REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL CONVERGENCE REPORT 2016 (prepared in accordance with Article 140(1) of the Treaty on the Functioning of the European Union)
Date: 2016-06-07
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Bulgaria, Croatia, Czechia, Hungary, Poland, Romania, Sweden, convergence criteria, euro, euro area

EUROPEAN 
COMMISSION 

Brussels, 7.6.2016  
COM(2016) 374 final 

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND 
THE COUNCIL 

CONVERGENCE REPORT 2016 

(prepared in accordance with Article 140(1) of the Treaty on the Functioning of the 
European Union) 
{SWD(2016) 191 final} 

EN 

   EN 

 
 
 
 
  
 
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 European Central Bank (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 June 2014.  

The  2016  Convergence  Report  covers  the  following  seven  Member  States  with  a 
derogation:  Bulgaria,  the  Czech  Republic,  Croatia,  Hungary,  Poland,  Romania  and 
Sweden2. A more detailed assessment of the state of convergence in those Member 
States is provided in a Technical Annex to this Report.  

The content of the reports prepared by the Commission and the ECB is governed by 
Article 140(1) 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  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) TFEU. The four convergence criteria are developed in a 
Protocol annexed to the Treaties (Protocol No 13 on the convergence criteria). 

its 

that 

instruments  need 

The financial and economic crisis, along with the euro-area sovereign debt crisis, has 
exposed  gaps  in  the  economic  governance  system  of  the  Economic  and  Monetary 
Union  (EMU)  and  showed 
to  be  used  more 
comprehensively.  With  the  aim  of  ensuring  a  sustainable  functioning  of  EMU,  an 
overall  strengthening  of  economic  governance  in  the  Union  has  been  undertaken. 
The assessment of convergence is thus aligned with the broader European Semester 
approach which takes an integrated 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  State's  convergence  process  and  its  sustainability, 
include  inter  alia  the  strengthening  of  the  excessive  deficit  procedure  by  the  2011 
reform  of  the  Stability  and  Growth  Pact  and  new  instruments  in  the  area  of 
surveillance  of  macroeconomic  imbalances.  In  particular,  this  report  takes  into 
account the assessment of the 2016 Convergence Programmes and the findings under 
the Macroeconomic Imbalances Procedure3. 

1  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. 
2  Denmark and the United Kingdom have not expressed an intention to adopt the euro and are therefore not 

covered in the assessment.  

3  The Commission published its fifth Alert Mechanism Report (AMR) in November 2015 and the conclusions 

of the corresponding in-depth reviews in March 2016. 

2 

 
 
                                                            
Convergence criteria 

The examination of the compatibility of national legislation, including the statutes 
of  the  national  central  bank,  with  Article  130  and  with  the  compliance  duty  under 
Article  131  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 the national central bank into 
the ESCB. 

The price  stability criterion is defined in the first indent of Article  140(1) 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  provides  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”4. 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 
reference  to  the  most  recent  Commission  services'  forecast  of  inflation5.  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  0.7%  in  April  20166,  with 
Bulgaria, Slovenia and Spain as the three 'best-performing Member States'7. 

It is warranted to exclude from the 'best performers' countries whose inflation rates 
could  not  be  seen  as  a  meaningful  benchmark  for  other  Member  States8.  Such 
outliers  were  in  the  past  identified  in  the  2004,  2010,  2013  and  2014  Convergence 
Reports9. At the current juncture, it is warranted to identify Cyprus and Romania as 
outliers, as their inflation rates deviated by a wide margin from the euro area average 
and including them would unduly affect the reference value and thus the fairness of 

4  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. 

5  All forecasts for inflation and other variables in the current report are from the Commission services' Spring 
2016 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. 

6  The cut-off date for the data used in this report is 18 May 2016. 
7  The respective 12-month average inflation rates were -1.0%, -0.8% and -0.6%.   
8  The use of the term 'best performer in terms of price stability' should be understood in the meaning of Article 
140(1)  TFEU  and  is  not  intended  to  represent  a  general  qualitative  judgement  about  the  economic 
performance of a Member State. 

9  Lithuania, Ireland, Greece respectively, then in 2014, Greece, Bulgaria and Cyprus. 

3 

 
 
                                                            
the  criterion10.  In  case  of  Cyprus,  deeply  negative  inflation  mainly  reflected  the 
adjustment  needs  and  exceptional  situation  of  the  economy.  In  case  of  Romania,  it 
was  mainly  due  to  large  VAT  rate  reductions.  Against  that  background,  Bulgaria, 
Slovenia and Spain, the Member States with the next-lowest average inflation rates, 
are used for the calculation of the reference value. 

The  convergence  criterion  dealing  with  public  finances  is  defined  in  the  second 
indent  of  Article  140(1)  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 Pact11.  

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  provides:  “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”12. 

The relevant two-year period for assessing exchange rate stability in this report is 19 
May 2014 to 18 May 2016. In its assessment of the exchange rate stability criterion, 
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,  and  international 
financial  assistance  wherever  relevant,  in  maintaining  exchange  rate  stability. 
Currently  none  of  the  Member  States  assessed  in  this  Convergence  Report 
participates in ERM II. Entry into ERM II is decided upon request of a Member State 
by consensus of all ERM II participants. 

10  In  April  2016,  the  12-month  average  inflation  rate  of  Cyprus  and  Romania  were  respectively  -1.8%  and 

-1.3% and that of the euro area 0.1%. 

11  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  operationalisation  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. 

12  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. 

4 

 
 
                                                            
The  fourth  indent  of  Article  140(1)  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  lays  down  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”.  
The interest rate reference value was calculated to be 4.0% in April 201613.  

Article  140(1)  TFEU  also  requires  an  examination  of  other  factors  relevant  to 
economic  integration  and  convergence.  Those  additional  factors  include  the 
integration  of  markets,  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 and broadens the view on sustainability of convergence. 

2. 

BULGARIA 

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

Legislation in Bulgaria – in particular the Law on the Bulgarian National Bank – is 
not  fully  compatible  with  the  compliance  duty  under  Article  131  TFEU. 
Incompatibilities and imperfections exist in the fields of central bank independence, 
the prohibition of monetary financing and central bank integration into the ESCB at 
the time of euro adoption with regard to the tasks laid down in Article 127(2) TFEU 
and Article 3 of the ESCB/ECB Statute. 

Bulgaria  fulfils  the  criterion  on  price  stability.  The  average  inflation  rate  in 
Bulgaria  during  the  12  months  to  April  2016  was  -1.0%,  well  below  the  reference 
value of 0.7%. It is projected to remain well below the reference value in the months 
ahead. 

The  annual  HICP  inflation  rate  in  Bulgaria  has  been  negative  since  summer  2013, 
with  the  downturn  triggered  by  an  unusually  strong  combination  of  disinflationary 
factors.  Inflation  reached  a  trough  of  -2.4%  in  January  2015  and  then  increased  to 
-0.3% in May 2015, before falling back again. Core inflation was negative over most 
of the past two years, including in early 2016. Negative inflation has been sustained 
i.a. by weak domestic demand and falling import prices. In April 2016, annual HICP 
inflation stood at -2.5%. 

Inflation  is  expected  to  rise  gradually  as  the  effect  from  the  decline  in  commodity 
prices  slowly  tapers  off,  although  it  is  set  to  remain  negative  throughout  most  of 

13  The reference value for April 2016 is calculated as the simple average of the average long-term interest rates 

of Bulgaria (2.5%), Slovenia (1.8%) and Spain (1.8%), plus two percentage points.  

5 

 
 
                                                            
2016.  Accordingly,  the  Commission  services'  Spring  2016  Forecast  projects  annual 
average inflation at -0.7% in 2016 and 0.9% in 2017. The low price level in Bulgaria 
(47% of the euro-area average in 2014) suggests significant potential for further price 
level convergence in the long term. 

Graph 2a: Bulgaria - Inflation criterion since 2010

(percent, 12-month moving average)

5

4

3

2

1

0

-1

-2
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Bulgaria

Reference value

Note: The dots  in December 2016 show the projected 
reference value and 12-month average inflation in the country.
Sources: Eurostat, Commission services' Spring 2016 Forecast.

Bulgaria  fulfils  the  criterion  on  public  finances.  Bulgaria  is  not  the  subject  of  a 
Council  Decision  on  the  existence  of  an  excessive  deficit.  The  general  government 
deficit increased from 0.8% of GDP in 2013 to 5.4% in 2014, due mainly to financial 
sector support measures. The deficit-to-GDP ratio was 2.1% in 2015 and according 
to the Commission services' Spring 2016 Forecast, it is projected to decrease to 2.0% 
in 2016 and to 1.6% in 2017, under a no-policy-change assumption, supported by the 
economic recovery. The gross public debt ratio decreased to 26.7% of GDP in 2015 
and  it  is  projected  to  increase  to  28.1%  of  GDP  in  2016  and  to  28.7%  of  GDP  in 
2017. Based on the Commission's assessment of the 2016 Convergence Programme, 
Bulgaria  is  expected  to  broadly  comply  with  the  provisions  of  the  Stability  and 
Growth Pact. Nevertheless, further measures will be needed to ensure compliance in 
both 2016 and 2017. The Bulgarian fiscal framework has recently been strengthened 
towards 
by  successive 
implementation. 

legislative  steps,  and 

is  now  shifting 

focus 

the 

Graph 2b: Bulgaria - Government budget balance and debt
Inverted scale
-6

(in percent of GDP)

-5

-4

-3

-2

-1

0

30

25

20

15

10

5

2010

2011

2012

2013

2014

2015

2016(*) 2017(*)

Government balance (lhs)
Gross debt (rhs)

Cyclically-adjusted balance (lhs)

(*) Commission services' Spring 2016 Forecast.
Source: Eurostat, Commission services.

Bulgaria  does  not  fulfil  the  exchange  rate  criterion.  The  Bulgarian  lev  is  not 
participating in ERM II. The Bulgarian National Bank pursues its primary objective 

6 

 
 
 
 
of price stability through an exchange rate anchor in the context of a Currency Board 
Arrangement  (CBA).  Bulgaria  introduced  its  CBA  in  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  remained  favourable.  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 fulfils the criterion on the convergence of long-term interest rates. The 
average long-term interest rate in Bulgaria in the year to April 2016 was 2.5%, below 
the  reference  value  of  4.0%.  Long-term  interest  rates  in  Bulgaria  declined  from 
around  3.5%  in  early  2014  to  around  2.5%  by  early  2015.  Yield  spreads  vis-à-vis 
euro-area long-term benchmark bonds14 increased significantly in the second half of 
2014  partly  linked  to  Bulgaria's  banking  problems,  but  then  declined  in  2015.  The 
spread against the German benchmark bond widened again to some 230 basis points 
in early 2016. 

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments  and  integration  of  markets.  Bulgaria's  external  balance  recorded  a 
significant  surplus  in  2015.  The  improvements  in  the  trade  and  capital  account 
balances  from  2013  to  2015  more  than  counterbalanced  the  deterioration  in  the 
secondary income account. The Bulgarian economy is well integrated with the euro 
area  through  trade  and  investment  linkages.  On  the  basis  of  selected  indicators 
relating  to  the  business  environment,  Bulgaria  performs  worse  than  most  euro-area 
Member  States.  Bulgaria's  financial  sector  is  well  integrated  with  the  EU  financial 
sector, in particular through a high level of foreign ownership in its banking system. 
In the context of the Macroeconomic Imbalance Procedure, Bulgaria was subject to 
an  in-depth  review  in  2016,  which  found  that  Bulgaria  continues  to  experience 
excessive  macroeconomic  imbalances.  The  economy  is  characterised  by  remaining 
fragilities  in  the  financial  sector  and  high  corporate  indebtedness  in  a  context  of 
limited labour market adjustment. 

3. 

THE CZECH REPUBLIC 

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

Legislation in the Czech Republic – in particular the Czech National Council Act 
No.  6/1993  Coll.  on  the  Česká  národní  banka  (the  ČNB  Law)  –  is  not  fully 
compatible  with  the  compliance  duty  under  Article  131  TFEU.  Incompatibilities 
concern  the  independence  of  the  central  bank  and  central  bank  integration  in  the 
ESCB at the time of euro adoption with regard to the ČNB's objectives and the ESCB 
tasks laid down in Article 127(2) TFEU and Article 3 of the ESCB/ECB Statute. In 
addition,  the  ČNB  Law  also  contains  imperfections  relating  to  the  prohibition  of 
monetary financing and the ESCB tasks.  

14  Countries'  long-term  interest  spreads  vis-à-vis  the  euro-area  long-term  benchmark  bonds  (n.b.  the  German 
benchmark  bond  is  used  as  a  proxy  for  the  euro  area)  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". 

7 

 
 
                                                            
The Czech Republic fulfils the criterion on price stability. The average inflation 
rate in the Czech Republic during the 12 months to April 2016 was 0.4%, below the 
reference  value  of  0.7%.  It  is  projected  to  remain  below  the  reference  value  in  the 
months ahead.  

Price  growth  moderated  significantly  in  2014,  with  the  annual  HICP  inflation  rate 
slowing  to  0.4%  on  average.  This  was  mainly  due  to  a  large  negative  contribution 
from  energy  prices,  reflecting  the  pass-through  of  a  sharp  decline  in  oil  prices  to 
domestic  fuel  prices,  while  the  inflation  contributions  of  food  and  services  also 
declined.  Inflation  accelerated  somewhat  during  the  first  half  of  2015  but  then 
slowed down again in the second half of the year amid renewed declines in food and 
energy prices. The annual HICP inflation rate thus averaged 0.3% in 2015. It picked 
up somewhat in early 2016 and stood at 0.5% in April 2016. 

Inflation is projected to remain subdued in 2016 as the decline in oil and food prices 
during  the  second  half  of  2015  will  continue  to  exert  a  dampening  impact  on  the 
year-on-year rate. At the same time, domestic price pressures are expected to become 
stronger  over  the  forecast  horizon,  particularly  with  regard  to  services  prices.  As  a 
result, the Commission services' Spring 2016 Forecast projects annual HICP inflation 
to  average  0.5%  in  2016  and  1.4%  in  2017.  The  price  level  in  the  Czech  Republic 
(about  63%  of  the  euro-area  average  in  2014)  suggests  potential  for  price  level 
convergence in the long term.  

Graph 3a: Czech Republic - Inflation criterion since 2010

(percent, 12-month moving average)

5

4

3

2

1

0
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Czech Republic

Reference value

Note: The dots  in December 2016 show the projected 
reference value and 12-month average inflation in the country.
Sources: Eurostat, Commission services' Spring 2016 Forecast.

The Czech Republic fulfils the criterion on public finances. The Czech Republic 
is not the subject of a Council Decision on the existence of an excessive deficit. The 
general  government  deficit  declined  substantially  from  1.9  %  of  GDP  in  2014  to 
0.4% of GDP in 2015. According to the Commission services' Spring 2016 Forecast, 
the general government deficit is projected at 0.7% of GDP in 2016 and to 0.6% in 
2017,  under  a  no-policy-change  assumption.  The  gross  public  debt  ratio  declined 
from its peak of 45.1% of GDP in 2013 to 41.1% of GDP in 2015. It is projected to 
fall to 40.9% of  GDP in 2017.  Based on the Commission's assessment of the 2016 
Convergence  Programme,  the  Czech  Republic  is  expected  to  comply  with  the 
provisions of the Stability and Growth Pact. The Czech Republic's fiscal framework 
is  one  of  the  weakest  in  the  EU.  Adoption  of  the  reform  package  aimed  at 
strengthening  it  has  been  repeatedly  delayed,  putting  on  hold  the  completion  of 

8 

 
 
 
transposition of the Directive on national budgetary frameworks into the Czech legal 
order, which was due by the end of 2013. 

Graph 3b: Czech Rep. - Government budget balance and debt
Inverted scale
-5

(in percent of GDP)

-4

-3

-2

-1

0

50

45

40

35

30

25

2010

2011

2012

2013

2014

2015

2016(*) 2017(*)

Government balance (lhs)

Cyclically-adjusted balance (lhs)

Gross debt (rhs)

(*) Commission services' Spring 2016 Forecast.

Source: Eurostat, Commission services.

The Czech Republic does not fulfil the exchange rate criterion. The Czech koruna 
is not participating in ERM II. The Czech Republic operates a floating exchange rate 
regime, allowing for foreign exchange market interventions by the central bank. On 7 
November 2013, the ČNB announced that it would intervene on the foreign exchange 
market to weaken the koruna, so that its exchange rate against the euro was above 27 
CZK/EUR.  As  a  result,  the  koruna  swiftly  weakened  from  below  26  CZK/EUR  to 
above  27  CZK/EUR.  The  koruna  traded  on  average  at  around  27.5  CZK/EUR 
throughout 2014 and the first half of 2015, amid low volatility. It strengthened close 
to  27  CZK/EUR  in  mid-2015  and  then  remained  near  that  lower  bound  set  be  the 
ČNB during the second half of 2015 and in early 2016. During the two years before 
this assessment, the koruna appreciated against the euro by some 1.6%. 

The  Czech  Republic  fulfils  the  criterion  on  the  convergence  of  long-term 
interest rates. The average long-term interest rate in the Czech Republic in the year 
to April 2016 was  0.6%, well below the reference value of 4%.  Long-term interest 
rates in the Czech Republic followed a downward trend from early 2014 up to April 
2015, declining from above 2.4% to below 0.3%. Long-term interest rates jumped to 
above 1% in June 2015 but then declined again gradually throughout the second half 
of  2015.  The  spread  against  the  German  benchmark  bond  oscillated  at  around  25 
basis points in early 2016.  

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments  and  integration  of  markets.  The  external  balance  of  the  Czech 
Republic remained in surplus over the last two years, increasing from below 1% of 
GDP in 2014 to above 3% of GDP in 2015. The Czech economy is highly integrated 
with  the  euro  area  through  trade  and  investment  linkages.  On  the  basis  of  selected 
indicators  relating  to  the  business  environment,  the  scores  received  by  the  Czech 
Republic in international rankings have improved in recent years, converging close 
to the euro-area average. The Czech financial sector is highly integrated into the EU 
financial sector, in particular through a high degree of foreign ownership of financial 
intermediaries.  

9 

 
 
 
4. 

CROATIA 

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

Legislation in Croatia is fully compatible with the compliance duty under Article 
131 TFEU. 

Croatia fulfils the criterion on price stability. The average inflation rate in Croatia 
during the 12 months to April 2016 was -0.4%, below the reference value of 0.7%. It 
is expected to fall well below the reference value in the months ahead. 

Annual HICP inflation in Croatia averaged 0.2% in 2014 as declining prices of non-
energy industrial goods and unprocessed food dampened growth of the headline rate. 
The  inflation  rate  dropped  into  negative  territory  in  December  2014  and  then 
remained  negative  throughout  most  of  2015  due  to  rapidly  falling  energy  prices. 
HICP  inflation  thus  averaged  -0.3%  in  2015.  It  declined  further  in  early  2016  and 
stood at -0.9% in April 2016. 

According to the Commission services' Spring 2016 Forecast, annual HICP inflation 
is projected to remain negative throughout 2016 mainly as a result of falling energy 
prices. It is expected to turn positive in 2017 as the negative impact of lower energy 
prices fades out while continued economic expansion should support consumer price 
growth. Annual HICP inflation is thus forecasted to average -0.6% in 2016 and 0.7% 
in  2017.  The  price  level  in  Croatia  (about  65%  of  the  euro-area  average  in  2014) 
suggests potential for further price level convergence in the long term. 

Graph 4a: Croatia - Inflation criterion since 2010

(percent, 12-month moving average)

5

4

3

2

1

0

-1
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Croatia

Reference value

Note: The dots  in December 2016 show the projected 
reference value and 12-month average inflation in the country.
Sources: Eurostat, Commission services' Spring 2016 Forecast.

Croatia  does  not  fulfil  the  criterion  on  public  finances.  Croatia  is  at  present  the 
subject  of  a  Council  Decision  on  the  existence  of  an  excessive  deficit  (Council 
Decision of 28 January 2014), which the Council recommended to correct by 2016. 
After  having  increased  to  5.5%  of  GDP  in  2014,  the  general  government  deficit 
declined to 3.2% of GDP in 2015. The Commission services' Spring 2016 Forecast 
projects  the  deficit  to  decline  to  2.7%  of  GDP  in  2016  and  2.3%  of  GDP  in  2017. 
The general government debt-to-GDP ratio is projected to peak at 87.6% of GDP in 
2016 and then to decline slightly in 2017. Based on the Commission's assessment of 

10 

 
 
 
the 2016 Convergence Programme, there is a risk that Croatia will not comply with 
the provisions of the Stability and Growth Pact. Therefore, further measures will be 
needed  to  ensure  compliance  in  2017.  Despite  some  recent  improvements,  the 
Croatian fiscal framework remains relatively weak in terms of design and execution, 
mostly  due  to  the  magnitude  and  frequency  of  budget  plan  revisions,  the  extent  of 
off-budget transactions and the insufficient safeguards regarding the independence of 
the national monitoring body. 

(in percent of GDP)

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

2010

2011

2012

2013

2014

2015

2016(*) 2017(*)

90
85
80
75
70
65
60
55
50

Government balance (lhs)
Gross debt (rhs)

Cyclically-adjusted balance (lhs)

(*) Commission services' Spring 2016 Forecast.

Source: Eurostat, Commission services.

Croatia  does  not  fulfil  the  exchange  rate  criterion.  The  Croatian  kuna  is  not 
participating in ERM II. The HNB operates a tightly managed floating exchange rate 
regime,  using  the  exchange  rate  as  the  main nominal anchor to achieve its  primary 
objective  of  price  stability.  International  reserves  held  by  the  HNB  hovered  above 
EUR 12 billion throughout 2014. They increased to above EUR 14 billion in the first 
quarter of 2015 but then declined again and stood at some EUR 13.7 billion (31% of 
GDP)  by  end-2015.  The  kuna's  exchange  against  the  euro  has  remained  broadly 
stable  over  the  past  two  years,  oscillating  around  7.6  HRK/EUR.  It  continued  to 
follow  an  intra-year  pattern  of  temporarily  appreciating  in  spring  as  a  result  of 
foreign exchange inflows generated by the tourism sector.  

Croatia fulfils the criterion on the convergence of long-term interest rates. The 
average long-term interest rate in Croatia in the year to April 2016 was 3.7%, below 
the reference value of 4%. Long-term interest rates in Croatia declined from above 
5% in early 2014 to about 3% in the second quarter of 2015 but then increased again 
to  around  3.9%  in  the  second  half  of  2015.  The  spread  against  the  German 
benchmark bond stood at some 350 basis points in early 2016. 

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments  and  integration  of  markets.  Croatia's  external  surplus  (i.e.  the 
combined  current  and  capital  account)  increased  significantly  from  1%  of  GDP  in 
2014 to some 5.6% of GDP in 2015, partly as a result of losses incurred by foreign-
owned banks due the legislated conversion of CHF loans. The Croatian economy is 
well  integrated  with  the  euro  area  through  trade  and  investment  linkages.  On  the 
basis  of  selected  indicators  relating  to  the  business  environment,  Croatia  performs 
worse than most euro-area Member States. The financial sector is highly integrated 
into  the  EU  financial  system  through  foreign  ownership  of  domestic  banks.  In  the 
context  of  the  Macroeconomic  Imbalance  Procedure,  Croatia  was  subject  to  an  in-
depth  review  in  2016,  which  found  that  Croatia  continues  to  experience  excessive 

11 

 
 
 
macroeconomic  imbalances.  Vulnerabilities  were  linked  to  high  levels  of  public, 
corporate and external debt in a context of high unemployment. 

5. 

HUNGARY 

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

Legislation  in  Hungary  -  in  particular  the  Law  on  the  Magyar  Nemzeti  Bank 
(MNB) - is not fully compatible with the compliance duty under Article 131 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)  TFEU  and 
Article 3 of the ESCB/ECB Statute. In addition, the Law on the MNB also contains 
further imperfections relating to MNB integration into the ESCB.  

Hungary  fulfils  the  criterion  on  price  stability.  The  average  inflation  rate  in 
Hungary during the 12 months to April 2016 was 0.4%, below the reference value of 
0.7%. It is projected to remain below the reference value in the months ahead.  

Annual  HICP  inflation  in  Hungary  over  the  last  two  years  reflected  mainly  global 
trends and was mostly driven by the fall in oil prices. It hovered around zero in 2014 
and  reached  a  trough  of  -1.4%  at  the  beginning  of  2015,  as  domestic  demand 
generated  no  inflationary  pressure,  in  the  context  of  historically  low  inflation 
expectations. HICP inflation rose to 1% by end-2015, partly due to unprocessed food 
prices. In early 2016 inflation fell again, mainly thanks to a VAT cut on some meat 
products and another drop in the oil price. In April 2016, annual HICP inflation stood 
at 0.3%. 

Inflation is projected to increase to 0.4% in 2016 and to 2.3% in 2017 according to 
the  Commission  services'  Spring  2016  Forecast,  mainly  due  to  less  favourable 
commodity  price  developments  and  strengthening  domestic  demand.  The  relatively 
low  price  level  in  Hungary  (about  57%  of  the  euro-area  average  in  2014)  suggests 
potential for further price level convergence in the long term. 

Graph 5a: Hungary - Inflation criterion since 2010

(percent, 12-month moving average)

6

5

4

3

2

1

0

-1
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Hungary

Reference value

Note: The dots  in December 2016 show the projected 
reference value and 12-month average inflation in the country.
Sources: Eurostat, Commission services' Spring 2016 Forecast.

12 

 
 
 
Hungary  fulfils  the  criterion  on  public  finances.  Hungary  is  not  the  subject  of  a 
Council  Decision  on  the  existence  of  an  excessive  deficit.  The  general  government 
deficit  decreased  from  2.6%  of  GDP  in  2013  to  2.3%  in  2014,  due  mainly  to  the 
increase in revenues. The deficit-to-GDP ratio decreased further to 2.0% in 2015 and 
according to the Commission services' Spring 2016 Forecast, it is projected to remain 
at that level in both 2016 and 2017, under a no-policy-change assumption. The gross 
public debt ratio decreased to 75.3% of GDP in 2015 and it is projected to decrease 
further  to  74.3%  of  GDP  in  2016  and  to  73%  of  GDP  in  201715.  Based  on  the 
Commission's assessment of the 2016 Convergence Programme, there is a high risk 
that Hungary will not comply with the provisions of the Stability and Growth Pact, as 
there is a high risk of a significant deviation from the required adjustment in 2016 as 
well  as,  under  unchanged  policies,  in  2016  and  2017  taken  together.  Therefore 
further  measures  will  be  needed  in  both  years  to  ensure  compliance.  The  wide-
ranging  revamp  of  the  Hungarian  fiscal  framework  launched  in  2011  is  near  to 
completion, but its effectiveness is yet to be established. 

Graph 5b: Hungary - Government budget balance and debt
Inverted scale
(in percent of GDP)

-6

-5

-4

-3

-2

-1

0

85

80

75

70

65

2010

2011

2012

2013

2014

2015

2016(*) 2017(*)

Government balance (lhs)

Cyclically-adjusted balance (lhs)

Gross debt (rhs)

(*) Commission services' Spring 2016 Forecast, see also footnote 15.

Source: Eurostat, Commission services.

Hungary does not fulfil the exchange rate  criterion. The Hungarian forint is not 
participating in ERM II. Hungary operates a floating exchange rate regime, allowing 
for foreign exchange market interventions by the central bank. The forint depreciated 
in summer 2014 to around 314 HUF/EUR, but regained those losses in the autumn, 
as the rate-cutting cycle was suspended in Hungary and the MNB provided foreign-
currency  liquidity  for  housing  mortgage  loan-related  currency  conversions.  The 
forint  weakened  again  in  January  2015  (to  316.5  HUF/EUR),  following  the  SNB's 
decision to let the Swiss franc appreciate. It then strengthened to around 299 in April 
in  the  wake  of  further  monetary  easing  in  the  euro  area,  until  the  MNB  responded 
with policy rate reduction in June 2015. From then on, the forint was broadly stable 
against  the  euro  trading  mostly  in  the  range  of  310  to  315.  During  the  two  years 
before this assessment, the forint depreciated against the euro by about 1%. 

Hungary fulfils the criterion on the convergence of long-term interest rates. The 
average  long-term  interest  rate  in  the  year  to  April  2016  was  3.4%,  below  the 
reference value of 4.0%. The monthly average long-term interest rate declined from 
around  6%  in  early  2014  to  close  to  3%  by  early  2015,  due  to  improving  market 
confidence against the background of a global search for yields. Long-term interest 

15  Eurostat has expressed a reservation on the quality of government finance data reported by Hungary in the 
April 2016 notification. This relates to the sector classification of Eximbank and would result in an increase 
of the government debt level for all years. 

13 

 
 
 
                                                            
rates temporarily rose to near 3.9% in mid-2015, together with rising US and euro-
area  yields,  and  were  then  fluctuating  around  3.3%  from  autumn  2015.  Long-term 
spreads  vis-à-vis  the  German  benchmark  bond  stood  at  some  290  basis  points  in 
April 2016.  

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments  and  integration  of  markets.  The  external  balance  recorded  large 
surpluses  over  the  past  two  years,  increasing  from  around  6%  of  GDP  in  2014  to 
almost  9%  of  GDP  in  2015,  reflecting  mainly  high  absorption  of  EU  funds.  The 
balance-of-payments  assistance  granted  to  Hungary  by  the  EU  and  the  IMF  in 
autumn  2008  was  fully  repaid  by  April  2016.  The  Hungarian  economy  is  highly 
integrated with the euro area through trade and investment linkages. On the basis of 
selected  indicators  relating  to  the  business  environment,  Hungary  performs  worse 
than most euro-area Member States. Hungary's financial sector is well integrated into 
the EU financial system.  

6. 

POLAND 

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

Legislation in Poland - in particular the Act on the Narodowy Bank Polski (NBP) 
and  the  Constitution  of  the  Republic  of  Poland  -  is  not  fully  compatible  with  the 
compliance  duty  under  Article  131  TFEU. 
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. 

Incompatibilities  concern 

Poland fulfils the criterion on price stability. The average inflation rate in Poland 
during the 12 months to April 2016 was -0.5%, below the reference value of 0.7%. It 
is expected to remain below the reference value in the months ahead.  

Annual  HICP  inflation  turned  negative  in  August  2014  and  decelerated  to  a 
minimum  of  -1.3%  in  February  2015,  recovering  gradually  in  early  2016.  These 
developments  were  mainly  driven  by  falling  global  oil  and  food  prices.  In  April 
2016, annual HICP inflation stood at -0.5%. 

Inflation  is  expected  to  increase  only  gradually  to  0.0%  in  2016  and  1.6%  in  2017 
according  to  the  Commission  services'  Spring  2016  Forecast.  The  low  global 
inflation  environment  and  subdued  commodity  prices  should  counteract  positive 
impulses from the expected acceleration of wages. The relatively low price level in 
Poland (close to 55% of the euro-area average in 2014) suggests potential for further 
price level convergence in the long term. 

14 

 
 
Graph 6a: Poland - Inflation criterion since 2010

(percent, 12-month moving average)

5

4

3

2

1

0

-1
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Poland

Reference value

Note: The dots  in December 2016 show the projected 
reference value and 12-month average inflation in the country.
Sources: Eurostat, Commission services' Spring 2016 Forecast.

Poland  fulfils  the  criterion  on  public  finances.  Poland  is  not  the  subject  of  a 
Council  Decision  on  the  existence  of  an  excessive  deficit.  The  general  government 
deficit  declined  from  4.0%  of  GDP  in  2013  to  3.3%  in  2014,  due  to  fiscal 
consolidation  measures.  The  deficit-to-GDP  ratio  improved  to  2.6%  in  2015  and 
according to the Commission services' Spring 2016 Forecast it is projected to remain 
at  2.6%  of  GDP  in  2016  and  to  widen  to  3.1%  in  2017,  under  a  no-policy-change 
assumption. The general government debt-to-GDP ratio is forecast to increase from 
51.3% in 2015 to 52.7% in 2017. Based on the Commission's assessment of the 2016 
Convergence  Programme,  there  is  a  risk  that  Poland  will  not  comply  with  the 
provisions  of  the  Stability  and  Growth  Pact,  as  there  is  a  risk  of  a  significant 
deviation  from  the  recommended  adjustment  both  in  2016  and,  under  unchanged 
policies, in 2017. Therefore further measures will be needed to ensure compliance in 
2016 and 2017. Poland remains the only EU country that does not have and does not 
plan to establish an independent fiscal council. 

Graph 6b: Poland - Government budget balance and debt
Inverted scale
-10

(in percent of GDP)

-8

-6

-4

-2

0

60

57

54

51

48

45

2010

2011

2012

2013

2014

2015

2016(*) 2017(*)

Government balance (lhs)
Gross debt (rhs)

(*) Commission services' Spring 2016 Forecast.

Source: Eurostat, Commission services.

Cyclically-adjusted balance (lhs)

Poland  does  not  fulfil  the  exchange  rate  criterion.  The  Polish  zloty  is  not 
participating in ERM II. Poland operates a floating exchange rates regime, allowing 
for  foreign  exchange  market  interventions  by  the  central  bank.  After  broadly 
stabilising  until  end-2014  in  the  range  of  4.1-4.3  PLN/EUR,  the  zloty  appreciated 
steeply  until  April  2015  to  4.0  PLN/EUR,  supported  by  accelerating  economic 
growth, ECB easing and end of the monetary easing cycle in Poland. It reversed the 
trend thereafter, affected by domestic political uncertainties. Exchange rate volatility 

15 

 
 
 
 
in early 2016 was driven by factors such as a credit rating downgrade, global risks 
and  compression  of  risk  premia.  Poland  has  benefited  from  a  Flexible  Credit  Line 
arrangement with the IMF since 2009. Compared to April 2014, the exchange rate of 
the zloty against the euro was around 2.9% weaker in April 2016.  

Poland  fulfils  the  criterion  on  the  convergence  of  long-term  interest  rates. The 
average  long-term  interest  rate  in  the  year  to  April  2016  was  2.9%,  below  the 
reference  value  of  4.0%.  It  declined  from  above  4%  at  the  beginning  of  2014  to 
around  3%  in  early  2015.  It  then  went  down  to  2.7%  during  2015  as  market 
confidence  improved  and  increased  slightly  at  the  beginning  of  2016.  As  a  result, 
long-term interest rate spreads vis-à-vis the German benchmark bond stood at around 
280 basis points in early 2016. 

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments  and  integration  of  markets.  Poland’s  external  balance  improved 
considerably  in  recent  years  and  has  been  in  surplus  since  2013,  driven  by  a 
strengthening  trade  balance.  The  Polish  economy  is  well  integrated  with  the  euro 
area  through  trade  and  investment  linkages.  On  the  basis  of  selected  indicators 
relating  to  the  business  environment,  Poland  performs  worse  than  most  euro-area 
Member  States.  Poland's  financial  sector  is  well  integrated  into  the  EU  financial 
sector as confirmed by the substantial share of foreign-owned banks. 

7. 

ROMANIA 

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

Legislation in Romania – in particular Law No. 312 on the Statute of the Bank of 
Romania (the BNR Law) – is not fully compatible with the compliance duty under 
Article  131  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 BNR Law contains imperfections relating 
to central bank independence and to central bank integration in the ESCB at the time 
of euro adoption with regard to the BNR's objectives and the ESCB tasks laid down 
in Article 127(2) TFEU and Article 3 of the ESCB/ECB. 

Romania  fulfils  the  criterion  on  price  stability.  The  average  inflation  rate  in 
Romania  during  the  12  months  to  April  2016  was  -1.3%,  well  below  the  reference 
value of 0.7%. It is projected to remain well below the reference value in the months 
ahead.  

Annual HICP inflation has been on a downward path over the past two years, mainly 
driven  by  successive  VAT  cuts  and  low  global  oil  prices,  though  underlying  price 
pressures  have  been  building  amid  strong  domestic  demand  supported  by  fiscal 
stimulus and high wage growth. Inflation fluctuated between 1% and 2% for most of 
2014, and moved into negative territory in June 2015 (-0.9%) following the cut of the 
VAT rate for some food products from 24% to 9%. The annual HICP inflation rate 
has been negative since then. HICP inflation was pushed down again by a reduction 
of  the  standard  VAT  rate  by  4  pp.  from  January  2016  and  stood  at  -2.6%  in  April 
2016.    

16 

 
 
The  Commission  services'  Spring  2016  Forecast  projects  annual  HICP  inflation  to 
average -0.6% in 2016 and to rebound to 2.5% in 2017, once the transitory impact of 
the VAT rate cut for food products fades out, as the output gap closes and domestic 
pressures are mounting. Upside risks relate mainly to a stronger-than-expected build-
up of domestic price pressures and acceleration of wage growth. The relatively low 
price  level  in  Romania  (around  52%  of  the  euro-area  average  in  2014)  suggests 
significant potential for further price level convergence in the long term. 

Graph 7a: Romania - Inflation criterion since 2010

(percent, 12-month moving average)

8

6

4

2

0

-2
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Romania

Reference value

Note: The dots  in December 2016 show the projected 
reference value and 12-month average inflation in the country.
Sources: Eurostat, Commission services' Spring 2016 Forecast.

Romania fulfils the criterion on public finances. Romania is not the subject of a 
Council  Decision  on  the  existence  of  an  excessive  deficit.  The  general  government 
deficit  declined  from  2.1%  of  GDP  in  2013  to  0.9%  in  2014,  mainly  due  to 
expenditure restraint and better tax collection. The deficit-to-GDP ratio turned out at 
0.7% in 2015 and according to the Commission services' Spring 2016 Forecast, it is 
projected  to  deteriorate  to  2.8%  of GDP  in  2016  and  to  3.4%  in  2017,  under  a  no-
policy-change assumption. The general government debt ratio is expected to increase 
from 38.4% of GDP in 2015 to 40.1% of GDP in 2017. Based on the Commission's 
assessment  of  the  2016  Convergence  Programme,  there  is  a risk  that  Romania  will 
not comply with the provisions of the Stability and Growth Pact, as there is a risk of 
a significant deviation both in 2016 and, under unchanged policies, 2017. Therefore 
further  measures  will  be  needed  to  ensure  compliance  in  2016  and  2017.  Romania 
has  adopted  a  comprehensive  set  of  fiscal  framework  related  provisions,  but  their 
disciplining effect is diminished by ineffective implementation. 

17 

 
 
 
 
Graph 7b: Romania - Government budget balance and debt
Inverted scale
-8

(in percent of GDP)

-6

-4

-2

0

45

40

35

30

25

2010

2011

2012

2013

2014

2015

2016(*) 2017(*)

Government balance (lhs)
Gross debt (rhs)

Cyclically-adjusted balance (lhs)

(*) Commission services' Spring 2016 Forecast.

Source: Eurostat, Commission services.

Romania  does  not  fulfil  the  exchange  rate  criterion.  The  Romanian  leu  is  not 
participating in ERM II. Romania operates a floating exchange rate regime, allowing 
for  foreign  exchange  market  interventions  by  the  central  bank.  The  leu's  exchange 
rate against the euro showed relatively limited fluctuation between spring 2014 and 
early  2016,  supported  by  the  EU-IMF  financial  assistance  programme  until  end-
2015.  The  leu  predominantly  traded  in  the  range  of  4.4-4.5  RON/EUR  during  the 
assessment period. It weakened somewhat in late 2014, mainly due to an increase in 
global risk aversion, and firmed moderately at the beginning of 2015, supported by 
additional monetary easing in the euro area. It weakened again at the end of 2015 due 
to  domestic  political  uncertainties  but  recovered  in  early  2016.  Compared  to  April 
2014, the exchange rate of the leu against the euro was basically unchanged in April 
2016.  

Romania fulfils the criterion on the convergence of long-term interest rates. The 
average  long-term  interest  rate  in  Romania  in  the  year  to  April  2016  was  3.6%, 
below the reference value of 4.0%. Long-term interest rates declined gradually from 
above  5%  in  spring  2014  to  below  4%  at  the  end  of  2014  and  were  temporarily 
moving  to  below  3%  in  February  2015.  They  went  up  again  in  mid-2015  touching 
4% and fluctuated around 3.5% thereafter. As a result, long-term interest rate spreads 
vis-à-vis the German benchmark bond declined from above 500 basis points in late 
2012 to about 330 basis points in April 2016. 

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments and the integration of markets. Romania's external balance has been in 
surplus  since  2013,  reflecting,  in  particular,  a  lower  merchandise  trade  deficit. 
Romania  was  a  beneficiary of international financial assistance programmes during 
2009-2015. The first two-year EU-IMF financial assistance programme in 2009 was 
followed by two successor programmes, granted in 2011 and 2013. Unlike the first 
programme, these were treated as precautionary, and no funding was requested. The 
Romanian  economy  is  well  integrated  with  the  euro  area  through  trade  and 
investment  linkages.  On  the  basis  of  selected  indicators  relating  to  the  business 
environment,  Romania  performs  worse  than  most  euro-area  Member  States. 
Romania's  financial  sector  is  well  integrated  into  the  EU  financial  system  as 
confirmed by the substantial share of foreign-owned banks.  

18 

 
 
 
8. 

SWEDEN  

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

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  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. 

Sweden does not fulfil the criterion on price stability. The average inflation rate in 
Sweden during the 12 months to April 2016 was 0.9%, above the reference value of 
0.7%. It is projected to return below the reference value in the months ahead.  

Sweden's average inflation rate reached 0.7% in 2015, up from 0.2% in 2014, mainly 
due  to  krona  depreciation,  tax  hikes  as  well  as  expanding  domestic  demand 
supported  by  an  accommodative  monetary  policy.  In  April  2016,  annual  HICP 
inflation stood at 1.0%. 

HICP inflation is likely to increase moderately in the course of 2016 on the back of 
currently  strong  growth,  whereas  low  oil  and  commodity  prices  have  a  dampening 
effect.  No  particular  upward  pressure  is  foreseen  from  any  HICP  component  and 
wage developments are projected to remain moderate. Accordingly, the Commission 
services' Spring 2016 Forecast projects annual average inflation at 0.9% in 2016 and 
1.2%  in  2017.  The  level  of  consumer  prices  in  Sweden  relative  to  the  euro  area 
gradually increased since Sweden's EU accession in 1995, reaching 124% in 2014. 

Graph 8a: Sweden - Inflation criterion since 2010 

(percent, 12-month moving average)

5

4

3

2

1

0
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Sweden

Reference value

Note: The dots  in December 2016 show the projected 
reference value and 12-month average inflation in the country.
Sources: Eurostat, Commission services' Spring 2016 Forecast.

Sweden  fulfils  the  criterion  on  public  finances.  Sweden  is  not  the  subject  of  a 
Council  Decision  on  the  existence  of  an  excessive  deficit.  The  general  government 
balance  improved  from  1.6%  of  GDP  in  2014  to  0.0%  of  GDP  in  2015,  reflecting 
mainly a strong rise in tax revenues, supported by buoyant private consumption and 
tax  increases.  According  to  the  Commission  services'  Spring  2016  Forecast,  the 
general government deficit is expected to reach 0.4% of GDP in 2016 and 0.7% in 
2017. The gross general government debt ratio reached 43.4% of GDP in 2015 and is 

19 

 
 
 
expected  to  gradually  decline  in  the  coming  years  to  41.3%  of  GDP  in  2016  and 
40.1%  of  GDP  in  2017.  Based  on  the  Commission's  assessment  of  the  2016 
Convergence Programme, Sweden is expected to comply with the provisions of the 
Stability and Growth Pact. Sweden has a strong national fiscal framework, which is 
also reflected in its extensive track record of budgetary soundness. 

Graph 8b: Sweden - Government budget balance and debt
Inverted scale
-2

(in percent of GDP)

-1

0

1

50

45

40

35

2010

2011

2012

2013

2014

2015 2016(*) 2017(*)

Government balance (lhs)
Gross debt (rhs)

Cyclically-adjusted balance (lhs)

(*) Commission services' Spring 2016 Forecast.

Source: Eurostat, Commission services.

Sweden  does  not  fulfil  the  exchange  rate  criterion.  The  Swedish  krona  is  not 
participating in ERM II. Sweden operates a floating exchange rate regime, allowing 
for foreign exchange market interventions by the central bank. Between early-2013 
and the beginning of 2015, the krona was on a depreciation trend, falling overall by 
almost 14% against the euro amid decisive monetary easing in Sweden. During the 
two  years  before  this  assessment,  the  krona  depreciated  against  the  euro  by  some 
1.6%, fluctuating around on average 9.30 SEK/EUR. 

Sweden fulfils the criterion on the convergence of long-term interest rates. The 
average long-term interest rate in Sweden in the year to April 2016 was 0.8%, well 
below  the  reference  value  of  4.0%.  Swedish  long-term  interest  rates  continued 
declining in 2014, reaching an all-time low of 0.3% in April 2015, before recovering 
somewhat  by  early-2016.  The  spread  vis-à-vis  the  German  benchmark  bond 
narrowed since early 2014 owing to a partial reversal of safe-haven flows from the 
euro area at the height of the crisis. The spread stood at some 68 basis points at the 
end of April 2016. 

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments and integration of markets. The surplus on Sweden's external balance 
has been relatively stable at around 6% since 2010. Sweden's economy is integrated 
with  the  euro  area  through  trade  and  investment  linkages.  On  the  basis  of  selected 
indicators  relating  to  the  business  environment,  Sweden  performs  better  than  most 
euro-area  Member  States.  Sweden's  financial  sector  is  well  integrated  into  the  EU 
financial  sector,  especially  through  inter-linkages  in  the  Nordic-Baltic  financial 
cluster.  In  the  context  of  the  Macroeconomic  Imbalance  Procedure,  Sweden  was 
subject  to  an  in-depth  review  in  2016,  which  found  that  Sweden  continues  to 
experience macroeconomic imbalances. 

20