those among its members representing Member States whose currency is the euro. These members shall act within six months of the Council receiving the Commission’s proposal.

The qualified majority of the said members, as referred to in the second subparagraph, shall be defined in accordance with Article 238(3)(a).

3. If it is decided, in accordance with the procedure set out in paragraph 2, to abrogate a derogation, the Council shall, acting with the unanimity of the Member States whose currency is the euro and the Member State concerned, on a proposal from the Commission and after consulting the European Central Bank, irrevocably fix the rate at which the euro shall be substituted for the currency of the Member State concerned, and take the other measures necessary for the introduction of the euro as the single currency in the Member State concerned.

Euro demise or progress towards economic and monetary union (EMU)? See for yourself.

Ralf Grahn

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