Convergence criteria
Encyclopedia
The euro convergence criteria (also known as the Maastricht criteria) are the criteria for European Union
member states to enter the third stage of European Economic and Monetary Union
(EMU) and adopt the euro
as their currency. The four main criteria are based on Article 121(1) of the European Community Treaty.
In 2009 the International Monetary Fund
floated a suggestion that countries should be allowed to "partially adopt" the euro - adopting the currency but not qualifying for a seat on the European Central Bank
(ECB). Monaco, San Marino and the Vatican City State are in a similar situation: they have adopted the euro and mint their own coins, but they do not have ECB seats.
For eurozone members, there is the Stability and Growth Pact
which has similar requirements for budget deficit and debt. However some eurozone countries have without action from the EU severely violated these criteria (e.g. Greece 10.5 % deficit in 2010), which has resulted in european sovereign debt crisis.
No more than 1.5 percentage points higher than the average of the three best performing member states of the EU.
2. Government finance:
3. Exchange rate:
Applicant countries should have joined the exchange-rate mechanism
(ERM II) under the European Monetary System
(EMS) for two consecutive years and should not have devalued its currency during the period.
4. Long-term interest rates:
The nominal long-term interest rate must not be more than 2 percentage points higher than in the three lowest inflation member states.
The purpose of setting the criteria is to maintain the price stability within the Eurozone even with the inclusion of new member states.
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
member states to enter the third stage of European Economic and Monetary Union
Economic and Monetary Union of the European Union
The Economic and Monetary Union is an umbrella term for the group of policies aimed at converging the economies of members of the European Union in three stages so as to allow them to adopt a single currency, the euro. As such, it is largely synonymous with the eurozone.All member states of the...
(EMU) and adopt the euro
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
as their currency. The four main criteria are based on Article 121(1) of the European Community Treaty.
In 2009 the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
floated a suggestion that countries should be allowed to "partially adopt" the euro - adopting the currency but not qualifying for a seat on the European Central Bank
European Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...
(ECB). Monaco, San Marino and the Vatican City State are in a similar situation: they have adopted the euro and mint their own coins, but they do not have ECB seats.
For eurozone members, there is the Stability and Growth Pact
Stability and Growth Pact
The Stability and Growth Pact is an agreement among the 27 Member states of the European Union that take part in the Eurozone, to facilitate and maintain the stability of the Economic and Monetary Union...
which has similar requirements for budget deficit and debt. However some eurozone countries have without action from the EU severely violated these criteria (e.g. Greece 10.5 % deficit in 2010), which has resulted in european sovereign debt crisis.
Criteria
1. Inflation rates:No more than 1.5 percentage points higher than the average of the three best performing member states of the EU.
2. Government finance:
- Annual government deficit:
- The ratio of the annual government deficit to gross domestic productGross domestic productGross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
(GDP) must not exceed 3% at the end of the preceding fiscal year. If not it is at least required to reach a level close to 3%. Only exceptional and temporary excesses would be granted for exceptional cases.
- Government debt:
- The ratio of gross government debtGovernment debtGovernment debt is money owed by a central government. In the US, "government debt" may also refer to the debt of a municipal or local government...
to GDP must not exceed 60% at the end of the preceding fiscal year. Even if the target cannot be achieved due to the specific conditions, the ratio must have sufficiently diminished and must be approaching the reference value at a satisfactory pace.
3. Exchange rate:
Applicant countries should have joined the exchange-rate mechanism
European Exchange Rate Mechanism
The European Exchange Rate Mechanism, ERM, was a system introduced by the European Community in March 1979, as part of the European Monetary System , to reduce exchange rate variability and achieve monetary stability in Europe, in preparation for Economic and Monetary Union and the introduction of...
(ERM II) under the European Monetary System
European Monetary System
There are three stages of monetary cooperation in the European Union.-Background:European currency exchange rate stability has been one of the most important objectives of European policy makers at least since the Second World War....
(EMS) for two consecutive years and should not have devalued its currency during the period.
4. Long-term interest rates:
The nominal long-term interest rate must not be more than 2 percentage points higher than in the three lowest inflation member states.
The purpose of setting the criteria is to maintain the price stability within the Eurozone even with the inclusion of new member states.
See also
- Treaty of Maastricht
- Enlargement of the eurozoneEnlargement of the eurozoneThe enlargement of the eurozone is a continuing process within the European Union . All member states of the EU, except for Denmark, the United Kingdom and de facto Sweden, are obliged to adopt the euro as their sole currency when they meet the criteria...
- Economy of the European Union#Economies of member states which contains values also for Eurozone countries.
- Copenhagen criteriaCopenhagen criteriaThe Copenhagen criteria are the rules that define whether a country is eligible to join the European Union. The criteria require that a state has the institutions to preserve democratic governance and human rights, has a functioning market economy, and accepts the obligations and intent of the EU...
- Stability and Growth PactStability and Growth PactThe Stability and Growth Pact is an agreement among the 27 Member states of the European Union that take part in the Eurozone, to facilitate and maintain the stability of the Economic and Monetary Union...
- Exchange Rate Mechanism
External links
- http://europa.eu/scadplus/leg/en/lvb/l25014.htm
- http://www.statistics.gov.uk/CCI/nugget.asp?ID=277