Proposal for a Council Decision on the adoption by Estonia of the euro on 1 January 2011
Date: 2010-05-12
Institutions: European Commission
Subjects: Economic and Monetary Union, Estonia, economic convergence, euro, euro area

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EUROPEAN COMMISSION 

Brussels, 12.5.2010 
COM(2010) 239 final 

2010/0135 (NLE) 

Proposal for a 

COUNCIL DECISION 

on the adoption by Estonia of the euro on 1 January 2011 

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EXPLANATORY MEMORANDUM 

1. 

CONTEXT OF THE PROPOSAL 

On  3  May  1998  the  Council  decided  that  Belgium,  Germany,  Spain,  France,  Ireland,  Italy, 
Luxembourg, the Netherlands, Portugal, Austria and Finland fulfilled the necessary conditions 
for the adoption of the euro on 1 January 1999. Denmark and the United Kingdom made use 
of their opt-out clauses and were not, therefore, assessed by the Council. Greece and Sweden 
were considered by the Council as Member States with a derogation. On  19 June  2000,  the 
Council decided that Greece fulfilled the necessary conditions to adopt the euro on 1 January 
2001. The countries which joined the European Union on 1 May 2004 (the Czech Republic, 
Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia) became 
Member  States  with  a  derogation  in  accordance  with  Article  4  of  the  respective  Act  of 
Accession.  On  11  July  2006,  the  Council  decided  that  Slovenia  fulfilled  the  necessary 
conditions  to  adopt  the  euro  on  1  January  2007.  Bulgaria  and  Romania,  who  joined  the 
European Union on 1 January 2007, became Member States with a derogation in accordance 
with Article 5 of the respective Act of Accession. On 10 July 2007, the Council decided that 
Cyprus and Malta fulfilled the necessary conditions to adopt the euro on 1 January 2008. On 8 
July 2008, the  Council decided that Slovakia fulfilled the necessary conditions for adopting 
the euro as of 1 January 2009.  

Articles  140(1)  of  the  Treaty  on  the  Functioning  of  the  European  Union  (hereinafter  the 
Treaty) provides that at least once every two years or at the request of a Member State with a 
derogation, the Commission and the European Central Bank have to report to the Council on 
the progress made in the fulfilment by Member States with a derogation of their obligations 
regarding the achievement of economic and monetary union. Based on its own report and that 
of the ECB, the Commission can submit to the Council a proposal for a Council decision, in 
accordance  to  the  procedure  laid  down  in  Article  140(2)  of  the  Treaty,  to  abrogate  the 
derogation of the Member States fulfilling the necessary conditions. 

The previous Commission and ECB regular Convergence Reports were adopted in May 2008. 
Denmark and the United Kingdom have not expressed a wish to adopt the euro. Therefore, the 
Convergence  Report  2010  covers  the  following  nine  Member  States  with  a  derogation: 
Bulgaria,  the  Czech  Republic,  Estonia,  Latvia,  Lithuania,  Hungary,  Poland,  Romania  and 
Sweden.  

The Commission Convergence Report 2010 was adopted by the College on 12 May 2010. The 
ECB adopted its report on 12 May. The reports include an examination of the compatibility of 
the  national  legislation,  in  particular  the  statute  of  each  national  central  bank,  with  Articles 
130  and  131  of  the  Treaty  and  the  Statute  of  the  ESCB  and  of  the  ECB.  The  reports  also 
examine  the  achievement  of  a  high  degree  of  sustainable  convergence  by  reference  to  the 
fulfilment of the convergence criteria and take account of several other factors required under 
the final sub-paragraph of Article 140(1) of the Treaty. 

In  its  Convergence  Report,  the  Commission  concludes  that  amongst  the  assessed  Member 
States only Estonia fulfils the conditions for the adoption of the euro. 

On  the  basis  of  its  report  and  that  of  the  ECB,  the  Commission  has  adopted  the  attached 
proposal  for  a  Council  decision  to  abrogate  the  derogation  of  Estonia  with  effect  from  1 
January 2011. 

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2. 

RESULTS OF CONSULTATIONS WITH THE INTERESTED PARTIES AND 
IMPACT ASSESSMENT 

Discussions  with  Member  States  on  economic  policy  challenges  in  Member  States  are  held 
under  various  headings  on  a  regular  basis  in  the  Economic  and  Financial  Committee  and 
ECOFIN/Eurogroup. These include informal discussions on issues specifically relevant to the 
preparation  of  eventual  euro  area  entry  (incl.  exchange  rate  policies).  Dialogue  with 
academics and other interested groups takes place in the context of conferences/seminars and 
on an ad-hoc basis. 

Economic  developments  in  the  euro  area  and  the  Member  States  are  assessed  in  the 
framework  of  the  various  procedures  of  economic  policy  co-ordination  and  surveillance 
(notably under Art. 121 of the Treaty), as well as in the context of the Commission’s regular 
monitoring  and  analysis  of  country-specific  and  area-wide  developments  (incl.  forecasts, 
regular  publication  series,  input  to  EFC  and  ECOFIN/Eurogroup).  In  accordance  with  the 
proportionality  principle  and  in  line  with  past  practice,  the  Commission  proposes  not  to 
develop a formal impact assessment. 

3. 

LEGAL ELEMENTS OF THE PROPOSAL 

3.1. 

Legal basis 

The legal basis for the present proposal is Article 140(2) of the Treaty, which lays down the 
procedure for a Council decision on euro adoption and for abrogation of the derogation in the 
concerned Member States.  

The  Council  shall  act  on  a  proposal  from  the  Commission,  after  consulting  the  European 
Parliament,  after  discussion  in  the  European  Council  and  after  having  received  a 
recommendation  of  a  qualified  majority  of  those  among  its  members  representing  Member 
States whose currency is the euro.  

3.2. 

Subsidiarity and proportionality 

The  proposal  falls  under  the  exclusive  competence  of  the  Union.  The  subsidiarity  principle 
therefore does not apply. 

The  present  initiative  does  not  go  beyond  what  is  necessary  to  achieve  its  objective  and, 
therefore, complies with the proportionality principle. 

3.3. 

Choice of the legal instrument 

The Decision instrument is the only appropriate legal instrument according to Article 140(2) 
of the Treaty.  

4. 

BUDGETARY IMPLICATION 

The proposal has no implications for the budget of the Union. 

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2010/0135 (NLE) 

Proposal for a 

COUNCIL DECISION 

on the adoption by Estonia of the euro on 1 January 2011 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 140(2) thereof, 

Having regard to the proposal from the European Commission, 

Having regard to the report from the European Commission1 

Having regard to the report from the European Central Bank2 

Having regard to the opinion of the European Parliament, 

Having regard to the discussion of the European Council,  

Having  regard  to  the  recommendation  of  the  members  of  the  Council  representing  Member 
States whose currency is the euro, 

Whereas: 

(1) 

(2) 

1 
2 
3 
4 
5 
6 
7 

The  third  stage  of  economic  and  monetary  union  (hereinafter  'EMU')  started  on  1 
January 1999. The Council, meeting in Brussels on 3 May 1998 in the composition of 
Heads  of  State  or  Government,  decided  that  Belgium,  Germany,  Spain,  France, 
Ireland,  Italy,  Luxembourg,  the  Netherlands,  Austria,  Portugal  and  Finland  fulfilled 
the necessary conditions for adopting the euro on 1 January 19993. 

By  Decision  2000/427/EC4  Council  decided  that  Greece  fulfilled  the  necessary 
conditions  for  adopting  the  euro  on  1  January  2001.  By  Decision  2006/495/EC5 
Council decided that Slovenia fulfilled the necessary conditions for adopting the euro 
on  1  January  2007.  By  Decisions  2007/503/EC6  and  2007/504/EC7  Council  decided 
that  Cyprus  and  Malta  fulfilled  the  necessary  conditions  for  adopting  the  euro  on  1 

Decision 1998/317/EC (OJ L 139, 11.5.1998, p.30). 
OJ L 167 of 7.7.2000, p.19. 
OJ L 195 of 15.7.2006, p.25. 
OJ L 186 of 18.7.2007, p.29. 
OJ L 186 of 18.7.2007, p. 32 

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January  2008.  By  decision  2008/608/EC8  Council  decided  that  Slovakia  fulfilled  the 
necessary conditions for adopting the euro.  

In  accordance  with  paragraph  1  of  the  Protocol  on  certain  provisions  relating  to  the 
United  Kingdom  of  Great  Britain  and  Northern  Ireland  annexed  to  the  Treaty 
establishing  the  European  Community  (hereinafter  EC  Treaty),  the  United  Kingdom 
notified  the  Council  that  it  did  not  intend  to  move  to  the  third  stage  of  EMU  on  1 
January 1999. This notification has not been changed. In accordance with paragraph 1 
of  the  Protocol  on  certain  provisions  relating  to  Denmark  annexed  to  the  EC  Treaty 
and  the  Decision  taken  by  the  Heads  of  State  or  Government  in  Edinburgh  in 
December  1992,  Denmark  has  notified  the  Council  that  it  will  not  participate  in  the 
third  stage  of  EMU.  Denmark  has  not  requested  that  the  procedure  referred  to  in 
Article 140(2) of the Treaty on the Functioning of the European Union (hereinafter the 
Treaty) be initiated. 

By virtue of Decision 98/317/EC Sweden has a derogation as defined in Article 139(1) 
of the Treaty. In accordance with Article 4 of the 2003 Act of Accession9, the Czech 
Republic, Estonia, Latvia, Lithuania, Hungary, Poland and Slovakia have a derogation 
as defined in Article 139(1) of the Treaty. In accordance with Article 5 of the 2005 Act 
of Accession10, Bulgaria and Romania have a derogation as defined in Article 139(1) 
of the Treaty. 

the 

(hereinafter 

The  European  Central  Bank 
'ECB')  was  established  on 
1 July 1998. The European Monetary System has been replaced by an exchange rate 
mechanism,  the  setting-up  of  which  was  agreed  by  a  resolution  of  the  European 
Council  on  the  establishment  of  an  exchange-rate  mechanism  in  the  third  stage  of 
economic and monetary union of 16 June 199711. The procedures for an exchange-rate 
mechanism in stage three of economic and monetary union (ERM II) were laid down 
in  the  Agreement  of  16  March  2006  between  the  European  Central  Bank  and  the 
national  central  banks  of  the  Member  States  outside  the  euro  area  laying  down  the 
operating procedures for an exchange rate mechanism in stage three of economic and 
monetary union.12 

Article 140(2) of the Treaty lay down the procedures for abrogation of the derogation 
of the Member States concerned. At least once every two years, or at the request of a 
Member  State  with  a  derogation,  the  Commission  and  the  ECB  shall  report  to  the 
Council  in  accordance  with  the  procedure  laid down in Article 140(1) of the Treaty. 
The latest Commission and ECB regular Convergence Reports were adopted in May 
2010.  

National  legislation  in  the  Member  States  including  the  statutes  of  national  central 
banks  shall  as  necessary  be  adapted  with  a  view  to  ensuring  compatibility  with 
Articles 130 and 131 of the Treaty and the Statute of the European System of Central 
Banks and of the European Central Bank (hereinafter the 'Statute of the ESCB and of 

OJL 195, 24.7.2008, p. 24. 
OJ L 236, 23.9.2003, p. 33. 
OJ L 157, 21.6.2005, p. 203. 
OJ C 236, 2.8.1997, p. 5. 
OJ C 73, 25.3.2006, p. 21. Agreement as amended by the Agreement of 14 December 2007 (OJ C 319, 
29.12.2007, p. 7). 

(3) 

(4) 

(5) 

(6) 

(7) 

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(8) 

the ECB'). The reports of the Commission and the ECB provide a detailed assessment 
of  the  compatibility  of  the  legislation  of  Estonia  with  Articles  130  and  131  of  the 
Treaty and the Statute of the ESCB and of the ECB.  

According to Article 1 of the Protocol No 13 on the convergence criteria referred to in 
Article 140 of the Treaty, the criterion on price stability referred to in the first indent 
of  Article  140(1)  of  the  Treaty  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 one and a half percentage 
points  that  of,  at  most,  the  three  best  performing  Member  States  in  terms  of  price 
stability. For the purpose of the criterion on price stability, inflation will be measured 
by the harmonised indices of consumer prices (HICPs) defined in Council Regulation 
(EC)  No  2494/95  of  23  October  1995  concerning  harmonised  indices  of  consumer 
prices13. In order to assess the price stability criterion a Member State's inflation has 
been  measured  by  the  percentage  change  in  the  arithmetic  average  of  12  monthly 
indices relative to the arithmetic average of 12 monthly indices of the previous period. 
A reference value calculated as the simple arithmetic average of the inflation rates of 
the three best-performing Member States in terms of price stability plus 1.5 percentage 
points was considered in the reports of the Commission and the ECB. In the one-year 
period  ending  in  March  2010,  the  inflation  reference  value  was  calculated  to  be  1.0 
percent,  with  Portugal,  Estonia  and  Belgium  as  the  three  best-performing  Member 
States in terms of price stability, with inflation rates of, respectively -0.8 percent, -0.7 
percent  and  -0.1  percent.  In  the  current  economic  circumstances  characterised  by  a 
large common adverse shock, where a significant number of countries face episodes of 
negative inflation rates, it seems warranted to exclude from the best performers those 
countries whose  average  inflation rate is distant from the euro area  average  inflation 
(0.3%  in  March  2010)  by  a  wide  margin  –  in  line  with  the  precedent  of  the  2004 
Convergence  Report  –  ,  as  these  outliers  cannot  reasonably  be  judged  as  being  best 
performers  in  terms  of  price  stability  and  including  them  would  severely  affect  the 
reference value and thus the fairness of the criterion. In March 2010, this leads to the 
exclusion of Ireland, the only country whose 12-month average inflation rate (at -2.3% 
in  March  2010)  deviated  by  a  wide  margin  from  that  of  the  euro  area  and  other 
Member States, mainly reflecting the severe economic downturn.14  

(9) 

According to Article 2 of the Protocol No 13 on the convergence criteria annexed to 
the  Treaty,  the  criterion  on  the  government  budgetary  position  referred  to  in  the 
second  indent  of  Article  140(1)  of  the  Treaty  shall  mean  that  at  the  time  of  the 
examination the Member State is not the subject of a Council decision under Article 
126(6) of the Treaty that an excessive deficit exists. 

(10)  According to Article 3 of the Protocol No 13 on the convergence criteria annexed to 
the  Treaty,  the  criterion  on  participation  in  the  exchange-rate  mechanism  of  the 
European  Monetary  System  referred  to  in  the  third  indent  of  Article  140(1)  of  the 
Treaty  means  that  a  Member  State  has  respected  the  normal  fluctuation  margins 

13 

14 

OJ L 257, 27.10.1995, p. 1. Regulation as amended by Regulation (EC) No 1882/2003 of the European 
Parliament and the Council (OJ L 284, 31.10.2003, p. 1) and by Regulation (EC) No 596/2009 of the 
European Parliament and the Council. 
In its result, this approach is also consistent with what was done in 2004 when Lithuania's average 12-
month  inflation  was  2.3  percentage  points  below  the  euro  area  average  12-month  inflation  and  was 
excluded from the best performers. 

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provided  for  by  the  exchange-rate  mechanism  (ERM)  of  the  European  Monetary 
System without severe tensions for at least the last two years before the examination. 
In particular, the Member State must not have devalued its currency's bilateral central 
rate against the euro on its own initiative for the same period. Since 1 January 1999 
the ERM II provides the framework for assessing the fulfillment of the exchange rate 
criterion. In assessing the fulfillment of this criterion in their reports, the Commission 
and the ECB have examined the two-year period ending on 23 April 2010. 

(11)  According to Article 4 of the Protocol No 13 on the convergence criteria annexed to 
the Treaty, the criterion on the convergence of interest rates referred to in the fourth 
indent of Article 140(1) of the Treaty 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.  For  the  purpose  of  the 
criteria  on  the  convergence  of  interest  rates,  comparable  interest  rates  on  10-year 
benchmark  government  bonds  were  used.  Estonia,  which  was  one  of  the  best 
performing Member States in terms of price stability in March 2010, does not have a 
harmonized  benchmark  long-term  government  bond  or  a  comparable  security  that 
could  be  used  for  the  calculation  of  the  reference  value.  Therefore,  in  line  with  the 
wording  of  the  Protocol  (referring  to  'at  most  the  three  best  performing  Member 
States'), in order to assess the fulfillment of the interest-rate criterion a reference value 
calculated as the simple arithmetic average of the nominal long-term interest rates of 
the  two  other  best  performing  Member  States  in  terms  of  price  stability  plus  two 
percentage points was considered in the reports of the Commission and the ECB. On 
this  basis,  the  reference  value  in  the  one  year  period  ending  in  March  2010  was  6.0 
percent, the average of interest rate in Portugal (4.2%) and Belgium (3.8%).  

(12) 

In  accordance  with  Article  5  of  the  Protocol  No  13  on  the  convergence  criteria 
annexed to the Treaty, the data used in the current assessment of the fulfillment of the 
convergence criteria have to provided by the Commission. For the preparation of this 
proposal  the  Commission  provided  data.  Budgetary  data  were  provided  by  the 
Commission after reporting by the Member States by 1 April 2010 in accordance with 
Council  Regulation  (EC)  No  479/2009  of  25  May  2009  on  the  application  of  the 
Protocol  on  the  excessive  deficit  procedure  annexed  to  the  Treaty  establishing  the 
European Community. 

(13)  On  the  basis  of  reports  presented  by  the  Commission  and  the  ECB  on  the  progress 
made  in  the  fulfillment  by  Estonia  of  its  obligations  regarding  the  achievement  of 
economic and monetary union, the Commission concluded that: 

(a) 

In  Estonia,  national  legislation,  including  the  Statute  of  the  national  central 
bank, is compatible with Articles 130 and 131 of the Treaty and the Statute of 
the ESCB and of the ECB. 

(b)  Regarding the fulfillment by Estonia of the convergence criteria mentioned in 

the four indents of Article 140(1) of the Treaty: 

– 

The average inflation rate in Estonia in the year ending March 2010 stood at -
0.7 percent, which is well below the reference value, and it is likely to remain 
below the reference value in the months ahead;  

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– 

– 

– 

Estonia is not the subject of a Council decision on the existence of an excessive 
deficit, with a budget deficit of 1.7% of GDP in 2009;  

Estonia  has  been  a  member  of  ERM  II  since  28  June  2004;  in  the  two-year 
period ending 23 April 2010, the Estonian kroon has not been subject to severe 
tensions  and  there  has  been  no  deviation  from  the  ERM  II  central  rate  since 
kroon's participation; 

As a result of Estonia's very low level of gross public debt, no benchmark long-
term  government  bonds  or  other  appropriate  securities  are  available  to  assess 
the  durability  of  convergence  as  reflected  in  long-term  interest  rates.  While 
financial market risk perceptions vis-à-vis Estonia increased at the height of the 
crisis,  their  development  during  the  reference  period,  as  well  as  a  broader 
assessment  on  the  durability  of  convergence,  including  Estonia's  continued 
prudent policies, would support a positive assessment on Estonia's fulfilment of 
the long-term interest rate criterion.  

(c) 

In the light of the assessment on legal compatibility and on the fulfilment of the 
convergence  criteria  as  well  as  the  additional  factors,  Estonia  fulfils  the 
necessary conditions for the adoption of the euro.  

HAS ADOPTED THIS DECISION:  

Article 1 

Estonia fulfils the necessary conditions for the adoption of the euro. The derogation in favour 
of Estonia referred to in Article 4 of the 2003 Act of Accession is abrogated with effect from 
1 January 2011. 

This Decision is addressed to the Member States. 

Article 2 

Article 3 

This Decision shall be published in the Official Journal of the European Union. 

Done at Brussels, 

For the Council 
The President 

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