Sweden and eurozone: Optional treaty compliance?

Sweden is a unique case among the member state economies in the European Union: competitive and social and with healthy public finances.



According to Wikipedia eight states are obliged to join the eurozone once they fulfil the strict entry criteria, but this does not include Sweden, “which has a de facto opt out”.

The Wikipedia article Eurozone explains this interpretation in the following way:

Sweden gained a de facto opt-out by using a legal loophole. It is required to join the eurozone as soon as it fulfills the convergence criteria, which includes being part of ERM II for two years, while joining ERM II is voluntary. Sweden has so far decided not to join ERM II.

We can all agree that Sweden is factually outside the euro area, but the European Central Bank (ECB) takes a different view on the admissibility.



The European Central Bank’s Convergence Report May 2010 (273 pages) states in the country summary (page 53):

Sweden is a Member State with a derogation and must therefore comply with all adaptation requirements under Article 131 of the Treaty. Furthermore, the ECB notes that, pursuant to the Treaty, Sweden has been under the obligation to adopt national legislation with a view to integration into the Eurosystem since 1 June 1998. As yet no legislative action has been taken by the Swedish authorities to remedy the incompatibilities described in this and previous reports.

When we read the European Commission’s Convergence Report 2010 (Brussels, 12.5.2010 COM(2010) 238 final;30 pages), we notice that legislation in Sweden is not fully compatible with Articles 130 and 131 TFEU.

Sweden does not fulfil the criterion on price stability, nor the exchange rate criterion (pages 28 to 29).

In the light of its assessment on legal compatibility and on the fulfilment of the convergence criteria, the Commission considers that Sweden does not fulfil the conditions for the adoption of the euro.

Rule of law?


The Swedish government position seems to be that possible treaty compliance is subject to the outcome of a referendum in an unforeseeable future.

Normally, if a member state has failed to fulfil an obligation under the treaties, the Commission delivers a reasoned opinion. In case of non-compliance, the Commission or a member state may bring the matter before the Court of Justice of the European Union (Articles 258 and 259 TFEU).

Sweden has been in breach since 1998, but no Court proceedings seem to be imminent.

Are we to conclude that treaty compliance is optional in the European Union, at least de facto?

The rule of law is mentioned as one of the founding values of the European Union (Article 2 TEU), but would it be more to the point to call it a floundering value?




Ralf Grahn

EU: Convergence programme Latvia

Stability programmes for eurozone countries on the one hand, convergence programmes for member states still without the euro; you can start by reading the background remarks on economic policy coordination in the European Union, in the blog post EU: Useful stability and convergence programmes? (3 June 2010).



You can then move on to the EU Council opinion on the convergence programme of Latvia, published in the Official Journal of the European Union (OJEU):



COUNCIL OPINION on the updated convergence programme of Latvia, 2009-2012; OJEU 1.6.2010 C 142/19



Economic background


The updated convergence programme of Latvia covers the period 2009 to 2012. The EU Council began its 26 April 2010 assessment with the following remarks on the economic situation:

The global financial crisis amplified the shock of the reversal of Latvia's domestic lending and house price boom by tightening credit availability and conditions. The concomitant downturn in external markets hit the tradeables sector. Furthermore, the depreciation of the currencies of certain principal trading partners added to the competitiveness losses of previous years.

Latvia's financial markets and banking sector came under significant pressure from October 2008 onwards. This prompted the Latvian authorities to seek international financial assistance, which was provided at the end of 2008 and made conditional on major fiscal consolidation as well as financial system and structural reforms. Subsequently, in view of a much larger than expected deterioration in economic and budgetary conditions in the first half of 2009, the government implemented additional fiscal consolidation measures, partly underpinned by structural reforms. The above mentioned developments led the Council to decide on the existence of an excessive deficit in Latvia on 7 July 2009 and to recommend its correction in accordance with Article 104(7) TEC by 2012. In the second half of 2009, the export-oriented sector of the economy stabilised and started to show some early signs of a recovery. However, the fall of domestic demand remained very severe, due mainly to a sharp deterioration on the labour market and negative credit growth. Nevertheless, the disbursements of international financial assistance, the rigorous implementation of the 2009 budget and the successful adoption of the 2010 budget with further fiscal consolidation measures helped to stabilise confidence and improved market sentiment towards Latvia. The main challenge for economic policy remains economic stabilisation and a return to a well-founded catching-up process. Economic stabilisation depends to a great extent on anchoring long-term expectations for which the implementation of the planned fiscal consolidation path is crucial. Economic stabilisation also hinges directly on taking structurally sound and socially equitable fiscal measures and also on the progress with restructuring the economy towards the tradeable sector. In view of the significant deterioration in external competitiveness during the boom years, there appears to be some further need for domestic price adjustment and productivity improvement. The use of EU structural funds should contribute to the strengthening of the tradeable sector and cushion the recession.

The sharp decline in domestic demand and the opening up of spare capacity helped unwind existing imbalances, reducing inflation and eliminating the external deficit, largely through a collapse in imports. The external account balance, substantially negative in the boom years and financed by capital imports associated with the banking sector, leading to a rapid increase in net external liabilities, reached in 2009 an estimated surplus of over 8 % of GDP, and is set to remain in significant surplus over the programme period.

The financial rescue package was described in the following terms:

The up to EUR 7.5 bilion financing package is jointly funded by the EU, IMF, World Bank, EBRD, Nordic countries, Czech Republic, Estonia and Poland and is provided to Latvia in several instalments up to end-2011, in a front-loaded manner.

Council recommendation

Despite the measures undertaken and endured, arduous times still lie ahead for the government and people of Latvia.

After a detailed discussion, and in the light of the recommendation under Article 104(7) TEC, as well as given the need to ensure sustainable convergence and a smooth participation in ERM II, the EU Council invited Latvia to:

(i) fully implement the 2010 budget as adopted on 1 December 2009; prepare a menu of budgetary options producing savings or additional revenues allowing the adoption of a 2011 budget in accordance with the consolidation needs; adopt a 2012 budget also consistent with the targeted fiscal path, in line with the Council Recommendation under Article 104(7);

(ii) carry out the thorough and forward-looking analysis needed for a wide-ranging social benefits reform, with a view to implement such a reform in the course of 2011 together with further measures on the revenue side;

(iii) improve fiscal governance and transparency, inter alia by adopting the draft fiscal discipline law, by strengthening the binding nature of the medium-term budgetary framework, and by putting in place effective sanction procedures for individuals’ misuses of public funds; strengthen control, coordination and sanction mechanisms aiming at tackling the grey economy;

(iv) foster economic growth by promoting the shift towards the tradeable sector and productivity improvements, including by ensuring that the available EU structural funds reach the real economy, and restructuring state-owned banks in a timely manner, within a medium-term strategy.

Convergence reports


For a wider view and comparison between nine EU member states still outside the euro area, you can study the convergence reports published by the European Central Bank and the European Commission:



European Central Bank: Convergence Report May 2010 (273 pages)



European Commission: Convergence Report 2010 (Prepared in accordance with Article 140(1) of the Treaty); Brussels, 12.5.2010 COM(2010) 238 final (30 pages)



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




Ralf Grahn

EMU convergence programme Czech Republic

On 26 April 2010 the Council examined the updated convergence programme of the Czech Republic, which covers the period 2009 to 2012:



COUNCIL OPINION on the updated convergence programme of the Czech Republic, 2009-2012; published OJEU 28.5.2010 C 138/1.


In the wake of the financial and economic crisis, this is how the Council introduced the state of the Czech public economy:

The global crisis had a strong impact on the Czech economy. Following a three-year period of growth above 6 %, real GDP grew by only 2.5 % in 2008 and declined by 4 % in 2009, according to the updated convergence programme. The economy was mainly affected through the trade channel, but also through confidence effects, a tightening of credit conditions, and shrinking foreign investment inflows. The authorities reacted determinedly to the crisis.

The Czech National Bank reduced its key policy interest rate from 3.75 % in mid-2008 to 1 % currently, and the government designed and implemented a sizeable fiscal stimulus package in line with the European Economic Recovery Plan (EERP), amounting to 2,2 % of GDP in 2009. The Czech koruna depreciated by about one fifth against the euro between mid-July 2008 and mid-February 2009 (it then appreciated by some 14 % by mid-February 2010). In the current immediate post-crisis period, the Czech economy does not suffer from important macroeconomic vulnerabilities. The main challenge is to reduce the high structural government deficit, estimated at around 6 % of GDP in 2009, to a sustainable level. Furthermore, it is also important to ensure a rapid adjustment of the labour market to the downturn and progress towards long-lasting convergence. On 2 December 2009, in view of the planned deficit for 2009, the Council decided on the existence of an excessive deficit and issued recommendations to bring the deficit below the 3 % of GDP threshold by 2013.

After discussing various aspects and assumptions, with a view to sustainable convergence, the Council invited the Czech Republic to:

(i) implement the 2010 budget rigorously and avoid expenditure slippages; in line with the Council Recommendation under Article 126(7), target, in the context of the 2011 and 2012 budgets, a larger budgetary adjustment than the one planned in the programme and specify in more detail the measures that are necessary to correct the excessive deficit by 2013 at the latest;

(ii) take action to improve budgetary procedures and to enforce and monitor more rigorously the medium-term budgetary targets; in particular, avoid upward revisions of expenditure ceilings beyond the revisions permitted by the budgetary rules;

(iii) implement the necessary reforms in order to improve the long-term sustainability of public finances.

The Czech Republic is also invited to add in its next update of the convergence programme more substantial information in the separate chapter on progress made to bring the excessive deficit situation to an end, as requested by the Council in its recommendations under Article 126(7) of 2 December 2009.

Further reading

Since the date of the Council opinion on the Czech Republic, the European Central Bank (ECB) and the European Commission have published their convergence reports, which contain more detail and allow for comparison with other euro area hopefuls.



The ECB Convergence Report 2010 was published 12 May 2010. The 359 page report is available on the ECB website in 21 languages.



The Commission’s Convergence Report 2010 was published 12 May 2010 under the responsibility of the Directorate-General for Economic and Financial Affairs (226 pages).


The 2010 convergence reports examine nine countries, committed by the treaty to adopt the euro: Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Romania and Sweden.




Ralf Grahn

EMU convergence programme Bulgaria

On 26 April 2010 the Council examined the updated convergence programme of Bulgaria, which covers the period 2009 to 2012:




COUNCIL OPINION on the updated convergence programme of Bulgaria, 2009-2012; published OJEU 27.5.2010 C 137/12.


The Council opinion presents the background:

Before the onset of the global economic and financial downturn Bulgaria had witnessed strong real GDP growth underpinned by fast credit expansion and large foreign investment inflows. The robust economic activity, however, was accompanied by increasing macroeconomic imbalances such as the build-up of a very large external deficit and private debt as well as substantial inflationary pressures. The FDI-led investment boom and high wage increases, far exceeding productivity gains, aggravated these imbalances. As the global economic crisis unfolded, economic activity was hit hard, resulting in a contraction of real GDP by 5 % in 2009.

The main goal of the medium-term budgetary strategy is to maintain a balanced general government budget throughout the programme period.

The government gross debt ratio is well below the Treaty reference value throughout the programme period. It is estimated at close to 15 % of GDP in 2009, slightly up from the year before.

As an EU member only from 2007, Bulgaria is not yet a part of the eurozone. The country has a lot to do to catch up with the rest of the union, which requires continued reform efforts.

After a more detailed discussion and given the need for sustainable convergence, the Council reached the following fairly benign conclusions, inviting Bulgaria to:

(i) continue implementing strict fiscal policies and adopt further consolidation measures to achieve the programme target for 2010 with a view to sustaining the on-going adjustment in the external imbalances and safeguarding investor confidence in the economy; in particular, contain public sector wage growth in order to contribute to overall wage moderation and improve competitiveness;

(ii) strengthen the efficiency of public spending by vigorously implementing the planned structural reforms in the area of public administration, healthcare, education, and pensions in order to boost productivity and ensure sustainable convergence within the European Union.

Further reading

Since the date of the Council opinion on Bulgaria, the European Central Bank (ECB) and the European Commission have published their convergence reports, which contain more detail and allow for comparison with other euro area hopefuls.



The ECB Convergence Report 2010 was published 12 May 2010. The 359 page report is available on the ECB website in 21 languages.



The Commission’s Convergence Report 2010, published 12 May 2010 under the responsibility of the Directorate-General for Economic and Financial Affairs (226 pages).




Ralf Grahn

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

Eurozone: UK and Sweden

The United Kingdom seems to be moving so far off from qualifiying for euro adoption that I wonder how Commission President José Manuel Barroso even bothered to discuss the matter in public. The convergence criteria (analysed earlier on this blog) spell out decent government deficits and participation in the exchange rate mechanism without devaluation. If the rule of law continues to be upheld, Britain is beyond the pale for many years to come, even if the political leadership had a change of heart. Having promised a referendum, Labour is in no position to join the eurozone for internal reasons either, even if the political class wanted to jettison the Pound Sterling.

Britain has opted out of options.

***

Sweden is also outside the euro area, but without an opt-out. The Swedish Government did not bother to use the Lisbon Treaty negotiations to get one, but Sweden’s Government acts as if it had no obligation to adopt the euro currency.

Sweden’s updated convergence programme (Uppdatering av Sveriges konvergensprogram, November 2008) was published today:

http://www.regeringen.se/content/1/c6/11/66/99/b55c41d6.pdf

Despite the slide of the Swedish Crown, the tone of the Government is almost defiant (page 9):

“I september 2003 genomfördes en folkomröstning om Sverige skulle införa euron som valuta. Resultatet av folkomröstningen föranledde inga förändringar i penning- och valutapolitiken. Regeringen har ansvaret för övergripande valutapolitiska frågor och beslutar om växelkurssystemet medan Riksbanken ansvarar för tillämpningen av växelkurssystemet. Den nuvarande penning- och valutapolitiska regimen ligger fast. Sveriges erfarenheter av inflationsmål och rörlig växelkurs är mycket goda. En knytning av kronan till ERM2 är inte aktuell.”

In short, no change is in sight. Sweden does not contemplate joining the exchange rate mechanism (ERM II).

As long as the Commission continues to turn a blind eye, Sweden can flout the common rules.

***

There have been some reports that Iceland contemplates adopting the euro, but without EU membership. Iceland would also have to fulfil the Maastricht criteria, in itself a hard task given the present meltdown. But how would Iceland participate in the rudimentary economic governance within the euro group, to say nothing about other policy areas outside the current EEA deal?


Ralf Grahn

EU: Excessive government deficits If

As an interlude, we complement our presentation of legal materials with some suggestions for further reading on economic and monetary union (EMU), including excessive government deficits.

***

Wikipedia


For the general reader, Wikipedia offers a very short introduction ‘Economic and Monetary Union of the European Union’, although the article mainly outlines monetary union (the single currency), not economic policy:

http://en.wikipedia.org/wiki/Economic_and_Monetary_Union_of_the_European_Union


***

Stability and Growth Pact


The Economic and Financial Affairs web pages of the European Commission offer a page ‘Stability and Growth Pact’ with links to relevant documents:

http://ec.europa.eu/economy_finance/other_pages/other_pages12638_en.htm


***

EMU legal and political texts

The joint publication by the Council Secretariat and the Commission ‘Economic and monetary union ─ Legal and political texts’ is called selective, but manages to compile more than enough for more casual readers on its 276 pages. The materials are still fresh, published in June 2007, and they offer “all you need” in one handy chunk, available in print form through OPCE’s EU Bookshop and as a free download at:

http://bookshop.europa.eu/eubookshop/FileCache/PUBPDF/QC7606262ENC/QC7606262ENC_002.pdf

***

Implementation requirements

The Commission’s ‘Specifications on the implementation of the Stability and Growth Pact and Guidelines on the format and content of Stability and Convergence Programmes’ presents a lot of factual information about the reporting and programme criteria:

http://ec.europa.eu/economy_finance/about/activities/sgp/codeofconduct_en.pdf


***

EMU at ten

The European Commission’s publication ‘EMU@10: successes and challenges after 10 years of Economic and Monetary Union’ looks at the history, the shortcomings and the challenges of EMU. The 342 page report proceeds to propose the Commission’s reform agenda. EMU@10 is available at:

http://ec.europa.eu/economy_finance/publications/publication12682_en.pdf

The report was accompanied by a Communication bearing the same name, COM(2008) 238 final:

http://ec.europa.eu/economy_finance/emu10/com2008_238en.pdf

***

Public finances in EMU

The European Commissions 314 page report ‘Public finances in EMU ─ 2008’ offers a wealth of information on the fiscal policies and effects both in the Eurozone (and the EU) as a whole and for each member state. The report shows how robust the public economies of the member states were before the financial sector meltdown:

http://ec.europa.eu/economy_finance/publications/publication12832_en.pdf

***

On the back of the report ‘Public finances in EMU ─ 2008’ the Commission published a Communication ‘The role of quality public finances in the EU governance framework’ COM(2008) 387 final, with suggestions for improvements:

http://ec.europa.eu/economy_finance/publications/publication12836_en.pdf

***

Convergence Report

Ten member states still outside the Eurozone are studied in ‘Convergence Report 2008’ on fulfilment of their obligations to achieve economic and monetary union. The Report consists of the Commission Communication COM(2008) 248 and a Technical Annex (224 pages in all).
These member states ‘with a derogation’ are Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Romania, Slovakia and Sweden.

(Denmark and the United Kingdom have legal arrangements not to adopt the euro, and are not included in the report, whereas Sweden stays outside the Eurozone artificially.)
The Convergence Report 2008, which includes a recap of the convergence criteria, is available at:

http://ec.europa.eu/economy_finance/publications/publication12574_en.pdf

The different language versions of the Convergence Report 2008 can be accessed through the web pages of the European Central Bank, too; here is the English version:

http://www.ecb.eu/pub/pdf/conrep/cr200805en.pdf

***

Stability reports

The majority (15 ─ soon 16 ─ of 27) member states already having adopted the single currency file stability reports. The latest Council opinion is on the updated stability programme of Belgium: Council Opinion of 8 July 2008 on the updated stability programme of Belgium, 2007-2011 (OJ 19.7.2008 C 182/1) offers a picture of the procedures and assessments:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2008:182:0001:0005:EN:PDF


Ralf Grahn