FAQs on EU enlargement and Economic and Monetary Union (EMU)
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. Bulgaria and Romania joined the EU on 1 January 2007; Croatia on 1 July 2013. There are currently five candidate countries for EU accession: Albania, the former Yugoslav Republic of Macedonia, Montenegro, Serbia and Turkey. Accession criteria are identical for all countries and remain those defined by the 1993 Copenhagen European Council.
Do new Member States automatically adopt the euro after joining the EU?
No, they don’t. However, they are expected to do so when they fulfil the Maastricht convergence criteria. Unlike Denmark and the United Kingdom, new EU Member States do not have a right to opt out of the single currency.
Is there a pre-set timetable for the adoption of the euro by new Member States?
There is no such timetable, 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.
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 convergence criteria set out in Article 140 of the Treaty on the Functioning of the European Union and further detailed in a Protocol attached to the Treaties. The criteria entail the following:
“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. Moreover, in the light of the revisions to the Stability and Growth Pact, in force since end-2011, the assessment will include also the degree of compliance with the enhanced fiscal governance rules. Among other things, 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, i.e. in line with the newly introduced debt reduction benchmark.
“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”. When assessing compliance with this criterion, the emphasis is placed on the exchange rate being close to its central rate against the euro for a period of at least two years without severe tensions, while also considering factors that may have led to an exchange rate appreciation.
“The durability of convergence [...] being reflected in the 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”.
The assessment will take 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”.
Moreover, also according to Article 140 of the Treaty, the convergence assessment will include an examination of the compatibility between the national legislation of each of the Member States in question, including the statutes of its national central bank, and Articles 130 and 131 of the Treaty and the Statute of the ESCB and of the ECB.
Do new EU members join the exchange rate mechanism (ERM II) and, if so, 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. 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).
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).
What are the economic advantages of euro area enlargement?
The euro 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. 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.
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 new EU members to facilitate their smooth integration into the operational framework of the Eurosystem.
To which ECB bodies do the national central banks of new EU Member States belong? And which ones will they join when their respective countries adopt the euro?
The central banks of 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 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).
Is it possible for 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.
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 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).
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.
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 3.75% of the full amount of their subscribed capital.