REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL CONVERGENCE REPORT 2018 (prepared in accordance with Article 140(1) of the Treaty on the Functioning of the European Union)
Date: 2018-05-23
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Bulgaria, Croatia, Czechia, Hungary, Poland, Romania, Sweden, convergence criteria, euro, euro area

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 23.5.2018 COM(2018) 370 final  REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL CONVERGENCE REPORT 2018   (prepared in accordance with Article 140(1) of the Treaty on the Functioning of the European Union) {SWD(2018) 350 final}  
 
 
1. 

PURPOSE OF THE REPORT 

The euro is meant to be the single currency of the European Union as a whole. It is 
now  used  every  day  by  around  342  million  people  in  19  Member  States  ("euro 
area"). The euro is the second most used currency worldwide. Sixty other countries 
and territories around the world, home to 175 million people, have chosen to use the 
euro as their currency or to peg their own currency to it.  

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 2016.  

The  2018  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 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 seventh Alert Mechanism Report (AMR) in November 2017 and the conclusions of the corresponding in-

depth reviews in March 2018. 

1 

 
 
                                                           
These  crises  also  revealed  the  existence  of  undesirable  links  between  national 
banking  sectors  and  their  sovereigns  and  unleashed  strong  fragmentation  forces  in 
financial markets. The Banking Union was created to break those links and reverse 
fragmentation, as well as to ensure better risk diversification across Member States 
and adequate financing of the economy. Several key elements of the Banking Union 
are already established, i.e. the Single Rulebook, the Single Supervisory Mechanism 
(SSM) and the Single Resolution Fund (SRF). Member States which adopt the euro 
will  also  participate  in  the  Banking  Union.  Such  participation  is  irrespective  of  the 
assessment of the convergence criteria undertaken in this report. 

As part of the package on deepening Europe's EMU presented on 6 December 2017, 
the European Commission proposed to set up a dedicated work stream (as part of its 
technical  assistance  activities)  to  offer  targeted  support  to  Member  States  on  their 
way  to  joining  the  euro4.  This  proposal  was  reflected  in  the  amendment  to  the 
Structural  Reform  Support  Programme  Regulation5.  The  Commission  also 
announced  that  for  the  period  post-2020,  it  will  propose  a  dedicated  convergence 
facility in order to support Member States in their concrete preparation for a smooth 
participation  in  the  euro  area.  This  is  however  irrespective  of  the  formal  process 
towards euro adoption, which is conducted through the Convergence Reports. 

Convergence criteria 

The examination of the compatibility of national legislation, including the statutes 
of  the  national  central  bank,  with  Article  130  TFEU  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”6. 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 

4   European Commission, Communication on new budgetary instruments for a stable euro area within the Union framework, COM(2017) 

0822 final, 6 December 2017. 

5   Proposal for a Regulation of the EP and of the Council amending Regulation (EU) 2017/825, COM(2017) 825 final, 2017/0334(COD), 6 

6 

December 2017.  
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. 

2 

 
 
                                                           
reference  to  the  most  recent  Commission  services'  forecast  of  inflation7.  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  1.9%  in  March  20188,  with 
Cyprus, Ireland and Finland as the three 'best-performing Member States'9. 

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 Pact10.  

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”11. 

The relevant two-year period for assessing exchange rate stability in this report is 24 
April 2016 to 23 April 2018. 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 participants12. 

7  All  forecasts  for  inflation  and  other  variables  in  the  current  report  are  from  the  Commission  services'  Spring  2018  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. 

8  The cut-off date for the data used in this report is 23 April 2018. 
9   The respective 12-month average inflation rates were 0.2%, 0.3% and 0.8%.   
10  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. 
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. 

11 

12   ERM II participants are the euro-area finance ministries, the ECB, non-euro area ERM II finance ministries and central banks. 

3 

 
 
                                                           
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 3.2% in March 201813.  

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 March 2018 was 1.4%, below the reference value 
of 1.9%. It is projected to remain below the reference value in the months ahead. 

The  annual  HICP  inflation  rate  in  Bulgaria  was  negative  between  mid-2013  and 
early-2017, due to combination of several factors, i.e. declining imported commodity 
prices, subdued domestic demand and reductions in administered prices. In 2016, it 
dropped  from  -0.4%  in  January  to  about  -2.5%  in  mid-2016,  when  it  started  to 
increase. In December 2016, it reached -0.5%, and continued to increase until April 
2017, when it stood at 1.7%. In May-July 2017, inflation again temporarily declined, 
but  soon  reverted  to  increasing  path  reaching  about  1.9%  in  November  2017.  The 
pick-up  in  annual  inflation  in  2017  reflected  larger  inflation  contributions  from 
energy  and  food  prices.  Inflation  has  dropped  again  in  early  2018  and  reverted  to 
1.9% in March 2018. 

13  The reference value for March 2018 is calculated as the simple average of the average long-term interest rates of Cyprus (2.2%), Ireland 

(0.8%) and Finland (0.6%), plus two percentage points.  

4 

 
 
                                                           
Inflation  is  expected  to  rise  further  as  a  result  of  internal  factors,  i.e.  a  boost  in 
private  demand  fuelled  by  an  expected  increase  of  the  households'  disposable 
incomes,  and  as  a  result  of  external  forces,  i.e.  an  expected  increase  in  global  oil 
prices and their spill-overs to energy prices. Accordingly, the Commission services' 
Spring 2018 Forecast projects HICP inflation to average 1.8% in 2018 and 2019. The 
relatively low price level in Bulgaria (about 47% of the euro-area average in 2016) 
suggests significant potential for price level convergence in the long term. 

Bulgaria  fulfils  the  criterion  on  public  finances.  Moreover,  based  on  the 
assessment  of  the  2018  Convergence  Programme,  Bulgaria  is  expected  to  comply 
with the Stability and Growth Pact in 2018 and 2019. Bulgaria is not the subject of a 
Council  Decision  on the  existence of  an  excessive  deficit. The  general  government 
budget  balance  was  0.2%  and  0.9%  of  GDP  in  2016  and  2017,  respectively. 
According  to  the  Commission  services'  Spring  2018  Forecast,  it  is  projected  to 
remain  positive  at  0.6%  of  GDP  in  both  2018  and  2019,  under  a  no-policy-change 
assumption. The gross public debt ratio decreased to 25.4% of GDP in 2017 and it is 
projected  to  further  decrease  to  23.3%  of  GDP  in  2018  and  to  21.4%  of  GDP  in 
2019. The Bulgarian fiscal framework has recently been strengthened by successive 
legislative steps, which now require implementation. 

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 

5 

-2-101234Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18BulgariaReference valueGraph 2a: Bulgaria -Inflation criterion since 2012(percent, 12-month moving average)Note: The dots  in December 2018 show the projected reference value and 12-month average inflation in the country.Sources: Eurostat, Commission services' Spring 2018 Forecast.1015202530-6-5-4-3-2-10122012201320142015201620172018(*)2019(*)Government balance (lhs)Cyclically-adjusted balance (lhs)Gross debt (rhs)Graph 2b: Bulgaria -Government budget balance and debtSource: Eurostat, Commission services.(in percent of GDP)(*) Commission services' Spring 2018 Forecast.Inverted scale 
 
 
 
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  to  the  euro.  Additional  indicators,  such  as 
developments in foreign exchange reserves and short-term interest rates, suggest that 
investors' risk perception of Bulgaria have  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 up to March 2018 was 1.4%, 
below  the  reference  value  of  3.2%.  Long-term  interest  rates  in  Bulgaria  declined 
from 2.4% in January 2016 to 0.9% in January 2018. Yield spreads vis-à-vis German 
benchmark bond increased by some 50 basis points in the first half of 2016 reaching 
about 250 basis points in July 2016, but have been on a decreasing path since then. 
At the end of 2017 the spread reached 72 basis points, further decreasing to below 40 
basis points in early 2018. 

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments  and  integration  of  markets.  Bulgaria's  external  balance  recorded  a 
significant surplus, reaching 4.5% and 5.5% of GDP in 2016 and 2017, respectively. 
The  Bulgarian  economy  is  well  integrated  with  the  euro  area  through  trade  and 
investment  linkages.  On  the  basis  of  selected  indicators  related  to  the  business 
environment,  Bulgaria  performs  worse  than  most  euro-area  Member  States.  Major 
challenges  also  relate  to  the  institutional  framework  including  corruption  and 
government  efficiency.  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  2018,  which  concluded  that  Bulgaria  experiences 
macroeconomic  imbalances  (thereby  revising  the  previous  conclusion  of  excessive 
imbalances),  linked  to  vulnerabilities  in  the  financial  sector  coupled  with  high 
indebtedness and  non-performing  loans in the corporate sector. Persistent structural 
weaknesses prevent labour market to improve faster.  

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.  

The Czech  Republic does not fulfil the  criterion on price stability. The average 
inflation rate in the Czech Republic during the 12 months to March 2018 was 2.2%, 

6 

 
 
above  the  reference  value  of  1.9%.  It  is  projected  to  decline  below  the  reference 
value in the months ahead.  

The  annual  HICP  inflation  rate  dropped  from  0.5%  in  early  2016  to  -0.1%  in  June 
2016 before increasing to above 2% by end-2016. It then floated between 2 and 3% 
during 2017. The annual HICP inflation rate thus averaged 0.6% in 2016 and 2.4% in 
2017. The pick-up in annual inflation in 2017 reflected larger inflation contributions 
from energy and food prices as well as higher price increases in the service sector. 
Annual inflation declined in early 2018 and stood at 1.6% in March 2018. 

Annual  HICP inflation is expected to decline in 2018, mainly  because the inflation 
contribution of food prices (both processed and unprocessed food) should decrease. 
At  the  same  time,  prices  of  energy  and  services  are  expected  to  exert  a  stronger 
inflation  contribution  than  in  previous  years.  As  a  result,  the  Commission  services' 
Spring  2018  Forecast  projects  annual  HICP  inflation  to  average  2.1%  in  2018  and 
1.8%  in  2019.  The  price  level  in  the  Czech  Republic  (about  64%  of  the  euro-area 
average  in  2016)  suggests  potential  for  further  price  level  convergence  in  the  long 
term.  

The Czech Republic fulfils the criterion on public finances. Moreover, based on 
the assessment of the 2018 Convergence Programme, the Czech Republic is expected 
to comply with the Stability and Growth Pact in 2018 and 2019. The Czech Republic 
is not the subject of a Council Decision on the existence of an excessive deficit. The 
general government balance improved substantially, from -2.1% of GDP in 2014 to a 
surplus  of  1.6%  of  GDP  in  2017.  According  to  the  Commission  services'  Spring 
2018 Forecast, the general government balance is projected at 1.4% of GDP in 2018 
and  0.8%  of GDP in  2019, under a no-policy-change  assumption. The gross  public 
debt ratio declined from its peak of 44.9% of GDP in 2013 to below 35% of GDP in 
2017. It is projected to fall below 32% of GDP in 2019. The Czech fiscal framework 
was strengthened with the adoption of the Fiscal Responsibility Law in early 2017, 
but its effectiveness will depend on the implementation of the new rules. 

7 

01234Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18Czech RepublicReference valueGraph 3a: Czech Republic -Inflation criterion since 2012(percent, 12-month moving average)Note: The dots  in December 2018 show the projected reference value and 12-month average inflation in the country.Sources: Eurostat, Commission services' Spring 2018 Forecast. 
 
 
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. 
Between  November  2013  and  April  2017,  the  ČNB  used  the  exchange  rate  as  an 
additional  instrument  for  easing  monetary  conditions  by  allowing  the  koruna 
exchange  rate  against  the  euro  to  float  freely  only  on  the  weaker  side  of  the  27 
CZK/EUR  level.  Koruna  traded  marginally  above  27  CZK/EUR  throughout  2016 
and  in  early  2017  as  foreign  exchange  market  interventions  by  the  ČNB  precluded 
further exchange rate appreciation. Following the expiry of the ČNB's exchange rate 
commitment in April 2017, the koruna followed a gradual appreciation trend against 
the euro, strengthening from above 27 CZK/EUR in early April 2017 to below 25.5 
CZK/EUR  in  early  2018.  During  the  two  years  before  this  assessment,  the  koruna 
appreciated against the euro by more than 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 March 2018 was 1.3%, below the reference value of 3.2%. The long-term interest 
rate of the Czech Republic oscillated around 0.4% in 2016. It then slowly increased 
to  about  1.5%  by  end-2017  as  the  ČNB  gradually  tightened  its  monetary  policy 
stance. The spread against the German benchmark bond fluctuated around 120 basis 
points in early 2018.  

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments  and  integration  of  markets.  The  external  balance  of  the  Czech 
Republic recorded a surplus of 2.7% of GDP in 2016 and 2% of GDP in 2017. 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  seem  to  have 
stabilised below the euro-area average in recent years. The Czech financial sector is 
highly integrated into the EU financial sector, in particular through a high degree of 
foreign ownership of financial intermediaries.  

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. 

8 

253035404550-4-3-2-10122012201320142015201620172018(*)2019(*)Government balance (lhs)Cyclically-adjusted balance (lhs)Gross debt (rhs)Graph 3b: Czech Rep. -Government budget balance and debtSource: Eurostat, Commission services.(in percent of GDP)(*) Commission services' Spring 2018 Forecast.Inverted scale 
 
 
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 March 2018 was 1.3%, below the reference value of 1.9%. It 
is expected to remain below the reference value in the months ahead. 

Annual  HICP  inflation  remained  negative  throughout  most  of  2016  due  to  falling 
energy and unprocessed food prices. It thus averaged -0.6% for the year as a whole. 
Annual inflation rates turned positive in late 2016 and then increased to above 1% in 
early  2017  thanks  to  larger  inflation  contributions  from  all  its  main  components. 
Annual  inflation  rates  thereafter  oscillated  around  1.3%  until  early  2018.  Annual 
inflation stood at 1.2% in March 2018. 

According to the Commission services' Spring 2018 Forecast, annual HICP inflation 
is projected to remain broadly stable as recovering energy prices are likely to offset 
lower  inflation  contribution  of  unprocessed  food.  Core  inflation  is  expected  to 
slightly  accelerate  in  2019,  in  line with  the  continued  economic  expansion.  Annual 
HICP inflation is thus forecast to average 1.4% in 2018 and 1.5% in 2019. The price 
level in Croatia (about 65% of the euro-area average in 2016) suggests potential for 
price level convergence in the long term. 

Croatia fulfils the criterion on public finances. Moreover, based on the assessment 
of  the  2018  Convergence  Programme,  Croatia  is  expected  to  comply  with  the 
Stability and Growth Pact in 2018 and 2019. Croatia is not the subject of a Council 
Decision  on  the  existence  of  an  excessive  deficit.  The  general  government  balance 
turned  into  a  surplus  of  0.8%  of  GDP  in  2017.  The  Commission  services'  Spring 
2018  Forecast  projects  the  general  government  balance  to  remain  broadly  stable  at 
0.7%  of  GDP  in  2018  and  0.8%  of  GDP  in  2019.  The  general  government  debt  is 
forecasted  to  decline  to  around  70%  of  GDP  by  2019.  Following  repeated  delays 
with  the  adoption  of  the  planned  reform  acts,  the  Croatian  fiscal  framework  has 
remained relatively weak in all major aspects, most notably the design of numerical 
rules, the binding power of medium-term plans, and the set-up of its national fiscal 
council. 

9 

-2-1012345Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18CroatiaReference valueGraph 4a: Croatia -Inflation criterion since 2012(percent, 12-month moving average)Note: The dots  in December 2018 show the projected reference value and 12-month average inflation in the country.Sources: Eurostat, Commission services' Spring 2018 Forecast. 
 
 
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. Between early 2016 and early 2018 the kuna experienced 
some  appreciation  pressures  which  necessitated  foreign  exchange  purchases  from 
banks by the HNB aimed at stabilising its exchange rate against the euro. The kuna's 
exchange  against  the  euro  has  continued  to  exhibit  a  seasonal  pattern  of  temporary 
appreciating in spring thanks  to foreign  exchange inflows generated by the tourism 
sector. During the two years before this assessment, the kuna appreciated against the 
euro by almost 2%. 

Croatia fulfils the criterion on the convergence of long-term interest rates. The 
average long-term interest rate in Croatia in the year to March 2018 was 2.6%, below 
the reference value of 3.2%. The long-term interest rate of Croatia remained broadly 
stable  from  August  2015  until  August  2016,  floating  between  3.5%  and  4%.  It 
declined  to  about  3%  in  late  2016  and  then  mostly  hovered  below  3%  throughout 
2017.  In  early  2018,  the  long-term  interest  rate  declined  to  below  2.4%  and  the 
spread  vis-à-vis  the  German  benchmark  bond  to  below  200  basis  points  as  Croatia 
received its first rating upgrade since 2004. 

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments  and  integration  of  markets.  Croatia's  external  surplus  increased  from 
3.6% of GDP in 2016 to 4.2% of GDP in 2017 benefiting from an improvement in 
the  income  balance.  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.  Major  challenges  also  relate  to  the  institutional  framework  including 
regulatory  quality.  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 
2018  which  found  that  it  continued  to  experience  excessive  macroeconomic 
imbalances  linked  to  high  levels  of  public,  private  and  external  debt,  all  largely 
denominated in foreign currency, in a context of low potential growth. 

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 

10 

5560657075808590-7-6-5-4-3-2-10122012201320142015201620172018(*)2019(*)Government balance (lhs)Cyclically-adjusted balance (lhs)Gross debt (rhs)Graph 4b: Croatia -Government budget balance and debtSource: Eurostat, Commission services.(in percent of GDP)(*) Commission services' Spring 2018 Forecast.Inverted scale 
 
 
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 does not fulfil the criterion on price stability. The average inflation rate 
in  Hungary  during  the  12  months  to  March  2018  was  2.2%,  above  the  reference 
value  of  1.9%.  It  is  projected  to  remain  above  the  reference  value  in  the  months 
ahead.  

Annual  HICP  inflation  in  Hungary  over  the  last  two  years  exited  from  very  low 
levels,  including  negative  values  in  mid-2016.  Inflation  then  started  to  rise  steeply, 
reaching 2.9% by February 2017 before moderating thereafter, due mostly to energy 
price  fluctuations.  From  spring  2017,  processed  food  prices  put  increasing  upward 
pressure on HICP inflation, keeping the headline figure above 2% in 2017. In early 
2018 inflation declined again, mainly thanks to energy and durable goods prices. In 
March 2018, annual HICP inflation stood at 2.0%. 

Inflation is projected to decrease slightly to 2.3% in 2018 and to increase to 3.0% in 
2019  according  to  the  Commission  services'  Spring  2018  Forecast,  as  services 
inflation  is  expected to  increase  on  the  back  of  strong  wage  growth.  The  relatively 
low  price  level  in  Hungary  (about  58%  of  the  euro-area  average  in  2016)  suggests 
significant potential for further price level convergence in the long term. 

Hungary  fulfils  the  criterion  on  public  finances.  Hungary  is  not  the  subject  of  a 
Council Decision on the existence of an excessive deficit. However, the Commission 
recommends opening a Significant Deviation Procedure for Hungary in light of the 
significant  observed  deviation  from  the  requirements  of  the  Stability  and  Growth 
Pact in 2017. Based on the assessment of the 2018 Convergence Programme, there is 
a  risk  of  a  significant  deviation  from  the  requirements  also  in  2018  and  2019. 

11 

-10123456Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18HungaryReference valueGraph 5a: Hungary -Inflation criterion since 2012(percent, 12-month moving average)Note: The dots  in December 2018 show the projected reference value and 12-month average inflation in the country.Sources: Eurostat, Commission services' Spring 2018 Forecast. 
 
 
Therefore, significant further measures will be needed as of 2018 to comply with the 
provisions  of  the  Stability  and  Growth  Pact.  The  general  government  deficit 
decreased to 1.7% of GDP in 2016, compared to 1.9% in 2015, and then rebounded 
to 2.0% in 2017. According to the Commission services' Spring 2018 Forecast, it is 
projected to increase to 2.4% of GDP in 2018 and thereafter to moderate at 2.1% of 
GDP  in  2019,  under  a  no-policy-change  assumption.  The  gross  public  debt  ratio 
decreased to 73.6% of GDP in 2017 and it is projected to decrease further to 73.3% 
of GDP in 2018 and to 71.0% of GDP in 2019. The Hungarian fiscal framework is 
well-developed around stringent rules and procedures of debt control across all layers 
of  general  government;  however,  some  noteworthy  weaknesses  (most  notably,  the 
feeble role of medium-term fiscal planning) still remain. 

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 weakened 
from  around  311  HUF/EUR  in  March  2016  to  314  HUF/EUR  in  mid-2016,  before 
strengthening to 307 HUF/EUR by October 2016, when the MNB introduced volume 
caps  on  the  three-month  deposit  facility.  The  forint  then  traded  around  310 
HUF/EUR  until  mid-2017,  when  a  new  appreciation  wave  drove  it  to  near  304 
HUF/EUR in August 2017. Following the MNB's verbal intervention, hinting at the 
introduction of new instruments and the cutting of the overnight deposit rate to minus 
15  basis  points,  the  forint  returned  to  somewhat  below  310  HUF/EUR  after 
September 2017. In March 2018, the forint was broadly at the same level against the 
euro, as two years earlier. 

Hungary fulfils the criterion on the convergence of long-term interest rates. The 
average  long-term  interest  rate  in  the  year  to  March  2018  was  2.7%,  below  the 
reference  value  of  3.2%.  The  monthly  average  long-term  interest  rate  decreased  to 
around 2.8% by August 2016, before it rose to 3.5% by February 2017. It then started 
to decline again and reached 2.1% in December 2017, reflecting the MNB's efforts to 
extend  its  monetary  stimulus  even  more  to  long-term  rates.  Hungary's  long-term 
interest  rate  increased  to  around  2.6%  by  February  2018,  in  an  international 
environment of rising yields. The long-term spread vis-à-vis the German benchmark 
bond stood around 200 basis points in early 2018. 

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, although it deteriorated in 2017, mainly on account 

12 

65707580-4-3-2-102012201320142015201620172018(*)2019(*)Government balance (lhs)Cyclically-adjusted balance (lhs)Gross debt (rhs)Graph 5b: Hungary -Government budget balance and debtSource: Eurostat, Commission services.(in percent of GDP)(*) Commission services' Spring 2018 Forecast.Inverted scale 
 
 
of the trade balance. 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 March 2018 was 1.4%, below the reference value of 1.9%. It 
is expected to remain below the reference value in the months ahead.  

Annual HICP inflation turned positive in October 2016 and increased fast to a local 
high of 1.9% in February 2017, before declining to 1.3% in June 2017. The second 
half of 2017 was marked by a gradual inflation increase before it jumped to 2% in 
November and receded to 1.7% in December 2017. It fell sharply futher to 0.7% in 
February 2018. This somewhat volatile pattern is explained by strong swings in the 
dynamics  of  energy  and  unprocessed  food  prices.  In  March  2018,  annual  HICP 
inflation stood at 0.7%. 

Inflation  is  projected  to  decrease  to  1.3%  in  2018  and  to  increase  to  2.5%  in  2019 
according  to  the  Commission  services'  Spring  2018  Forecast,  due  mainly  to 
strengthening pressure from accelerating wages amid further tightening of the labour 

13 

-1012345Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18PolandReference valueGraph 6a: Poland -Inflation criterion since 2012(percent, 12-month moving average)Note: The dots  in December 2018 show the projected reference value and 12-month average inflation in the country.Sources: Eurostat, Commission services' Spring 2018 Forecast. 
 
 
market. The relatively low price level in Poland (about 52% of the euro-area average 
in 2016) suggests significant potential for price level convergence in the long term. 

Poland  fulfils  the  criterion  on  public  finances.  Poland  is  not  the  subject  of  a 
Council  Decision  on  the  existence  of  an  excessive  deficit.  However,  based  on  the 
assessment  of  the  2018  Convergence  Programme,  there  is  a  risk  of  significant 
deviation  from  the  Stability  and  Growth  Pact  requirements  in  2018  so  that  further 
measures  will  be  needed  as  of  2018  to  comply  with  the  provisions  of  the  Stability 
and  Growth  Pact.  The  general  government  deficit  declined  from  2.6%  in  2015  to 
2.3%  of  GDP  in  2016.  The  deficit-to-GDP  ratio  improved  to  1.7%  in  2017  and 
according  to  the  Commission  services'  Spring  2018  Forecast  it  is  projected  to 
improve further to  1.4% of GDP in  both  2018 and 2019, under a no-policy-change 
assumption. The general government debt-to-GDP ratio is forecast to decrease from 
50.6%  in  2017  to  49.1%  in  2019.  Poland's  domestic  fiscal  framework  is  overall 
strong, with weaknesses mainly  in the areas of budgetary planning and procedures, 
and independent monitoring. 

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.  The  zloty  traded  at 
around 4.4 against the euro between April 2016 and late 2016. It appreciated between 
December  2016  and  May  2017,  cumulatively  by  almost  6%.  The  zloty  then 
weakened  somewhat  until  early  October  2017  (to  around  4.3  PLN/EUR)  to 
subsequently  strengthen  during  the  rest  of  2017.  Poland  gradually  exited  from  the 
Flexible  Credit  Line  arrangement  it  had  with  the  IMF  since  2009,  terminating  the 
access  in  November  2017.  During  the  two  years  before  this  assessment,  the  zloty 
appreciated against the euro by about 2%.  

Poland  does  not  fulfil  the  criterion  on  the  convergence  of  long-term  interest 
rates.  The  average  long-term  interest  rate  in  the  year  to  March  2018  was  3.3%, 
above  the  reference  value  of  3.2%.  The  monthly  average  long-term  interest  rate 
increased  from  below  3%  in  April  2016  to  around  3.8%  in  early  2017.  Long-term 
interest rates then decreased to around 3.2% by June 2017, before slightly increasing 
again thereafter. The long-term interest rate spread vis-à-vis the German benchmark 
bond stood at around 270 basis points in early 2018. 

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments  and  integration  of  markets.  Poland’s  external  balance  has  been  in 
surplus  since  2013,  backed  by  a  continued  improvement  in  the  trade  balance.  The 

14 

454851545760-5-4-3-2-102012201320142015201620172018(*)2019(*)Government balance (lhs)Cyclically-adjusted balance (lhs)Gross debt (rhs)Graph 6b: Poland -Government budget balance and debtSource: Eurostat, Commission services.(in percent of GDP)(*) Commission services' Spring 2018 Forecast.Inverted scale 
 
 
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 around the average of euro-area Member States. Poland's financial 
sector is well integrated into the EU financial sector. 

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 does not fulfil the criterion on price stability. The average inflation rate 
in Romania during the 12 months to March 2018 was 1.9%, at the reference value of 
1.9%.  It  is,  however,  projected  to  increase  well  above  the  reference  value  in  the 
months ahead.  

Annual  HICP  inflation  was  on  a  downward  path  in  2016,  mainly  driven  by 
successive VAT cuts and low global oil prices. After reaching a low of almost -3% in 
May  2016,  it  remained  in  negative  territory  for  most  of  2016.  In  2017,  inflation 
increased progressively, but remained subdued due to a further 1 percentage point cut 
in  the  standard  VAT  rate  and  a  reduction  in  excise  duties on  fuel  in  January  2017. 
Inflation started to accelerate in the second half of 2017 mainly on account of rising 
food prices and the reversal of the January excise duties cut in October, moving from 
0.6% in August to 2.6% in December 2017. Inflation continued to increase in early 

15 

-20246Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18RomaniaReference valueGraph 7a: Romania -Inflation criterion since 2012(percent, 12-month moving average)Note: The dots  in December 2018 show the projected reference value and 12-month average inflation in the country.Sources: Eurostat, Commission services' Spring 2018 Forecast. 
 
 
2018 as the effect of the January 2017 tax cuts faded away, reaching 4.0% in March 
2018. 

According to the Commission services' Spring 2018 Forecast, annual HICP inflation 
is  projected to  rise  to  4.2%  in  2018 and then to  decline to 3.4%  in  2019 as  energy 
price inflation moderates. The relatively low price level in Romania (about 51% of 
the  euro-area  average  in  2016)  suggests  significant  potential  for  price  level 
convergence in the long term. 

Romania fulfils the criterion on public finances. Romania is not the subject of a 
Council Decision on the existence of an excessive deficit. However, Romania is the 
subject  to  a  significant  deviation  procedure  (SDP)  due  to  the  significant  observed 
deviation from the medium-term budgetary objective in 2016. In autumn 2017, it was 
found  not  to  have  delivered  effective  action  under  the  SDP  and  a  revised 
recommendation was issued. Moreover, the Commission recommends opening again 
a  Significant  Deviation  Procedure  for  Romania  in  light  of  the  significant  observed 
deviation from the requirements of the Stability and Growth Pact also in 2017. Based 
on  the  assessment  of  the  2018  Convergence  Programme,  there  is  a  risk  of  a 
significant  deviation  from  the  requirements  also  in  2018  and  2019.  Therefore, 
significant further measures will be needed as of 2018 to comply with the provisions 
of  the  Stability  and  Growth  Pact, in  light  of  a  strongly  deteriorating  fiscal  outlook. 
The headline deficit increased from 0.8% of GDP in 2015 to 3.0% and 2.9% of GDP 
in  2016  and  2017,  respectively,  as  the  authorities  have  been  pursuing  an 
expansionary, pro-cyclical fiscal policy, driven by indirect tax cuts and increases to 
public  wages  and  old-age  pensions.  According  to  the  Commission  services'  Spring 
2018 Forecast, it is projected to deteriorate to 3.4% of GDP in 2018 and to 3.8% in 
2019,  under  a  no-policy-change  assumption.  The  general  government  debt  ratio  is 
forecast to continue to increase to 35.3% in 2018 and 36.4% in 2019. The provisions 
of  Romania's  fiscal  framework  are  strong.  However,  the  fiscal  framework's  track 
record  of  effective  implementation  has  been  poor  in  recent  years  as  shown  by  the 
worsening  structural  balance  and  the  circumvention  of  expenditure  rules  through 
intra-year budget amendments. 

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 displayed a stable behaviour until September 2016, when it has 
started  to  moderately  depreciate.  The  main  drivers  of  the  depreciation  were  a  pro-

16 

25303540-5-4-3-2-102012201320142015201620172018(*)2019(*)Government balance (lhs)Cyclically-adjusted balance (lhs)Gross debt (rhs)Graph 7b: Romania -Government budget balance and debtSource: Eurostat, Commission services.(in percent of GDP)(*) Commission services' Spring 2018 Forecast.Inverted scale 
 
 
cyclical fiscal policy boosting trade and current account deficits and higher inflation 
expectations.  The  exchange  rate  reached  4.63  RON/EUR  at  the  end  of  2017  and 
continued  to  depreciate  in  early  2018  up  to  4.66  RON/EUR  in  March  2018.  In 
comparison  with  other regional peers operating under floating exchange rates, leu's 
exchange  rate  against  the  euro  was  relatively  less  volatile.  During  the  two  years 
before this assessment, the leu depreciated against the euro by about 4%.  

Romania  does  not  fulfil  the  criterion  on  the  convergence  of  long-term  interest 
rates. The average long-term interest rate in Romania in the year to March 2018 was 
4.1%, above the reference value of 3.2%. Long-term interest rates declined gradually 
to some 3% in October 2016, when they started to increase again. They have been on 
an increasing path to date, reaching 4.5% in early 2018. The long-term spread vis-à-
vis the German benchmark bond declined from around 340 basis points in April 2016 
to  below  300  basis  points  in  October  2016,  when  it  started  to  increase  again.  In 
March 2018, it stood at 400 basis points.  

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments  and  the  integration  of  markets.  Romania's  external  balance  has  been 
deteriorating progressively since 2015 and in 2017 turned negative for the first time 
in five years. On the basis of selected indicators related to the business environment, 
Romania performs worse than most euro-area Member States. Major challenges also 
relate to the institutional framework including corruption and government efficiency. 
Romania's  financial  sector  is  well  integrated  with  the  EU  financial  sector,  in 
particular through a high level of foreign ownership in its banking system.  

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 fulfils the criterion on price stability. The average inflation rate in Sweden 
during the 12 months to March 2018 was 1.9%, at the reference value of 1.9%. It is 
projected to decline below the reference value in the months ahead.  

Sweden's average inflation rate reached 1.9% in 2017, up from 1.1% in 2016, with 
main  increases  in  services  and  energy  prices  mainly  due  to  krona  depreciation  and 
the  continued  expansion  of  domestic  demand  supported  by  the  accommodative 
monetary  policy  of  the  Riksbank.  In  March  2018,  annual  HICP  inflation  stood  at 
2.0%. 

HICP inflation is likely to remain broadly stable in the course of 2018. Oil prices are 
projected  to  exert  upward  pressure  on  the  HICP  in  2018.  However,  muted  wage 
growth, which is projected to remain moderate and has been subdued due to global 

17 

 
 
competitive pressures, low wage expectations and untapped labour force, is expected 
to dampen somewhat the effect from higher oil prices. Accordingly, the Commission 
services' Spring 2018 Forecast projects annual average inflation at 1.9% in 2018 and 
1.7% in 2019. The price level in Sweden is relatively high (about 122% of the euro-
area average in 2016). 

Graph 8a: Sweden - Inflation criterion since 2012  

 (percent, 12-month moving average) 

4

3

2

1

0
janv.-12 janv.-13 janv.-14 janv.-15 janv.-16 janv.-17 janv.-18

Sweden

Reference value

Note: The dots  in December 2018 show the projected  
reference value and 12-month average inflation in the country. 
Sources: Eurostat, Commission services' Spring 2018 Forecast. 

Sweden  fulfils  the  criterion  on  public  finances.  Sweden  is  not  the  subject  of  a 
Council  Decision  on  the  existence  of  an  excessive  deficit.  Moreover,  based  on  the 
assessment  of  the  2018  Convergence  Programme,  Sweden  is  expected  to  continue 
complying  with  the  provisions  of  the  Stability  and  Growth  Pact  in  2018  and  2019. 
The  general  government  surplus  slightly  increased  from  1.2%  of  GDP  in  2016  to 
1.3% of GDP in 2017, still supported by revenue performance, which, underpinned 
by  solid  economic  growth,  surprised  on  the  upside.  By  contrast,  expenditure  for 
taking  in  and  integrating  asylum  seekers,  was  lower  than  expected  in  2016-2017. 
According  to  the  Commission  services'  Spring  2018  Forecast,  the  general 
government  surplus  is  expected  to  reach  0.8%  of  GDP  in  2018  and  0.9%  in  2019. 
The gross general government debt-to-GDP ratio decreased to 40.6% in 2017 and is 
expected to gradually decline to 38.0% of GDP in 2018 and 35.5% of GDP in 2019. 
Sweden  has  a  strong  fiscal  framework,  which  was  subject  to  reforms  in  late  2017, 
including  lowering  the  surplus  target  to  0.33%  of  GDP  (from  1%  previously), 
introducing  a  new  debt  anchor  and  strengthening  the  mandate  of  the  Fiscal  Policy 
Council. 

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3035404550-2-10122012201320142015201620172018(*)2019(*)Government balance (lhs)Cyclically-adjusted balance (lhs)Gross debt (rhs)Graph 8b: Sweden -Government budget balance and debtSource: Eurostat, Commission services.(in percent of GDP)(*) Commission services' Spring 2018 Forecast.Inverted scale 
 
 
 
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. The krona continued 
the  depreciating  trend  started  early  2013.  The  depreciation  took  place  against  the 
background of continued monetary easing and of a widening three-months STIBOR-
EURIBOR  spread  during  2016-2017,  with  fluctuations  between  broadly  -30  basis 
points and -10 basis points. In early 2018 the spread stood at around -10 basis points. 
During the two years before this assessment, the krona averaged a SEK/EUR rate of 
9.6 and depreciated against the euro by about 10%. 

Sweden fulfils the criterion on the convergence of long-term interest rates. The 
average long-term interest rate in Sweden in the year to March 2018 was 0.7%, well 
below  the  reference  value  of  3.2%.  Swedish  long-term  interest  rates  on  a  monthly 
basis  started  recovering  from  their  all-time  low  of  0.1%  in  August  2016,  reaching 
0.9% in early 2018, which remains very low by historical standards. The spread vis-
à-vis  the  German  benchmark  bond  remained  extremely  low,  even  if  they  increased 
from the negative values of the summer 2016. They remained in the range of 20 to 40 
basis points until the last quarter of 2017 when they slightly moved above this range. 
In March 2018 they stood at 53 basis points 

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments and integration of markets. Sweden's external balance has remained in 
surplus,  posting  a  4.2%  of  GDP  in  2016  and  3.2%  in  2017.  Sweden's  economy  is 
well  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.  In  the  context  of  the  Macroeconomic 
Imbalance Procedure, Sweden was identified as warranting a further in-depth review. 
The latter found that Sweden continues to experience macroeconomic imbalances as 
overvalued house price levels coupled with a continued rise in household debt poses 
risks  of  a  disorderly  correction.  Awareness  of  mounting  risks  among  authorities  is 
high, and policy steps were taken to rein in mortgage debt growth and raise housing 
construction. However, the latter have not been sufficient to address the imbalances 
so far. 

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