What does a country need to do to join the euro area?
23 May 2018
First, it must be an EU Member State – adopting the euro is an important step of EU membership.
The euro, introduced on 1 January 1999, has replaced the national currencies of 19 of 28 EU Member States. The single currency is the legal tender of 340 million EU citizens, who can rely on prices remaining stable as they work and travel across borders. Seven of the nine other EU Member States – Denmark and the United Kingdom are excluded under a special arrangement – are committed under the Treaty on the Functioning of the European Union to adopt the euro, which implies that they must strive to fulfil the Treaty’s convergence criteria. What are these criteria?
First, the Treaty requires Member States to achieve a high degree of sustainable economic convergence before they can join the euro area. This means that their economies must be able to keep pace with those already using the euro. Economic convergence is measured in terms of progress with regard to:
- price developments, i.e. inflation
- fiscal balances and public debt
- exchange rates
- long-term interest rates
In addition, other factors relevant to economic integration and convergence are also taken into account, for example the strength of the country’s institutional environment.
Convergence must also be sustainable, meaning that satisfying the economic convergence criteria at one point in time is not enough – they need to be met on a lasting basis. This is very important for countries sharing a single currency. They need to ensure that their economies are resilient, so that the currency union can function smoothly and all members can reap the benefits of monetary stability.
There are also legal requirements – for example, national legislation must be compatible with the Treaties and, in particular, with the Statute of the European System of Central Banks and of the European Central Bank.
The economic convergence criteria in more detail
Price developments refer to the change in the prices of goods and services over time, in other words inflation. It is important for the functioning of the economy and economic welfare that prices do not increase too fast, but rather are stable, moving only gradually over time. If prices remain stable, this means that the value of money is preserved and you maintain your purchasing power. More broadly, it means that money can fulfil its core functions, which include being a stable means of exchange and a store of value.
A country is considered to meet the price stability criterion if its average inflation rate does not exceed the inflation rate of the three best-performing EU Member States by more than 1.5 percentage points during a one-year observation period.
Developments in fiscal balances and public debt
Based on Treaty provisions, a Member State’s general financial position is considered sustainable based on two criteria:
- the government’s expenditure does not exceed its revenue by too much (specifically, its annual fiscal deficit should not exceed 3% of gross domestic product)
- overall government debt does not exceed 60% of gross domestic product
These criteria are intended to ensure the sustainability of public finances and that the government is able to manage its debts. The Treaty does, however, provide for some flexibility with respect to the two criteria and the final assessment is provided by the Ecofin Council, i.e. the meeting of the finance ministers of EU Member States.
Exchange rate developments
A country has to maintain a stable exchange rate of its currency. This is important as it allows businesses and individuals to plan ahead, confident that the prices of export and imports will be stable.
Exchange rate stability is evaluated by assessing whether the exchange rate of the country’s currency has remained within the fluctuation bands provided for by the exchange rate mechanism (ERM II) for at least the previous two years, without devaluating against the euro.
Long-term interest rate developments
A country’s long-term interest rate should not exceed that of the three best-performing Member States by more than 2 percentage points during the one-year observation period prior to the assessment. The interest rate is measured on the basis of long-term government bonds or comparable securities. This criterion is important for demonstrating that the country’s convergence is durable and sustainable.
Who assesses whether an EU Member State is ready to adopt the euro?
At least once every two years, or at the request of an EU Member State which has not yet adopted the euro, the ECB and the European Commission report to the Council of the European Union on the progress made by non-euro area Member States towards achieving the convergence criteria outlined in the Maastricht Treaty. These reports are called convergence reports.
In addition to preparing these reports, both the ECB and the Commission regularly monitor progress throughout the year.
The ultimate decision on whether a country can adopt the euro as its currency lies with the Council of the European Union. Representatives from all EU countries take a decision based on a proposal by the European Commission and after consulting the European Parliament.