Convergence criteria

Price developments

Treaty provisions

• The first indent of Article 140(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 (No 13) on the convergence criteria referred to in Article 140(1) of the Treaty stipulates:
  “The criterion on price stability referred to in the first indent of Article 140(1) of the Treaty on the Functioning of the European Union 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 1 ½ 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 change 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 taking the unweighted arithmetic average of the rate of inflation in the three countries with the lowest inflation rates, unless there are outliers. Price developments in a country can be judged to be an outlier if its inflation rate is significantly lower than those of the other Member States owing to the accumulation of country-specific factors (see the ECB’s 2010 Convergence Report for more details).

Fiscal developments

Treaty provisions

• The second indent of Article 140(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 126(6)”.
• Article 2 of the Protocol (No 13) on the convergence criteria referred to in Article 140(1) 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 126(6) of the said Treaty that an excessive deficit exists”.

Excessive deficit procedure

Article 126 sets out the excessive deficit procedure. According to Article 126(2) and (3), the European Commission prepares 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 must 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 formulates an opinion on the Commission’s report.
• Finally, in accordance with Article 126(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, decides, following an overall assessment and acting by qualified majority, excluding the Member State concerned, 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, as well as the outlook and challenges for public finances, and focuses on the links between deficit and debt developments.

Exchange rate developments

Treaty provisions

• The third indent of Article 140(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 euro”.
• Article 3 of the Protocol (No 13) on the convergence criteria referred to in Article 140(1) of the Treaty stipulates:
  “The criterion on participation in the exchange-rate mechanism of the European Monetary System referred to in the third indent of Article 140(1) of the said 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 the euro on its own initiative for the same period.”

Application of Treaty provisions

The Treaty refers to the criterion of participation in ERM II (which superseded the ERM in 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 Protocol (No 13).
• Second, the examination of exchange rate stability against the euro focuses on the exchange rate being close to the central rate in ERM II, while also taking into account factors that may have led to an appreciation, which is in line with the approach taken in the past. In this respect, the width of the fluctuation band within ERM II does not prejudice the examination of the exchange rate stability criterion.
• Third, the issue of the absence of “severe tensions” is generally addressed by examining the extent to which exchange rates deviate from the central rates against the euro in ERM II. This is done by using indicators such as exchange rate volatility against the euro, as well 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 and international financial assistance programmes in stabilising the currency.

Long-term interest rate developments

Treaty provisions

• The fourth indent of Article 140(1) of the Treaty requires: “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”.
• Article 4 of the Protocol (No 13) on the convergence criteria referred to in Article 140(1) of the Treaty stipulates:
  “The criterion on the convergence of interest rates referred to in the fourth indent of Article 140(1) of the said 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 two 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 is calculated as an arithmetic average over the latest 12-month period for which HICP data are 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, is applied by using the unweighted arithmetic average of the long-term interest rates of the same three Member States used for the calculation of the reference value for the criterion on price stability. Interest rates are measured on the basis of harmonised long-term interest rates, which were developed for the purpose of assessing convergence.