Frequently Asked Questions:
EU enlargement and Economic and Monetary Union (EMU)
1. Which countries have joined the EU since the ECB was established in 1998?
The Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia became members of the EU on 1 May 2004. Two other countries, Bulgaria and Romania, joined the EU on 1 January 2007. Croatia, the Former Yugoslav Republic of Macedonia and Turkey are official candidates for accession to the EU.
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2. Will the new Member States automatically adopt the euro after joining the EU?
No, they won’t. However, they are expected to do so when they fulfil the Maastricht convergence criteria (see question 4 below).
Unlike Denmark and the United Kingdom, the new EU Member States do not have a right to opt out of the single currency.
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3. When are the new Member States expected to adopt the euro?
Slovenia adopted the euro as its currency on 1 January 2007, as the first of the new EU Member States. On 1 January
2008 Cyprus and Malta followed. There is no pre-set timetable for the adoption of the euro by these countries as
the Governing Council of the ECB noted in its “Policy position of the Governing Council of the ECB on exchange rate
issues relating to the acceding countries”, published on 18 December 2003. In order to adopt the euro, they have to achieve a high degree of sustainable economic convergence. This is assessed by the EU Council on the basis of reports produced by the Commission and the ECB on the degree of these countries’ fulfilment of the Maastricht convergence criteria. These reports are prepared at least once every two years, or at the request of a Member State wishing to adopt the euro.
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4. What are the convergence criteria?
In order to adopt the euro, Member States have to achieve a high degree of sustainable economic convergence. This is assessed on the basis of the fulfilment of the Maastricht convergence criteria set out in Article 121 of the Treaty establishing the European Community and further detailed in a Protocol attached to the Treaty. The criteria entail:
- “the achievement of a high degree of price stability”. This means 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”;
- “the sustainability of the government financial position”. This means that, at the time of the examination, the Member State should not be deemed by the Council to have an excessive deficit. The Council decides whether or not an excessive deficit exists by referring to:
- the ratio of the planned or actual government deficit
to GDP at market prices, which should not exceed 3%,
- the ratio of government debt to GDP at market prices, which should not exceed 60%.
However, the assessment of compliance with the fiscal discipline requirement will also take into account other factors, such as
past progress in reducing budgetary imbalances and/or the existence of exceptional and temporary factors contributing to such
imbalances. At the same time, Member States with government debt ratios to GDP in excess of 60% are expected to bring them down
towards the reference level at a satisfactory pace.
- “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”. When assessing compliance with this criterion, the emphasis is placed on the exchange rate being close to its central rate against the euro, while also considering factors that may have led to an exchange rate appreciation. This reflects the fact that, in August 1993, the fluctuation margins of the ERM were widened from ±2.25 to ±15%, making the meaning of “the normal fluctuation margins of the ERM” less clear. Moreover, on 1 January 1999, the exchange rate mechanism of the European Monetary System was replaced by a new exchange rate mechanism in Stage Three of EMU, in which the participating currencies have bilateral central rates against the euro with a standard fluctuation band of ±15%. Issues related to “severe tensions” are also addressed.
- “the durability of convergence...being reflected in long-term interest-rate levels”. This means 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”.
- Finally, the assessment takes several other factors into account, such as “the results of the integration of markets, the situation and development of the balances of payments on current account and an examination of the development of unit labour costs and other price indices”.
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5. When will the new EU members join the exchange rate mechanism (ERM
II) and under what conditions?
The ERM II Resolution states that “participation in the exchange rate mechanism
will be voluntary for the Member States outside the euro area. Nevertheless,
Member States with a derogation can be expected to join the mechanism. A Member
State which does not participate from the outset in the exchange rate mechanism
may participate at a later date.” There are no specific entry pre-conditions,
but a common accord on the central rate and the fluctuation band needs to be
reached (see question 14). At the same time, as mentioned above (see question
4), participation in ERM II for at least two years prior to the convergence assessment
is one of the criteria to be met for adopting the euro (see also the “Policy
position of the Governing Council of the ECB on exchange rate issues relating
to the acceding countries” published on 18 December 2003).
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6. What will be the role of the ECB when the central parity rates of the acceding country currencies vis-à-vis the
euro in ERM II are fixed?
In accordance with the Resolution of the Amsterdam European Council of 16 June
1997, decisions on central rates in ERM II are taken by mutual agreement of the
Finance Ministers of the euro area countries, the ECB and the Finance Ministers
and central bank Governors of the non-euro area countries participating in the
new mechanism, following a common procedure involving the European Commission,
and after consultation of the Economic and Financial Committee. The Finance Ministers
and Governors of the central banks of the Member States not participating in
ERM II take part but do not have the right to vote in the procedure. All parties
to the mutual agreement, including the ECB, have the right to initiate a confidential
procedure aimed at reconsidering central rates (see also the “Policy position
of the Governing Council of the ECB on exchange rate issues relating to the acceding
countries” published on 18 December 2003).
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7. How does the size of the economies of the 12 newest Member States compare with the size of the euro area?
In 2005, the nominal GDP of the newest Member States (adjusted to include Bulgaria and Romania) was €654 billion, or around 8% of the euro area's GDP of €7,974 billion. In that same year, this group of countries had a total population of 104 million, or around one-third of the euro area’s population of 313 million.
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8. What are the economic advantages of euro area enlargement?
The euro is a public good that brings many benefits to the participating countries.
It eliminates exchange rate risks between countries that adopt it, thereby lowering
interest rates, and allows countries to enjoy the benefits of price stability,
which is the primary objective of the ECB. It also paves the way for a deep,
liquid and integrated capital market among countries that adopt it. Euro area
enlargement means that a larger number of EU Member States can enjoy these benefits.
Furthermore, some of the economic advantages of monetary union, such as the elimination
of exchange rate uncertainties, increase with the size of the euro area. People
no longer have to change money, and pay transaction costs to do so, when travelling
through the euro area. However, in order to be able to fully exploit the benefits,
a country must be ready for the euro. This will be assessed on the basis of the
Maastricht convergence criteria (see question 4).
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9. Does the ECB have any say in the process of EMU enlargement?
The ECB as well as the European Commission will both prepare convergence reports,
either every two years, or at the request of a Member State with a derogation.
These reports provide the basis for the EU Council’s decision on whether the
Member State concerned fulfils the necessary conditions for adoption of the euro.
All ECB convergence reports are available in the
Publications
section on this website.
In addition to its role in the context of the convergence exercise, the ECB also cooperates with the national central banks of the new EU members to facilitate their smooth integration into the operational framework of the Eurosystem.
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10. To which ECB bodies do the national central banks of the new EU
Member States belong? And which ones will they join when their respective countries
adopt the euro?
The central banks of the new EU Member States are full members of the European
System of Central Banks (ESCB) and their respective Governors full members
of the General Council. The central banks’ experts in the ESCB Committees have
full-member status when the committees meet in ESCB composition, i.e. with
all the EU national central banks (NCBs), not just those in the euro area.
After the new Member States have adopted the euro, the Governors of the respective
central banks will become members of the Governing Council and their experts
will become members of ESCB Committees meeting in Eurosystem composition (i.e.
with all euro area NCBs).
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11. Is it possible for the new Member States to start to use the euro as a parallel
currency (i.e. euroisation) before
joining the Eurosystem?
“Euroisation” runs counter to the underlying economic rationale of EMU, which
envisages the eventual adoption of the euro as the end point of a convergence
process within
a multilateral framework. The stages laid down in the Treaty on the way to adopting
the euro cannot be circumvented by unilateral euroisation.
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12. Is it possible for an EU Member State to keep its
currency board in place when joining ERM II?
ERM II is a multilateral arrangement in which non-euro area Member States’ currencies
are pegged to the euro and in which decisions are taken by mutual agreement of
the parties concerned. A Member State can maintain a euro-based currency board
arrangement (CBA) as a unilateral commitment within ERM II provided that there
is a mutual agreement about the fixed exchange rate prevailing under the CBA
and which then serves as that currency’s ERM II central rate. CBAs that are not
based on the euro are not compatible with participation in ERM II. More generally,
the Governing Council of the ECB neither encourages nor discourages the adoption
of CBAs. In any event, such arrangements cannot be regarded as an alternative
to two years’ participation in ERM II (see question 4 and the “Policy position
of the Governing Council of the ECB on exchange rate issues relating to the acceding
countries” published on 18 December 2003 and referred to above).
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13. What is the impact of enlargement on the structure of the ECB’s decision-making bodies?
The Governors of the national central banks of all EU member states are full members of the General Council of the ECB, which also comprises the ECB’s President and Vice-President.
After the new Member States have adopted the euro, the Governors of the respective central banks will become members of the Governing Council of the ECB. However, the number of members with voting rights will be capped at 21: six permanent voting rights for the members of the Executive Board and 15 voting rights for the Governors of national central banks, to be exercised on the basis of a rotation system. All members entitled to vote will have one vote, in line with the one person, one vote principle. All members will have the right to attend and to speak.
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14. Will new Member States participating in the ESCB subscribe to
the ECB’s capital?
Yes. In accordance with the Statute of the ESCB, all national central banks participating
in the ESCB subscribe to the ECB’s capital in accordance with a key that reflects
their countries’ shares in the population and GDP of the EU. However, national
central banks of countries which have not yet adopted the euro only have to pay up 7% of the full amount of their subscribed capital.
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15. Does the ECB hire employees from the new EU Member States?
Yes. The ECB has been recruiting employees from the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia since the Accession Treaty was signed in April 2003, and from Bulgaria and Romania since their Accession Treaty was signed in April 2005.
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16. What are the official languages of the EU?
Bulgarian, Czech, Danish, Dutch, English, Estonian, Finnish, French, German, Greek, Hungarian, Irish, Italian, Latvian, Lithuanian, Maltese, Polish, Portuguese, Romanian, Slovak, Slovene, Spanish and Swedish.
back to top17. Will the new EU countries adopt the euro and introduce the euro banknotes and coins at the same time?
This will be a national decision. Each country will choose to have either a simultaneous
launch of the currency and cash (big-bang scenario) or a transition period.
The ECB and the European Commission will be involved in the coordination, especially
with regard to the production of banknotes and coins.
back to top18. Will the cash changeover to the euro eventually affect prices in the new EU Member States?
The cash changeover should not lead to a general rise in prices. Although there
was much discussion about price increases in the euro area linked to the introduction
of the euro, the empirical evidence does not suggest that it had, on average,
a strong upward effect on prices. Changes in relative prices are a normal
feature of all market economies.
Countries can reduce the likelihood of prices
being affected by informing consumers and producers well in advance, by seeking
agreements from retailers on price change conventions, and by using dual
pricing during the crucial months. New euro area members can certainly benefit
from
the experience gained during the 2002 cash changeover. Over the longer term,
competition between businesses will make it more difficult for them to take
advantage of people’s unfamiliarity with the new euro prices by raising prices.
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