REPORT FROM THE COMMISSION CONVERGENCE REPORT 2012 (Prepared in accordance with Article 140(1) of the Treaty on the functioning of the European Union)
Date: 2012-05-30
Institutions: European Commission
Subjects: Bulgaria, Czechia, Hungary, Latvia, Lithuania, Poland, Romania, Sweden, convergence criteria

EUROPEAN COMMISSION 

Brussels, 30.5.2012  
COM(2012) 257 final 

REPORT FROM THE COMMISSION 

CONVERGENCE REPORT 2012 

(Prepared in accordance with Article 140(1) of the Treaty on the functioning of the 
European Union) 

{SWD(2012) 144 final} 

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REPORT FROM THE COMMISSION 

CONVERGENCE REPORT 2012 

(Prepared in accordance with Article 140(1) of the Treaty on the functioning of the 
European Union) 

1. 

PURPOSE OF THE REPORT 

Article  140(1)  of  the  Treaty  on  the  Functioning  of  the  European  Union  (hereafter 
TFEU) requires the Commission and the ECB to report to the Council, at least once 
every  two  years,  or  at  the  request  of  a  Member  State  with  a  derogation1,  on  the 
progress  made  by  the  Member  States  in  fulfilling  their  obligations  regarding  the 
achievement  of  economic  and  monetary  union.  The  latest  Commission  and  ECB 
Convergence Reports were adopted in May 2010. 

The  2012  Convergence  Report  covers  the  following  eight  Member  States  with  a 
derogation:  Bulgaria,  the  Czech  Republic,  Latvia,  Lithuania,  Hungary,  Poland, 
Romania  and  Sweden2.  A  more  detailed  assessment  of  the  state  of  convergence  in 
these  Member  States  is  provided  in  a  Technical  Annex  to  this  report  (SWD(2012) 
144). At the time of the last Convergence Report in 2010, Member States had shown 
uneven  progress  with  convergence,  as  many  of  them  were  undergoing  significant 
adjustments  of  previously  accumulated  imbalances,  against  the  background  of  the 
economic and financial crisis. The present examination takes place in a still difficult 
external environment, with a fragile recovery in the region and recurrent headwinds 
on financial markets.  

The content of the reports prepared by the Commission and the ECB is governed by 
Article  140(1)  of  the  TFEU.  This  Article  requires  the  reports  to  include  an 
examination of the compatibility of national legislation, including the statutes of the 
national central bank, with Articles 130 and 131 of the TFEU and the Statute of the 
European  System  of  Central  Banks  and  of  the  European  Central  Bank  (hereafter 
ESCB/ECB  Statute).  The  reports  must  also  examine  whether  a  high  degree  of 
sustainable  convergence  has  been  achieved  in  the  Member  State  concerned  by 
reference  to  the  fulfilment  of  the  convergence  criteria  (price  stability,  public 
finances, exchange rate stability, long-term interest rates), and by taking account of 
other  factors  mentioned  in  the  final  sub-paragraph  of  Article  140(1)  of  the  TFEU. 
The  four  convergence  criteria  are  developed  further  in  a  Protocol  annexed  to  the 
Treaties (Protocol No 13 on the convergence criteria). 

The  economic  and  financial  crisis  has  exposed  gaps  in  the  current  economic 
governance system of EMU and showed that its existing instruments need to be used 

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2 

The Member States that have not yet fulfilled the necessary conditions for the adoption of the euro are 
referred to as "Member States with a derogation". Denmark and the United Kingdom negotiated opt-out 
arrangements before the adoption of the Maastricht Treaty and do not participate in the third stage of 
EMU. 
Denmark and the United Kingdom have not expressed an intention to adopt the euro and are therefore 
not covered in the assessment. 

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more  fully.  The  present  examination  takes  place  within  a  context  of  the  reform  of 
EMU  governance,  which  was  undertaken  over  past  two  years  with  the  aim  of 
ensuring a sustainable functioning of economic and monetary union. The assessment 
of convergence is thus aligned with the broader "European semester" approach which 
takes an integrated and upstream look at the economic policy challenges facing the 
EMU in ensuring fiscal sustainability, competitiveness, financial market stability and 
economic growth. The key innovations in the area of governance reform, reinforcing 
the  assessment  of  each  Member  States'  convergence  process  and  its  sustainability, 
include inter alia the excessive deficit procedure, as strengthened by the 2011 reform 
of the Stability and Growth Pact, and new instruments in the area of surveillance of 
macroeconomic imbalances. In particular, it takes into account the assessment of the 
2012 Convergence Programmes3 and the findings under the Alert Mechanism Report 
of the Macroeconomic Imbalances Procedure4. 

Convergence criteria 

The examination of the compatibility of national legislation, including the statutes 
of the national central banks, with Article 130 and with the compliance duty under 
Article  131  of  the  TFEU  encompasses  an  assessment  of  observance  of  the 
prohibition  of  monetary  financing  (Article  123)  and  the  prohibition  of  privileged 
access  (Article  124);  consistency  with  the  ESCB's  objectives  (Article  127(1))  and 
tasks (Article 127(2)) and other aspects relating to the integration of national central 
banks into the ESCB at the moment of the euro adoption. 

The  price  stability  criterion  is  defined  in  the  first  indent  of  Article  140(1)  of  the 
TFEU:  “the  achievement  of  a  high  degree  of  price  stability  […]  will  be  apparent 
from a rate of inflation which is close to that of, at most, the three best performing 
Member States in terms of price stability”. 

Article  1  of  the  Protocol  on  the  convergence  criteria  further  stipulates  that  “the 
criterion  on  price  stability  […]  shall  mean  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  1.5 
percentage points that of, at most, the three best-performing Member States in terms 
of price stability. Inflation shall be measured by means of the consumer price index 
on a comparable basis, taking into account differences in national definitions”5. The 
requirement of sustainability implies that the satisfactory inflation performance must 
essentially  be  attributable  to  the  behaviour  of  input  costs  and  other  factors 
influencing  price  developments  in  a  structural  manner,  rather  than  the  influence  of 
temporary  factors.  Therefore,  the  convergence  examination  includes  an  assessment 
of the factors that have an impact on the inflation outlook and is complemented by a 

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Available  at  http://ec.europa.eu/economy_finance/economic_governance/sgp/convergence/programmes 
/2012_en.htm 
A key lesson from the economic and financial crisis has been that the economic governance framework 
underpinning  EMU  needed  to  be  further  strengthened  to  address  the  issue  of  unsustainable 
macroeconomic trends. The new procedure on prevention and correction of macroeconomic imbalances 
–  the  Macroeconomic  Imbalance  Procedure  (MIP)  –  responds  to  this  need  and  was  one  of  the  key 
elements of the legislative package (the so-called "6-pack" that entered into force in December 2011) to 
enhance the governance structures in EMU 
For  the  purpose  of  the  criterion  on  price  stability,  inflation  is  measured  by  the  Harmonised  Index  of 
Consumer Prices (HICP) defined in Council Regulation (EC) No 2494/95. 

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reference  to  the  most  recent  Commission  services'  forecast  of  inflation6.  Related  to 
this, the report also assesses whether the country is likely to meet the reference value 
in the months ahead.  

The  inflation  reference  value  was  calculated  to  be  3.1%  in  March  2012,  with 
Sweden, Ireland and Slovenia as the three best-performing Member States. 

The  convergence  criterion  dealing  with  public  finances  is  defined  in  the  second 
indent  of  Article  140(1)  of  the  TFEU  as  “the  sustainability  of  the  government 
financial  position:  this  will  be  apparent  from  having  achieved  a  government 
budgetary  position  without  a  deficit  that  is  excessive  as  determined  in  accordance 
with  Article  126(6)”.  Furthermore,  Article  2  of  the  Protocol  on  the  convergence 
criteria  states  that  this  criterion  means  that  “at  the  time  of  the  examination  the 
Member State is not the subject of a Council decision under Article 126(6) of the said 
Treaty  that  an  excessive  deficit  exists”.  As  part  of  an  overall  strengthening  of 
economic  governance  in  EMU,  the  secondary  legislation  related  to  public  finances 
was  enhanced  in  2011,  including  the  new  regulations  amending  the  Stability  and 
Growth Pact7.  

The TFEU refers to the exchange rate criterion in the third indent of Article 140(1) 
as “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”. 

Article  3  of  the  Protocol  on  the  convergence  criteria  stipulates:  “The  criterion  on 
participation in the exchange rate mechanism of the European Monetary System (…) 
shall  mean  that  a  Member  State  has  respected  the  normal  fluctuation  margins 
provided  for  by  the  exchange-rate  mechanism  of  the  European  Monetary  System 
without  severe  tensions  for  at  least  the  last  two  years  before  the  examination.  In 
particular, the Member State shall not have devalued its currency’s bilateral central 
rate against the euro on its own initiative for the same period”8. 

The relevant two-year period for assessing exchange rate stability in this report is 1 
May 2010 to 30 April 2012. In its assessment of the exchange rate stability criterion, 

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All forecasts for inflation and other variables in the current report are from the Commission services' 
Spring 2012 Forecast. The Commission services' forecasts are based on a set of common assumptions 
for external variables and on a no-policy change assumption while taking into consideration measures 
that  are  known  in  sufficient  detail.  The  forecast  of  the  reference  value  is  subject  to  significant 
uncertainties given that it is calculated on the basis of the inflation forecasts for the three Member States 
projected to be the best performers in terms of price stability in the forecast period, thereby increasing 
the possible margin of error. 
A  directive  on  minimum  requirements  for  national  budgetary  frameworks,  two  new  regulations  on 
macroeconomic  surveillance  and  three  regulations  amending  the  Stability  and  Growth  Pact  (SGP) 
entered  into  force  on  13  December  2011  (one  out  of  two  new  regulations  on  macroeconomic 
surveillance and one out of three regulations amending the SGP include new enforcement mechanisms 
for  euro  area  Member  States).  Besides  the  operationalization  of  the  debt  criterion  in  the  Excessive 
Deficit  Procedure,  the  amendments  introduced  a  number  of  important  novelties  in  the  Stability  and 
Growth  Pact,  in  particular  an  expenditure  benchmark  to  complement  the  assessment  of  progress 
towards the country-specific medium-term budgetary objective. 
In  assessing  compliance  with  the  exchange  rate  criterion,  the  Commission  examines  whether  the 
exchange rate has remained close to the ERM II central rate, while reasons for an appreciation may be 
taken into account, in accordance with the Common Statement on Acceding Countries and ERM2 by 
the Informal ECOFIN Council, Athens, 5 April 2003. 

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the  Commission  takes  into  account  developments  in  auxiliary  indicators  such  as 
foreign  reserve  developments  and  short-term  interest  rates,  as  well  as  the  role  of 
policy measures, including foreign exchange interventions, in maintaining exchange 
rate  stability.  The  analysis  also  takes  into  account  the  impact  of  external  official 
financing  arrangements  wherever  relevant,  including  their  size,  the  amount  and 
profile of assistance flows and the possible policy conditionality. 

The  fourth  indent  of  Article  140(1)  of  the  TFEU  requires  “the  durability  of 
convergence achieved by the Member State with a derogation and of its participation 
in  the  exchange  rate  mechanism  being  reflected  in  the  long-term  interest  rate 
levels”.  Article  4  of  the  Protocol  on  the  convergence  criteria  further  stipulates  that 
“the  criterion  on  the  convergence  of  interest  rates  (…)  shall  mean  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  2 
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”.  At  the  current  juncture,  sovereign  bond  markets  in  some 
Member States are subject to severe distortions, which make their long-term interest 
rates  not  a  meaningful  benchmark  for  the  assessment  of  convergence.  Against  this 
background,  it  would  not  be  appropriate  to  include  the  long-term  interest  rate  of 
Ireland, one of the three best-performing Member States in terms of price stability, in 
the calculation of the reference value for the long-term interest rate criterion. Hence, 
the reference value is based on the long-term interest rates in Sweden and Slovenia9.  

The interest rate reference value was calculated to be 5.8% in March 2012.  

Article 140(1) of the TFEU also requires an examination of other factors relevant to 
economic integration and convergence. These additional factors include financial and 
product  market integration, the development of the balance of payments on current 
account and the development of unit labour costs and other price indices. The latter 
are  covered  within  the  assessment  of  price  stability.  The  additional  factors  are 
important indicators that the integration of a Member State into the euro area would 
proceed without difficulties.  

2. 

BULGARIA 

Legislation  in  Bulgaria  –  in  particular  the  Law  on  the  Bulgarska  narodna  banka 
(BNB) and the Conflict of Interest Prevention and Ascertainment Act – is not fully 
compatible  with 
the  TFEU. 
Incompatibilities and imperfections exist in the fields of independence of the BNB, 
prohibition  of  monetary  financing  and  central  bank  integration  into  the  ESCB,  as 
regards the ESCB tasks laid down in Article 127(2) of the TFEU and Article 3 of the 
ESCB/ECB Statute. 

the  compliance  duty  under  Article  131  of 

9 

The  reference  value  for  March  2012  is  calculated  as  the  simple  average  of  the  average  long-term 
interest  rates  in  Sweden  (2.2%)  and  Slovenia  (5.4%).  In  contrast,  the  12-month  average  long-term 
interest  rate  in  Ireland  was  9.1%  in  March  2012.  Ireland  has  been  the  beneficiary  of  an  EU/IMF 
financial assistance programme since December 2010. 

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In Bulgaria, 12-month average inflation had been above the reference value at each 
convergence  assessment  since  EU  accession  in  2007.  The  average  inflation  rate  in 
Bulgaria during the 12 months to March 2012 was 2.7%, below the reference value 
of 3.1%. It is projected to remain below the reference value in the months ahead. 

Annual HICP inflation declined to close to zero by late 2009 on the back of falling 
commodity prices and the strong recession. Strengthening commodity prices, indirect 
tax increases and still substantial wage growth put inflation back on an upward trend 
in  2010.  It  reached  a  peak  of  4.6%  in  early  2011  before  decreasing  again  with  the 
fading of the impact of the former two factors to 2% by end-2011. In March 2012, 
annual HICP inflation stood at 1.7%. 

Inflation  is  expected  to  pick  up  slightly  during  the  course  of  2012,  as  commodity 
price increases at the beginning of the year will feed through and high nominal wage 
growth is set to lift services prices, despite weak domestic demand. Accordingly, the 
Commission services' 2012 Spring Forecast projects annual average inflation at 2.6% 
in  2012  and  2.7%  in  2013.  The  relatively  low  price  level  in  Bulgaria  (49%  of  the 
euro  area  average  in  2010)  suggests  significant  potential  for  further  price  level 
convergence in the long term. 

Bulgaria fulfils the criterion on price stability.  

Graph 2a: Bulgaria - Inflation criterion since 2006

(percent, 12-month moving average)

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8

6

4

2

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Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Bulgaria
Note: The dots in December 2012 show the projected 
reference value and 12-month average inflation in the country.
Sources: Eurostat, Commission services' Spring 2012 Forecast.

Reference value

Bulgaria  is  at  present  the  subject  of  a  Council  Decision  on  the  existence  of  an 
excessive  deficit  (Council  Decision  of  13  July  2010)10.  The  Council  recommended 
Bulgaria to take action to bring the deficit below 3% of GDP by 2011 in a credible 
and sustainable manner. The general government balance fell from a deficit of 4.3% 
of  GDP  in  2009  to  3.1%  in  2010,  on  the  back  of  lower  expenditures-to-GDP.  The 
deficit-to-GDP  ratio  was  2.1%  in  2011  and  according  to  the  Commission  services' 
Spring 2012 Forecast, it is projected to improve further to 1.9% of GDP in 2012 and 
1.7% in 2013, under a no-policy-change assumption, supported by a continued freeze 
in  public  sector  wage  bill  and  pensions  as  well  as  measures  to  boost  revenue 
collection.  The  gross  public  debt  ratio  remained  low  at  around  16.3%  of  GDP  in 

10 

2010/422/EU (OJ L 199, 31.7.2010, p. 26). 

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2011 and it is projected to increase to 17.6% of GDP in 2012 and 18.5% of GDP in 
2013. 

In view of these developments and the Commission services' Spring 2012 Forecast, 
the  Commission  considers  that  the  excessive  deficit  has  been  corrected  with  a 
credible  and  sustainable  reduction  of  the  budget  deficit  below  3%  of  GDP.  The 
Commission is therefore recommending that the Council abrogate the decision on the 
existence of an excessive deficit for Bulgaria. 

If  the  Council  decides  to  abrogate  the  excessive  deficit  procedure  for  Bulgaria, 
Bulgaria will fulfil the criterion on public finances. 

(in percent of GDP)

Graph 2b: Bulgaria - Government budget balance and debt
Inverted scale
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-4
-3
-2
-1
0
1
2
3

2006

2007

2008

2009

2010

2011

2012(*) 2013(*)

25

20

15

10

5

Government balance (lhs)

Cyclically-adjusted balance (lhs)

Gross debt (rhs)

(*) Commission services' Spring 2012 Forecast.
Source: Eurostat, Commission services.

The  Bulgarian  lev  is  not  participating  in  ERM  II.  The  BNB  pursues  its  primary 
objective  of  price  stability  through  an  exchange  rate  anchor  in  the  context  of  a 
Currency Board Arrangement (CBA). Bulgaria introduced its CBA on 1 July 1997, 
pegging  the  Bulgarian  lev  to  the  German  mark  and  later  the  euro.  Additional 
indicators, such as developments in foreign exchange reserves and short-term interest 
rates,  suggest  that  investors'  risk  perception  towards  Bulgaria  has  been  generally 
improving since 2009. A sizeable official reserves buffer continues to underpin the 
resilience  of  the  CBA.  During  the  two-year  assessment  period,  the  Bulgarian  lev 
remained fully stable vis-à-vis the euro, in line with the operation of the CBA.  

Bulgaria does not fulfil the exchange rate criterion. 

The average long-term interest rate in Bulgaria in the year to March 2012 was 5.3%, 
below  the  reference  value  of  5.8%.  It  gradually  declined  from  above  7%  in  early 
2010  to  somewhat  above  5%  by  end-2011.  Yield  spreads  vis-à-vis  the  euro  area 
long-term benchmark bonds11 were volatile but gradually declined between autumn 
2009  and  early  2012,  as  Bulgarian  bond  yields  fell  with  the  calming  of  global 
financial  tensions  and  a  reduction  in  the  country  risk  premia.  In  mid-2010,  a 
temporary bout of pressure affecting the Bulgarian long-term yields was linked to the 
euro-area  sovereign  debt  crisis  and  concerns  about  the  quality  of  Bulgarian  public 
finance statistics.  

11 

Countries' long-term interest spreads vis-à-vis the euro area long-term benchmark bonds are computed 
using the monthly series "EMU convergence criterion bond yields" published by Eurostat. The series is 
also  published  by  the  ECB  under  the  name  "Harmonised  long-term  interest  rate  for  convergence 
assessment purposes". 

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Bulgaria fulfils the criterion on the convergence of long-term interest rates.  

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments  and  product  and  financial  market  integration.  Bulgaria's  external 
balance adjusted from very large deficits until 2008 to broadly balanced position in 
2010 and a surplus of around 2% of GDP in 2011. The improvement was mostly on 
account  of  the  trade  balance,  as  imports  fell  with  lower  domestic  demand,  while 
exports grew dynamically in 2010 and 2011. The reduction in net external funding of 
the  banking  sector  resulted  in  significant  outflows  in  the  financial  account,  partly 
counterbalanced by FDI inflows, which continued albeit at a lower level than before 
the  crisis.  The  Bulgarian  economy  is  well  integrated  within  the  EU  economy, 
particularly  through  strong  trade  and  FDI  linkages.  On  the  basis  of  selected 
indicators relating to the business environment, Bulgaria performs below the average 
of euro area Member States. The integration of the domestic financial sector into the 
EU  financial  system  is  substantial,  mainly  thanks  to  a  high  level  of  foreign 
ownership of the banking system. In line with the conclusion of the Alert Mechanism 
Report  from  February  2012,  Bulgaria  was  subject  to  an  in-depth  review  in  the 
context of the Macroeconomic Imbalance Procedure. 

In  the  light  of  its  assessment  on  legal  compatibility  and  on  the  fulfilment  of  the 
convergence criteria, and taking into account the additional factors, the Commission 
considers that Bulgaria does not fulfil the conditions for the adoption of the euro. 

3. 

THE CZECH REPUBLIC 

Legislation in the Czech Republic – in particular the Act on the Česká národní banka 
(ČNB) – is not fully compatible with the compliance duty under Article 131 of the 
TFEU.  Incompatibilities  notably  concern  the  independence  of  the  central  bank,  the 
prohibition of monetary financing and central bank integration into the ESCB at the 
time of euro adoption with regard to the ESCB tasks laid down in Article 127(2) of 
the TFEU and Article 3 of the ESCB/ECB Statute. In addition, the Act on the ČNB 
also  contains  some  imperfections  relating  to  central  bank  independence,  the 
prohibition of monetary financing and ESCB tasks.  

In the Czech Republic, 12-month average inflation was below the reference value at 
the time of the last convergence assessment in 2010. The average inflation rate in the 
Czech Republic during the 12 months to March 2012 was 2.7%, below the reference 
value  of  3.1%.  It  is  projected  to  increase  above  the  reference  value  in  the  months 
ahead.  

Inflation in the Czech Republic moved broadly in line with euro area levels in recent 
years.  Annual  inflation  fell  sharply  and  briefly  became  negative  in  the  course  of 
2009,  when  the  Czech  economy  entered  recession.  Inflation  remained  subdued  in 
2010  and  2011  amid  muted  domestic  demand,  while  import  price  developments 
largely drove domestic prices. Headline inflation picked up in early 2012, largely due 
to an increase in the VAT preferential rate. 

Inflation is expected to remain higher in 2012 compared to recent years in response 
to  the  VAT  rate  increase,  though  sluggish  domestic  demand  and  favourable  unit 
labour  cost  developments  are  expected  to  moderate  price  increases  going  forward. 

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On this basis, the Commission services' Spring 2012 Forecast projects annual HICP 
inflation  to  average  3.3%  in  2012  and  2.2%  in  2013.  The  price  level  in  the  Czech 
Republic (about 72% of the euro area average in 2010) suggests potential for price 
level convergence in the long term.  

The Czech Republic does not fulfil the criterion on price stability. 

Graph 3a: Czech Republic - Inflation criterion since 2006

(percent, 12-month moving average)

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6

5

4

3

2

1

0
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Czech Republic

Reference value

Note: The dots in December 2012 show the projected 
reference value and 12-month average inflation in the country.
Sources: Eurostat, Commission services' Spring 2012 Forecast.

The Czech Republic is at present the subject of a Council Decision on the existence 
of  an  excessive  deficit  (Council  Decision  from  2  December  2009)12.  The  Council 
recommended  the  Czech  Republic  to  correct  the  excessive  deficit  by  2013.  The 
general government deficit in the Czech Republic peaked at 5.8% of GDP in 2009, 
but it declined to 4.8% and 3.1% of GDP in 2010 and 2011 respectively amid fiscal 
consolidation efforts. According to the Commission services' Spring 2012 Forecast, 
which  is  based  on  a  no-policy-change  assumption,  the  deficit-to-GDP  ratio  will 
amount  to  2.9%  in  2012  and  2.6%  in  2013,  while  general  government  debt  is 
expected to increase from 43.9% of GDP in 2012 to 44.9% of GDP in 2013.  

The Czech Republic does not fulfil the criterion on public finances. 

(in percent of GDP)

Graph 3b: Czech Rep. - Government budget balance and debt
Inverted scale
-7
-6
-5
-4
-3
-2
-1
0

50
45
40
35
30
25
20
15

2006

2007

2008

2009

2010

2011

2012(*) 2013(*)

Government balance (lhs)

Cyclically-adjusted balance (lhs)

Gross debt (rhs)

(*) Commission services' Spring 2012 Forecast.

Source: Eurostat, Commission services.

12 

2010/284/EU (OJ L 125, 21.5.2010, p. 36–37). 

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The  Czech  koruna  is  not  participating  in  ERM  II.  The  Czech  Republic  operates  a 
floating  exchange  rate  regime.  Following  a  strong  weakening  impetus  amid  the 
unfolding global financial crisis in late 2008, the koruna's exchange rate against the 
euro  followed  a  broad  appreciation  trend  between  2009  and  mid-2011.  Short-term 
interest  rate  spreads  vis-à-vis  the  euro  narrowed  significantly  in  2009-2010  and 
turned  negative  in  2011  amid  tensions  in  euro  area  financial  markets.  The  koruna 
depreciated  in  the  second  half  of  2011,  but  it  recovered  part  of  the  losses  in  early 
2012.  During  the  two  years  before  this  assessment,  the  koruna  appreciated  against 
the euro by 2.8%. 

The Czech Republic does not fulfil the exchange rate criterion. 

The average long-term interest rate in the Czech Republic in the year to March 2012 
was 3.5%, well below the reference value of 5.8%. Average long-term interest rates 
in  the  Czech  Republic  stayed  below  the  reference  value  at  each  convergence 
assessment since EU accession in May 2004. Yield spreads vis-à-vis euro area long-
term benchmark bonds widened sharply amid global market tensions in late 2008 and 
in the first half of 2009, but they remained less affected compared to other Member 
States with a derogation. The long-term yields on Czech government bonds markedly 
declined between 2009 and early 2012, reflecting notably cuts in the central bank's 
policy rates as well as the comparatively strong fundamentals of the economy.  

The  Czech  Republic  fulfils  the  criterion  on  the  convergence  of  long-term 
interest rates.  

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments and product and financial market integration. In the years 2008-2011, 
the external deficit averaged at moderate levels of around 2% of GDP; an increase in 
the merchandise trade surplus was counteracted by rising net income outflows amid 
solid  FDI-related  profits.  The  Czech  economy  is  highly  integrated  within  the  EU 
economy through strong trade and FDI linkages. On the basis of selected indicators 
relating to the business environment, the Czech Republic performs below the average 
of euro area Member States. The integration of the domestic financial sector into the 
EU financial system is substantial, particularly through strong interbank linkages.  

In  the  light  of  its  assessment  on  legal  compatibility  and  on  the  fulfilment  of  the 
convergence criteria, and taking into account the additional factors, the Commission 
considers that the Czech Republic does not fulfil the conditions for the adoption of 
the euro.  

4. 

LATVIA 

the  compliance  duty  under  Article  131  of 

Legislation  in  Latvia  –  in  particular  the  Law  on  the  Latvijas  Banka  –  is  not  fully 
compatible  with 
the  TFEU. 
Incompatibilities  notably  concern  the  independence  of  the  central  bank,  the 
prohibition of monetary financing and central bank integration into the ESCB at the 
time of euro adoption with regard to the ESCB tasks laid down in Article 127(2) of 
the TFEU and Article 3 of the ESCB/ECB Statute. In addition, imperfections subsist 
in the field of central bank independence and ESCB tasks.  

EN 

10 

   EN 

 
In Latvia, the 12-month average inflation rate was below the reference value at the 
time of the last convergence assessment in 2010. The average inflation rate in Latvia 
during  the  12  months  to  March  2012  was  4.1%,  i.e.  above  the  reference  value  of 
3.1%. It is projected to decrease below the reference value in the months ahead.  

After  a  peak  of  annual  HICP  inflation  at  15.3%  in  2008,  significant  nominal  wage 
adjustment  and  a  correction  in  import  prices  led  to  negative  headline  inflation 
between  October  2009  and  November  2010.  As  the  cycle  turned  and  a  new  global 
commodity price shock set in, average inflation rose from -1.2% in 2010 to 4.2% in 
2011,  boosted  also  by  indirect  tax  increases.  In  March  2012,  annual  inflation 
moderated to 3.2%, as the impact of the temporary factors waned. 

HICP  inflation  is  expected  to  fall  to  2.6%  on  average  in  2012,  according  to  the 
Commission  services'  Spring  2012  Forecast,  with  the  slowing  economic  recovery 
and fading effect of indirect tax changes in 2011. It is projected to fall further in 2013 
to  2.1%  on  average,  in  the  context  of  relatively  weak  domestic  demand.  The  price 
level in Latvia (close to 70% of the euro area average in 2010) suggests potential for 
further price level convergence over the long term.  

Latvia does not fulfil the criterion on price stability.  

Graph 4a: Latvia - Inflation criterion since 2006
(percent, 12-month moving average)

16

12

8

4

0

-4
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Latvia

Reference value

Note: The dots in December 2012 show the projected 
reference value and 12-month average inflation in the country.
Sources: Eurostat, Commission services' Spring 2012 Forecast.

Latvia  is  at  present  subject  of  a  Council  Decision  on  the  existence  of  an  excessive 
deficit  (Council  Decision  of  7  July  2009)13.  The  Council  recommended  Latvia  to 
correct  the  excessive  deficit  by  2012.  The  general  government  deficit  in  Latvia 
reached  8.2%  of  GDP  in  2010,  but  decreased  to  3.5%  of  GDP  in  2011  due  to  a 
considerable  consolidation  effort.  The  Commission  services'  Spring  2012  Forecast 
projects the deficit-to-GDP ratio to further moderate to 2.1% both in 2012 and 2013 
under  a  no-policy-change  assumption.  The  ratio  of  gross  public  debt  to  GDP 
decreased to 42.6% in 2011 but it is projected to increase to 44.7% of GDP by end-
2013.  

Latvia does not fulfil the criterion on public finances.  

13 

2009/591/EC (OJ L 202, 4.8.2009, p. 50). 

EN 

11 

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Graph 4b: Latvia - Government budget balance and debt
(in percent of GDP)
Inverted scale
-12

-10

-8

-6

-4

-2

0

60

50

40

30

20

10

0

2006

2007

2008

2009

2010

2011

2012(*) 2013(*)

Government balance (lhs)

Cyclically-adjusted balance (lhs)

Gross debt (rhs)

(*) Commission services' Spring 2012 Forecast.
Source: Eurostat, Commission services.

The  Latvian  lats  has  participated  in  ERM  II  since  2  May  2005,  i.e.  for  more  than 
seven years at the time of adoption of this report. Upon ERM II entry, the authorities 
unilaterally committed to keep the lats within the ±1% fluctuation margin around the 
central rate. During the two years preceding this assessment, the lats exchange rate 
did  not  deviate  from  its  central  rate  by  more  than  ±1%  and  it  did  not  experience 
severe tensions, though the lats traded mostly close to the lower limit of the unilateral 
band. At the beginning of 2011, and more lastingly from late 2011, the exchange rate 
moved to the strong side of the band, as the Latvian Treasury changed the conversion 
practice of its foreign currency funds and thereby increased market demand for lats. 
Additional indicators, such as developments in foreign exchange reserves and short-
term interest rates do not reveal significant pressures on the exchange rate. The last 
disbursements by the IMF and the EU under the financial assistance programme took 
place  in  August  and  October  2010,  respectively.  In  June  2011,  Latvia  successfully 
returned to the international bond market, followed by another significant issuance in 
February 2012, signalling good market access.  

Latvia fulfils the exchange rate criterion. 

The average long-term interest rate in Latvia in the year to March 2012 was 5.8%, at 
the reference value of 5.8%. The average long-term interest rate in Latvia has been 
above  the  reference  value  at  the  2010  convergence  assessment,  but  it  declined 
strongly  from  almost  13%  in  early  2010  to  below  6%  by  end-2011.  Latvia's  long-
term  spreads  to  the  euro  area  long-term  benchmark  bonds  largely  compressed  in 
2010,  as  confidence  in  the  currency  peg  was  regained,  fiscal  consolidation  yielded 
results  and  the  conversion  of  assistance  programme  funds  created  ample  lats 
liquidity.  The  Treasury  returned  to  the  10-year  domestic  bond  market  with  several 
smaller  issues  during  the  first  half  of  2011  and  yields  on  these  bonds  were  quite 
resilient to international financial market turmoil in late 2011. 

Latvia fulfils the criterion on the convergence of long-term interest rates.  

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments  and  product  and  financial  market  integration.  The  external  balance 
reversed  in  2008-2009  from  large  deficits  during  the  boom  years  to  a  surplus  of 
around 11% of GDP in 2009, which decreased to 4.9% of GDP in 2010 and 0.9% of 
GDP in 2011. The two most important drivers of the external balance were the trade 
deficit and the income balance. In the financial account, the FDI balance gradually 

EN 

12 

   EN 

 
 
improved  from  2009,  but  repayment  of  net  external  funding  of  the  banking  sector 
continued  even  in  2011.  The  EU-IMF  balance  of  payments  assistance  programme 
granted  to  Latvia  in  late  2008  was  successfully  concluded  in  January  2012.  Latvia 
borrowed altogether only about EUR 4.5 billion out of the total EUR 7.5 billion that 
was available under the programme. In confidence of its policies and of its regained 
market access, Latvia has not requested a follow-up programme. 

Latvia's economy is well integrated within the EU economy through trade and FDI 
linkages.  On  the  basis  of  selected  indicators  relating  to  the  business  environment, 
Latvia  performs  broadly  in  line  with  the  average  of  euro  area  Member  States.  The 
integration  of  the  domestic  financial  sector  into  the  EU  financial  system  is 
substantial,  mainly  thanks  to  a  high  level  of  foreign  ownership  of  the  banking 
system. 

In  the  light  of  its  assessment  on  legal  compatibility  and  on  the  fulfilment  of  the 
convergence criteria, and taking into account the additional factors, the Commission 
considers that Latvia does not fulfil the conditions for the adoption of the euro. 

EN 

13 

   EN 

 
5. 

LITHUANIA 

Legislation  in  Lithuania  is  compatible  with  the  TFEU  and  the  ESCB/ECB  Statute 
with the exception of one imperfection regarding central bank independence: Article 
14(4)  of  the  Law  on  the  State  Audit  Office  should  be  fully  brought  in  line  with 
Article 27.1 of the ESCB/ECB Statute. 

In Lithuania, 12-month average inflation was above the reference value at the time of 
each convergence assessment since 2006. During the 12 months to March 2012, the 
average inflation rate in Lithuania was 4.2%, above the reference value of 3.1%. It is 
projected to approach the reference value in the months ahead. 

Annual HICP inflation peaked at above 12% in mid-2008 and then decreased rapidly 
throughout 2009 as the economy moved into recession. Following a marginal year-
on-year decline in the price level in early 2010, annual inflation increased gradually 
to  some  5%  in  May  2011,  mainly  as  a  result  of  substantial  commodity  price 
increases. Subsequently, it declined slowly to below 4% at the end of 2011, largely 
due to lower food price inflation. Annual inflation broadly stabilised in early 2012. 

Inflation  is  expected  to  decrease  to  around  3%  in  2012  and  2013  according  to  the 
Commission  services'  Spring  2012  Forecast,  reflecting  a  slower  pace  of  output 
growth  and  the  elevated  level  of  unemployment.  The  relatively  low  price  level  in 
Lithuania  (around  62%  of  the  euro-area  average  in  2010)  suggests  potential  for 
further price level convergence in the long term. 

Lithuania does not fulfil the criterion on price stability.  

Graph 5a: Lithuania - Inflation criterion since 2006

(percent, 12-month moving average)

12

10

8

6

4

2

0
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Lithuania

Reference value

Note: The dots in December 2012 show the projected 
reference value and 12-month average inflation in the country.
Sources: Eurostat, Commission services' Spring 2012 Forecast.

Lithuania  is  at  present  the  subject  of  a  Council  Decision  on  the  existence  of  an 
excessive deficit (Council Decision of 7 July 2009)14. In February 2010, the Council 
recommended  Lithuania  to  correct  the  excessive  deficit  by  2012.  The  general 
government  deficit decreased from 7.2% of GDP in 2010 to 5.5% of GDP in 2011 
thanks  to  continued  fiscal  consolidation  efforts.  According  to  the  Commission 

14 

2009/588/EC (OJ L 202, 4.8.2009, p. 44-45). 

EN 

14 

   EN 

 
 
                                                 
services'  Spring  2012  Forecast,  the  deficit-to-GDP  ratio  should  amount  to  3.2%  in 
2012  based  on  the  2012  budget  and  3%  of  GDP in 2013 under a no-policy-change 
assumption. Government  gross debt is expected to increase from 38.5% of GDP in 
2011 and to just below 41% of GDP in 2013. 

Lithuania does not fulfil the criterion on public finances.  

Graph 5b: Lithuania - Government budget balance and debt
Inverted scale
-10

(in percent of GDP)

-8

-6

-4

-2

0

50

40

30

20

10

0

2006

2007

2008

2009

2010

2011

2012(*) 2013(*)

Government balance (lhs)

Cyclically-adjusted balance (lhs)

Gross debt (rhs)

(*) Commission services' Spring 2012 Forecast.

Source: Eurostat, Commission services.

Lithuania  entered  ERM  II  on  28  June  2004  and  has  been  participating  in  the 
mechanism  for  almost  eight  years  at  the  time  of  the  adoption  of  this  report.  Upon 
ERM  II  entry,  the  authorities  unilaterally  committed  to  maintain  the  prevailing 
Currency  Board  Arrangement  within 
the  mechanism.  The  Currency  Board 
Arrangement  remains  well  supported  by  official  reserves.  Short-term  interest 
differentials vis-à-vis the euro area have remained below 50 basis points since early 
2011.  During  the  two-year  assessment  period,  the  litas  did  not  deviate  from  the 
central rate, and it did not experience severe tensions.  

Lithuania fulfils the exchange rate criterion. 

Average long-term interest rates in Lithuania were above the reference value at the 
time of the last convergence assessment in 2010. The average long-term interest rate 
in the year to March 2012 was 5.2%, below the reference value of 5.8%. Long-term 
interest rates remained at just above 5% from March 2010 until late 2011, when they 
increased slightly. The long-term interest rate used for the convergence examination 
should, however, be interpreted with caution as it reflects the secondary market yield 
on  a  single  benchmark  government  bond  with  a  comparatively  short  residual 
maturity of around 6 years while the Lithuanian market is very shallow.  

Lithuania fulfils the criterion on the convergence of long-term interest rates.  

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments as well as product and financial market integration. After turning to a 
substantial  surplus  in  2009,  Lithuania's  external  balance  deteriorated  again  in  2010 
and  2011,  reflecting  a  worsening  of  the  current  account  balance,  while  the  capital 
account  surplus  continued  to  increase  thanks  to  higher  absorption  of  EU  funds.  At 
the same time, Lithuania managed to attract increasing net inflows of foreign direct 
investment in 2010 and 2011. The Lithuanian economy is well integrated into the EU 
economy through trade and FDI linkages. On the basis of selected indicators relating 

EN 

15 

   EN 

 
 
to the business environment, Lithuania performs broadly in line with the average of 
euro area Member States. Lithuania’s financial sector is well integrated into the EU 
financial system as confirmed by the high share of foreign-owned banks.  

In  the  light  of  its  assessment  on  legal  compatibility  and  on  the  fulfilment  of  the 
convergence criteria, and taking into account the additional factors, the Commission 
considers that Lithuania does not fulfil the conditions for the adoption of the euro.  

6. 

HUNGARY 

Legislation  as  presently  in  force  in  Hungary  -  in  particular  the  Act  on  the  Magyar 
Nemzeti  Bank  (MNB)  and  the  Transitional  Provisions  of  the  Fundamental  Law  of 
Hungary - is not fully compatible with the compliance obligations under Article 131 
of  the  TFEU.  Incompatibilities  notably  concern  the  independence  of  the  MNB,  the 
prohibition of monetary financing and central bank integration into the ESCB at the 
time of euro adoption with regard to the ESCB tasks laid down in Article 127(2) of 
the TFEU and Article 3 of the ESCB/ECB Statute. In addition, the Law on the MNB 
also contains further imperfections relating to central bank independence and MNB 
integration into the ESCB. The draft legislation as presented by the government on 7 
March  2012  for  the  ECB  opinions  will,  if  adopted,  remove  the  incompatibilities  as 
regards the central bank independence. 

In Hungary, 12-month average inflation was above the reference value at the time of 
each  convergence  assessment  since  EU  accession.  The  average  inflation  rate  in 
Hungary during the 12 months to March 2012 was 4.3%, above the reference value 
of 3.1%. It is projected to move well above the reference value in the months ahead.  

Annual HICP inflation peaked at above 6% in January 2010, pushed up by indirect 
tax  hikes  adopted  in  2009  and  pass-through  from  a  weaker  exchange  rate.  Amid 
substantial  volatility,  consumer  price  inflation  broadly  followed  a  downward  trend, 
declining to around 3% in July 2011, as the inflationary impact of one-off measures 
faded  and  the  exchange  rate  strengthened.  Annual  inflation  increased  again  in  the 
second  half  of  2011,  driven  mainly  by  energy  price  increases  reflecting  higher 
commodity prices and a weaker exchange rate. In early 2012, a new round of indirect 
tax hikes induced a further pick-up in consumer prices.  

Inflation  is  expected  to  increase  to  above  5%  in  2012  and  then  to  decline  to  just 
below  4%  in  2013  according  to  the  Commission  services'  Spring  2012  Forecast, 
mainly  reflecting  the  changing  inflation  contribution  of  indirect  tax  hikes.  The 
relatively low price level in Hungary (about 62% of the euro area average in 2010) 
suggests potential for further price level convergence in the long term. 

Hungary does not fulfil the criterion on price stability.  

EN 

16 

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Graph 6a: Hungary - Inflation criterion since 2006

(percent, 12-month moving average)

10

8

6

4

2

0
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Hungary

Reference value

Note: The dots in December 2012 show the projected 
reference value and 12-month average inflation in the country.
Sources: Eurostat, Commission services' Spring 2012 Forecast.

Hungary  is  at  present  the  subject  of  a  Council  Decision  on  the  existence  of  an 
excessive  deficit  (Council  Decision  of  5  July  2004)15.  In  2009,  the  Council 
recommended Hungary to correct the excessive deficit by 2011. In January 2012, the 
Council  established  that  Hungary  had  not  taken  effective  action  in  response  to  the 
2009 Council Recommendation, as compliance with the 3% of GDP reference value 
in 2011 was not based on a structural and sustainable correction. In March 2012, the 
Council  issued  a  new  (the  fifth  consecutive)  recommendation  to  Hungary  under 
Article 126(7) and, on the basis of its January non-compliance decision, it partially 
suspended  commitments  of  the  EU  Cohesion  Fund  for  2013  (amounting  to  some 
EUR  0.5bn).  The  general  government  balance,  after  recording  a  deficit  of  4.2%  of 
GDP in 2010, turned to a surplus of 4.3% of GDP in 2011 due to significant one-off 
operations without which the deficit would have exceeded 5% of GDP; the structural 
balance  is  estimated  to  have  remained  in  a  deficit  of  above  4%  of  GDP  in  2011. 
According  to  the  Commission  services'  Spring  2012  Forecast,  the  deficit-to-GDP 
ratio will amount to 2.5% in 2012, as well as 2.9% in 2013 under a no-policy-change 
assumption. General government debt is expected to fall from 80.6% of GDP in 2011 
to 78% of GDP in 2013.  

Hungary does not fulfil the criterion on public finances.  

Graph 6b: Hungary - Government budget balance and debt
Inverted scale
-12

(in percent of GDP)

-9

-6

-3

0

3

6

90

85

80

75

70

65

60

2006

2007

2008

2009

2010

2011

2012(*) 2013(*)

Government balance (lhs)

Cyclically-adjusted balance (lhs)

Gross debt (rhs)

(*) Commission services' Spring 2012 Forecast.

Source: Eurostat, Commission services.

15 

2004/918/EC (OJ L 389, 30.12.2004, p. 27). 

EN 

17 

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The  Hungarian  forint  is  not  participating  in  ERM  II.  In  February  2008,  Hungary 
moved to a floating exchange rate regime, abandoning the unilateral peg of the forint 
to the euro (with a ±15% fluctuation band). The forint exchange rate against the euro 
exhibited  high  volatility  in  recent  years.  After  having  enjoyed  a  period  of  relative 
stability between August 2009 and April 2010 in the context of the EU-IMF balance 
of payments assistance programme, the forint depreciated sharply in May 2010 and 
remained weaker throughout the summer 2010. It followed a mild appreciating trend 
from September 2010 until April 2011 and then broadly stabilised for another three 
months. In the second half of 2011, as mounting financial market tensions in the euro 
area started to also negatively affect currency markets in central and eastern Europe, 
the forint depreciated by some 12% against the euro, also due to some controversial 
domestic economic policy measures such as the possibility to repay foreign currency-
denominated  mortgage  loans  at  historical  exchange  rates.  It  recovered  part  of  the 
losses in early 2012 amid a pick-up in global risk appetite and expectations that an 
agreement on precautionary balance of payments assistance by the EU and the IMF 
would  be  reached  soon.  During  the  two-year  assessment  period,  the  forint 
depreciated by 6.5% against the euro.  

Hungary does not fulfil the exchange rate criterion. 

Average  long-term  interest  rates  in  Hungary  were  above  the  reference  value  at  the 
time of each convergence assessment since EU accession, reflecting high risk premia 
in  view  of  perceived  weak  macroeconomic  fundamentals.  The  average  long-term 
interest rate in the year to March 2012 was 8.0%, well above the reference value of 
5.8%.  Between  September  2009  and  September  2011  long-term  interest  rates 
predominantly  oscillated  between  6.5%  and  8%.  Afterwards,  they  followed  a  steep 
upward  trend,  exceeding  9%  in  January  2012,  as  a  number  of  controversial  policy 
measures adopted by the Hungarian authorities raised investors' concerns regarding 
local financial stability.  

Hungary  does  not  fulfil  the  criterion  on  the  convergence  of  long-term  interest 
rates. 

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments as well as product and financial market integration. After turning into 
surplus in 2009, Hungary's external balance improved further in 2010 and 2011. The 
continued  adjustment  was  driven  by  falling  domestic  demand,  dampening  import 
growth, combined with a resilient export performance as well as higher absorption of 
EU  funds.  Net  foreign  direct  investment  inflows  remained  relatively  small  in  2010 
before  ceasing  entirely  in  2011,  as  larger  direct  investments  by  residents  abroad 
offset  increased  foreign  direct  investments  in  Hungary.  The  balance  of  payments 
assistance granted to Hungary by the EU and the IMF in 2008 expired in 2010 with 
no  disbursements  from  the  pre-committed  official  funding  taking  place  after  mid-
2009. However, Hungary asked for precautionary balance of payments assistance by 
the  EU  and  the  IMF  in  November  2011  amid  a  deteriorating  financial  market 
situation. No agreement on a possible assistance programme was reached by the cut-
off  date  of  the  report.  In  line  with  the  conclusion  of  the  Alert  Mechanism  Report 
from February 2012, Hungary was subject to an in-depth review in the context of the 
Macroeconomic Imbalance Procedure. 

EN 

18 

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The  Hungarian  economy  is  highly  integrated  into  the  EU  economy  through  strong 
trade  and  FDI  linkages.  On  the  basis  of  selected  indicators  relating  to  the  business 
environment,  Hungary  performs  below  the  average  of  euro  area  Member  States.  It 
scores  particularly  poorly  in  terms  of  the  legal  and  regulatory  framework,  which  is 
complex  and  unstable  due  to  frequent  and  sometimes  ad-hoc  modifications. 
Hungary's  financial  sector  is  well  integrated  into  the  EU  financial  system  as 
confirmed by the substantial share of foreign-owned banks.  

In  the  light  of  its  assessment  on  legal  compatibility  and  on  the  fulfilment  of  the 
convergence criteria, and taking into account the additional factors, the Commission 
considers that Hungary does not fulfil the conditions for the adoption of the euro.  

7. 

POLAND 

Legislation  in  Poland  -  in  particular  the  Act  on  the  Narodowy  Bank  Polski  (NBP) 
and the Constitution of the Republic of Poland - are not fully compatible with the 
compliance  duty  under  Article  131  of  the  TFEU.  Incompatibilities  concern  the 
independence of the central bank, the prohibition of monetary financing and central 
bank integration into the ESCB at the time of euro adoption. In addition, the Act on 
the NBP also contains some imperfections relating to central bank independence and 
the NBP integration into the ESCB at the time of euro adoption.  

In Poland, 12-month average inflation was above the reference value at the time of 
the last convergence assessment in 2010. The average inflation rate in Poland during 
the 12 months to March 2012 was 4.0%, above the reference value of 3.1%, and it is 
likely to remain above the reference value in the months ahead.  

Annual  HICP  inflation  declined  gradually  from  4.5%  to  below  2%  between  mid-
2009  and  mid-2010,  mainly  reflecting  lower  food  and  service  price  increases. 
Afterwards, inflation started to pick up again, driven by rising commodity prices and 
a VAT rate increase effective from January 2011. Although it declined temporarily 
between  May  and  September  2011,  largely  due  to  a  favourable  evolution  of 
unprocessed  food  prices,  the  considerable  weakening  of  the  exchange  rate  in  late 
2011 pushed annual inflation back up to 4.5% in December 2011. Annual inflation 
declined somewhat in early 2012, mainly due to favourable base effects. 

Inflation is expected to decrease to 3.7% in 2012 and 2.9% in 2013 according to the 
Commission  services'  Spring  2012  Forecast,  as  the  inflationary  impact  of  one-off 
measures effective in 2011 should largely fade out while output growth is likely to 
decline.  The  relatively  low  price  level  in  Poland  (close  to  60%  of  the  euro-area 
average  in  2010)  suggests  potential  for  further  price  level  convergence  in  the  long 
term. 

Poland does not fulfil the criterion on price stability.  

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Graph 7a: Poland - Inflation criterion since 2006

(percent, 12-month moving average)

5

4

3

2

1

0
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Poland

Reference value

Note: The dots in December 2012 show the projected 
reference value and 12-month average inflation in the country.
Sources: Eurostat, Commission services' Spring 2012 Forecast.

Poland  is  at  present  the  subject  of  a  Council  Decision  on  the  existence  of  an 
excessive  deficit  (Council  Decision  of  7  July  2009)16.  The  Council  recommended 
Poland  to  correct  the  excessive  deficit  by  2012.  The  general  government  deficit  in 
Poland decreased from 7.8% of GDP in 2010 to 5.1% of GDP in 2011. According to 
the  Commission  services'  Spring  2012  Forecast,  the  deficit-to-GDP  ratio  should 
amount  to  3.0%  in  2012  and  2.5%  in  2013  under  a  no-policy-change  assumption. 
Despite high average real GDP growth, government gross debt increased to 56.3% of 
GDP in 2011 but it is projected to decline to below 54% of GDP in 2013.  

Poland does not fulfil the criterion on public finances.  

(in percent of GDP)

Graph 7b: Poland - Government budget balance and debt
Inverted scale
-8
-7
-6
-5
-4
-3
-2
-1
0

2006

2007

2008

2009

2010

2011

2012(*) 2013(*)

60

55

50

45

40

35

30

Government balance (lhs)

Cyclically-adjusted balance (lhs)

Gross debt (rhs)

(*) Commission services' Spring 2012 Forecast.

Source: Eurostat, Commission services.

The Polish zloty is not participating in ERM II. Since April 2000, Poland has been 
operating a floating exchange rate regime. The zloty exchange rate against the euro 
has recently displayed relatively high volatility. From early-2010 until mid-2011, the 
zloty's  exchange  rate  predominantly  oscillated  in  a  relatively  wide  range  between 
3.85  and  4.15  PLN/EUR.  In  August  2011,  rising  financial  market  tensions  in  the 
euro-area started to negatively affect currency markets in central and eastern Europe. 
As  a  result,  the  zloty  weakened  by  some  11%  against  the  euro  between  July  and 
December  2011.  In  early  2012,  the  zloty  exchange  rate  against  the  euro  partly 

16 

2009/589/EC (OJ L 202, 4.8.2009, p. 46). 

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recovered  earlier  losses.  During  the  two-year  assessment  period,  the  zloty 
depreciated by 6.1% against the euro.  

Poland does not fulfil the exchange rate criterion. 

Average long-term interest rates in Poland were above the reference value at the time 
of  the  last  convergence  assessment  in  2010.  The  average  long-term  interest  rate  in 
the year to March 2012 was 5.8%, at the reference value of 5.8%. Long-term interest 
rates  decreased  from  above  6%  in  early  2010  to  below  5.5%  in  September  2010, 
reflecting  the  substantial  fall  in  domestic  inflation.  They  returned  to  above  6%  by 
early  2011  amid  a  gradual  monetary  policy  tightening.  Long-term  interest  rates 
declined  again  to  below  6%  by  mid-2011  and  then  to  below  5.5%  in  early  2012, 
benefiting from improved investor sentiment towards the country.  

Poland fulfils the criterion on the convergence of long-term interest rates.  

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments as well as product and financial market integration. While remaining 
in  deficit,  Poland’s  external  balance  improved  considerably  in  2009.  Although  it 
worsened  somewhat  in  2010  due  to  a  higher  current  account  deficit,  it  improved 
again  in  2011,  as  the  rapidly  increasing  surplus  on  the  capital  account,  induced  by 
higher absorption of EU funds, offset the further deterioration in the current account 
balance.  Net  inflows  of  foreign  direct  investment  (FDI)  decreased  substantially  in 
2010,  mostly  as  a  result  of  lower  direct  investment  in  Poland,  before  recovering 
again  in  2011,  when  they  covered  about  40%  of  the  current  account  deficit.  The 
Polish  economy  is  well  integrated  into  the  EU  economy  through  trade  and  FDI 
linkages.  On  the  basis  of  selected  indicators  relating  to  the  business  environment, 
Poland  performs  below  the  average  of  euro  area  Member  States.  Poland's  financial 
sector is well integrated into the EU financial system as confirmed by the high share 
of foreign-owned banks.  

In  the  light  of  its  assessment  on  legal  compatibility  and  on  the  fulfilment  of  the 
convergence criteria, and taking into account the additional factors, the Commission 
considers that Poland does not fulfil the conditions for the adoption of the euro.  

8. 

ROMANIA 

Legislation  in  Romania,  in  particular  the  Law  on  the  Banca  Naţională  a  României 
(BNR), is  not fully compatible with the compliance duty under Article 131 of the 
TFEU.  Incompatibilities  concern  the  independence  of  the  central  bank,  the 
prohibition of monetary financing and central bank integration into the ESCB at the 
time of euro adoption. In addition, the Law on the BNR also contains imperfections 
relating to central bank independence and BNR integration into the ESCB at the time 
of euro adoption.  

In  Romania,  12-month  average  inflation  was  above  the  reference  value  at  each 
convergence  assessment  since  EU  accession  in  2007.  The  average  inflation  rate  in 
Romania during the 12 months to March 2012 was 4.6%, well above the reference 
value of 3.1%. It is projected to approach the reference value in the months ahead. 

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21 

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Romania recorded volatile and, for protracted periods, high inflation rates in recent 
years.  In  2009,  annual  inflation  remained  elevated  despite  the  sharp  economic 
downturn amid increases in excise duties and persistently high inflation in services. 
Inflation  increased  sharply  in  the  second  half  of  2010  due  to  a  5  percentage  point 
increase in the standard VAT rate. Inflation fell sharply in the second half of 2011, 
averaging 3.8%. This reflected inter alia a VAT-related base effect and easing food 
prices due to an exceptionally good agricultural harvest.  

Inflation  is  expected  to  remain  lower  in  2012  and  2013  compared  to  recent  years, 
amid  sluggish  domestic  demand  and  on  assumption  of  moderate  increases  in 
administered prices. The Commission services' Spring 2012 Forecast projects annual 
HICP inflation to average 3.1% in 2012 and 3.4% in 2013. The relatively low price 
level in Romania (around 56% of the euro area average in 2010) suggests significant 
potential for further price level convergence in the long term. 

Romania does not fulfil the criterion on price stability.  

Graph 8a: Romania - Inflation criterion since 2006

(percent, 12-month moving average)

10

8

6

4

2

0
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Romania
Note: The dots in December 2012 show the projected 
reference value and 12-month average inflation in the country.
Sources: Eurostat, Commission services' Spring 2012 Forecast.

Reference value

Romania  is  at  present  the  subject  of  a  Council  Decision  on  the  existence  of  an 
excessive deficit (Council Decision of 7 July 2009)17. In February 2010, the Council 
recommended  Romania  to  correct  the  excessive  deficit  by  2012.  The  general 
government  deficit  in  Romania  peaked  at  9.0%  of  GDP  in  2009,  but  it  declined  to 
6.8%  and  5.2%  of  GDP  in  2010  and  2011  respectively  amid  fiscal  consolidation 
efforts. According to the Commission services' Spring 2012 Forecast, which is based 
on a no-policy-change assumption, the deficit-to-GDP ratio will amount to 2.8% in 
2012  and  2.2%  in  2013,  while  general  government  debt  is  expected  to  stabilise  at 
34.6% of GDP in 2012 and 2013 respectively.  

Romania does not fulfil the criterion on public finances.  

17 

2009/590/EC (OJ L 202, 4.8.2009, p. 48). 

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22 

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Graph 8b: Romania - Government budget balance and debt
Inverted scale
-10

(in percent of GDP)

-8

-6

-4

-2

0

40

30

20

10

0

2006

2007

2008

2009

2010

2011

2012(*) 2013(*)

Government balance (lhs)

Cyclically-adjusted balance (lhs)

Gross debt (rhs)

(*) Commission services' Spring 2012 Forecast.

Source: Eurostat, Commission services.

The  Romanian  leu  is  not  participating  in  ERM  II.  Romania  operates  a  floating 
exchange  rate  regime.  The  nominal  exchange  rate  of  the  leu  against  the  euro 
fluctuated in a wide range in the pre-crisis years. The leu faced significant weakening 
pressures in  autumn 2008 amid the intensification of the global financial crisis and 
against  a  background  of  large  domestic  macroeconomic  imbalances.  Short-term 
interest rate differentials vis-à-vis the euro area started to widen as the ensuing lack 
of liquidity drove up Romanian short-term interest rates. Following an agreement in 
early 2009 to provide Romania with a coordinated package of international financial 
assistance, financial market pressures eased and the leu broadly stabilised against the 
euro at levels that then prevailed for most of the period from 2009 to 2011. The leu's 
exchange  rate  against  the  euro  depreciated  during  temporary  bouts  of  global  risk 
aversion,  including  in  the  second  half  of  2011.  In  early  2012,  it  remained  at  a 
moderately  weaker  level  than  the  2009-2011  average.  During  the  two  years  before 
this assessment, the leu depreciated against the euro by 6.4%. 

Romania does not fulfil the exchange rate criterion. 

Average long-term interest rates in Romania were above the reference value at each 
convergence assessment since EU accession. The average long-term interest rate in 
Romania  in  the  year  to  March  2012  was  7.3%,  above  the  reference  value  of  5.8%. 
Spreads  vis-à-vis  the  euro  area  peaked  in  the  midst  of  the  global  financial  crisis  in 
mid-2009.  Long-term  interest  rates  in  Romania  declined  sharply  in  late  2009  and 
remained at just above 7% for most of the period 2010-2011, before falling further in 
early 2012. This decline reflected, inter alia, a downward adjustment in the expected 
path  of  interbank  rates  as  well  as  robust  demand  for  sovereign  bonds  amid  fiscal 
consolidation efforts.  

Romania  does  not  fulfil  the  criterion  on  the  convergence  of  long-term  interest 
rates.  

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments  and  product  and  financial  market  integration.  Romania's  external 
balance  (i.e.  the  combined  current  and  capital  account)  improved  markedly  during 
the global crisis. The external deficit declined from a peak of around 13% of GDP in 
2007 to an average of around 4% of GDP in the years 2009-2011. The narrowing of 
the external shortfall over  the past three years reflected in particular a significantly 
lower merchandise trade deficit, due to a sharp decline in imports amid plummeting 

EN 

23 

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domestic demand. Romania has been a recipient of international financial assistance 
since 2009. In spring 2011, following the successful completion of the first balance-
of-payments assistance programme, a precautionary EU-IMF  programme (available 
until early 2013) totalling up to about EUR 5 billion was made available to Romania. 
No  funding  has  been  requested  under  the  programme  so  far.  External  financing 
pressures eased markedly in 2010-2011 amid the sharp improvement in the external 
balance,  disbursements  of  international  financial  assistance  and  recovery  in  global 
risk appetite. 

The Romanian economy is well integrated to the EU economy through trade and FDI 
linkages.  On  the  basis  of  selected  indicators  relating  to  the  business  environment, 
Romania performs poorly compared to euro area Member States. The integration of 
the  domestic  financial  sector  into  the  EU  financial  system  is  substantial,  mainly 
through a high degree of foreign ownership of financial intermediaries18.  

In  the  light  of  its  assessment  on  legal  compatibility  and  on  the  fulfilment  of  the 
convergence criteria, and taking into account the additional factors, the Commission 
considers that Romania does not fulfil the conditions for the adoption of the euro.  

9. 

SWEDEN  

Legislation  in  Sweden  -  in  particular  the  Sveriges  Riksbank  Act,  the  Instrument  of 
Government  and  the  Law  on  the  Exchange  Rate  Policy  -  is  not  fully  compatible 
with  the  compliance  duty  under  Article  131  of  the  TFEU.  Incompatibilities  and 
imperfections exist in the fields of independence of the central bank, prohibition of 
monetary  financing  and  central  bank  integration  into  the  ESCB  at  the  time  of  euro 
adoption.  

In Sweden, 12-month average inflation was above the reference value at the time of 
the last convergence assessment in 2010. Since then, inflation has gradually declined. 
The average inflation rate in Sweden during the 12 months to March 2012 was 1.3%, 
well  below  the  reference  value  of  3.1%  and  is  likely  to  remain  well  below  the 
reference value in the months ahead.  

After averaging 3.4% in 2008, HICP inflation has been below 2% in the following 
years  as  a  stronger  krona  together  with  subdued  unit  labour  costs  have  held  back 
inflationary  pressures.  Inflation  temporarily  picked  up  in  the  second  half  of  2010 
amid higher energy prices but fell back in the course of 2011. On average, inflation 
amounted to 1.4% in 2011. 

Inflation  is  expected  to  remain  moderate  in  2012  and  2013,  averaging  about  1.1% 
and 1.5%, respectively, according to the Commission services' Spring 2012 Forecast, 
as  low  domestic  demand  and  ample  spare  capacity  is  expected  to  restrain  the 
inflationary impact of higher unit labour costs.  

Sweden fulfils the criterion on price stability.  

18 

Romania, as a Member State under EU-IMF financial assistance programme and in order to avoid the 
duplication  of  surveillance  procedures,  is  not  examined  under  the  macroeconomic  imbalances 
procedure in 2012. It was therefore not covered in the Alert Mechanism Report and in-depth reviews.  

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24 

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Graph 9a: Sweden - Inflation criterion since 2006

(percent, 12-month moving average)

5

4

3

2

1

0
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Sweden

Reference value

Note: The dots in December 2012 show the projected 
reference value and 12-month average inflation in the country.
Sources: Eurostat, Commission services' Spring 2012 Forecast.

Sweden  is  not  the  subject  of  a  Council  Decision  on  the  existence  of  an  excessive 
deficit.  Swedish  public  finances  were  strong  in  the  run-up  to  the  global  financial 
crisis, with general government surpluses amounting to 3.6% and 2.2% in 2007 and 
2008, respectively. The balance briefly turned into a deficit of 0.7% in 2009. As the 
economic  recovery  got  underway,  the  balance  swung  back  into  a  small  surplus  of 
0.3%  in  2010,  remaining  at  that  level  in  2011.  According  to  the  Commission 
services'  Spring  2012  Forecast,  the  government  balance  will  end  up  in  deficit  of 
0.3% in 2012, before turning back to a surplus of 0.1% in 2013 under a no-policy-
change assumption. The gross public debt ratio stood at 38.4% of GDP in 2011 and it 
is projected to continue its downward trend and reach to 34.2% of GDP in 2013.  

Sweden fulfils the criterion on public finances.  

Graph 9b: Sweden - Government budget balance and debt
Inverted scale
-1

(in percent of GDP)

0

1

2

3

4

50

45

40

35

30

25

2006

2007

2008

2009

2010

2011

2012(*) 2013(*)

Government balance (lhs)

Cyclically-adjusted balance (lhs)

Gross debt (rhs)

(*) Commission services' Spring 2012 Forecast.

Source: Eurostat, Commission services.

The  Swedish  krona  is  not  participating  in  ERM  II.  Sweden  has  pursued  a  floating 
exchange  rate  regime  and  inflation  targeting  since  the  early  1990s.  The  krona 
depreciated sharply in the midst of the financial crisis in 2008 as investors became 
more risk averse, but it then quickly recovered. The krona strengthened by some 20% 
against the euro between March 2009 and February 2011. After some weakening in 
the first half of 2011, the krona broadly stabilised before strengthening in the end of 
2011  as  Sweden's  strong  public  finances  triggered  safe-haven  flows  into  krona. 

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25 

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During  the  two-year  assessment  period,  the  krona  appreciated  by  7.7%  against  the 
euro.  

Sweden does not fulfil the exchange rate criterion. 

The average long-term interest rate in Sweden in the year to March 2012 was 2.2%, 
well below the reference value of 5.8%. Average long-term interest rates have been 
below  the  reference  value  since  EU  accession  in  1995.  Swedish  long-term  interest 
rates have very closely followed the lowest long-term yields among EU countries in 
recent years.  

Sweden fulfils the criterion on the convergence of long-term interest rates.  

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments  and  product  and  financial  market  integration.  The  Swedish  external 
account has been in surplus since the mid-1990s, driven by high net exports in goods 
and recently also in services. The external account surplus has increased from some 
4% of GDP in the early 2000s to around 7-8% since 2004. The Swedish economy is 
highly integrated within the EU economy through strong trade and FDI linkages. On 
the  basis  of  selected  indicators  relating  to  the  business  environment,  Sweden 
performs well above the average of euro area Member States, particularly due to the 
high level of technological adoptions, innovations, internet access, higher education 
and  quality  of  public  and  private  institutions.  The  integration  of  the  domestic 
financial  sector  into  the  EU  financial  sector  is  substantial,  with  particularly  strong 
links  to  other  Nordic  countries  and  the  Baltic  States.  Sweden’s  financial  sector  is 
well developed, both in size and sophistication and corresponds to its advanced stage 
of  economic  development.  Sweden  however  saw  very  strong  increases  in  house 
prices over past years which have started to stabilise only recently. In line with the 
conclusion of the Alert Mechanism Report from February 2012, Sweden was subject 
to an in-depth review in the context of the Macroeconomic Imbalance Procedure. 

In  the  light  of  its  assessment  on  legal  compatibility  and  on  the  fulfilment  of  the 
convergence criteria, and taking into account the additional factors, the Commission 
considers that Sweden does not fulfil the conditions for the adoption of the euro. 

EN 

26 

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