Euro Convergence Criteria - Criteria

Criteria

The Maastricht Treaty, which was signed in February 1992 and entered into force on 1 November 1993, outlined the 5 convergence criteria to comply with, in order for EU member states to adopt the new monetary currency the euro. The purpose of setting the criteria is to maintain the price stability within the eurozone, even with the inclusion of new member states.

1. HICP inflation (12-months average of yearly rates): Shall be no more than 1.5% higher, than the unweighted arithmetic average of the similar HICP inflation rates in the 3 EU member states with the lowest HICP inflation. EU member states with a HICP rate significantly below the comparable rates in other Member States, do not qualify as a benchmark country for the reference value and will be ignored, if it can be established its price developments have been strongly affected by exceptional factors (i.e. severe wage cuts and/or a strong recession).
2. Government budget deficit: The ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3% at the end of the preceding fiscal year. Deficits being "sligthly above the limit" (previously outlined by the evaluation practise to mean deficits in the range from 3.0-3.5%), will as a standard rule not be accepted, unless it can be established that either: "1) The deficit ratio has declined substantially and continuously before reaching the level close to the 3%-limit" or "2) The small deficit ratio excess above the 3%-limit has been caused by exceptional circumstances and has a temporary nature (i.e. expenditure one-offs triggered by a significant economic downturn, or expenditure one-offs triggered by the implementation of economic reforms with a positive mid/long-term effect)".
3. Government debt-to-GDP ratio: The ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year. Or if the debt-to-GDP ratio exceeds the 60% limit, the ratio shall at least be found to have "sufficiently diminished and must be approaching the reference value at a satisfactory pace".
4. Exchange rate: Applicant countries should have joined the exchange-rate mechanism (ERM / ERM II) under the European Monetary System (EMS) for two consecutive years, and should not have devalued its currency during the last two years, meaning that the country shall have succeded to keep its monetary exchange-rate within a +/- 15% range from an unchanged central rate.
5. Long-term interest rates (average yields for 10yr government bonds in the past year): Shall be no more than 2.0% higher, than the unweighted arithmetic average of the similar 10-year government bond yields in the 3 EU member states with the lowest HICP inflation (having qualified as benchmark countries for the calculation of the HICP reference value). If any of the 3 EU member states in concern are suffering from interest rates significantly higher than the "GDP-weighted eurozone average interest rate", and at the same time have no complete funding access to financial markets (which will be the case for as long as a country receives disbursements from a sovereign state bailout program), then such a country will not qualify as a benchmark country for the reference value; which then only will be calculated upon data from fewer than 3 EU member states.

ECB will minimum with two-years intervals publish a Convergence Report, to check how well the EU members aspiring for euro adoption comply with the criteria. The first convergence report was published in November 1996, and concluded there only was a full criteria compliance at that point of time for 3 out of 15 EU member states (Denmark, Luxembourg and Ireland). This was followed by a more positive second convergence report in March 1998, leading to the electronic introduction of the euro for the first 11 out of 12 applying countries on 1 January 1999 (with only Greece missing out the deadline to qualify). Subsequent convergence reports have so far resulted in an additional 6 EU member states complying with all criteria and adopting the euro (Greece, Slovenia, Cyprus, Malta, Slovakia and Estonia). The latest convergence report was published in May 2012, and checked for compliance in the reference year from April 2011 - March 2012, where none of the current 7 applicants were found to fully comply. As the reference values for HICP inflation and long-term interest rates basically change on a monthly basis, any non-euro member state also have the right to ask ECB for a renewed compliance check whenever they believe to posses a chance of having met all criteria. In example, Latvia is expected to ask for a renewed compliance check in April 2013.