Convergence criteria

Price developments

Treaty provisions

• The first indent of Article 121 (1) of the Treaty requires:
  “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”;
• Article 1 of the Protocol on the convergence criteria referred to in Article 121 of the Treaty:
  “The criterion on price stability referred to in the first indent of Article 121 (1) of this Treaty shall mean that a Member State has a price performance that is sustainable and an average rate of inflation, observed over a period of one year before the examination, that does not exceed by more than 1½ percentage points that of, at most, the three best-performing Member States in terms of price stability. Inflation shall be measured by means of the consumer price index on a comparable basis, taking into account differences in national definitions.”

Application of Treaty provisions

• With regard to “an average rate of inflation, observed over a period of one year before the examination”, the inflation rate is calculated using the increase in the latest available 12-month average of the Harmonised Index of Consumer Prices (HICP) over the previous 12-month average.
• The notion of “at most, the three best-performing Member States in terms of price stability”, which is used for the definition of the reference value, is applied by using the unweighted arithmetic average of the rate of inflation in the three countries with the lowest inflation rates, given that these rates are compatible with price stability.

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Fiscal developments

Treaty provisions

• The second indent of Article 121 (1) of the Treaty requires:
  “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 104 (6)”.
• Article 2 of the Protocol on the convergence criteria referred to in Article 121 of the Treaty stipulates that this criterion
  “shall mean that at the time of the examination the Member State is not the subject of a Council decision under Article 104 (6) of this Treaty that an excessive deficit exists”.

Excessive deficit procedure

Article 104 sets out the excessive deficit procedure. According to Article 104 (2) and (3), the European Commission shall prepare a report if an EU Member State does not fulfil the requirements for fiscal discipline, in particular if:

1. the ratio of the planned or actual government deficit to GDP exceeds a reference value (defined in the Protocol on the excessive deficit procedure as 3% of GDP), unless:
   • either the ratio has declined substantially and continuously and reached a level that comes close to the reference value; or, alternatively,
   • the excess over the reference value is only exceptional and temporary and the ratio remains close to the reference value;
2. the ratio of government debt to GDP exceeds a reference value (defined in the Protocol on the excessive deficit procedure as 60% of GDP), unless the ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace.

Additional provisions

• The report prepared by the European Commission shall take into account whether the government deficit exceeds government investment expenditure and all other relevant factors, including the medium-term economic and budgetary position of the Member State.
• The Commission may also prepare a report if, notwithstanding the fulfilment of the requirements under the criteria, it is of the opinion that there is a risk of an excessive deficit in a Member State. The Economic and Financial Committee shall formulate an opinion on the report of the Commission.
• Finally, in accordance with Article 104 (6), the EU Council, on the basis of a recommendation from the Commission and having considered any observations which the Member State concerned may wish to make, shall, acting by qualified majority, decide, after an overall assessment, whether an excessive deficit exists in a Member State.

Procedural issues and the application of Treaty provisions

For the purpose of examining convergence, the ECB expresses its view on fiscal developments. With regard to sustainability, the ECB examines key indicators of fiscal developments in the relevant period, considers the outlook and challenges for public finances and focuses on the links between deficit and debt developments. back to top

Exchange rate developments

Treaty provisions

• The third indent of Article 121 (1) of the Treaty requires:
  “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”.
• Article 3 of the Protocol on the convergence criteria referred to in Article 121 (1) of the Treaty stipulates that:
  “the criterion on participation in the exchange-rate mechanism of the European Monetary System referred to in the third indent of Article 121 (1) of this Treaty shall mean that a Member State has respected the normal fluctuation margins provided for by the exchange-rate mechanism of the European Monetary System without severe tensions for at least the last two years before the examination. In particular, the Member State shall not have devalued its currency’s bilateral central rate against any other Member State’s currency on its own initiative for the same period.”

Application of Treaty provisions

The Treaty refers to the criterion of participation in the European exchange rate mechanism (ERM until December 1998; superseded by ERM II as of January 1999).

• First, the ECB assesses whether the country has participated in ERM II “for at least the last two years before the examination”, as stated in the Treaty.
• Second, with regard to the definition of “normal fluctuation margins”, the ECB recalls the formal opinion that was put forward by the EMI Council in October 1994 and its statements in the November 1995 report entitled “Progress towards convergence”:
  
  The EMI Council’s opinion of October 1994 stated that “the wider band has helped to achieve a sustainable degree of exchange rate stability in the ERM”, that “the EMI Council considers it advisable to maintain the present arrangements”, and that “member countries should continue to aim at avoiding significant exchange rate fluctuations by gearing their policies to the achievement of price stability and the reduction of fiscal deficits, thereby contributing to the fulfilment of the requirements set out in Article 121 (1) of the Treaty and the relevant Protocol”.
  
  In the November 1995 report entitled “Progress towards convergence” it was recognised by the EMI that “when the Treaty was conceived, the ‘normal fluctuation margins’ were ±2.25% around bilateral central parities, whereas a ±6% band was a derogation from the rule. In August 1993 the decision was taken to widen the fluctuation margins to ±15%, and the interpretation of the criterion, in particular of the concept of ‘normal fluctuation margins’, became less straightforward”. It was then also proposed that account would need to be taken of “the particular evolution of exchange rates in the European Monetary System (EMS) since 1993 in forming an ex post judgement”.
  
  Against this background, in the assessment of exchange rate developments the emphasis is placed on exchange rates being close to the ERM II central rates.
• Third, the issue of “severe tensions” is generally addressed by examining the degree of deviation of exchange rates from the ERM II central rates against the euro. This is done by using such indicators as short-term interest rate differentials vis-à-vis the euro area and their evolution and also by considering the role played by foreign exchange interventions.

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Long-term interest rate developments

Treaty provisions

• The fourth indent of Article 121 (1) of the Treaty requires:
  “the durability of convergence achieved by the Member State and of its participation in the exchange-rate mechanism of the European Monetary System being reflected in the long-term interest-rate levels”.
• Article 4 of the Protocol on the convergence criteria referred to in Article 121 of the Treaty stipulates that:
  “the criterion on the convergence of interest rates referred to in the fourth indent of Article 121 (1) of this Treaty shall mean that, observed over a period of one year before the examination, a Member State has had an average nominal long-term interest rate that does not exceed by more than 2 percentage points that of, at most, the three best performing Member States in terms of price stability. Interest rates shall be measured on the basis of long-term government bonds or comparable securities, taking into account differences in national definitions.”

Application of Treaty provisions

• First, with regard to “an average nominal long-term interest rate” observed over “a period of one year before the examination”, the long-term interest rate has been calculated as an arithmetic average over the latest 12 months for which HICP data were available.
• Second, the notion of “at most, the three best performing Member States in terms of price stability” which is used for the definition of the reference value has been applied by using the unweighted arithmetic average of the long-term interest rates of the three countries with the lowest inflation rates. Interest rates have been measured on the basis of harmonised long-term interest rates, which were developed for the purpose of assessing convergence.

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