REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL CONVERGENCE REPORT 2022 (prepared in accordance with Article 140(1) of the Treaty on the Functioning of the European Union)
Date: 2022-06-01
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, 1.6.2022  COM(2022) 280 final  REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL CONVERGENCE REPORT 2022      (prepared in accordance with Article 140(1) of the Treaty on the Functioning of the European Union)  {SWD(2022) 280 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 343 million people in 19 Member States in the euro 
area. The practical benefits include stable prices, lower transaction costs for people 
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  (TFEU) 
requires  the  Commission  and  the  European  Central  Bank  (ECB)  to  report  to  the 
Council,  at  least  once  every  2  years,  or  at  the  request  of  a  Member  State  with  a 
derogation1, on the progress made by Member States in fulfilling their obligations on 
the achievement of economic and monetary union. The latest Commission and ECB 
Convergence Reports were adopted in June 2020. 

The  2022  Convergence  Report  covers  the  following  seven  Member  States  with  a 
derogation:  Bulgaria,  Czechia,  Croatia,  Hungary,  Poland,  Romania  and  Sweden2. 
The  staff  working  document  accompanying  this  report  provides  a  more  detailed 
assessment of the state of convergence in these Member States3. 

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  (‘the  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  relevant  to  economic 
integration and convergence 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 outbreak of the COVID-19 pandemic in  March 2020 led to  a severe economic 
downturn  for  the  EU  as  a  whole  and  in  all  Member  States.  Unprecedented  action 
taken at EU level and by the individual Member States cushioned the impact of the 
crisis  and  led  to  a  robust  recovery  in  2021.  In  particular,  swift  activation  of  the 
general escape clause of the Stability and Growth Pact, coupled with the temporary 
framework on State aid, enabled large-scale fiscal support in all Member States. The 
ECB  also  took  a  broad  set  of  monetary  policy  measures  to  preserve  favourable 
financing  conditions  for  all  sectors  of  the  economy  in  order  to  support  economic 
activity and safeguard medium-term price stability. The roll-out of the Recovery and 
Resilience  Facility,  which  is  the  centrepiece  of  NextGenerationEU,  is  further 
bolstering the EU’s resilience. At the same time, the strong recovery in 2021, supply 
chain bottlenecks and a surge in energy prices contributed to a sharp rise in inflation 
throughout 2021 and into 2022.  

Russia’s  invasion  of  Ukraine  on  24  February  2022  forced  a  re-assessment  of  the 
outlook for the EU economy, which had been expected to  expand strongly  in  2022 

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  before  the  adoption  of  the  Maastricht  Treaty  and  does  not  participate  in  the  third 
stage of economic and monetary union. 

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  18  May  2022.  The  convergence  assessment  is  based  on  a  range  of  monthly 

convergence indicators that are calculated up to April 2022.  

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and 2023. The crisis  has mainly dealt a new supply-side shock to  an economy that 
was  already  facing  inflationary  pressures.  It  has  weakened  recovery  prospects  and 
reinforced  upward  price  pressures,  while  further  underlining  the  need  for  greater 
private  and  public  investment  to  diversify  Europe’s  energy  supplies  and  improve 
energy  security.  Several  of  the  Member  States  with  a  derogation  assessed  in  this 
report  are  among  the  most  heavily  exposed  to  the  crisis  triggered  by  Russia’s 
invasion  of  Ukraine.  To  varying  degrees,  this  exposure  reflects  the  relatively  high 
energy intensity of their economies, strong dependency by some on Russian gas and 
oil  supplies,  trade  linkages  with  Russia  and  the  provision  of  frontline  assistance  to 
people  fleeing  Ukraine.  The  Commission  proposed  a  REPowerEU  plan  on  18  May 
2022, for which the Recovery  and Resilience  Facility  will be a  key tool.  It  aims to 
phase out  dependence on fossil fuels  from  Russia well before 2030 by diversifying 
the EU’s gas supplies and speeding up the green transition.  

fiscal  policy, 

On  23  May  2022,  the  Commission  presented  its  European  Semester  spring  2022 
package. Member States should primarily focus on the timely implementation of the 
recovery  and  resilience  plans  (RRPs).  Therefore,  the  Commission  proposes  to  the 
Council to address to all Member States with an approved RRP: a recommendation 
on 
relevant;  a 
fiscal-structural 
recommendation  on  the  implementation  of  the  RRP  and  the  cohesion  policy 
programmes;  a  recommendation  on  energy  policy  in  line  with  the  objectives  of 
REPowerEU;  where  relevant,  an  additional  recommendation  on  outstanding  and/or 
newly  emerging  structural  challenges.  The  scope  of  the  recommendations  is  larger 
for Member States that do not have approved RRPs.  

reforms  where 

including 

The  outbreak  of  the  COVID-19  pandemic,  the  measures  taken  in  response  to  that 
crisis, the surge in commodity prices, the supply bottlenecks and the robust recovery 
in  2021  have  had  a  significant  impact  on  some  of  the  economic  convergence 
indicators  used  in  this  report.  This  is  especially  the  case  for  the  assessment  of  the 
price  stability  criterion.  Differences  in  inflation  performance  across  the  EU  have 
increased mainly due to the heterogeneous impact of the recovery on Member States’ 
inflation rates and the differences in  energy price inflation.  In addition,  the various 
fiscal measures taken by national authorities to cushion the impact of higher energy 
prices  play  a  role.  While  some  of  these  measures,  such  as  social  transfers  to  most 
vulnerable households, do not have a direct impact on consumer prices, others have a 
more  direct  impact  on  the  inflation  convergence  assessment.  In  addition,  long-term 
interest  rates  were  influenced,  initially,  by  the  policy  measures  taken  to  stabilise 
financial markets and preserve favourable financing conditions and, later, by higher 
inflation expectations and the differing paths of monetary tightening.  

The 2020 economic recession and fiscal response to the COVID-19 pandemic led to 
a  sharp  increase  in  general  government  deficits  and  debt.  In  2020,  the  deficit  was 
above  the  3%  of  GDP  Treaty  reference  value  in  25  Member  States,  with  an  EU 
aggregate deficit of 6.8% of GDP. In 2021, the strong economic recovery contributed 
to an improvement in government deficits and debt improved, with fifteen Member 
States  recording  deficits  higher  than  3%  of  GDP  and  the  EU  aggregate  deficit 
declining  to  4.7%  of  GDP.  In  March  2020,  the  European  Commission,  with  the 
agreement of the EU Ministers of Finance, activated the general escape clause of the 
Stability  and  Growth  Pact.  On  23  May  2022,  in  its  Communication  on  the  2022 
European Semester spring package,  the Commission considered that the Union was 
not  yet  out  of  a  period  of  severe  economic  downturn  and  that  the  conditions  to 
maintain the general escape clause in 2023 and to deactivate it as of 2024 were met. 

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The Commission invited the Council to endorse this conclusion to provide clarity to 
Member  States.  In  spring  2020,  2021  and  2022,  the  Commission  considered  that  a 
decision  on  whether  to  place  Member  States  under  the  excessive  deficit  procedure 
should not be taken, taking into account the extraordinary macroeconomic and fiscal 
impact  of  the  COVID-19  pandemic  that,  together  with  the  geopolitical  situation  in 
spring  2022,  create  exceptional  uncertainty,  including  for  designing  a  detailed  path 
for  fiscal  policy4.  These  conclusions  have  straightforward  implications  for  the 
assessment  of  the  criterion  on  the  government  budgetary  position  presented  in  this 
report. 

The impact  of Russia’s invasion of Ukraine on the historical  data used in the 2022 
Convergence Report is limited. This is a consequence of the report’s cut-off date (18 
May),  which  together  with  the  Treaty-defined  calculation  methods  of  the  price 
stability  and  long-term  interest  rate  criteria  (i.e.  one  year  averages),  mean  that  the 
corresponding data largely reflect the situation prior to Russia’s invasion. Instead, the 
extent  to  which  the  economic  convergence  indicators  are  affected  by  the  crisis 
triggered by Russia’s invasion as well as by other ongoing economic developments is 
fully captured in the economic projections for 2022 and 2023, which the Commission 
published  on  16  May  2022  (Commission’s  Spring  2022  Economic  Forecast)  and 
which are used to assess the sustainability of convergence. This forecast is the first 
comprehensive  Commission  assessment  of  the  likely  economic  effects  in  2022  and 
2023  of  the  crisis  triggered  by  Russia’s  invasion  of  Ukraine,  and  as  such,  is 
surrounded by higher than usual uncertainty. 

Convergence criteria 

The examination of the compatibility of national legislation, including the statutes 
of national central banks of Member States with a derogation, together with Article 
130  TFEU  and  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  be  attributable  to  the  behaviour  of  input  costs  and  other  factors  influencing 
price  developments  in  a  structural  manner,  rather  than  the  influence  of  temporary 

4   On 3 April 2020, the Council decided that an excessive deficit exists in Romania based on the planned excessive deficit in 2019. 
5 

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. 

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factors. The convergence examination therefore 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  forecast  of  inflation6.  Related  to  this,  the  report  also 
assesses  whether  the  country  is  likely  to  meet  the  reference  value  in  the  months 
ahead. 

The inflation reference value was calculated to be 4.9% in April 2022, with France, 
Finland and Greece as the three ‘best-performing Member States’7. 

Malta and Portugal have been identified as outliers, as their inflation rates deviated 
by  a  wide  margin  from  the  euro  area  average  and  were  driven  by  country-specific 
factors  that  limit  their  scope  to  act  as  meaningful  benchmarks  for  other  Member 
States8.  This  is  consistent  with  past  practice  as  outliers  were  identified  in  the 
Convergence Reports of 2004, 2010, 2013, 2014 and 2016. Outliers are identified on 
the basis of two criteria taken in combination: i) an inflation rate substantially below 
the euro area average and ii) an inflation rate driven by country-specific factors that 
cannot be seen as representative of the process driving inflation in the euro area. In 
past  Convergence Reports,  Member States that  had an  inflation rate 1.5  percentage 
points  or  more  below  the  euro  area  were  generally  considered  as  outliers.  In  April 
2022, the 12-month average inflation rates of Malta and Portugal were respectively 
2.2 percentage points and 1.7 percentage points below the euro area average of 4.4%.  

In  addition,  the  inflation  performances  of  Malta  and  Portugal  were  driven  by 
country-specific  factors.  In  the  case  of  Malta,  country-specific  factors  that  are 
reflected  in  the  comparatively  low  average  inflation  rate  include  broadly  stable 
energy  prices  in  a  context  of  surging  international  oil  and  gas  prices  and  larger 
changes in the weights used to calculate the HICP than in most other EU countries in 
2021.  The  absence  of  energy  price  inflation  in  Malta  was  notably  enabled  by 
government  measures,  including  through  financial  support  to  the  energy  sector.  A 
fixed price contract for the supply of liquefied natural gas also contributed.  

In  the  case  of  Portugal,  country-specific  factors  that  are  reflected  in  the 
comparatively  very  low  average  inflation  rate  include  comparatively  low  energy 
inflation and the weaker cyclical  position of the country  compared with  most other 
EU Member States. A combination of factors weighed on energy inflation, including 
a  broad  range  of  regulatory  measures  that  kept  the  growth  in  retail  prices  of 
electricity  and  natural  gas  well  below  the  EU  average.  In  addition,  the  COVID-19 
crisis  had  a  prolonged  negative  impact  on  Portuguese  activity  and  inflation.  The 
country’s activity was more severely hit than in most other EU Member States in the 
early stages of the pandemic and its recovery has since been comparatively slow. In 
the fourth quarter of 2021, Portugal’s GDP was still significantly below its pre-crisis 
peak and the gap was  the second largest  in  the EU. This  reflects  mainly  Portugal’s 
large  exposure  to  tourism  and  particularly  aviation-based  tourism,  which  has  been 
heavily  and  durably  hit  by  the  pandemic.  The  relative  weakness  in  Portugal’s 
recovery has had a lasting dampening effect on inflation in services, particularly in 
sectors related to tourism.  

6   All  forecasts  for  inflation  and  other  variables  in  the  current  report  are  from  the  Commission’s  Spring  2022  Economic  Forecast.  The 
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. 

7   The respective twelve-month average inflation rates were 3.2%, 3.3% and 3.6%. 
8  

In April 2022, the twelve-month average inflation rates of Malta and Portugal were 2.1% and 2.6% respectively and that of the euro area 
4.4%. 

4 

 
 
                                                           
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’’9. 

The relevant two-year period for assessing exchange rate stability in this report is 19 
May 2020 to 18 May 2022. 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. It also takes into account 
the  role  of  policy  measures,  including  foreign  exchange  interventions,  and 
international  financial  assistance  wherever  relevant,  in  maintaining  exchange  rate 
stability.  Two  of  the  Member  States  with  a  derogation  assessed  in  this  report 
currently participate in the European exchange rate mechanism (ERM II) – Bulgaria 
and Croatia. Entry into ERM II is decided upon request of a Member State by mutual 
agreement of all ERM II participants10. 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 join 
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 states 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’. 

9 

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. 

10   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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The interest rate reference value was calculated to be 2.6% in April 202211. 

Article  140(1)  TFEU  also  requires  the  reports  to  take  account  of  other  factors 
relevant  to  economic  integration  and  convergence.  These  include  the  integration  of 
markets, the development of the balance of payments on current account and of unit 
labour costs and other price indices12. The latter are covered within the assessment of 
price  stability.  The  additional  factors  to  be  considered  are  important  indicators  on 
whether a Member State would integrate into the euro area without difficulties and 
they broaden the view on the sustainability of convergence. 

The assessment of the degree of sustainable convergence for the Member States with 
a  derogation  presented  in  this  report  draws  on  the  Commission’s  Spring  2022 
Economic Forecast and the policy guidance provided under the European Semester. 
It  is  informed in  particular by the fiscal  surveillance carried out  under the Stability 
and  Growth  Pact  and  the  Macroeconomic  Imbalance  Procedure.  It  also  reflects  the 
Commission’s  assessments  of  fiscal  sustainability  risks  and  of  the  national  fiscal 
frameworks, as well as the implementation of the recovery and resilience plans. 

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 does not fulfil the criterion on price stability. The average inflation rate 
in Bulgaria during the 12 months to April 2022 was 5.9%, above the reference value 
of  4.9%.  The  Commission  projects  it  to  remain  above  the  reference  value  in  the 
months ahead. 

11  The  reference  value  for  April  2022 is  calculated  as the  simple  average  of  the 12-month average  of  long-term  interest  rates  of  France 

(0.3%), Finland (0.2%) and Greece (1.4%), plus two percentage points.  

12   It is, however, important to bear in mind that unit labour costs data may have been impacted by the labour retention schemes put in place 

in some Member States following the outbreak of the pandemic. 

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Bulgaria’s  annual  HICP  inflation  rate  averaged  1.2%  in  2020,  and  accelerated  to 
2.8% in 2021. Annual HICP inflation decreased from 1.3% in April 2020 to -0.3% in 
January  2021.  Headline  inflation  then  increased  during  the  course  of  2021,  before 
accelerating  sharply  in  the  first  months  of  2022,  reaching  12.1%  in  April  2022. 
Deflation in unprocessed food prices and low inflation rates in processed food prices 
drove inflation down in April 2020 to January 2021. The subsequent acceleration of 
inflation  in  2021  was  due  to  strong  contributions  from  all  broad  categories.  In 
particular, fuel prices contributed 3.5 percentage points to the annual inflation rate in 
December 2021. In the first part of 2022, headline inflation continued to increase on 
the back of higher energy prices and other broad-based price increases. Annual HICP 
inflation rates in Bulgaria in 2020 and 2021 were on average higher than those of the 
euro area. 

In  the  Commission’s  Spring  2022  Economic  Forecast,  inflation  is  projected  to 
accelerate  significantly  from  2.8%  in  2021  to  11.9%  in  2022,  gradually  easing  to 
5.0% in 2023. Headline inflation is expected to increase and remain elevated because 
of  persistently  higher  costs  of  energy  and  other  intermediate  products,  expected 
increases  in  regulated  gas  and  heating  prices,  as  well  as  higher  international  food 
prices and growing import deflators. The relatively low price level in Bulgaria (about 
52% of the euro  area average in  2020) 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 
balance remained broadly stable with a deficit of 4.0% of GDP in 2020 and a deficit 
of  4.1%  of  GDP  in  2021.  After  a  period  of  budget  surpluses,  these  deficits  are  the 
result  of  the  pandemic-induced  shock  and  the  measures  taken  by  the  Bulgarian 
government  in  response  to  it.  The  Commission’s  Spring  2022  Economic  Forecast 
expects the general government balance is projected to improve to -3.7% of GDP in 
2022.  Fiscal  costs  associated  with  people  fleeing  the  war  in  Ukraine  as  well  as 
measures in light of higher energy prices weigh on the deficit’s recovery path. The 
deficit  is  expected  to  reach  -2.4%  of  GDP  in  2023  under  a    ‘no  policy  change’ 
assumption.  On  23  May  2022,  the  Commission  adopted  a  report  prepared  in 
accordance  with  Article  126(3)  of  the  TFEU  for  18  Member  States,  including 
Bulgaria. Overall, taking into account all relevant factors as appropriate, the analysis 
in the report suggested that Bulgaria did not fulfil the deficit criterion. In line with its 

7 

 
 
 
Communication  of  2  March  202213,  the  Commission  did  not  propose  opening  new 
excessive deficit procedures. It noted that the COVID-19 pandemic continues to have 
an  extraordinary  macroeconomic  and  fiscal  impact  that,  together  with  Russia’s 
invasion  of  Ukraine,  creates  exceptional  uncertainty,  including  for  designing  a 
detailed path for fiscal policy. On these grounds, the Commission considered that a 
decision  on  whether  to  place  Member  States  under  the  excessive  deficit  procedure 
should not be taken in spring 2022. The public debt-to-GDP ratio increased from just 
below 25% in 2020 to 25.1% in 2021, and is expected to remain broadly the same in 
2022, before increasing slowly towards 26% in 2023. Despite the low projected debt 
level by 2032 (37% of GDP), debt sustainability risks for Bulgaria appear medium in 
the medium term. The projection is subject to considerable uncertainty. Bulgaria has 
developed  a  strong  fiscal  framework  in  recent  years,  and  now  has  a  better  track 
record  in  compliance.  The  system  of  rules,  however,  appears  complex,  which 
increases the need to streamline the process. 

In line with its currency board arrangement, the exchange rate of the Bulgarian 
lev against the euro has been stable since the previous Convergence Report. The 
two-year period relevant for the assessment of exchange-rate stability extends from 
19 May 2020 to 18 May 2022. The Bulgarian lev joined ERM II on 10 July 2020 and 
observes  a  central  rate  of  1.95583  to  the  euro  with  a  standard  fluctuation  band  of 
±15%. The Bulgarian National Bank pursues its primary objective of price stability 
through an exchange rate anchor as part of a currency board arrangement. Bulgaria 
introduced its currency board arrangement in 1997, pegging the Bulgarian lev to the 
German mark and later to the euro. Bulgaria joined ERM II with its existing currency 
board  arrangement  in  place,  as  a  unilateral  commitment,  thereby  placing  no 
additional obligations  on the ECB. The lev exchange rate has remained stable over 
the two-year assessment period without any signs of tensions or devaluation against 
the  euro.  Additional  indicators,  such  as  developments  in  foreign  exchange  reserves 
and short-term interest rates, suggest that investors' risk perception towards Bulgaria 
has  remained  favourable.  A  sizeable  buffer  of  official  reserves  continues  to 
underpincurrency  board  arrangement’s  resilience.  After  joining  ERM II,  Bulgaria 
committed  to  implement  a  set  of  policy  measures  –  the  so-called  post-entry 
commitments  –  to  ensure  that  its  participation  in  the  mechanism  is  sustainable  and 
that the country achieves a high degree of economic convergence before adopting the 
euro.  The  measures  cover  four  policy  areas:  the  non-banking  financial  sector,  the 

13   For more information, see COM(2022) 85 final: https://ec.europa.eu/info/sites/default/files/economy-

finance/com_2022_85_1_en_act_en.pdf.  

8 

 
 
 
                                                           
insolvency  framework,  the  anti-money  laundering  framework,  and  governance  of 
state-owned  enterprises.  Bulgaria  is  currently  working  towards  completing  these 
post-entry  commitments,  in  cooperation  with  the  Commission,  which  monitors  its 
progress. 

The  lev  has  remained  at  the  ERM II  central  rate  for  the  2  years  covered  by  this 
assessment. There has been no devaluation of the lev’s central parity inside ERM II. 
By  the  time  of  a  possible  Council  Decision  in  July  2022,  the  lev  will  have 
participated in ERM II for 24 months. Bulgaria fulfils the exchange rate criterion. 

Bulgaria fulfils the criterion on the convergence of long-term interest rates. The 
average long-term interest rate in the year up to April 2022 was 0.5%, well below the 
reference value of 2.6%. Long-term interest rates in Bulgaria have been very low and 
fairly  stable  since  the  beginning  of  2020  until  the  end  of  2021,  remaining  within  a 
band  of  0.1-0.4%.  There  was  only  a  brief  peak  in  June-July  2020,  when  the 
benchmark  interest  rate  increased  to  0.7%.  In  the  same  period,  the  spread  vis-à-vis 
the German benchmark bond has hovered mostly around 60 basis points, with a brief 
peak above 100 basis points in mid-2020. However, at the beginning of 2022, both 
the interest rate and the spread started to increase, and were 1.6% and 89 basis points 
respectively in April 2022. 

The  Commission  has  also  examined  additional  factors,  including  balance  of 
payments  developments  and the integration of markets.  Bulgaria’s  external  balance 
(the combined current and capital account) has remained in surplus, at 1.5% of GDP 
in 2020 and 0.3% in 2021. The Bulgarian economy is well integrated with the euro 
area  through  trade  and  investment  linkages.  Selected  indicators  related  to  the 
business  environment  show  that  Bulgaria  performs  worse  than  many  euro  area 
Member  States.  Challenges  also  relate  to  the  institutional  framework  including 
corruption  and  government  efficiency.  However,  in  the  context  of  successful 
participation in the ERM II and in accordance with the recovery and resilience plan 
(RRP),  Bulgaria  is  taking  measures  to  improve  the  business  environment  and 
maintain financial sector stability, in the four areas covered by the post-entry ERM II 
commitments mentioned above. The financial sector in Bulgaria is smaller and less 
developed  than  in  the  euro  area,  with  an  above  average  share  of  non-performing 
loans that has been declining only very gradually in the past several years. Banking 
dominates  the  Bulgarian  financial  sector,  and  its  banking  sector  is  well  integrated 
with  the  euro  area  financial  sector,  in  particular  through  a  high  level  of  foreign 
ownership. However, market based financing is less developed, which is reflected in 
the  very  small  markets  for  equity  and  private  sector  debt.  In  the  context  of  the 
Macroeconomic  Imbalance  Procedure,  the  Commission  concluded  in  its  Alert 
Mechanism  Report  for  2022  that  it  was  not  necessary  to  carry  out  further  in-depth 
analysis for Bulgaria. 

The  effective  implementation  of  the  reforms  and  investment  set  out  in  Bulgaria’s 
recovery  and  resilience  plan  will  address  key  macro-economic  challenges.  These 
include social inclusion, education and skills, healthcare, decarbonisation, the digital 
transition,  the  business  environment,  and  financing  of  small  and  medium-sized 
enterprises. Key investments are included in renewable energy production, electricity 
storage  and 
the  digitalisation  of  public 
administration  and  digital  skills.  Key  reforms  include  the  introduction  of  a 
framework  for  coal  phase-out, 
the  electricity  market, 
comprehensive educational reform, and strengthening the minimum income scheme, 
the  anti-money  laundering  and  the  insolvency  frameworks.  The  plan  also  contains 

interconnection  capacities,  and 

liberalisation  of 

the 

in 

9 

 
 
measures to improve the efficiency of the public administration and justice system, to 
prevent, detect and correct corruption. 

3.  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 Czech national bank(the ČNB Law) – is not fully compatible with the 
the 
compliance  duty  under  Article  131  TFEU. 
independence  of  the  central  bank  and  central  bank  integration  in  the  ESCB  at  the 
time  of  euro  adoption  with  regard  to  the  Česká  národní  banka’s  (ČNB)  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 April 2022 was 6.2%, well above the reference 
value of 4.9%. It is projected to remain well above the reference value in the months 
ahead. 

The annual HICP inflation rate eased from 3.8% at the beginning of 2020 to 2.1% in 
February  2021  mostly  due  to  falling  energy  and  food  inflation.  Headline  inflation 
then  picked  up  during  the  course  of  2021,  before  accelerating  sharply  in  the  first 
months of 2022 to reach 13.2% in April 2022. The increase in 2021 and early 2022 
was broad based, reflecting both a surge in energy prices and a strong acceleration of 
core inflation (driven by non-energy industrial goods and services). The annual HICP 
inflation rate averaged 3.3% in both 2020 and 2021. Annual HICP inflation rates in 
Czechia in 2020 and 2021 were on average higher than those of the euro area. 

The  Commission’s  Spring  2022  Economic  Forecast  expects  inflation  to  accelerate 
significantly  to  11.7%  in  2022  and  then  moderate  to  4.5%  in  2023  .  Headline 
inflation  is  expected  to  increase  and  remain  elevated  over  both  years  because  of 
persistently  higher  costs  of  energy  and  other  intermediate  products,  expected 
increases  in  administered  prices  for  energy  and  other  utilities,  and  core  inflation 

10 

 
 
 
components, especially goods followed by services. The relatively low price level in 
Czechia (about 73% of the euro area average in 2020) 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 worsened somewhat from a deficit of 5.8% in 2020 to a deficit of 5.9% of 
GDP  in  2021.  The  Commission’s  Spring  2022  Economic  Forecast  expects  the 
general  government  balance  to  improve  to  -4.3%  of  GDP  in  2022,  despite  the 
negative impact of Russia’s invasion of Ukraine. This led to the implementation of 
emergency  and  integration  measures  to  support  those  fleeing  Ukraine  as  well  as 
measures to ease energy costs. The general government balance is forecast to reach -
3.9% of GDP in 2023 under a ‘no policy change’ assumption. On 23 May 2022 the 
Commission  adopted  a  report  prepared  in  accordance  with  Article  126(3)  of  the 
TFEU  for  18  Member  States,  including  Czechia.  Overall,  taking  into  account  all 
relevant factors as appropriate, the analysis in the report suggested that Czechia did 
not fulfil the deficit criterion. In line with its Communication of 2 March 202214, the 
Commission did not propose opening new excessive deficit procedures. It noted that 
the  COVID-19  pandemic  continues  to  have  an  extraordinary  macroeconomic  and 
fiscal  impact  that,  together  with  Russia’s  invasion  of  Ukraine,  create  exceptional 
uncertainty,  including  for  designing  a  detailed  path  for  fiscal  policy.  On  these 
grounds,  the  Commission  considered  that  a  decision  on  whether  to  place  Member 
States under the excessive deficit procedure should not be taken in spring 2022. The 
public debt-to-GDP ratio increased from around 38% in 2020 to 41.9% in 2021, and 
is expected to increase to 42.8% in 2022 and to 44.0% in 2023. Debt sustainability 
risks  for  Czechia  appear  medium  in  the  medium  term,  particularly  as  government 
debt  is  projected  to  increase  to  around  61%  of  GDP  in  2032.  The  projection  is 
subject to significant sensitivity to adverse macro-financial developments. The Czech 
national  fiscal  framework  is  well  developed.  After  the  outbreak  of  the  COVID-19 
pandemic, Parliament fast-tracked legislative amendments that allow a larger deficit 
over  2021–2027  and  a  longer  adjustment  path  (0.5  percentage  point  correction  per 
year, in structural terms). 

Czechia  does  not  fulfil  the  exchange  rate  criterion.  The  Czech  koruna  does  not 
participate  in  ERM  II.  Czechia  operates  a  de  jure  floating  exchange  rate  regime, 
allowing the central bank to make foreign exchange market interventions . Following 

14   For more information, see COM(2022) 85 final: https://ec.europa.eu/info/sites/default/files/economy-

finance/com_2022_85_1_en_act_en.pdf.  

11 

 
 
 
                                                           
the  lock-down  measures  taken  in  the  early  stages  of  the  COVID-19  pandemic,  the 
koruna  depreciated  significantly  by  about  6%  in  April  2020  (year-on-year).  From 
June 2020 it fluctuated at slightly higher levels until December 2020, when it entered 
an appreciation phase that ended abruptly in early 2022. The appreciation was mostly 
driven  by  a  sharp  monetary  tightening  by  the  ČNB.  However,  in  the  wake  of 
Russia’s  invasion  of  Ukraine  the  Czech  koruna  experienced  strong  depreciation 
pressures,  which  triggered  short-lasting  stabilising  interventions  by  the  ČNB  in  the 
foreign exchange market in early March 2022. In April 2022, the Czech koruna was 
about  12%  stronger  against  the  euro  than  2  years  earlier.  Short-term  interest  rate 
differentials  vis-à-vis  the  euro  area  increased  from  around  90  basis  points  in  May 
2021 to around 580 basis points by April 2022, following the strong tightening cycle 
that the ČNB started in August 2021. 

Czechia fulfils the criterion on the convergence of long-term interest rates. The 
average  long-term  interest  rate  in  the  year  to  April  2022  was  2.5%,  below  the 
reference value of 2.6%. The long-term interest rate of Czechia fell in the first few 
months  of  2020  to  bottom  out  at  around  0.9%  in  summer  2020.  It  then  increased 
slowly to about 1.9% in spring 2021 before picking up more strongly on the back of 
the ČNB’s sharp monetary tightening and a rapid increase in inflation. The long-term 
interest  rate  reached  4.0%  in  April  2022,  with  the  spread  vis-à-vis  the  German 
benchmark bond nearing 330 basis points. 

The  Commission  has  also  examined  additional  factors,  including  balance  of 
payments  developments  and  the  integration  of  markets.  Czechia’s  external  balance 
(the combined current and capital account) recorded an exceptionally high surplus of 
3.6%  of  GDP  in  2020  due  to  the  effect  of  the  COVID-19  crisis  on  the  trade  and 
primary income balances. The Czech economy is highly integrated with the euro area 
through  trade  and  investment  linkages.  Selected  indicators  related  to  the  business 
environment  show  that  Czechia  performs  around  the  average  of  euro  area  Member 
States.  Challenges    relate  to  the  institutional  framework  including  government 
efficiency  and  the  anti-corruption  framework,  for  instance  in  relation  to  avoiding 
conflicts  of  interest.  The  financial  sector  in  Czechia  is  smaller  and  less  developed 
than in the euro area. Market based financing is less developed, which is reflected in 
the very small markets for equity and private sector debt. The Czech financial sector 
is highly integrated into the euro area financial system, in particular through a high 
degree of foreign ownership of financial intermediaries.  

The  effective  implementation  of  the  reforms  and  investment  set  out  in  Czechia’s 
recovery  and  resilience  plan  (RRP)  will  address  key  macro-economic  challenges. 
These  include  technological  changes,  such  as  those  posed  by  automation  and  the 
green  transition,  investment  in  research  and  development,  new  childcare  facilities, 
and  up-skilling  and  reskilling  actions.  Key  investments  are  included  on  energy 
efficiency  of  buildings,  digital  skills  and  access  to  finance  for  companies.  Key 
reforms  are  aimed  at  addressing  the  quality  of  public  administration  (including 
digitalisation), increasing the capacity of childcare facilities, improving access to and 
the resilience of the healthcare sector, improving education programmes, upgrading 
labour  market  services,  supporting  research  activities  and  the  introduction  of 
innovation  in  firms.  The  business  environment  is  being  improved  by  several  e-
government  measures,  anti-corruption 
the 
institutional and administrative framework linked to avoiding conflict of interest and 
a  comprehensive  reform  of  the  procedure  for  granting  building  permits,  which 
currently represent major obstacles to investment in Czechia.   

including  strengthening 

reforms, 

12 

 
 
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 fulfils the conditions for the adoption of the 
euro. 

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

Croatia fulfils the criterion on price stability. The average inflation rate in Croatia 
during the 12 months to April 2022 was 4.7%, below the reference value of 4.9%. It 
is projected to remain below the reference value in the months ahead. 

In  2021,  the  annual  HICP  inflation  rate  averaged  2.7%,  increasing  significantly 
compared  to  2020,  when  it  averaged  0%.  Inflation  was  slightly  negative  in  Croatia 
between April 2020 and January 2021, mostly due very low and negative energy and 
non-energy  industrial  goods  inflation.  It  then  accelerated  sharply  throughout  2021 
and  in  the  first  months  of  2022  to  reach  9.6%  in  April.  The  increase  in  2021  and 
early 2022 was broad based, reflecting higher energy prices but also an acceleration 
of core inflation. Annual HICP inflation rates in Croatia in 2020 and 2021 were on 
average very close to those of the euro area. 

The Commission’s Spring 2022 Economic Forecast expects annual HICP inflation to 
accelerate to 6.1% in 2022 before decelerating to 2.8% in 2023, mostly supported by 
an expected decline in international commodity prices. Headline inflation is therefore 
projected to remain very close to the euro area headline inflation in 2022 and 2023. 
The  core  inflation  rate  is  expected  to  be  higher  than  in  the  euro  area  in  2022  (i.e., 
4.3%  vs.  3.5%),  reflecting  the  stronger  recovery  from  the  COVID-19  crisis  in 
Croatia,  but  this  is  expected  to  be  temporary,  as  the  gap  is  projected  to  narrow  in 
2023 (i.e., 3.3% vs. 3.1%). Unit labour costs are projected to remain subdued in both 
2022 and 2023. 

The  requirement  of  sustainability  implies  that  respecting  the  reference  value  is  the 
result  of  underlying  fundamentals  rather  than  temporary  factors.  The  analysis  of 
underlying fundamentals and the fact that the reference value will continue to be met 
in  the  months  ahead  support  a  positive  assessment  on  the  fulfilment  of  the  price 
stability criterion. While RRP-related investments and reforms are expected to have a 
muted  if  not  disinflationary  effect  in  the  long  run,  investments  should  also  support 
aggregate  demand  in  the  short  term  (see  the  next  paragraph).  According  to  the 
Commission’s  Spring  2022  Economic  Forecast,  inflation  is  projected  to  ease 
significantly  over  the  forecast  horizon,  which  suggests  that  any  possible  short-term 
inflationary effect of RRP-related investments should remain limited. 

In the longer-term, inflation prospects will hinge in particular on wages  growing in 
line  with  productivity.  Inflation  cycles  in  Croatia  are  already  highly  synchronised 
with  the  inflation  cycle  of  the  euro  area  and  wage  developments  are  expected  to 
continue  to  underpin  this  synchronisation.  However,  although  the  2013  and  2014 
labour  market  reforms  substantially  increased  the  level  of  flexibility  in  the  labour 
market,  wage  setting  remains  imperfectly  aligned  with  productivity  developments. 
This is partly linked to the public sector’s role as wage leader. The associated risks in 
terms  of  wage  developments  are  not  expected  to  increase  with  euro  accession. 
Furthermore, RRP-related reforms (e.g., reduction of administrative burden and para-
fiscal  charges,  deregulation  of  services  etc.)  should  enhance  competition  on  the 

13 

 
 
market and reduce costs for companies, leading to downward pressure on the prices 
of final products in the long run. In particular, two reforms could contribute to better 
align  productivity  wages  in  the  medium  term.  The  first  is  the  new  wage  and  work 
model in civil and public service, which should introduce a fairer, more transparent 
and  sustainable  wage  system  in  the  state  administration  and  public  services.  The 
second  is  the  Amendment  to  the  Labour  Act,  tackling  unjustified  temporary 
employment and incentivising workers to remain active, among others. Furthermore, 
although there is  a potential for further price level  convergence in  the long term,  it 
should be noted that at about 67% of the euro area average in 2020, the price level in 
Croatia has already achieved a higher level of price convergence with the euro area 
than other Member States when they joined the euro area. 

Croatia  fulfils  the  criterion  on  public  finances.  Croatia  is  not  the  subject  of  a 
Council Decision on the existence of an excessive deficit. After 3  years  of broadly 
balanced budgets and surpluses, the general government balance turned into a deficit 
of 7.3% of GDP in 2020 due to the COVID-19 crisis. The general government deficit 
declined  to  2.9%  of  GDP  in  2021,  thanks  largely  to  the  strong  economic  recovery 
and  the  gradual  phasing  out  of  COVID-19  support  measures.  The  Commission’s 
Spring 2022 Economic Forecast projects the general government balance to improve 
further  to  -2.3%  of  GDP  in  2022,  notwithstanding  the  measures  taken  by  the 
government  to  reduce  the  economic  and  social  impact  of  the  increase  in  energy 
prices and the costs of assistance to those fleeing Ukraine. In 2023, the government 
balance should reach -1.8% of GDP on a no policy change basis. The public debt-to-
GDP ratio decreased from around 87% in 2020 to 79.8% in 2021, and is expected to 
decline to 75.3% in 2022 and to 73.1% in 2023. Debt sustainability risks for Croatia 
appear medium in the medium term, with  government debt projected to stay below 
its  2021  level  until  2032.  However,  the  projections  are  subject  to  significant 
sensitivity to adverse macro-financial developments.  The Croatian fiscal framework 
has  been  significantly  strengthened  recently,  largely  thanks  to  the  transposition  of 
some  of  the  outstanding  requirements  of  the  Council  Directive  on  Budgetary 
Frameworks (2011/85/EU). 

14 

 
 
 
The  exchange  rate  of  the  Croatian  kuna  against  the  euro  has  been  broadly 
stable  since  the  previous  Convergence  Report.  The  two-year  period  relevant  for 
the assessment of exchange  rate stability runs from  19 May 2020 to  18  May 2022. 
The  Croatian  kuna  joined  ERM  II  on  10  July  2020  and  observes  a  central  rate  of 
7.53450  to  the  euro  with  a  standard  fluctuation  band  of  ±15%.  After  having 
depreciated  against  the  euro  by  up  to  2%  in  the  first  2  months  of  the  pandemic  in 
March and April 2020, the kuna-euro exchange rate in the 2 months before Croatia 
joined  ERM  II  was  stable  with  only  minor  deviations  from  the  post-ERM  II  entry 
central rate. The kuna has fluctuated in a narrow band of less than +/-1% against its 
central rate to the euro since it joined ERM II, with the Croatian central bank having 
operated a de jure managed floating exchange rate before the ERM II entry. Over the 
last  2  years,  the  kuna's  exchange  rate  against  the  euro  has  continued  to  exhibit  a 
seasonal  pattern of temporary modest appreciation in  the summer thanks to  foreign 
currency  inflows  related  to  the  tourism  sector.  On  18  May  2022,  the  kuna  stood  at 
7.535 HRK/EUR, very close to its ERM II central rate to the euro and broadly stable 
compared to its level 2 years earlier. Additional indicators, such as developments in 
foreign  exchange  reserves  and  short-term  interest  rates,  suggest  that  investors'  risk 
perception  towards  Croatia  has  remained  favourable.  International  reserves  held  by 
the Croatian National Bank  stood at EUR 25 billion at the end of 2021, increasing 
from  close  to  EUR  19  billion  at  the  end  of  2020.  The  spread  of  the  Croatian 
benchmark  short-term  rate,  i.e.  the  3-month  NRR  rate,  to  the  EURIBOR  has  been 
broadly stable and averaged about 60 basis points over the 2020-2021 period. Upon 
its ERM II entry, Croatia committed to implement a set of policy measures – the so-
called post-entry commitments – to ensure that its participation in the mechanism is 
sustainable  and  that  the  country  achieves  a  high  degree  of  economic  convergence 
before  adopting  the  euro.  The  measures  cover  four  policy  areas:  the  anti-money 
laundering,  the  business  environment,  state-owned  enterprises  and  the  insolvency 
framework. 

The kuna has remained very close to the ERM II central rate for the 2 years covered 
by this assessment. There has been no devaluation of the kuna's central parity inside 
ERM II. By the time of a possible Council Decision in July 2022, the kuna will have 
participated in ERM II for 24 months. Croatia fulfils the exchange rate criterion. 

Croatia fulfils the criterion on the convergence of long-term interest rates. The 
average  long-term  interest  rate  of  Croatia  was  0.8%  in  April  2022,  well  below  the 
reference value of 2.6%. Having risen in the first 2 months of the pandemic by over 
60 basis points to 1.2% in April 2020, the long-term interest rate then declined very 

15 

 
 
 
gradually, falling to as low as 0.3% by the end of 2021. The long-term interest rate 
picked  up  slightly  in  December  2021  and  moved  higher  in  the  first  few  months  of 
2022  amid  increasing  geopolitical  risks  at  global  level  and  a  deterioration  in  the 
inflation  outlook  against  the  backdrop  of  an  already  high  level  of  inflation  in  most 
advanced economies. The spread against the German long-term benchmark bond was 
slightly  above  100  basis  points  in  2020  but  declined  gradually  in  2021,  falling  to 
around 50 basis points by the end of 2021. It widened again to above 100 basis points 
at the beginning of 2021, rising to 168 basis points in April 2022 after having peaked 
by 180 basis points in the previous month. 

The  Commission  has  also  examined  additional  factors,  including  balance  of 
payments  developments  and  the  integration  of  markets.  Croatia's  external  balance 
(the combined current and capital account) decreased to 2.1% of GDP in 2020 from 
4.6%  of  GDP  in  2019  due  to  the  economic  fallout  of  the  COVID-19  pandemic. 
Benefiting  from  a  high  current  account  surplus  as  a  result  of  a  strong  recovery  of 
tourism export services, it rose substantially to 5.5% of GDP in 2021. The Croatian 
economy is well integrated with the euro area through trade and investment linkages. 
Selected indicators relating to the business environment show that Croatia performs 
worse  than  many  euro  area  Member  States.  Challenges  inter  alia  relate  to  the 
institutional framework including regulatory quality and corruption. However, there 
has  been renewed effort  as part of post-entry  ERM  II  commitments to  improve the 
business  environment,  in  particular  to  reduce  the  administrative  burden  and 
regulatory restrictions (see also below the paragraph on the RRP-related measures). 
Croatia’s banking sector is highly integrated with the euro area financial system, in 
particular  through  a  high  share  of  foreign  ownership  of  financial  intermediaries.  In 
July  2020,  the  ECB  adopted  a  decision  to  establish  close  cooperation  with  the 
Croatian  National  Bank  in  the  field  of  banking  supervision.  The  ECB  is  now 
responsible  for  the  supervision  of  Croatia’s  major  banking  institutions  and  Croatia 
has  effectively  joined  the  Banking  Union.  The  Croatian  financial  sector  is  smaller 
than  that  of  the  euro  area  in  terms  of  GDP.  It  is  dominated  by  the  banking  sector 
which  is  highly  integrated  into  the  euro  area  banking  sector,  in  particular  through 
foreign ownership. At the same time, the insurance and pension funds sector is also 
relatively  large  in  Croatia.  However,  market-based  financing  is  less  developed, 
which is reflected in the very small markets for equity and private sector debt. In the 
context  of the Macroeconomic  Imbalance Procedure, the Commission  concluded in 
its  Alert  Mechanism  Report  for  2022  that  Croatia  warranted  an  In-Depth  Review 
(IDR).  In the updated scoreboard including  figures  until  2020, the net  international 
investment position (NIIP), unit labour cost (ULC) growth, house price growth and 
general  government  gross  debt  indicators  were  above  their  indicative  thresholds. 
However,  the  findings  of  the  Commission’s  2022  In-Depth  Review  (IDR)  indicate 
that  the  unwinding  of  macroeconomic  imbalances  resumed  in  2021,  following  a 
relatively  contained  deterioration  in  2020.  Based  on  this  in-depth  review,  the 
Commission  considered  that  Croatia  is  no  longer  experiencing  macroeconomic 
imbalances. 

The  effective  implementation  of  the  reforms  and  investment  set  out  in  Croatia’s 
recovery  and  resilience  plan  will  address  key  macro-economic  and  institutional 
challenges.  These  include  low  employment  and  activity  rates,  skills  gaps,  a 
burdensome  and  complex  business  environment  and  the  low  quality  of  education. 
Key 
included  on  energy  efficiency  and  post-earthquake 
reconstruction of buildings, sustainable transport, the digital transition of the public 

investments  are 

16 

 
 
administration  and  5G  infrastructure.  Reforms  are  planned  in  areas  such  as  early 
childhood education and care, the healthcare system, anti-money laundering and anti-
corruption,  judiciary,  fiscal  framework  and  the  business  environment,  notably  by 
reducing administrative barriers. 

5.  HUNGARY 

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

Legislation  in  Hungary  –  in  particular  the  Law  on  the  Magyar  Nemzeti  Bank 
(MNB) – is not fully compatible with the compliance duty under Article 131 TFEU. 
Notable incompatibilities concern the independence of the MNB, the prohibition of 
monetary  financing  and  central  bank  integration  into  the  ESCB  at  the  time  of  the 
euro adoption with regard to the ESCB’s 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 April 2022 was 6.8%, well above the reference 
value of 4.9%. It is projected to remain well above the reference value in the months 
ahead. 

Annual  HICP  inflation  in  Hungary  was  on  an  upward  path  in  2020  and  2021, 
averaging  3.4%  and  5.2%  respectively.  Annual  HICP  inflation  rose  from  2.5%  in 
April 2020 to 5.2% in April 2021. It then accelerated further in the first few months 
of  2022,  reaching  8.6%  in  March  2022.  Inflation  acceleration  in  2021  was  mostly 
driven  by  developments  in  energy  and  commodity  prices.  However,  core  inflation 
(measured  as  HICP  inflation  excluding  energy  and  unprocessed  food)  increased 
sharply, after easing slightly between August 2020 and March 2021. Inflation stood 
at  9.6%  in  April  2022.  Annual  HICP  inflation  rates  in  Hungary  in  2020  and  2021 
were on average higher than those of the euro area. 

Inflation is projected to increase to 9.0% in 2022 and to slow down to 4.1% in 2023 
according to the Commission’s Spring 2022 Economic Forecast. Inflation is expected 

17 

 
 
 
to be mostly driven by energy and commodity prices but also relatively sizable wage 
increases.  The  relatively  low  price  level  in  Hungary  (about  63%  of  the  euro  area 
average in 2020) 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.  The  general  government 
deficit reached 7.8% of GDP in 2020, before declining to 6.8% of GDP in 2021. The 
Commission’s  Spring  2022  Economic  Forecast  expects  that,  on  the  back  of  better-
than-expected output growth, the general government deficit will decrease to 6.0% of 
GDP in 2022, notwithstanding the measures taken by the  government to reduce the 
economic  and  social  impact  of  the  increase  in  energy  prices  and  the  costs  of 
assistance to those fleeing Ukraine. It is forecast to further decrease to 4.9% of GDP 
in 2023, under a ‘no policy change’ assumption. On 23 May 2022, the Commission 
adopted  a  report  prepared  in  accordance  with  Article  126(3)  of  the  TFEU  for  18 
Member States, including Hungary. Overall, taking into account all relevant factors 
as appropriate, the analysis in the report suggested that the Hungary did not fulfil the 
deficit  and  debt  criteria.  In  line  with  its  Communication  of  2  March  202215,  the 
Commission  did  not  propose  to  open  new  excessive  deficit  procedures.  The 
Commission considered, within its assessment of all relevant factors, that compliance 
with the debt reduction benchmark would imply a too demanding frontloaded fiscal 
effort  that  risks  to  jeopardise  growth.  Therefore,  in  the  view  of  the  Commission, 
compliance  with  the  debt  reduction  benchmark  is  not  warranted  under  the  current 
exceptional  economic  conditions.  The  Commission  noted  that  the  COVID-19 
pandemic continues to have an extraordinary macroeconomic and fiscal impact that, 
together with Russia’s invasion of Ukraine, create exceptional uncertainty, including 
for  designing  a  detailed  path  for  fiscal  policy.  On  these  grounds,  the  Commission 
considered  that  a  decision  on  whether  to  place  Member  States  under  the  excessive 
deficit procedure should not be taken in spring 2022. The public debt-to-GDP ratio 
decreased from around 80% in 2020 to 76.8% in 2021 and is forecast to increase to 
76.4% in 2022 and decrease to 76.1 % in 2023. Debt sustainability risks for Hungary 
appear  medium  in  the  medium  term.  The  projection  is  subject  to  particularly  large 
uncertainty  and  is  sensitive  to  adverse  macro-financial  developments.    The 
Hungarian fiscal framework has been improved through reforms that began in 2011, 
but  there  is  still  room  for  improvement.  The  Fiscal  Council’s  role  in  fiscal  policy 
making  could  be  strengthened  and  the  volatility  of  the  medium-term  framework 
could still be reduced. 

15   For more information, see COM(2022) 85 final: https://ec.europa.eu/info/sites/default/files/economy-

finance/com_2022_85_1_en_act_en.pdf.  

18 

 
 
                                                           
Hungary does not fulfil the exchange rate criterion. The Hungarian forint does not 
participate  in  ERM  II.  Hungary  operates  a  de  jure  floating  exchange  rate  regime, 
allowing for foreign exchange market interventions by the central bank. Overall, the 
forint  depreciated  against  the  euro  over  the  period  covered  by  the  report,  resulting 
from oscillating depreciation and re-appreciation movements. In particular, there was 
a  strong  depreciation  immediately  after  the  Russia’s  invasion  of  Ukraine,  partially 
reduced thanks to restrictive monetary policy. In April 2022, the forint was about 5% 
weaker against the euro than 2 years earlier. Short-term interest rate differentials vis-
à-vis  the  euro  area  increased  substantially  since  the  beginning  of  the  COVID-19 
crisis, when the previous upward movement in Hungarian rates was accentuated. The 
spread  first  increased  in  winter  2020  and  early  spring  2020,  when  monetary  rates 
were  raised  to  support  the  exchange  rate  at  the  height  of  the  crisis.    After  a 
stabilisation  at  around  130  basis  point  between  January  and  June  2021,  the  spread 
started to increase steeply due to monetary policy tightening. The spread reached 705 
basis points in April 2022.  

Hungary  does  not  fulfil  the  criterion  on  the  convergence  of  long-term  interest 
rates.  The  average  long-term  interest  rate  stood  at  4.1%  in  April  2022,  above  the 
reference  value  of  2.6%.  Hungary’s  long-term  interest  rate,  which  stood  at  around 
2.5% in April 2020, decreased until the end of 2020, reflecting the monetary easing 
conducted  by  major  central  banks.  Hungary’s  long-term  interest  rate  started  to 
increase  again  in  2021,  in  particular  from  September  2021  onwards,  reflecting  the 
tightening  of  monetary  policy,  to  surpass  4%  in  November  2021.  The  increase  in 
long-term  rates  continued,  and  accelerated  further  in  March  2022,  on  the  back  of 
Russia’s invasion of Ukraine. Despite the increase in rates on the German benchmark 
bond  over  the  same  period,  the  long-term  spread  vis-à-vis  the  German  benchmark 
bond has increased over the last 2 years and reached 584 basis points in April 2022. 

The  Commission  has  also  examined  additional  factors  have  also  been  examined, 
including  balance  of  payments  developments  and  the  integration  of  markets.  The 
external balance (the combined current and capital account) deteriorated in 2020 and 
2021, mainly due to strong growth in imports that was not compensated by exports, 
which were affected by the COVID-19 disruptions. The external balance deteriorated 
from  1.0%  of  GDP  in  2020  to  -0.4%  in  2021.  The  Hungarian  economy  is  highly 
integrated  with  the  euro  area  through  trade  and  investment  linkages.  Selected 
indicators relating to  the business  environment,  show that Hungary performs  worse 
than  many  euro  area  Member  States.  Hungary  inter  alia  faces  challenges  in  areas 
such  as  controlling  corruption,  judicial  independence  and  the  quality  of  decision-

19 

 
 
 
making.  Hungary’s  financial  system  is  characterised  by  a  large  presence  of  foreign 
holdings  that  perform  no  financial  intermediation  in  the  domestic  economy. 
Excluding these, Hungary’s financial system is less developed than those of the euro 
area.  Hungary's  banking  sector  shows  a  large  and  relatively  stable  weight  in  the 
financial  sector  and  is  well  integrated  into  the  euro  area  financial  system  due  to  a 
relatively  large  share  of  foreign  ownership.  The  equity  and  debt  markets  are  small 
and relatively less developed.  

Hungary  submitted  its  recovery  and  resilience  plan  on  11  May  2021.  The  plan  is 
currently being assessed by the Commission to make sure that all assessment criteria 
are being fulfilled. The plan proposes investments and reforms to strengthen primary 
care  and  hospitals,  increase  the  capacity  of  suburban  rail  and  increase  renewable 
energy production at residential level.   

6. 

POLAND 

In  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 
the 
compliance  duty  under  Article  131  TFEU.  Incompatibilities  relate 
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 integration of the NBP into the ESCB at the time of euro adoption. 

to 

Poland does not fulfil the criterion on price stability. The average inflation rate in 
Poland during the 12 months to April 2022 was 7.0%, well above the reference value 
of 4.9%. It is projected to remain well above the reference value in the months ahead. 

Annual HICP inflation in Poland was on a broad upward trend during most of 2020 
and  2021,  averaging  3.7%  in  2020  and  5.2%  in  2021  mostly  due  to  service  and 
energy  inflation.  Annual  HICP  fell  to  2.9%  in  April  2020  following  the 
disinflationary  effect  of  the  first  wave  of  the  pandemic  in  Poland.  It  recovered  to 
3.8%  in  June  2020  and  remained  broadly  constant  until  February  2021.  Annual 

20 

 
 
 
inflation  then  increased  sharply  throughout  2021  and  early  2022,  driven  by  rising 
energy and food prices  as well as accelerating core inflation (driven by non-energy 
industrial goods and services). It reached 7.0% in April 2022. Annual HICP inflation 
rates in Poland in 2020 and 2021 were on average higher than in the euro area. 

Inflation is projected to increase to 11.6% in 2022 and to 7.3% in 2023 according to 
the  Commission’s  Spring  2022  Economic  Forecast.  Energy  prices  are  expected  to 
increase  strongly  amid  a  hike  in  regulated  energy  prices  at  the  beginning  of  2022, 
although the increase will be somewhat counterbalanced by a policy package put in 
place by the  government to  reduce tax rates paid  in  energy and food products.  The 
relatively  low  price  level  in  Poland  (about  56%  of  the  euro  area  average  in  2020) 
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  increased  sharply  to  6.9%  of  GDP  in  2020  and  fell  to  1.9%  in  2021.  The 
Commission’s  Spring  2022  Economic  Forecast  expects  the  deficit-to-GDP  ratio  to 
deteriorate  to  4.0%  in  2022,  reflecting  the  measures  taken  by  the  government  to 
reduce the economic and social impact of the increase in energy prices and the costs 
of assistance to those fleeing Ukraine. It is projected to reach 4.4% in 2023 under a 
‘no policy change’ assumption. On 23 May 2022, the Commission adopted a report 
prepared  in  accordance  with  Article  126(3)  of  the  TFEU  for  18  Member  States, 
including Poland. Overall, taking into account all relevant factors as appropriate, the 
analysis in the report suggested that Poland did not fulfil the deficit criterion. In line 
with its Communication of 2 March 202216, the Commission did not propose opening 
new excessive deficit procedures. It noted that the COVID-19 pandemic continues to 
have an extraordinary macroeconomic and fiscal impact that, together with Russia’s 
invasion  of  Ukraine,  create  exceptional  uncertainty,  including  for  designing  a 
detailed path for fiscal policy. On these grounds, the Commission considered that a 
decision  on  whether  to  place  Member  States  under  the  excessive  deficit  procedure 
should  not  be  taken  in  spring  2022.  The  public  debt-to-GDP  ratio  decreased  from 
around 57.1% in 2020 to 53.8% in 2021 and is forecast to further decrease to 50.8% 
in 2022 and 49.8% in 2023. The debt sustainability analysis for Poland indicates low 
risk in the medium term, particularly as government debt is projected to stay below 
60%  of  GDP  until  2032.  The  fiscal  framework  in  Poland  is  strong  overall  and  the 
numerical  fiscal  rules  are  at  the  centre  of  the  framework.  The  framework  was 
recently relaxed slightly to take account of the pressures emerging from the COVID-
19 pandemic.  

16   For more information, see COM(2022) 85 final: https://ec.europa.eu/info/sites/default/files/economy-

finance/com_2022_85_1_en_act_en.pdf.  

21 

 
 
                                                           
Poland  does  not  fulfil  the  exchange  rate  criterion.  The  Polish  zloty  does  not 
participate  in  ERM  II.  Poland  operates  a  de  jure  floating  exchange  rate  regime, 
allowing  for  foreign  exchange  market  interventions  by  the  central  bank.  The  zloty 
depreciated sharply after the onset of the COVID-19 crisis in early 2020. Afterwards 
it  went  through  a  period  of  fluctuations  but  showed  no  clear  trend  up  to  February 
2022.  The  NBP  intervened  actively  in  the  foreign  exchange  market  to  stabilise  the 
zloty during this period. The outbreak of Russia’s invasion of Ukraine weakened the 
zloty.  In  April  2022,  the  zloty  was  about  2%  weaker  against  the  euro  than  2  years 
earlier.  The  short-term  interest  rate  differential  vis-à-vis  the  euro  area  fluctuated 
strongly  in  2020  and  2021,  mirroring  differences  in  the  monetary  policy  stances  in 
Poland and the euro area. It narrowed to historically low levels after the onset of the 
COVID-19  crisis  on  the  back  of  an  easing  of  the  NBP’s  monetary  policy.  From 
October  2021,  the  short-term  interest  rate  differential  widened  rapidly  as  the  NBP 
tightened its policy and the reference rate reached 5.25% in May 2022. International 
reserves  held  by  the  NBP  increased  and  by  the  end  of  2021  constituted  EUR  147 
billion (around 26% of GDP).  

Poland  does  not  fulfil  the  criterion  on  the  convergence  of  long-term  interest 
rates. The average long-term interest rate in the year to April 2022 was 3.0%, above 
the  reference  value  of  2.6%.  The  easing  of  monetary  policy  after  the  onset  of  the 
pandemic in 2020 contributed to a significant decrease in the long-term interest rates, 
which  remained  at  1.3%  until  the  end  of  2020.  In  January  2021,  the  long-term 
interest  rate  reached  its  lowest  level  on  record  (1.2%)  before  starting  to  increase 
moderately  until  the  summer.  The  tightening  of  monetary  policy,  which  started  in 
October  2021,  then  contributed  to  a  considerable  increase  in  the  long-term  interest 
rate  reaching  3.0%  in  April  2022.  The  long-term  interest  rate  spread  vis-à-vis  the 
German benchmark bond narrowed strongly during the early months of the COVID-
19  crisis  and  fluctuated  around  180  basis  points  up-to  April  2021.  In  mid-2021,  it 
started to increase slightly and by October 2021 the spread had started to widen. By 
the end of 2021, the long-term interest rate spread reached around 373  basis points 
and continued to widen to 521 basis points in April 2022.  

The  Commission  has  also  examined  additional  factors,  including  balance  of 
payments  developments  and  the  integration  of  markets.  Poland’s  external  balance 
(the  combined  current  and  capital  account)  stayed  in  surplus  in  2020  and  2021  but 
weakened in late 2021 and early 2022 due to the rising price of commodity imports. 
The  Polish  economy  is  well  integrated  with  the  euro  area  through  trade  and 
investment  linkages.  Selected  indicators  relating  to  the  business  environment  show 
that  Poland  performs  worse  than  many  euro  area  Member  States,  in  particular  in 

22 

 
 
 
relation  to  indicators  on  rule  of  law  and  government  effectiveness.  The  financial 
sector  in  Poland  is  smaller  and  less  developed  than  in  the  euro  area.  It  is  highly 
dominated  by  banks,  which  are  well  integrated  into  the  euro  area  financial  system. 
Market  based  financing  is  less  developed,  which  is  reflected  in  the  very  small 
markets for equity and private sector debt.  

Poland  submitted  its  recovery  and  resilience  plan  (RRP)  on  3  May  2021.  The  plan 
proposes  investments  and  reforms  to  decarbonise  the  Polish  economy,  make  the 
transport  sector  more  sustainable,  address  challenges  related  to  the  investment 
climate,  notably  with  regard  to  the  Polish  judicial  system  as  well  as  decision-  and 
law-making  processes,  improve  IT  connectivity  and  make  the  healthcare  system 
more resilient. 

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 relate to 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 Statute. 

Romania does not fulfil the criterion on price stability. The average inflation rate 
in Romania during the 12 months to April 2022 was 6.4%, above the reference value 
of 4.9%. It is projected to remain  above the reference value in the months ahead. 

Annual HICP inflation in Romania accelerated throughout 2021, from an average of 
2.3% in 2020 to 4.1% in 2021. The annual inflation rate fell from 3.9% in January 
2020 to 1.8% in May 2020, reflecting the reduced demand for goods and services at 
the outset of the COVID-19 pandemic, as well as the sharp drop in the international 
price  of  crude  oil  in  the  first  4  months  of  2020.  After  a  temporary  rise  to  2.5%  in 
August  2020,  reflecting  strong  food  price  inflation,  it  declined  again  and  bottomed 
out at 1.7% in November 2020. Subsequently, inflation rose steadily, reaching 3.5% 
in June 2021 and 6.7% in December 2021. The increase was driven by higher energy 
prices throughout 2021 and, in the second half of 2021, was also sustained by higher 
core  inflation.  It  continued  to  accelerate  in  the  first  4  months  of  2022,  reaching 
11.7%  in  April  2022.  Annual  HICP  inflation  rates  in  Romania  in  2020  and  2021 
were on average higher than those of the euro area.   

The Commission’s Spring 2022 Economic Forecast expects the annual average rate 
of  inflation  to  increase  to  8.9%  in  2022,  before  falling  to  5.1%  in  2023.  The 
significant increase in 2022 is mainly due to the hike in energy prices, while higher 
food prices also contribute. The relatively low price level in Romania (about 52% of 
the  euro  area  average  in  2020)  suggests  significant  potential  for  price  level 
convergence in the long term.  

23 

 
 
including  a 

Romania  does  not  fulfil  the  criterion  on  public  finances.  Romania  has  been 
subject  to  an  excessive  deficit  procedure  since  April  2020,  based  on  the  pre-
pandemic  developments.  On  18  June  2021,  taking  into  account  the  continued 
application of the general escape clause of the Stability and Growth Pact, the Council 
adopted a revised recommendation under Article 126(7) of the Treaty (TFEU), with a 
view to bringing an end to the excessive government deficit in Romania by 2024 at 
the latest. On 23 May 2022, the Commission concluded that, taking into account the 
deficit outturn of 7.1% of GDP in 2021 and the fiscal effort in 2021, Romania was in 
line  with  the  Council  recommendation  of  18  June  2021  and  the  excessive  deficit 
procedure should be kept in abeyance. The improvement in the general government 
deficit in 2021, down from 9.3% of GDP in 2020, was mainly due to higher revenues 
as a result of the economic recovery, while the government also implemented some 
consolidation  measures, 
in  public  sector  wages.  The 
Commission’s Spring 2022 Economic Forecast projects that the general government 
deficit will decrease further to 7.5% of GDP in 2022, notwithstanding the measures 
taken by the government to reduce the economic and social impact of the increase in 
energy  prices  and  the  costs  of  assistance  to  those  fleeing  Ukraine.  It  is  forecast  to 
decrease  to  6.3%  of  GDP  in  2023  under  the  ‘no  policy  change’  assumption. 
However,  for  both  2022  and  2023,  Romania  is  at  risk  of  non-compliance  with  the 
fiscal  targets  established  in  the  Council  Recommendation  of  18  June  2021.  The 
public  debt-to-GDP  ratio  increased  from  47.2%  in  2020  to  48.8%  in  2021  and  is 
expected to increase further to 50.9% in 2022 and 52.6% in 2023. Debt sustainability 
risks  for  Romania  appear  medium  in  the  medium  term,  particularly  as  government 
debt  is  projected to  increase to  around 73% of  GDP in  2032 and due to significant 
sensitivity  of  the  projections  to  adverse  macro-financial  developments.  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.  In  particular,  the  annual  budget  laws  have  repeatedly  contradicted 
national fiscal rules and have not been guided by  medium-term budgetary strategies. 

freeze 

24 

 
 
 
Romania does not fulfil the exchange rate criterion. The Romanian leu does not 
participate  in  ERM  II.  Romania  operates  a  de  jure  floating  exchange  rate  regime, 
allowing  for  foreign  exchange  market  interventions  by  the  central  bank.  The  leu 
depreciated  steadily  against  the  euro  in  2020  and  2021.  In  April  2022,  the  leu  was 
about  2%  weaker  against  the  euro  compared  to  2  years  earlier.  The  short-term 
interest  rate  spread  vis-à-vis  the  euro  area  decreased  by  around  120  basis  points 
between  March  2020  and  February  2021  from  330  basis  points,  mirroring  the  key 
policy  rate  cuts  by  the  BNR  over  this  period.  Subsequently,  it  increased  from  its 
trough  of  slightly  over  200  basis  points  in  June  2021  to  around  520basis  points  in 
April 2022, as monetary policy tightened between September 2021 and April 2022. 

Romania  does  not  fulfil  the  criterion  on  the  convergence  of  long-term  interest 
rates. The average long-term interest rate in the year to April 2022 was 4.7%, above 
the  reference  value  of  2.6%.  At  the  outset  of  the  COVID-19  crisis,  the  long-term 
interest  rate  in  Romania  increased  sharply  from  4.0%  in  February  2020  to  4.8%  in 
April 2020. Subsequently, it decreased steadily, reaching a low of 2.7% in February 
2021, with the decline reflecting widespread monetary policy loosening measures by 
central banks. Interest rates started to increase again in March 2021 and were on an 
upward  path  throughout  the  rest  of  the  year,  rising  to  5.4%  in  December  2021, 
reflecting higher inflationary pressures and, as from October 2021, monetary policy 
tightening in  Romania.  In the first  4 months  of 2022, Romania’s long-term  interest 
rate increased further to 6.6% in April 2022, in the context of continued inflationary 
pressures,  further  monetary  policy  tightening  and  greater  risk  aversion  following 
Russia’s  invasion  of  Ukraine.  The  long-term  spread  versus  the  German  benchmark 
bond reached 586 basis points in that month, up from  310 basis points in February 
2021. 

The  Commission  has  also  examined  additional  factors,  including  balance  of 
payments  developments  and the integration of markets.  Romania's  external  balance 
(the combined current and capital account) deteriorated from -3.1% of GDP in 2020 
to -4.8% in 2021, mainly due to a widening in the goods trade deficit. The Romanian 
economy is well integrated with the euro area through trade and investment linkages. 
Selected indicators relating to the business environment show that Romania performs 
worse than many euro area Member States. In particular, companies face constraints 
to doing business such as corruption, overly regulated markets for business services, 
frequent  legislative  changes  coupled  with  inadequate  impact  assessments.  The 
financial  sector  in  Romania  is  smaller  and  less  developed  than  in  the  euro  area. 
Romania's  banking  sector  is  well  integrated  with  the  euro  area  financial  system,  in 

25 

 
 
 
particular through a high level of foreign ownership in its banking system. However, 
market-based  financing  is  less  developed,  which  is  reflected  in  the  very  small 
markets  for  equity  and  private  sector  debt.  In  the  context  of  the  Macroeconomic 
Imbalance Procedure, the Commission concluded in its Alert Mechanism Report for 
2022 that Romania warranted an In-Depth Review (IDR). The latter concluded that 
Romania  is  experiencing  macroeconomic  imbalances.  Vulnerabilities  relate  to 
external accounts and are linked to large fiscal deficits and to competitiveness issues 
that are re-emerging. 

The  effective  implementation  of  the  reforms  and  investment  set  out  in  Romania’s 
recovery  and  resilience  plan  will  address  key  macro-economic  challenges.  These 
include  the  sustainability  of  public  finances,  education,  increasing  greenhouse  gas 
emissions  and  the  lack  of  digital  connectivity.  Key  investments  are  included  for 
railway modernisation, the energy efficiency of buildings, the digitalisation of public 
administration  and  making  the  health  system  more  resilient.  Key  reforms  aim  at  
addressing  fiscal  sustainability,  improving  access  to  financing,  strengthening  the 
public administration and modernising the social benefits system. The plan also aims 
at  addressing  the  main  issues  related  to  respect  of  rule  of  law  in  Romania  by 
strengthening  the  independence  and  increasing  the  efficiency  of  the  judiciary, 
improving access to justice, and stepping up the fight against corruption. 

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 
the  compliance  duty  under  Article  131  TFEU.  Incompatibilities  and 
with 
imperfections  exist  in  the  fields  of  the  independence  of  the  central  bank,  the 
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  April  2022  was  3.7%, below  the  reference  value  of  4.9%. 
The  Commission  projects  this  to  remain  below  the  reference  value  in  the  months 
ahead. 

26 

 
 
Sweden's annual HICP inflation rate averaged 2.7% in 2021, up from 0.7% in 2020. 
During 2021, annual HICP inflation was on a strong upward trend, and accelerated 
sharply  in  the  first  months  of  2022,  reaching  6.6%  in  April  2022.  The  trend  was  
briefly  interrupted  in  the  middle  of  2021,  when  inflation  decreased  due  to  a 
temporary easing in the rate of increase for prices of services and industrial goods, as 
they  adjusted  after  the  first  wave  of  the  pandemic.  The  overall  pick-up  in  year-on-
year inflation mainly reflected markedly higher energy prices — foremost electricity 
prices —, and later in the year, broader price increases across various categories of 
the consumer price index. During 2021, inflation in Sweden was broadly in line with 
that of the euro area. In April 2022, annual HICP inflation stood at 6.6%. 

In the Commission’s Spring 2022 Economic Forecast, the Commission projects that 
inflation will increase to 5.3% in 2022, on the back of higher energy and commodity 
prices  interacting  with  more  persistent  broader  price  increases,  and  supply  chain 
disruptions,  before  falling  back  to  3.0%  in  2023.  The  price  level  in  Sweden  is 
relatively high (about 116% of the euro area average in 2020), and given the level of 
economic development,  convergence towards the prevailing euro area price level is 
unlikely. 

Sweden  fulfils  the  criterion  on  public  finances.  Sweden  is  not  the  subject  of  a 
Council  Decision  on  the  existence  of  an  excessive  deficit.  The  general  government 
balance improved from a deficit of 2.7% of GDP in 2020 to a deficit of 0.2% of GDP 
in  2021,  reflecting  the  phasing  out  of  several  COVID-19  measures,  dominating 
continued  expenditure  support  in  some  areas,  and  a  denominator  effect  as  growth 
rebounded in 2021. The Commission’s Spring 2022 Economic Forecast expects the 
general government balance to reach -0.5% of GDP in 2022 and 0.5% in 2023, partly 
reflecting  the  withdrawal  of  fiscal  support  as  the  recovery  takes  hold.  The  public 
debt-to-GDP ratio decreased from 39.6% in 2020 to 36.7% in 2021 and is expected 
to decrease further to 33.8% in 2022 and to 30.5% in 2023. Debt sustainability risks 
for  Sweden  appear  low  in  the  medium  term,  particularly  as  government  debt  is 
projected to decline to a particularly low level by 2032 (around 11% of GDP). The 
sensitivity  of  the  projections  to  adverse  macro-financial  developments  is  limited. 
Sweden has a strong fiscal framework that was reformed in 2019, preserving the key 
pillars of the previous set-up and strengthening these with new elements  (such as a 
debt anchor at 35% of GDP). 

27 

 
 
 
Sweden  does  not  fulfil the  exchange  rate  criterion.  The  Swedish  krona  does  not 
participate  in  ERM II.  Sweden  operates  a  de  jure  floating  exchange  rate  regime, 
allowing for foreign exchange market interventions by the central bank. After a long 
period of slow depreciation against the euro between 2013 and early 2020, the krona 
started to appreciate on the back of the economy’s resilience to the COVID-19 crisis. 
Between  April  2020  and  November  2021,  the  krona  appreciated  by  almost  8% 
against  the  euro.  The  appreciation  took  place  despite  stable  monetary  conditions 
(compared  with  the  euro  area),  where  the  three-month  STIBOR-EURIBOR  spread 
during  2020  and  2021  averaged  50  and  51  basis  points,  respectively.  At  the 
beginning  of  2022,  the  krona  depreciated,  as  Russia’s  invasion  of  Ukraine  spurred 
safe-haven flows, reflecting changes in risk appetite and temporary flows associated 
with  dividend  payments  of  multi-national  firms.  Subsequently,  the  krona  regained 
somewhat.  In  April  2022,  the  spread  stood  at  around  55  basis  points  and  the 
exchange rate was 5% stronger against the euro than it had been 2 years earlier. 

Sweden fulfils the criterion on the convergence of long-term interest rates. The 
average long-term  interest  rate in  the  year to  April 2022 was 0.4%, well below the 
reference  value  of  2.6%.  Since  the  beginning  of  2021,  Swedish  long-term  interest 
rates  have  been  fluctuating  around  a  level  of  0.3%  on  a  monthly  basis.  This  is 
slightly  higher  than  the  year  before.  The  spread  vis-à-vis  the  German  benchmark 
bond  remained  low  in  2020  and  2021,  and  even  decreased  slightly  after  a  brief 
COVID-induced  peak  of  76  basis  points  in  March  2021  to  46  basis  points  in 
February 2022. After a recent increase, the spread was 72 basis points in April 2022. 

The  Commission  has  also  examined  additional  factors,  including  balance  of 
payments  developments  and  the  integration  of  markets.  Sweden's  external  balance 
(the combined current and capital account) has remained in surplus, at 6.1% of GDP 
in 2020 and 5.5% in 2021. Sweden's economy is well-integrated with the euro area 
through  trade  and  investment  linkages.  Selected  indicators  relating  to  the  business 
environment show that Sweden performs better than most euro area Member States. 
The financial sector in Sweden is highly developed and well-integrated into the EU 
financial  sector.  Banking  dominates  the  financial  sector,  but  the  insurance  and 
pension funds are integral parts of significant size. Moreover, Sweden has one of the 
most  developed  credit  and  equity  markets  among  EU  Member  States,  and  market 
financing  is  among  the  highest  in  the  EU.  In  the  context  of  the  Macroeconomic 
Imbalance Procedure, the Commission concluded in its Alert Mechanism Report for 
2022 that an In-Depth Review was warranted for Sweden. Based on the assessment 
in  the  In-Depth  Review,  the  Commission  considers  that  Sweden  is  experiencing 

28 

 
 
 
imbalances  with  vulnerabilities  that  relate  to  high  and  rising  house  prices  and  high 
household indebtedness, which exposes Sweden to the risk of adverse shocks and a 
disorderly  correction  of  housing  prices,  with  potential  harmful  implications  for  the 
real economy and the banking sector. 

include 

the  green  and  digital 

The  effective  implementation  of  the  reforms  and  investment  set  out  in  Sweden’s 
recovery  and  resilience  plan  (RRP)  will  address  key  macro-economic  challenges. 
These 
transitions,  demographic  change,  and 
strengthening the education and healthcare systems. Key investments include subsidy 
schemes  to  speed  up  the  decarbonisation  of  industry  and  transport,  the  roll-out  of 
high-speed  broadband  in  sparsely  populated  areas  and  investment  in  learning  and 
digital  skills.  Key  reforms  involve  requiring  fuel  suppliers  to  blend  sustainable 
biofuels in petrol, diesel and jet fuel, improving the sustainability of the pension and 
social  security  systems,  combating  money  laundering,  increasing  the  accessibility 
and  capacity  of  the  health  care  system,  and  promoting  housing  supply  by  reducing 
bottlenecks in the permit procedure. 

29