REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL - CONVERGENCE REPORT 2020 (prepared in accordance with Article 140(1) of the Treaty on the Functioning of the European Union)
Date: 2020-06-10
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Bulgaria, Croatia, Czechia, Economic and Monetary Union, Hungary, Poland, Romania, Sweden, convergence criteria, euro area

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 10.6.2020  COM(2020) 237 final  REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL CONVERGENCE REPORT 2020   (prepared in accordance with Article 140(1) of the Treaty on the Functioning of the European Union)   {SWD(2020) 107 final}  
 
 
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 in the euro 
area. The practical benefits of the euro include stable prices, lower transaction costs 
for citizens and businesses, more transparent and competitive markets and increased 
intra-EU  and  international  trade.  The  euro  is  also  the  second  most  used  currency 
worldwide.  

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  such  Member  States  in  fulfilling  their 
obligations  regarding  the  achievement  of  economic  and  monetary  union.  The  latest 
Commission and ECB Convergence Reports were adopted in May 2018. 

The  2020  Convergence  Report  covers  the  following  seven  Member  States  with  a 
derogation: Bulgaria, Czechia, Croatia, Hungary, Poland, Romania and Sweden2. A 
more  detailed  assessment  of  the  state  of  convergence  in  those  Member  States  is 
provided in the Staff Working Document accompanying this Report3.  

Article  140(1)  TFEU  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 
further  in  a  Protocol  annexed  to  the  Treaties  (Protocol  No  13  on  the  convergence 
criteria). 

The  2008-2009  financial  and  economic  crisis,  along  with  the  euro-area  sovereign 
debt  crisis,  had  revealed  certain  gaps  in  the  economic  governance  system  of  the 
Economic and Monetary Union (EMU) and showed that its instruments needed to be 
strengthened and used more comprehensively. With the aim of ensuring a sustainable 
functioning of EMU, an overall strengthening of economic governance in the Union 
was  undertaken.  The  assessment  of  convergence  is  thus  aligned  with  the  broader 
European  Semester  approach  which  takes  an  integrated  look  at  the  economic  and 
employment  policy  challenges  facing  the  EMU  in  ensuring  fiscal  sustainability, 
competitiveness, financial market stability, economic growth and high employment. 
The  key  governance  reforms,  reinforcing  the  assessment  of  each  Member  State's 
convergence  process  and  its  sustainability,  included  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 

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 negotiated an opt-out arrangement before the adoption of the Maastricht Treaty and does not participate in 
the third stage of EMU. 

2  Denmark has not expressed an intention to adopt the euro and is therefore not covered in the assessment.  
3   The  cut-off  date  for  the  data  used  in  this  report  is  23  April  2020.  The  convergence  assessment  is  based  on  a  range  of  monthly 
convergence indicators that are calculated up to March 2020. The report also draws on the Commission services’ Spring 2020 Forecast 
and the policy guidance under the European Semester, including the Macroeconomic Imbalance Procedure. 

1 

 
 
                                                           
particular,  this  report  takes  into  account  the  findings  under  the  Macroeconomic 
Imbalances Procedure4. 

These  crises  also  revealed  the  existence  of  problematic  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  Union’s  economy.  Several  key  elements  of  the 
Banking  Union  are  by  now  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.  The 
procedure  to  enter  the  Banking  Union  is  distinct  from  the  assessment  of  the 
convergence criteria undertaken in this report. 

Convergence criteria 

The examination of the compatibility of national legislation, including the statutes 
of  national  central  banks  of  Member  States  with  a  derogation,  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 
TFEU) and the prohibition of privileged access to financial institutions (Article 124 
TFEU);  consistency  with  the  ESCB's  objectives  (Article  127(1)  TFEU)  and  tasks 
(Article  127(2)  TFEU),  and  other  aspects  relating  to  the  integration  of  national 
central banks 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; this 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”5.  

The requirement of sustainability implies that the satisfactory inflation performance 
must  essentially  be  attributable  to  the  behaviour  of  input  costs  and  other  factors 
influencing  price  developments  in  a  structural  manner,  rather  than  the  influence  of 
temporary  factors.  Therefore,  the  convergence  examination  includes  an  assessment 
of the factors that have an impact on the inflation outlook and is complemented by a 
reference to  the most recent  Commission services' forecast  of inflation6.  Related to 
this, the report also assesses whether the country is likely to meet the reference value 
in the months ahead.  

4  The Commission published its latest Alert Mechanism Report (AMR) in December 2019 and the results of the corresponding in-depth 

5 

reviews in February 2020. 
For the purpose of the criterion on price stability, inflation is measured by the Harmonised Index of Consumer Prices (HICP) defined in 
Regulation (EU) 2016/792 of the European Parliament and of the Council. 

6  All  forecasts  for  inflation  and  other  variables  in  the  current  report  are  from  the  Commission  services'  Spring  2020  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. 

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The  inflation  reference  value  was  calculated  to  be  1.8%  in  March  2020,  with 
Portugal, Cyprus and Italy as the three 'best-performing Member States'7. 

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”. 

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

The relevant two-year period for assessing exchange rate stability in this report is 24 
April 2018 to 23 April 2020. 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 with a derogation assessed in this Convergence 
Report  participates  in  ERM  II.  Entry  into  ERM  II  is  decided  upon  request  of  a 
Member State by mutual agreement of  all ERM II  participants9. This  Report  is  not 
related  to  the  ERM  II  entry  process  and  it  does  not  provide  an  assessment  of  a 
Member State’s capacity to enter into ERM II. 

The  fourth  indent  of  Article  140(1)  TFEU  requires  that  “the  durability  of 
convergence achieved by the Member State with a derogation and of its participation 
in the exchange rate mechanism” is “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 

7   The respective 12-month average inflation rates were 0.2%, 0.4% and 0.4%. 
8 

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. 

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

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bonds  or  comparable  securities,  taking  into  account  differences  in  national 
definitions”.  
The interest rate reference value was calculated to be 2.9% in March 202010. 

Article  140(1)  TFEU  also  requires  the  reports  to  take  account  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  to  be 
considered  are  important  indicators  that  the  integration  of  a  Member  State  into  the 
euro  area  would  proceed  without  difficulties  and  broadens  the  view  on  the 
sustainability of convergence. 

The COVID-19 pandemic represents a severe shock that fundamentally disrupts the 
economy  of  the  EU  and  of  its  Member  States.  Accordingly,  it  could  have  a 
significant  impact  on  economic  convergence  indicators,  making  it  more  difficult  to 
assess  the  sustainability  of  convergence.  However,  the  impact  of  the  COVID-19 
pandemic on the historical data used in the 2020 Convergence Report is limited. This 
is mainly due to the constraints imposed by its cut-off date (23 April), which together 
with  the  Treaty-defined  calculation  methods  of  the  price  stability  and  long-term 
interest  rate  criteria  (i.e.  one  year  averages  have  to  be  used),  mean  that  the 
corresponding data still largely reflect the situation prior to the COVID-19 pandemic. 
In  addition,  the  latest  Commission  assessment  of  macroeconomic  imbalances  has 
also taken place before the pandemic (see footnote 3).  

The  implications  of  the  COVID-19  pandemic  for  the  forward-looking  elements  of 
this  Report  are  taken  into  account  through  inputs  from  the  Commission  services’ 
Spring  2020  Forecast,  i.e.  using  the  latest  available  Commission  forecast.  This 
forecast  is  the  first  comprehensive  assessment  from  the  Commission  of  the  likely 
economic  effects  of  the  COVID-19  crisis  in  2020  and  2021,  and  as  such,  it  is 
surrounded  by  higher  than  usual  uncertainty11.  Furthermore,  on  20  May  2020,  the 
Commission  proposed  policy  guidance  to  each  Member  State  in  the  form  of  its 
Recommendations for country-specific recommendations (CSRs) under the European 
Semester12. These reflect among other things that on 19 March 2020 the Commission 
set  out  its  view  that  the  conditions  allowing  the  Union  institutions  to  activate  the 
general  escape  clause  of  the  EU  fiscal  framework  were  fulfilled,  to  which  the 
Finance  Ministers  of  the  Member  States  reacted  favourably  on  23  March  2020, 
which facilitates the necessary budgetary response to the economic consequences of 
the  COVID-19  crisis.  The  activation  of  the  general  escape  clause  allows  for  a 
temporary  departure  from  the  adjustment  path  towards  the  medium-term  budgetary 
objective,  provided  that  this  does  not  endanger  fiscal  sustainability  in  the  medium 
term13. 

10  The  reference  value  for  March  2020  is  calculated  as  the  simple  average  of  the  average  long-term  interest  rates  of  Portugal  (0.5%), 

Cyprus (0.8%) and Italy (1.6%), plus two percentage points.  

11   Beyond the forecast horizon, the COVID-19 crisis could also have a significant effect on the economic structures of the Member States 
with  a  derogation,  for  instance  in  terms  of  labour  mobility  or  integration  in  global  value  chains.  Assessing  this  impact  is,  however, 
beyond the scope of this report. 

12  See: https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-economic-governance-monitoring-

prevention-correction/european-semester/european-semester-timeline/eu-country-specific-recommendations_en 

13  For more information, see: https://ec.europa.eu/info/sites/info/files/economy-finance/2_en_act_part1_v3-adopted_text.pdf 

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1.  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 does not fulfil the criterion on price stability. The average inflation rate 
in  Bulgaria  during  the  12  months  to  March  2020  was  2.6%,  above  the  reference 
value of 1.8%. However, it is projected to approach the reference value in the months 
ahead. 

Annual HICP inflation rose from 1.7% in April 2018 to 3.7% by August and returned 
to 2.3% by end-2018. It then increased to 3.1% by April 2019, before falling back to 
1.6%  by  September.  Inflation  then  started  to  rise  again,  reaching  3.4%  in  January 
2020. The fluctuation of inflation was mainly driven by energy and unprocessed food 
prices.  Services  inflation  was  strong,  partly  due  to  rapid  unit  labour  cost  growth. 
Processed  food  prices  increasingly  contributed  to  headline  inflation,  while  non-
energy  industrial  goods  had  a  dampening  effect.  Annual  inflation  decreased  from 
January 2020 and stood at 2.4% in March 2020. 

Inflation is projected to decline to 1.1% in 2020 and remain at the same level in 2021 
according to the Commission services’ Spring 2020 Forecast. The headline inflation 
is expected to decline significantly in 2020, as a result of falling energy prices and a 
sharp  decrease  in  services  inflation  due  to  reduced  demand  in  the  service  sectors 
affected  by  the  COVID-19  pandemic.  The  relatively  low  price  level  in  Bulgaria 
(about 49% of the euro-area average in 2018) suggests significant potential for price 
level convergence in the long term. 

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 

5 

 
 
 
budget surplus  increased from  1.1% of GDP in  2017 to  2.0% of GDP  in 2018 and 
2.1% of GDP in 2019. According to the Commission services’ Spring 2020 Forecast, 
the  general  government  balance  is  projected  to  turn  negative  to  -2.8%  of  GDP  in 
2020 due to the adverse impact of the COVID-19 pandemic and reach -1.8% of GDP 
in 2021 under a no-policy-change assumption. However, the Bulgarian government 
projects a deficit of the government balance of slightly over 3%. On 20 May 2020, 
the Commission adopted a report under Article 126(3) TFEU due to a planned breach 
of  the  Treaty  reference  value  of  3%  of  GDP.  The  report  concluded  that  the  deficit 
criterion  of  the  Stability  and  Growth  Pact  is  fulfilled  and  Bulgaria  is  the  only  EU 
country  where  that  is  the  case  in  2020.  The  gross  public  debt  ratio  decreased  from 
around 25% of GDP in 2017 to 20.4% of GDP in 2019 but it is projected to increase 
to 25.5% of GDP in 2020 and stay at 25.4% of GDP in 2021. The Bulgarian fiscal 
framework has been strengthened over the recent years and Bulgaria is bound by the 
Fiscal  Compact  provisions  of 
intergovernmental  Treaty  on  Stability, 
the 
Coordination and Governance in the Economic and Monetary Union (TSCG). 

Bulgaria  does  not  fulfil  the  exchange  rate  criterion.  The  Bulgarian  lev  is  not 
participating  in  ERM  II.  In  July  2018,  Bulgaria  announced  its  intention  to  put  in 
place the necessary elements for a successful entry into ERM II. In order to ensure a 
smooth transition to, and participation in, ERM II, Bulgaria committed to implement 
before  joining  the  ERM  II  a  number  of  measures  (i.e.  prior-commitments)  in  the 
following  six  policy  areas:  banking  supervision,  macro-prudential  framework, 
supervision  of  non-banking  financial  sector,  insolvency  framework,  anti-money 
laundering  framework  and  governance  of  state-owned  enterprises.  Bulgaria  is 
currently  working  towards  the  completion  of  these  prior-commitments,  in  close 
liaison with the Commission and the ECB who monitor their progress. The Bulgarian 
National  Bank  (BNB)  pursues  its  primary  objective  of  price  stability  through  an 
exchange  rate  anchor  in  the  context  of  a  Currency  Board  Arrangement  (CBA). 
Bulgaria introduced its CBA in 1997, pegging the Bulgarian lev to the German mark 
and  later  to  the  euro.  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 2020 was 0.3%, 
well below the reference value of 2.9%. Long-term interest rates in Bulgaria declined 
from  1.1%  in  May  2018  to  0.1%  in  February  2020.  The  spread  vis-à-vis  German 
benchmark  bond  hovered  mostly  around  60  basis  points,  with  significantly  lower 

6 

 
 
 
spreads around October 2018 and higher ones around August 2019. The spread stood 
around 70 basis points in March 2020. 

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments  and  integration  of  markets.  Bulgaria  recorded  sizable  external 
surpluses over recent years. 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  many  euro-area 
Member  States.  Challenges  also  relate  to  the  institutional  framework  including 
corruption and government efficiency. However, action is being taken to improve the 
business  environment,  in  particular  regarding  the  insolvency  framework  and 
governance of state-owned enterprises. Progress has also been made in strengthening 
financial sector governance and addressing outstanding regulatory issues.  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 identified as  warranting an  In-
Depth  Review  (IDR).  The  latter  concluded  that  Bulgaria  does  not  experience 
macroeconomic 
the  previous  conclusion  of 
imbalances 
macroeconomic imbalances). 

(thereby 

revising 

2.  CZECHIA 

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  Czechia  does  not  fulfil  the  conditions  for  the 
adoption of the euro.  

Legislation in Czechia  – 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. 
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. 

Incompatibilities  concern 

Czechia does not fulfil the criterion on price stability. The average inflation rate 
in Czechia during the 12 months to March 2020 was 2.9%, well above the reference 
value of 1.8%. It is projected to remain well above the reference value in the months 
ahead. 

7 

 
 
The  annual  HICP  inflation  rate  increased  from  1.6%  at  the  time  of  the  last 
assessment  in  March  2018  to  2.4%  in  August  2018.  After  dropping  to  1.6%  in 
December  2018,  HICP  inflation  steadily  increased  throughout  2019.  The  annual 
HICP  inflation  rate  thus  averaged  2.0%  and  2.6%  in  2018  and  2019,  respectively. 
The  pick-up  in  annual  inflation  throughout  2019  reflected  larger  inflation 
contributions  from  food  and  energy  prices  as  well  as  higher  price  increases  in  the 
service  sector.  Annual  inflation  picked-up  substantially  at  the  end  of  2019  and 
remained  elevated  in  the  beginning  of  2020  mainly  due  to  a  hike  in  food  prices, 
increasing administered prices, and changes in indirect taxes. In March 2020, annual 
HICP inflation stood at 3.6%. 

Due to a fall in demand related to the COVID-19 pandemic, an easing of the labour 
market  and  declining  oil  prices,  the  Commission  services’  Spring  2020  Forecast 
projects annual HICP inflation to average 2.3% in 2020 and 1.9% in 2021. The price 
level in Czechia (about 69% of the euro-area average in 2018) suggests that there is 
potential for further price level convergence in the long term. 

Czechia  fulfils  the  criterion  on  public  finances.  Czechia  is  not  the  subject  of  a 
Council  Decision  on  the  existence  of  an  excessive  deficit.  The  general  government 
balance in 2019 stood at a surplus of 0.3% of GDP. Under the impact of the COVID-
19 crisis,  according to  the Commission  services’ Spring  2020 Forecast,  the general 
government balance is projected to turn to  -6.7% of GDP in 2020 and, under a no-
policy-change  assumption,  to  -4%  of  GDP  in  2021.  On  20  May  2020,  the 
Commission adopted a report under Article 126(3) TFEU due to the planned breach 
of  the  Treaty  reference  value  of  3%  of  GDP.  The  report  concluded  that  the  deficit 
criterion  of  the  Stability  and  Growth  Pact  is  not  fulfilled.  In  light  of  the  current 
situation,  the  Commission  considers  that  at  this  juncture  a  decision  on  whether  to 
place Czechia under EDP should not be taken. The gross public debt ratio declined to 
below 31% of GDP in 2019. It is projected to increase to 39% of GDP in 2020 and 
40%  in  2021.  The  Czech  national  fiscal  framework  is  well  developed.  Against  the 
backdrop  of  the  COVID-19  pandemic,  the  Parliament  recently  fast-tracked  a 
legislative amendment to widen the structural deficit ceiling in 2021 from 1% to 4% 
of GDP and alter the adjustment path until 2027. 

8 

 
 
 
Czechia  does  not  fulfil  the  exchange  rate  criterion.  The  Czech  koruna  is  not 
participating in ERM II. Czechia operates a floating exchange rate regime, allowing 
for foreign exchange market interventions by the central bank. The koruna traded at 
around 25.6 CZK/EUR in May 2018 and appreciated only temporarily after the CNB 
increased  policy  rates  four  times  in  the  second  half  of  2018.  Beginning  2019,  it 
fluctuated  in  a  relative  narrow  band  around  25.7  CZK/EUR  before  depreciating  to 
25.9  CZK/EUR  in  September  2019  (i.e.  by  around  1%).  Thereafter,  the  koruna 
appreciated  steadily  and  reached  25.1  CZK/EUR  in  February.  Following  the  lock-
down measures due to the COVID-19 pandemic, the koruna depreciated significantly 
and stood above 26.6 CZK/EUR in March 2020. Short-term interest rate differentials 
vis-à-vis the euro area increased from around 120 basis points in May 2018 to around 
240  basis  points  by  March  2020.  During  the  two  years  before  this  assessment,  the 
koruna depreciated against the euro by 4.3%. 

Czechia fulfils the criterion on the convergence of long-term interest rates. The 
average  long-term  interest  rate  in  Czechia  in  the  year  to  March  2020  was  1.5%, 
below the reference value of 2.9%. The long-term interest rate of Czechia increased 
slightly  from  1.9%  in  May  to  2.1%  in  June  2018.  It  remained  stable  at  2.1%  until 
October 2018 and decreased steadily to 1.4% in the first half of 2019. After dropping 
temporarily to  1% in  August  2019, it increased again  and reached 1.6% in  January 
2020. It recently declined and stood at 1.3% in March 2020. The spread against the 
German benchmark bond fluctuated around 190 basis points in early 2020. 

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments and integration of markets. The external balance of Czechia recorded a 
surplus of 0.6% of GDP in 2018 and 0.5% of GDP in 2019. 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,  Czechia  performs 
around the average of euro-area Member States. 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 

 
 
 
3.  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 March 2020 was 0.9%, below the reference value of 1.8%. It 
is projected to remain below the reference value in the months ahead. 

After having peaked at 2.2% in July 2018 due to rising prices of energy, services and 
unprocessed food, the annual inflation rate moderated thereafter, declining to a low 
of 0.5% in June 2019. VAT reduction on selected unprocessed foods depressed HICP 
inflation in the first half of 2019, while energy inflation started moderating already 
towards the end of 2018 and remained low throughout 2019. With dissipating effects 
of  the  VAT  rate  change,  the  annual  inflation  rate  picked  up  gradually  in  the  last 
quarter  of  2019.  After  having  peaked  at  1.8%  in  January  2020,  it  declined 
significantly  due  to  the  sharp  drop  in  energy  prices  in  the  following  two  months, 
reaching 0.5% in March 2020. 

Due to weaker overall demand and the fall in oil prices in the first quarter of 2020, 
the annual HICP inflation is projected to decline to 0.4% in 2020 before picking up 
slightly  to  0.9%  in  2021  according  to  the  Commission  services’  Spring  2020 
Forecast. At about 66% of the euro-area average in 2018, the price level in Croatia 
suggests that there is potential for price level convergence in the long term. 

Croatia  fulfils  the  criterion  on  public  finances.  Croatia  is  not  the  subject  of  a 
Council Decision on the existence of an excessive deficit. The government  balance 
was slightly positive at +0.2% of GDP in 2018. In 2019, it improved slightly further 
to  stand  at  +0.4%  of  GDP,  in  spite  of  the  materialisation  of  substantial  contingent 
liabilities  associated  with  ailing  shipyards.  The  Commission  services’  Spring  2020 
Forecast projects the general government balance to fall to -7.1% in 2020 as a result 
of  a  significantly  worsened  macroeconomic  outlook  and  a  sizeable  fiscal  package 

10 

 
 
 
aimed  at  supporting  employment  and  companies  faced  with  markedly  declining 
revenues  due to  the COVID-19 pandemic.  In 2021, the government  balance should 
improve  to  -2.2%  of  GDP  on  a  no-policy-change  basis.  On  20  May  2020,  the 
Commission adopted a report under Article 126(3) TFEU due to the planned breach 
of  the  Treaty  reference  value  of  3%  of  GDP.  The  report  concluded  that  the  deficit 
criterion  of  the  Stability  and  Growth  Pact  is  not  fulfilled.  In  light  of  the  current 
situation,  the  Commission  considers  that  at  this  juncture  a  decision  on  whether  to 
place  Croatia  under  EDP  should  not  be  taken.  The  general  government  debt  is 
forecast  to  increase  to  almost  89%  of  GDP  in  2020  before  resuming  its  downward 
path, dipping below 84% in 2021. The Croatian fiscal framework remains relatively 
weak, requiring further legislative steps and implementation efforts. 

Croatia  does  not  fulfil  the  exchange  rate  criterion.  The  Croatian  kuna  is  not 
participating in ERM II. In July 2019, Croatia announced its intention to put in place 
the  necessary  elements  for  a  successful  entry  into  ERM  II.  In  order  to  ensure  a 
smooth transition to, and participation in, ERM II, Croatia committed to implement 
before  joining  the  ERM  II  a  number  of  measures  (i.e.  prior-commitments)  in  the 
following  six  policy  areas:  banking  supervision,  macro-prudential  framework,  anti-
money  laundering,  statistics,  public  sector  governance  and  business  environment. 
Croatia is currently working towards the completion of these prior-commitments, in 
close  liaison  with  the  Commission  and  the  ECB  who  monitor  their  progress.  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  2018  and  early  2020,  the  kuna  was  mostly  stable  against  the  euro, 
fluctuating  slightly  around  7.44  HRK/EUR  and  exhibiting  a  seasonal  pattern  of 
temporary  and  limited  appreciation  in  summer  months  thanks  to  foreign  currency 
inflows  related  to  the  tourism  sector.  The  kuna  experienced  a  limited  depreciation 
episode in March 2020 amid the COVID-19 pandemic when it weakened to around 
7.60 HRK/EUR, which was around 2% lower than two years earlier. 

Croatia fulfils the criterion on the convergence of long-term interest rates. The 
average long-term interest rate of Croatia stood at 0.9% in March 2020, well below 
the reference value of 2.9%. The long-term interest rate of Croatia declined gradually 
during  2018.  It  fell  more  sharply  in  the  first  half  of  2019  dropping  even  slightly 
below  0.50%  in  September  2019  as  the  Croatian  sovereign  debt  was  raised  to 
investment grade with positive outlook. After having fluctuated just above 0.50% in 
the  following  months,  it  rose  sharply  to  close  to  1%  in  March  2020  amid  the 

11 

 
 
 
COVID-19  outbreak,  with  the  spread  to  the  German  long-term  benchmark  bond 
widening to 150 basis points. 

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments  and  integration  of  markets.  Croatia's  external  surplus  increased  from 
3.3% of GDP in 2018 to 4.5% of GDP in 2019, benefiting from an improvement in 
the  capital  and  current  transfers  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  many 
euro-area  Member  States.  Challenges  also  relate  to  the  institutional  framework 
including regulatory quality. However, there has been renewed effort to improve the 
business  environment,  in  particular  to  reduce  the  administrative  burden  and 
regulatory restrictions. The financial sector is highly integrated with the EU financial 
system,  in  particular  through  a  high  share  of  foreign  ownership  of  financial 
intermediaries.  In  the  context  of  the  Macroeconomic  Imbalance  Procedure,  Croatia 
was  identified  as  warranting  an  In-Depth  Review  (IDR).  Although  the  latter 
concluded  that  Croatia  continued  to  experience  macroeconomic  imbalances,  stock 
imbalances have been narrowing over the past years, driven by resuming growth and 
a  prudent  fiscal  policy.  Remaining  vulnerabilities  are  linked  in  particular  to  high 
levels of public, private and external debt in a context of low potential growth. 

4.  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 does not fulfil the criterion on price stability. The average inflation rate 
in Hungary during the 12 months to March 2020 was 3.7%, well above the reference 
value of 1.8%. It is projected to remain well above the reference value in the months 
ahead. 

12 

 
 
Annual HICP inflation in Hungary was on an upward path over the last two years, on 
the back of broad-based price increases, reflecting strong demand growth and rising 
unit  labour  costs.  Unprocessed  food  and  energy  prices  added  volatility  to  the 
headline figure. Inflation rose to 3.9% in October 2018, before moderating to 2.8% 
by end-2018. It increased to 4% by May 2019 and decreased to 2.9% by September, 
before  rising  again  to  4.1%  in  December.  The  annual  HICP  inflation  rate  thus 
averaged  2.9%  in  2018  and  3.4%  in  2019.  It  increased  further  until  January  2020, 
due to a rapid increase of unprocessed food and energy prices and stood at 3.9% in 
March 2020. 

Inflation is projected to decrease to around 3.0% in 2020 and 2.7% in 2021 according 
to the Commission services’ Spring 2020 Forecast, as the oil price declines and the 
COVID-19  recession  is  expected  to  reduce  core  inflation.  The  relatively  low  price 
level in Hungary (about 61% of the euro-area average in 2018) suggests that there is 
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. Hungary has  been under 
consecutive  Significant  Deviation  Procedures  since  June  2018.  The  general 
government deficit decreased to 2.1% of GDP in 2018, compared to 2.5% in 2017, 
and  then  further  to  2.0%  in  2019.  According  to  the  Commission  services’  Spring 
2020  Forecast,  it  is  projected  to  increase  to  5.2%  of  GDP  in  2020  due  to  the 
COVID-19  crisis,  before  decreasing  to  4.0%  of  GDP  in  2021,  under  a  no-policy-
change  assumption.  On  20  May  2020,  the  Commission  adopted  a  report  under 
Article 126(3) TFEU due to the planned breach of the Treaty reference value of 3% 
of GDP. The report concluded that the deficit criterion of the Stability and Growth 
Pact is not fulfilled. In light of the current situation, the Commission considers that at 
this juncture a decision on whether to place Hungary under EDP should not be taken. 
The gross public debt ratio decreased to 66.3% of GDP in 2019 and it is projected to 
increase  to  75.0%  of  GDP  in  2020  and  to  reach  73.5%  of  GDP  in  2021.  The 
Hungarian fiscal framework is well-developed around stringent rules and procedures 
of  debt  control  across  all  layers  of  general  government;  however,  the  role  of  the 
Fiscal Council in scrutinizing and shaping fiscal policies is weak. 

13 

 
 
 
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 Hungarian forint 
traded around 317 HUF/EUR in May 2018, before depreciating to 325 HUF/EUR by 
September  2018.  It  then  appreciated,  reaching  316  HUF/EUR  in  March  2019. 
Thereafter the forint depreciated to the euro, as the MNB signalled its intent to keep 
loose monetary conditions longer than other regional central banks and inflation rose 
above  its  target.  The  forint  weakened  further  in  March  2020,  amid  the  COVID-19 
outbreak. Short-term interest rate differentials vis-à-vis the euro area increased from 
around 40 basis points in  May 2018 to  around 100 basis points by March 2020.  In 
March  2020,  the  forint  was  by  about  10%  weaker  against  the  euro  than  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  2020  was  2.3%,  below  the 
reference value of 2.9%. The monthly average long-term interest rate increased from 
around 2.9% in May 2018 to about 3.7% by October 2018, as higher exchange rate 
risk of the forint was priced in. It then started to decrease again and reached 1.9% in 
December 2019, reflecting a renewed international search for yield, as major central 
banks embarked on further monetary easing. As the long-term interest rate increased 
to 2.4% in March 2020, amid the unfolding COVID-19 crisis, the long-term spread 
vis-à-vis the German benchmark bond reached around 300 basis points. 

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments and the integration of markets. The external balance deteriorated over 
the past two years, mainly due to strong growth of goods imports, but it remained in 
a  small  surplus.  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  many  euro-area  Member 
States. Hungary's financial sector is well integrated into the EU financial system. 

14 

 
 
 
5. 

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 does not fulfil the criterion on price stability. The average inflation rate in 
Poland  during  the  12  months  to  March  2020  was  2.8%,  well  above  the  reference 
value of 1.8%. It is projected to remain well above the reference value in the months 
ahead. 

Annual  HICP  inflation  rose  to  1.5%  by  September  2018,  before  dipping  back  to 
0.6% by January 2019. It increased to 2.1% by April 2019 and further up to 2.4% by 
November,  mainly  on  the  back  of  rising  services  inflation,  partly  due  to  increasing 
unit labour costs. Annual inflation rose sharply further at end-2019 and early 2020, 
reaching 3.8% in  January  2020. This  overall volatile pattern is  explained by strong 
swings  in  the  dynamics  of  energy  and  unprocessed  food  prices.  In  March  2020, 
annual HICP inflation stood at 3.9%. 

Inflation is projected to increase from 2.1% in 2019 to 2.5% in 2020 and to 2.8% in 
2021 according to the Commission services’ Spring 2020 Forecast, driven mainly by 
growth of food prices in 2020 and the economic recovery in 2021. The relatively low 
price  level  in  Poland  (about  56%  of  the  euro-area  average  in  2018)  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.  The  general  government 
deficit  declined  from  1.5%  of  GDP  in  2017  to  0.2%  in  2018.  The  deficit-to-GDP 

15 

 
 
 
ratio deteriorated to 0.7% in 2019 and according to the Commission services’ Spring 
2020  Forecast  it  is  projected  to  reach  9.5%  in  2020  and,  under  a  no-policy-change 
assumption, 3.8% in 2021, driven mainly by the effect of the COVID-19 pandemic 
on activity and measures to support the economy. On 20 May 2020, the Commission 
adopted a report under Article 126(3) TFEU due to the planned breach of the Treaty 
reference value of 3% of GDP. The report concluded that the deficit criterion of the 
Stability  and  Growth  Pact  is  not  fulfilled.  In  light  of  the  current  situation,  the 
Commission  considers  that  at  this  juncture  a  decision  on  whether  to  place  Poland 
under  EDP  should  not  be  taken.  The  general  government  debt-to-GDP  ratio  is 
forecast  to  strongly  increase  from  46%  in  2019  to  over  58%  in  2021.  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  mostly 
traded in a quite narrow range against the euro at around 4.3 over the past two years. 
There  was  a  short  period  of  relative  zloty  weakness  in  July  2018  and  in  August-
September 2019 (with PLN/EUR 4.35), amid signs of an economic slowdown. This 
was followed by a period of strength, with the average exchange rate reaching 4.25 
PLN/EUR  in  January  2020,  after  monetary  easing  in  some  major  advanced 
economies. The COVID-19 crisis resulted in a depreciation of the zloty to an average 
of  4.4  PLN/EUR  in  March  2020.  Short-term  interest  rate  differentials  vis-à-vis  the 
euro  area  increased  from  around  200  basis  points  to  around  210  in  July  2019,  but 
decreased to around 190 basis points on average in March 2020. In March 2020, the 
zloty was by around 5% weaker against the euro than two years earlier. 

Poland  fulfils  the  criterion  on  the  convergence  of  long-term  interest  rates.  The 
average  long-term  interest  rate  in  the  year  to  March  2020  was  2.2%,  below  the 
reference  value  of  2.9%.  The  monthly  average  long-term  interest  rate  was  around 
3.2% between May and November 2018, before decreasing to 2.7% by early 2019. It 
decreased further to around 2% in summer 2019 and reached around 1.8% in March 
2020. The long-term interest rate spread vis-à-vis the German benchmark bond stood 
at around 230 basis points in March 2020. 

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments  and  integration  of  markets.  Poland’s  external  balance  stayed  in 
surplus, over the past two years supported by an improvement in the services trade 
balance. The Polish economy is well integrated with the euro area through trade and 

16 

 
 
 
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. 

6.  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 2020 was 3.7%, well above the reference 
value of 1.8%. It is projected to remain well above the reference value in the months 
ahead.  

Annual  HICP  inflation  in  Romania  accelerated  to  4.1%  in  2018  and  remained 
relatively  high  in  2019  at  an  average  of  3.9%,  supported  by  robust  consumer 
demand. Inflation peaked at 4.7% in September 2018, as the effect of past VAT cuts 
faded away, global oil prices picked up and the January 2017 cut in excise duties was 
reversed. It decelerated to 3.0% by the end of 2018, including due to a sharp drop in 
the international price of crude oil in the fourth quarter of 2018. After a rise to 4.4% 
in April 2019, it decelerated to 3.2% by October 2019, but increased again to 4% in 
December 2019. Inflation eased in the first three months of 2020, reaching 2.7% in 
March 2020. 

According  to  the  Commission  services’  Spring  2020  Forecast,  the  annual  average 
rate  of  inflation  is  projected  to  decrease  to  2.5%  in  2020  and  3.1%  in  2021.  The 

17 

 
 
 
relatively low price level in Romania (about 50% of the euro-area average in 2018) 
suggests significant potential for price level convergence in the long term.  

Romania does not fulfil the criterion on public finances. As a consequence of the 
breach of the Treaty deficit threshold in 2019, the Council on 4 April 2020 opened an 
excessive  deficit  procedure  for  Romania,  indicating  2022  as  deadline  for  the 
correction of the excessive deficit. Romania had been under consecutive Significant 
Deviation  Procedures  since  June  2017,  but  did  not  take  effective  action.  Thus,  the 
general government deficit increased from 2.9% in 2018 to 4.3% in 2019, driven by 
increases in current expenditures and a rebound of capital spending from the record-
low  levels  of  the  previous  years.  The  Commission  services’  Spring  2020  Forecast 
projects the general government deficit to increase further to around 9.2% of GDP in 
2020 and around 11.4% of GDP in 2021 under the no policy change assumption. The 
expansionary  trend  largely  driven  by  legislated  pension  increases  is  set  to  be 
reinforced  by  the  impact  of  the  COVID-19  crisis.  The  public-debt-to-GDP  ratio  is 
expected  to  increase  from  35.2%  in  2019  to  around  46.2%  in  2020  and  54.7%  in 
2021.  Despite  having  the  appropriate  legislative  setting,  the  implementation  track 
record  of  the  Romanian  fiscal  framework  has  been  generally  weak  and  has  not 
improved since the last report. This is because the authorities continued their practice 
of derogating from the national fiscal rules, rendering them ineffective. 

Romania does not fulfil the exchange rate criterion. The Romanian leu does not 
participate in  ERM  II. Romania operates  a floating  exchange rate  regime, allowing 
for  foreign  exchange  market  interventions  by  the  central  bank.  The  leu  averaged  a 
RON/EUR  level  of  4.65  in  2018.  After  weakening  against  the  euro  by  around  1% 
between  January  and  May  2019,  the  leu  experienced  a  short  episode  of  moderate 
appreciation over the summer of 2019 but the depreciation trend resumed moderately 
after  October  2019.  Amid  the  COVID-19  outbreak,  the  leu  depreciated  by  around 
1.1% between mid-February and end of March  2020. The three-month interest  rate 
spread relative to the euro stood at around 325 basis points in March 2020 compared 
to  its  peak of 370 basis points in July 2018.  In  March 2020, the leu was about  3% 
weaker against the euro than two years earlier. 

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 2020 was 
4.4%,  above  the  reference  value  of  2.9%.  Long-term  interest  rates  increased 
gradually  from  around  4.5%  in  April  2018  to  5.1%  in  July  2018.  After  remaining 
stable  at  around  4.8%  on  average  between  August  2018  and  May  2019,  long-term 

18 

 
 
 
interest  rates  started  to  decline  and  reached  4.3%  in  November  2019.  The  decline 
reflected  the  monetary  policy  loosening  measures  by  major  central  banks,  which 
depressed  long-term  yields.  As  the  COVID-19  crisis  intensified,  the  long-term 
interest  rate  increased  to  4.6%  in  March  2020  and  the  long-term  spread  versus  the 
German benchmark bond reached 510 basis points in that month.   

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments  and  the  integration  of  markets.  Romania's  external  balance  turned 
negative in 2017 for the first time in five years and deteriorated further to  -3.2% of 
GDP in 2018 and -3.3% of GDP in 2019, the worst among the countries analysed in 
this  Report.  According  to  selected  indicators  relating  to  business  environment, 
Romania  performs  worse  than  many  euro-area  Member  States.  The  persistent 
regulatory unpredictability has been one of the main factors negatively affecting the 
business  environment  in  recent  years.  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.  In  the  context  of  the  Macroeconomic  Imbalance  Procedure, 
Romania  was  identified  as  warranting  an  In-Depth  Review  (IDR).  The  latter 
concluded  that  Romania  continued  to  experience  macroeconomic  imbalances.  In 
particular, the current account continued to widen in 2019, while risks linked to cost 
competitiveness  were building up in  a context of an expansionary fiscal  policy and 
an unpredictable business environment. 

7. 

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 2020 was 1.6%, below the reference value of 1.8%. It 
is projected to remain below the reference value in the months ahead.  

Sweden's  average  inflation  rate  reached  1.7%  in  2019,  down  from  2.0%  in  2018. 
After a brief spell at 2.1% in April and May 2019, inflation decreased, reaching 1.3% 
in  September  and,  after  a  short  rebound  to  1.8%  in  November  it  moderated  again 
driven by the slowdown in economic growth and a sharp decrease in  energy prices. 
In March 2020, annual HICP inflation stood at 0.8%. 

Oil  prices  are  projected  to  exert  downward  pressure  on  HICP  in  2020  and  wage 
growth  is  projected  to  remain  moderate,  which  should  more  than  compensate  the 
impact  of  the  expected  krona  depreciation.  Accordingly,  the  Commission  services’ 
Spring 2020 Forecast projects annual average inflation at 0.4% in 2020 and 1.1% in 
2021.  The  price  level  in  Sweden  is  relatively  high  (about  116%  of  the  euro-area 
average in 2018). 

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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 
surplus  slightly  decreased  from  0.8%  of  GDP  in  2018  to  0.5%  of  GDP  in  2019, 
reflecting  in  particular  weaker  revenue  performance  as  real  GDP  growth  slowed. 
According  to  the  Commission  services’  Spring  2020  Forecast,  the  general 
government balance is expected to reach -5.6% of GDP in 2020 and -2.2% in 2021 
on  the  back  of  the  COVID-19  crisis.  On  20  May  2020,  the  Commission  adopted  a 
report under Article 126(3) TFEU due to the planned breach of the Treaty reference 
value of 3% of GDP. The report concluded that the deficit criterion of the Stability 
and  Growth  Pact  is  not  fulfilled.  In  light  of  the  current  situation,  the  Commission 
considers  that  at  this  juncture  a  decision  on  whether  to  place  Sweden  under  EDP 
should not  be taken. The gross  general  government  debt-to-GDP ratio decreased to 
35.1%  in  2019  and  is  expected  to  increase  to  42.6%  of  GDP  in  2020  and  remain 
broadly  stable  at  42.5%  of  GDP  in  2021.  Sweden  has  a  strong  fiscal  framework, 
which was subject to reform in 2019, preserving the key pillars of the previous set-up 
and reinforcing it with new elements (such as a debt anchor at 35% of GDP). 

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. In 2018-19, the krona 
continued  its  long-term  depreciating  trend  against  the  euro.  The  depreciation  took 
place  despite  some  monetary  tightening  (compared  with  the  euro  area)  and  of  a 

20 

 
 
 
 
widening  three-months  STIBOR-EURIBOR  spread  during  2019,  with  the  latter 
averaging -7 basis points in 2018 and 33 in 2019. In March 2020, the spread stood at 
around 65 basis points. The depreciation was not uniform over the period covered by 
the report, with the euro reaching a peak at 10.80 SEK/EUR in October 2019, before 
slightly  depreciating  to  the  10.5-10.6  range  between  December  2019  and  February 
2020.  The  COVID-19  crisis  resulted  in  a  temporary  strong  krona  depreciation. 
During the two years to March 2020, the krona averaged a SEK/EUR rate of about 
10.5 and depreciated against the euro by roughly 7%. 

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 2020 was -0.1%, well 
below  the  reference  value  of  2.9%.  Swedish  long-term  interest  rates  on  a  monthly 
basis  recorded  a  new  all-time  low  in  August  2019,  reaching  -0.36.  After  exiting 
negative territory last November, the interest rate turned negative again in February 
2020 to reach -0.17% in March 2020, amid the COVID-19 crisis. The spread vis-à-
vis the German benchmark bond remained low, even if it increased slightly in 2019, 
after decreasing in 2018. In March 2020 it stood at 37 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,  at  1.7%  of  GDP  in  2018  and  3.9%  in  2019.  Sweden's  economy  is  well 
integrated  with  the  euro  area  through  trade  and  investment  linkages.  Based  on 
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  (IDR).  The  latter 
concluded  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.  

21