The European Commission has today released its 2014 Convergence Report, which assesses eight Member States’ readiness to join the single currency. These countries have made uneven progress on the road to euro adoption, but Lithuania stands out from this group as it now fulfils the convergence criteria.
The Commission is therefore proposing that the EU Council of Ministers decide that Lithuania can adopt the euro on 1 January 2015. The Council will take the final decision on the matter in the second half of July, after EU Heads of State and Government have discussed the subject at the 26-27 June European Council, and after the European Parliament has given its opinion.
Olli Rehn, Commission Vice-President responsible for Economic and Monetary Affairs and the Euro, said: “Lithuania’s readiness to adopt the euro reflects its long-standing support for prudent fiscal policies and economic reforms. That reform momentum, driven in part by Lithuania’s EU accession ten years ago, has led to a striking increase in Lithuanians’ prosperity: the country’s per capita GDP has risen from just 35% of the EU28 average in 1995 to a projected 78% in 2015.”
He added: “The Economic and Monetary Union remains an attractive community to be in. The euro area today has more effective economic policy coordination, a robust financial firewall to safeguard stability and, from this year, a banking union. All of these Lithuania is committed to participating in and to further strengthening. Thanks to the efforts of the past five years, this ship is far better placed to navigate rough seas than it was at the outbreak of the crisis.”
Of the seven other Member States with a so-called ‘derogation’1 (Bulgaria, the Czech Republic, Croatia, Hungary, Poland, Romania and Sweden), none currently fulfil all of the criteria to adopt the euro. Their situation will therefore be reassessed in two years’ time.
Compliance of the eight countries with the convergence criteria
Lithuania’s average inflation rate during the 12 months to April 2014 was 0.6%, well below the reference value of 1.7% for the same month, and is likely to remain below the reference value in the period ahead. The analysis of underlying fundamentals and the fact that the reference value has been met by a wide margin support a positive assessment of the fulfilment of the price stability criterion.
The other countries satisfying this criterion are Bulgaria, the Czech Republic, Croatia, Hungary, Poland and Sweden. Romania does not fulfil the criterion.
Public finances: debt and deficit levels
Lithuania is not the subject of a Council decision on the existence of an excessive deficit (under Article 126(6) of the Treaty). In Lithuania the general government deficit-to-GDP ratio declined from 5.5% in 2011 to 2.1% in 2013 and is projected to remain at 2.1% in 2014 according to the Commission’s Spring 2014 Economic Forecast. The general government debt stood at 39.4% of GDP at end-2013, well below the Maastricht limits.
The other countries satisfying this criterion are Bulgaria, Hungary, Romania and Sweden. The Czech Republic will also fulfil the criterion if the Council decides to abrogate the excessive deficit procedure, as proposed by the Commission. Two Member States (Croatia and Poland) are still subject to an excessive deficit procedure and hence do not fulfil the criterion.
Exchange rate stability
In the Exchange Rate Mechanism II (ERM II), the exchange rate of a non-euro area Member State is fixed against the euro and is only allowed to fluctuate within set limits (standard fluctuation bands being +/-15% around the central rate). Lithuania has been a member of the ERM II since 28 June 2004.
In the two-year reference period, the Lithuanian litas has not been subject to any tensions and there has been no deviation from the ERM II central rate.
No other country currently satisfies this criterion as no other Member State is in ERM II.
Long-term interest rates
Lithuania’s average long-term interest rate over the year to April 2014 was 3.6%, well below the reference value of 6.2%. The spreads vis-à-vis euro area long-term benchmark bonds have declined markedly since 2010 to very low levels, which reflect robust market confidence in Lithuania.
All other countries also satisfy this criterion.
Other factors have also been examined, including balance of payments developments and integration of product, labour and financial markets. Lithuania’s external balance adjusted significantly during the past years, supported also by improvements in its external competitiveness. Lithuania’s economy is well integrated within the EU economy through trade and labour market linkages, and it attracts sizeable levels of foreign direct investment. The integration of the domestic financial sector into the EU financial system is substantial, mainly due to a high level of foreign ownership of the banking system.
Finally, Lithuania’s legislation in the monetary field is fully compatible with EU legislation.
Among the other Member States, only Croatia’s legislation is also fully compatible with EU legislation.
The Commission’s assessment is complemented by the European Central Bank’s (ECB) own convergence report, also published today.
Throughout the crisis, Lithuania has successfully managed a difficult macro-economic adjustment process and returned to economic growth following deep recession in 2009.
All EU Member States, except the UK and Denmark, are committed by the Treaty to adopt the euro once they fulfil the necessary conditions. Eighteen countries already share the single currency. This leaves eight other EU members still outside the euro area (i.e. ‘Member States with a derogation’).
According to the EU Treaty, the Commission and the ECB, every two years or upon request of an EU Member State which would like to join the euro area, examine whether the Member States satisfy the necessary conditions to adopt the single currency.
The conditions for euro adoption consist of four stability-oriented economic criteria regarding the government budgetary position, price stability, exchange rate stability and convergence of long-term interest rates which need to be fulfilled in a sustainable manner. National legislation on monetary affairs must also be in line with the EU Treaty.
According to the Treaty, additional factors also have to be taken into account in the assessment (balance of payments, market integration) as indicators that the integration of a Member State into the euro area will go ahead without problems and to broaden the view on the sustainability of convergence.
The 2014 Convergence Report is accompanied by a Staff Working Document with a more detailed analysis of the fulfilment of the conditions.
The assessment of the eight Member-States can be consulted in the document “Convergence Report 2014”, available online here: http://ec.europa.eu/economy_finance/publications/european_economy/2014/ee4_en.htm
See also MEMO/14/391
ECB Convergence Report: http://www.ecb.europa.eu/pub/pdf/conrep/cr201406en.pdf