Chapter News

Reviving Convergence: Making Member States Fit for the Euro Area

Beyond Nominal Convergence

The current criteria for adopting the euro refer to nominal variables relating to the macroeconomic environment – the inflation rate, the long-term interest rate and the exchange rate – and to the budget deficit and debt ratios. However, these criteria do not necessarily reflect developments in the real economy, which can also pose challenges on the road to adopting the euro.

The European debt crisis, multiple euro area accession experiences, academic analyses, as well as evidence from the ground have shown that fulfilling the existing convergence criteria does not necessarily lead to longterm,sustainable economic performance. Other factors also matter. Namely, a number of Member States that joined the euro area had serious problems due to lack of competitiveness, shortcomings in their public administration and weaknesses in their banking sector. A weak macroeconomic environment added to the negative impact.

Therefore, as already emphasised by the European Central Bank and European Commission,3 it is also important to look at Member States in terms of their overall competitiveness and institutional capacity.

Read the full report here.

Compliments of the European Commission