Christian Noyer: Presentation of the ECB Convergence Report 2000
Introductory statement by Mr Christian Noyer, Vice-President of the European Central Bank, at the
presentation of the ECB Convergence Report 2000 to the Committee on Economic and Monetary
Affairs of the European Parliament, Brussels, on 3 May 2000.
* * *
It is a great pleasure for me to have the opportunity to present this year's Convergence Report,
prepared by the European Central Bank (ECB), to your Committee. The report examines in-depth,
with regard to Greece and Sweden, the achievement of a high degree of sustainable convergence, as
well as compliance with the statutory requirements to be fulfilled by national central banks in order for
them to become integral parts of the European System of Central Banks (ESCB).
In producing this report, the ECB fulfilled the requirements of Article 122 (2) in conjunction with
Article 121 (1) of the Treaty to report to the Council of the European Union on the progress of
Member States with a derogation, with regard to their obligations concerning the achievement of
Economic and Monetary Union (EMU). It will now be up to the Council to decide, on the basis of the
Convergence Reports prepared by the European Commission and the ECB, and of the Parliament's
opinion and a proposal from the European Commission, whether or not the current derogation status of
Greece and Sweden can be abrogated.
In view of the comprehensive assessment provided in our report, it goes without saying that I can only
touch upon its main conclusions. However, in the following discussion we should have an opportunity
to consider in more depth one or other aspect in which you might be particularly interested. I should
like, first, to refer to our assessment of economic convergence in Greece and Sweden and then to
address the requirements of legal convergence.
I. Assessment of economic convergence in Greece
As far as economic convergence in Greece is concerned, it is noted that Greece achieved an average
rate of HICP inflation of 2.0% during the reference period (April 1999 to March 2000). This is below
the reference value of 2.4%. Looking back, a clear trend towards lower inflation is discernible in
Greece, with the CPI rate falling from 20.4% in 1990 to 2.6% in 1999. Inflation in Greece is now
closer to a level which can generally be considered to be consistent with price stability. However, due
attention needs to be paid to the fact that the recent reduction in inflation rates is partly attributable to
temporary factors such as cuts in indirect taxes.
At the same time, future price developments in Greece are subject to a number of upward risks, in
particular in 2001. Inflation rates will be influenced upwards as the recent cuts in indirect taxes will
cease to have a moderating impact. Moreover, an eventual alignment of Greek interest rates with those
in the euro area and the further convergence of the drachma towards its conversion rate will exert
upward pressure on prices.
Turning to fiscal policy, the 1999 general government deficit ratio was 1.6%, well below the 3%
reference value. By contrast, the debt ratio was 104.4%, ie far above the 60% reference value. Looking
back over the years from 1990 to 1999, the deficit has been reduced considerably and in 2000 the
deficit ratio is forecast to decrease further to 1.3% of GDP, while the debt ratio is projected to decline
to 103.7%.
However, notwithstanding the efforts and the substantial progress made towards improving the current
fiscal situation, there is an ongoing concern as to whether the ratio of government debt to GDP will be
"sufficiently diminishing and approaching the reference value at a satisfactory pace" and whether
sustainability of the fiscal position has been achieved.
Greece's public debt is falling only slowly, despite high primary surpluses and privatisation receipts.
As a consequence, substantial primary surpluses and persistent, sizeable overall fiscal surpluses
outperforming the targets of the updated Greek Convergence Programme are crucial if the debt ratio is
to be reduced to 60% within an appropriate period of time. Tight fiscal policy will also be needed in
order to contain the earlier-mentioned inflationary pressures.
As regards the development of long-term interest rates, which constitute another key variable within
the overall convergence assessment, their level reached 6.4% on average during the reference period
from April 1999 to March 2000. As a result, they stood 0.8%-point below the reference value for the
interest rate criterion of 7.2%.
With regard to the fulfilment of the exchange rate criterion, it is noted that the Greek drachma has
been participating in ERM and subsequently ERM II since 16 March 1998. During the two-year
reference period (April 1998 to March 2000) the drachma traded significantly above its central rates.
Exchange rate volatility declined significantly during the reference period and the significant
short-term interest rate differentials also displayed a gradual decrease from September 1998 onwards.
After a gradual depreciation during most of 1999 and a revaluation of the central rate by 3.5% in
January 2000, the drachma was traded on average 2.0% above its new central rate against the euro in
March 2000 and came closer to the central rate in April.
I should like to add that, throughout the reference period covered by this report, Greece recorded
current account deficits which can be partly interpreted as a result of the country's need to finance
investments.
To sum up the findings concerning the economic performance of Greece, the report identifies a
number of positive developments, such as a significant reduction in HICP inflation and substantial
progress towards improving the fiscal situation. However, continued efforts to support sustained price
stability are of particular importance for Greece. This implies an ongoing need for tight fiscal policies
and decisive structural reforms aimed at improving the functioning of product and labour markets. In
this context a speedier transposition of Single Market legislation into national law, further progress on
the liberalisation of a number of network industries and determined efforts to overcome structural
rigidities in the labour market are warranted. Furthermore, increased efforts to reform the social
security system are needed, while further progress on privatisation would reduce liabilities in the
wider public sector.
II. Assessment of economic convergence in Sweden
Turning now to Sweden, I should like to start with a brief review of price developments. The country
achieved an average rate of HICP inflation of 0.8% during the reference period, ie a level which is
well below the reference value and consistent with price stability.
Recent trends and forecasts indicate, however, that there is increasing upward pressure on prices and
costs. This has to be seen, inter alia, against the background of a period of high growth in Sweden in
recent years, led predominantly by domestic demand. At the same time, the fiscal stance has become
more neutral, resulting in a rapid closing of the output gap. As a result of these and other factors,
forecasts indicate that inflation will be around 1.5% in 2000 and around 2% in 2001.
As concerns fiscal policies, Sweden achieved a fiscal surplus of 1.9% of GDP in 1999, thereby
meeting the 3% reference value, and the outlook is for a surplus of 2.4% of GDP in 2000. The
debt-to-GDP ratio stood at 65.5% in 1999, somewhat above the 60% reference value. With regard to
the sustainability of its fiscal position, the outlook is for a further decline in the debt ratio to 61.3% in
2000 and Sweden is expected to comply with the medium-term objective of the Stability and Growth
Pact of having a budgetary position that is close to balance or in surplus. Concerning the ageing of the
population, Sweden benefits from a partly funded pension system, which is gradually being
supplemented by a new system which will reduce pressures on public finances.
Not least because of the improvement in the country's public finances and the comparatively low rates
of inflation, the level of long-term interest rates in Sweden was 5.4% on average during the reference
period, ie well below the reference value for the interest rate criterion of 7.2%.
While Sweden has been successful in complying with the aforementioned convergence criteria, the
country does not participate in ERM II. In this context it should be noted that Sweden is a Member
State with a derogation and does not have a clause allowing it to opt out of Stage Three of EMU.
Sweden is thus committed by the Treaty to adopting the euro, which implies that it has to strive to
fulfil all the convergence criteria, including the exchange rate criterion.
Throughout 1999 and until April 2000 the development of the krona was characterised by a strong
appreciation against the euro. This strengthening reflects a normalisation of the situation after the
global crisis in autumn 1998 and Sweden's stronger than expected economic performance. In this
context I should like to add that Sweden recorded current account surpluses, while maintaining a net
external liability position.
III. Assessment of legal convergence in Greece and Sweden
With regard to the legal chapter of the Convergence Report, I should like to highlight the following
points.
The report focuses on the compatibility of Greek and Swedish national legislation, including the
statutes of the Bank of Greece and of Sveriges Riksbank, with the requirements for the full
participation of Greece and Sweden in Monetary Union laid down in the Treaty and the Statute of the
ESCB.
While acknowledging that issues related to central bank independence were already resolved in 1998
and do not, therefore, need to be addressed again, the ECB Convergence Report follows the same
approach as that of the Convergence Report prepared in 1998 by the European Monetary Institute
(EMI).
It addresses two issues:
• first, the legal requirements for the full legal integration of the Bank of Greece and Sveriges
Riksbank into the Eurosystem; and
• second, the adaptation of legislation other than the statutes of these two national central
banks.
With regard to Greece it concludes that:
• the Statute of the Bank of Greece has been adapted and, on the basic assumption that the new
Statute will be ratified by Parliament and will enter into force on time and that obsolete
provisions of a law dating back to 1997 (law 2548/1997) will be repealed, there will be no
remaining imperfections in the Statute of the Bank of Greece relating to the requirements of
the Treaty and the Statute of the ESCB for the full legal integration of the Bank of Greece
into the Eurosystem.
• the ECB also takes note that other legislation will be adapted by means of a law introducing
the euro.
With regard to Sweden, the conclusions of the EMI's 1998 Convergence Report remain unchanged.
Swedish legislation, and in particular the Statute of Sveriges Riksbank, does not provide for the
Bank's legal integration into the Eurosystem and is not, therefore, compatible with the Treaty and the
Statute of the ESCB. As far as other legislation is concerned, the ECB notes that legislation on access
to public documents and the law on secrecy need to be reviewed in the light of the confidentiality
regime set out in Article 38 of the Statute of the ESCB.
I should now be happy to answer any questions you may have with regard to the ECB's convergence
assessment of Greece and Sweden.