COMMISSION STAFF WORKING DOCUMENT CONVERGENCE REPORT 2022 Accompanying the document 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  SWD(2022) 280 final  COMMISSION STAFF WORKING DOCUMENT CONVERGENCE REPORT 2022 Accompanying the document 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) {COM(2022) 280 final}  
 
 
ABBREVIATIONS 

Member States 

Bulgaria 
Czechia 
Croatia 
Hungary 
Poland 
Romania 
Sweden 
Euro area  

BG 
CZ 
HR 
HU 
PL 
RO 
SE 
EA 
EA-19   Euro area, 19 Member States 
EA-18  Euro area, 18 Member States before 2015 
EA-17    Euro area, 17 Member States before 2014 
EU-28  European Union, 28 Member States 
EU-27  European Union, 27 Member States before July 2013 (i.e. EU-28 excl. HR) and from February 
2020 (i.e. EU-28 excl. UK) 
EU-25  European Union, 25 Member States before 2007 (i.e. EU-28 excl. BG, RO and HR) 
EU-15  European Union, 15 Member States before 2004 

Currencies 

EUR   Euro 
BGN  Bulgarian lev 
CZK 
Czech koruna 
HRK  Croatian kuna 
HUF  Hungarian forint 
PLN 
RON  Romanian leu (ROL until 30 June 2005) 
SEK 
USD  United States dollar 

Swedish krona 

Polish zloty 

Central Banks 

BNB  Bulgarska narodna banka (Bulgarian National Bank – central bank of Bulgaria) 
ČNB  Česká národní banka (Czech National Bank – central bank of Czechia) 
HNB  Hrvatska narodna banka (Croatian National Bank – central bank of Croatia) 
MNB  Magyar Nemzeti Bank (Hungarian National Bank – central bank of Hungary) 
NBP  Narodowy Bank Polski (National Bank of Poland – central bank of Poland) 
BNR  Banca Naţională a României (National Bank of Romania – central bank of Romania) 

Other abbreviations 

Balance of Payments 

AMR  Alert Mechanism Report 
BoP 
CAR  Capital adequacy ratio 
CBA  Currency board arrangement 
Central and Eastern Europe 
CEE 
Corporate Income Tax 
CIT 
Consumer price index 
CPI 
Concentration ratio (aggregated market share of five banks with the largest market share) 
CR5 
European Community 
EC 
European Central Bank 
ECB 
EDP 
Excessive Deficit Procedure 
EMU  Economic and monetary union 

i 

 
 
 
European Union 

In-Depth Review 

European System of Accounts 

Foreign direct investment 
Funding for Growth Scheme 
Financial Supervisory Authority 

ERM II  Exchange rate mechanism II 
ESA 
ESCB  European System of Central Banks 
EU 
Eurostat Statistical Office of the European Union 
FDI 
FGS 
FSA 
GDP  Gross domestic product 
HICP  Harmonised index of consumer prices 
HFSA  Hungarian Financial Supervisory Authority 
IDR 
MFI  Monetary Financial Institution  
MIP  Macroeconomic Imbalance Procedure 
NCBs  National central banks 
NEER  Nominal effective exchange rate 
Najwyższa Izba Kontroli (Poland's Supreme Chamber of Control) 
NIK 
Non-performing loans 
NPL 
Official Journal 
OJ 
Official Journal Lex 
OJL 
Personal Income Tax 
PIT 
PPS 
Purchasing Power Standard 
REER  Real effective exchange rate 
RRF 
RRP 
SGP 
TFEU  Treaty on the Functioning of the European Union 
ULC   Unit labour costs 
VAT  Value added tax 

Recovery and Resilience Facility  
Recovery and Resilience Plan 
Stability and Growth Pact 

ii 

 
 
 
 
ACKNOWLEDGEMENTS 

The Convergence Report and its Technical Annex were prepared in the Directorate-General for Economic 
and Financial Affairs. The main contributors were Lucian Briciu, Staffan Linden, Adriana Reut, Virgilijus 
Rutkauskas, Matteo Salto and Vaclav Zdarek. 

Other contributors were Ronald Albers, Pedro Arevalo, Lucian Albulescu, Martin Åström, Cristiana Belu 
Manescu, Adrian Bodea, Alessandra Cepparulo, Stefan Ciobanu, Angela D’Elia, Lukas Demoen, Patrick 
D’Souza,  Ben  Deboeck,  Milan  Deskar-Skrbic,  Dorel-Adrian  Dumitrescu-Pasecinic,  Hugo  Ferradans 
Ramonde,  Carmine  Gabriele,  Nicola  Gagliardi,  Gabriele  Giudice,  Oskar  Grevesmuhl,  Valeska  Gronert, 
James Hinton, Martjin  Hoogeland, Szabolcs Klubuk, Willem Kooi,  Daniel Kosicki,  Ingo Kuhnert,  Ivan 
Lozev,  Robert  Markiewicz,  Philipp  Mohl,  Allen  Monks,  Markus  Münch,  Eloise  Orseau,  Stéphanie 
Pamies,  Anda  Patarau,  Gábor  Pellényi,  Arian  Perić,  Lucia  Piana,  Simona  Pojar,  Diana  Radu,  Ernesto 
Reitano,  Vincent  Rietvink,  Maja  Šamanović,  Martina  von  Terzi,  Daniel  Vâlcu,  Bartlomiej  Wiczewski, 
Rafał Wielądek and Christos Zavos.    

Statistical assistance was provided by Luisa Boa and Puck Boom, administrative assistance by Erdemia 
Malagrida and Sien Vangompel. 

The report benefitted from comments and suggestions by Isabel Grilo, Charlotte van Hooydonk, Michael 
Stierle, Massimo Suardi, Septimiu Szabo and Luc Tholoniat.  

The  report  was  coordinated  by  Adriana  Reut  under  the  supervision  of  Eric  Ruscher,  Head  of  Unit  and 
approved  by  Lucio  Pench,  Director,  Declan  Costello,  Deputy  Director  General,  and  Maarten  Verwey, 
Director General. 

Questions and comments may be referred to Adriana Reut (adriana.reut@ec.europa.eu). 

iii 

 
 
CONTENTS 

Convergence Report 2022 

Convergence Report 2022 - Technical annex 

1. 

Introduction 

1.1.  ROLE OF THE REPORT 
1.2.  APPLICATION OF THE CRITERIA 

1.2.1.  Compatibility of legislation 
1.2.2.  Price stability 
1.2.3.  Public finances 
1.2.4.  Exchange rate stability 
1.2.5.  Long-term interest rates 
1.2.6.  Additional factors 

2. 

Bulgaria 

2.1. 

Introduction 

LEGAL COMPATIBILITY 
2.1.1. 
2.1.2.  Central Bank independence 
2.1.3.  Prohibition of monetary financing and privileged access 
2.1.4. 
2.1.5.  Assessment of compatibility 

Integration in the ESCB 

2.2.  PRICE STABILITY 

2.2.1.  Respect of the reference value 
2.2.2.  Recent inflation developments 
2.2.3.  Underlying factors and sustainability of inflation 

2.3.  PUBLIC FINANCES 

2.3.1.  Recent fiscal developments 
2.3.2.  Medium-term prospects 

2.4.  EXCHANGE RATE STABILITY 
2.5. 
2.6.  ADDITIONAL FACTORS 

LONG-TERM INTEREST RATES 

2.6.1.  Developments of the balance of payments 
2.6.2.  Market integration 

3.  Czechia 

3.1. 

Introduction 

LEGAL COMPATIBILITY 
3.1.1. 
3.1.2.  Central Bank independence 
3.1.3.  Prohibition of monetary financing and privileged access 
3.1.4. 
3.1.5.  Assessment of compatibility 

Integration in the ESCB 

3.2.  PRICE STABILITY 

3.2.1.  Respect of the reference value 
3.2.2.  Recent inflation developments 
3.2.3.  Underlying factors and sustainability of inflation 

3.3.  PUBLIC FINANCES 

3.3.1.  Recent fiscal developments 
3.3.2.  Medium-term prospects 

3.4.  EXCHANGE RATE STABILITY 
3.5. 
3.6.  ADDITIONAL FACTORS 

LONG-TERM INTEREST RATES 

3.6.1.  Developments of the balance of payments 

1 

3 

5 

5 
8 
8 
8 
12 
16 
18 
19 

23 

23 
23 
23 
24 
24 
25 
25 
25 
25 
26 
29 
29 
30 
32 
33 
33 
34 
36 

41 

41 
41 
41 
42 
42 
43 
43 
43 
43 
44 
47 
47 
48 
49 
50 
51 
52 

v 

3.6.2.  Market integration 

4.  Croatia 

4.1. 

Introduction 

LEGAL COMPATIBILITY 
4.1.1. 
4.1.2.  Central Bank independence 
4.1.3.  Prohibition of monetary financing and privileged access 
4.1.4. 
4.1.5.  Assessment of compatibility 

Integration in the ESCB 

4.2.  PRICE STABILITY 

4.2.1.  Respect of the reference value 
4.2.2.  Recent inflation developments 
4.2.3.  Underlying factors and sustainability of inflation 

4.3.  PUBLIC FINANCES 

4.3.1.  Recent fiscal developments 
4.3.2.  Medium-term prospects 

4.4.  EXCHANGE RATE STABILITY 
4.5. 
4.6.  ADDITIONAL FACTORS 

LONG-TERM INTEREST RATES 

4.6.1.  Developments of the balance of payments 
4.6.2.  Market integration 
SUSTAINABILITY OF CONVERGENCE 

4.7. 

5.  Hungary 

5.1. 

Introduction 

LEGAL COMPATIBILITY 
5.1.1. 
5.1.2.  Central Bank independence 
5.1.3.  Prohibition of monetary financing and privileged access 
5.1.4. 
5.1.5.  Assessment of compatibility 

Integration in the ESCB 

5.2.  PRICE STABILITY 

5.2.1.  Respect of the reference value 
5.2.2.  Recent inflation developments 
5.2.3.  Underlying factors and sustainability of inflation 

5.3.  PUBLIC FINANCES 

5.3.1.  Recent fiscal developments 
5.3.2.  Medium-term prospects 

5.4.  EXCHANGE RATE STABILITY 
5.5. 
5.6.  ADDITIONAL FACTORS 

LONG-TERM INTEREST RATES 

5.6.1.  Developments of the balance of payments 
5.6.2.  Market integration 

6. 

Poland 

6.1. 

Introduction 

LEGAL COMPATIBILITY 
6.1.1. 
6.1.2.  Central Bank independence 
6.1.3.  Prohibition of monetary financing and privileged access 
6.1.4. 
6.1.5.  Assessment of compatibility 

Integration in the ESCB 

6.2.  PRICE STABILITY 

6.2.1.  Respect of the reference value 
6.2.2.  Recent inflation developments 
6.2.3.  Underlying factors and sustainability of inflation 

vi 

53 

57 

57 
57 
57 
57 
57 
57 
57 
57 
58 
58 
61 
61 
62 
64 
65 
66 
67 
68 
71 

79 

79 
79 
79 
80 
81 
82 
82 
82 
82 
83 
86 
86 
87 
89 
90 
91 
92 
93 

97 

97 
97 
97 
98 
99 
100 
100 
100 
100 
101 

 
6.3.  PUBLIC FINANCES 

6.3.1.  Recent fiscal developments 
6.3.2.  Medium-term prospects 

6.4.  EXCHANGE RATE STABILITY 
6.5. 
6.6.  ADDITIONAL FACTORS 

LONG-TERM INTEREST RATES 

6.6.1.  Developments of the balance of payments 
6.6.2.  Market integration 

7. 

Romania 

7.1. 

Introduction 

LEGAL COMPATIBILITY 
7.1.1. 
7.1.2.  Central Bank independence 
7.1.3.  Prohibition of monetary financing and privileged access 
7.1.4. 
7.1.5.  Assessment of compatibility 

Integration in the ESCB 

7.2.  PRICE STABILITY 

7.2.1.  Respect of the reference value 
7.2.2.  Recent inflation developments 
7.2.3.  Underlying factors and sustainability of inflation 

7.3.  PUBLIC FINANCES 

7.3.1.  Recent fiscal developments 
7.3.2.  Medium-term prospects 

7.4.  EXCHANGE RATE STABILITY 
7.5. 
7.6.  ADDITIONAL FACTORS 

LONG-TERM INTEREST RATES 

7.6.1.  Developments of the balance of payments 
7.6.2.  Market integration 

8. 

Sweden 

8.1. 

Introduction 

LEGAL COMPATIBILITY 
8.1.1. 
8.1.2.  Central Bank independence 
8.1.3.  Prohibition of monetary financing and privileged access 
8.1.4. 
8.1.5.  Assessment of compatibility 

Integration in the ESCB 

8.2.  PRICE STABILITY 

8.2.1.  Respect of the reference value 
8.2.2.  Recent inflation developments 
8.2.3.  Underlying factors and sustainability of inflation 

8.3.  PUBLIC FINANCES 

8.3.1.  Recent fiscal developments 
8.3.2.  Medium-term prospects 

8.4.  EXCHANGE RATE STABILITY 
8.5. 
8.6.  ADDITIONAL FACTORS 

LONG-TERM INTEREST RATES 

8.6.1.  Developments of the balance of payments 
8.6.2.  Market integration 

LIST OF TABLES 

2.1.  Bulgaria - Components of inflation 
2.2.  Bulgaria - Other inflation and cost indicators 

103 
103 
104 
106 
106 
107 
108 
109 

113 

113 
113 
113 
114 
115 
115 
115 
115 
116 
117 
120 
120 
121 
122 
123 
124 
126 
127 

131 

131 
131 
131 
132 
132 
133 
133 
133 
133 
134 
138 
138 
138 
140 
141 
142 
143 
144 

25 
25 

vii 

 
 
2.3.  Bulgaria - Budgetary developments and projections (as % of GDP unless indicated 

otherwise) 

2.4.  Bulgaria - Balance of payments 
2.5.  Bulgaria - Market integration 
2.6.  Bulgaria - Allocation of assets by financial sub-sector 
2.7.  Bulgaria - Financing of the economy1) 
3.1.  Czechia - Components of inflation 
3.2.  Czechia - Other inflation and cost indicators 
3.3.  Czechia - Budgetary developments and projections (as % of GDP unless indicated 

otherwise) 

3.4.  Czechia - Balance of payments 
3.5.  Czechia - Market integration 
3.6.  Czechia - Allocation of assets by financial sub-sector 
3.7.  Czechia - Financing of the economy1) 
4.1.  Croatia - Components of inflation 
4.2.  Croatia - Other inflation and cost indicators 
4.3.  Croatia - Budgetary developments and projections (as % of GDP unless indicated 

otherwise) 

4.4.  Croatia - Balance of payments 
4.5.  Croatia - Market integration 
4.6.  Croatia - Allocation of assets by financial sub-sector 
4.7.  Croatia - Financing of the economy1) 
5.1.  Hungary - Components of inflation 
5.2.  Hungary - Other inflation and cost indicators 
5.3.  Hungary - Budgetary developments and projections (as % of GDP unless indicated 

29 
35 
38 
38 
38 
43 
44 

46 
51 
53 
55 
55 
58 
59 

61 
67 
70 
70 
71 
82 
85 

otherwise) 

86 
92 
5.4.  Hungary - Balance of payments 
93 
5.5.  Hungary - Market integration 
94 
5.6.  Hungary - Allocation of assets by financial sub-sector 
95 
5.7.  Hungary - Financing of the economy1) 
100 
6.1.  Poland - Components of inflation 
101 
6.2.  Poland - Other inflation and cost indicators 
6.3.  Poland - Budgetary developments and projections (as % of GDP unless indicated otherwise)  103 
108 
6.4.  Poland - Balance of payments 
109 
6.5.  Poland - Market integration 
110 
6.6.  Poland - Allocation of assets by financial sub-sector 
111 
6.7.  Poland - Financing of the economy1) 
116 
7.1.  Romania - Components of inflation 
7.2.  Romania - Other inflation and cost indicators 
116 
7.3.  Romania - Budgetary developments and projections (as % of GDP unless indicated 

otherwise) 

7.4.  Romania - Balance of payments 
7.5.  Romania - Market integration 
7.6.  Romania - Allocation of assets by financial sub-sector 
7.7.  Romania - Financing of the economy1) 
8.1. 
Sweden - Components of inflation 
8.2. 
Sweden - Other inflation and cost indicators 
8.3. 
Sweden - Budgetary developments and projections (as % of GDP unless indicated 
otherwise) 
Sweden - Balance of payments 
Sweden - Market integration 
Sweden - Allocation of assets by financial sub-sector 
Sweden - Financing of the economy1) 

8.4. 
8.5. 
8.6. 
8.7. 

119 
125 
127 
129 
129 
133 
134 

137 
143 
145 
146 
146 

viii 

 
 
LIST OF GRAPHS 

2.1.  Bulgaria - Inflation criterion 
2.2.  Bulgaria - HICP inflation 
2.3.  Bulgaria - Inflation, productivity and wage trends 
2.4.  Bulgaria - Fiscal stance and its components 
2.5.  Bulgaria - BGN/EUR exchange rate 
2.6.  Bulgaria - Annual effective interest rate spread to 1-M Euribor 
2.7.  Bulgaria - Long-term interest rate criterion 
2.8.  Bulgaria - Long-term interest rates 
2.9.  Bulgaria - Effective exchange rates 
2.10.  Bulgaria - 2020 World Bank's Worldwide Governance Indicators 
2.11.  Bulgaria - Foreign ownership and concentration in the banking sector 
2.12.  Bulgaria - Intra-EU integration in equity and debt portfolio investment 
3.1.  Czechia - Inflation criterion 
3.2.  Czechia - HICP inflation 
3.3.  Czechia - Inflation, productivity and wage trends 
3.4.  Czechia - Fiscal stance and its components 
3.5.  Czechia - CZK/EUR exchange rate 
3.6.  Czechia - 3-M Pribor spread to 3-M Euribor 
3.7.  Czechia - Long-term interest rate criterion 
3.8.  Czechia- Long-term interest rates 
3.9.  Czechia - Effective exchange rates 
3.10.  Czechia - 2020 World Bank's Worldwide Governance Indicators 
3.11.  Czechia - Foreign ownership and concentration in the banking sector 
3.12.  Czechia - Intra-EU integration in equity and debt portfolio investment 
4.1.  Croatia - Inflation criterion 
4.2.  Croatia - HICP inflation 
4.3.  Croatia - Inflation, productivity and wage trends 
4.4.  Croatia - Fiscal stance and its components 
4.5.  Croatia - HRK/EUR exchange rate 
4.6.  Croatia - 3-M Zibor(1) and 3-M NRR(2) spread to 3-M Euribor 
4.7.  Croatia - Long-term interest rate criterion 
4.8.  Croatia - Long-term interest rates 
4.9.  Croatia - Effective exchange rates 
4.10.  Croatia - 2020 World Bank's Worldwide Governance Indicators 
4.11.  Croatia - Foreign ownership and concentration in the banking sector 
4.12.  Croatia - Intra-EU integration in equity and debt portfolio investment 
5.1.  Hungary - Inflation criterion 
5.2.  Hungary - HICP inflation 
5.3.  Hungary - Inflation, productivity and wage trends 
5.4.  Hungary - Fiscal stance and its components 
5.5.  Hungary - HUF/EUR exchange rate 
5.6.  Hungary - 3-M Bubor spread to 3-M Euribor 
5.7.  Hungary - Long-term interest rate criterion 
5.8.  Hungary - Long-term interest rates 
5.9.  Hungary - Effective exchange rates 
5.10.  Hungary - 2020 World Bank's Worldwide Governance Indicators 
5.11.  Hungary - Foreign ownership and concentration in the banking sector 
5.12.  Hungary - Intra-EU integration in equity and debt portfolio investment 
6.1.  Poland - Inflation criterion 
6.2.  Poland - HICP inflation 
6.3.  Poland - Inflation, productivity and wage trends 
6.4.  Poland - Fiscal stance and its components 
6.5.  Poland - PLN/EUR exchange rate 
6.6.  Poland - 3-M Wibor spread to 3-M Euribor 

25 
26 
28 
31 
32 
33 
33 
33 
36 
37 
39 
39 
43 
44 
46 
48 
50 
50 
50 
51 
53 
54 
56 
56 
58 
58 
60 
64 
64 
65 
65 
66 
68 
69 
71 
71 
82 
83 
85 
88 
89 
90 
90 
91 
92 
93 
95 
96 
100 
101 
102 
105 
106 
106 

ix 

 
6.7.  Poland - Long-term interest rate criterion 
6.8.  Poland - Long-term interest rates 
6.9.  Poland - Effective exchange rates 
6.10.  Poland - 2020 World Bank's Worldwide Governance Indicators 
6.11.  Poland - Foreign ownership and concentration in the banking sector 
6.12.  Poland - Intra-EU integration in equity and debt portfolio investment 
7.1.  Romania - Inflation criterion 
7.2.  Romania - HICP inflation 
7.3.  Romania - Inflation, productivity and wage trends 
7.4.  Romania - Fiscal stance and its components 
7.5.  Romania - RON/EUR exchange rate 
7.6.  Romania - 3-M Robor spread to 3-M Euribor 
7.7.  Romania - Long-term interest rate criterion 
7.8.  Romania - Long-term interest rates 
7.9.  Romania - Effective exchange rates 
7.10.  Romania - 2020 World Bank's Worldwide Governance Indicators 
7.11.  Romania - Foreign ownership and concentration in the banking sector 
7.12.  Romania - Intra-EU integration in equity and debt portfolio investment 
8.1. 
8.2. 
8.3. 
8.4. 
8.5. 
8.6. 
8.7. 
8.8. 
8.9. 
8.10.  Sweden - 2020 World Bank's Worldwide Governance Indicators 
8.11.  Sweden - Foreign ownership and concentration in the banking sector 
8.12.  Sweden - Intra-EU integration in equity and debt portfolio investment 

Sweden - Inflation criterion 
Sweden - HICP inflation 
Sweden - Inflation, productivity and wage trends 
Sweden - Fiscal stance and its components 
Sweden - SEK/EUR exchange rate 
Sweden - 3-M Stibor spread to 3-M Euribor 
Sweden - Long-term interest rate criterion 
Sweden - Long-term interest rates 
Sweden - Effective exchange rates 

LIST OF BOXES 

1.1.  Article 140 of the Treaty 
1.2.  Assessment of price stability and the reference value 
1.3.  Excessive deficit procedure 
1.4. 
1.5.  A reinforced approach to ERM II participation by means of upfront policy commitments by 

Fiscal policy in the EU since COVID-19 crisis 

the applicant Member States 

1.6.  Data for the interest rate convergence 
1.7. 

The Macroeconomic Imbalance Procedure (MIP) 

107 
107 
109 
110 
111 
111 
116 
116 
119 
122 
123 
123 
123 
124 
126 
128 
130 
130 
133 
134 
136 
139 
140 
141 
141 
142 
144 
145 
147 
147 

7 
9 
13 
16 

17 
20 
20 

x 

 
 
 
 
 
 
Convergence Report 2022 

(prepared in accordance with Article 140(1) of the Treaty) 

 
 
Report 

 
 
Convergence Report 2022 

Technical annex 

 
 
1. 

INTRODUCTION 

1.1. 

ROLE OF THE REPORT 

The  euro  was  introduced  on  1  January  1999  by 
eleven Member States. Since then, Greece (2001), 
Slovenia 
(2007),  Cyprus  and  Malta  (2008), 
Slovakia (2009), Estonia (2011), Latvia (2014) and 
Lithuania (2015) have also adopted the euro. 

Member  States  for  which  the  Council  has  not  yet 
decided that they fulfil the necessary conditions for 
the  adoption  of  the  euro  are  referred  to  as 
"Member States with a derogation". Article 140 of 
the  Treaty  lays  down  provisions  and  procedures 
for  examining 
the  convergence  situation  of 
Member  States  with  a  derogation  (Box  1.1).  At 
least  once  every  two  years,  or  at  the  request  of  a 
Member  State  with  a  derogation,  the  Commission 
and  the  European  Central  Bank  (ECB)  prepare 
Convergence  Reports  for  such  Member  States. 
Denmark negotiated an opt-out arrangement before 
the adoption of the Maastricht Treaty (1) and does 
not  participate  in  the  third  stage  of  EMU.  Until 
Denmark  indicates  that  it  wishes  to  participate  in 
the  third  stage  and  adopt  the  euro,  it  is  not  the 
subject of an assessment as to whether it fulfils the 
necessary conditions for such a participation.  

In  2020,  the  Commission  and  the  ECB  adopted 
their latest regular Convergence Reports (2). None 
of the Member States assessed in those reports was 
deemed  to  meet  the  necessary  conditions  for 
adopting the euro.  

In  2022,  two  years  have  elapsed  since  the  last 
regular  reports  were  prepared.  Denmark  has  not 
expressed  a  wish  to  enter  the  third  stage  of 
EMU (3).  Therefore,  this  convergence  assessment 
covers  Bulgaria,  Czechia,  Croatia,  Hungary, 
Poland,  Romania  and  Sweden.  This  Commission 
Staff Working Document is a Technical  Annex to 
the  Convergence  Report  2022  and  includes  a 
detailed 
the  progress  with 
convergence,  as  required  by  Article  140(1)  of  the 
Treaty. 

assessment  of 

(1)  Protocol  (No  16)  on  certain  provisions  relating 

to 

Denmark. 

(2)  European  Commission,  Convergence  Report  2020, 
COM(2020)  237  final,  10  June  2020;  European  Central 
Bank, Convergence Report 2020, June 2020. 

(3)  The United Kingdom has withdrew from the EU since the 

May 2018 Convergence Report. 

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  the  Member  States. 
Unprecedented action taken at the level of the EU 
and  the  individual  Member  States  cushioned  the 
impact of the crisis and led to a robust recovery in 
2021.  In  particular,  the  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.  In  parallel,  the  EU  mobilised  its 
budget,  in  particular  with  the  EU  temporary 
instrument  to  Support  to  mitigate  Unemployment 
Risks  in  an  Emergency  (SURE),  to  mitigate  the 
impact  of  the  crisis  on  workers  and  companies. 
The ECB also took a broad set of monetary policy 
measures 
financing 
conditions  for  all  sectors  of  the  economy  in  order 
to  support  economic  activity  and  safeguard 
medium-term price stability. 

to  preserve 

favourable 

is 

The  roll-out  of  the  Recovery  and  Resilience 
Facility  (RRF),  which 
the  centrepiece  of 
NextGenerationEU,  is  further  bolstering  the  EU’s 
resilience  through  large-scale  financial  support  to 
Member  States  of  up  to  EUR  723.8  billion  (in 
current  prices)    in  grants  (EUR  338  billion)  and 
loans (EUR 385.8 billion)  to finance reforms and 
investments,  especially  those  for  the  green  and 
digital transitions.  At the same time, the  stronger-
than-expected  recovery  in  2021,  supply  chain 
bottlenecks  and  a  surge 
in  energy  prices 
contributed  to  a  sharp  rise  in  inflation  throughout 
the year and in 2022. 

Russia’s invasion of Ukraine on 24 February 2022 
forced  a  re-assessment  of  the  outlook  for  the  EU 
economy,  which  was  hitherto  expected  to  expand 
vigorously in 2022 and 2023. The crisis mainly has 
dealt a new supply-side shock to an economy that 
was  already  facing  inflationary  pressures.  It  has 
weakened 
reinforced 
recovery  prospects  and 
upward  price  pressures,  while  further  underlining 
the  need  for  higher  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 

5 

 
                                                           
linkages with Russia and the provision of frontline 
assistance  to  people  fleeing  Ukraine.  On  18  May 
2022,  the  Commission  proposed  a  REPowerEU 
plan,  for  which  the  RRF  will  be  a  key  tool.  The 
plan 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.  

On  23  May  2022,  the  Commission  also  presented 
its  European  Semester  spring  2022  package. 
Member  States  should  primarily  focus  on  the 
timely implementation of the RRPs. Therefore, the 
Commission proposes to the Council to address to 
all  Member  States  with  an  approved  RRP:  i)  a 
recommendation on fiscal policy, including fiscal-
structural 
a 
recommendation  on  the  implementation  of  the 
RRP  and  the  cohesion  policy  programmes;  iii)  a 
recommendation on energy policy in line with the 
objectives  of  REPowerEU;  iv)  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 

relevant; 

ii) 

The  successive  economic  shocks  triggered  by  the 
COVID-19  pandemic  and  Russia’s  invasion  of 
Ukraine  have 
the 
convergence assessment presented in this report. 

implications  for 

important 

in 

criterion.  Differences 

In  particular,  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 
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,  national 
authorities  have  taken  a  range  of  fiscal  and 
regulatory  measures  to  cushion  the  impact  of 
these 
higher  energy  prices.  While  some  of 
measures,  such  as  social 
to  most 
vulnerable households, do not have a direct impact 
on  consumer  prices,  others  have  a  more  direct 
impact  on  the  inflation  convergence  assessment. 
These  include  price  caps  in  wholesale  or  retail 
energy  markets,  changes  in  indirect  taxes  on 
subsidies  on  energy 
energy  products,  and 
production  and  consumption.  In  addition,  long-
term interest rates were influenced, initially, by the 

transfers 

Convergence Report 2022 - Technical annex 

Chapter 1 - Introduction 

policy  measures 
taken 
markets  and  preserve 
and, 
conditions 
expectations  and 
monetary tightening across Member States. 

financial 
to  stabilise 
financing 
favourable 
inflation 
later,  by  higher 
the  differentiated  paths  of 

The  2020  economic  recession  and  the  fiscal 
response to the COVID-19 pandemic led to a sharp 
increase 
in  government  deficits  and  debt. 
Government  deficits  in  most  Member  States  rose 
to  above  the  3%  of  GDP  reference  value  of  the 
Treaty.  In  2021,  government  deficits  and  debt 
improved  and  fifteen  Member  States  had  deficits 
higher  than  3%  of  GDP.  In  March  2020,  the 
European  Commission,  with  the  agreement  of  the 
EU  Ministers  of  Finance  of  the  Member  States, 
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 
it  as  of  2024  were  met.  The 
deactivate 
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, 
for 
designing  a  detailed  path  for  fiscal  policy (4). 
straightforward 
These 
implications for the assessment of the criterion on 
the  government  budgetary  position  presented  in 
this report. 

conclusions 

including 

have 

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 cut-
off  date  of  the  report  (18  May  2022),  which 
the  Treaty-defined  calculation 
together  with 
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 
the  economic  convergence 
indicators  are  affected  by  the  crisis  triggered  by 
invasion  as  well  as  other  ongoing 
Russia’s 

to  which 

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

6 

                                                           
Convergence Report 2022 - Technical annex 

Chapter 1 - Introduction 

economic  developments  is  fully  captured  in  the 
economic  projections  for  2022  and  2023,  namely 
the  Commission  services’  Spring  2022  Forecast, 
which  are  used  to  assess  the  sustainability  of 
convergence. 

Russia’s  invasion  of  Ukraine,  and  as  such,  it  is 
surrounded by higher than usual uncertainty (5).  

The  remainder  of  the  first  chapter  presents  the 
methodology  used  for  the  application  of  the 

The  forward-looking  elements  of  this  report  are 
based on inputs from the Commission Spring 2022 
Forecast,  which  was  published  on  16  May  2022. 
This forecast is the first comprehensive assessment 
from  the  Commission  of  the  likely  economic 
effects in 2022 and 2023 of the crisis triggered by 

(5)  Beyond  the  forecast  horizon,  the  crisis  could  also  have  a 
significant  effect  on  the  economic  structures  of  the 
Member States with a derogation, for instance the flow of 
refugees could affect their demography and labour force in 
the  medium  term,  although  at  this  stage  this  is  subject  to 
considerable  uncertainty.  Assessing  this  impact  is  beyond 
the scope of this report. 

7 

Box 1.1: Article 140 of the Treaty"1. At least once every two years, or at the request of a Member State with a derogation, the Commission and the European Central Bank shall report to the Council on the progress made by the Member States with a derogation in fulfilling their obligations regarding the achievement of economic and monetary union. These reports shall include an examination of the compatibility between the national legislation of each of these Member States, including the statutes of its national central bank, and Articles 130 and 131 and the Statute of the ESCB and of the ECB. The reports shall also examine the achievement of a high degree of sustainable convergence by reference to the fulfilment by each Member State of the following criteria: — 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, — 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), — 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, — the durability of convergence achieved by the Member State with a derogation and of its participation in the exchange-rate mechanism being reflected in the long-term interest-rate levels. The four criteria mentioned in this paragraph and the relevant periods over which they are to be respected are developed further in a Protocol annexed to the Treaties. The reports of the Commission and the European Central Bank shall also take account of the results of the integration of markets, the situation and development of the balances of payments on current account and an examination of the development of unit labour costs and other price indices. 2. After consulting the European Parliament and after discussion in the European Council, the Council shall, on a proposal from the Commission, decide which Member States with a derogation fulfil the necessary conditions on the basis of the criteria set out in paragraph 1, and abrogate the derogations of the Member States concerned. The Council shall act having received a recommendation of a qualified majority of those among its members representing Member States whose currency is the euro. These members shall act within six months of the Council receiving the Commission's proposal. The qualified majority of the said members, as referred to in the second subparagraph, shall be defined in accordance with Article 238(3)(a). 3. If it is decided, in accordance with the procedure set out in paragraph 2, to abrogate a derogation, the Council shall, acting with the unanimity of the Member States whose currency is the euro and the Member State concerned, on a proposal from the Commission and after consulting the European Central Bank, irrevocably fix the rate at which the euro shall be substituted for the currency of the Member State concerned, and take the other measures necessary for the introduction of the euro as the single currency in the Member State concerned."                                                            
 
 
  
 
 
Convergence Report 2022 - Technical annex 

Chapter 1 - Introduction 

assessment criteria. Chapters 2 to 8 examine, on a 
country-by-country  basis,  the  fulfilment  of  the 
convergence criteria and other requirements in the 
order  in  which  they  appear  in  Article  140(1)  (see 
Box  1.1).  The  cut-off  date  for  the  statistical  data 
included  in  this  Convergence  Report  was  18  May 
2022.  

1.2.  APPLICATION OF THE CRITERIA 

In  accordance  with  Article  140(1)  of  the  Treaty, 
the  Convergence  Reports  shall  examine 
the 
compatibility  of  national  legislation  with  Articles 
130  and  131  of  the  Treaty  and  the  Statute  of  the 
European System of Central Banks (ESCB) and of 
the European Central Bank. The reports shall also 
examine  the  achievement  of  a  high  degree  of 
sustainable  convergence  by  reference 
the 
fulfilment of the four convergence criteria dealing 
with price stability, public finances, exchange rate 
stability  and  long  term  interest  rates  as  well  as 
some  additional  factors.  The  four  convergence 
criteria  are  developed  further 
in  a  Protocol 
annexed  to  the  Treaty  (Protocol  No  13  on  the 
convergence criteria). 

to 

1.2.1.  Compatibility of legislation 

In  accordance  with  Article  140(1)  of  the  Treaty, 
the  legal  examination  includes  an  assessment  of 
compatibility 
a  Member  State’s 
legislation,  including  the  statute  of  its  national 
central  bank,  and  Article  130  and  131  of  the 
Treaty. This assessment mainly covers three areas. 

between 

  First,  the  independence  of  the  national  central 
bank  and  of  the  members  of  its  decision-
making  bodies,  as  laid  down  in  Article  130, 
must  be  assessed.  This  assessment  covers  all 
issues  linked  to  a  national  central  bank's 
institutional, financial independence and to the 
personal  independence  of  the  members  of  its 
decision-making bodies.  

financing 

  Second,  in  accordance  with  Articles  123  and 
124  of  the  Treaty,  the  compliance  of  the 
national  legislation  is  verified  against  the 
prohibition  of  monetary 
and 
privileged access. The prohibition of monetary 
financing is laid down in Article 123(1) of the 
Treaty,  which  prohibits  overdraft  facilities  or 
any  other  type  of  credit  facility  with  the  ECB 
or the central banks of Member States in favour 
of  Union 
institutions,  bodies,  offices  or 
agencies,  central  governments,  regional,  local 
or  other  public  authorities,  other  bodies 

governed by public law, or public undertakings 
of  Member  States;  and  the  purchase  directly 
from these public sector entities by the ECB or 
central  banks  of  debt  instruments.  As  regards 
the  prohibition  on  privileged  access  as  set  out 
in  Article  124,  the  central  banks,  as  public 
authorities,  may  not  take  measures  granting 
privileged  access  by  the  public  sector  to 
financial  institutions  if  such  measures  are  not 
based on prudential considerations.  

  Third,  in  accordance  with  Article  131,  the 
integration of the national central bank into the 
ESCB  has  to  be  examined,  in  order  to  ensure 
that  at  the  latest  by  the  moment  of  euro 
adoption,  the  objectives  of  the  national  central 
bank are compatible  with the objectives of the 
ESCB  as  formulated  in  Article  127  of  the 
Treaty. The national provisions on the tasks of 
the  national  central  bank  are  assessed  against 
the  relevant  rules  of  the  Treaty  and  the 
ESCB/ECB Statute. 

1.2.2.  Price stability 

The  price  stability  criterion  is  defined  in  the  first 
indent  of  Article  140(1)  of  the  Treaty:  “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  stipulates  that  “the  criterion  on 
price stability […] shall mean that a Member State 
has a price  performance that  is sustainable and an 
average rate of inflation, observed over a period of 
one  year  before  the  examination,  that  does  not 
exceed by more than 1.5 percentage points that of, 
at  most,  the  three  best  performing  Member  States 
in  terms  of  price  stability.  Inflation  shall  be 
measured by means of the consumer price index on 
a comparable basis, taking into account differences 
in national definitions”.  

Since  national  consumer  price  indices  (CPIs) 
diverge substantially in terms of concepts, methods 
and  practices, 
the 
appropriate  means to  meet the Treaty requirement 
that  inflation  must  be  measured  on  a  comparable 
basis. To this end, the Council adopted on   

they  do  not  constitute 

8 

Convergence Report 2022 - Technical annex 

Chapter 1 - Introduction 

(Continued on the next page) 

9 

Box 1.2: Assessment of price stability and the reference valueThe numerical part of the price stability criterion implies a comparison between a Member State's average price performance and a reference value.  A Member State’s average rate of inflation is measured by the percentage change in the unweighted average of the last 12 monthly indices relative to the unweighted average of the 12 monthly indices of the previous period, rounded to one decimal. This measure captures inflation trends over a period of one year as requested by the provisions of the Treaty. Using the commonly used inflation rate – calculated as the percentage change in the consumer price index of the latest month over the index for the equivalent month of the previous year – would not meet the one year requirement. The latter measure may also vary importantly from month to month because of exceptional factors.  The reference value is calculated as the unweighted average of the average rates of inflation of, at most, the three best-performing Member States in terms of price stability plus 1.5 percentage points. The outcome is rounded to one decimal. While in principle the reference value could also be calculated on the basis of the price performance of only one or two best performing Member States in terms of price stability, it has been existing practice to select the three best performers. Defining the reference value in a relative way (as opposed to a fixed reference value) allows to take into account the effects of a common shock that affects inflation rates across all Member States.  As Article 140(1) of the Treaty refers to 'Member States' and does not make a distinction between euro-area and other Member States, the Convergence Reports select the three best performers from all Member States – EU-15 for the Convergence Reports before 2004, EU-25 for the reports between 2004 and 2006, EU-27 for reports between 2007 and 2013, EU-28 for reports between 2014 and 2018 and EU-27 for the reports between 2020 and 2022.  The notion of 'best performer in terms of price stability' is not defined explicitly in the Treaty. It is appropriate to interpret this notion in a non-mechanical manner, taking into account the state of the economic environment and country-specific factors at the time of the assessment. In particular, an outlier analysis should be performed to identify those countries whose inflation rates cannot be seen as meaningful benchmarks. These 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. Outliers were identified in the Convergence Reports of 2004, 2010, 2013, 2014 and 2016. In the 2004 report, Lithuania was not taken into account in the calculation of the reference value because its negative rate of inflation, which was due to country-specific economic circumstances, was significantly diverging from that of the other Member States, making Lithuania a de facto outlier that could not be considered as 'best performer' in terms of price stability. Its 12-month average inflation rate was 2.3 percentage points below that of the euro area (2.1%). In 2010, in an environment characterised by exceptionally large common shocks (the global economic and financial crisis and the associated sharp fall in commodity prices), a significant number of countries faced episodes of negative inflation rates (the euro-area average inflation rate in March 2010 was only slightly positive, at 0.3%). In this context, Ireland was excluded from the best performers on the ground that its average inflation rate (-2.3% in March 2010) deviated by a very wide margin from that of the euro area, mainly due to the severe economic downturn in that country. In 2013, Greece was excluded from the best performers, as its inflation rate was 1.8 percentage points lower than the euro area average of 2.2%, mainly reflecting the severe adjustment needs and the exceptional situation of the Greek economy. In 2014, Greece, Bulgaria and Cyprus were identified as outliers. In April 2014, the 12-month average inflation rate of Greece, Bulgaria and Cyprus were respectively -1.2%, -0.8% and -0.4%, significantly deviating from the euro area average of 1.0%. In case of Greece and Cyprus, negative inflation mainly reflected the severe adjustment needs and exceptional situation of the economy. In case of Bulgaria, it was due to an unusually strong   
 
 
   
 
Convergence Report 2022 - Technical annex 

Chapter 1 - Introduction 

Box (continued) 

10 

(Continued on the next page) 

combination of disinflationary factors, inter alia, a good harvest, administrative energy price reductions and declining import prices. In 2016, it was warranted to identify Cyprus and Romania as outliers, as their inflation rates deviated by a wide margin from the euro area average. In April 2016, the 12-month average (negative) inflation rates of Cyprus and Romania were respectively 1.9 percentage points and 1.4 percentage points below the euro area inflation rate of 0.1%. In case of Cyprus, deeply negative inflation mainly reflected the adjustment needs and exceptional situation of the economy. In case of Romania, it was mainly due to large VAT rate reductions. Table 1 lists the reference value in the Convergence Reports issued since 1998.  In April 2022, the three Member States with the lowest 12-month average inflation rates are: Malta (2.1%), Portugal (2.6%) and France (3.2%). The next Member States with the lowest average inflation are Finland (3.3%), Greece (3.6%) and Denmark (3.6%). The Commission’s assessment suggests that it is warranted to identify Malta and Portugal as outliers, as their inflation rates a.) deviated by a wide margin from the euro-area average and b.) were driven by country-specific factors that limit their scope to act as meaningful benchmarks for other Member States. In past Convergence Reports those Member States that had an inflation rate of 1.5 percentage points or more below the euro area were generally considered as outliers.  In addition, the inflation performances of Malta and Portugal were driven by country-specific factors. In the case of Malta, the country-specific factors that are reflected in the comparatively low average inflation rate include broadly stable energy prices in a context surging international oil and gas prices and larger changes in the weights used to calculate the HICP than in most other EU Member States in 2021. The absence of energy price inflation in Malta was 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.            Table 1:Inflation reference value in previous and current Convergence ReportsConvergence ReportCut-off monthThree bestReferenceEuro area averageadoption dateperformers 1) 2)value 3)inflation rate 4)1998January 1998Austria, France, Ireland2.71.52000March 2000Sweden, France, Austria2.41.42002April 2002United Kingdom, France, Luxembourg 5)3.32.42004August 2004Finland, Denmark, Sweden2.42.12006 May March 2006Sweden, Finland, Poland2.62.32006 DecemberOctober 2006Poland, Finland, Sweden2.82.22007March 2007Finland, Poland, Sweden3.02.12008March 2008Malta, Netherlands, Denmark3.22.52010March 2010Portugal, Estonia, Belgium 1.00.32012March 2012 Sweden, Ireland, Slovenia3.12.82013April 2013Sweden, Latvia, Ireland2.72.22014April 2014Latvia, Portugal, Ireland1.71.02016April 2016Bulgaria, Slovenia, Spain0.70.12018March 2018Cyprus, Ireland, Finland1.91.42020March 2020Portugal, Cyprus, Italy1.81.12022April 2022France, Finland, Greece4.94.41) EU15 until April 2004; EU25 between May 2004 and December 2006; EU27 between January 2007 and June 2013; EU28 between July 2013    and January 2020; EU27 (without UK) from February 2020 onwards.2) In case of equal rounded average inflation for several potential best performers, the ranking is determined on the basis of unrounded data.3) Reference values are only computed at the time of Convergence Reports. All calculations of the reference value    between the Convergence Reports are purely illustrative.4) Measured by the percentage change in the arthmetic average of the latest 12 monthly indices relative to the     arithmetic average of the 12 monthly indices of the previous period.5) Based on revised data, Germany would replace Luxembourg as one of the three Member States with the lowest    12-month average inflation in April 2002. This change would not affect the price and long-term interest rate reference values in April 2002.Sources: Eurostat and European Commission calculations. 
 
   
 
Convergence Report 2022 - Technical annex 

Chapter 1 - Introduction 

Box (continued) 

legal  basis  for 

23 October 1995 a framework regulation (6) setting 
the  establishment  of  a 
the 
harmonised  methodology  for  compiling  consumer 
price  indices  in  the  Member  States.  This  process 
resulted  in  the  production  of  the  Harmonised 
Indices  of  Consumer  Prices  (HICPs),  which  are 
used  for  assessing  the  fulfilment  of  the  price 
stability criterion.  

in 

inflation 

the  percentage  change 

As has been the case in past convergence reports, a 
is 
Member  State’s  average  rate  of 
measured  by 
the 
arithmetic  average  of  the  last  12  monthly  indices 
relative to the arithmetic average of the 12 monthly 
indices of the previous period. The reference value 
is  calculated  as  the  arithmetic  average  of  the 
average  rate  of  inflation  of  the 
'best-
performing  EU  Member  States  in  terms  of  price 
stability' plus 1.5 percentage points (see Box 1.2). 

three 

Accordingly, the reference value is currently 4.9%, 
based on the data of France (3.2%), Finland (3.3%) 
and  Greece  (3.6%)    over  the  12-month  period 
covering  May  2021-April  2022.  Malta  and 
Portugal  were  identified  as  outliers,  as  their 
inflation rates deviated by a wide margin from the 
reflecting  country-specific 
euro  area  average 
economic circumstances (see Box 1.2).  

The  Protocol on the convergence criteria  not only 
requires  Member  States  to  have  achieved  a  high 

(6)  Council  Regulation  (EC)  No  2494/95  of  23  October  1995 
concerning  harmonised  indices  of  consumer  prices  (OJ  L 
257,  27.10.1995,  pp.  1-4),  amended  by  Regulations  (EC) 
No  1882/2003  and  No  596/2009  of 
the  European 
Parliament and of the Council, and repealed by Regulation 
(EU)  2016/792  of  the  European  Parliament  and  of  the 
Council. 

degree  of  price  stability  but  also  calls  for  a  price 
performance  that  is  sustainable.  The  requirement 
of sustainability aims at ensuring that the degree of 
price  stability  and  inflation  convergence  achieved 
in previous years will be maintained after adoption 
of  the  euro.  This  deserves  particular  attention  as 
sustained divergences in price developments in one 
or  more  euro  area  Member  States  can  lead  to  the 
emergence  of  competitiveness  losses  that  must  be 
corrected via painful adjustment processes and can 
trigger negative spillover effects on other Member 
States.  

than  reflecting 
temporary 

Inflation sustainability implies that the satisfactory 
inflation  performance  must  essentially  be  due  to 
the  adequate  behaviour  of  input  costs  and  other 
in  a 
factors 
influencing  price  developments 
the 
structural  manner,  rather 
influence  of  cyclical  or 
factors. 
Therefore, this Technical Annex also takes account 
of  the  role  of  the  macroeconomic  situation  and 
cyclical  position  in  the  inflation  performance,  of 
developments  in  unit  labour  costs  as  a  result  of 
trends 
labour  productivity  and  nominal 
compensation  per  head,  and  of  developments  in 
import  prices 
to  assess  how  external  price 
impacted  on  domestic 
developments  have 
inflation.  Similarly,  the  impact  of  administered 
prices  and  indirect  taxes  on  headline  inflation  is 
also considered.  

in 

From  a  forward-looking  perspective,  the  report 
includes  an  assessment  of  medium-term  prospects 
for price developments. The analysis of factors that 
have an impact on the inflation outlook  – cyclical 
conditions, labour market developments and credit 
growth  –  is  complemented  by  a  reference  to  the 

11 

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 of 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. Portugal’s vulnerability was magnified by the aviation-based nature of its tourism industry. Aviation-based tourism was hit by the COIVID-19 crisis more severely and more durably than the road-based tourism prevalent in most other Member States. The relative weakness in Portugal’s recovery has had a lasting dampening effect on inflation in services, particularly in sectors related to tourism with Portugal posting, for instance, the lowest rate of inflation in the EU in the hotel and accommodation sector.                                                             
 
   
 
 
Convergence Report 2022 - Technical annex 

Chapter 1 - Introduction 

On  23  May  2022,  the  Commission  adopted  a 
report  under  Article  126(3)  of  the  TFEU  for  18 
Member  States,  including  for  Bulgaria,  Czechia, 
Hungary  and  Poland (9).  Overall,  taking  into 
account  all  relevant  factors  as  appropriate,  the 
analysis  in  the  report  suggests  that  the  deficit 
criterion as defined in the Treaty and in Regulation 
(EC)  No  1467/1997  is  not  fulfilled  by  Bulgaria, 
Czechia, Hungary and Poland. Taking into account 
all relevant factors, the analysis also suggests that 
the  debt  criterion  as  defined  in  the  Treaty  and  in 
Regulation  (EC)  No  1467/1997  is  not  fulfilled  by 
Hungary.  The  Commission  considered,  within  its 
assessment of all relevant factors, that compliance 
with  the  debt  reduction  benchmark  could  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 
its 
exceptional 
In 
that 
conclusions, 
the 
COVID-19  pandemic  continues 
to  have  an 
extraordinary  macroeconomic  and  fiscal  impact 
that,  together  with  the  invasion  of  Ukraine  by 
Russia,  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 EDP should not be taken in spring 2022. 

conditions. 
economic 
the  Commission  noted 

While  Romania  had  become  subject 
to  an 
Excessive  Deficit  Procedure  (EDP)  due  to  the 
planned  non-compliance  with  the  deficit  criterion 
in 2019, the Commission has not proposed to open  
other  Excessive  Deficit  Procedures  since  the 
outbreak  of  the  COVID-19  pandemic.  In  the 
context  of  the  European  Semester,  the  fiscal 
recommendations 
for  2022  and  2023  were 
consistent  with  the  principles  of  cross-country 
differentiation,  while also taking into account the 
quality of public finances (see Box 1.4). 

most  recent  Commission  services’  forecast  of 
inflation. That forecast can subsequently be used to 
assess whether the Member State is likely to meet 
the  reference  value  also  in  the  months  ahead (7). 
Medium-term inflation prospects are also assessed 
by  reference  to  the  economies'  key  structural 
characteristics,  including  the  functioning  of  the 
labour and product markets. 

1.2.3.  Public finances 

the 
The  convergence  criterion  dealing  with 
government  budgetary  position  is  defined  in  the 
second  indent  of  Article  140(1)  of  the  Treaty  as 
“the  sustainability  of  the  government  financial 
this  will  be  apparent  from  having 
position; 
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 convergence assessment in the budgetary area 
is  thus  directly  linked  to  the  excessive  deficit 
procedure which is specified in Article 126 of the 
Treaty  and  further  clarified  in  the  Stability  and 
Growth  Pact  (see  Box  1.3  for  further  information 
on the excessive deficit procedure as strengthened 
by  the  2011  reform  of  the  Stability  and  Growth 
Pact).  The  details  of 
the  excessive  deficit 
procedure  are  defined  in  Regulation  1467/97  as 
amended in 2005 and 2011 which sets out the way 
in  which  government  deficit  and  debt  levels  are 
assessed to determine whether an excessive deficit 
exists,  under  Article  126  of  TFEU.  The 
convergence  assessment  in  the  budgetary  area  is 
therefore  judged  by  whether  the  Member  State  is 
subject  to  a  Council  decision  under  126(6) on  the 
existence of an excessive  deficit (8). 

(7)  Based on the Commission services’ Spring 2022 Forecast, 
the inflation reference value is forecast to stand at 6.3% in 
December 2022. 

(8)  The definitions of the government deficit and debt used in 
this  report  are  in  accordance  with  the  excessive  deficit 
procedure, as was the case in previous convergence reports. 
These  definitions  are  laid  out  in  the  amended  Council 
Regulation  (EC)  No  479/2009.  In  particular,  government 
debt  is  general  government  consolidated  gross  debt  at 
nominal value.  Information regarding the excessive deficit 
procedure  and  its  application  to  different  Member  States 
since 
at: 
http://ec.europa.eu/economy_finance/economic_governanc
e/sgp/deficit/index_en.htm. 

found 

2002 

can 

be 

(9)  Croatia  was  not  discussed  in  this  report.  While  its 
government debt at end 2021 was also above 60% of GDP, 
the general government deficit in 2021 and 2022 was  (and 
is projected to remain) below 3% of GDP and it respected 
the debt reduction benchmark in 2021.  

12 

                                                           
                                                           
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13 

Box 1.3: Excessive deficit procedureThe excessive deficit procedure (EDP) is specified in Article 126 of the Treaty, the associated Protocol on the excessive deficit procedure and Council Regulation (EC) No 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure (1). Together, these determine the steps to be followed to reach a Council decision on the existence and correction of an excessive deficit, which forms the basis for the assessment of compliance with the convergence criterion on the government budgetary position. The debt criterion in Article 126(2) of the Treaty was operationalised in the 2011 amendment of Council Regulation (EC) No 1467/97. Article 126(1) states that Member States shall avoid excessive government deficits. The Commission is required to monitor the development of the budgetary situation and of the stock of government debt in the Member States with a view to identifying gross errors (Article 126(2)). Compliance with budgetary discipline is examined by the Commission on the basis of the following two criteria:  whether the ratio of the planned or actual government deficit to gross domestic product exceeds a reference value, specified in the Protocol on the EDP as 3% of GDP, unless:  the ratio has declined substantially and continuously and reached a level that comes close to the reference value;  or, alternatively, the excess over the reference value is exceptional and temporary and the ratio remains close to the reference value;  whether the ratio of government debt to gross domestic product exceeds a reference value, specified in the Protocol on the EDP as 60% of GDP, unless the ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace. According to the EDP Protocol, the Commission provides the statistical data for the implementation of the procedure. Member States have to provide data on government deficits, government debt, nominal GDP and other associated variables twice a year, before 1 April and before 1 October (2). Eurostat validates the submitted data subject to its compliance with ESA2010 (3) rules and related Eurostat decisions. Under Article 126(3), the Commission prepares a report if a Member State does not fulfil the requirements under one or both of the above criteria. The report takes into account whether the government deficit exceeds government investment expenditure and all other relevant factors. These include developments related to the medium-term economic position (4), the medium-term budgetary position (5), the medium-term government debt position (6), and other factors which, in the opinion of the Member State concerned, are relevant and which the Member State has put forward.  The Council and the Commission make a balanced overall assessment of the relevant factors. Those factors shall be taken into account in the steps leading to the decision on the existence of an excessive deficit when assessing compliance on the basis of the debt criterion. When assessing compliance on the basis of the deficit criterion in a country with a debt ratio exceeding the reference value, those factors shall be taken into account in the steps leading to the decision on the existence of an excessive deficit subject to the double                                                            (1) OJ L 209, 2.8.1997, p. 6. Regulation as amended by Regulation (EC) No 1056/2005 (OJ L 174, 7.7.2005, p. 5). (2) Council Regulation (EC) No 479/2009 on the application of the Protocol on the excessive deficit procedure (OJ L 145, 10.06.2009, p1), as amended. (3) Regulation (EU) No 549/2013 of the European Parliament and of the Council of 21 May 2013 on the European system of national and regional accounts in the European Union, OJ L 174, 26.6.2013, p 1–727). (4) In particular, potential growth, including the various contributions, cyclical developments, and the private sector net savings position. (5) In particular, the record of adjustment towards the medium-term budgetary objective, the level of the primary balance and developments in primary expenditure, the implementation of policies in the context of the prevention and correction of excessive macroeconomic imbalances and in the context of the common growth strategy of the Union, as well as the overall quality of public finances, in particular the effectiveness of national budgetary frameworks. (6) In particular, debt dynamics and sustainability, including risk factors, the maturity structure and currency denomination of the debt, stock-flow adjustment and its composition, accumulated reserves and other financial assets, guarantees (in particular those linked to the financial sector), and implicit liabilities related to ageing and private debt, to the extent that it may represent a contingent implicit liability for the government.  
 
 
  
 
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14 

condition that the deficit is close to the reference value and its excess over it is temporary. Due consideration is foreseen for pension reforms introducing a multi-pillar system including a mandatory, fully-funded pillar and the net cost of the publicly managed pillar. In the next step of the procedure, the Economic and Financial Committee (EFC) formulates an opinion on the Commission report within two weeks of its publication (Article 126(4), Article 3.1 of Regulation 1467/97). If the Commission considers that an excessive deficit exists or may occur, the Commission addresses an opinion to the Council (Article 126(5)). Then, on the basis of the Commission’s proposal and the overall assessment the Council decides whether an excessive deficit exists (Article 126(6)).  If the Council decides that an excessive deficit exists, it has to issue without delay a recommendation to the Member State concerned to correct the deficit within a given period (Article 126(7)). According to Regulation 1467/97, the Council recommendation should specify the deadline for the correction of the excessive deficit, the annual budgetary targets, and a maximum deadline of six months for effective action to be taken by the Member State concerned. Within this deadline, the Member State concerned shall report to the Council on actions taken. The report shall include targets for government expenditure, revenue and discretionary measures consistent with the Council's recommendation, as well as information on the measures taken and the nature of those envisaged to achieve the targets.  If effective action has been taken in compliance with a recommendation under Article 126(7) and, compared with the economic forecasts underlying the recommendation, unexpected adverse economic events with major unfavourable consequences for government finances occur subsequent to its adoption, the Council may decide, on a recommendation from the Commission, to adopt a revised recommendation under the same article. The revised recommendation may extend the deadline for the correction of the excessive deficit. In the case of severe economic downturn for the euro area or the EU as a whole, the Council may also decide, on recommendation by the Commission, to adopt a revised recommendation under Article 126(7), provided that this does not endanger fiscal sustainability in the medium term. If the Council establishes lack of effective action in response to its recommendations, the Council adopts a decision under Article 126(8) on the basis of a Commission recommendation immediately after the expiration of the deadline for taking action (or at any time thereafter when monitoring of the action taken by the Member State indicates that action is not being implemented or is proving to be inadequate). The provisions of Article 126(9 and 11) on enhanced Council surveillance and sanctions in case of non-compliance, as well as the enforcement mechanisms introduced in 2011, are not applicable to Member States with a derogation (that is, those that have not yet adopted the euro), which is the case of the Member State considered in this report. Following a Council decision establishing, under Article 126(8), that the Member State did not take effective action in response to a Council recommendation under Article 126(7), the Council, on recommendation by the Commission, addresses to Member States with a derogation a new recommendation under Article 126(7).  When, in the view of the Council, the excessive deficit in the Member State concerned has been corrected, the Council abrogates its decision on the existence of an excessive deficit, again on the basis of a Commission recommendation (Article 126(12)). More information about the EU fiscal surveillance framework can be found in the Vade Mecum on the Stability and Growth Pact, European Economy Institutional Paper 101, April 2019: https://ec.europa.eu/info/publications/vade-mecum-stability-and-growth-pact-2019-edition_en   
 
 
 
 
 
 
  
 
 
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15 

Box 1.4: Fiscal policy in the EU since COVID-19 crisisOn 20 March 2020, the Commission issued a Communication where it considered that the conditions for activating the general escape clause of the Stability and Growth Pact (SGP) were fulfilled. The EU Finance Ministers endorsed the Commission’s view on 23 March 2020. The general escape clause can be activated in case of a severe economic downturn in the euro area or the EU as a whole. Specifically, in the preventive arm of the SGP, Regulation (EC) 1466/97, Articles 5(1) and 9(1), states that “in periods of severe economic downturn for the euro area or the Union as a whole, Member States may be allowed temporarily to depart from the adjustment path towards the medium-term budgetary objective, provided that this does not endanger fiscal sustainability in the medium term”. For the corrective arm, Regulation (EC) 1467/97, Articles 3(5) and 5(2), stipulates that in the case of a severe economic downturn, the Council may decide, on a recommendation from the Commission, to adopt a revised fiscal trajectory for Member States under an excessive deficit procedure. The general escape clause is a provision introduced with the SGP reform of 2011 (six-pack reform), in the wake of the global financial crisis, and was untested before the COVID-19 crisis. It allows for a collective departure from the normal requirements of the Pact. This has facilitated the deployment of large fiscal support to the healthcare sector, households and firms to cope with the pandemic and the related restrictions to economic activities. No new Excessive Deficit Procedure (EDP) has been opened since the activation of general escape clause. The situation created by the COVID-19 crisis first and by the Russia's invasion of Ukraine in February 2022 create exceptional uncertainty, including for designing a detailed path for fiscal policy. A bold, coordinated fiscal policy response to the pandemic, unprecedented support from new EU instruments and the accommodative monetary policy have helped the EU economy weather the COVID-19 crisis and are underpinning the recovery. However, public deficits and debts increased significantly. In 2020, the EU aggregate deficit rose to 6.8% of GDP from 0.6% in 2019. It then fell to 4.7% of GDP in 2021 and, based on the Commission’s Spring 2022 Economic Forecast, it is expected to fall further in 2022 (to 3.6%) thanks to the improved cyclical conditions and the phasing out of the emergency temporary measures related to COVID-19, while measures to mitigate to impact of the energy crisis and to provide assistance to people fleeing Ukraine have a deficit-increasing impact in 2022. The aggregate EU government debt rose by 12.5 percentage points in 2020, to 90% of GDP(1), and is expected to fall to around 87% by the end of 2022. For 2022, the Council provided qualitative recommendations on the 2021 Stability and Convergence Programmes in June 2021. The fiscal recommendations were differentiated on the basis of debt levels: • Member States with high debt were recommended to use the Recovery and Resilience Facility (RRF) to finance additional investment in support of the recovery, while pursuing a prudent fiscal policy and preserving nationally financed investment. Italy and Portugal were also recommended to limit the growth of nationally-financed current expenditure (net of discretionary revenue measures). • Member States with low/medium debt were recommended to pursue/maintain a supportive fiscal stance and preserve nationally financed investment. Lithuania, Latvia, Bulgaria and Croatia were also recommended to keep the growth of nationally financed current expenditure under control.  For the purpose of these recommendations, all the Member States with a derogation were classified in the low/medium debt group.  In 2022, based on the Commission’s Spring 2022 Economic Forecast and including the information incorporated in their 2022 Convergence Programme, the fiscal stance in 2022 is projected to be supportive in Bulgaria, Croatia, Poland and Sweden, as recommended by the Council. On the other hand, the fiscal stance in 2022 is projected to be broadly neutral in Czechia and Hungary, while the Council recommended a supportive stance. All the Member States with a derogation, except Czechia, plan to preserve their nationally-financed investment, as recommended by the Council. In the case of Czechia, nationally-financed investment                                                            (1) Non-consolidated for intergovernmental loans.  
 
 
   
 
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Box (continued) 

1.2.4.  Exchange rate stability 

third 

The Treaty refers to the exchange rate criterion in 
indent  of  Article  140(1)  as  “the 
the 
observance  of  the  normal  fluctuation  margins 
provided  for  by  the  exchange-rate  mechanism  of 
the  European  Monetary  System,  for  at  least  two 
years, without devaluing against the euro”. 

Article  3  of  the  Protocol  on  the  convergence 
criteria  stipulates:  “The  criterion  on  participation 
in  the  exchange  rate  mechanism  of  the  European 
Monetary  System  […]  shall  mean  that  a  Member 
State has respected the normal fluctuation margins 
provided  for  by  the  exchange-rate  mechanism  of 

the  European  Monetary  System  without  severe 
tensions  for  at  least  the  last  two  years  before  the 
examination. In particular, the Member State shall 
not  have  devalued  its  currency’s  bilateral  central 
rate  against  the  euro  on  its  own  initiative  for  the 
same period” (10). Based on the Council Resolution  

(10)  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  ERM  II  by  the  Informal  ECOFIN  Council, 
Athens, 5 April 2003. 

16 

is projected to provide a contractionary contribution to the fiscal stance of 0.6 percentage point in 2022. In Croatia and Bulgaria, the growth in nationally-financed primary current expenditure (net of new revenue measures) in 2022 is projected to provide a significant expansionary contribution to the overall fiscal stance (of 1.0 and 1.4 percentage points, respectively). These significant expansionary contributions are only partially due to the measures to address the economic and social impact of the increase in energy prices and the costs to offer temporary protection to displaced persons from Ukraine. Therefore, on the basis of current Commission estimates, Croatia and Bulgaria do not sufficiently keep under control the growth of nationally-financed current expenditure in 2022.  In its Communication on the 2022 European Semester spring package of 23 May 2022, the Commission considered that the Union was not yet out of a period of severe economic downturn and the conditions to maintain the general escape clause in 2023 and to deactivate it as of 2024 were met. This consideration was made in the context of war in Europe, unprecedented energy price hikes and continued supply chain disturbances, with heightened uncertainty and strong downside risks to the economic outlook. The Commission invited the Council to endorse this conclusion to provide clarity to Member States.   The Commission called for fiscal policy to be prudent in 2023, while standing ready to react to the evolving economic situation. Fiscal policy should combine higher investment with controlling the growth in nationally-financed primary current expenditure, while allowing automatic stabilisers to operate and providing temporary and targeted measures to mitigate the impact of the energy crisis and to provide assistance to people fleeing from Russia's invasion of Ukraine. Full and timely implementation of the RRPs is key to achieving higher levels of investment. Moreover, Member States’ fiscal plans for 2023 should be anchored by prudent medium-term adjustment paths reflecting fiscal sustainability challenges associated with high debt-to GDP levels that have increased further due to the pandemic. The Commission recommended that fiscal policies in 2023 should continue to be appropriately differentiated across Member States:  High-debt Member States should ensure prudent fiscal policy, in particular by limiting the growth of nationally-financed current expenditure below medium-term potential output growth, taking into account continued temporary and targeted support to households and firms (subject to State Aid rules) most vulnerable to energy price hikes and to people fleeing Ukraine.   Low/medium-debt Member States should specifically ensure that the growth of nationally-financed current expenditure is in line with an overall neutral policy stance, taking into account continued temporary and targeted support to households and firms (subject to State Aid rules) most vulnerable to energy price hikes and to people fleeing Ukraine.  All Member States should stand ready to adjust current spending to the evolving situation and expand public investment for the green and digital transitions and for energy security, including by making use of the RRF, REPowerEU and other EU funds.  
                                                           
 
   
 
 
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17 

Box 1.5: A reinforced approach to ERM II participation by means of upfront policy commitments by the applicant Member StatesParticipating in ERM II is an essential step for a Member State with a derogation on the way to fulfil the exchange rate criterion and to euro adoption. Fulfilling the exchange rate criterion through the smooth participation in ERM II is provided for in Article 140 of the TFEU, Protocol No 13 to the TFEU on the convergence criteria and the Resolution of the European Council on the establishment of an exchange-rate mechanism in the third stage of economic and monetary union adopted in Amsterdam on 16 June 1997 (1). In accordance with this framework, ERM II entry of a Member State with a derogation requires a mutual agreement of all ‘ERM II parties’. These include the finance ministers of euro area Member States, the European Central Bank, and the finance ministers and the central bank governors of the non-euro area Member States participating in ERM II. The European Commission provides analytical support to the ERM II process, but has no voting right and no right of initiative in the ERM II entry process. In July 2018, learning from past episodes of economic overheating in ERM II and the euro-area crisis, the ERM II parties clarified the modalities of a reinforced approach for future ERM II participation with a view of ensuring a smooth transition to, and participation in, ERM II, in their statement on Bulgaria’s path towards ERM II, stating that this approach would apply to all Member States wishing to join ERM II from then onwards (2). The reinforced approach was confirmed in the later statement of the ERM II parties of July 2019 on Croatia’s path towards ERM II participation (3). According to this reinforced approach, the applicant Member State and ERM II parties agree on a number of policy commitments to be implemented by the former before joining ERM II. This package of so called prior policy commitments aims at maximising the country’s chances to operate smoothly in ERM II. It is country-specific, targeted and covers policy areas that are highly relevant for a smooth transition to and participation in ERM II including, for instance institutional quality, governance, the financial sector, fiscal policy, or the business environment. In particular, as being part of the euro area now also implies for a Member State to be part of the Banking Union’s pillars of the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM), the applicant Member State is expected to enter into ‘close cooperation’ with the ECB for banking supervision purposes at the latest by the time of its participation in ERM II. A Member State with a derogation can join the Banking Union before its euro adoption via an arrangement called ‘close cooperation’. Entering in close cooperation with the ECB means that the significant credit institutions established in the country concerned are supervised by the ECB via the involvement of the domestic national supervisor. Entering in close cooperation also implies participation in the Single Resolution Mechanism, including the Single Resolution Fund. In terms of process, the ECB and the Commission monitor the fulfilment of the prior-commitments undertaken by the applicant Member States in the respective areas of competence of the ECB and the Union and in close cooperation with the Member State concerned. The two institutions regularly inform ERM II parties on the progress made with the prior-commitments. A comprehensive assessment of the applicants’ banking sector is carried out by the ECB as part of the process of establishing close cooperation with the ECB. This includes an asset quality review and a stress test that aims at assessing whether banks are fundamentally sound. The results of the comprehensive assessment are made public on the ECB’s website (4).                                                            (1) https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A31997Y0802%2803%29  (2) See: https://www.consilium.europa.eu/en/press/press-releases/2018/07/12/statement-on-bulgaria-s-path-towards-erm-ii-participation/  (3) See: https://www.consilium.europa.eu/en/press/press-releases/2019/07/08/statement-on-croatia-s-path-towards-erm-ii-participation/  (4) The results of the comprehensive assessment of six Bulgarian banks are available at:  https://www.bankingsupervision.europa.eu/press/pr/date/2019/html/ssm.pr190726~1b474e3467.en.html   
 
 
  
 
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Box (continued) 

participate  in  ERM  II  (see  Box  1.5  for  further 
information on ERM II participation). The relevant 
period for assessing exchange rate  stability in this 
Technical Annex is 19 May 2020 to 18 May 2022.  

1.2.5.  Long-term interest rates 

The  fourth  indent  of  Article  140(1)  of  the  Treaty 
that  “the  durability  of  convergence 
requires 
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  stipulates  that  “the 
criterion  on  the  convergence  of  interest  rates  […] 
shall mean that, observed over a period of one year 
before the examination, a Member State has had an 
average  nominal  long-term  interest  rate  that  does 
not  exceed  by  more  than  two  percentage  points 
that of, at most, the three best performing Member  

on  the  establishment  of  the  ERM  II (11),  the 
European  Monetary  System  has  been  replaced  by 
the  Exchange  Rate  Mechanism  II  upon 
the 
introduction of the euro, and the  euro has become 
the centre of the mechanism. 

in  auxiliary 

In  its  assessment  of  the  exchange  rate  stability 
criterion,  the  Commission  takes  into  account 
indicators  such  as 
developments 
foreign  reserve  developments  and  short-term 
interest  rates,  as  well  as  the  role  of  policy 
measures, 
exchange 
interventions, and international financial assistance 
wherever  relevant,  in  maintaining  exchange  rate 
stability. 

including 

foreign 

The  assessment  of  this  criterion  verifies  the 
participation  in  ERM  II  and  examines  exchange 
rate  behaviour  within  the  mechanism.  Currently 
two  of 
the  Member  States  assessed  in  this 
Convergence Report, namely Bulgaria and Croatia,  

(11)  97/C 236/03 of 16 June 1997, OJ C 236, 2.8.1997, p.5. 

18 

In line with the long-standing ERM II practice, ERM II parties also expect applicant Member States to take further policy commitments at the moment of joining ERM II with the aim of achieving a high degree of sustainable economic convergence by the time the euro will be adopted. At the time of writing this report, Bulgaria, Croatia and Denmark were the only non-euro-area Member States participating in ERM II. Bulgaria and Croatia joined the ERM II on 10 July 2020 after having completed their respective prior policy commitments (5). Both countries established close cooperation with the ECB. In addition, the prior policy commitments of the Bulgarian authorities covered measures related to the macroprudential framework, the supervision of the non-banking financial sector, the insolvency framework, the anti-money laundering framework and the governance of state-owned enterprises (6). The additional prior policy commitments of the Croatian authorities covered measures related to the macroprudential framework, the anti-money laundering framework, the collection, production and dissemination of statistic, public sector governance and firms’ administrative and financial burden (7). At the time of ERM II entry, the Bulgarian and Croatian authorities also committed to pursue sound economic policies with the aim of preserving economic and financial stability and achieving a high degree of sustainable economic convergence. In particular, the Bulgarian authorities committed to implement specific policy measures (the so-called post-ERM II entry commitments) on the non-banking financial sector, state-owned enterprises, the insolvency framework and the anti-money laundering framework (8). The Croatian authorities committed to implement specific policy measures on the anti-money laundering framework, the business environment, state-owned enterprises and the insolvency framework (9).                                                             (5) For the details on the decision of the ERM II parties on Croatia and Bulgaria see:  https://ec.europa.eu/commission/presscorner/detail/en/IP_20_1321  (6) For more details on the prior-commitments taken by Bulgarian authorities see:  https://www.consilium.europa.eu/media/36125/st11119-en18.pdf  (7) For the details on the decision of the ERM II parties on Croatia and Bulgaria see:  https://ec.europa.eu/commission/presscorner/detail/en/IP_20_1321  (8) See: https://www.ecb.europa.eu/pub/pdf/annex/ecb.pr200710_annex~29156bba37.en.pdf  (9) See: https://www.ecb.europa.eu/pub/pdf/annex/ecb.pr200710_1_annex.en.pdf                                                             
 
  
 
 
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States in terms of price stability. Interest rates shall 
be measured on the basis of long-term government 
bonds  or  comparable  securities, 
into 
account  differences  in  national  definitions”  (see 
Box 1.6). 

taking 

labour  market  integration  and  the  development  of 
the  balance  of  payments.  The  analysis  of  the 
development  of  unit  labour  costs  and  other  price 
indices, which is also prescribed by Article 140 of 
the Treaty, is covered in the price stability section. 

the  criterion  on 

the  assessment  of 

the 
For 
convergence of interest rates, yields on benchmark 
long-term bonds have been taken, using an average 
rate over the latest 12 months. The reference value 
for April 2022 is calculated as the simple average 
of  the  average  long-term  interest  rates  in  France 
(0.3%),  Finland  (0.2%)  and  Greece  (1.4%)  plus  2 
percentage  points,  yielding  a  reference  value  of 
2.6%. 

1.2.6.  Additional factors 

into  account  other 

Article 140(1) TFEU also requires that the reports 
take 
to 
economic 
integration  and  convergence.  These 
additional  factors  include  financial,  product  and 

factors  relevant 

The  assessment  of  additional  factors  gives  an 
important indication of a Member State's ability to 
integrate into the euro area without difficulties. As 
regards  the  balance  of  payments,  the  focus  is  on 
the  situation  and  development  of  the  external 
balance (12). Market integration is assessed through  

(12)  The  external  balance  is  defined  as  the  combined  current 
and  capital  account  (net  lending/borrowing  vis-à-vis  the 
rest of the world). This concept permits in particular to take 
full  account  of  external transfers  (including  EU  transfers), 
which  are  partly  recorded  in  the  capital  account.  It  is  the 
concept closest to the current account as defined when the 
Maastricht Treaty was drafted. 

19 

Box 1.6: Data for the interest rate convergenceThe fourth indent of Article 140(l) of the Treaty requires that the durability of nominal convergence and exchange rate stability in Member States should be assessed by reference to long-term interest rates. Article 4 of the Protocol on the convergence criteria adds that these “Interest rates shall be measured on the basis of long-term government bonds or comparable securities, taking into account differences in national definitions”. Article 5 of the Protocol requires that the Commission should provide the statistical data used for the application of the convergence criteria. However, in the context of the interest rate criterion, the ECB has developed the criteria for harmonising the series of 10-year benchmark bond yields on behalf of Eurostat and collects the data from the central banks. The selection of bonds for inclusion in this series is based on the following criteria:  issued by central government;  a residual maturity as close as possible to 10 years;  adequate liquidity, which is the main selection criterion; the choice between a single benchmark or the simple average of a sample is based on this requirement;  fixed coupon;  yield gross of tax. For sixteen Member States, the residual maturity of the benchmark bond is at least 9.5 years. For eleven Member States, the residual maturity of the benchmark bond is below 9.5 years, in particular for Lithuania and Luxembourg with residual maturity below 3 and 5 years respectively. All yields are calculated on the basis of secondary market rates, where available. For Czechia, Germany and Spain a basket of bonds is used, while a single benchmark bond is used in twenty-four Member States.  Data used in this Report can be found on Eurostat ("Maastricht criterion bond yields (mcby): EMU convergence criterion bond yields", code: tec00097). The same series is also published by the ECB's Statistical Data Warehouse (code IRS.M.Country Code.L.L40.CI.0000.Currency Code.N.Z) and in a dedicated page in the ECB website with additional information: http://www.ecb.europa.eu/stats/financial_markets_and_interest_rates/long_term_interest_rates/html/index. en.html.                                                            
 
 
  
 
 
Convergence Report 2022 - Technical annex 

Chapter 1 - Introduction 

(Continued on the next page) 

20 

Box 1.7: The Macroeconomic Imbalance Procedure (MIP) Key elements of the MIP A key lesson from the economic and financial crisis was that the economic governance framework in the EU needed to be further strengthened to better support macroeconomic stability, including in aspects beyond fiscal policy. The Macroeconomic Imbalance Procedure (MIP) responds to that need by aiming at the detection, prevention and correction of macroeconomic imbalances that could harm economic stability in an EU country, the euro area, or the EU as a whole. It was a key element of the legislative package (the "Six-Pack") to enhance the governance structures in the EU adopted in 2011.  No simple and mechanistic criteria are available for the identification of macroeconomic imbalances because drivers of macroeconomic instability are multi-dimensional phenomena whose severity needs to be assessed along several aspects and taking into account also country-specific features, notably linked to the adjustment capacity of the economy. For this reason, the MIP relies on an annual two-step approach for the identification of imbalances. In a first step for the identification of imbalances under the MIP, the Alert Mechanism Report (AMR) identifies the Member States that require more in-depth investigation on whether they may be affected by macroeconomic imbalances. The AMR builds on the economic reading of a scoreboard of economic and financial indicators with indicative thresholds. The scoreboard covers different challenges Member States may be faced with and comprises fourteen indicators of external imbalances and competitiveness developments, internal imbalances, and the employment situation (1). In particular, it encompasses variables that the economic literature associates with crisis episodes. Beyond the scoreboard, the analysis in the AMR takes into account additional information and assessment tools, as well as previous in-depth assessments at country level. In a second step, the analysis carried out in the in-depth reviews (IDRs) for selected Member States provides the basis for the identification of imbalances, and their severity, by the Commission. IDR analysis makes use of updated and country-specific information and analytical tools developed by the Commission services.  Both ‘imbalances’ and ‘excessive imbalances’ imply possible recommendations by the Council upon Commission proposal, which have so far been integrated in the single package of Country-Specific Recommendations (CSRs) under the European Semester. The identification of ‘excessive imbalances’ implies a stronger surveillance process, possibly leading to an Excessive Imbalance Procedure. The latter provides a framework underpinned by a corrective action plan designed by the concerned Member State, endorsed by the Commission and the Council and monitored by the Commission, and including the possibility of sanctions for euro area Member States in case of repeated non-compliance. Whilst the Excessive Imbalance Procedure has never been launched, Member States experiencing excessive imbalances have tended to receive more policy recommendations than other Member States. Over the last two years, the approach to CSRs, including MIP-relevant ones, was subject to some streamlining as economic policy coordination refocused first on the response to the COVID-19 pandemic crisis and subsequently on the preparation and implementation of the recovery and resilience plans to address the green and digital transition challenges for our economies and societies. The review of the EU economic governance framework, encompassing the MIP, is ongoing (2).                                                              (1) The variables are: current account, net international investment position, real effective exchange rates, unit labour cost, and export market shares; private sector debt, general government debt, private sector credit flow, change in total financial sector liabilities, house prices; unemployment rate, activity rate, long-term and youth unemployment. (2) Communication from the Commission to the European Parliament, the Council, the European Central Bank, the European Economic and Social Committee, the Committee of the Regions, “The EU economy after COVID-19: implications for economic governance”, (COM(2021) 662 final).  
 
 
   
 
Convergence Report 2022 - Technical annex 

Chapter 1 - Introduction 

Box (continued) 

trade,  foreign  direct  investment  and  a  smooth 
functioning  of  the  internal  market.  Moreover, 
progress  in  financial  integration  is  examined, 
together  with  the  main  characteristics,  structures 
and  trends  of  the  financial  sector.  Given  that 
Member  States  which  adopt 
the  euro  also 
participate  in  the  banking  union,  developments  in 
national banking sectors are specifically looked at 
as well. 

is  aligned  with 

Starting  with  the  2012  Convergence  Report,  the 
convergence  assessment 
the 
broader  European  Semester  approach  which  takes 
the  economic  policy 
an 
challenges 
fiscal 
sustainability,  competitiveness,  financial  market 
stability and economic growth. 

look  at 
facing  EMU 

in  ensuring 

integrated 

The  section  on  additional  factors  makes  reference 
to  the  surveillance  of  macroeconomic  imbalances 
under  the  Macroeconomic  Imbalance  Procedure, 
which  was  adopted  in  December  2011  as  one  of 
the  key  elements  of  the  legislative  package  (the 
"Six-Pack")  to  enhance  the  governance  structures 
into  the 
in  EMU,  and 
assessment (see Box 1.7). 

its  results 

integrates 

21 

The 2022 Alert Mechanism Report (AMR) and In-Depth Reviews (IDR) In its latest AMR from November 2021, the Commission concluded that IDRs were warranted for 12 Member States, which coincided with the ones that had been identified with imbalances or excessive imbalances in the previous annual MIP cycle. Three of those Member States are covered in this Convergence Report (Croatia, Romania, and Sweden). On the basis of the most recent IDRs, in May 2022, the Commission concluded that Croatia is no longer experiencing imbalances while Romania and Sweden continue experiencing imbalances (3).                                                             (3) Communication from the Commission to the European Parliament, the Council, the European Central Bank, the European Economic and Social Committee, the Committee of the Regions and the European Investment Bank “2022 European Semester – Spring Package”, (COM(2022) 600 final).  
   
 
 
2. 

BULGARIA 

2.1. 

LEGAL COMPATIBILITY 

2.1.1.  Introduction 

The  legal  basis  for  the  Bulgarska  Narodna  Banka 
(BNB – central bank of Bulgaria), the Law on the 
Bulgarian National Bank (the BNB Law) of 1997, 
has  been  amended  since  the  2020  Convergence 
Report.  Bulgarian  authorities  have  amended  the 
BNB Law to remedy certain  incompatibilities and 
imperfections  highlighted  in  the  Commission's 
2020  Convergence  Report (13).  In  particular,  it 
concerns  issues  flagged  in  previous  convergence 
reports in the section on central bank independence 
and  prohibition  of  monetary 
financing  and 
privileged access. Other issues remain unresolved. 
Therefore, certain comments provided in the 2020 
report are repeated also in this year's assessment. 

2.1.2.  Central Bank independence 

Interest  Prevention 

The  Conflict  of 
and 
Ascertainment  Act  of  2008,  which  regarding  the 
possibility to dismiss the Governor of the BNB had 
to  be  brought  in  line  with  Article  14.2  of  the 
ESCB/ECB  Statute,  was  fully  repealed  and 
replaced  by  the  Act  on  Corruption  Counteraction 
and  Eviction  of  Illegally  Acquired  Property  of 
2018 (14).  Article  80(1)  of  the  Act  on  Corruption 
Counteraction  and  Eviction  of  Illegally  Acquired 
Property  was  supplemented  and  now  explicitly 
provides  that  the  ascertainment  of  a  conflict  of 
interest  by  an  enforceable  instrument  shall  be  a 
ground  for  release  from  office,  unless  otherwise 
provided  for  in  the  Constitution  or  the  Statute  of 
the European System of Central Banks and of the 
European  Central  Bank.  This  provision 
is 
compatible  with  Article  14.2  of  the  ESCB/ECB 
Statute. 

Pursuant  to  Article  12(1)  of  the  BNB  Law,  the 
the  National 
Governor  shall  be  elected  by 
Assembly.  The  National  Assembly  has  taken  the 
view  that  it  has  the  power  to  annul  or  amend  its 
decisions,  including  decisions  under  Article  12(1) 
of  the  BNB  Law.  The  National  Assembly  has 
substantiated this assertion by stating that pursuant 
to  a  Constitutional  Court  decision  of  26  February 
1993, 
the  Bulgarian  Constitution  does  not 
explicitly  prohibit  the  National  Assembly  from 

(13)  SG No. 12/2021 12.02.2021 
(14)  SG No. 7/19.01.2018. 

amending  or  annulling 
its  decisions.  Such 
understanding  would  allow  the  dismissal  of  the 
Governor  under  conditions  other 
those 
mentioned  in  Article  14.2  of  the  ESCB/ECB 
Statute.  It  should  be  ensured  that  the  Governor, 
when  properly  elected  or  appointed,  may  not  be 
dismissed  under  conditions  other 
those 
mentioned  in  Article  14.2  of  the  ESCB/ECB 
Statute. 

than 

than 

the 

Article  13(2)  of  the  BNB  Law  foresees  that  the 
Governor  of  the  BNB  shall  swear  an  oath  before 
the Parliament.  The content of the  oath laid down 
in paragraph one of the same provision refers inter 
alia  to  abiding  by  law  and  to  contribute  to  the 
performance  of  the  functions  of  the  BNB.  Article 
13(1) was amended to provide explicitly that upon 
taking office, the Governor, the Deputy Governors 
and  the  other  three  members  of  the  Governing 
Council  shall  be  sworn  in  to  contribute  to  the 
independent  performance  of 
functions 
entrusted  to  the  Bank.  However,  the  imperfection 
in  this  provision  has  only  been  partially  solved. 
Since the Governor, the Deputy Governors and the 
other three members of the Governing Council are 
involved  in  the  performance  of  ESCB-related 
tasks,  any  oath  should  make  a  clear  reference  to 
the central bank independence under Article 130 of 
the TFEU. The Governor of the BNB acts in dual 
capacity  as  a  member  of  BNB’s  decision-making 
bodies and of the relevant decision-making bodies 
of  the  ECB.  Article  13  of  the  BNB  Law  needs  to 
be adapted to reflect the status and the obligations 
and duties of the Governor of the BNB as member 
of the relevant decision-making bodies of the ECB. 
The oath as it stands is an imperfection and should 
be remedied. 

Article  44(1)  second  sentence  of  the  BNB  Law 
refers  to  the  public  institutions  and  bodies  not 
having  the  right  to  influence  the  BNB,  the 
Governor  and  the  members  of  the  Governing 
Council. The  wording should be  further improved 
by  referring  to  the  wording  of  Article  130  of  the 
TFEU, which states that public authorities may not 
seek  to  influence  the  members  of  national  central 
banks’ decision-making bodies. 

Article  3  of  the  BNB  Law  providing  that  “in  the 
formulation of the general outlines of the monetary 
policy, the BNB and the Council of Ministers shall 
inform  each  other”  has  been  repealed.  Thus,  the 

23 

                                                           
Convergence Report 2022 - Technical annex 

Chapter 2 - Bulgaria 

incompatibility  in  the  area  of  independence,  with 
Article  130  of  the  TFEU  and  Article  7  of  the 
ESCB/ECB has been solved. 

2.1.4.  Integration in the ESCB 

Objectives 

The secondary objective of the BNB (Article 2(2) 
of the BNB Law) is compatible with the Treaty on 
the Functioning of the European Union. 

Article 2(1) of the BNB Law correctly reflects that 
the  primary  objective  of  the  BNB  is  to  maintain 
price  stability.  However,  as  from  the  day  that 
Bulgaria adopts the euro, the latter will replace the 
national  currency  (lev)  in  accordance  with  Article 
140 (3) of the TFEU. The reference to the wording 
‘through  ensuring  the  stability  of  the  national 
currency’ will become obsolete as from that day.  

The  incompatibilities  in  the  BNB  Law  are  linked 
to the following ESCB/ECB tasks: 

  absence  of  a  general  reference  to  the  BNB  as 
an  integral  part  of  the  ESCB  (Article  1(1)  of 
the  BNB  Law)  and  to  its  subordination  to  the 
ECB’s legal acts (Articles 16 (1) and (2) and 60 
of the BNB Law); 

  definition  of  monetary  policy  and  monetary 
functions,  operations  and  instruments  of  the 
ESCB (Articles 2(1) and (3), 16(4) and (5), 28, 
29,  30,  31,  32,  33,  35,  38,  41  and  61  of  the 
BNB Law); 

  conduct of foreign exchange operations and the 
definition  of  foreign  exchange  rate  policy 
(Articles 20(1), 28, 29, 30, 31, 32 of the  BNB 
Law); 

 

right to authorise the issue of banknotes and the 
volume of coins (Articles 2(5), 16(9), 24 to 27 
of the BNB Law); 

  non-recognition  of  the  role  of  the  ECB  in  the 
field  of  international  cooperation  (Articles  5, 
16(12) and 37(4) of the BNB Law); 

  ECB's right to impose sanctions (Article 61, 62 

of the BNB Law). 

There are also numerous imperfections regarding: 

  non-recognition  of  the  role  of  the  ECB  in  the 
functioning  of  the  payment  systems  (Articles 
2(4) and 40(1) of the BNB Law); 

2.1.3.  Prohibition  of  monetary  financing  and 

privileged access 

in 

and 

Article  45(1)  of  the  BNB  Law  provides  that  the 
BNB  shall  not  extend  credits  and  guarantees, 
including through purchase of debt instruments, to 
the  Council  of  Ministers,  municipalities,  other 
institutions, 
municipal 
government 
organisations  and  undertakings 
the  public 
sector, European Union institutions, bodies, offices 
or agencies, the central government, regional, local 
or  other  public  authorities,  other  bodies  governed 
by  public  law  or  public  sector  entities  of  EU 
Member  States.  The 
list  of  national  entities 
referred to in Article 45(1) is an imperfection and 
should  be  amended  with  a  view  to  including  the 
national public entities mentioned in Article 123(1) 
of  the  TFEU  and  Article  21.1  of  the  ESCB/ECB 
Statute. 

Article  45(3)  of  the  BNB  Law  provides  that  the 
BNB  shall  not  purchase  in  the  primary  and 
secondary  markets  public  debt  instruments.  This 
paragraph is inconsistent with Article 45(1) of the 
BNB Law and with Article 123 of the TFEU given 
the  word  ‘direct’  refers  to  the  prohibition  to 
purchase  debt  instruments  on  the  primary  market 
only.  Purchases  on  the  secondary  market  are  not 
prohibited  unless  they  qualify  as  a  circumvention 
of  the  objective  of  Article  123  of  the  TFEU.  For 
this reason, the wording ‘and secondary” in Article 
45(3)  should  be  removed.  In  addition,  since  the 
first  paragraph  of  Article  45  of  the  BNB  Law 
already covers the prohibition to buy directly debt 
instruments,  i.e.  on  the  primary  market,  the  third 
paragraph’s  content  becomes  redundant  after 
adjustment. 

Pursuant  to  Article  45(2)  in  conjunction  with 
Article 33(2) of the BNB Law, Article 45(1) of the 
BNB  Law  does  not  apply  to  the  extension  of 
credits  to  state-owned  and  municipal  banks  in 
emergency  cases  of  liquidity  risk  that  may  affect 
the  stability  of  the  banking  system.  The  scope  of 
this  exemption  should  be  amended  to  be  fully 
consistent  with  the  wording  of  Article  123(2)  of 
the  TFEU  and  Article  21.3  of  the  ESCB/ECB 
Statute. 

24 

Convergence Report 2022 - Technical annex 

Chapter 2 - Bulgaria 

  non-recognition of the role of the ECB and the 
EU  in  the  collection  of  statistics  (Article  4(1) 
and 42 of the BNB Law); 

above  the  reference  value.  The  12-month  average 
inflation  rate  is  projected  to  remain  above  the 
reference value in the months ahead. 

  non-recognition  of  the  role  of  the  ECB  and  of 
the  Council  in  the  appointment  of  the  external 
auditor (Article 49(4) of the BNB Law); 

  absence  of  an  obligation  to  comply  with  the 
Eurosystem's regime for the financial reporting 
of  NCB  operations  (Article  16(11),  46  and  49 
of the BNB Law). 

Tasks 

2.1.5.  Assessment of compatibility 

remedy 

authorities 

the  efforts  of 
The  Commission  welcomes 
Bulgarian 
the 
to 
incompatibilities  and  imperfections  in  comparison 
its  previous  2020  Convergence  Report. 
to 
However, the BNB Law is not yet fully compatible 
with  Article  131  of  the  TFEU  as  regards  central 
bank  independence,  the  prohibition  of  monetary 
financing  and  the  integration  in  the  ESCB  at  the 
time of euro adoption. 

2.2. 

PRICE STABILITY 

2.2.1.  Respect of the reference value 

The 12-month average inflation rate, which is used 
for  the  convergence  assessment,  was  above  the 
reference value at the time of the last convergence 
assessment  of  Bulgaria  in  2020.  It  then  decreased 
to  a  low  of  0.5%  in  March  2021,  after  which  it 
increased  rapidly  throughout  the  rest  of  2021.  In 
the  reference  value  was  4.9%, 
April  2022, 
calculated as the average of the 12-month average 
inflation rates in France, Finland and Greece plus 

1.5 percentage points. The corresponding inflation 
rate  in  Bulgaria  was  5.9%,  i.e.  1 percentage  point 

2.2.2.  Recent inflation developments 

The  annual  HICP  inflation  rate  decreased  from 
1.3% in April 2020 to -0.3% in January 2021, then 
increased throughout 2021 and accelerated further 
to 12.1% in April 2022. The decline in the period 
April 2020 to January 2021 was  mostly driven by 
deflation  in  unprocessed  food  prices  and  low 
inflation  rates  in  processed  food  prices.  Prices  of 
meat and meat products fell after the price hike in 
2019  that  was  caused  by  the  African  swine  fever, 
contributing 
inflation.  The 
acceleration  of  inflation  in  2021  was  due  to 
contributions from all broad categories. Fuel prices 
had  a  contribution  of  3.5  percentage  points  to  the 
annual inflation in December 2021. Inflation rates 
in  Bulgaria  have  exceeded  those  of  the  euro  area 
over the past two years. 

lower 

food 

to 

inflation  (measured  as  HICP 

Core 
inflation 
excluding energy and unprocessed food) was on a 
declining  path  since  April  2020,  arriving  at  0.6% 
in  August  2021.  It  then  accelerated  sharply  as  of 

25 

-202468101214Jan-16Jan-17Jan-18Jan-19Jan-20Jan-21Jan-22BulgariaReference valueGraph 2.1: Bulgaria -Inflation criterion(percent, 12-month moving average)Note: The dots at the right end of the chart show the projected reference value and 12-month average inflation rate of the country in December 2022.The reference values for 2016, 2018 and 2020 refer to the reference values calculated in the previous Convergence Reports.Source: Eurostat, Commission's Spring 2022 Economic Forecast.Table 2.1:weights  Bulgaria - Components of inflation(percentage change)1)in total   201620172018201920202021Apr-222022HICP-1.31.22.62.51.22.85.91000Non-energy industrial goods-1.6-1.1-0.50.2-0.10.72.3308Energy-7.05.86.41.4-6.110.620.4134Unprocessed food -1.15.91.35.35.5-0.37.452Processed food-0.60.04.33.22.32.02.8233Services-0.60.04.33.22.32.02.8273HICP excl. energy and unproc. food-0.40.32.12.52.01.93.6814HICP at constant tax rates -1.51.02.42.41.53.26.01000Administered prices HICP0.11.62.22.61.72.43.61751) Measured by the arithmetic average of the latest 12 monthly indices relative to the arithmetic average of the 12 monthly indices    in the previous period.Source: Eurostat, European Commission calculations.          
 
 
     
 
 
Convergence Report 2022 - Technical annex 

Chapter 2 - Bulgaria 

September  2021  and  reached  3.9%  in  December 
2021.  Core  inflation  remained  above  headline 
inflation  for  one  year  from  April  2020  onwards 
and  was  then  surpassed  by  overall  HICP  inflation 
due  to  energy  price  increases.  Annual  inflation  in 
important 
processed 
food  was 
determinant  of  core 
It 
decelerated  from  4.9%  in  April  2020  to  1.3%  in 
March  2021,  and 
then  gathered  pace  as  of 
September  2021.  The  increase  in  processed  food 
prices in Q4-2021 was driven by cost-push factors, 
such  as  higher  prices  of  energy  and  agricultural 
production in this period. 

inflation  dynamics. 

the  most 

Annual average inflation in services decelerated in 
2020  and  2021.  Weaker  seasonal  demand  for 
travel,  food  and  accommodation  services  in  the 
summer exercised a sizable downward pressure on 
services  prices  in  2020  and  2021.  Price  weakness 
in  the  sector  of  hotels  and  restaurants  was  also 
magnified  by  a  downward  adjustment  in  wages 
during the months of lockdown. Price dynamics in 
non-energy  industrial  goods  had  a  negligible 
influence on overall inflation in 2020 and most of 
2021.  Towards  the  end  of  2021,  prices  in  this 
category  also  started  to  rise  with  contributions 
from  higher  energy  and  from  intermediate  input 
costs and import prices. 

2.2.3.  Underlying  factors  and  sustainability  of 

inflation 

Macroeconomic  policy  mix  and  growth 
developments 

Due  to  the  adverse  impact  of  the  pandemic,  real 
GDP  contracted  by  4.4%  in  2020,  and  then 
recovered  by  4.2%  in  2021.  Across  demand 
components, economic activity in 2020 contracted 
mostly due to lower external demand and reduced 
private  investment  and  consumption.  Exports  of 
goods  rebounded  quickly  already  in  Q3-2020, 
while exports of services remained subdued also in 
2021.  Aggregate 
largely 
unchanged  in  2020,  despite  the  impulse  from 
public  investment,  and  then  registered  a  sizable 
decline of 11% in 2021. The contraction in capital 

investment  remained 

26 

-4-202468101214201620172018201920202021BulgariaEuro areaGraph 2.2: Bulgaria -HICP inflation(y-o-y percentage change)Source: Eurostat.Table 2.2:Bulgaria - Other inflation and cost indicators(annual percentage change)20162017201820192020202120221)20231)HICP inflationBulgaria-1.31.22.62.51.22.811.95.0Euro area0.21.51.81.20.32.66.12.7Private consumption deflatorBulgaria1.74.62.42.0-0.63.611.94.7Euro area0.41.31.51.10.52.35.82.7Nominal compensation per employeeBulgaria5.810.59.76.97.29.59.77.7Euro area1.21.72.12.1-0.74.13.63.5Labour productivityBulgaria2.51.02.83.7-2.14.01.92.7Euro area0.41.00.20.3-4.94.21.41.5Nominal unit labour costsBulgaria3.29.56.73.19.55.47.74.8Euro area0.80.72.01.94.40.02.22.0Imports of goods deflatorBulgaria-6.07.52.2-0.1-6.015.011.94.3Euro area-3.33.32.6-0.5-3.89.613.20.81) Commission Spring 2022 Economic Forecast.Source: Eurostat, Commission's Spring 2022 Economic Forecast.   
 
 
      
 
 
distancing  measures 

formation in 2021 was driven by high uncertainty, 
combined  with  reduced  business  activity  in  the 
sectors  most  affected  by  the  pandemic.  In  Q2-
2020,  private  consumption  contracted  sharply  by 
3.2%  quarter-on-quarter  with  the  introduction  of 
social  distancing  measures  in  March  2020,  and 
then  swiftly  regained  ground  in  Q3-2020.  The 
social 
subsequently 
introduced in late 2020 and in 2021 were less strict 
and more selective. Combined with the businesses 
adjusting  to  operate  in  the  new  environment  (e.g. 
introducing  home  delivery),  this  largely  avoided 
In  2021,  private 
repeated  demand  slumps. 
consumption 
8%, 
by 
underpinned  by  positive  wage  dynamics,  limited 
job  losses,  due  to  the  swift  introduction  of  job 
the  SURE 
retention  schemes,  supported  by 
instrument  and  REACT-EU,  and 
relatively 
optimistic expectations about economic activity. 

expanded 

strongly 

is 

forecast 

investment 

According  to  the  Commission’s  Spring  2022 
Economic Forecast, economic growth is forecast to 
slow  down  to  2.1%  in  2022,  due  to  both  slower 
expansion in domestic and external demand. GDP 
is  then  forecast  to  grow  by  3.1%  in  2023.  In 
response to increased energy and other input costs 
and  general  high  uncertainty,  firms  are  set  to 
postpone investments and new hires. The slump in 
private 
fully 
compensated  by  public  investments,  supported  by 
the  Recovery  and  Resilience  Plan.  The  decreased 
hiring intensity is expected to lead to a stabilisation 
of  the  unemployment  rate  slightly  below  5%. 
Private  consumption  growth 
to 
decelerate  markedly  to  2.8%  in  2022  and  then 
increase  marginally  to  3%  in  2023.  The  relative 
slow-down  in  consumer  spending  is  linked  to  the 
expected strong price increases in 2022, which are 
set  to  erode  real  disposable  income.  The  output 
gap is projected to narrow, but remain negative in 
2022 and then turn slightly positive in 2023. 

is  expected 

to  be 

In 2021, the fiscal stance (15) remained supportive 
at the same level as in 2020 (-0.6% of GDP), based 
on  the  Commission’s  Spring  2022  Economic 
Forecast.  The  fiscal  stance  is  expected  to  become 

(15)  The  fiscal  stance  is  measured  as  the  change  in  primary 
expenditure  (net  of  discretionary  revenue  measures), 
excluding  Covid-19  crisis-related  temporary  emergency 
measures  but  including  expenditure  financed  by  non-
repayable  support  (grants)  from 
the  Recovery  and 
Resilience Facility and other EU funds, relative to medium-
term  potential  growth.  A  negative  (positive)  sign  of  the 
indicator  corresponds  to  an  excess  (shortfall)  of  primary 
expenditure growth compared with medium-term economic 
growth,  indicating  an  expansionary  (contractionary)  fiscal 
policy. 

Convergence Report 2022 - Technical annex 

Chapter 2 - Bulgaria 

even more supportive in 2022 (-3.4% of GDP) due 
to the expenditures financed through the Recovery 
and  Resilience  Fund  and  other  EU  grants  and 
temporary  support  to  mitigate  the  impact  of  high 
energy  prices  on  vulnerable  households  and  firms 
(around  0.3%  of  GDP (16)).  The  budgetary  costs 
related  to  people  fleeing  the  war  in  Ukraine  is 
assumed  at  0.11%  of  GDP. The  no  policy-change 
forecast for 2023 shows a further supportive stance 
(-1.3%  of  GDP) 
increasing 
thanks 
expenditure  financed  by  Recovery  and  Resilience 
Fund  and  other  EU  grants,  despite  the  assumed 
phasing out of energy crisis measures. 

the 

to 

The  BNB  pursues  its  primary  objective  of  price 
stability  through  an  exchange  rate  anchor  in  the 
context  of  a  currency  board  arrangement  (CBA) 
with  the  lev  pegged  to  the  euro.  The  CBA  serves 
as a key macroeconomic policy anchor. During the 
COVID-19 crisis, the sound public finances and a 
stable banking sector combined with the exchange 
rate  stability,  ensured  by  the  currency  board, 
allowed  Bulgaria  to  finance  itself  at  favourable 
interest  rates.  In  March  2020,  the  Bulgarian 
National  Bank  introduced  a  package  of  measures 
in response to the COVID-19 crisis, amounting to 
BGN  9.3  billion  to  preserve  the  stability  and 
improve  the  flexibility  of  the  banking  system. 
These measures included reducing the commercial 
banks’ foreign exposure by BGN 7 billion and full 
capitalisation  of  profits  for  BGN  1.6  billion,  and 
both  were  discontinued  at  the  beginning  of  2022. 
In April 2020, the BNB approved a non-legislative 
moratorium  on  loan  repayments,  in  line  with  the 
Guidelines  of  the  European  Banking  Authority 
(EBA/GL/2020/02)  until  end-2020.  This  measure 
expired at the end of 2021, with a total of BGN 8.1 
billion  of  loans  deferred  under  the  arrangement. 
The  central  bank  also  agreed  with  the  ECB  in 
April  2020  to  set  up  a  precautionary  currency 
agreement (swap line) to provide euro liquidity up 
to  EUR  2  billion  until  end-2020.  Given  the 
uncertain  economic  outlook,  the  risks  to  the  debt-
service  capacity  of  borrowers,  and  the  quality  of 
banks’ assets, the BNB decided in March 2022 to 
respond to the continued strong lending activity in 
the  house-loan 
the 
segment  by 
countercyclical  capital  buffer  rate  applicable  to 
domestic credit risk exposures from 0.5% to 1.0% 
from October 2022 and to 1.5% in effect from the 
beginning of 2023. 

increasing 

(16)  In incremental terms. The level amount is around 0.9% of 

GDP in 2022. 

27 

                                                           
                                                           
Convergence Report 2022 - Technical annex 

Chapter 2 - Bulgaria 

returned to trend growth rates, typical for the pre-
crisis period. On average, ULC increased by 9.5% 
in  2020  and  then  by  5.4%  in  2021.  According  to 
the  Commission’s  Spring  2022  Economic 
Forecast, ULC is expected to increase  by 7.7% in 
2022 and 4.8% in 2023. 

External factors 

Given  the  high  import  component  of  aggregate 
demand, imported inflation plays an important role 
in  domestic  price  formation.  Import  prices  of 
mineral fuels, food and other  manufactured goods 
and materials are particularly relevant for inflation 
in  Bulgaria.  Since  mid-2021, 
the  prices  for 
electricity  on  the  unregulated  domestic  market 
have  increased  four-fold,  following  the  regional 
and  global  price  increase.  In  2021,  the  domestic 
‘Day ahead’ market became more tightly linked to 
the  EU  electricity  market,  as  its  trading  platform 
was  integrated  with  the  ones  in  Greece  and 
Romania. 

in  2020  and  2.7% 

The  lev’s  nominal  effective  exchange  rate,  which 
is  determined  by  the  price  of  the  lev  vis-à-vis  the 
currencies  of  36  major  trade  partners,  appreciated 
by  2.8% 
in  2021.  The 
appreciation  at  the  end  of  2021  was  strongly 
influenced  by  the  depreciation  of  the  Turkish  lira 
against  the  euro.  Turkey  is  the  most  important 
trading  partner  for  Bulgaria  outside  the  EU, 
accounting  for  6.1%  of  total  exports  and  7.8%  of 
total imports in 2021. 

Administered prices and taxes 

The  share  of  administered  prices  in  the  HICP 
basket is relatively high at around 17%, compared 
to  13%  in  the  euro  area.  Regulated  prices  of 
electricity,  heat  and  water  follow  a  seasonal 
the 
pattern,  as 

they  are  usually  updated  at 

Wages and labour costs 

the  onset  of 

restaurants  and  other 

At 
the  COVID-19  pandemic 
employment  quickly  adjusted  downwards  in  the 
sectors most affected by the domestic and external 
demand  slump  —  manufacturing,  trade,  transport, 
hotels  and 
services. 
Nevertheless, the number of persons employed fell 
by less compared to the economic activity in these 
sectors.  On  aggregate,  gross  value  added  declined 
by  6.6%  quarter-on-quarter  in  Q2-2020,  while  the 
number  of  persons  employed  fell  by  2.2%  in  the 
same  period.  Further  job  losses  in  the  subsequent 
periods  were  prevented  by  the  quick  rebound  in 
manufacturing  production, 
relaxation  of 
containment  measures  and  swift  introduction  of 
subsidised short-time work schemes. The recovery 
in employment levels continued in 2021 across all 
sectors.  On  average  for  2020,  the  number  of 
employed dropped by 2.3% and then grew by 0.2% 
in  2021.  Nominal  compensation  per  employee  in 
the most affected sectors contracted sizably in Q2-
2020,  reflecting  to  a  large  extent  the  reduction  in 
hours  worked (17). 
following  periods 
aggregate  wage growth resumed its  upward trend, 
in line with the stabilisation and partial recovery of 
the 
labour  market  situation.  On  aggregate, 
compensation per employee grew by 7.2% in 2020 
and  9.5%  in  2021,  broadly  in  line  with  the  pre-
crisis trend. 

the 

the 

In 

Labour productivity dropped by 4.5% in Q2-2020 
as  a  result  of  labour  hoarding  in  the  sectors  most 
affected by the COVID-19 crisis. It then recovered 
to  pre-pandemic  levels  at  the  beginning  of  2021. 
Overall, aggregate labour productivity declined by 
2.1% in 2020 and then rebounded by 4% in 2021. 
The 
aggregate  numbers,  however,  obscure 
diverging  trends.  Productivity  in  manufacturing 
exhibited a strong rebound already in 2020, while 
in  the  retail  and  wholesale  trade,  catering  and 
accommodation  services  productivity  is  still  on  a 
declining  path.  The  dynamics  in  nominal  unit 
labour  cost  (ULC)  have  been  strongly  influenced 
by  fluctuations  in  labour  productivity.  Wages 
resumed  their  steady  growth  after  the  contraction 
at  the  onset  of  the  COVID-19  crisis  in  Q2-2020, 
which  was  driven  by  wage  cuts  in  the  private 
sector.  In  particular,  nominal  ULC  went  up  by 
5.8%  quarter-on-quarter  in  Q2-2020  and  then 

(17)  While  the  job  retention  schemes  were  introduced  fairly 
swiftly at the onset of the spring 2020 lockdown, they were 
arguably  less  generous  than  in  other  EU  countries.  With 
time  the  scope  and  coverage  has  widened.  This  evolution 
can largely explain the less distorted figures for Bulgaria at 
the beginning of the crisis. 

28 

-30369121520162017201820192020202120222023Productivity (real GDP per person employed)Nominal compensation per employeeNominal unit labour costsHICP inflation(y-o-y % change)Source: Eurostat, Commission's Spring 2022 Economic Forecast.Graph 2.3: Bulgaria -Inflation, productivity and wage trends                                                           
        
beginning  of  the  year  or  in  the  summer  months. 
Administered  price 
inflation  accelerated  from 
1.7%  in  2020  to  2.4%  in  2021  on  the  back  of 
increasing  energy  prices.  The  National  Assembly 
imposed  a  moratorium  on  future  increases  in  the 
price  for  electricity,  central  heating  and  water 
in  December  2021.  The  moratorium 
supply 
expired at the end of March 2022. Meanwhile, the 
government  introduced  support  programmes  for 
firms,  public  utilities 
and  household  gas 
consumers.  Without  the  moratorium,  the  energy 
regulator  had  envisaged  a  12%  increase  in  the 
electricity  price.  Administered  price 
inflation 
surpassed  overall  HICP  in  2020  and  then  went 
below headline consumer price inflation in 2021. 

Changes in indirect taxes had a negative effect on 
inflation  in  2020  and  2021.  As  a  response  to  the 
pandemic and the containment measures, VAT on 
hotels,  restaurants  and  other  tourist  services,  as 
well  as  the  sale  of  books  and  other  items  was 
temporarily  reduced  as  of  mid-2020.  Annual 
constant-tax  HICP  was  thus  0.3  of  a  percentage 
point and 0.4 of a percentage point above headline 
inflation  in  2020  and  2021,  respectively.  The 
measures  were  still  in  place  in  2021,  which 
explains the persistence in the inflation differential 
in  2021  through  the  carry-over  effect  from  2020. 
In  the  euro  area,  annual  constant-tax  HICP  also 
exceeded  the  headline  inflation  by  0.3  of  a 
percentage  point  in  2020,  but  then  fell  below 
overall  inflation  by  -0.2  of  a  percentage  point  in 
2021. 

Convergence Report 2022 - Technical annex 

Chapter 2 - Bulgaria 

so  far  mitigated  the  impact  of  sharp  increases  in 
energy  prices.  The  discontinuation  of  natural  gas 
supplies by Gazprom in late April is expected to be 
compensated  through  alternative  sources,  leading 
to a one-off increase in gas prices.  

The  level  of  consumer  prices  in  Bulgaria  stood  at 
about 55% of the euro area average in 2020. This 
suggests  that  there  is  a  significant  potential  for 
price  level  convergence  in  the  long  term,  as  GDP 
per  capita  in  PPS  (about  55%  of  the  euro-area 
average  in  2021)  increases  towards  the  euro-area 
average. 

Medium-term  inflation  prospects  will  depend  on 
wage and productivity developments as well as on 
the  functioning  of  product  and  services  markets. 
These developments may be substantially affected 
by  the  cyclical  position  of  the  economy.  The 
sizable  inflows  of  EU  funds,  including  the  RRF 
funding,  could  bring  the  economic  output  above 
potential.  In  that  context,  an  important  aspect  to 
minimise  the  overheating  pressures  and  maximise 
long-term productivity gains is ensuring that public 
investments  effectively  expand  the  production 
capacity of the economy in the medium term. This 
could  be  done  via  investments  in  physical  and 
the 
human  capital  and  reforms 
functioning of product and labour markets, so that 
demand  increase  is  matched  by  positive  supply 
side reactions. 

improve 

to 

2.3. 

PUBLIC FINANCES 

Medium-term prospects 

2.3.1.  Recent fiscal developments 

inflation 

increases 

forward,  annual  HICP 

is 
Looking 
expected to accelerate significantly in 2022 on the 
back of persistently high costs of energy and other 
intermediate  products,  expected 
in 
regulated gas and heating prices, as well as higher 
international  food  prices  and  growing  import 
deflators.  In  2023,  inflation  is  forecast  to  abate 
relative  to  the  previous  year,  but  to  remain 
somewhat  elevated  at  5.0%,  due  to  the  lagged 
indirect  effect  of  high  energy  cost  on  final  goods 
and  services  prices.  In  the  context  of  the  weaker 
expected  labour  market  pressures,  the  second-
round effects via a wage-price spiral are projected 
to be limited. 

In parallel to the introduction of the moratorium on 
prices of utilities between 15 December 2021 and 
introduced 
31  March  2022, 
support  programmes  for  firms,  public  utilities 
suppliers  and  household  gas  consumers  that  have 

the  government 

took  measures 

After  a  period  of  budget  surpluses,  the  general 
government balances recorded deficits of 4.0% and 
4.1%  of  GDP  in  2020  and  2021,  respectively,  as 
the  Bulgarian  government 
to 
respond to the pandemic-induced shock. Measures 
like those raising or preserving remuneration in the 
public  and  private  sector  sustained  income  taxes 
and  revenues  from  social  contributions.  However, 
the  reduced  economic  activity  led  to  a  decline  in 
receipts  from  taxes  on  production  and  imports, 
while  sales  starkly  declined  too.  As  a  result,  total 
revenue  decreased  by  around  1.3%  and  by  0.3 
percentage  points  as  a  percentage  of  GDP.  By 
contrast,  the  expenditure-to-GDP  ratio  increased 
by 5.7 percentage points during the same period as 
the  government  introduced  emergency  measures 
like  higher  wage  bonuses  for  medical  staff, 
subsidies to corporations, pension top-ups and the 
purchase of medical equipment. In 2021, revenues 
largely  recovered,  thanks  to  higher  receipts  from 

29 

Convergence Report 2022 - Technical annex 

Chapter 2 - Bulgaria 

higher  taxes  on  production  and  imports,  income 
and  wealth  taxes,  and  the  upswing  in  sales. 
Overall,  total  public  revenue  as  a  percentage  of 
GDP  increased  by  0.9 of  a  percentage  point  from 
2020 to 2021, slightly lowered by the recovery of 
GDP.  Emergency  measures  remained  largely  in 
place,  leading  to  a  further  1.1  percentage  point  in 
the expenditure-to-GDP ratio. 

Bulgaria  entered  the  crisis  with  a  strong  fiscal 
position,  as  reflected  by  budget  surpluses  in 
previous  years  and  a  low  debt-to-GDP  ratio  of 
20%  in  2019.  The  primary  deficits  in  2020  and 
2021  translated  into  a  rising  debt-to-GDP  ratio, 
reaching  25.1%  in  2021,  which  had  already 
increased  to  24.7%  in  2020.  A  positive  snowball 
effect  of  0.6%  of  GDP  on  gross  public  debt 
contributed  to  the  rise  in  2020.  However,  given 
towards  sound 
Bulgaria’s  strong  commitment 
fiscal  policy,  a  negatively  turning  interest  rate-
growth  differential  and 
the  expected  gradual 
phase-out of emergency measures, the government 
debt-to-GDP ratio is set to stay below 26% in the 
medium-term. 

2.3.2.  Medium-term prospects 

The  elections  held  at  the  end  of  2021,  and  the 
subsequent  protracted  government 
formation, 
delayed  the  usual  adoption  of  the  2022  budget, 
which  the  National  Assembly  adopted  on  25 
includes,  among 
February  2022.  The  budget 
others,  the  gradual  increase  in  the  excise  duty  on 
tobacco  and  toll  taxes,  increases  in  the  minimum 
wage,  and  changes  in  pension  policy  parameters. 

While  initially  Bulgaria’s  budget  balance  was 
expected  to  largely  improve  due  to  the  gradual 
phasing-out  of  pandemic-related  measures  from 
4.3%  in  2021  to  1.8%  of  GDP  in  2022,  the 
worsened  economic  outlook  due 
to  Russia’s 
invasion  of  Ukraine  and  rising  energy  costs 
the  deficit  recovery.  Key  emergency 
impede 
support  measures that remain in place to fight the 
pandemic  include  the  provision  of  vaccines  and 
medical  products,  pension  top-ups,  and  business 
support  schemes.  As  a  consequence  of  Russia’s 
invasion of Ukraine, the Bulgarian government has 
introduced  new  measures  like  the  evacuations  of 
Bulgarian  nationals  residing  in  Ukraine  and  the 
provision  of  humanitarian  aid  (e.g.  providing 
accommodation  and  daily  allowances  for  up  to 
three  months  upon  arrival)  to  Ukrainian  refugees 
arriving  in  Bulgaria.  According  to  Commission 
estimations,  the  related  total  costs  of  the  flow  of 
refugees, due to the Russian military aggression in 
Ukraine,  amount  to  0.11%  and  0.16%  of  GDP  in 
2022 and 2023. 

On  29  April  2022,  Bulgaria  submitted  its  2022 
Convergence  Programme.  According 
the 
Programme,  the  headline  deficit  is  projected  to 
increase  to  5.3%  of  GDP  in  2022  and  2.9%  in 
2023. 

to 

The  Commission’s  Spring  2022  Economic 
Forecast,  which  is  based  on  a  no-policy  change 
assumption, forecasts a general government deficit 
of  around  3.7%  of  GDP  in  2022.  The  projected 
government  deficit  is  lower  than  the  planned 

30 

Table 2.3:Bulgaria - Budgetary developments and projections (as % of GDP unless indicated otherwise)Outturn and forecast 1)20162017201820192020202120221)20231)General government balance0.31.61.72.1-4.0-4.1-3.7-2.4#NAME?35.137.138.738.438.139.040.240.7- Total expenditure34.835.437.036.342.043.143.943.1   of which: - Interest expenditure0.90.80.70.60.50.50.50.5p.m.: Tax burden29.229.829.730.330.632.432.633.1Primary balance1.22.42.42.7-3.5-3.6-3.1-1.9Fiscal stance 2)-0.6-0.6-3.4-1.3Government gross debt29.125.122.120.024.725.125.325.6p.m: Real GDP growth (%)3.02.82.74.0-4.44.22.13.11) Commission’s Spring 2022 Economic Forecast. 2) A negative (positive) sign of the indicator corresponds to an excess (shortfall) of primary expenditure growth compared with medium-term economic growth, indicating an expansionary (contractionary) fiscal policy.Source: European Commission. 
 
         
 
 
deficit  in  the  Convergence  Programme  due  to 
different  underlying  macroeconomic  assumptions, 
including  the  inflow  of  people  fleeing  the  war  in 
Ukraine and the associated costs, higher growth in 
revenues from taxes on production and imports as 
intermediate 
well  as  a  smaller 
the 
consumption.  The  Commission  projects 
general  government  deficit  to  further  decrease  to 
around 2.4% of GDP in 2023, as the costs of both 
COVID-19  and  energy  price  measures  are  set  to 
phase out. 

increase 

in 

financed  by 

In  2022,  the  fiscal  stance  is  projected  in  the 
Commission’s  Spring  2022  Economic  Forecast  to 
continue  to  be  supportive,  at  -3.4%  of  GDP (18). 
The  positive  contribution  to  economic  activity  of 
expenditure 
the  Recovery  and 
Resilience  Facility  grants  and  other  EU  funds  is 
projected  to  increase  by1.1  percentage  points  of 
GDP  in  2022,  compared  to  2021.  Nationally 
financed investment is projected to provide as well 
an expansionary contribution to the fiscal stance in 
2022  by  1.1  percentage  points  of  GDP.  At  the 
same  time,  the  growth  in  nationally  financed 
primary  current  expenditure  (net  of  discretionary 
revenue measures) in 2022 is projected to provide 
an  expansionary  contribution  of  -1.4  percentage 
points  to  the  overall  fiscal  stance,  as  current 
expenditure  is  set  to  grow  at  a  faster  pace  than 
medium-term potential growth. However, some of 
this  expansion  is  due  to  measures  related  to  the 
energy  crisis  (-0.2  of  a  percentage  point)  and  the 
assistance  to  those  fleeing  Ukraine  (-0.1  of  a 
percentage  point).  In  2023,  the  fiscal  stance  is 
projected at -1.3% of GDP. The additional positive 
contribution  to  economic  activity  of  expenditure 
financed  by  Recovery  and  Resilience  Facility 
grants and other EU funds is projected to increase 
by 0.7 of a percentage point of GDP, compared to 
2022.  Nationally  financed  investment  is  projected 
to be expansionary too by 0.2 percentage points of 
GDP (19).  The  growth 
in  nationally  financed 
primary current expenditure is projected to provide 
an  expansionary  contribution  of 
-0.5  of  a 
percentage  point  to  the  overall  fiscal  stance  in 
2023.  This  includes  the  impact  from  the  phasing 
out  of  the  measures  addressing  the  increased 
energy prices (0.82% of GDP). 

Convergence Report 2022 - Technical annex 

Chapter 2 - Bulgaria 

the  positive 

The deficit is set to fall below the Treaty threshold 
of 3% in 2023. While the global economic outlook 
remains  uncertain, 
impact  of 
investments  financed  through  the  Recovery  and 
Resilience Fund, as  well as the continued phasing 
out  of  COVID-19  and  energy  price  measures, 
to  2.4%  of  GDP.  The 
improve 
the  deficit 
government  debt-to-GDP  ratio 
to 
increase  slightly  to  25.6%  due  to  the  persistent 
primary  deficits,  but  cushioned  by  economic 
growth. 

is  forecast 

Debt  sustainability  risks  appear  medium  over  the 
medium  term.  Government  debt  is  projected  to 
increase,  reaching  around  37%  of  GDP  in  2032. 
This projection assumes that the structural primary 
balance remains constant (except for the impact of 
ageing)  at  the  forecast  level  for  2023  of  -2.2%  of 
GDP, hence below the 2019 level.  

The  sensitivity  to  possible  macro-fiscal  shocks 
contributes  to  this  assessment.  While  Bulgaria’s 
debt  is  projected  to  stay  at  a  low  level  by  2032 
under  all  deterministic  scenarios,  the  stochastic 
projections  point  to  a  particularly  large  degree  of 
uncertainty. 

including 

Several  factors  mitigate  risks, 
the 
lengthening  of  debt  maturity  in  recent  years 
historically  low  borrowing  costs  and  the  expected 
positive  impact  on  long-term  growth  of  reforms 
under  the  Recovery  and  Resilience  Plan.  Risk-
increasing  factors  include  Bulgaria’s  negative  net 
international  investment  position,  the  substantial 
share  of  public  debt  in  foreign  currency  and 
contingent  liability  risks  stemming  from  the  poor 
financial  performance  of 
state-owned 
enterprises (20). 

some 

(18)  For a definition of the fiscal stance used in this report, see 
footnote  in  Section  2.2.3  on  underlying  factors  and 
sustainability of inflation. 

(19)  Other  nationally  financed  capital  expenditure  is  projected 

(20)  For  further  details  see  the  2021  Fiscal  Sustainability 

to provide a neutral contribution.  

Report. 

31 

-4-3-2-1012020202120222023Net nationally financed  primary current expenditureNationally financed investmentOther capital expenditureExpenditure financed by RRF grants and EU fundsFiscal stanceExpansionaryContractionarySource: Commission's Spring 2022 Economic Forecast.Graph 2.4: Bulgaria -Fiscal stance and its components(percent of GDP)                                                           
         
                                                           
to  enable 

the  necessary 

the  highest  number  of 

Bulgaria  has  developed  a  strong  institutional 
setting.  According  to  the  Commission’s  Fiscal 
Governance  Database,  with  nine  national  fiscal 
rules in place at the general and subnational level, 
Bulgaria  has 
fiscal 
constraints  in  the  EU,  while  also  showing  an 
improving  track-record  of  compliance.  The  rules 
system,  however,  appears  complex,  not  least 
because  of  using  different  accounting  standards 
(both  Maastricht-based  and  cash-based),  which 
raises the  need to streamline the process. In 2020, 
Bulgaria added additional flexibility in the form of 
escape  clauses  to  four  rules  targeting  the  general 
government 
fiscal 
adjustments  in  the  face  of  the  COVID  shock 
(according to the Commission’s Fiscal Governance 
Database).  Based  on  its  broad  remit,  the  Fiscal 
Council  has  gradually  established  a  system  for 
releasing  its  mandatory  monitoring  reports  on  the 
fiscal  plans  and 
annual  and  medium-term 
compliance with all the numerical rules laid down 
in the Public Finance Act. However, issues remain 
with  respect  to  the  management  and  planning  of 
the government finances. The Ministry of Finance 
does not always seem to have enough information 
for  the  purposes  of  budgetary  planning  on  the 
detailed content of major public expenditures. This 
fiscal 
failure 
together  with 
projections  in  terms  of  the  European  System  of 
National  and  Regional  Accounts  (ESA),  and  a 
systematic  underestimation  of  budget  projections 
raise  the  need  to  strengthen  the  capacity  of  the 
administration  to  plan,  forecast  and  report  on  the 
general  government  budget  in  both  accrual  (ESA) 
and cash terms. 

to  produce 

the 

Convergence Report 2022 - Technical annex 

Chapter 2 - Bulgaria 

Bulgaria  introduced  its  CBA  on  1  July  1997, 
pegging the Bulgarian lev to the German mark and 
subsequently  to  the  euro  (at  an  exchange  rate  of 
1.95583  BGN/EUR).  Under  the  CBA,  the  BNB 
has  to  cover  its  monetary  liabilities  with  foreign 
reserves  fully.  The  BNB  is  obliged  to  exchange 
the  official 
monetary 
exchange rate without any limit. 

liabilities  and  euro  at 

increased 

international  reserves 

to 
Bulgaria's 
around  EUR  35  billion  by  the  end  of  2021,  after 
having  increased  from  EUR  25  billion  at  the 
beginning of 2020 to around EUR 31 billion at the 
end  of  the  same  year.  International  reserves 
increased in the course of 2021 mainly because of 
positive net currency inflows. The  transfers of EU 
funds  and  the  BNB’s  net  purchases  of  reserve 
currency from commercial banks account for most 
of  the  inflows.  With  the  further  increase  in 
international  reserves  in  2021,  their  share  as  a 
percentage  of  GDP  also  increased  to  51%  from 
around 50% at the end of 2020. 

2.4. 

EXCHANGE RATE STABILITY 

The  Bulgarian  lev  joined  the  ERM II  on  10  July 
2020 and in parallel, the Bulgarian National Bank 
entered  into  a  close  cooperation  with  the  ECB. 
After  joining,  Bulgaria  committed  to  pursue  a  set 
of  policy  measures, 
the  so-called  post-entry 
commitments,  to  ensure  that  their  participation  in 
the  mechanism  is  sustainable  and  achieves  a  high 
degree of economic convergence ahead of the euro 
adoption.  The  measures  cover  four  policy  areas: 
the  non-banking  financial  sector,  the  insolvency 
framework, the anti-money laundering framework, 
state-owned  enterprises. 
and  governance  of 
Bulgaria 
the 
completion  of  these  post-commitments,  in  close 
liaison  with  the  Commission,  who  monitors  their 
progress. 

is  currently  working 

towards 

The  BNB  does  not  set  monetary  policy  interest 
rates. The monetary policy of the euro area affects 
the  domestic  interest  rate  environment  directly 
through  the  operation  of  Bulgaria's  CBA.  The 
BNB  discontinued  the  production  of  short-term 
reference rates (e.g. SOFIBOR) as of 1 July 2018. 
Instead,  the  central  bank  publishes  a  base  interest 
rate (BIR) based on the index LEONIA Plus (LEv 
OverNight  Interest  Average  Plus),  which  is  a 
reference rate of concluded and effected overnight 
deposit  transactions  in  Bulgarian  levs  on  the 
interbank  market  in  Bulgaria.  In  June  2020,  the 
BIR  stood  at  -0.7%.  Since  then  it  has  been  very 
stable  until  the  end  of  2021,  when  the  BIR 
exhibited  more  volatility.  After  an  increase  to  -
0.45%  in  December,  it  fell  back  to  -0.6%  in 
February  2022.  As  a  result,  bedside  the  short 
increase  at  the  beginning  of  the  year,  the  interest 
rate differential of the BIR to the 1-month Euribor 

32 

1.81.92.02.1201620172018201920202021Graph 2.5: Bulgaria -BGN/EUR exchange rate(monthly averages)Source: ECB.    
Convergence Report 2022 - Technical annex 

Chapter 2 - Bulgaria 

The  Bulgarian  long-term  interest  rate  has  been 
very  low  and  rather  stable  since  the  beginning  of 
2020, remaining within a band of 0.1-0.4%. There 
was only a brief peak in June-July, 2020, when the 
interest rate increased to 0.7%. The low long-term 
interest  rates  reflect  the  loose  monetary  policy  in 
the  euro  area.  The  spread  to  German  long-term 
benchmark  rates  has  also  remained  broadly  stable 
within  a  band  of  0.4-0.8  of  a  basis  point,  with  a 
brief episode above 100 basis points in mid-2020. 
At  the  beginning  of  2022,  Bulgarian  long-term 
interest  rate  started  to  increase  and  reached  1.6% 
in  April.  The  German  long-term  interest  rate  also 
increased,  but  by  a  slightly  smaller  amount, 
resulting in the spread breaking through the above-
mentioned bounds to 0.9 of a basis point. 

rate  has  remained  relatively  stable  at  around  -10 
basis points -7 basis points in March 2022. 

2.5. 

LONG-TERM INTEREST RATES 

Long-term  interest  rates  used  for  the  convergence 
examination reflect the secondary market yield on 
a  single  benchmark  Bulgarian  government  bond 
with a residual maturity of around 10 years. 

The  Bulgarian  12-month  moving  average  long-
term interest rate relevant for the assessment of the 
Treaty  criterion  was  below  the  reference  value  in 
the  2020  convergence  assessment  of  Bulgaria. 
Since then the interest rates has been very low and 
very stable. It stood at 0.3% at the end of 2020 and 
edged down to 0.2% by the end of 2021. In April 
2022, the reference value, given by the average of 
long-term  interest  rates  in  France,  Finland  and 
Greece plus 2 percentage points, stood at 2.6%. At 
the  same  time,  the  12-month  moving  average  of 
the  yield  on  the  Bulgarian  benchmark  bond  stood 
at  0.5%,  i.e.  2.1  percentage  points  below  the 
reference value. 

2.6.  ADDITIONAL FACTORS 

The  Treaty  (Article  140  TFEU)  calls  for  an 
examination  of  other  factors  relevant  to  economic 
integration  and  convergence  that  the  Commission 
should  take  into  account  in  its  assessment.  The 
assessment  of  the  additional  factors  —  including 
balance  of  payments  developments,  as  well  as 
product, labour and financial market integration — 
gives  an  indication  of  a  Member  State's  ability  to 
integrate into the euro area without difficulties. 

In  November  2021,  the  Commission  published  its 
last  Alert  Mechanism  Report  (AMR 2022)  under 
the  Macroeconomic  Imbalance  Procedure  (MIP  – 
see also Box 1.7), which concluded that it was not 
necessary  to  carry  out  further  in-depth  analysis  in 
the context of the MIP. In the past, vulnerabilities 
in  the  financial  sector  were  coupled  with  high 
indebtedness  and  non-performing  loans  in  the 
corporate  sector.  Consistent  policy  action  and  a 
favourable  macroeconomic  environment  have 
reduced  risks  and  vulnerabilities  before  the  onset 

33 

-30-20-1001020304050201620172018201920202021Graph 2.6: Bulgaria -Annual effective interest rate spread to 1-M Euribor(basis points, monthly values)Source: Eurostat and National Bank of Bulgaria.0246Jan-16Jan-17Jan-18Jan-19Jan-20Jan-21Jan-22BulgariaReference valueGraph 2.7: Bulgaria -Long-term interest rate criterion(percent, 12-month moving average)Source: European Commission.-2024201620172018201920202021BulgariaGermanyGraph 2.8: Bulgaria -Long-term interest rates(percent, monthly values)Source: Eurostat.    
    
    
Convergence Report 2022 - Technical annex 

Chapter 2 - Bulgaria 

the 

framework 

educational 

for  coal  phase-out, 

electricity  market, 
and 
reform, 

digital skills. Key reforms include the introduction 
the 
of  a 
a 
liberalisation  of 
comprehensive 
a 
strengthening  of  the  minimum  income  scheme.  A 
significant number of reforms and investments are 
expected  to  reinforce  the  institutional  framework. 
These  include  reforms  to  improve  the  functioning 
of  the  judiciary  system  and  the  anti-corruption 
bodies,  to  strengthen  anti-money  laundering  and 
frameworks,  public  procurement, 
insolvency 
whistle-blower  protection,  regulation  of  lobbying, 
e-government and integrity of public servants. 

The  plan  devotes  58.9%  of  its  total  allocation  to 
measures supporting climate objectives and 25.8% 
to the digital transition, all while respecting the do 
no significant harm principle. 

The  implementation  of  the  investments  in  the 
Bulgarian plan, along with other investments under 
NextGenerationEU, is estimated to raise Bulgaria’s 
GDP by 1.9% to 2.9% by 2026, of which 0.6% due 
to the positive spillover effects of  the coordinated 
implementation  of  NextGenerationEU  across 
Member States (Pfeiffer et al. 2021) (22). This does 
not  take  into  account  the  positive  impact  of 
structural reforms on growth. 

2.6.1.  Developments  of 

the  balance  of 

payments 

Bulgaria’s  external  balance  (i.e.  the  combined 
current and capital accounts) shrank, but remained 
positive  at  1.5%  and  0.3%  of  GDP  in  2020  and 
2021,  respectively.  The  reduction  was  driven  by 
the current account, which turned slightly negative 
in 2020 and 2021, from a surplus of 1.9% in 2019. 
Secondary  income,  which  largely  consists  of 
remittances  from  abroad,  fell  roughly  by  50%  in 
2020  and  2021  possibly  due  to  the  worsened 
economic situation of nationals residing abroad. In 
addition  to  the  deterioration  of  the  secondary 
income  balance,  the  deterioration  of  the  external 
position  in  2020  was  also  caused  by  an  abrupt 
contraction  in  exports  of  services,  reflecting  the 
imposed travel restrictions and the weaker external 
demand  for  tourist  services.  The  trade  balance 
became  less  negative  than  in  the  preceding  years, 
as  nominal  imports  contracted  more  than  nominal 

(22)  See  Pfeiffer  P.,  Varga  J.  and  in  ’t  Veld  J.  (2021), 
“Quantifying  Spillovers  of  NGEU  investment”,  European 
Economy  Discussion  Papers,  No.  144  and  Afman  et  al. 
(2021),  “An  overview  of  the  economics  of  the  Recovery 
and  Resilience  Facility”,  Quarterly  Report  on  the  Euro 
Area (QREA), Vol. 20, No. 3 pp. 7-16. 

concluded 

of  the  COVID-19  crisis.  Taking  into  account  the 
assessment  in  its  2020  In-Depth  Review,  the 
that  Bulgaria  was 
Commission 
experiencing  no  imbalances.  Notwithstanding  the 
progress  made,  non-performing  loans  are  still 
relatively  high  albeit  declining  in  the  segment  of 
corporate  loans  granted  by  domestically  owned 
banks. 

Increased  vulnerabilities  in  the  housing  market 
stem from the higher, although still contained, risk 
for  overvaluation.  House  prices  accelerated  to  a 
growth rate of 8.7% in 2021. In parallel, mortgage 
growth  increased  rapidly  to  16.5%  in  2021,  while 
as  a  percentage  of  GDP,  mortgages  remain  low 
compared to the euro area. The European Systemic 
Risk  Board  has  issued  a  warning  to  Bulgaria  in 
February  2022 
these  risks,  as  it 
considers  macroprudential  polices  only  partially 
appropriate  and  sufficient.  Based  on  similar 
concerns,  the  Bulgarian  National  Bank  increased 
the  countercyclical  capital  buffer  in  March  2022, 
from 0.5% to 1% as of 1 October 2022, and 1.5% 
in effect from the beginning of 2023. 

to  address 

Bulgaria submitted its recovery and resilience plan 
on  15  October  2021.  The  Commission’s  positive 
assessment  on  7  April  2022  and  the  Council’s 
approval  on  4  May,  paved  the  way  for  the 
implementation  of  the  Recovery  and  Resilience 
Plan  and  the  disbursement  of  EUR  6.3  billion  in 
grants (21)  over  the  period  2022-2026,  which  is 
equivalent to 10.2% in 2019 GDP. 

Bulgaria’s  plan  includes  an  extensive  set  of 
mutually  reinforcing  reforms  and  investments  (56 
investments  and  47  reforms)  that  contribute  to 
effectively addressing all or a significant subset of 
the economic and social challenges outlined in the 
country-specific  recommendations  addressed  to 
Bulgaria by the Council in the European Semester 
in 2019 and 2020. 

The  plan  will  address  key  macro-economic 
challenges such as social inclusion, education and 
skills,  healthcare,  decarbonisation  and  digital 
transition 
environment.  Key 
investments  are  included  in  renewable  energy 
production,  electricity  storage  and  interconnection 
capacities,  energy  efficiency  of  buildings  and  in 
the  digitalisation  of  public  administration  and 

business 

and 

(21)  The  maximum  financial  contribution  for  Bulgaria  in 
ANNEX IV of Regulation (EU) 2021/241 is determined at 
EUR  6.3  billion,  but  30%  of  the  total  amount  available 
shall be recalculated with actual data by 30 June 2022.. 

34 

                                                           
                                                           
Convergence Report 2022 - Technical annex 

Chapter 2 - Bulgaria 

exports  on  account  of  positive  terms  of  trade 
effects.  The  higher  share  of  mineral  fuels  in 
imports  than  in  exports,  combined  with  the  31% 
oil  price  drop  in  2020,  partially  explains  these 
terms of trade gains. In 2021, the external balance 
of  services  improved,  but  remained  below  2019 
levels  as  a  share  of  GDP,  as  the  recovery  in 
tourism  revenues  was  incomplete.  The  balance  of 
goods  deteriorated  in  2021  as  imports  of  goods 
increased  faster 
than  exports  of  goods.  The 
in  economic  activity  and  private 
recovery 
consumption  spurred  growth 
imports  of 
intermediate,  investment  and  consumer  goods. 
Exports  of  goods  also  grew  strongly  in  2021  and 
benefitted from further gains in terms of trade. The 
capital account remained in surplus. 

in 

The  financial  account,  net  of  official  reserves, 
deteriorated in 2020 and then improved in 2021. In 
March  2020,  as  part  of  a  package  of  measures  to 
preserve  the stability of the banking system at the 
onset  of  the  COVID-19  pandemic,  the  Bulgarian 
National  Bank  imposed  a  limit  on  commercial 
banks’  foreign  exposures.  These  measures  to 
increase  the  liquidity  in  the  banking  system 
resulted  in  a  simultaneous  net  outflow  of  other 
investments and an increase in official reserves at 
the  central  bank.  In  2021,  the  banking  sector 

maintained  high  liquidity  and  capital  adequacy 
ratios  and  improved  profitability.  This  positive 
development  led  to  renewed  investment  in  other 
assets  abroad  by  the  foreign-owned  banks,  while 
official reserves kept growing, albeit less strongly. 
The net inflow of Foreign Direct Investment (FDI) 
remained positive with positive contributions from 
debt  instruments  in  2020  and  from  reinvested 
earnings in 2020 and 2021. 

The negative net international investment position 
continued  to  shrink  rapidly  in  2020-2021.  Net 
external  liabilities  consist  mostly  of  FDI  equity, 
which  have  been  relatively  stable  as  a  share  of 
GDP after the crisis of 2009. 

In  2020-2021,  measures  of  competitiveness 
exhibited  different  dynamics  depending  on  the 
deflator  used.  The  rate  of  appreciation  of  the  real 
effective exchange rate  (REER) deflated by ULC, 
accelerated,  as  labour  hoarding  pushed  up  labour 
costs. (23)  The  appreciation  in  REER  deflated  by 
HICP  has  been  more  moderate, 
reflecting 
moderate price inflation until mid-2021. The swift 
acceleration of inflation at the end of 2021 has not 

(23)  The REER based on unit labour costs should be interpreted 
with prudence as unit labour costs were distorted by labour 
retention schemes in some countries, including Bulgaria. 

35 

Table 2.4:Bulgaria - Balance of payments(percentage of GDP)201620172018201920202021Current account3.13.30.91.9-0.1-0.4of which: Balance of trade in goods-2.0-1.5-4.8-4.7-3.2-4.9                 Balance of trade in services7.05.87.38.05.06.6                 Primary income balance -5.0-4.3-4.8-4.2-3.5-3.3                 Secondary income balance3.13.33.22.91.51.1Capital account2.21.01.11.41.50.7External balance 1)5.34.32.03.31.50.3Financial account9.03.95.63.94.14.9of which: Direct investment-1.2-2.5-1.3-2.0-4.5-1.7                Portfolio investment-1.45.42.82.61.23.4                Other investment 2)4.51.21.74.2-2.1-2.1                Change in reserves7.1-0.22.4-0.99.45.3Financial account without reserves1.94.13.14.8-5.4-0.4Errors and omissions3.8-0.43.50.62.64.6Gross capital formation19.019.821.221.020.319.6Gross saving23.524.922.222.919.918.5Net international investment position-47.5-43.0-37.0-30.2-27.1-19.81) The combined current and capital account.2) Including financial derivatives.Sources: Eurostat, European Commission calculations, Bulgarian National Bank.                                                           
 
 
      
 
 
Convergence Report 2022 - Technical annex 

Chapter 2 - Bulgaria 

caused  real  appreciation  vis-à-vis  the  rest  of  the 
world, since inflation picked up globally, including 
in major trade partners. 

Bulgaria's  main  trading  partners  are  Turkey  and 
Russia (especially for energy imports). 

Net FDI inflows increased, but remained relatively 
low at 4.5% of GDP in 2020 and 1.7% of GDP in 
2021. The stock of FDI amounted to 75% of GDP 
in  2020  and  71%  in  2021. The  decline  in  2021  is 
explained  by  the  high  nominal  GDP  growth.  26% 
of all FDI stock is directed to industry (excluding 
construction),  22%  are  invested  in  real  estate, 
while  the  trade  sector  attracted  15%  of  total  FDI 
stock. 

far, 

terms  of 

The  swift  rebound  of  exports  following  their 
decline  in  Q2-2020,  caused  by  the  global  demand 
slump,  indicates  that  exporting  firms  managed  to 
maintain  their  export  market  share.  The  global 
hikes in prices of energy and other materials pose 
to  remain 
to  domestic  producers 
challenges 
competitive, in addition to the problems caused by 
supply  bottlenecks.  So 
trade 
developments  have  been  favourable  for  exporters. 
the  economy, 
intensity  of 
The  high  energy 
however,  bear  some  risks  for 
the  economic 
outlook. Firms are expected to respond to the cost-
push  shock  by  restricting  nominal  wage  growth 
investment 
and  postponing  new  hiring  and 
decisions.  This  cost-saving  strategy  to  maintain 
competitive position is set to be more prominent in 
manufacturing,  while 
is 
expected  to  pass  through  higher  costs  to  final 
consumers.  Apart  from  the  direct  and  indirect 
impact  of  the  war  on  goods  exports,  Bulgarian 
firms  are  forecast  to  maintain  market  shares 
abroad. 

the  services  sector 

According  to  the  Commission’s  Spring  2022 
Economic Forecast, the current account balance is 
expected  to  deteriorate  further  to  -1.8%  in  2022 
and remain at that level in 2023. 

2.6.2.  Market integration 

in  a 

The  business  environment 
is  generally  not 
supportive  of  investment,  and  institutional  quality 
remains  a  challenge.  According  to  the  World 
Bank's  Worldwide  Governance  Indicators  (2020), 
Bulgaria  ranks  low  in  voice  and  accountability, 
government  effectiveness,  rule  of  law  and  control 
of  corruption  compared  with  the  average  of  the 
five  euro  area  Member  States  with  the  lowest 
scores. (24)  Bulgaria  also  ranks  relatively  low  in 
the  World  Bank’s  Ease  of  Doing  Business 
indicator,  where  it  maintained  its  rank  of  61 
between  2019  and  2020,  but 
longer 
perspective  the  trend  has  been  negative (25).  In 
addition,  institutions  remain  among  the 
least 
performing  areas  in  the  Global  Competitiveness 
Index.  In  the  Council  Implementing  Decision, 
approving  the  Recovery  and  Resilience  Plan,  the 
authorities  have  committed 
to  a  number  of 
measures  that  address  challenges  identified  in  the 
Cooperation  and  Verification  Mechanism  (CVM), 
the Rule of Law Report, and also the recitals to the 
country-specific  recommendations.  This  includes 
problems  with  the  functioning  of  the  judiciary, 
corruption  and  issues  with  the  accountability  and 
criminal liability of the Prosecutor General. For the 
latter,  important  elements  are  the  introduction  of 
necessary  safeguards  and  guarantees 
for  an 
the  Prosecutor 
independent 
General and his deputies; possibility  for a judicial 
review  of  a  prosecutor’s  decision  not  to  open  an 
investigation,  and  annual 
the 
and 
on 
Prosecutor  General 
convictions  in  corruption  cases.  Anti-corruption 
measures  include  the  set-up  of  a  new  anti-

reporting  by 
investigations 

investigation  of 

The economy is well integrated with the euro area 
through  trade  and  investment  linkages.  After  a 
period of decline between 2017 and 2020, the ratio 
of  trade  openness  rebounded  to  close  to  64%  in 
2021, which is close to the peak of above 68% in 
2017.  Bulgaria  thus  remains  a  relatively  open 
economy.  Trade  with  the  euro  area  was  close  to 
29%  of  total  trade  in  2021.  Outside  the  EU, 

(24)  A  Member  State  is  considered  to  have  a  ‘low’  (‘high’) 
ranking compared with the average five euro area Member 
States with the lowest scores for each indicator if its score 
is at least 0.3 percentage points lower (higher) than that of 
the average of this euro area group. 

(25)  The  World  Bank  Doing  Business  (DB)  program  was 
paused in 2021. The programme will continue with a new 
governance  and  improved  accountability  and  transparency 
under  the  name  Business  Enabling  Environment  (BEE). 
The first edition of the BEE is expected in 2023. 

36 

8090100110120130140150201620172018201920202021Graph 2.9: Bulgaria -Effective exchange ratesNEERREER, HICP deflatedREER, ULC deflated(vs. 36 trading partners;  monthly averages;index numbers, 2016 = 100)Source: European Commission.    
                                                           
Convergence Report 2022 - Technical annex 

Chapter 2 - Bulgaria 

The  4th  Anti-money  Laundering  Directive 
imposed  transposition  by  26  June  2017.  Bulgaria 
communicated to the Commission several adopted 
measures to transpose the Directive between April 
2018  and  November  2019.  The  Commission’s 
analysis of the communicated measures concluded 
that  the  Directive  had  been  fully  transposed.  An 
assessment  of  the  concrete  implementation  and 
the  4th  Anti-money 
effective  application  of 
Laundering  Directive  in  Bulgaria  is  at  present 
ongoing. 

As  regards 
the  5th  Anti-money  Laundering 
Directive, whose transposition deadline elapsed on 
10  January  2020,  Bulgaria  has  notified  national 
transposition  measures 
the 
transposition to be complete. The Commission is at 
present  completing  its  analysis  of  whether  there 
are  any  potential  completeness  or  conformity 
issues in the transposition or implementation of the 
Directive. 

declared 

and 

The  COVID-19  crisis  has  entailed  employment 
losses  and  increased  inactivity  rates.  More  severe 
adverse  outcomes  have  largely  been  avoided 
through  the  swift  transition  to  short-time  work 
schemes 
the  state. 
that  were  supported  by 
Unemployment  increased  in  Q2-2020  and  then 
broadly  stabilised  until  the  end  of  2021.  The 
COVID-19  crisis  highlighted  the  existing  social 
vulnerabilities,  such  as  a  high  share  of  population 
at risk of poverty and social exclusion, high levels 
of  inactivity  in  some  population  groups  (e.g. 
NEETs, Roma), combined with regional disparities 
and skills mismatches. The high social inequalities 
weigh  on  the  prospects  for  fair  and  inclusive 
growth. 

37 

investigation 
corruption  body  with  criminal 
powers,  introduction  of  legislative  measures  to 
protect  whistle-blowers  and  to  regulate  lobbying 
activities,  and  the  establishment  of  an  integrity 
servants 
verification  mechanism 
occupying  positions  that  have  a  high  corruption 
risk. 

civil 

for 

Labour  and  skills  shortages  as  well  as  skills 
labour  market  needs 
mismatches  relative 
to 
to  business 
significant  barrier 
represent  a 
investment  and 
limit  productivity  gains.  The 
uptake  of  digital  technologies  is  slow  in  both 
public  and  private  sectors  and  Bulgaria  ranks  last 
among  EU  Member  States  in  digital  skills.  There 
are  measures in the Recovery and Resilience Plan 
focusing on improving the labour market relevance 
of  the  education  and  lifelong-learning  systems, 
including  targeting  the  development  of  digital 
skills, 
advancing 
digitalisation.  This  should  also  help  to  alleviate 
some  of  the  labour  market  bottlenecks  and  to 
modernise the economy. 

and  more 

broadly 

on 

-0.50.00.51.01.5Voice and AccountabilityPolitical Stability and Absence ofViolence/TerrorismGovernment EffectivenessRegulatory QualityRule of LawControl of CorruptionBulgariaEuro area average five lowestEuro area averageGraph 2.10: Bulgaria -2020 World Bank's Worldwide Governance IndicatorsNote: Estimate of governance ranges from -2.5 (weak) to 2.5 (strong). Source: World Bank.Table 2.5:Bulgaria - Market integration201620172018201920202021Trade openness 1) (%)64.468.066.564.257.164.2Trade with EA in goods & services 2)+3) (%)29.430.230.228.525.428.6World Bank's Ease of Doing Business Index rankings 4)3950596161-IMD World Competitiveness Ranking 5)504948484853Internal Market Transposition Deficit 6) (%)1.71.30.70.61.6-Real house price index 7)105.3109.3113.8118.3124.4130.5 1) (Imports + Exports of goods and services / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics, Balance of Payments). 2) (Imports + Exports of goods with EA-19 / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics). 3) Trade in services with EA-19 (average credit and debit in % of GDP at current prices) (Balance of Payments). 4) Data not available for 2021. The Ease of Doing Business report by the World Bank was discontinued in September 2021.  5) International Institute for Management Development (IMD). 6) Percentage of internal market directives not yet communicated as having been transposed, relative to the total.    (November data, as of 2016 date refers to the year of publication). 7) Deflated house price index (2015=100) (Eurostat). Sources: Eurostat, World Bank, International Institute for Management Development, European Commission calculations.    
 
 
  
 
 
Convergence Report 2022 - Technical annex 

Chapter 2 - Bulgaria 

size  is  comparable  to  those  of  the  five  euro-area 
Member States with the smallest financial sectors. 

As  to  the  financing  of  the  economy,  Bulgaria  has 
less developed credit and equity markets relative to 
GDP  than  countries  in  the  euro  area,  and  market 
financing  (debt  securities  and  listed  shares)  is 
relatively  under  developed.  However,  Bulgaria  is 
still fully comparable to the five euro-area Member 
States  with  the  smallest  national  capital  markets. 
Loans  are  the  dominant  source  of  funding  and 
make  up  116%  of  GDP  in  2020,  compared  to 
240% of GDP in the euro area. Still, corporate debt 
surpasses  the  fundamental  threshold,  although  the 
gap  has  been  narrowing  and 
the  prudential 
benchmark  is  satisfied. (26)  Equity  and  private-
sector-debt  markets  are  very  small  compared  to 
those  of  the  euro  area  and  represent  only  14%  of 
GDP altogether. This compares to 83% for private-
sector  debt  and  73%  for  listed  stocks  in  the  euro 
area.  Government  debt  is  significantly  lower  than 
in  the  euro  area.  In  terms  of  share  in  the  sum  of 
liabilities, loans in Bulgaria are comparable to that 
of  the  euro  area.  For  securities,  the  differences 
the  smaller  share  of  market  funding 
reflect 
available in Bulgaria. 

Bulgaria's banking sector is well integrated into the 
euro-area  financial  sector,  in  particular  through  a 
high  level  of  foreign  ownership  in  the  banking 
system. The share of foreign-owned institutions in 
total  bank  assets  stood  at  77%  in  2020.  Bank 
concentration, as measured by the market share of 
the  five  largest  credit  institutions  in  total  assets, 

(26)  Methodology  to  compute  the  fundamentals-based  and  the 
prudential benchmarks based on Bricongne et al. (2017). 

Demographic  developments  strongly  affect  the 
labour market, and may constrain future economic 
growth. The population has shrunk by around 10% 
for  the  past  decade  on  account  of  both  mortality 
due  to  ageing  and  emigration.  Furthermore,  the 
share of population in working age (15-64 year) is 
also on a declining path, coming down from 68.5% 
in 2010 to 63.9% in 2020. 

The financial sector in Bulgaria is smaller and less 
developed than in the euro area. Relative to GDP, 
assets managed by the financial sector are a quarter 
of  that  of  the  euro  area.  The  financial  sector  has 
grown  since  2016,  but  not  at  the  same  pace  as  in 
the  euro  area.  Banking  dominates  the  Bulgarian 
financial  sector  and  makes  up  more  than  53%  of 
the financial sector’s assets. The central bank is the 
second  largest  holder  of  financial  assets  with  a 
share of 26%, more than all non-banking financial 
intermediaries together.  Although these shares are 
larger  than  in  the  euro  area,  they  compare  well 
with  the  five  euro-area  Member  States  with  the 
smallest financial sectors. 

The  insurance  and  the  pension-fund  sector  in 
Bulgaria  is  much  smaller  than  in  the  euro  area, 
relative to GDP. However, the sector’s share of the 
total  financial  sector  is  comparable  to  that  of  the 
euro  area.  Since  end-2016,  the  Bulgarian  sector 
has  increased  its  holdings  of  financial  assets  by 
3.5 %  of  GDP,  in  the  euro  area  it  increased  by 
12.3 percentage points. Nevertheless, the  financial 
position  of  the  National  Bureau  of  Bulgarian 
Motor  Insurers  has  come  into  question  due  to 
delays  in  the  claims  handling  process  in  one 
undertaking.  This  has  led  to  monitoring  by  the 
international  Council  of  Bureaux,  which  is  still 
ongoing. Moreover, the introduction of the bonus-
malus  system  has  not  progressed  in  the  last  two 
years.  The  investment-funds  sector  plays  a  very 
small role in the Bulgarian financial system, but its 

38 

Table 2.6:Bulgaria - Allocation of assets by financial sub-sectorRatio to GDP (%)BGEAEA 5 smallest201620202016202020162020Financial corporations (total)184191722796177215Central bank495045783761Monetary financial institutions991022863119798Other financial intermediaries17172021792028Non-MMF investment funds1)1210012745Insurance co. and Pension Funds1821901021823Share of total (%)BGEAEA 5 smallest201620202016202020162020Central bank27266102129Monetary financial institutions545340395546Other financial intermediaries9928221112Non-MMF investment funds11141622Insurance co. and Pension Funds1011121310111) MMF stands for money market funds.Source: Eurostat.Table 2.7:Bulgaria - Financing of the economy1)Ratio to GDP (%)BGEAEA 5 smallest201620202016202020162020Liabilities (total)393376743770324335Loans127116238236115112Non-financial co. debt securities43121534Financial co. debt securities1174681112Government debt securities252283955157Listed shares121065731718Unlisted shares68731861935556Other equity938851564248Trade credits and advances646433352929Share of total (%)BGEAEA 5 smallest201620202016202020162020Loans323132313533Non-financial co. debt securities112211Financial co. debt securities0010933Government debt securities6611121617Listed shares339955Unlisted shares172025251818Other equity2423771314Trade credits and advances161745991) The table focuses on the financing needs of a country and how these are met by the financial system. The table is constructed from the liabilities of all economic sectors, but only considers loans, debt securities, equity and trade credits. The sum of liabilities in the table only reflects the total for the liabilities considered.Source: Eurostat. 
 
     
 
 
 
 
   
 
 
                                                           
Convergence Report 2022 - Technical annex 

Chapter 2 - Bulgaria 

has increased significantly since 2016, and reached 
almost 67%  in 2020. This is  14 percentage points 
above  the  euro  area  average  in  2020.  In  parallel 
with the inclusion of the Bulgarian lev in the ERM 
II,  the  Bulgarian  National  Bank  entered  into  a 
close  cooperation  with 
the  ECB,  effectively 
joining the Banking Union. As of 1 October 2020, 
Bulgaria joined the Single Resolution Mechanism, 
and  the  ECB  became  responsible  for  the  direct 
in 
supervision  of 
the  significant 
less 
Bulgaria,  as  well  as 
significant institutions. 

the  oversight  of 

institutions 

Although  intra-EU  integration  in  equity  and  debt 
markets, as measured by the home bias in portfolio 
investments,  are  in  general  relatively  low  across 
EU  Member  States,  Bulgaria  is  commensurate  to 
levels  of  integration  of  the  average  euro-area 
Member  State  in  debt  markets. (27)  Moreover, 
integration  in  this  market  segment  has  improved 
markedly  between  2016  and  2020.  Concerning 
portfolio investments in equity, however, the home 
bias is very strong in Bulgaria relative to euro-area 
Member  States.  Almost  all  investments  in  equity 
markets take place domestically. 

(27)  Home  bias  in  portfolio  investments  measures  the  average 
propensity  of  investors  in  a  Member  State  to  invest 
domestically  as  compared  with  investing  in  other  EU 
countries.  The  indicator  ranges  between  0  and  1,  with  a 
value  of  0  indicating  that  investors  prefer  domestic  over 
foreign  assets.  The  inverse  of  the  home  bias  can  be 
interpreted  as  one  measure  of  financial  integration  among 
EU countries. 

39 

020406080100BG, 2016BG, 2020EA, 2016EA, 2020Concentration in the banking sector (CR5 ratio)Share of foreign institutions as % of total assetsGraph 2.11: Bulgaria -Foreign ownership and concentration in the banking sector(in percent, weighted averages)Source: ECB, Structural financial indicators.0.00.20.4BG, 2016BG, 2020EA, 2016EA, 2020EA Low,2016EA Low,2020DebtEquityGraph 2.12: Bulgaria -Intra-EU integration in equity and debt portfolio investmentNote: The chart shows the extent of home bias in debt and equity markets. A value index of 1 implies ‘full integration’ with the financial markets of other Member States, while 0 denotes ‘no integration’.Source: FinFlows database: European Commission, Joint Research Centre (JRC). (index)  
 
                                                           
   
3.  CZECHIA 

3.1. 

LEGAL COMPATIBILITY 

3.1.1.  Introduction 

The  Česká  národní  banka  (ČNB  –  Czech  national 
bank,  hereafter  ČNB)  was  established  on 
January 1,  1993. Its  main  legal  basis  is  the  Czech 
National  Council  Act  No.  6/1993  Coll.  on  the 
Czech  National  Bank,  adopted  on  17  December 
1992 (the ČNB Law). 

Following  the  Commission’s  2020  Convergence 
Report, the ČNB Law was amended (28). However, 
since  there  have  been  no  amendments  as  regards 
the 
the 
the 
Commission's  2020  Convergence  Report, 
comments  made  in  the  latter  report  are  repeated 
also in this year's assessment. 

incompatibilities 

highlighted 

in 

3.1.2.  Central Bank independence 

Article  9(1)  of  the  ČNB  Law  prohibits  the  ČNB 
and  its  Board  from  taking  instructions  from  the 
President of Czechia, Parliament, the Government, 
authorities,  European  Union 
administrative 
institutions, any government of a Member State of 
the European Union or any other body.  

Article 9(1) of the  ČNB Law needs to be  adapted 
to fully reflect the provisions of Article 130 of the 
TFEU  and  Article  7  of 
the  Statute  and 
consequently  expressly  prohibit  third  parties  from 
giving  instructions  to  the  ČNB  and  its  Board 
members  who  are  involved  in  the  performance  of 
ESCB-related tasks. 

The  power  for  the  Chamber  of  Deputies  of  the 
Parliament  to  impose  modifications  to  the  annual 
financial  report,  which  was  previously  submitted 
and rejected (Article 47(5) of the ČNB Law) could 
hamper  the  ČNB’s  institutional  independence. 
Moreover,  it  is  formulated  in  a  very  general 
manner,  which  could  create  situations  where  the 
Parliament requests changes affecting the financial 
independence  of  the  ČNB.  Thus,  the  current 
wording  of  Article  47(5)  of  the  ČNB  Law 
constitutes  an  incompatibility,  which  should  be 
removed from the Act. 

(28)  The  amendments  stem  from  the  Act.  No.  219/2021  Coll., 
Act  No.  238/2020  Coll.,  Act  No.  353/2021  Coll.  and  Act 
No. 417/2021 Coll. 

Article  6(10)  of  the  ČNB  Law  provides  that 
members  of  the  Bank  Board,  which  also  includes 
the  Governor  of  the  ČNB,  may  be  relieved  from 
office  only  if  they  no  longer  fulfil  the  conditions 
required  for  the  performance  of  their  duties  or  if 
they  have  been  guilty  of  serious  misconduct. 
Although  Article  6(10)  of  the  ČNB  Law  extends 
the  protection  offered  by  Article  14.2  of  the 
ESCB/ECB  Statute  to  Governors  against  arbitrary 
dismissal to all Bank Board members of the ČNB, 
it remains silent on the Governor’s right in case of 
dismissal  to  seek  a  remedy  before  the  Court  of 
Justice of the European Union. However, pursuant 
to  footnote  22,  the  Commission  understands  that 
the  possibility  to  seek  legal  redress  by  the 
Governor  before  the  Court  of  Justice  of  the 
European  Union,  as  enshrined  in  Article  14.2  of 
the  ESCB/ECB  Statute,  would  apply.  However, 
the ČNB Law  would benefit  from a  more  explicit 
clarification.  

to  attend 

Pursuant  to  Article  11(1)  of  the  ČNB  Law,  the 
Minister of Finance or another nominated member 
of the Government may attend the meetings of the 
Bank  Board  in  an  advisory  capacity  and  may 
submit  motions  for  discussion.  Article  11(2) 
entitles  the  Governor  of  the  ČNB,  or  a  Vice-
Governor  nominated  by  him, 
the 
meetings  of  the  Government  in  an  advisory 
capacity. With regard to Article 11(1) of the ČNB 
Law,  although  a  dialogue  between  a  central  bank 
and third parties is not prohibited as such, it should 
be ensured that this dialogue is constructed in such 
a  way  that  the  Government  should  not  be  in  a 
position  to  influence  the  central  bank  when  the 
latter 
its 
independence is protected by the TFEU. The active 
participation  of  the  Minister,  even  without  voting 
right,  in  discussions  where  monetary  policy  is  set 
would  structurally  give  to  the  Government  the 
opportunity  to  influence  the  central  bank  when 
taking  its  key  decisions.  Therefore,  Article  11(1) 
of the  ČNB Law is  incompatible with  Article 130 
of the TFEU, as Member States have to undertake 
not  to  seek  to  influence  the  members  of  the 
decision-making  bodies  of  the  national  central 
bank. 

is  adopting  decisions 

for  which 

41 

                                                           
Convergence Report 2022 - Technical annex 

Chapter 3 - Czechia 

3.1.3.  Prohibition  of  monetary  financing  and 

3.1.4.  Integration in the ESCB 

privileged access 

Objectives 

System 

Pursuant to Article 33a of the ČNB Law, where the 
Financial  Market  Guarantee 
has 
insufficient  funds  to  carry  out  its  duties  arising 
from  the  legislation  on  deposit  insurance  and  this 
situation  might  jeopardise  the  stability  in  the 
financial  market,  the  ČNB  may,  upon  request, 
exceptionally provide it with short-term credit, for 
a  period  of  up  to  three  months,  guaranteed  by 
government bonds or other securities underwritten 
by  the  Government  and  owned  by  the  Financial 
Market  Guarantee  System.  The  Financial  Market 
Guarantee  System  qualifies  as  a  “body  governed 
by  public  law”  within  the  meaning  of  Article 
123(1)  of  the  TFEU,  being  closely  dependent  on 
the  public  sector  entities  referred  to  in  Article 
123(1)  of  the  TFEU.  The  governing  body  of  the 
Financial  Market  Guarantee  System  is  composed 
of two employees of the Czech National Bank, two 
employees  of  the  Ministry  of  Finance,  and  one 
representative  appointed  on  a  proposal  from  the 
Czech  Banking  Association.  Although  only  a 
minority  of  the  members  of  the  Financial  Market 
Guarantee 
are 
representatives  of  the  Ministry  of  Finance,  the 
Ministry  of  Finance  has  the  right  to  appoint  and 
dismiss  all  the  members  of  the  Financial  Market 
Guarantee  System’s  governing  body.  Therefore, 
the provisions laid down in Article 33a of the ČNB 
Law  regarding  the  possibility  of  ČNB  granting 
the  Financial  Market 
short-term  credit 
Guarantee  System  are  not  compatible  with  the 
monetary  financing  prohibition  and  the  relevant 
legal framework should be amended accordingly.  

governing 

System’s 

body 

to 

institutions  or  other  entities  of 

Article 34a(1) first half-sentence of the ČNB Law 
prohibits 
the  ČNB  from  providing  overdraft 
facilities or any other type of credit facility  to the 
the 
bodies, 
European Union, central governments, regional or 
local  authorities  or  other  bodies  governed  by 
public  law,  other  entities  governed  by  public  law 
or public undertakings of the Member States of the 
European Union. The list of entities does not fully 
mirror the one in Article 123(1) of the TFEU and, 
therefore, has to be amended. 

Moreover,  the  footnote  in  Article  34a(2)  of  the 
ČNB  Law  should  refer  to  Article  123(2)  of  the 
TFEU  instead  of  globally  to  Article  123  of  the 
TFEU. 

42 

Pursuant  to  Article  2(1)  of  the  ČNB  Law,  "in 
addition"  to  the  ČNB's  primary  objective  of 
maintaining price stability, the ČNB shall work to 
ensure financial stability and the safety and sound 
operation  of  the  financial  system  and  –  without 
prejudice  to  its  primary  objective  –  support  the 
general  economic  policies  of the  Government  and 
the European Union. Article 2(1) of the ČNB Law 
needs  to  be  amended  with  a  view  to  achieving 
compatibility with Article 127 TFEU and Article 2 
of  the  ESCB/ECB  Statute.  Compatibility  with  the 
ESCB's  objectives  requires  a  clear  supremacy  of 
the primary objective over any other objective. 

Tasks 

The  incompatibilities  in  this  area,  following  the 
TFEU provisions and ESCB/ECB Statute, include: 

  definition  of  monetary  policy  and  monetary 
functions,  operations  and  instruments  of  the 
ECB/ESCB (Articles 2(2)(a), 5(1) and 23 to 26, 
28, 29, 32, 33 of the ČNB Law); 

  conduct  of  exchange  rate  operations  and  the 
definition  of  exchange  rate  policy  (Articles  35 
and 36 of the ČNB Law); 

  holding  and  management  of  foreign  reserves 
(Articles 35(c), 36 and 47a of the ČNB Law); 

  non-recognition of the competences of the ECB 
and of the Council on the banknotes and coins 
(Article  2(2)(b),  Articles  12  to  22  of  the  ČNB 
Law); 

  ECB's right to impose sanctions (Article 46a of 

the ČNB Law);  

 

policy 
the 

the  possibility  for  Parliament 
to  demand 
amendments  to  the  report  of  the  ČNB  on 
to 
monetary 
determine 
the 
extraordinary report in view of the absence of a 
specification 
the  non-forward-
looking  nature  of  the  reports  (Article  3  of  the 
ČNB Law). 

developments 
content/scope 

regarding 

and 
of 

  There are also some imperfections regarding: 

 

the  partial  absence  of  reference  to  the  role  of 
the  ECB  and  of  the  EU  in  the  collection  of 
statistics (Article 41); 

  non-recognition  of  the  role  of  the  ECB  in  the 
functioning  of  the  payment  systems  (Articles 
2.2 c), 38 and 38a of the ČNB Law); 

  non-recognition  of  the  role  of  the  ECB  and  of 
the  Council  in  the  appointment  of  the  external 
audit  of  the  ČNB  (Article  48(2)  of  the  ČNB 
Law); 

  absence  of  an  obligation  to  comply  with  the 
Eurosystem's regime for the financial reporting 
of  NCB  operations  (Article  48  of  the  ČNB 
Law); 

  non-recognition  of  the  role  of  the  ECB  in  the 
field  of  international  cooperation  (Article  2(3) 
of the ČNB Law). 

3.1.5.  Assessment of compatibility 

As  regards  the  independence  of  the  central  bank, 
the  prohibition  of  monetary  financing  and  the 
integration of the central bank in the  ESCB at the 
time  of  euro  adoption,  the  ČNB  Law  is  not  fully 
compatible with the compliance duty under Article 
131  of  the  TFEU.  The  Czech  authorities  are 
invited 
above-mentioned 
incompatibilities. 

remedy 

the 

to 

3.2. 

PRICE STABILITY 

3.2.1.  Respect of the reference value 

to  2.7% 

The 12-month average inflation rate, which is used 
for  the  convergence  assessment,  was  above  the 
reference value at the time of the last convergence 
assessment  of  Czechia  in  2020.  After  a  gradual 
increase  up  to  3.4%  in  October  2020,  it  steadily 
decreased 
in  summer  2021,  before 
increasing steeply to 6.2% in April 2022. In April 
2022, the reference  value  was 4.9%, calculated as 
the average of the 12-month average inflation rates 
in France, Finland, and Greece plus 1.5 percentage 
points. The corresponding inflation rate in Czechia 
was  6.2%,  i.e.  1.3  percentage  points  above  the 
reference  value.  According  to  the  Commission’s 
Spring  2022  Economic  Forecast,  the  12-month 
average  inflation  rate  is  projected  to  remain  well 
above the reference value in the months ahead. 

Convergence Report 2022 - Technical annex 

Chapter 3 - Czechia 

3.2.2.  Recent inflation developments 

The  annual  HICP 
inflation  rate  experienced 
considerable volatility in the past two years. After 
peaking  at  3.8%  in  January  2020,  it  followed  a 
broad  downward  path  in  2020  to  reach  a  low  of 
2.1%  in  February  2021.  The  deceleration  was 
mainly  due  to  declining  energy  prices.  HICP 
inflation  then  increased  steadily  from  2.2%  to 
5.4%  at  the  end  of  2021,  exceeding  the  central 
bank’s upper tolerance band of 3.0% continuously 
from  August  onwards (29).  It  surged  further  to 
13.2% in April 2022. The acceleration of inflation 
since  the  beginning  of  2021  is  explained  by  a 
combination  of  strong  domestic  demand  and 
external factors related to supply chain bottlenecks 
and surging energy prices. Since end 2018, annual 
HICP inflation has been higher in Czechia than in 
the euro area.  

inflation  (measured  as  HICP 

Core 
inflation 
excluding  energy  and  unprocessed  food  prices) 
was  above  headline  inflation  in  2020  and  2021. 
This  was  mainly  due  to  on  average  rather  low 
energy inflation and slowdown of the  food prices. 
The annual core inflation oscillated between 3.3% 
and  4.2%  in  2020.  It  then  decelerated  moderately 
up  to  summer  2021  due  services  inflation  before 
accelerating  steadily  to  reach  a  rate  of  6.4%  in 
December  and  10.4%  in  April  2022.  Prices  of 
services  slowed  down  between  summer  2020  and 
September  2021,  but  started  gathering  pace 
afterwards.  The  surge  in  core  inflation  since 
summer 2021 has been broad-based, with services, 
non-energy  industrial  goods  and  processed  food 
prices all increasing strongly.  

(29)  It  is  important  to  note  that  the  ČNB’s  tolerance  band  is 
based  on CPI  inflation,  which  was  even  higher  during  the 
same period due to a different basket composition. 

43 

02468101214Jan-16Jan-17Jan-18Jan-19Jan-20Jan-21Jan-22CzechiaReference valueGraph 3.1: Czechia -Inflation criterion(percent, 12-month moving average)Note: The dots at the right end of the chart show the projected reference value and 12-month average inflation rate of the country in December 2022.The reference values for 2016, 2018 and 2020 refer to the reference values calculated in the previous Convergence Reports.Source: Eurostat, Commission's Spring 2022 Economic Forecast.          
                                                           
Convergence Report 2022 - Technical annex 

Chapter 3 - Czechia 

remained  low  during  much  of  2021  and  started 
rebounding only towards the end of 2021. 

According  to  the  Commission’s  Spring  2022 
Economic  Forecast,  real  GDP  is  expected  to 
increase by about 1.9% in 2022 and 2.7% in 2023. 
Consequently,  the  Czech  economy  is  projected  to 
reach  the  pre-pandemic  output  level  only  during 
the second quarter of 2023. 

the  phase-out  of 

In order to help combat the negative effects of the 
COVID  pandemic  on  the  economy,  the  fiscal 
stance  was  strongly  expansionary  in  2020  and  in 
2021 (30),  through  employment  retention  schemes 
as  well  as  support  targeted  at  the  most  affected 
sectors.  The  fiscal  stance  is  expected  to  turn 
neutral in 2022 (+0.1% of GDP) as the expenditure 
financed  through  the  RRF  and  other  EU  grants 
contributes  positively  by  around  1.0%  of  GDP. 
Still, 
the  pandemic-related 
measures is to help offset some of the inflationary 
pressures.  Additional  measures  to  cope  with  the 
inflow  of  people  fleeing  Ukraine  as  well  as  the 
support 
the  high 
to  households  affected  by 
inflation  are  also  to  provide  an  expansionary 
consumption 
Government 
contribution. 
contributed  positively  to  GDP  growth  with  a  real 
growth of 3.4% in 2020 and 1.6% in 2021 but its 
real growth pace is expected to slow down to 0.6% 
in 2022, before picking up to 1.3% in 2023. On the 
other hand, public investments growth rate is likely 

(30)  The  fiscal  stance  is  measured  as  the  change  in  primary 
expenditure  (net  of  discretionary  revenue  measures), 
excluding  COVID-19  crisis-related  temporary  emergency 
measures  but  including  expenditure  financed  by  non-
repayable  support  (grants)  from 
the  Recovery  and 
Resilience Facility and other EU funds, relative to medium-
term  potential  growth.  A  negative  (positive)  sign  of  the 
indicator  corresponds  to  an  excess  (shortfall)  of  primary 
expenditure growth compared with medium-term economic 
growth,  indicating  an  expansionary  (contractionary)  fiscal 
policy 

3.2.3.  Underlying  factors  and  sustainability  of 

inflation 

Macroeconomic  policy  mix  and  growth 
developments 

Due to the negative impact of the global pandemic, 
the Czech economy decelerated in 2020, when real 
GDP  declined  by  5.8%.  The  Czech  economy 
rebounded  by  3.3%  in  2021,  as  activity  benefited 
from  the  easing  of  pandemic-related  restrictions. 
Private  consumption  was  the  main  driver  of  GDP 
growth  in  2021,  supported  by  low  unemployment 
and  a  pick-up  in  real  disposable  income  growth, 
partially  due  to  income  tax  changes.  Private 
consumption is expected to remain the main driver 
of 
reflecting  high 
employment 
levels,  pent-up  demand  and  a 
declining  saving  rate  of  households.  A  sharp 
increase  in  the  cost  of  living,  in  particular  due  to 
high energy prices is, however, likely to weigh on 
domestic  spending.  Gross  fixed  capital  formation 
declined  strongly  in  2020  (by  7.5%),  largely 
influenced  by  low  investment  activity  in  the 
industry.  Facing  further  problems 
automotive 
investment  activity 
related 

to  supply  chains, 

the  economic 

recovery, 

44 

-202468101214201620172018201920202021CzechiaEuro areaGraph 3.2: Czechia -HICP inflation(y-o-y percentage change)Source: Eurostat.Table 3.1:weights  Czechia - Components of inflation(percentage change)1)in total   201620172018201920202021Apr-222022HICP0.62.42.02.63.33.36.21000Non-energy industrial goods0.80.60.60.52.64.36.7269Energy-2.51.23.24.8-1.51.712.1117Unprocessed food 0.52.22.31.48.4-1.30.352Processed food1.24.41.72.75.04.35.5249Services1.52.92.63.43.63.15.1314HICP excl. energy and unproc. food1.22.61.82.33.73.85.7831HICP at constant tax rates 0.42.61.92.63.23.46.01000Administered prices HICP1.41.11.53.73.60.84.51451) Measured by the arithmetic average of the latest 12 monthly indices relative to the arithmetic average of the 12 monthly indices    in the previous period.Source: Eurostat, European Commission calculations.   
                                                           
 
 
    
 
 
Convergence Report 2022 - Technical annex 

Chapter 3 - Czechia 

Wages and labour costs 

The  labour  market  continued  to  perform  well  in 
2020  and  2021.  Despite  its  tightness,  Czechia’s 
labour market was in a good position to absorb the 
impact  of  the  crisis.  Cushioned  by  temporary  job 
retention  schemes  supporting  self-employed  and 
companies,  the unemployment rate  increased only 
slightly  to  2.6%  in  2020  (annual  average)  and  to 
2.8%  in  2021.  As  a  result,  nominal  wage  growth 
continued  to  be  buoyant  in  2020  and  2021 
(supported  by 
sector 
employees).  Although  wage  growth  moderated 
significantly  in  2020  due  to  the  impact  of  the 
pandemic  and  supply  chain  disruptions,  the  still 
high  growth  rate  compared  to  the  historical 
average  is  mainly  attributable  to  persisting  labour 
shortages, due to e.g. demographic factors, and to 
an  increase  in  the  minimum  wage (32).  Wages  in 
both  the  public  and  private  sector  showed  similar 
growth dynamics in 2020 and 2021. 

for  public 

increases 

adversely 

On  the  sectoral  level,  differences  in  wage  growth 
are  observed.  Notably,  the  sectors  that  have  been 
chain 
affected  by 
most 
disruptions  and  that  have  faced  relatively  less 
labour 
lower  wage 
increases.  The  RRP  will  support  Czechia  in 

experienced 

shortages 

supply 

(32)  Despite  the  increase  in  the  minimum  wage,  the  relative 
value in PPS of the statutory minimum wage in Czechia is 
the  fifth  lowest  in  the  EU, after  Latvia, Bulgaria, Estonia, 
and Slovakia.  

45 

to accelerate in 2022 and 2023 with the help of EU 
funds,  with  investments-to-GDP  ratio  expected  to 
increase towards a past decade high of 5%. 

The  ČNB  conducts  monetary  policy  within  an 
inflation  targeting  framework.  The  use  of  the 
exchange  rate  as  an  additional  monetary  policy 
instrument  was  discontinued  in  April  2017.  The 
decision  was  supported  by  macroeconomic  data 
and  forecasting  scenarios  indicating  a  sustainable 
fulfilment  of  the  2%  inflation  target  over  the 
forecast  horizon.  After  a  hike  in  February  2020, 
the  ČNB  eased  significantly  its  main  policy  rate 
(the  2-week  repo  rate)  cutting  it  by  200  basis 
points in three steps in March and May to 0.25%, 
to  counter  the  impact  of  the  pandemic  on  the 
Czech  economy.  The  key  policy  rate  was  kept  at 
this  low  level  until  June  2021.  Due  to  strongly 
increasing  domestic  inflation  pressures,  the  ČNB 
Board raised its policy rates as from summer 2021. 
increased  by 
Overall, 
550 basis  points  to  reach  5.75%  after  the  ČNB 
Board’s decision at the meeting in early May 2022. 
From  early  March  2022,  the  ČNB  has  been 
repeatedly  active  in  the  exchange  rate  market 
(stabilising  intervention)  in  the  aftermath  of  the 
Russia’s invasion of Ukraine (31), although shortly, 
on  the  back  of  self-stabilising  mechanisms  in  the 
exchange rate market. 

the  main  policy  rate 

(31)  The  details  are  provided  in  Section  3.4  on  exchange  rate 

stability. 

Table 3.2:Czechia - Other inflation and cost indicators(annual percentage change)20162017201820192020202120221)20231)HICP inflationCzechia0.62.42.02.63.33.311.74.5Euro area0.21.51.81.20.32.66.12.7Private consumption deflatorCzechia0.42.32.52.82.83.111.75.4Euro area0.41.31.51.10.52.35.82.7Nominal compensation per employeeCzechia4.07.28.17.23.25.72.45.3Euro area1.21.72.12.1-0.74.13.63.5Labour productivityCzechia0.93.61.82.8-4.23.2-0.32.4Euro area0.41.00.20.3-4.94.21.41.5Nominal unit labour costsCzechia3.03.56.14.37.72.42.82.8Euro area0.80.72.01.94.40.02.22.0Imports of goods deflatorCzechia-3.80.6-0.60.6-1.04.98.22.9Euro area-3.33.32.6-0.5-3.89.613.20.81) Commission Spring 2022 Economic Forecast.Source: Eurostat, Commission's Spring 2022 Economic Forecast.                                                           
                                                           
 
 
  
 
 
Convergence Report 2022 - Technical annex 

Chapter 3 - Czechia 

prices  for  machinery  and  transport  equipment  as 
well as increasing energy prices. 

spring  2020  but 

The  nominal  effective  exchange  rate  (measured 
against  the  main  36  trading  partners)  depreciated 
in 
recovered  afterwards, 
contributing to bringing import prices down during 
that period. Import prices are set to remain broadly 
stable  in  2022,  as  the  effect  of  the  expected 
appreciation of the koruna in 2022 should be offset 
the 
inflationary  pressures  stemming  from 
by 
supply  chain  bottlenecks  and  by  elevated  oil 
prices. 

Administered prices and taxes 

The  share  of  administered  prices  in  the  HICP 
basket  stabilised  at  15.6%  in  2021,  slightly  above 
the  euro  area  average  of  13.3%.  Changes  in 
administered  prices  were  a  significant  driver  of 
inflation  in  2020,  as  they  increased  by  3.6%,  i.e. 
faster than headline HICP. This was not the case in 
2021,  where  growth  in  administered  prices  was 
just 0.8%, compared to 3.3% for the overall HICP. 
Increases in heat energy were the main contributor 
to the increase  in administered prices in 2020 and 
their  decline  in  2021.  HICP  at  constant  tax  rates 
was  around  the  same  level  as  headline  inflation 
(3.4%). 
both 
Administered  prices  picked  up  sharply  in  January 
2022,  due  to  a  surge  in  energy  prices  and  the 
reintroduction  of  VAT  on  electricity  and  gas  (the 
the  government  support 
non-prolongation  of 
measures in late 2021). 

(3.2%)  and  2021 

in  2020 

Medium-term prospects 

Annual  HICP  inflation  increased  in  early  2022, 
driven  by  increasing  energy  prices,  accompanied 
by increasing food prices and prices of services, as 
well  as  further  rises 
in  administered  prices, 
changes to indirect taxes and non-energy industrial 
goods  inflation.  Inflation  is  expected  to  remain 
elevated  in  the  second  half  of  2022,  before 
moderating 
in  2023,  as  global  supply  side 
distortions  take  time  to  resolve,  and  the  on-going 
tightening of domestic monetary conditions comes 
into effect. According to the Commission’s Spring 
2022 Economic Forecast, annual HICP inflation is 
projected to average at 11.7% in 2022 and 4.5% in 
2023.  In  order  to  combat  the  effects  of  the  high 
inflation,  the  government  lowered  temporarily  the 
excise duties on petrol and diesel (from June until 
September 2022) and reduced the road tax on cars 
and  trucks.  However,  it  is  expected  that  these 
measures  will  have  only  a  limited  effect  on 

such 

sectoral 

imbalances 

overcoming 
by 
promoting  policies  that  are  inclusive  and  targeted 
at  boosting  skills,  fostering  the  green  and  digital 
and 
transition, 
diminishing 
risks 
stemming  for  instance  from  import  dependencies 
in energy. 

current  macroeconomic 

entrepreneurship 

stimulating 

in  2020  and 
Labour  productivity  declined 
recovered only partially in 2021. As compensation 
per  employee  kept  growing  at  a  faster  pace  than 
productivity,  nominal  unit  labour  costs  grew  by 
7.7% in 2020, and 2.4% in 2021. According to the 
Commission’s  Spring  2022  Economic  Forecast 
wage  growth  is  expected  to  have  picked  up  in 
2021, grow slightly less in 2022 and increase more 
again in 2023, while productivity remains subdued 
in  2022  with  an  expected  pick-up  in  2023.  Unit 
labour cost growth will also notably depend on the 
way labour  shortages are addressed and the  scope 
companies have to increase wages, during this time 
of elevated inflation. In the medium- to long term, 
inflation is expected to lead to increases in nominal 
wages. In the short-term, wage growth is, however, 
expected  to  be  somewhat  limited  given  inflation, 
overall 
disruptions 
chain 
supply 
macroeconomic 
profit 
uncertainty 
margins  and  therefore  limiting  the  possibilities  of 
companies to increase wages. Overall, the risks of 
significant second-round effects of wage increases 
– a wage-price spiral – appear to be constrained. 

and 
reducing 

External factors 

the  size  and  openness  of 

the  Czech 
Given 
economy,  import  prices  have  a  sizeable  effect  on 
domestic  price  formation.  The  imports  of  goods 
deflator  fell  by  1%  in  2020,  mainly  due  to 
declining  oil  prices.  The  fall  was  more  moderate 
than  in  the  euro  area  (-3.8%).  In  2021,  goods’ 
import  prices  increased  by  about  4.9%,  driven  by 

46 

-6-30369121520162017201820192020202120222023Productivity (real GDP per person employed)Nominal compensation per employeeNominal unit labour costsHICP inflationGraph 3.3: Czechia -Inflation, productivity and wage trends(y-o-y % change)Source: Eurostat, Commission's Spring 2022 Economic Forecast.    
Convergence Report 2022 - Technical annex 

Chapter 3 - Czechia 

inflation.  Support  measures  targeted  at  the  low-
income households have also been introduced and 
the household allowance have been increased. 

The  risks  to  the  inflation  outlook  are  unusually 
high  overall.  The  main  upside  risks  are  weaker 
anchoring  of  inflation  expectations  and  slower 
appreciation of the koruna because of tightening of 
monetary policy abroad. At the same  time,  higher 
than  expected  wage  growth  and  repercussions  of 
Russian’s  invasion  of  Ukraine  could  push  prices 
up. By contrast, consolidation of public finances is 
a slight downside risk to inflation.  

The level of consumer prices in Czechia was about 
73%  of  the  euro-area  average  in  2020,  suggesting 
that  there  is  still  potential  for  further  price  level 
convergence in the long term. Since 2012, Czechia 
has steadily converged to the euro area average in 
GDP per capital in PPS, to about 88% in 2021 (the 
COVID-19  pandemic  brought  about  a  small  tick 
down from 89% reached in 2020). 

3.3. 

PUBLIC FINANCES 

3.3.1.  Recent fiscal developments 

On the back of an ample fiscal expansion launched 
to combat the effects of the COVID crisis, Czechia 
reported  a  deficit  of  the  general  government 
budget of  5.8% in 2020 and 5.9% in 2021. While 
government  revenues  proved  more  resilient  with 
the revenue-to-GDP ratio dropping only 1 pp from 
41.4% in 2019 to 40.5% in 2021, the expenditure-

to-GDP  ratio  expanded  from  41.0%  in  2019  to 
in  2021.  Temporary  COVID-related 
46.4% 
measures  taken  by  the  government  accounted  for 
extra  expenses  of  about  2.7%  of  yearly  GDP  on 
average  in  2020  and  2021.  Among  the  largest 
the  short-time  work 
temporary  measures  are 
schemes,  i.e.  “Antivirus”  programme  and  the 
Compensatory  bonus  for  self-employed  or  the 
companies  support  programs  “COVID-Uncovered 
temporary 
costs”  and  “COVID-2021”.  These 
in  maintaining 
schemes  were 
employment 
the 
crisis. (33)  They  were  supplemented  by  permanent 
measures like the decrease in the personal income 
tax (about 1.8% of GDP per year) as well as cuts in 
VAT for certain services or the  elimination of the 
residential transaction tax. 

for  businesses  affected  by 

instrumental 

The  2021  general  government  deficit  of  5.9%  of 
GDP  (almost  unchanged  vs  5.8%  in  2020)  was 
significantly better than the estimate of 8.8% in the 
2021  Convergence  Programme.  This  is  explained 
by  a  higher  nominal  GDP  growth  of  7.6% 
compared  to  4.9%  in  the  program  but  also  lower 
take-up  for  some  of  the  pandemic-related  support 
measures. 

While  public  debt  is  still  low  compared  to  other 
EU Member States, the pace of its growth in 2020-
2021  was  high,  with  public  debt-to-GDP  ratio 

(33)  However,  a  recently  published  review  of  government 
accounts  by  the  independent  Supreme  Audit  Office  found 
most  of  the  2021  increase  of  government  expenditures  as 
not related to the COVID-19 pandemic. 

47 

Table 3.3:Czechia - Budgetary developments and projections (as % of GDP unless indicated otherwise)Outturn and forecast 1)20162017201820192020202120221)20231)General government balance0.71.50.90.3-5.8-5.9-4.3-3.9- Total revenue40.540.541.541.441.640.540.239.8- Total expenditure39.839.040.641.147.346.444.543.7   of which: - Interest expenditure0.90.70.70.70.80.70.90.9p.m.: Tax burden35.135.436.036.036.135.134.033.6Primary balance1.62.21.61.0-5.0-5.1-3.4-3.0Fiscal stance 2)0.0-1.30.10.1Government gross debt36.634.232.130.137.741.942.844.0p.m: Real GDP growth (%)2.55.23.23.0-5.83.31.92.71) Commission’s Spring 2022 Economic Forecast.2) A negative (positive) sign of the indicator corresponds to an excess (shortfall) of primary expenditure growth compared with medium-term economic growth, indicating an expansionary (contractionary) fiscal policy.Source: European Commission.                                                           
 
 
  
 
 
Convergence Report 2022 - Technical annex 

Chapter 3 - Czechia 

additional  measures  taken  by  the  government  to 
counter  the  social  and  economic  impact  of  the 
increase  in energy prices,  as well as the  provision 
of  humanitarian  assistance 
to  people  fleeing 
Ukraine. 

the  government  balance 

According  to  the  Commission’s  Spring  2022 
Economic  Forecast  and  based  on  a  no-policy 
change  scenario, 
is 
expected to decrease to 4.3% of GDP in 2022 and 
further to 3.9% in 2023, as revenues are expected 
to grow strongly on the back of high nominal GDP 
growth,  while  COVID-19  temporary  emergency 
measures are expected to be phased out. 

In  2022,  the  fiscal  stance  is  projected  in  the 
Commission’s  Spring  2022  Economic  Forecast  to 
be  broadly  neutral,  at  +0.1%  of  GDP (34).  The 
positive  contribution  to  economic  activity  of 
expenditure  financed  by  Recovery  and  Resilience 
Facility  grants  and  other  EU  funds  is  projected  at 
2.0  percentage  points  of  GDP  in  2022,  higher  by 
1.0  percentage  points  of  GDP  compared  to  2021. 
Nationally  financed  investment  is  projected  to 
provide  a  contractionary  contribution  to  the  fiscal 
stance  of  0.6  percentage  points  in  2022.  At  the 
same  time,  the  growth  in  nationally  financed 
primary  current  expenditure  (net  of  new  revenue 
measures)  in  2022  is  projected  to  provide  a 
contractionary  contribution  of  0.7  percentage 
points  of  GDP  to  the  overall  fiscal  stance,  as 
current expenditure is set to grow at a slower pace 
than medium-term potential growth. 

In 2023, the fiscal stance is projected at +0.1% of 
GDP.  The  positive  contribution 
to  economic 
activity  of  expenditure  financed  by  Recovery  and 
Resilience  Facility  grants  and  other  EU  funds  is 

(34)  For a definition of the fiscal stance used in this Report, see 
footnote  in  Section  3.2.3  on  underlying  factors  and 
sustainability of inflation. 

increasing  from 30.1% in 2019 to 41.9% in 2021, 
driven by the negative headline balance only partly 
offset  by  nominal  GDP  growth.  Liquidity  support 
for  households  and  companies  in  the  form  of 
guarantees did not have a direct budgetary impact, 
but  the  guarantees  provided  in  response  to  the 
contingent 
COVID-19 
liabilities, estimated by the Commission services at 
around 1.5% of 2022 GDP as of March 2022. 

pandemic 

represent 

3.3.2.  Medium-term prospects 

The  2022  budget  approved  by 
the  Czech 
parliament  in  March  2022  envisages  a  central 
government  deficit  of  4.2%  of  GDP  and  aims  to 
start  a  correction  of  the  high  deficit  registered  in 
the  previous  years.  The  budget  maintains  the  tax 
cuts  implemented  in  2020  (e.g.  the  cut  in  the 
personal  income  tax)  and  focuses  instead  on 
limiting  public  expenses  growth.  A  planned 
phasing-out  of  the  temporary  COVID-19  support 
measures  will  help  contain  related  expenses. 
Public wages growth for 2022 has been limited to 
6%  for  health  personnel,  while  other  public 
employees’  categories  had  either  small  indexation 
or  their  salaries  frozen.  On  the  other  hand,  due  to 
high  inflation,  pensions  are  set  to  be  boosted  by 
two automatic indexations (in January and in June 
2022), 
to  add  pressure  on 
expenditure.  Investments  are  to  expand  further  on 
the  back  of  a  higher  contribution  of  EU  funds 
including  the  Recovery  and  Resilience  Facility 
(RRF). In light of the increase in energy prices, the 
Government adopted measures to help households 
and  companies  to  cope  with  the  economic  and 
social  impact  of  rising  prices.  The  measures 
consist  of  a  temporary  decrease  in  excises  duties 
on fuel prices (0.1% of GDP) but also increase  in 
housing  allowances  targeted  at  lower  income 
households  (0.1%  of  GDP).  The  budgetary  costs 
related  to  assisting  people  fleeing  Ukraine  is 
assumed, according to Commission’s Spring 2022 
Economic Forecast at close to 0.4% of GDP. 

thus  continuing 

in  2022  and  at  3.2% 

The  2022  Convergence  Programme  has  been 
approved by the government on 11 May 2022. The 
Program  aims  to  provide  a  consolidation  path  of 
the  public  finances  over  the  medium  term.  The 
Program  expects  the  general  headline  balance  at 
4.5% 
in  2023.  The 
consolidation path is mostly based on containment 
of  expenses  that  are  forecast  to  grow  slower  than 
the nominal GDP growth, thus creating savings of 
1.4% of GDP in 2022 and another 1.8% of GDP in 
2023,  compared  with  the  levels  from  2021.  The 
government  deficit  in  2022  is  impacted  by  the 

48 

-2-10122020202120222023Net nationally financed  primary current expenditureNationally financed investmentOther capital expenditureExpenditure financed by RRF grants and EU fundsFiscal stanceExpansionaryContractionaryGraph 3.4: Czechia -Fiscal stance and its components(percent of GDP)Source: Commission's Spring 2022 Economic Forecast.     
                                                           
projected  to  increase  by  0.1  percentage  points  of 
GDP  in  2023.  Nationally  financed  investment  is 
projected  to  provide  an  expansionary  contribution 
to  the  fiscal  stance  of  0.2  percentage  points  of 
GDP (35),  whereas 
in  nationally 
financed  primary  current  expenditure  is  projected 
to  provide  a  contractionary  contribution  of  0.4 
percentage  points  to  the  overall  fiscal  stance  in 
2023.  

the  growth 

The  government-debt-to-GDP  ratio  is  forecast  by 
the Commission to increase to 42.8% in 2022 and 
44.0% in 2023, which is about 6 percentage points 
higher  than  in  2020,  driven  by  the  negative 
headline  balance,  being  only  partly  offset  by  the 
robust nominal GDP growth. 

Debt  sustainability  risks  appear  medium  over  the 
medium  term,  as  government  debt  is  projected  to 
increase  to  around  61%  of  GDP  in  2032.  This 
projection  assumes  that  the  structural  primary 
balance (except  for the impact of ageing) remains 
constant at the forecast level for 2023 of  -2.5% of 
GDP, hence below the 2019 level.  

The sensitivity to possible macro-fiscal shocks also 
contributes to this assessment. In particular, if only 
half of the projected improvement in the structural 
primary  balance  in  2022–2023  were  to  occur,  the 
projected  debt  ratio  in  2032  would  be  almost  10 
percentage  points  of  GDP  higher  than  in  the 
baseline.  

Some  factors  mitigate  risks,  including  and  the 
expected  positive  impact  on  long-term  growth  of 
reforms  under  the  Recovery  and  Resilience  Plan. 
In  addition,  Czechia’s  negative  net  international 
investment position is contained, and this position 
is  even  positive  when  excluding  non-defaultable 
instruments.  Risk-increasing  factors  include  the 
possible materialisation of state guarantees granted 
to  firms  and  self-employed  during  the  COVID-19 
crisis  though  this  risk  appears  limited  given  the 
relatively low level and low take-up (36). 

The  capacity  of  the  Czech  fiscal  framework  to 
ensure  sustainable  public  finances  is  under  test. 
The  act  establishing  the  Czech  fiscal  rules  was 
amended  twice  in  2020:  the  April  amendment 
allowed for a larger structural deficit and a longer 
the  December  2020 
adjustment  path,  while 

(35)  Other  nationally  financed  capital  expenditure  is  projected 

to provide a neutral contribution. 

(36)  For  further  details  see  the  2021  Fiscal  Sustainability 

Report. 

Convergence Report 2022 - Technical annex 

Chapter 3 - Czechia 

amendment  corresponded  to  a  “tax  package”, 
which widened further the structural deficit. As the 
debt outlook has deteriorated, there is a higher risk 
that the threshold  for triggering the  debt brake  (at 
55% of GDP) would be reached over the medium 
term.  Moreover,  the 
increase  of  the  general 
government  deficit  over  the  forecast  horizon  is 
mostly  due  to  permanent  measures.  Against  this 
background and in line with its mandate, the Czech 
Fiscal  Council  found  the  2020  budget  compliant 
with  the  national  fiscal  rules  and  that  the  starting 
position  for  debt  projections  had  significantly 
worsened  the  fiscal  sustainability  prospects  over 
the  long-term.  The  Committee  on  Budgetary 
Forecasts, 
the 
forecasts, 
macroeconomic 
confirmed  the  realism  of  the  forecasts  in  all  its 
2021 
local  governments 
continued  to  have  a  positive  albeit  decreasing 
contribution  to  the  general  government  balance  in 
2020. Only six municipalities with debt above 60% 
of  their  average  revenues  over  the  previous  four 
years  had  to  take  remedial  action  with  respect  to 
the  debt  reduction  rule (37).  Finally,  a  draft  law 
amending  Act  No  166/1993  is  currently  under 
consideration  to  broaden  the  mandate  of  the 
Supreme Audit Office.  

assessments.  The 

budgetary 

assessing 

tasked 

with 

and 

3.4. 

EXCHANGE RATE STABILITY 

The Czech koruna does not participate in ERM II. 
Since the late 1990s, the ČNB has been operating 
an explicit inflation targeting framework combined 
with  a  de  jure  floating  exchange  rate  regime, 
allowing 
exchange  market 
interventions by the central bank (38). The ČNB is 
legally  allowed 
to  conduct  foreign  exchange 
interventions to influence the koruna exchange rate 
and moderate excessive exchange rate volatility in 
exceptional situations (e.g. in 2022). 

foreign 

for 

Following  the  expiry  of  the  ČNB's  exchange  rate 
commitment in April 2017, the koruna followed a 
gradual  appreciation 
the  euro, 
strengthening  from  above  27  CZK/EUR  in  early 
April 2017 to 25.5 CZK/EUR in May 2018, around 
which  level  it  oscillated  until  end  of  2019. 
Following  the  lock-down  measures  taken  in  the 

trend  against 

(37)  Should  the  debt  of  a  local  authority  exceed  60%  of  its 
average  annual  revenues  over  the  last  four  budget  years, 
the debt reduction rule implies that the local authority shall 
reduce its debt in the following year by at least 5% of the 
difference  between  the  amount  of  its  debt  and  60%  of  its 
average revenues over the last four budget years. 

(38)  Since 2010, the inflation target is set at 2% with a tolerance 

band of +/- 1%. 

49 

                                                           
                                                           
significantly 

early  stages  of  the  COVID-19  pandemic,  the 
koruna  depreciated 
above  27 
CZK/EUR in March. It then oscillated between 26 
CZK/EUR and slightly above 27 CZK/EUR before 
entering  an  appreciation  phase  from  late  2020  to 
reach 24.5 CZK/EUR early 2022. The appreciation 
was mostly driven by a sharp monetary tightening 
by the ČNB. However, in the wake of the Russia’s 
invasion of Ukraine the Czech koruna experienced 
strong  depreciation  pressures,  which  triggered 
short-lived stabilising interventions of the ČNB in 
the  foreign  exchange  market  in  early  March.  In 
April  2022,  the  koruna  was  trading  again  around 
24.4 CZK/EUR. The ČNB has entered the foreign 
market  around  mid-May  again  to  support  the 
Czech koruna with the aim to limit its depreciation 
following the appointment of the new governor. 

to 

response 

in 
the  ČNB  kept 

The 3-month interest rate  differential vis-à-vis the 
euro  area  decreased  sharply  by  about  200  basis 
points in the months following the beginning of the 
COVID-19  pandemic  to  approach  70  basis  points 
in  spring  2020.  The  narrowing  of  the  spread  was 
the result of the substantial monetary policy easing 
the  pandemic. 
in  Czechia 
Afterwards, 
its  policy  rates 
unchanged and the three-month interest rate spread 
relative  to  the  euro  fluctuated  between  80  and  90 
until June  2021. The subsequent strong tightening 
cycle  by  the  ČNB  from  August  2021  led  to  a 
steady  and  large  rise  in  the  Czech  3-month 
PRIBOR  and,  accordingly,  of  the  spread  vis-à-vis 
the  euro  area  which  climbed  up  strongly  and 
surpassed  the  mark  of  580  basis  points  in  April 
2022. 

Convergence Report 2022 - Technical annex 

Chapter 3 - Czechia 

International  reserves  held  by  the  ČNB  increased 
from EUR 133 billion at the end of 2019  (59% of 
GDP) to about EUR 157 billion (62% of GDP) at 
the beginning of 2022. The level of reserve assets 
was  mainly  influenced  by  a  rise  in  returns  on  the 
ČNB’s securities and inflows of EU funds. 

3.5. 

LONG-TERM INTEREST RATES 

Long-term  interest  rates  in  Czechia  used  for  the 
convergence examination reflect secondary market 
yields  on  a  basket  of  government  bonds  with  the 
average residual maturity of close to, but below, 10 
years.  

The  Czech  12-month  average  long-term  interest 
rate  relevant  for  the  assessment  of  the  Treaty 
criterion was well below the reference value at the 
time  of  the  last  convergence  assessment  in  2020. 
Since  then  it  has  followed  a  gradual  downward 
trend  up  to  February  2021,  followed  by  a  rise  to 
about  2.2%  in  early  2022.  In  April  2022,  the 
reference value, given by the average of long-term 
interest  rates  in  France,  Finland,  and  Greece  plus 
2 percentage points, stood at 2.6%. In that  month, 
the  12-month  moving  average  of  the  yield  on  the 

50 

202224262830201620172018201920202021Graph 3.5: Czechia -CZK/EUR exchange rate(monthly averages)Source: ECB.0100200300400500600700201620172018201920202021Graph 3.6: Czechia -3-M Pribor spread to 3-M Euribor(basis points, monthly values)Source: Czech national Bank, Eurostat and Thomson Reuters.0246Jan-16Jan-17Jan-18Jan-19Jan-20Jan-21Jan-22CzechiaReference valueGraph 3.7: Czechia -Long-term interest rate criterion(percent, 12-month moving average)Source: European Commission.   
    
    
Czech  benchmark  bond  stood  at  2.5%,  i.e.  0.1 
percentage points below the reference value. 

The  long-term  interest  rate  of  Czechia  fell  in  the 
first  months  of  2020  as  the  ČNB’s  eased  its 
monetary  policy  in  response  to  the  COVID-19 
pandemic.  It  reached  a  local  through  of  0.9%  in 
summer  2020  before  increasing  slowly  to  about 
1.9%  in  Spring  2021.  After  a  few  months  of 
oscillations  around  that  level,  it  then  rose  rapidly 
to  2.6%  in  November  2021  and  over  3%  in  early 
2022 to reach 4.0% in April 2022, in line with the 
ČNB’s  sharp  tightening  of  the  monetary  policy 
stance  and  a 
inflation. 
Consequently,  the  spread  vis-à-vis  the  German 
long-term benchmark bond widened first by about 
90  basis  points  between  summer  2020  and  spring 
2021  and  again  by  about  70  basis  points  between 
summer 2021 and early 2022 when it crossed 300 
basis  points.  In  April,  it  came  close  to  330  basis 
points. 

increase 

rapid 

in 

3.6.  ADDITIONAL FACTORS 

The  Treaty  (Article  140  TFEU)  calls  for  an 
examination  of  other  factors  relevant  to  economic 
integration  and  convergence  to  be  taken  into 
account  in  the  assessment.  The  assessment  of  the 
additional factors – including balance of payments 
financial 
developments,  product, 
market integration – gives an important indication 
of  a  Member  State's  ability  to  integrate  into  the 
euro area without difficulties. 

labour  and 

In  December  2021,  the  Commission  published  its 
tenth Alert Mechanism Report (AMR 2022) under 
the  Macroeconomic  Imbalance  Procedure  (MIP  – 
see  also  Box  1.7),  which  highlighted  issues 
relating  to  competitiveness  and  pressures  in  the 
housing market in Czechia. However, since overall 
risks remained limited, no In-Depth Review (IDR) 

Convergence Report 2022 - Technical annex 

Chapter 3 - Czechia 

was warranted for that country. While considerable 
improvements  in  current  accounts  have  been 
recorded  in  Czechia,  nominal  unit  labour  costs 
have increased significantly, on the back of strong 
wage  rises  and  acute  labour  market  shortages, 
although  some  deceleration  is  expected.  At  the 
same time, Czechia  is exposed to risks relating to 
the  trade  policy  environment  (such  as  import  of 
commodities,  strong  dependence  on  the  German 
economy)  and  related  disruption  of  global  value 
chains  (especially  in  car  manufacturing).  Real 
house price  growth has remained elevated both in 
2020  and  even  accelerated  in  2021.  House  prices 
appear  to  be  overvalued  in  several  regions  in 
Czechia. The real house price index has continued 
the upward trend started in 2013, driven by supply 
constraints  and  strong  demand.  In  2021, 
it 
exceeded its 2015 level by about 61% (39). 

Czechia submitted its recovery and resilience plan 
on  1  June  2021.  The  Commission’s  positive 
assessment  on  19  July  2021  and  Council’s 
approval  on  8  September  2021  paved  the  way  for 
the 
the 
disbursement  of  EUR  7  billion  in  grants  over  the 
period 2021–2026, which is equivalent to 3.1% of 
2019 GDP. 

implementation  of 

the  RRP  and 

and 

reforms 

investments 

includes  a  set  of  mutually 
Czechia’s  plan 
reinforcing 
(91 
investments  and  33  reforms)  that  contribute  to 
effectively addressing all or a significant subset of 
the economic and social challenges outlined in the 
country-specific 
(CSRs) 
addressed  to  Czechia  by  the  Council  in  the 
European Semester in 2019 and 2020.  

recommendations 

in 

research 

The  plan  will  address  key  macro-economic 
challenges  such  as  technological  changes,  such  as 
those  posed  by  automation  and 
the  green 
and 
investment 
transition, 
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 
education 
healthcare 

improving 

sector, 

(39)  The very fast growth of house prices in real terms (almost 
11% p.a. since 2019) has been mostly driven by constraints 
of  structural  nature.  The  macroprudential  regulation  has 
been  broadly  appropriate;  see  ESRB,  “Vulnerabilities  in 
the  real  estate  sectors  of  the  EEA  countries”,  ESRB, 
Frankfurt, February 2022. 

51 

-20246201620172018201920202021CzechiaGermanyGraph 3.8: Czechia-Long-term interest rates(percent, monthly values)Source: Eurostat. 
                                                           
Convergence Report 2022 - Technical annex 

Chapter 3 - Czechia 

not  take  into  account  the  positive  impact  of 
structural reforms on growth.   

3.6.1.  Developments  of 

the  balance  of 

payments 

According to balance of payments data, Czechia’s 
external  balance  (i.e.  the  combined  current  and 
capital  account)  rose  strongly  in  2020,  reaching 
3.2% of GDP before decreasing to 0.7% of GDP in 
2021. These developments  in the external balance 
mostly mirror those of the current account surplus 
with  the  capital  account  remaining  broadly  stable 
at  about  1.4%  of  GDP (41),  following  the  below–
one-per-cent  balance  in  previous  few  years.  The 
trade  surplus  was  strongly  affected  by  the  uneven 
impact of the COVID-19 pandemic on exports and 
imports:  it  increased  strongly  in  2020  before 
falling back in 2021. In contrast to previous years, 
net  exports  contributed  negatively  to  economic 
growth  in  2021.  While  net  trade  in  services  was 

and  Resilience  Facility”,  Quarterly  Report  on  the  Euro 
Area (QREA), Vol. 20, No. 3 pp. 7–16. 

(41)  In 2020, the current account recorded the highest surplus in 
the history of Czechia, both in absolute terms and relative 
to GDP. The main reason was a reduction of the deficit on 
primary income as a result of a massive drop in the outflow 
of income on direct investment of non-residents in Czechia. 

reforms, 

programmes,  upgrading  labour  market  services, 
supporting  research  activities  and  the  introduction 
of  innovation  in  firms.  The  business  environment 
improved  by  several  e-government 
is  being 
measures, 
including 
anti-corruption 
strengthening  the  institutional  and  administrative 
framework  linked  to  avoiding  conflict  of  interest 
and  a  comprehensive  reform  of  the  procedure  for 
currently 
granting  building  permits,  which 
represent  major  obstacles 
in 
Czechia.  The  plan  devotes  42%  of  its  total 
climate 
allocation 
objectives, 22% to the digital transition and 35% to 
social  expenditure;  all  while  respecting  the  do  no 
significant harm principle.  

to  measures 

investment 

supporting 

to 

The implementation of the investments planned in 
Czechia’s plan, along with other investments under 
NextGenerationEU  (NGEU),  is  estimated  to  raise 
Czechia’s  GDP  by  0.8%  to  1.2%  by  2026,  of 
which 0.3% due to the positive spillover effects of 
the  coordinated  implementation  of  NGEU  across 
Member States (Pfeiffer et al. 2021) (40). This does 

(40)  See  Pfeiffer  P.,  Varga  J.  and  in’t  Veld  J.  (2021), 
“Quantifying  Spillovers  of  NGEU  investment”,  European 
Economy  Discussion  Papers,  No.  144  and  Afman  et  al. 
(2021),  “An  overview  of  the  economics  of  the  Recovery 

52 

Table 3.4:Czechia - Balance of payments(percentage of GDP)201620172018201920202021Current account1.81.50.40.32.0-0.8of which: Balance of trade in goods5.45.13.74.14.91.2                 Balance of trade in services2.22.42.21.81.81.8                 Primary income balance -5.3-5.0-4.8-5.0-4.3-3.3                 Secondary income balance-0.6-1.0-0.7-0.6-0.5-0.5Capital account1.10.90.20.41.21.6External balance 1)2.92.40.70.83.20.7Financial account2.52.31.10.12.90.2of which: Direct investment-3.9-0.9-0.9-2.4-2.6-0.1                Portfolio investment-3.5-5.20.6-1.8-2.41.2                Other investment 2)-1.8-16.00.62.47.0-5.8                Change in reserves11.724.40.91.90.84.8Financial account without reserves-9.2-22.10.2-1.82.0-4.7Errors and omissions-0.3-0.20.4-0.6-0.3-0.5Gross capital formation26.026.427.227.625.930.1Gross saving25.827.226.626.728.427.8Net international investment position -27.2-24.9-24.4-19.8-16.3-15.61) The combined current and capital account.2) Including financial derivatives.Sources: Eurostat, European Commission calculations, Czech National Bank.                                                           
                                                                                   
 
 
    
 
 
broadly balanced (as a sudden drop associated with 
travel  services  was  compensated  with  an  increase 
in  other  services,  such  as  ICT),  net  exports  of 
goods  were  negative,  in  particular  through  supply 
shortages,  longer  delivery  times  and  increased 
transportation  cost,  as  well  as 
the 
deteriorated  macroeconomic  situation  in  the  main 
trading  partners.  With  record  credits  and  debits, 
the  capital  account  recorded  the  highest  surplus 
since 2015. It  was driven by  a high  growth in the 
utilisation  of  funds  from  the  EU  budget  and  a 
sharp  drop 
for  emission 
in  net  payments 
allowances (ETS). 

through 

The  crisis  also  temporarily  affected  the  primary 
income balances (as a result of lower payments of 
factors  of  production  to  abroad)  but  left  the 
secondary income balance broadly unchanged; the 
income  balance  as  a  whole  stayed  less  negative 
compared  to  the  pre-pandemic  years.  The  capital 
account balance remained in surplus and increased 
to a level of about 1.2% of GDP in 2020 and 1.6% 
in  2021.  A  considerable  net  outflow  of  capital 
connected  with  the  surplus  on  the  current  and 
capital  accounts  was  evident  on  the  financial 
account  in  2020  (-0.2%  of  GDP),  recovering  in 
2021  (1.4%  of  GDP).  The  net 
international 
investment position slightly worsened in 2021, due 
to  a  faster  accumulation  of  liabilities  relative  to 
assets,  however,  remained  close  to  -16%  as  in 
2020. 

Measured  by  the  export  market  share,  the  trade 
performance  declined  in  2020.  In  2020–2021, 
measures  of  competitiveness  exhibited  different 
dynamics depending on the deflator used. The rate 
of appreciation of  the real effective  exchange rate 
(REER)  deflated  by  ULC,  accelerated,  as  labour 
hoarding pushed up labour costs. The appreciation 
in  REER  deflated  by  HICP  has  been  more 
moderate,  reflecting  moderate  price  inflation  until 

Convergence Report 2022 - Technical annex 

Chapter 3 - Czechia 

mid-2021. The swift acceleration of inflation at the 
end of 2021 has not caused a real appreciation vis-
à-vis  the  rest  of  the  world,  since  inflation  has 
picked  up  globally, 
trade 
partners (42). 

including  major 

According  to  the  Commission’s  Spring  2022 
Economic  Forecast  based  on  national  accounts 
data, the external balance is expected to contribute 
slightly  negatively  to  GDP  growth  in  2022. 
However, as the external environment is expected 
to  improve,  the  trade  balance  is  set  to  increase  in 
2023. 

3.6.2.  Market integration 

The  Czech  economy  is  highly  integrated  with  the 
euro  area  through  trade  and  investment  linkages, 
although  the  related  indicators  decreased  during 
trade  openness  of 
the  reporting  period.  The 
Czechia  declined  slightly  in  2020  but  remained 
very  high  at  around  87%  of  GDP  in  2021.  The 
share  of  trade  with  euro  area  countries  stood  at 
around  53%  of  GDP  in  2021  (51%  in  2020). 
Neighbouring 
as 
Germany, Poland and Slovakia are among its most 
important trade partners. 

countries, 

euro-area 

such 

FDI  inflows  did  not  recover  from  a  large  drop 
recorded  in  2020 (over  3%  of  GDP),  followed  by 
another  decline  of  about  3%  of  GDP  in  2021. 
Nevertheless, 
inflows  as 
the  stock  of  FDI 
percentage  of  GDP  reached  about  82%  in  2021, 
despite  labour  market  shortages  and  increasing 
wages.  Austria,  Belgium,  France,  the  Netherlands 
and  Switzerland  are  the  biggest  investor  partners 
providing more than half of the FDI inflows as of 
end  of  2021.  Financial  services,  manufacturing, 
trade,  hotels  and  restaurants  are  the  main  target 
sectors 
inflows.  The  geographical 
proximity  to  EU  core  markets,  a  relatively  good 
infrastructure  and  a  highly  educated  labour  force 
have supported the attractiveness of the country for 
foreign investors. 

for  FDI 

Czechia’s performance in international rankings of 
competitiveness  and  ease  of  doing  business  has 
been  worsening  over  recent  years  and  it  is  thus 
relatively weaker than in many euro-area Member 
States.  In  the  IMD’s  World  Competitiveness 
Index,  Czechia’s  position  is  around  the  middle  of 
the  ladder  and  has  worsened  somewhat  lately 
(from 33 in 2020 to 34 in 2021, from a total of 64 

(42)  The REER based on unit labour costs should be interpreted 
with prudence as unit labour costs were distorted by labour 
retention schemes in some countries, including Czechia. 

53 

9095100105110115120125130135201620172018201920202021Graph 3.9: Czechia -Effective exchange ratesNEERREER, HICP deflatedREER, ULC deflated(vs. 36 trading partners;  monthly averages;index numbers, 2016 = 100)Source: European Commission.    
                                                           
Convergence Report 2022 - Technical annex 

Chapter 3 - Czechia 

included 

the  Recovery  and 
measures  are 
Resilience  Plan).  Concerns  remain  over  cases  of 
high-level corruption. 

in 

surveyed  economies),  with  attractiveness  issues 
related 
legal 
the  effectiveness  of 
environment,  the  competency  of  the  government 
and the quality of corporate governance.  

the 

to 

According  to  the  World  Bank's  Ease  of  Doing 
Business  indicator,  Czechia  maintained  the  same 
ranking in 2020, as in 2019, i.e. 41, but a relative 
worsening  can  be  noticed  with  respect  to  2018  or 
2017, when it ranked 35th and 30th respectively (43). 

in  place,  while 

Corruption remains an issue of concern in Czechia. 
Legal  and  institutional  frameworks  to  address 
corruption  are  broadly 
the 
Government  has  prioritised  some  anti-corruption 
measures.  A  number  of  planned  reform  initiatives 
in  the  fight  against  corruption  were  not  adopted 
before  the  end  of  the  parliamentary  term  in  2021, 
including  reforms  on  lobbying,  whistleblowing, 
the Supreme Audit Office  mandate, and a code of 
(some 
for  members  of  Parliament 
conduct 

to 

the  World  Bank's  Worldwide 
According 
Governance  Indicators  (2020),  Czechia  ranks 
higher  than  the  average  of  the  five  euro  area 
Member  States  with 
for 
regulatory  quality,  political  stability  and  absence 
law  and  government 
of  violence, 
effectiveness (44). 

lowest  scores 

rule  of 

the 

According to the 2020 Single Market Scoreboard, 
Czechia's  transposition  deficit  of  EU  Directives 
was at 1.1%, a stable result for the 3rd consecutive 
year,  very  close  to  the  EU  average  (1%)  and  the 
target 
the  European 
Commission in the Single Market Act (2011). 

(0.5%)  proposed  by 

The Czech Republic has taken steps to improve its 
Anti-Money  Laundering  and  Countering 
the 
Financing  of  Terrorism  (AML/CFT)  framework. 
The Register on Beneficial Owners and the Central 
Register  of  Bank  Accounts  were  established  to 
improve  transparency  of  beneficial  owners  and  to 
account 
provide  quicker 
information.  The  Czech  authorities  have  achieved 
a substantial level of effectiveness in international 
cooperation; 
and 
instrumentalities  of  crime;  and  FT  investigations 
and  prosecutions.  On  the  other  hand,  the  Czech 
Republic  has  achieved  moderate  results  in  the 

confiscation  of  proceeds 

to  bank 

access 

(43)  The  World  Bank  Doing  Business  (DB)  program  was 
paused in 2021. The programme will continue with a new 
governance  and  improved  accountability  and  transparency 
under  the  name  Business  Enabling  Environment  (BEE). 
The first edition of the BEE is expected in 2023. 

(44)  A  Member  State  is  considered  to  have  a  ‘low’  (‘high’) 
ranking compared with the average five euro area Member 
States with the lowest scores for each indicator if its score 
is at least 0.3 percentage points lower (higher) than that of 
the average of this euro area group. 

54 

0.00.40.71.11.4Voice and AccountabilityPolitical Stability and Absenceof Violence/TerrorismGovernment EffectivenessRegulatory QualityRule of LawControl of CorruptionCzechiaEuro area average five lowestEuro area averageGraph 3.10: Czechia -2020 World Bank's Worldwide Governance IndicatorsNote: Estimate of governance ranges from -2.5 (weak) to 2.5 (strong). Source: World Bank.Table 3.5:Czechia - Market integration201620172018201920202021Trade openness 1) (%)88.890.189.086.083.286.8Trade with EA in goods & services 2)+3) (%)54.955.654.452.550.553.1World Bank's Ease of Doing Business Index rankings 4)2730354141-IMD World Competitiveness Ranking 5)272829333334Internal Market Transposition Deficit 6) (%)1.51.20.70.81.5-Real house price index 7)106.8116.5123.4131.0138.3160.6 1) (Imports + Exports of goods and services / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics, Balance of Payments). 2) (Imports + Exports of goods with EA-19 / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics). 3) Trade in services with EA-19 (average credit and debit in % of GDP at current prices) (Balance of Payments). 4) Data not available for 2021. The Ease of Doing Business report by the World Bank was discontinued in September 2021.  5) International Institute for Management Development (IMD). 6) Percentage of internal market directives not yet communicated as having been transposed, relative to the total.    (November data, as of 2016 date refers to the year of publication). 7) Deflated house price index (2015=100) (Eurostat). Sources: Eurostat, World Bank, International Institute for Management Development, European Commission calculations.    
                                                           
                                                           
 
 
  
 
 
Convergence Report 2022 - Technical annex 

Chapter 3 - Czechia 

other areas covered by the FATF standards and its 
transposition  of  the  5th  AMLD  is  still  under 
assessment by the European Commission. 

well  with  the  five  euro-area  Member  States  with 
the smallest financial sectors. 

The  Czech  labour  market  performed  strongly  in 
2020  and  2021.  Despite  a  slight  increase  to  2.6% 
in  2020  and  2.7%  in  2021,  Czechia  remained  the 
best  performer  in  terms  of  unemployment  in  the 
EU for  the fourth  year in a row. The employment 
rate  of  those  aged  between  20  and  64  reached 
79.7% in 2020, which was eight percentage points 
above the EU average. However, labour shortages 
are  pervasive  and  hamper  Czechia´s  growth 
potential.  The  protection  of  permanent  employees 
against  collective  and  individual  dismissals  is 
relatively  strict  (as  measured  by  the  2013  OECD 
employment  protection  indicator)  whereas  the 
duration  of  unemployment  benefits  is  below  the 
EU  average.  Cross-border  migration  flows  have 
remained  relatively  subdued,  although  the  tight 
labour  market  has  started  to  attract  workers  from 
both EU and non-EU countries. 

The  insurance  and  the  pension-fund  sectors  in 
Czechia  continues  to  be  smaller  (five-times)  than 
in  the  euro  area,  relative  to  GDP.  However,  the 
sector’s  share  of  the  total  financial  sector  is 
relatively  comparable  to  that  of  the  euro  area. 
Since end-2016, the Czech sector has not changed 
its  holdings  of  financial  assets  relative  to  GDP 
(slightly  reducing  its  share  in  the  Czech  financial 
sector),  compared  to  an  increase  by  about  12 
percentage points in the euro area. The investment-
funds  sector  plays  a  very  small  role  in  the  Czech 
financial system, but its size is comparable to that 
of  the  five  euro-area  Member  States  with  the 
smallest financial sectors. 

The  financial  sector  in  Czechia  continues  to  be 
smaller  and  somewhat  less  developed  than  in  the 
euro area. Relative to GDP, assets managed by the 
financial sector are slightly above one third of that 
of the euro area, however, surpassing the five euro-
area  Member  States  with  the  smallest  financial 
sectors.  The  size  of  the  financial  sector  has 
increased  by  about  45  percentage  points  since 
2016,  reaching  almost  260%  of  GDP  in  2020. 
Banks  dominate  the  Czech  financial  sector  and 
make  up  around  52%  of  the  financial  sector’s 
assets  in  2020.  The  central  bank  is  the  second 
largest  holder  of  financial  assets  with  a  share  of 
24% (more than double compared to the euro area 
average) and has exactly the same share as all non-
banking 
together. 
larger  and  more 
Although 
dominating  than  in  the  euro  area,  they  compare 

financial 
these  shares  are 

intermediaries 

As  to  the  financing  of  the  economy,  Czechia  has 
less developed credit and equity markets relative to 
GDP  than  countries  in  the  euro  area,  and  market 
financing  (especially  debt  securities  and  listed 
shares)  is  relatively  under-developed.  However, 
Czechia  is  still  comparable  to  the  five  euro-area 
Member  States  with  the  smallest  national  capital 
markets. Loans are the dominant source of funding 
and  make  up  96%  of  GDP  in  2020,  compared  to 
240% of GDP in the euro area. Unlisted shares and 
other  equity  are  another  important  source  of 
funding  and  stand  at  70%  and  63%  of  GDP  in 
2020 (related to FDI), compared to 192% and 55% 
in  the  euro  area  respectively.  The  decrease  of  the 
share  of  trade  credits  and  advances,  the  fourth 
source of private funding (36% of GDP), brings it 
at  par  with  its  euro  area  average  counterpart. 
Financing  through  private  debt  markets  remains 

55 

Table 3.6:Czechia - Allocation of assets by financial sub-sectorRatio to GDP (%)CZEAEA 5 smallest201620202016202020162020Financial corporations (total)215259722796177215Central bank466245783761Monetary financial institutions1201362863119798Other financial intermediaries23332021792028Non-MMF investment funds1)71010012745Insurance co. and Pension Funds1919901021823Share of total (%)CZEAEA 5 smallest201620202016202020162020Central bank21246102129Monetary financial institutions565240395546Other financial intermediaries111328221112Non-MMF investment funds34141622Insurance co. and Pension Funds97121310111) MMF stands for money market funds.Source: Eurostat.Table 3.7:Czechia - Financing of the economy1)Ratio to GDP (%)CZEAEA 5 smallest201620202016202020162020Liabilities (total)341341743770324335Loans9496238236115112Non-financial co. debt securities76121534Financial co. debt securities152074681112Government debt securities393883955157Listed shares131065731718Unlisted shares66701861935556Other equity616351564248Trade credits and advances473633352929Share of total (%)CZEAEA 5 smallest201620202016202020162020Loans282832313533Non-financial co. debt securities222211Financial co. debt securities4610933Government debt securities111111121617Listed shares439955Unlisted shares192125251818Other equity1819771314Trade credits and advances141145991) The table focuses on the financing needs of a country and how these are met by the financial system. The table is constructed from the liabilities of all economic sectors, but only considers loans, debt securities, equity and trade credits. The sum of liabilities in the table only reflects the total for the liabilities considered.Source: Eurostat. 
 
     
 
 
 
 
     
 
 
Convergence Report 2022 - Technical annex 

Chapter 3 - Czechia 

markets,  the  home  bias  remains  very  strong  in 
Czechia  relative  to  euro-area  Member  States.  The 
very  large  home  bias  indicates  that  most  of  the 
transactions 
take  place 
domestically. 

the  debt  market 

in 

low vis-à-vis their euro area counterparts, and also 
equity markets are very small compared to those of 
the  euro  area  and  represent  10%  of  GDP.  This 
compares to 83% for private-sector debt and 73% 
for listed stocks in the euro area. Government debt 
is  also  lower  than  in  the  euro  area.  In  terms  of 
share of the sum of liabilities, loans in Czechia are 
comparable  to  that  of  the  euro  area,  while  trade 
credits  and  advances  are  higher  than  in  the  euro 
area.  For  security  and  equity  financing,  the  large 
differences  reflect  the  smaller  share  of  market 
funding available in Czechia compared to the euro 
area. 

integration 

The Czech financial sector is highly integrated into 
is 
the  EU  financial  sector.  This 
noticeable  in  ownership  linkages  of  the  banking 
system. Foreign institutions held more than 90% of 
banking sector's assets via their local branches and 
subsidiaries in 2020. Concentration in the banking 
sector,  as  measured  by  the  market  share  of  the 
largest five credit institutions in total assets, edged 
up from almost 64% in 2018 to over 65% in 2020 
and thus continued to exceed the euro-area average 
of 53% by about 12 percentage points. 

Although  intra-EU  integration  in  equity  and  debt 
markets, as measured by the home bias in portfolio 
investments,  are  in  general  relatively  low  across 
EU Member States, Czechia is roughly comparable 
in  terms  of  levels  of  integration  of  the  low  euro-
in  equity  markets (45). 
area  Member  State 
Integration  in  this  market  segment,  has  slightly 
worsened between 2016 and 2020. The very large 
home bias indicates that an overwhelming majority 
of  investments  in  equity  markets  does  still  take 
place  domestically.  Similarly,  in  case  of  debt 

(45)  Home  bias  in  portfolio  investments  measures  the  average 
propensity  of  investors  in  a  Member  State  to  invest 
domestically  as  compared  with  investing  in  other  EU 
countries.  The  indicator  ranges  between  0  and  1,  with  a 
value  of  0  indicating  that  investors  prefer  domestic  over 
foreign  assets.  The  inverse  of  the  home  bias  can  be 
interpreted  as  one  measure  of  financial  integration  among 
EU countries. 

56 

020406080100CZ, 2016CZ, 2020EA, 2016EA, 2020Concentration in the banking sector (CR5 ratio)Share of foreign institutions as % of total assetsGraph 3.11: Czechia -Foreign ownership and concentration in the banking sector(in percent, weighted averages)Source: ECB, Structural financial indicators. 0.00.20.4CZ, 2016CZ, 2020EA, 2016EA, 2020EA Low,2016EA Low,2020DebtEquityGraph 3.12: Czechia -Intra-EU integration in equity and debt portfolio investmentNote: The chart shows the extent of home bias in debt and equity markets. A value index of 1 implies ‘full integration’ with the financial markets of other Member States, while 0 denotes ‘no integration’.Source: FinFlows database: European Commission, Joint Research Centre (JRC). (index)  
                                                           
   
4.  CROATIA 

4.1. 

LEGAL COMPATIBILITY 

4.1.3.  Prohibition  of  monetary  financing  and 

4.1.1.  Introduction 

The  main  legal  rules  governing  the  Croatian 
National  Bank  (Hrvatska  narodna  banka  –  HNB) 
are  laid  down  in  Article  53  of  the  Constitution  of 
the  Republic  of  Croatia (46)  and  the  Act  on  the 
Croatian  National  Bank  (the  HNB  Act) (47).  The 
HNB  Act  was  amended  in  2013  with  a  view  to 
Croatia  entering  the  European  Union  on  1  July 
2013. The Act provides for specific rules applying 
to  the  HNB  as  of  EU  accession  of  Croatia  and  a 
specific  chapter  for  rules  applying  to  the  HNB  as 
of  the  moment  the  euro  becomes  the  official 
currency  of  the  Republic.  The  Act  also  contains 
provisions  regarding  the  close  cooperation  of 
Croatia  with  the  ECB  for  banking  supervision 
purposes (48). Article 53 of the Constitution of the 
Republic  of  Croatia  and  the  HNB  Act  have  not 
the  Commission’s  2020 
been  amended  since 
Convergence Report. 

4.1.2.  Central Bank independence 

The principle of independence of the HNB is laid 
down  in  Article  53  of  the  Constitution  and  in 
Articles 2 (2) and 71 of the HNB Act. Article 71 of 
the  HNB  Act  contains  a  specific  reference  to  the 
principle  of  central  bank 
independence  as 
enshrined  in  the  TFEU,  stating  that  the  HNB  and 
members  of  its  decision-making  bodies  shall  be 
independent in achieving its objective and carrying 
out its tasks under the Act and relevant EU rules in 
accordance  with  Article  130  of  the  TFEU  while 
adding that public authorities have to respect such 
independence.  As  regards  the  rules  on  a  possible 
removal of the HNB Governor from office, Article 
81  of  the  HNB  Act  makes  a  specific  reference  to 
the  relevant  wording  of  Article  14.2  of  the 
ESCB/ECB Statute. 

No incompatibilities and imperfections exist in this 
area. 

(46)  Constitution  as  amended  and  published  in  the  Official 
Journal  of  the  Republic  of  Croatia  no.  56/90,  135/97, 
113/2000,  123/2000,  124/2000,  28/2001,  55/2001  and 
76/2010, 5/2014. 

(47)  Official Journal of the Republic of Croatia no. 75/2008 and 

54/2013. 

(48)  Decision (EU) 2020/1016 of the European Central Bank of 
24  June  2020  on  the  establishment  of  close  cooperation 
between the European Central Bank and Hrvatska Narodna 
Banka (ECB/2020/31). 

privileged access 

No incompatibilities and imperfections exist in this 
area.  The  rules  on  prohibition  of  lending  to  the 
public  sector  pursuant  to  Article  78  of  the  HNB 
Act include a  specific reference to the  prohibition 
of monetary financing as laid down in Article 123 
of the TFEU. 

4.1.4.  Integration in the ESCB 

Objectives 

The  objectives  of  the  HNB  are  laid  down  in 
Articles  3  and  72  of  the  HNB  Act  and  are  fully 
compatible  with  the  objectives  applying  to  the 
European  System  of  Central  Banks  pursuant  to 
Article 127 of the TFEU. 

Tasks 

The  provisions  under  chapters  VIII  and  IX  of  the 
HNB Act define the tasks the HNB has to carry out 
as integral part of the European System of Central 
Banks  pursuant  to  the  rules  of  the  TFEU  and  the 
ESCB/ECB  Statute.  No  incompatibilities  exist 
with regard to these tasks. 

4.1.5.  Assessment of compatibility 

The  Constitution  and  the  Act  on  the  Croatian 
National  Bank  are  fully  compatible  with  Articles 
130 and 131 of the TFEU. 

4.2. 

PRICE STABILITY 

4.2.1.  Respect of the reference value 

time  of 

The 12-month average inflation rate, which is used 
for  the  convergence  assessment,  was  below  the 
reference  value  at 
the  2020 
the 
convergence  assessment  of  Croatia.  From  then,  it 
decreased  to  reach  to  -0.2  %  in  February  2021 
before shifting again to an  upward trend. In  April 
2022, the reference  value  was 4.9%,  calculated as 
the average of the 12-month average inflation rates 
in France, Finland and Greece, plus 1.5 percentage 
points. The corresponding inflation rate in Croatia 
was  4.7%,  i.e.  0.2  percentage  points  below  the 
reference  value.  The  12-month  average  inflation 
rate  is  projected  to  remain  below  the  reference 
value in the months ahead. 

57 

                                                           
Convergence Report 2022 - Technical annex 

Chapter 4 - Croatia 

4.2.2.  Recent inflation developments 

4.2.3.  Underlying  factors  and  sustainability  of 

In  2021,  the  annual  HICP  inflation  rate  averaged 
2.7%,  significantly  higher  than  in  2020,  when  it 
averaged  0%.  The  increase  was  mostly  due  to 
rising energy prices, which grew by 8.8% in 2021, 
after  falling  by  6.5%  in  2020  in  average  yearly 
terms.  Price  increases  in  the  services  sector  also 
contributed  to  the  higher  headline  inflation,  with 
service inflation averaging 2% in 2021 after 0.8% 
2020.  Processed  food  (including  alcohol  and 
tobacco)  inflation  averaged  3%  in  2021,  rising 
from  a  2.1%  average  recorded  in  2020.  The 
inflation rate  of unprocessed food and non-energy 
industrial  goods  remained  subdued,  below  1%  in 
2021.  In  April  2022,  the  inflation  rate  accelerated 
to  9.6%  year-on-year,  with 
strongest 
contributions  coming  from  energy  and  processed 
food prices, which increased by 23.1% and 22.9% 
and contributed by 3.0 and 2.3 percentage points to 
headline inflation,  

the 

respectively.  The  April  inflation  rate  in  Croatia 
was  above  euro  area  average,  where  prices 
increased by 7.4%. This puts the average inflation 
rate  in  the  trailing  twelve  months  through  April 
2022 at 4.7% in Croatia, just above the EA average 
of 4.4%. 

In 2021, the average core inflation rate (measured 
as  the  growth  of  HICP  excluding  energy  and 
unprocessed food) accelerated to 1.8%, from 0.8% 
in 2020. In April 2022, core inflation rate stood at 
7.3%,  further  accelerating  compared  to  previous 
months. This figure was higher than the euro area 
average  (3.9%),  due  most  notably  to  the  stronger 
growth of processed food prices, which also have a 
stronger  weight in  Croatia compared to euro area. 
The  overall  contribution  of  processed  food  prices 
to  the  core  inflation  rate  stood  at  2.8  percentage 
points. 

58 

inflation 

Macroeconomic  policy  mix  and  growth 
developments 

level.  Looking  at 

Economic  developments  in  2021  point  to  a  V-
shaped recovery of the Croatian economy. After a 
drop of 8.1% in 2020, real GDP recorded a yearly 
growth of 10.2% in 2021, bringing output above its 
pre-pandemic 
the  GDP 
components,  the  recovery  in  2021  was  supported 
by  exports  of  goods  and  services  –  with  tourism 
playing  a  key  role  –  and  by  private  consumption. 
Strong  growth  of  final  demand  spurred  imports 
growth, but the overall  growth contribution of  net 
exports was positive. 

to  rising 

According  to  the  Commission’s  Spring  2022 
Economic  Forecast,  GDP  growth  in  2022  is 
forecast  at  3.4%,  due 
inflationary 
pressures  and  other  indirect  effects  of  Russia’s 
is 
invasion  of  Ukraine.  Private  consumption 
expected to grow by 2.4%, driven by the expected 
implementation of the RRP and the acceleration of 
earthquake-related-reconstruction 
investment 
should  remain  strong,  rising  by  6.5%,  in  spite  of 
the  rising  costs  of  materials,  potential  supply 
bottlenecks  and  rising  uncertainty,  Government 
consumption 
to  contribute 
should  continue 
positively to growth. On the external side, weaker 
demand  in  main  trading  partners  is  expected  to 
affect  goods  exports,  but  the  growth  rate  should 
remain  solid  5.3%.  Growth  rate  of  exports  of 
tourist 
services  should  be  mostly  driven  by 
activity,  which  is  expected  to  converge  towards 
pre-crisis 
in  spite  of  current  global 
developments.  Import  dynamics  should  follow 
final  demand  and  overall 
developments  of 
contribution  of  net  exports  to  growth  in  2022  is 
expected to be mildly positive. 

levels 

-202468Jan-16Jan-17Jan-18Jan-19Jan-20Jan-21Jan-22CroatiaReference valueGraph 4.1: Croatia -Inflation criterion(percent, 12-month moving average)Note: The dots at the right end of the chart show the projected reference value and 12-month average inflation rate of the country in December 2022.The reference values for 2016, 2018 and 2020 refer to the reference values calculated in the previous Convergence Reports.Source: Eurostat, Commission's Spring 2022 Economic Forecast.-4-2024681012201620172018201920202021CroatiaEuro areaGraph 4.2: Croatia -HICP inflation(y-o-y percentage change)Source: Eurostat.             
        
Convergence Report 2022 - Technical annex 

Chapter 4 - Croatia 

neutral  contribution  to  the  fiscal  stance  of  -0.2 
percentage point of GDP. 

In  2020,  the  HNB  took  a  range  of  measures  to 
ensure  the  stability  of  the  financial  sector  in  the 
aftermath  of  COVID-19  pandemic.  The  Croatian 
central  bank  used  various  standard  and  non-
standard  measures, 
including  purchases  of 
government bonds on the secondary market, direct 
purchases of foreign currency from the Ministry of 
finance,  sales  of  foreign  currency  on  the  FX 
market  and  a  cut  in  reserve  requirement  ratio (50). 
The  HNB  also  agreed  upon  establishing  a 
precautionary currency swap line with the ECB in 
April 2020. The currency swap line allows for the 
exchange of the kuna for up to EUR 2bn that could 
be  used  to  provide  additional  euro  liquidity  to 
Croatian  financial  institutions  without  using  the 
HNB own international reserves, if needed. While 
the  swap  line  was  initially  set  to  expire  on  31 
December 2020, it had been extended thereafter to 
31  March  2022.  The  HNB  continued  to  pursue 
accommodative monetary policy throughout 2021, 
ensuring  high  levels  of  liquidity  in  the  banking 
system  and  simultaneously  maintaining  a  broadly 
stable exchange rate of the kuna against the euro. 

(50)  Croatian  National  Bank  (2021).  Tri  desetljeća  izazova, 
the  30th 

the  celebration  of 

brochure  prepared  for 
anniversary of CNB. 

59 

In 2020-2021, the government’s policy response to 
the  COVID-19  crisis  provided  significant  support 
to the healthcare sector, households and companies 
hit by the pandemic, including incentives to retain 
the  workforce.  This  response  was  facilitated  by 
new  European  instruments  like  loans  from  SURE 
(Support  to  mitigate  Unemployment  Risks  in  an 
Emergency)  and  grants  from  Next  Generation 
EU/RRF.  In  2021,  the  fiscal  stance (49)  remained 
supportive  (-0.2  percentage  point  of  GDP,  after  -
2.3  percentage  points  of  GDP  in  2020),  based  on 
the  Commission’s  Spring  2022  Economic 
Forecast.  The  fiscal  stance  is  expected  to  remain 
supportive  in  2022  (-1.8  percentage  points  of 
GDP)  partly  due  to  the  expenditure  financed 
through 
the  RRF  and  other  EU  grants  and 
temporary  support  to  mitigate  the  impact  of  high 
energy prices on vulnerable households and firms. 
Net 
current 
expenditure  in  2022  is  projected  to  provide  an 
expansionary  contribution  of  1.0  percentage  point 
of GDP to the overall fiscal stance. The budgetary 
costs related to refugees from Ukraine is assumed 
at  0.1  percentage  point  of  GDP.  The  forecast  for 
2023  shows  a  further  supportive  stance  (-0.7 
percentage  point  of  GDP)  due  to  the  increasing 
expenditure financed by RRF and other EU grants 
and  despite  the  assumed  phasing  out  of  energy 
crisis  measures.  Net  nationally-financed  primary 
current expenditure is projected to have a broadly 

nationally-financed 

primary 

(49)  The  fiscal  stance  is  measured  as  the  change  in  primary 
expenditure  (net  of  discretionary  revenue  measures), 
excluding  Covid-19  crisis-related  temporary  emergency 
measures  but  including  expenditure  financed  by  non-
repayable  support  (grants)  from 
the  Recovery  and 
Resilience Facility and other EU funds, relative to medium-
term  potential  growth.  A  negative  (positive)  sign  of  the 
indicator  corresponds  to  an  excess  (shortfall)  of  primary 
expenditure growth compared with medium-term economic 
growth,  indicating  an  expansionary  (contractionary)  fiscal 
policy.  

Table 4.1:weights  Croatia - Components of inflation(percentage change)1)in total   201620172018201920202021Apr-222022HICP-0.61.31.60.80.02.74.71000Non-energy industrial goods0.60.70.3-0.2-0.20.62.4266Energy-5.7-0.15.60.9-6.58.813.5132Unprocessed food -0.92.90.2-4.03.11.05.359Processed food0.22.61.42.02.13.05.3229Services0.01.21.41.50.82.02.6315HICP excl. energy and unproc. food0.21.41.11.10.81.83.3809HICP at constant tax rates -0.81.21.51.40.32.44.61000Administered prices HICP-1.0-0.31.21.40.11.92.31231) Measured by the arithmetic average of the latest 12 monthly indices relative to the arithmetic average of the 12 monthly indices   in the previous period.Source: Eurostat, European Commission calculations.                                                           
                                                           
 
 
         
 
 
Convergence Report 2022 - Technical annex 

Chapter 4 - Croatia 

5.6%) (51).  However,  a  tighter  labour  market  and 
continued  wage  growth  will  result  in  a  slight  rise 
in  ULC  in  2022  and  2023.  As  a  result,  risks  of 
second-round  effects  of  wages  on  inflation  are 
expected to be limited. 

External factors 

After falling mildly by 0.3% in 2020, import price 
inflation  (measured  by  the  deflator  of  imports  of 
goods)  accelerated  to  7.4%  in  2021.  This  change 
price 
mainly 

increasing 

reflected 

energy 

(51)  However,  it  is  important  to  emphasize  that  unlike  many 
other  countries  Croatia 
fall  of 
productivity based on hours of work in 2020, as employers 
in  Croatia  recorded  full  time  hours  despite  the  fact  that 
workers were not working or they were working less hours. 

recorded  a  strong 

Wages and labour costs 

to 

in  part 

in  2021.  Thanks 

After  a  sharp  economic  downturn  caused  by  the 
COVID-19  pandemic  in  2020,  the  labour  market 
recovered 
the 
government  labour  support  schemes  and  liquidity 
measures,  employment  levels  in  2021  were  the 
same  as  those  registered  in  2019.  Meanwhile, 
changes in the active population brought about by 
more  accurate  population  statistics  led  to  a  1.5 
percentage points increase in the employment rate. 
However, the employment dynamics varied across 
sectors.  Due  to  the  measures  put  in  place  to  curb 
COVID-19  transmission,  activities  characterized 
by close social contact were the most affected, e.g. 
accommodation 
services.  The 
unemployment  rate  stood  at  7.6%  in  2021,  1 
percentage point above the all-time low reached in 
2019.  Continued 
and 
demographic trends in 2022 and 2023 are expected 
to bring the unemployment rate to 6.0% by the end 
of 2023. 

employment  growth 

food 

and 

Relatively  strong  wage  growth  in  2020-2021  can 
largely  be  attributed  to  the  employment  support 
measures  and  personal  income  tax  cuts.  Subdued 
nominal unit labour costs (ULC) dynamics in 2021 
partially  offset  the  increase  registered  in  2020,  as 
nominal 
productivity 
compensation  per  employee  growth  (8.9%  vs. 

outpaced 

growth 

60 

-8-40481220162017201820192020202120222023Productivity (real GDP per person employed)Nominal compensation per employeeNominal unit labour costsHICP inflationGraph 4.3: Croatia -Inflation, productivity and wage trends(y-o-y % change)Source: Eurostat, Commission's Spring 2022 Economic Forecast.Table 4.2:Croatia - Other inflation and cost indicators(annual percentage change)20162017201820192020202120221)20231)HICP inflationCroatia-0.61.31.60.80.02.76.12.8Euro area0.21.51.81.20.32.66.12.7Private consumption deflatorCroatia-1.10.91.41.10.32.76.02.5Euro area0.41.31.51.10.52.35.82.7Nominal compensation per employeeCroatia0.30.23.90.42.15.63.02.7Euro area1.21.72.12.1-0.74.13.63.5Labour productivityCroatia3.30.90.30.4-7.08.91.81.1Euro area0.41.00.20.3-4.94.21.41.5Nominal unit labour costsCroatia-2.8-0.73.60.09.8-3.11.11.5Euro area0.80.72.01.94.40.02.22.0Imports of goods deflatorCroatia-2.52.61.10.2-0.37.48.04.0Euro area-3.33.32.6-0.5-3.89.613.20.81) Commission Spring 2022 Economic Forecast.Source: Eurostat, Commission's Spring 2022 Economic Forecast.           
                                                           
 
 
            
 
 
developments.  Pressures  on  import  prices  were 
somewhat  offset  by  a  mild  appreciation  of  the 
kuna,  which  had  a  dampening  effect  on  domestic 
prices. 

Administered prices and taxes 

The  weight of administered prices in  the  Croatian 
HICP basket increased from  20% in 2020 to 28% 
in 2021. This change can be partially explained by 
the  government  decision  to  put  a  cap  on  gasoline 
prices  at  the  end  of  2021.  In  2021,  administered 
prices grew at 1.9% compared to a 2.7% rise in the 
overall price level. 

As of 1 April 2022, administered prices of gas and 
electricity  for  households  increased,  following  a 
surge  of  international  energy  prices  since  the 
summer  of  the  previous  year.  Consequently,  the 
for  households 
average  price  of  electricity 
increased by around 10% and that of gas by around 
16%. 
administered  prices 
accelerated  to  3.6%  on  yearly  basis,  up  from 
average 1.9% in Jan-Mar period. 

In  April  2022 

Medium-term prospects 

After  reaching  2.7%  in  2021,  HICP  inflation  is 
expected  to  accelerate  to  6.1%  in  2022.  Thus, 
inflation  in  Croatia  is  expected  to  be  in  line  with 
the expected inflation in the  euro area in 2022, in 
some  parts  reflecting  the  various  measures  taken 
by the Croatian government since the end of 2021 
to  tame  the  inflationary  pressures  coming  from 
rising  energy  and  food  prices.  These  measures 
include  cuts  in  the  VAT  rate  for  gas  and  various 
non-energy  products,  reduction  of  fees  of  state-
owned  electrical  distributer  (HEP)  and  direct 
transfers  to  vulnerable  households  and  SMEs.  In 
2023,  inflation  should  decelerate  to  around  2.7%, 
mostly 
supported  by  expected  decline  on 
international commodity prices. 

Risks  to  the  inflation  outlook  are  skewed  to  the 
upside, 
to 
due 
related 
commodity 
developments 
markets,  supply  chain  bottlenecks  and  to  the 
increases of administered prices mentioned above. 

uncertainties 
international 

to 
on 

The  price  level  in  Croatia  stood  at  67%  of  the 
euro-area average in 2020. There is a potential for 
gradual  price  level  convergence  in  the  long  term. 
However,  it  should  be  noted  that  Croatia  has 
level  of  price 
the  highest 
already  achieved 
convergence with the euro area compared to other 

Convergence Report 2022 - Technical annex 

Chapter 4 - Croatia 

member  states  at  the  moment  of  their  euro 
accession. 

inflation  prospects  are 

Medium-term 
largely 
expected  to  depend  on  price  developments  on 
global commodity and food markets. In particular, 
in line with Croatia’s deepening integration in EU 
value chains, domestic price  developments  should 
primarily be affected by price  developments in its 
main trading partners (Austria, Slovenia, Italy and 
Germany).  Inflation  cycles  in  Croatia  are  already 
highly synchronized with the inflation cycle of the 
euro area and  wage developments are  expected to 
continue  to  underpin  this  synchronisation.  As  for 
idiosyncratic factors, RRP-related investments and 
reforms  could  also  be  important  driver  of  price 
developments but are expected to have a muted if 
not disinflationary effect on the Croatian economy 
in the long run. On the one hand, RRP investments 
will  boost  aggregate  demand  in  the  economy, 
which could put some upside pressures on prices in 
the  short  term.  On  the  other  hand,  many  reforms 
(e.g.  reduction  of  administrative  burden  and  para-
fiscal charges, deregulation of services etc.) could 
enhance  competition  on  the  market  and  reduce 
costs for companies, thus putting some downward 
pressures  on  prices  of  final  products  in  the  long 
run. 

4.3. 

PUBLIC FINANCES 

4.3.1.  Recent fiscal developments 

After  a  surplus  in  2019,  the  general  government 
balance  turned  into  a  deficit  in  2020  (7.3%  of 
GDP)  due  to  the  COVID-19  crisis.  The  deficit  in 
2020 was directly impacted by the COVID-19 job 
preservation  support,  different  measures 
for 
companies  and  expenditure  on  medical  supplies. 
These  measures amounted overall to  around 3.3% 
of  GDP.  After  a  strong  increase  in  2020  (8.7%), 
total  expenditures  further  increased  by  2.8%  in 
2021.  Most  notably,  subsidies  to  companies  and 
social  expenditures  grew  on  account  of 
the 
COVID-19 support measures. Despite a substantial 
accumulation of new debt during the crisis, interest 
expenditure  decreased  in  2020  and  2021  as 
maturing  debt  was  refinanced  at  lower  interest 
rates. Total revenues remained stable as a share of 
GDP  between  2019  and  2021,  supported  by  the 
increase  in  EU  grants  (from  1.5%  to  2.7%  of 
GDP). 

The 2021 general government deficit was 2.9% of 
GDP. The improvement relative to 2020 is mainly 
explained by the strong economic recovery and the 

61 

Convergence Report 2022 - Technical annex 

Chapter 4 - Croatia 

decreasing  impact  of  the  COVID-19  temporary 
emergency measures, which are estimated to have 
amounted  to  2.1%  of  GDP.  The  2021  deficit 
outturn  was  significantly  lower  than  the  3.8%  of 
GDP  estimated 
the  2021  Convergence 
programme,  mainly  on  account  of  a  lower  than 
expected investment spending. 

in 

After increasing by more than 16 percentage points 
to  over  87%  of  GDP  in  2020,  the  public  debt-to-
GDP  ratio  decreased  to  slightly  below  80%  in 
2021.  Debt  dynamics  in  2021  was  driven  by  the 
solid GDP recovery, which largely offset the debt-
increasing  impact  of  interest  expenditure  and  the 
primary  deficit,  with  an  overall  debt-decreasing 
snow-ball  effect  of  more  than  9%  of  GDP  (after 
+8.4% 
in  2020).  The  stock-flow  adjustment 
provided  a  marginal  debt-increasing  impact  in 
2021 (after +2.5% in 2020). 

4.3.2.  Medium-term prospects 

The 2022 budget was adopted by the Parliament on 
8  December  2021.  Based  on  the  expectation  of  a 
general  government  deficit  of  4.5%  of  GDP  in 
2021, the budget foresaw a deficit of 2.6% of GDP 
in 2022. The 2022 budget envisaged a  withdrawal 
temporary  emergency  measures.  However, 
of 
considering the effects of the COVID-19 Omicron 
variant,  some  measures  to  retain  jobs  have  been 
kept in place for the first part of the year. In light 
of  the  rising  prices  in  energy  products,  the 
Government  adopted  measures 
the 
households  and  companies  to  cope  with  the 

to  help 

economic and social impact of rising prices. After 
freezing the petrol and diesel prices already at the 
end  of  2021,  authorities  temporarily  cut  excise 
duties on petrol and diesel in March 2022 until end 
of  May.  On  the  top  of  these  measures,  the 
authorities  adopted  on  9  March  2022  a 
comprehensive  set  of  measures,  effective  as  of  1 
April  amounting  to  1%  of  GDP.  This  package 
includes  a  temporary  reduction  of  VAT  on  gas 
from 25% to 5% (from April 1st 2022 to March 31st 
2023) and a permanent reduction of the VAT rate 
on electricity, gas (after March 2023 VAT rate on 
gas will remain at 13% vs previous 25%), heating, 
pellet,  wood  chippings  and  firewood,  and  support 
measures  designed  for  population  and  companies. 
The package also includes a permanent cut of VAT 
rates  on  non-energy  products,  including  food, 
hygienic products and tickets for sport and cultural 
events. There are also temporary support measures 
(until  end  of  March  2022)  for  households  and 
companies to help alleviate part of the increase in 
energy prices. 

On  29  April  2022,  Croatia  submitted  its  2022 
Convergence Programme, in line with Article 4 of 
Regulation  (EC)  No  1466/97.  The  government 
projects  real  GDP  to  grow  by  3%  in  2022  and 
4.4%  in  2023.  By  comparison,  the  Commission’s 
Spring  2022  Economic  Forecast  projects  a  higher 
real  GDP  growth  of  3.4%  in  2022  and  a  lower 
growth  of  3.0%  in  2023.  The  difference  between 
the two  forecasts comes from a  lower expectation 
by  the  Croatian  authorities  concerning  growth  in 
in  2022.  The 
real  household  consumption 

62 

Table 4.3:Croatia - Budgetary developments and projections (as % of GDP unless indicated otherwise)Outturn and forecast 1)20162017201820192020202120221)20231)General government balance-0.90.80.00.2-7.3-2.9-2.3-1.8- Total revenue45.945.545.546.347.246.446.446.7- Total expenditure46.944.745.546.154.549.248.648.5   of which: - Interest expenditure3.12.62.32.22.01.61.41.3p.m.: Tax burden37.337.237.537.637.036.235.935.9Primary balance2.13.42.32.4-5.3-1.3-0.9-0.5Fiscal stance 2)-1.8-0.2-1.8-0.7Government gross debt79.876.773.371.187.379.875.373.1p.m: Real GDP growth (%)3.53.42.93.5-8.110.23.43.01) Commission’s Spring 2022 Economic Forecast. 2) A negative (positive) sign of the indicator corresponds to an excess (shortfall) of primary expenditure growth compared with medium-term economic growth, indicating an expansionary (contractionary) fiscal policy.Source: European Commission. 
 
  
 
 
Convergence Report 2022 - Technical annex 

Chapter 4 - Croatia 

of  GDP  to  the  overall  fiscal  stance,  as  current 
expenditure  is  set  to  grow  at  a  faster  pace  than 
medium-term  potential  growth.  However,  most  of 
this  expansion  is  due  to  measures  related  to  the 
energy  crisis  (0.4  percentage  point  of  GDP)  and 
the  assistance 
those  fleeing  Ukraine  (0.1 
percentage point of GDP). 

to 

In  2023,  the  fiscal  stance  is  projected  at  -0.7 
percentage  point  of  GDP.  The  additional  positive 
contribution  to  economic  activity  of  expenditure 
financed  by  Recovery  and  Resilience  Facility 
(RRF)  grants  and  other  EU  funds  is  projected  at 
0.5  percentage  point  of  GDP  in  2023.  Nationally 
financed  investment  is  projected  to  provide  a 
slightly  expansionary  contribution  to  the  fiscal 
stance  of  0.1  percentage  point  of  GDP (53).  The 
growth  in  nationally  financed  primary  current 
expenditure 
revenue 
measures) is projected to provide a broadly neutral 
contribution of -0.2 percentage point of GDP to the 
overall fiscal stance in 2023 as part of the support 
measures  to  face  the  energy  crisis  in  2022  are 
assumed to be phased out. 

discretionary 

(net 

of 

Debt  sustainability  risks  appear  medium  over  the 
medium  run.  Government  debt  is  projected  to 
remain on a downward path until 2026 but increase 
again afterwards, reaching around 69% of GDP in 
2032.  This  projection  assumes  that  the  structural 
primary balance (except  for the impact of ageing) 
remains constant at the forecast level for 2023 of - 
1.0% of GDP, hence below the 2019 level.  

The  sensitivity  to  possible  macro-fiscal  shocks 
contributes  to this assessment. In particular, if the 
interest-growth  rate  differential  were  permanently 
1 percentage point higher than in the baseline, this 
would  lead  to  a  higher  debt  ratio  by  about  5 
percentage points of GDP by 2032 compared with 
the  baseline  and  put  debt  on  a  steeper  increasing 
path.  

risks, 

including 

factors  mitigate 

Some 
the 
lengthening  of  debt  maturity  in  recent  years  and 
(with  a 
relatively  stable 
diversified  and  large 
the 
expected  positive  impact  on  long-term  growth  of 
reforms  under  the  recovery  and  resilience  plan. 
Risk-increasing  factors  include  Croatia’s  negative 

investor  base)  and 

financing  sources 

in 

expect 

twenty 

expects 

and  health 

care.  Thereafter, 

invasion  of  Ukraine, 

Government 
the  Convergence 
Programme  that  the  headline  deficit  will  slightly 
decrease  to  2.8  %  of  GDP  in  2022,  mainly 
reflecting the growth in economic activity and the 
unwinding  of  most  emergency  measures.  Due  to 
the  Croatian 
Russia’s 
thousand 
around 
authorities 
refugees  and  an  increase  in  expenditure  related  to 
costs  of  accommodation,  food,  education,  social 
welfare 
the 
government deficit is expected to gradually decline 
to  1.6%  of  GDP  in  2023,  1.6%  of  GDP  in  2024 
and  to  1.2%  by  2025.  Therefore,  the  general 
government deficit is planned to remain below 3% 
of GDP over the programme horizon. Compared to 
the  Commission’s  Spring  2022  Economic 
Forecast,  these  deficit  projections  are  higher  in 
2022  and  lower  in  2023,  mainly  due  to  a  lower 
level  of  expenditure  expected  by  the  Commission 
in 2022 for gross fixed capital formation and other 
expenditure.  Furthermore 
the  Commission’s 
forecast entails somewhat lower level shift in both 
revenues  and  expenditures  compared 
the 
Convergence Programme attributed to a difference 
in  the  inflation  outlook,  where  government’s 
inflation  projection  is  notably  higher  than  that  of 
the Commission.  

to 

The  Commission’s  Spring  2022  Economic 
Forecast  expects  the  headline  deficit  to  narrow 
further  to  2.3%  of  GDP  in  2022  and  to  1.8%  in 
2023 as revenues are expected to grow strongly on 
the back of the economic recovery and the support 
from  the  RRF  for  investments,  while  COVID-19 
temporary emergency measures are expected to be 
completely phased out.  

In  2022,  the  fiscal  stance  is  projected  in  the 
Commission’s  Spring  2022  Economic  Forecast  to 
continue to be supportive, at -1.8 percentage points 
of GDP (52). The additional positive contribution to 
economic  activity  of  expenditure  financed  by  the 
Recovery  and  Resilience  Facility  grants  and  other 
EU  funds  is  projected  at  0.5  percentage  point  of 
GDP in 2022, after 0.3 percentage point of GDP in 
2021.  Nationally  financed  investment  is  projected 
to provide a expansionary contribution to the fiscal 
stance in 2022 of 0.4 percentage point. At the same 
time,  the  growth  in  nationally  financed  primary 
current  expenditure  (net  of  discretionary  revenue 
measures)  in  2022  is  projected  to  provide  an 
expansionary  contribution  of  1.0  percentage  point 

(52)  For a definition of the fiscal stance used in this report, see 
footnote  in  Section  4.2.3  on  underlying  factors  and 
sustainability of inflation. 

(53)  Other  nationally  financed  capital  expenditure  is  projected 

to provide a neutral contribution. 

63 

                                                           
                                                           
international 

net 
recently evidenced decline in population (54). 

investment  position  and  the 

Convergence Report 2022 - Technical annex 

Chapter 4 - Croatia 

the  kuna  exchange  rate  against  the  euro  but, 
through  its  foreign  exchange  transactions,  it  aims 
to prevent excessive exchange rate fluctuations. 

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%. Upon its 
ERM  II  entry,  Croatia  committed  to  implement  a 
set  of  policy  measures,  the  so-called  post-entry 
commitments,  with  the  aim  of  achieving  a  high 
degree of sustainable economic convergence ahead 
of the euro adoption. The commitments cover four 
policy 
laundering 
framework, the business environment, state-owned 
enterprises (SOEs) and the insolvency framework. 

anti-money 

areas: 

the 

The kuna depreciated against the euro by up to 2% 
in  the  first  two  months  of  the  pandemic  in  March 
and April 2020. Since joining the ERMII, the kuna 
has fluctuated in a narrow band of less than +/-1% 
against its central rate against the euro. The kuna's 
exchange against the euro has continued to exhibit 
a seasonal pattern of temporary appreciation in the 
summer thanks to foreign currency inflows related 
to  the  tourism  sector.  In  the  last  two  years,  it 
usually went below the central rate against the euro 
in the  summer months and moved just above it in 
the remaining months of each year. 

International  reserves  held  by  the  HNB  stood  at 
EUR  25  billion  (or  44%  of  GDP)  at  the  end  of 
2021.  After  declining  by  about  EUR  2  billion  in 
the  first  quarter  of  2020  due  to  the  foreign 
exchange  interventions  conducted  by  the  NHB  to 
maintain  the  stability  of  kuna  exchange  rate 
against the euro in midst of the pandemic-induced 
crisis,  international  reserves  increased  to  close  to 
EUR  19  billion  at  the  end of  the  year.  The  HNB’ 
international reserves rose by about EUR 6 billion 
in 2021. This increase was due to larger inflows of 
foreign  currency  to  the  government  account  from 
EU  funds  and  RRP  pre-financing  an  increased 

to 

(i.e., 

fiscal 

The  Croatian 
framework  has  been 
significantly  strengthened  recently,  largely  thanks 
to the transposition of outstanding requirements of 
the  Council  Directive  on  Budgetary  Frameworks 
(2011/85/EU).  The  New  Budget  Act  adopted  in 
December  2021  brought,  inter  alia,  significant 
the  forecasting 
improvements  with  regard 
process  and  the  consistency  and  level  of  detail  of 
the  medium-term  fiscal  plans.  Requirements  for 
the  publication  of  forecast  methodologies  and 
independent 
comparisons  with 
assumptions, 
forecasts 
the  European  Commission’s 
forecast)  and  sensitivity  analysis  contribute  to 
making  the  forecasting  process  more  transparent 
and  robust.  Likewise,  multi-annual  budgetary 
objectives  that  are  specified  in  more  detail  and 
with a clearer link to the annual budget process are 
bound  to  strengthen  the  medium-term  orientation 
of  fiscal  policy.  In  particular,  a  new  dedicated 
document  (i.e.,  a  Government  Decision)  will 
translate  the  multiannual  objectives  set  in  the 
Convergence  Programme  into  specific  limits  for 
budgetary  users  that  can  be  used  in  the  annual 
budget  process.  Finally,  the  chair  of  the  Fiscal 
Policy  Commission  – 
independent  fiscal 
council  set-up  since  2018  –  was  eventually 
nominated  in  late  2021,  following  several  failed 
attempts. 

the 

4.4. 

EXCHANGE RATE STABILITY 

The  HNB  operates  de  jure  a  managed  floating 
exchange  rate  regime,  using  the  exchange  rate 
against  the  euro  as  the  main  nominal  anchor  to 
achieve its primary objective of price stability. The 
HNB  does  not  target  a  specific  level  or  band  for 

(54)  For  further  details  see  the  2021  Fiscal  Sustainability 

Report. 

64 

-3-2-10122020202120222023Net nationally financed  primary current expenditureNationally financed investmentOther capital expenditureExpenditure financed by RRF grants and EU fundsFiscal stanceExpansionaryContractionaryGraph 4.4: Croatia -Fiscal stance and its componentsSource: Commission's Spring 2022 Economic Forecast. (percent of GDP)7.07.27.47.67.88.0201620172018201920202021Graph 4.5: Croatia -HRK/EUR exchange rate(monthly averages)Source: ECB.           
                                                           
      
Convergence Report 2022 - Technical annex 

Chapter 4 - Croatia 

volume of repo transactions,  and a new allocation 
of  special  drawing  rights  with  the  International 
Monetary Fund (IMF). 

0.5% in December, before starting to rise gradually 
in  the  first  months  of  2022.  In  April  2022,  the 
reference value, given by the average of long-term 
interest rates in France, Finland and Greece, plus 2 
percentage  points,  stood  at  2.6%.  In  that  month, 
the  12-month  moving  average  of  the  yield  on  the 
Croatian  benchmark  bond  stood  at  0.8%,  i.e.  1.8 
percentage points below the reference value. 

As  foreign  exchange  interventions  are  the  main 
monetary  policy  instrument,  the  HNB  does  not 
frequently change interest rates on its lending and 
deposit  facilities  and  developments  in  the  short-
term rates mainly reflects changes in kuna liquidity 
in  the  banking  system.  Following  the  decision  of 
the  Croatian  Banking  Association  to  discontinue 
the  calculation  of  the  Zagreb  Interbank  Offered 
Rate  (Zibor)  benchmarks  at  the  end  of  December 
2019,  the  HNB  has  started  to  publish  a  new  3-
month national reference rate (NRR) on a quarterly 
basis since the end of the first quarter of 2020. The 
NRR  is  a  rate  representing  the  average  funding 
expenses  of  the  Croatian  banking  sector  (banks, 
savings banks and branches of foreign banks). The 
3-month NRR stood at 0.20% in the first quarter of 
2020  and  declined  very  gradually 
thereafter 
throughout  2020  and  2021,  mostly  in  line  with 
developments  in  the  3-month  Euribor  rate.  As  a 
result,  the  interest  rate  differential  of  the  3-month 
NRR against the 3-month Euribor rate was broadly 
flat, averaging about 60 basis points over the 2020-
2021 period. 

4.5. 

LONG-TERM INTEREST RATES 

The long-term interest rates in Croatia used for the 
convergence  assessment  reflect 
the  secondary 
market  yield  on  a  single  benchmark  government 
bond  with  a  residual  maturity  of  about  7.5  years. 
The Croatian 12-month average long-term interest 
rate  relevant  for  the  assessment  of  the  Treaty 
criterion was below the reference value at the time 
of  the  2020  convergence  assessment  of  Croatia. 
After  having  stabilized  around  those  levels  in  the 
remaining  months  of  2020,  it  declined  very 
gradually  throughout  2021,  standing  just  below 

Following  the  first  two  months  of  the  pandemic, 
the long-term interest rate  of Croatia rose  by over 
60  basis  points  to  stand  at  1.2%  in  April  2020.  It 
declined  then  very  gradually,  falling  to  as  low  as 
0.3% in October 2021. The long-term interest rate 
of  Croatia  picked  up  slightly  in  December  2021 
and moved higher in the first months of 2022 amid 
increasing geopolitical risks at the global level and 
a  deterioration  of  the  inflation  outlook  in  the 
context  of  an  already  high  inflation  in  most 
advanced  economies.  The  spread  relative  to  the 
German  long-term  benchmark  bond  widened  to 
around  170  basis  points  in  the  first  months  of  the 
COVID-19  pandemic, 
it  narrowed  gradually 
subsequently, falling to as low as 50 basis points in 
October  2021  against  the  backdrop  of  a  strong 
economic recovery of the Croatian economy. Since 
November  2021,  the  spread  has  widened  again  to 
some extent in the context of a deterioration in the 
Croatian economic outlook related to the spread of 
the  Omicron  variant  and  of  an  increased  risk 
aversion  due  to  heightened  geopolitical  risks  and 
the beginning of the  Russia’s invasion of Ukraine 
in February 2022. In April 2022, the spread to the 
German  long-term  benchmark  bond  stood  at  168 
basis points, declining slightly from a recent years’ 
peak  of  180  basis  points  reached  in  the  previous 
month. 

65 

0100200201620172018201920202021Graph 4.6: Croatia -3-M Zibor(1) and 3-M NRR(2) spread to 3-M Euribor(1) The production of the previously used ZIBOR reference rate was discontinued by the national central bank as of 1 January 2020.(2) NRR is the national reference rate of average finacing expenses of thebanking sectorSource: Eurostat, Thomson Reuters and Croatian National Bank(basis points, monthly values until Dec.2019, quarterly values since Q1 2020)0246Jan-16Jan-17Jan-18Jan-19Jan-20Jan-21Jan-22CroatiaReference ValueGraph 4.7: Croatia -Long-term interest rate criterion(percent, 12-month moving average)Source: European Commission.      
          
Convergence Report 2022 - Technical annex 

Chapter 4 - Croatia 

support 
the  unwinding  of  macroeconomic 
imbalances  in  the  medium  term.  A  range  of  RRP 
reforms should help improve the fiscal framework, 
the cost effectiveness in the public sector, access to 
financing  and  the  business  environment.  They  are 
also expected to increase the export potential of the 
economy,  participation  on  the  labour  market  and 
boost long-term productivity. 

After  a  strong  increase  of  7.3%  in  2020,  the 
growth of real house prices decelerated to 4.6% in 
2021, thus moving below the prudential threshold. 
At  the  same  time,  lending  for  house  purchases 
continued  to  grow  at  a  robust  pace  in  2021, 
supported by the government subsidy program for 
first-time home owners (among other factors). Due 
to  signs  of  house  price  overvaluation,  elevated 
house  price  growth,  high  mortgage  credit  growth 
and  signs  of  loosening  of  lending  standards,  the 
ESRB  issued  a  warning  to  Croatia  in  February 
2022,  indicating  risks  as  medium  and  policy  as 
only  partially  appropriate  and  partially  sufficient. 
Although  the  ESRB  recognized  and  supported 
it 
current  CNB  macro-prudential  measures, 
emphasized  that  borrower-based  measures  should 
be activated. However, on the basis of the 2022 in-
depth  review  undertaken  under  Regulation  (EU) 
No 1176/2011 on the prevention and correction of 
macroeconomic 
the  Commission 
imbalances, 
considered in its Communication COM(2022) 600 
that  Croatia 
experiencing 
macroeconomic  imbalances.  Important  progress 
has  been  made  in  reducing  private  indebtedness 
and  net  external  liabilities.  General  government 
debt remains high but has resumed the  downward 
trajectory  that  delivered  marked  improvements 
before  the  pandemic.  The  banking  sector  remains 
stable  and 
liquid,  with  a  decreasing  non-
performing loans ratio. Potential output growth has 
increased,  building  on  strong  policy  action,  and  a 
strong 
further 
and 
implementation  of  Croatia’s 
resilience 
remaining 
plan 
vulnerabilities.  On  current  forecasts,  both  private 
and  government  indebtedness  are  expected  to 
continue 
the  external  position 
strengthening further benefiting also from the RRF 
funds. 

strengthening  based  on 

a 
recovery 

falling  with 

address 

longer 

can 

no 

is 

Croatia  submitted  its  recovery  and  resilience  plan 
(RRP)  on  14  May  2021.  The  Commission’s 
positive  assessment on 8 July 2021 and Council’s 
approval  on  28  July  2021  paved  the  way  for  the 
implementation  of  the  RRP  and  the  disbursement 

4.6.  ADDITIONAL FACTORS 

The  Treaty  (Article  140  TFEU)  calls  for  an 
examination  of  other  factors  relevant  to  economic 
integration  and  convergence  to  be  taken  into 
account  in  the  assessment.  The  assessment  of  the 
additional factors – including balance of payments 
developments,  as  well  as  product,  labour  and 
financial  market  integration  –  gives  an  important 
indication  of  a  Member  State's  ability  to  integrate 
into the euro area without difficulties. 

In  November  2021,  the  Commission  published  its 
ninth Alert Mechanism Report (AMR 2022) under 
the  Macroeconomic  Imbalance  Procedure  (MIP 
see  also  Box  1.7),  which  concluded  that  an  In-
Depth Review (IDR) was warranted for Croatia. 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 are above their indicative thresholds. 

that 

indicate 

following  a 

However,  the  findings  of  the  Commission’s  2022 
the 
(IDR) 
In-Depth  Review 
unwinding of macroeconomic imbalances resumed 
in  2021, 
relatively  contained 
deterioration 
in  2020.  The  public  debt  ratio 
decreased owing to strong economic recovery and 
partial  phasing  out  of  pandemic-related  fiscal 
measures.  The  recovery  also  reduced  the  private 
debt  ratio,  which  returned  close  to  the  pre-
pandemic  level.  Both  household  and  corporate 
debt are below prudential thresholds, although still 
above 
levels  suggested  by  fundamentals. 
External  balances  improved,  with  the  current 
account balance returning to positive  territory and 
the  net  international  investment  position  (NIIP) 
returning  to  an  upward  trajectory.  Croatia’s  RRP 
should facilitate reforms in different areas and thus 

the 

66 

-20246201620172018201920202021CroatiaGermanyGraph 4.8: Croatia -Long-term interest rates(percent, monthly values)Source: Eurostat.        
Convergence Report 2022 - Technical annex 

Chapter 4 - Croatia 

of EUR 6.3 billion in grants over the period 2021-
2026, which is equivalent to 11.5 % of 2019 GDP. 

Croatia’s  plan 
includes  an  extensive  set  of 
mutually reinforcing reforms and investments (146 
investments and 76 reforms) that should contribute 
to effectively addressing all or a significant subset 
of  the  economic  and  social  challenges  outlined  in 
the  country-specific 
(CSRs) 
addressed  to  Croatia  by  the  Council  in  the 
European Semester in 2019 and 2020.  

recommendations 

The  plan  will  address  among  others  key  macro-
economic challenges such as low employment and 
activity rates, a burdensome and complex business 
environment and the low quality of education. Key 
investments are included on energy efficiency and 
post-earthquake 
reconstruction  of  buildings, 
sustainable  transport,  the  digital  transition  of  the 
infrastructure. 
public  administration  and  5G 
Reforms  include  early  childhood  education  and 
care,  healthcare  system,  anti-corruption  and  anti-
money  laundering,  judiciary,  and  the  business 
environment, by reducing administrative barriers.  

The  plan  devotes  40.3%  of  its  total  allocation  to 
measures  supporting  climate  objectives,  20.4%  to 

transition  and  23%  on 

the  digital 
expenditure,  all  while  respecting 
significant harm principle.  

social 
the  do  no 

The  implementation  of  the  investments  in  the 
Croatian plan, along with other investments under 
Next Generation EU (NGEU), is estimated to raise 
Croatia’s  GDP  by  2.9%  by  2026,  of  which  0.5% 
due 
the 
to 
implementation  of  NGEU  across 
coordinated 
Member  States (55).  This  does  not 
into 
account  the  positive  impact  of  structural  reforms 
on growth. 

the  positive  spillover  effects  of 

take 

4.6.1.  Developments  of 

the  balance  of 

payments 

Croatia’s  current  account  balance  was  deeply 
affected by the  COVID-19 pandemic in 2020, but 
it recovered swiftly during 2021.  After registering 
a  surplus  of  3%  of  GDP  in  2019,  the  current 

(55)  Pfeiffer P., Varga J. and in ’t Veld J. (2021), “Quantifying 
Spillovers  of  NGEU  investment”,  European  Economy 
Discussion  Papers,  No.  144 and  Afman  et al.  (2021),  “An 
overview of the economics of the Recovery and Resilience 
Facility”, Quarterly Report on the Euro Area (QREA), Vol. 
20, No. 3 pp. 7-16.  

67 

Table 4.4:Croatia - Balance of payments(percentage of GDP)201620172018201920202021Current account2.23.51.83.0-0.13.1of which: Balance of trade in goods-16.1-16.9-18.3-18.8-17.3-18.3                 Balance of trade in services17.217.517.518.510.517.1                 Primary income balance -1.9-0.4-0.5-0.12.30.3                 Secondary income balance3.03.33.23.44.44.0Capital account1.40.91.31.62.12.3External balance 1)3.64.43.14.62.15.5Financial account3.14.63.44.41.34.9of which: Direct investment-4.2-2.3-1.6-6.1-1.3-3.9                Portfolio investment2.90.81.92.4-0.2-0.1                Other investment 2)4.90.90.16.31.6-1.5                Change in reserves-0.65.22.91.81.210.5Financial account without reserves3.7-0.60.42.60.1-5.6Errors and omissions-0.50.20.3-0.2-0.8-0.5Gross capital formation20.721.723.222.823.920.0Gross saving23.025.125.025.623.023.4Net international investment position -72.4-64.2-55.7-46.7-47.8-33.91) The combined current and capital account.2) Including financial derivatives.Sources: Eurostat, European Commission calculations, Croatian National Bank.                                                           
 
 
    
 
 
account balance  fell into  negative territory  for the 
first  time  since  2013,  at  -0.1%  of  GDP  in  2020. 
However,  a  strong  recovery  of  tourism  export 
services  and  a  robust  performance  in  exports  of 
goods, drove the current account balance back to a 
surplus  of  3.1%  of  GDP  in  2021.  Despite  the 
economic  fallout  of  the  COVID-19  crisis,  the 
capital  account  continued  improving  in  2020  and 
2021  amid  an  increasing  inflow  of  EU  funds. 
Thanks to this evolution, the  external balance (i.e. 
the combined current and capital account balance) 
reached 5.5% of GDP surplus in 2021. 

less  affected  by 

During 2020, exports of services fell by more than 
40%  compared  to  2019,  while  exports  of  goods 
the  COVID-19 
were  much 
pandemic  as  they  posted  a  growth  of  0.3%.  In 
2021, a better-than-expected tourism season helped 
exports  of  services  to  quickly  recover,  although 
they  remained  10%  behind  pre-pandemic  levels. 
As  a  result,  the  balance  of  trade  in  services 
improved over the year reaching 17.1% of GDP. In 
terms  of  trade  in  goods,  both  exports  and  imports 
exceeded  2019  levels  in  2021,  experiencing  a 
quick  and  strong  recovery  despite  supply  chain 
disruptions.  However,  the  trade  balance  of  goods 
deteriorated  by  1  percentage  points  in  2021, 
reaching -18.3% of GDP. 

Convergence Report 2022 - Technical annex 

Chapter 4 - Croatia 

real  effective  exchange  rate,  has  increased  since 
the  beginning  of  the  pandemic.  However,  the 
evolution  of  ULC-deflated  REER  in  2020  should 
be  interpreted  with  caution  due  to  challenges  in 
calculating ULC. (56). On the other hand, the HICP 
based  REER  indicates  a  slight  deterioration  in 
external price competitiveness since 2020. 

the  current  account 

According  to  the  Commission’s  Spring  2022 
Economic  Forecast, 
is 
expected  to  record  a  milder  surplus  of  1.5%  of 
GDP in 2022, with rising energy prices playing an 
important role, and 0.1% of GDP in 2023. Further 
reduction  of  surplus  in  2023  should  be  mostly 
driven  by  pressures  on  imports  of  goods  coming 
increasing  domestic  demand,  especially 
from 
investments, which have high import component. 

4.6.2.  Market integration 

The  Croatian  economy  is  well  integrated  with  the 
euro  area  through  trade,  financial  and  investment 
linkages. The degree of openness stood at 58% in 
2021 increasing significantly after having declined 
to as low as 51% in 2020 as international trade and 
Croatia’s  exports  of  tourism  and  travel  services 
were  particularly  hit  by  the  pandemic.  Trade  with 
the euro area amounted to 31.7% of GDP in 2021, 
with  Germany,  Italy,  Slovenia,  Hungary  and 
Austria, Croatia's largest trade partners, accounting 
for half of total trade. 

FDI has so far been mainly directed to the banking, 
real  estate  and  retail  sectors.  Croatia  has  so  far 
failed  to  attract  significant  FDI  inflows  into  the 
tradable  goods  sector  and  it  is  thus  weakly 
supply  chains.  The 
integrated 
unfavourable  business  environment  appears  to  be 
the  main  obstacle  to  attracting  more  FDI  in  the 
tradable goods sector. 

into  global 

In 2020, the financial account balance surplus fell 
to  1.3%  of  GDP,  down  from  4.4%  recorded  in 
2019,  mostly  due  to  a  reduction  in  portfolio 
investments,  lower  reserves  and,  in  particular,  to 
changes  in  other  investments.  However,  in  2021 
the  surplus  increased  to  4.9%  of  GDP,  heavily 
supported  by  a  strong  accumulation  of  reserves. 
Consequently, 
financial  account  balance 
without reserves decreased to -5.6% of GDP. 

the 

Based  on  national  accounts,  external  cost 
competitiveness, as measured by the ULC-deflated 

68 

With  regard  to  the  business  environment,  Croatia 
performs  worse  than  most  euro-area  Member 
States  according 
to  several  commonly  used 
indicators  (e.g.  the  World  Bank's  Ease  of  Doing 
Business Index or the IMD World Competitiveness 
Index).  In  the  World  Bank's  Ease  of  Doing 
Business, Croatia's worst rankings concern dealing 
a 
with 
business (57).  According  to  the  World  Bank's 

construction  permits 

starting 

and 

(56)  The  ULC-deflated  REER  should  be  interpreted  with 
prudence as unit labour costs were distorted by the uneven 
approach  to  recording  working  hours  in  the  presence  of 
labour retention schemes. 

(57)  The  World  Bank  Doing  Business  (DB)  program  was 
paused in 2021. The programme will continue with a new 
governance  and  improved  accountability  and  transparency 

90100110201620172018201920202021Graph 4.9: Croatia -Effective exchange ratesNEERREER, HICP deflatedREER, ULC deflated(vs. 36 trading partners;  monthly averages;index numbers, 2016 = 100)Source: European Commission.    
                                                           
Convergence Report 2022 - Technical annex 

Chapter 4 - Croatia 

to 

communicated 

2017-2018  Croatia 
the 
Commission  the  adoption  of  several  transposition 
measures.  The  Commission’s  analysis  of  the 
communicated  measures  concluded 
the 
that 
Directive  had  been 
transposed.  An 
assessment  of  the  concrete  implementation  and 
the  4th  Anti-money 
effective  application  of 
Laundering  Directive  in  Croatia  is  at  present 
ongoing. 

fully 

the  5th  Anti-money  Laundering 
As  regards 
Directive, whose transposition deadline elapsed on 
10  January  2020,  Croatia  has  notified  national 
transposition  measures 
the 
transposition to be complete. The Commission is at 
present  completing  its  analysis  of  whether  there 
are  any  potential  completeness  or  conformity 
issues in the transposition or implementation of the 
Directive. 

declared 

and 

the 

The  economic  expansion  in  Croatia  prior  to  the 
pandemic  supported  a  steady  increase  in  the 
employment rate (20-64), which reached 66.7% in 
2019. Unscathed during the crisis, the employment 
rate increased to 68.2% in 2021, but remained well 
below the EA average of 72.5% (age class from 20 
to  64  years).  Although 
job  preservation 
schemes,  also  supported  by  SURE,  ESF  and 
REACT-EU,  helped  cushion 
impact  on 
employment  levels,  the  COVID-19  crisis  strongly 
affected the youth (16-24 year olds). This is shown 
by  the  particularly  high  levels  of  involuntary 
temporary employment in this age group (30.9% in 
2020 compared to 12.2% in 15-64) indicating low 
levels  of  job  security.  However,  several  RRP 
reforms  and  investments  related  to  active  labour 
market policies aim to support the labour market in 
Croatia,  reduce  skills  gaps  and  increase  activity 
and  employment  rates,  which  should  help  Croatia 
speed up convergence to the EU averages. 

the 

Worldwide Governance Indicators (2020), Croatia 
ranks  low  in  voice  and  accountability,  regulatory 
quality and rule of law compared with the average 
of  the  five  euro  area  Member  States  with  the 
lowest  scores.  Croatia  ranks  higher  than  the 
average  five  lowest  euro  area  Member  States  for 
political  stability  and  absence  of  violence. (58)  On 
the other hand, Croatia stepped up its transposition 
of EU internal market directives. In addition, there 
has  been  renewed  effort  to  improve  the  business 
the 
environment, 
administrative  burden  and  regulatory  restrictions, 
especially supported by RRP funds and post-entry 
ERM II commitments. 

in  particular 

reduce 

to 

in 

issue 

important 

challenges 

Corruption  represents  an 
in 
Croatia, which is reflected in the poor performance 
in  the  perception  of  corruption  index.  This  points 
to  a  need  to  strengthen  the  framework  to  prevent, 
detect  and  correct  corruption.  Related,  Croatia 
addressing  Sustainable 
faces 
Development  Goal  16  –  Peace,  justice  and  strong 
institutions.  The  proportion  of  people  who 
perceive  their  justice  system  to  be  very  or  fairly 
independent  has  been  decreasing  in  recent  years 
and  is  the  lowest  in  the  EU.  The  Recovery  and 
Resilience  Plan  includes  reforms  and  investments 
in the justice system, for a combined total of EUR 
100  million,  which  is  expected  to  significantly 
improve  the  efficiency  of  the  justice  and  anti-
corruption  systems,  shorten  the  length  of  court 
proceedings and reduce the backlog of court cases, 
enhancing  the  transparency  and  efficiency  of 
public  procurement  system  and  put  in  place  a 
reliable management and control of the EU funds. 

The  4th  Anti-money  Laundering  Directive 
imposed transposition by 26 June 2017 and during 

under  the  name  Business  Enabling  Environment  (BEE). 
The first edition of the BEE is expected in 2023. 

(58)  A  Member  State  is  considered  to  have  a  ‘low’  (‘high’) 
ranking  compared  with  the  average  of  the  five  euro  area 
Member States with the lowest scores for each indicator if 
its  score  is  at  least  0.3  percentage  points  lower  (higher) 
than that of the average of this euro area group. 

69 

0.00.40.71.11.4Voice and AccountabilityPolitical Stability and Absenceof Violence/TerrorismGovernment EffectivenessRegulatory QualityRule of LawControl of CorruptionCroatiaEuro area average five lowestEuro area averageGraph 4.10: Croatia -2020 World Bank's Worldwide Governance IndicatorsNote: Estimate of governance ranges from -2.5 (weak) to 2.5 (strong). Source: World Bank.    
                                                                                   
Convergence Report 2022 - Technical annex 

Chapter 4 - Croatia 

As  for  the  funding  structure  of  the  Croatian 
economy,  this  is  dominated  by  bank  loans  and 
trade  credits  to  a  larger  extent  than  in  the  euro 
area. The outstanding bank loans and trade credits 
amounted to over 164% of Croatia’s GDP and the 
majority  of  bank  loans  was  denominated  in  euro. 
Possibly reflecting the large use of limited liability 
companies and the importance of SOEs in Croatia, 
other  equity (59)  represented  the  second  most 
important  source  of  funding  of  the  Croatian 
economy,  amounting  to  124%  of  GDP.  At  the 
same 
listed  and  unlisted  shares 
represented  about  64%  of  GDP,  broadly  in  line 
with the importance of government debt market in 
terms  of  GDP.  However,  the  importance  of  listed 
shares  amounted  to  just  36%  of  GDP  in  2020, 
declining  somewhat  compared  to  2016  when  it 
stood  at  41%  and  being  thus  just  half  of  its 

time, 

the 

(59)  Other  equity  refers  to  equity  claims  such  as  equity  in 
liability 
incorporated  partnerships,  equity 
companies  whose  owners  are  partners,  capital  invested  in 
cooperative  societies  or  investment  by  the  government  in 
the  capital  of  public  corporations  whose  capital  is  not 
divided into shares. 

limited 

in 

Although the size of the financial sector in Croatia 
reached  229%  of  its  GDP  in  2020,  it  was  smaller 
than that of the euro area. At the same time, its size 
was  comparable  to  that  of  the  five  euro  area 
Member  States  with  the  smallest  financial  sector. 
As in the  euro area, the banking sector dominates 
the  Croatian  financial  sector  but  its  share  was 
much  larger  than  in  the  euro  area,  representing 
about  56%  of  the  financial  sector’s  assets  against 
just 40% in the euro area in 2020. The central bank 
and the sector of insurance and pension funds were 
the second and the third largest holders of financial 
assets  with  a  share  of  20%  and  19%  respectively. 
As  a  result,  these  three  sectors  (i.e.  monetary 
financial  institutions,  central  bank  and  insurance 
companies  and  pension  funds)  concentrated  about 
95% of financial  sector assets, indicating a  higher 
concentration  of  financial  assets  than  in  the  euro 
area  but  also  than  in  the  five  smallest  euro  area 
financial  sectors.  Reflecting  on  one  hand  the 
impact  of  the  pandemic  on  the  financial  sector 
stability and on the other hand the measures taken 
by  the  central  bank  in  response  to  the  crisis,  the 
importance  of  the  central  bank  in  the  financial 
sector increased to 20% of GDP in 2020 from 15% 
of GDP in 2016. At the same time, the importance 
of  the  banking  system  declined  to  56%  of  GDP 
from  62%  in  2016,  reflecting  a  subdued  credit 
growth to the real economy and in particular to the 
non-financial  sector.  The 
the 
insurance and pension funds appears to have been 
more stable, standing to 19% of the total assets of 
the  financial  sector 
in  2020,  which  broadly 
compares to its importance of 17% in 2016. 

importance  of 

70 

Table 4.6:Croatia - Allocation of assets by financial sub-sectorRatio to GDP (%)HREAEA 5 smallest201620202016202020162020Financial corporations (total)196229722796177215Central bank304545783761Monetary financial institutions1221282863119798Other financial intermediaries972021792028Non-MMF investment funds1)3610012745Insurance co. and Pension Funds3343901021823Share of total (%)HREAEA 5 smallest201620202016202020162020Central bank15206102129Monetary financial institutions625640395546Other financial intermediaries5328221112Non-MMF investment funds13141622Insurance co. and Pension Funds1719121310111) MMF stands for money market funds.Source: Eurostat.Table 4.5:Croatia - Market integration201620172018201920202021Trade openness 1) (%)50.353.354.354.951.058.0Trade with EA in goods & services 2)+3) (%)28.629.630.430.728.131.7World Bank's Ease of Doing Business Index rankings 4)4351585151-IMD World Competitiveness Ranking 5)585961606059Internal Market Transposition Deficit 6) (%)2.21.30.30.21.2-Real house price index 7)102.0105.0109.8118.4127.0132.8 1) (Imports + Exports of goods and services / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics, Balance of Payments). 2) (Imports + Exports of goods with EA-19 / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics). 3) Trade in services with EA-19 (average credit and debit in % of GDP at current prices) (Balance of Payments). 4) Data not available for 2021. The Ease of Doing Business report by the World Bank was discontinued in September 2021.  5) International Institute for Management Development (IMD). 6) Percentage of internal market directives not yet communicated as having been transposed, relative to the total.    (November data, as of 2016 date refers to the year of publication). 7) Deflated house price index (2015=100) (Eurostat). Sources: Eurostat, World Bank, International Institute for Management Development, European Commission calculations. 
 
      
 
 
                                                           
 
 
  
 
 
Convergence Report 2022 - Technical annex 

Chapter 4 - Croatia 

importance  in  the  euro  area.  Overall,  Croatia  has 
less developed equity and debt markets in terms of 
GDP  than  the  euro  area  average.  Although  these 
markets  appear  relatively  larger  in  terms  of  GDP 
than  the  five  smallest  national  capital  markets  in 
euro  area,  their  relative  importance  as  a  funding 
source  remained  limited  and  broadly  in  line  with 
the euro area average. 

The banking  sector in Croatia is  highly integrated 
into  the  EU  financial  sector,  in  particular  through 
foreign ownership of the banking sector, as around 
90%  of  its  assets  are  held  by  subsidiaries  of 
foreign banks. Concentration in the banking sector 
is  much  higher  than  in  the  euro  area,  with  the 
largest  five  banking  institutions  reaching  80%  of 
sector’s  total  assets  in  2020,  against  50%  in  the 
euro-area.  In  parallel  with  the  inclusion  of  the 
Croatian  kuna  in  the  ERM  II,  the  Croatian 
National  Bank  entered  into  a  close  cooperation 
with  the  ECB,  effectively  joining  the  Banking 
Union.  As  of  1  October  2020,  Croatia  also joined 
the  Single  Resolution  Mechanism,  and  the  ECB 
has become responsible of the direct supervision of 
the  significant  banking  institutions  in  Croatia  as 
well as the oversight of less significant institutions. 

Measures  of  intra-EU  integration  in  equity  and 
debt  markets,  as  based  on  the  home  bias  in 
portfolio investments, (60) indicate that the level of 
integration of Croatia is very low in both segments 
and in particular in equity markets. Although intra-
EU  financial  integration,  by  the  same  measure,  is 
in  general  relatively  low  across  EU  Member 
States,  Croatia’s  integration  is  well  below  that  of 
the  euro-area  Member  States  exhibiting 
low 
integration. The very large home bias indicates that 
almost  all  investments  in  financial  markets  takes 
place domestically. 

4.7. 

SUSTAINABILITY OF CONVERGENCE  

This  concluding  section  draws  together  elements 
that  are  key  for  gauging  the  sustainability  of 
Croatia’s convergence vis-à-vis the euro area. The 
analysis  reviews  sustainability  from  a  number  of 
angles.  

(60)  Home  bias  in  portfolio  investments  measures  the  average 
propensity  of  investors  in  a  Member  State  to  invest 
domestically  as  compared  with  investing  in  other  EU 
countries.  The  indicator  ranges  between  0  and  1,  with  a 
value  of  0  indicating  that  investors  prefer  domestic  over 
foreign  assets.  The  inverse  of  the  home  bias  can  be 
interpreted  as  one  measure  of  financial  integration  among 
EU countries. 

71 

Table 4.7:Croatia - Financing of the economy1)Ratio to GDP (%)HREAEA 5 smallest201620202016202020162020Liabilities (total)441461743770324335Loans163164238236115112Non-financial co. debt securities54121534Financial co. debt securities0074681112Government debt securities576583955157Listed shares413665731718Unlisted shares28281861935556Other equity10912451564248Trade credits and advances383933352929Share of total (%)HREAEA 5 smallest201620202016202020162020Loans373632313533Non-financial co. debt securities112211Financial co. debt securities0010933Government debt securities131411121617Listed shares989955Unlisted shares6625251818Other equity2527771314Trade credits and advances9845991) The table focuses on the financing needs of a country and how these are met by the financial system. The table is constructed from the liabilities of all economic sectors, but only considers loans, debt securities, equity and trade credits. The sum of liabilities in the table only reflects the total for the liabilities considered.Source: Eurostat.020406080100HR, 2016HR, 2020EA, 2016EA, 2020Concentration in the banking sector (CR5 ratio)Share of foreign institutions as % of total assetsGraph 4.11: Croatia -Foreign ownership and concentrationin the banking sector(in percent, weighted averages)Source: ECB, Structural financial indicators  and HNB Banks Bulletin.0.00.20.4HR, 2016HR, 2020EA, 2016EA, 2020EA Low,2016EA Low,2020DebtEquityGraph 4.12: Croatia -Intra-EU integration in equity and debt portfolio investmentNote: The chart shows the extent of home bias in debt and equity markets. A value index of 1 implies ‘full integration’ with the financial markets of other Member States, while 0 denotes ‘no integration’.Source: FinFlows database: European Commission, Joint Research Centre (JRC). (index) 
 
     
 
 
  
   
                                                           
First, the sustainability dimension is inherent in the 
individual  convergence  criteria  themselves.  This 
the  price  stability 
holds  most  explicitly  for 
criterion,  which  includes  the  requirement  of  a 
“sustainable  price  performance”.  In  principle,  the 
fiscal  criterion  (EDP)  also  involves  a  forward-
looking aspect, providing a view on the durability 
of  the  correction  of  fiscal  imbalances.  While  the 
rate  criteria  are,  by 
exchange  and 
construction,  backward-looking, 
they  aim  at 
capturing  an  economy’s  ability  to  operate  durably 
under  conditions  of  macroeconomic  stability, 
hence 
the  conditions  for 
sustainable  convergence  following  euro  adoption 
are in place.  

indicating  whether 

interest 

integration) 

required  by 

Second, 
the  assessment  of  additional  factors 
(balance  of  payments,  product  and  financial 
market 
the  Treaty 
broadens the view on sustainability of convergence 
for  a  more  complete  picture, 
and  allows 
complementing 
In 
the  quantitative  criteria. 
particular,  a  sound  external  competitiveness 
position, effectively functioning markets for goods 
and services and a robust financial system are key 
ingredients to ensure that the convergence process 
remains smooth and sustainable.  

Third,  the  convergence  assessment  should  be 
informed  by  the  results  and  findings  of  enhanced 
policy  co-ordination  and  surveillance  procedures 
(MIP,  fiscal  governance)  put  in  place  after  the 
Global  Financial  Crisis.  The  aim  is  not  to  add  to 
the existing requirements for euro adoption, but to 
make full use of the comprehensive economic and 
financial  analysis  undertaken  under  the  so-called 
European  Semester.  While  some  elements  drawn 
from the European Semester (e.g., related to AMR 
scoreboard indicators) are included in the relevant 
chapters  on  convergence  above,  this  section  uses 
this  framework  more  systematically  to  provide  an 
integrated view of the sustainability dimension. 

the 

sustainability 

assessment  of 

Any 
sustainability  of 
convergence  has  limits  and  must  be  based  on  a 
judgement  of  the  likely  future  evolution  of  the 
economy.  In  particular,  as  experience  has  shown, 
the 
the 
and 
convergence  process  after  euro  adoption  is  to  a 
significant extent endogenous, i.e., it depends on a 
Member  State’s  domestic  policy  orientations  after 
it  has  joined  the  euro  area.  Therefore,  while  the 
assessment of sustainability is an essential element 
in  determining  a  Member  State’s  readiness  to 
adopt  the  euro  based  on  initial  conditions  and 

robustness 

of 

Convergence Report 2022 - Technical annex 

Chapter 4 - Croatia 

existing  policy  frameworks,  the  outcome  of  such 
an  assessment  should  be  seen  as  a  snapshot  at  a 
specific  point  in  time,  whereas  the  long-term 
sustainability of the convergence process will also 
depend  on  the  adoption  of  appropriate  policies 
over 
the  on-going 
surveillance  carried  out  in  the  context  of  the 
European  Semester  will  play  a  major  part  in 
ensuring that such policies are implemented by the 
Member State after euro adoption. 

respect, 

time. 

this 

In 

The  analysis  below  looks  at  sustainability  from 
four  different  perspectives:  price  stability;  fiscal 
performance  and  governance;  structural  resilience 
and growth sustainability; and financial resilience. 

Price stability 

While  inflation  has  increased  significantly  in 
Croatia  since  the  beginning  of  2021,  the  upward 
trend  has  been  broadly  comparable  to  what  has 
been  observed  in  the  euro  area.  As  a  result, 
Croatia’s  present  12-month  inflation  rate  is  below 
the  reference  value.  Looking  ahead,  the  12-month 
inflation  rate  is  expected  to  remain  below  the 
reference  value  in  the  next  few  months  and  close 
to the euro area average in both 2022 and 2023. 

the  outlook 

for  headline 

inflation, 
Beyond 
assessing  the  sustainability  of  price  stability  also 
requires  looking  at  underlying  price  and  cost 
fundamentals.  The  analysis  presented  in  Section 
4.2.3  does  not  point  to  any  source  of  concern 
related to the sustainability of price stability when 
examining 
the 
macroeconomic policy mix or risks related to price 
level convergence. 

imported  prices, 

labour  costs, 

Furthermore, it is important to stress that inflation 
developments in Croatia have been closely aligned 
with  those  of  the  euro  area  over  the  decade 
preceding  the  COVID-19  crisis.  On  average,  both 
headline and core inflation have been very close to 
the euro area average over this period, with annual 
deviations  never  exceeding  1  percentage  point. 
This  reflects  a  number  of  interrelated  factors, 
including  the  kuna’s  exchange  rate  regime,  high 
trade  and  financial  integration  with  the  euro  area 
and  a  business  cycle  that  is  generally  broadly 
aligned with that of the euro area. 

Nevertheless,  in  view  of  the  high  uncertainty 
currently  surrounding  the  inflation  outlook  in  the 
EU,  Croatia’s  successful  integration  in  the  euro 
area  will  require  the  continued  monitoring  of  a 
number of upside risks in terms of inflation. 

72 

Convergence Report 2022 - Technical annex 

Chapter 4 - Croatia 

First,  underlying  inflation  has  accelerated  more 
strongly  in  Croatia  than  in  the  euro  area  in  recent 
months,  reflecting  the  stronger  recovery  from  the 
COVID-19  crisis.  Despite  currently  stronger  core 
inflation  relative  to  the  euro  area  there  are  no 
indications that the drivers would be of a structural 
nature,  given  its  historic  alignment  with  the  euro 
area 
trends.  Thus,  current  deviation  of  core 
inflation rate compared to the euro area is expected 
to be transitory with the inflation gap fading in the 
upcoming  period.  However,  underlying  inflation 
pressures  will  need  to  be  monitored  closely 
looking ahead. 

Second, longer-term inflation prospects will hinge 
in  particular  on  wages  growing  in  line  with 
productivity.  Although  the  2013  and  2014  labour 
market  reforms  have  substantially  increased  the 
level  of  flexibility  in  the  labour  market,  wage-
setting in Croatia remains imperfectly aligned with 
productivity  developments,  which  is  partly  linked 
to the role of the public sector as the wage leader. 
While  this  represents  a  risk,  the  issue  could  be 
alleviated by the reforms envisaged in the  context 
of the RRP (see also next paragraph).  

RRP-related investments and reforms could also be 
important  drivers  of  price  developments  looking 
ahead.  On  the  one  hand,  RRP  investments  will 
boost  aggregate  demand  in  the  economy,  which 
could  put  upside  pressures  on  prices  in  the  short 
term.  On  the  other  hand,  many  reforms  (e.g. 
reduction  of  administrative  burden  and  para-fiscal 
charges,  deregulation  of  services  etc.)  should 
enhance  competition  on  the  market  and  reduce 
thus  putting  downward 
costs  for  companies, 
pressures  on  prices  of  final  products  in  the  long 
run. Moreover, two RRP reforms could contribute 
to  a  better  productivity-wage  relation  in  the 
medium-term.  The  first  one  is  the  new  wage  and 
work  models  in  civil  and  public  service,  which 
should introduce a fair, transparent and sustainable 
wage system in the state administration and public 
services. The second one is the Amendment to the 
temporary 
Labour  Act, 
employment  and  incentivising  workers  to  remain 
active, among others. On balance, the RRP-related 
investments  and  reforms  are  expected  to  have  a 
muted if not disinflationary effect on the  Croatian 
economy in the long run. 

tackling  unjustified 

Fiscal sustainability 

Stability  and  Growth  Pact  until  2020,  when  they 
took a hit as a result of the pandemic. A decline in 
economic  activity  adversely  affected  revenues, 
which  coincided  with  substantial  expenditure 
measures needed to protect employment and jump-
start  the  recovery.  As  a  result,  Croatia’s  headline 
general  government  balance  went  from  a  surplus 
of  0.2%  of  GDP  in  2019  to  a  deficit  of  7.3%  of 
GDP  in  2020.  At  the  same  time,  the  public  debt 
ratio  rise  by  more  than  16  percentage  points. 
However, already in 2021, the deficit was brought 
below 3%, driven by a full economic recovery and 
a  progressive  but  substantial  phasing-out  of  the 
expenditure measures. 

to 

Croatia’s  2022  Convergence  Programme  was 
adopted  on  27  April  and  submitted 
the 
Commission on 29 April. The programme projects 
the  general  government  deficit  to  narrow  from 
2.9% of GDP in 2021 to 2.8% of GDP in 2022 and 
1.6%  of  GDP  in  2023.  This  is  expected  to  bring 
general government public debt down to 71.7% of 
GDP  in  2023,  very  close  to  its  pre-COVID  level 
recorded  in  2019.  The  macroeconomic  outlook 
underpinning  the  Convergence  programme  differs 
from  the  Commission’s  Spring  2022  Economic 
Forecast.  The  main  difference  is  related  to  the 
inflation  figures  in  2022  and  2023,  which  are 
to  Commission’s 
notably  higher  compared 
forecast.  The 
the  Convergence 
in 
targets 
programme appear prudent and achievable. 

At  the  same  time,  Croatia  is  classified  at  medium 
fiscal  sustainability  risk  over  the  medium  term, 
according  to  the  Commission  Debt  Sustainability 
Analysis. (61). The debt ratio is projected to decline 
from its 2021 level of 79.8% of GDP until the mid-
2020s,  assuming  a  favourable  interest-growth  rate 
differential, but it will increase again as from 2027 
unless  measures are taken  to correct the  projected 
structural  primary  deficit,  especially  given  the 
projected increase in the cost of ageing in coming 
years.  Under 
less  favourable  macro-financial 
assumptions,  debt  could  revert  close  to  its  2021 
level  by  2032.  Additional  factors  may  aggravate 
sustainability  risks,  including  the  large  share  of 
debt  held  in  foreign  currency,  the  impact  of  the 
recent  decline  in  population  and  the  country’s 
negative net international investment position. 

After  a  timely  abrogation  of  the  excessive  deficit 
procedure 
in  2016,  Croatia’s  public  finances 
performed  well  in  the  preventive  arm  of  the 

(61)  The  classification  based  on  the  Commission  DSA  takes 
into  account  in  particular  the  projected  debt  level  and 
trajectory  under  the  baseline,  stress  test  scenarios  and 
stochastic simulations. 

73 

                                                           
Convergence Report 2022 - Technical annex 

Chapter 4 - Croatia 

tourism 

Current  commodity  price  shocks  are  expected  to 
negatively  affect  Croatia’s  goods  trade  balance, 
remittances  and 
but  stable 
accelerating  inflows  of  EU  funds  should  keep  the 
current account balance in surplus. A strong inflow 
of  EU  funds  on  the  capital  account  should  also 
support continued improvement of NIIP. 

inflows, 

is 

still 

to  a 

facing  various 

these  developments  make 

All 
the  Croatian 
economy more resilient to shocks. This increase in 
resilience  was  already  visible  during  the  COVID-
19  crisis,  after  which  the  Croatian  economy 
strongly  recovered,  with  GDP  reaching  pre-
pandemic  level  already  in  2021.  Despite  the 
progress  made  in  recent  years,  the  Croatian 
structural 
economy 
deficiencies  on 
labour  and  product  markets. 
Various  reports  (such  as  World  Bank’s  Doing 
Business Report or IMD’s World Competitiveness 
Report,  OECD’s  Product  Market  Regulation)  still 
point 
relatively  unfavourable  business 
environment,  rigidities  on  the  labour  and  product 
markets  and  high  administrative  burden. 
In 
addition,  the  public  sector’s  strong  role  in  the 
economy  weighs  on  the  allocative  efficiency  on 
the  market.  Worldwide  Governance  Indicators 
suggest 
institutions  has 
increased  in  recent  years,  but  Croatia  still  ranks 
below most euro area countries for indicators such 
as  the  Rule  of  Law,  Control  of  Corruption, 
Regulatory Quality and Government Effectiveness. 
the 
Similar  conclusions  can  be  drawn  from 
Transparency 
Corruption 
Perception Index. 

the  quality  of 

International’s 

that 

Measures  aimed  at  addressing  these  rigidities  and 
improving the quality of institutions have featured 
in  Croatia’s  prior  and  post-entry  ERM 
II 
commitments  as  well  as 
its  Recovery  and 
Resilience  Plan.  These  measures  include  cutting 
the  administrative  and  fiscal  burden,  improving 
SOEs  governance  and  the  anti-money-laundering 
framework (AML), increasing the efficiency of the 
judiciary and liberalizing regulated professions. 

In  July  2019,  Croatia  committed  to  implementing 
policy measures prior to joining the ERM II in the 
following  six  areas:  i)  banking  supervision  (close 
cooperation with the ECB), ii) the macroprudential 
laundering 
framework, 
framework, 
sector 
governance and vi) business environment. In June 
2020, the Croatian authorities notified the ERM II 
parties  of  the  fulfilment  of  these  commitments, 

the 
anti-money 
statistics,  v)  public 

iii) 
iv) 

On  the  positive  side,  however,  the  structure  of 
Croatia’s  debt  mitigates  the  risks,  notably  as  the 
debt maturity has been lengthened in recent years. 
Furthermore,  reforms  under  the  recovery  and 
resilience  plan  should  have  a  positive  impact  on 
long-term  growth,  contributing  to  improving  debt 
sustainability. 

Structural resilience and growth sustainability 

The  last  report  by  the  Commission  on  Croatia’s 
macroeconomic  imbalances (62)  noted  that  the 
country  was  still  experiencing  imbalances  related 
to  elevated  private  and  public  debt  levels  in  the 
context  of  low  potential  growth.  However,  in 
recent  years  indebtedness  of  private  and  public 
sector  has  declined  notably.  Public  debt  declined 
from  the  peak  of  around  84%  of  GDP  in  2014  to 
slightly  above  71%  in  2019,  while  private  sector 
debt  decreased  from  a  peak  of  120%  of  GDP  to 
around  88%  of  GDP  in  2019.  This  deleveraging 
has  come  against  the  backdrop  of  years  of  solid 
economic  growth  and  prudent  fiscal  policy.  The 
COVID-19  crisis  in  2020  temporarily  halted  the 
downward  trajectory  of  debt,  which  resumed 
already  in  2021  in  both  private  and  public  sector. 
Despite  the  current  uncertainties  surrounding  the 
economic  situation,  debt  ratios  should  continue  to 
decline  steadily,  supported  by  solid  economic 
growth  but  also  by  some  MIP-relevant  policies 
included in Croatia’s recovery and resilience plan, 
such  as  changes  in  bankruptcy  and  solvency 
financial 
framework  and  new  equity-based 
instruments  which  should  reduce  the  dependence 
of firms on bank loans. 

External  balances  have  also  improved  notably  in 
recent years. After six consecutive years of current 
account  surpluses,  the  COVID-19  shock  pushed 
the  balance  slightly  into  negative  territory,  but  
Croatia managed to record again a surplus of 3.2% 
of  GDP  in  2021.  At  the  same  time,  the  net 
international  investment  position  (NIIP)  improved 
from  –87%  of  GDP  to  -34%  of  GDP,  which 
brought  it  in  conformity  with  the  indicative  -35% 
of  GDP  threshold  in  the  scoreboard  of  the 
Macroeconomic  Imbalance  Procedure.  Moreover, 
Croatia’s  NIIP 
non-defaultable 
excluding 
instruments  (NENDI)  was  virtually  balanced  in 
2021  and  foreign  exchange  reserves  reached  44% 
of  GDP,  thus  mitigating  exchange-rate  risks. 

(62)  European  Commission  (2021),  Alert  Mechanism  Report 
at: 

2022. 
https://ec.europa.eu/info/sites/default/files/economy-
finance/2022_european_semester_alert_mechanism_report.
pdf  

Available 

74 

                                                           
Convergence Report 2022 - Technical annex 

Chapter 4 - Croatia 

which  the  ECB  and  the  Commission  assessed  as 
effectively implemented. (63) 

At  the  time  of  its  ERM  II  entry  in  July  2020, 
Croatia  committed 
further 
measures in the following four areas: i) anti-money 
laundering, ii) business environment, iii) SOEs and 
iv) insolvency framework. 

implementing 

to 

As  regards  AML,  the  implemented  measures 
consisted of awareness raising among stakeholders 
through  regular  education,  improved  cooperation 
between  the  Anti-Money  Laundering  Office  and 
the supervisory authorities and the implementation 
of  the  Action  Plan  to  reduce  the  risk  of  money 
laundering and financing of terrorism based on the 
updated  National  risk  assessment.  In  the  area  of 
Business  environment,  Croatia  followed  through 
on  its  commitments  to  simplify  and  digitalise 
administrative  procedures  as  specified  in  the 
Action  Plan  for  Administrative  Burden  Reduction 
2020 and further reduce parafiscal charges. With a 
view 
to  improving  public  sector  governance, 
Croatia  proceeded  to  revise  and  align  regulation 
and  practices  in  accordance  with  the  OECD 
Guidelines  on  Corporate  Governance  of  SOEs. 
Finally,  commitments  to  improve  the  insolvency 
framework  took  the  form  of  amendments  to  key 
legislation  governing  corporate  and  personal 
insolvency  procedures  and  the  operationalisation 
of  an 
for 
restructuring and insolvency procedures. 

interim  data  collection 

system 

laundering  and 

Notwithstanding  the  AML  measures  implemented 
by Croatia in the context of its prior and post-entry 
the  Mutual  Evaluation  Report 
commitments, 
assessing  Croatia’s  framework  for  combatting 
terrorist  financing (64) 
money 
identified  a  number  of  remaining  shortcomings 
with  regard  to  the  effective  implementation  of 
framework.  The  Croatian 
Croatia’s  AML 
authorities  are  currently  focusing  their  efforts  in 
swiftly addressing the recommended actions listed 
in the  report with a  view to achieve  a  satisfactory 
level of progress within the next year.  

The  aforementioned  structural  deficiencies  are 
weighing  on  the  long-term  potential  growth  by 
stifling  competitiveness  and  business  activity, 

in 

sector 

to  benefit 

intervention 

the  public 

to  address 
the  economy, 

which in turn hampers investment and discourages 
employment growth. The numerous reforms in the 
the  structural 
RRP  are  expected 
the 
increase 
weaknesses  of 
efficiency  of 
the 
and 
competitiveness  and  productivity  of  the  Croatian 
economy. Governance in SOEs is envisaged to be 
enhanced  by  implementing  OECD  standards.  At 
the  same  time,  divestments  of  government-owned 
shares  in  companies  should  reduce  the  level  of 
the  market  and 
government 
facilitate  the  administration  of  remaining  shares. 
Private sector productivity and investment activity 
are  expected 
the  planned 
continuation  of  the  reduction  of  administrative 
burden,  reform  of  the  R&D  incentive  system, 
measures  aimed  at  strengthening 
the  R&D 
capacity, 
funds  aimed  at  digitalization  of 
companies,  export  promotion  activities  and  new 
financial  instruments  based  on  grants  and  interest 
rate  subsidies  but  also  equity-funding  aimed  at 
SMEs. Croatia’s RRP also contains various active 
labour  market  policies  that  should  increase  labour 
market  participation  and  measures  aimed  at 
improving  workers’  skills  that  should  additionally 
increase  productivity.  All  these  measures  should 
boost the productive potential of the economy and 
contribute  to  the  acceleration  of  potential  growth 
rate in the mid run. 

from 

Financial resilience 

Although  the  resilience  of  Croatia’s  financial 
sector  has  been  tested  by  the  outbreak  of  the 
pandemic,  prompt  policy  support  and  regulatory 
measures (65)  have  so  far  alleviated  the  impact  of 
the  crisis  on  the  financial  sector.  Overall  banking 
system capital adequacy ratio actually increased in 
2020  and  reached  a  record  high  in  the  second 
quarter of 2021. 

The  Croatian  banking  sector  entered  the  COVID-
19  pandemic  in  an  already  strong  position  as 
shown by the positive results of the comprehensive 
assessment of  major Croatian banks conducted by 
the  ECB  ahead  of  its  decision  to  establish  close 
cooperation  in  the  field  of  banking  supervision 
with 
(HNB). 
Following  Croatia’s  request  for  close  cooperation 
with  the  ECB  in  May  2019,  the  ECB  adopted  a 

the  Croatian  National  Bank 

(63)  https://ec.europa.eu/info/business-economy-euro/euro-
area/introducing-euro/adoption-fixed-euro-conversion-
rate/erm-ii-eus-exchange-rate-mechanism_en  

(64)  The report was adopted in December 2021 by the Council 
of  Europe’s  Committee  of  Experts  on  the  Evaluation  of 
Anti-Money  Laundering  Measures  and  the  Financing  of 
Terrorism (MONEYVAL). 

(65)  The measures of support during the pandemic included an 
expansionary monetary policy, fiscal support to companies 
and favourable regulatory treatment of the moratoriums to 
mitigate to an extent the problem of non-performing loans, 
coupled  with  other  regulatory  reliefs  and  the  temporary 
restriction of banks’ profit distribution. 

75 

                                                           
                                                           
Convergence Report 2022 - Technical annex 

Chapter 4 - Croatia 

continue  to  operate  even  under  very  unfavourable 
conditions,  the  results  of  HNB’s  stress  tests  for 
other  credit  institutions  show  that  the  latter  are 
much  more  vulnerable 
to  adverse  economic 
conditions,  with  the  aggregate  capital  surplus 
being all but fully exhausted in the first year of the 
credit 
adverse 
institutions  account  for  less  than  5%  of  the  total 
banking system assets (HNB, 2021). 

scenario.  However, 

these 

to 

addition 

the  more 

bank-specific 
In 
vulnerabilities  discussed  above,  a  number  of 
pandemic-induced  developments 
and  policy 
measures  are  likely  to  have  increased  some  pre-
existing  vulnerabilities  of  the  Croatian  banking 
system.  Thus,  its  exposure  to  the  government  and 
the real estate market has risen. With over 20% of 
total  bank  assets  placed  on  Croatian  government 
bonds, Croatia is among the EU countries with the 
largest government exposures of credit institutions. 
While 
the  overall  banking  system  can  be 
considered resilient in light of the results of recent 
stress tests, this strong sovereign-bank-nexus could 
pose risks to its resilience as Croatia stands out in 
terms  of  the  level  of  public  debt  in  GDP.  Even 
before  the  outbreak  of  the  pandemic,  Croatia  had 
the  highest  level  of  public  debt  in  GDP  of  all 
Central  and  Eastern  European  countries.  The 
growing imbalances in the real estate sector is also 
a  risk  factor  for  the  Croatian  banking  system. (70) 
Thus, around 45% of loans to the private sector are 
covered  by  real  estate  collateral  and  a  possible 
decrease in real estate prices  may raise credit risk 
costs  (HNB,  2021).  Finally,  the  banking  sector  in 
Croatia remains also highly exposed to a currency-
induced  credit  risk  but  the  risks  themselves  are 
contained given the historical stability of the kuna 
exchange  rate  vis-à-vis  the  euro  and  the  sizeable 
foreign exchange reserves of the CNB. Overall, the 
above-mentioned  high  exposures  of  the  Croatian 
banking  system  could  represent  a  risk  for  its 
resilience  to  the  extent  they  continue  to  weigh  on 
its profitability looking ahead. 

Conclusion 

The  broad-based  analysis  of  underlying  factors 
sustainability  of  Croatia’s 
relevant 
for 
that  sufficiently  robust 
convergence  suggests 
conditions are in place for the country to be able to 

the 

(70)  As  a  result  of  the  continued  accumulation  of  cyclical 
systemic risks amid economic recovery following the crisis 
caused  by  the  pandemic,  the  growth  in  the  prices  of 
residential real estate and the pickup in lending activity, the 
CNB  adopted  on  28  March  2022  the  decision  to  increase 
the  countercyclical  buffer  rate  to  0.5%  as  of  31  March 
2023. 

stress 

(AQR)  and  a 

favourable decision in July 2020 after conducting a 
comprehensive  assessment  of 
five  Croatian 
banks (66),  which  comprised  an  asset  quality 
test. (67)  The 
review 
comprehensive  assessment  showed  that  the  five 
banks did not face any capital shortfalls as they did 
not  fall  below  the  relevant  thresholds  used  in  the 
AQR and the stress test. However, the assumptions 
used for the stress test scenarios could not take into 
account  the  COVID-19  crisis  given  that  this 
exercise  started  well  before  the  outbreak  of  the 
pandemic. 

A more recent stress test exercise conducted by the 
HNB and published in May 2021, uses as a starting 
point  the  situation  of  Croatian  banks’  balance 
sheets at the end of 2020 (68). It concludes that the 
overall  banking  system  is  resilient  and  ready  to 
bear increased credit losses even under an adverse 
scenario (69), 
further 
unfavourable  developments  in  the  pandemic  from 
the  second  quarter  of  2021.  Moreover, 
the 
observed  economic  developments  in  2021  turned 
out to be much more favourable than envisaged in 
the stress test exercise scenario, with the economy 
expanding  by  over  10%  as  opposed 
to  a 
hypothetical cumulative contraction of about 6.6% 
over the 2021-2023 period in the adverse scenario. 

envisaged 

which 

However,  Croatia’s  strong  economic  recovery  in 
2021 and the increased loss-absorption capacity of 
the  overall  banking  system  compared  to  the  pre-
COVID 
considerable 
heterogeneity  across  Croatian  banks.  While 
systemically  important  banks  should  be  able  to 

situation  mask 

a 

(66)  The comprehensive assessment covered Zagrebačka banka, 
Privredna  banka  Zagreb,  Erste  &  Steiermärkische  Bank, 
OTP banka Hrvatska and Hrvatska poštanska banka, all of 
which  consented  to  the  disclosure  of  the  exercise’s 
findings. 

(67)  Such  assessment  is  required  as  part  of  the  process  of 
establishing  close  cooperation  between  the  ECB  and  the 
national  competent  authority  of  an  EU  Member  State 
whose currency is not the euro. For more details please see 
https://www.bankingsupervision.europa.eu/press/pr/date/20
20/html/ssm.pr200605~ca8b62e58f.it.html  

(68)  See  Croatian  National  Bank  (2021),  Financial  Stability, 
No.  22:  https://www.hnb.hr/documents/20182/3899508/e-
fs-22.pdf/c82deec6-2de6-1d35-d4fb-849d8a5c15d9  

(69)  The  adverse  scenario  envisages  further  unfavourable 
developments  in  the  pandemic  from the  second quarter  of 
2021  and a hypothetical  fall  in  economic activity  of  1.2% 
in 2021, 4.0% in 2022 and 1.4% in 2023 as well as a high 
the  observed  adverse 
unemployment  rate 
throughout 
scenario  horizon.  In  addition 
the  assumption  of 
to 
difficulties and delays in global response to the pandemic, 
the  adverse  scenario  also  includes  a  materialisation  of 
additional sources of systemic risks such as a sharp fall in 
residential  real  estate  prices  and  depreciation  of  the 
exchange  rate  that  would  rise  to  HRK  8.0/EUR  following 
the escalation of the pandemic (CNB, 2021). 

76 

                                                           
                                                           
term, 

significant 

maintain  a  sustainable  convergence  path  in  the 
supporting  a  positive 
medium 
thus 
challenges 
assessment.  However, 
remain,  and  policy  discipline  will  need  to  be 
maintained in a determined manner to fully exploit 
the  benefits  of  participation  in  the  euro  area  and 
minimise  risks  to  the  convergence  path  going 
forward.  Recent  measures  and  policy  orientations 
included  in  Croatia’s  RRP  should  contribute  to 
ensure that it remains on a sustainable convergence 
path in the medium term. 

Convergence Report 2022 - Technical annex 

Chapter 4 - Croatia 

77 

5.  HUNGARY 

5.1. 

LEGAL COMPATIBILITY 

5.1.1.  Introduction 

laid  down 

The  main  rules  governing  the  Magyar  Nemzeti 
Bank  (MNB  –  Hungarian  national  bank,  hereafter 
MNB)  are 
in  Article  41  of  the 
Hungarian  Fundamental  Law  and  Act  CXXXIX 
2013  on  the  MNB  (hereafter:  MNB  Act).    No 
amendments  to  these  legal  acts  were  passed  with 
regard  to  the  incompatibilities  and  imperfections 
mentioned in the Commission’s 2020 Convergence 
Report.  Therefore,  the  comments  provided  in  the 
Commission’s  2020  Convergence  Report  are 
repeated also in this year's assessment. 

5.1.2.  Central Bank independence 

Frequent amendments to the Central Bank Act of a 
Member State can create instability in the  Central 
legal 
Bank's  operations.  Therefore,  a  stable 
framework that provides a solid basis for a Central 
Bank  to  function  is  essential  for  ensuring  central 
bank independence. Pursuant to Article 176 of the 
MNB  Act,  the  MNB  has  become  the  legal 
successor of the liabilities of the former Hungarian 
Financial  Supervisory  Authority  (HFSA),  which 
ceased  to  exist  on  1  October  2013.  This  legal 
transfer  of  all 
succession  also 
employees from the HFSA to the MNB pursuant to 
Article  183  of  the  MNB  Act.  The  principle  of 
central bank independence pursuant to Article 130 
of  the  TFEU  implies  that  the  MNB  must  have 
sufficient financial resources  to perform its ESCB 
and  ECB-related  tasks,  in  addition  to  its  national 
tasks. The tasks transferred from the HFSA to the 
MNB  must not affect its ability to carry out these 
tasks  from  an  operational  and  financial  point  of 
view. 

implies 

the 

any  HFSA 

Further to this principle, the MNB should be fully 
insulated  from  all  financial  obligations  resulting 
from 
activities.  Contractual 
relationships in the period prior to 1 October 2013 
including,  amongst  others,  all  employment 
relations between any new MNB staff member and 
the  former  HFSA  can  be  continued  only  with  the 
proviso that the continuation  does not impinge  on 
the  MNB's  independence  and  its  power  to  fully 
carry out its duties under the Treaties. Against this 
background, Article 176 and 183 of the MNB Act 
have to be aligned to the principle of central bank 

independence  as  enshrined  in  Article  130  of  the 
TFEU. 

According  to  Article  9(7)  of  the  MNB  Act,  the 
Governor and the Deputy Governors shall take  an 
oath before the President of the Republic and other 
members  of  the  Monetary  Council  before  the 
Parliament  upon  taking  office  with  the  words 
required  by  Law  XXVII  of  2008  as  amended  on 
the  oath  and  solemn  promise  of  certain  public 
officials.  The  Law  requires  making  an  oath  with 
words  "I,  (name  of  the  person  taking  the  oath), 
hereby make an oath to be faithful to Hungary and 
to  its  Fundamental  Law,  to  comply  with  its  laws, 
and  make  sure  others  citizens  comply  with  them 
too; I will fulfil the duties arising from my position 
as  a  (name  of  the  position)  for  the  benefit  of  the 
Hungarian nation […]". The oath does not contain 
a  reference  to  the  principle  of  central  bank 
independence  enshrined  in  Article  130  TFEU. 
What is more, the Fundamental Law contains only 
an  indirect  reference  to  EU 
law.  Since  the 
Governor  and  the  Deputy  Governors  as  members 
of  the  Monetary  Council  are  involved  in  the 
performance  of  ESCB  related  tasks,  any  oath 
should  make  a  clear  reference  to  the  central  bank 
independence  under  Article  130  of  the  TFEU. 
Therefore,  the  oath  is  an  imperfection  as  regards 
the institutional independence of the MNB and the 
wording of the oath should be adapted to be fully 
in line with Article 130 of the TFEU.  

Article  153(6)  of  the  MNB  Act  provides  for  the 
possibility  for  members  of  the  Monetary  Council 
(including  the  Governor)  and  MNB  employees  to 
take on roles in the management, boards of trustees 
or supervisory boards of foundations and business 
associations under majority ownership of the MNB 
established  by  the  MNB  under  Article  162(2)  of 
the MNB Act without being subject to the conflict 
of  interest  rules  provided  for  in  Article  152(1)  to 
(5)  of  the  MNB  Act,  including  any  formal 
disclosure requirement.  Hence, for those activities 
the  MNB  officials 
the 
Governor,  are  fully  shielded  from  any  scrutiny. 
Moreover,  Article  153(6)  of  the  MNB  Act  also 
provides  for  an  explicit  exemption  to  the  rule  of 
Article 156(1) of the MNB Act, which determines 
that  members  of  the  Monetary  Council  (including 
the  Governor)  may  only  perform  other  activities, 
which  are  compatible  with  their  central  bank 
decision-making duties. Hence, under national law 

including 

involved, 

79 

Convergence Report 2022 - Technical annex 

Chapter 5 - Hungary 

Such  an  automatism  may  lead  to  situations  where 
the  removal  from  office  would  result  from  an 
unintentional action that could not be qualified as a 
serious  misconduct  under  Article  14.2  of  the 
ESCB/ECB  Statute.  In  order  to  preserve  fully  the 
independence, 
principle  of  central  bank 
this 
removed  by  an 
should  be 
incompatibility 
amendment of Article 157 of the MNB Act, which 
would  provide  for  an  exception  for  such  kind  of 
unintentional omission. 

5.1.3.  Prohibition  of  monetary  financing  and 

privileged access 

Pursuant to Article 36 of the MNB Act and subject 
to  the  prohibition  of  monetary  financing  set  out 
under  Article 146 of the MNB Act, the  MNB can 
provide an emergency loan to credit institutions in 
the event of any circumstance arising in which the 
operation  of  a  credit  institution  jeopardizes  the 
stability of the financial system. In order to comply 
with  the  prohibition  on  monetary  financing  of 
Article  123  of  the  TFEU,  it  should  be  clearly 
specified that the loan is granted against adequate 
collateral to ensure that the MNB would not suffer 
any loss in case of debtor's default. 

Pursuant to Article 37 the MNB may grant loans to 
the  National  Deposit  Insurance  Fund  and  Investor 
Protection  Fund  in  emergency  cases,  subject  to 
prohibition  of  monetary  financing  under  Article 
146 of the Act. Though the Act adequately reflects 
conditions for central bank financing provided to a 
deposit  guarantee  scheme  a  specific  requirement 
should be included to ensure that the loans granted 
to  the  National  Deposit  Insurance  Fund  are 
provided  against  adequate  collateral  (e.g.  a  claim 
on 
government 
securities,  etc.)  to  secure  the  repayment  of  the 
loan.  Therefore,  Article  37  is  incompatible  with 
the prohibition on monetary financing as laid down 
in Article 123 of the TFEU. 

contributions, 

future 

cash 

Article  177(6)  of  the  MNB  Act  provides  for  state 
compensation to the MNB of all expenses resulting 
from  obligations,  which  exceed  the  assets  the 
MNB  has  taken  over  from  the  HFSA.  The  law 
does  not  contain  any  provisions  on  the  procedure 
and deadlines on how the state shall reimburse the 
MNB 
the 
reimbursement  under  Article  177(6)  of  the  MNB 
Act  is  not  accompanied  by  measures  that  would 
financial 
fully 
obligations  resulting  from  any  activities  and 
contractual  relationships  of  the  HFSA  originating 
from  prior  to  the  transfer  of  tasks.  In  case  of  a 

expenses.  Therefore, 

the  bank 

from  all 

insulate 

the 

of 

such  members  may  undertake  activities  in  the 
MNB's  foundations  and  business  associations  that 
are  incompatible  with  their  central  bank  decision-
making duties. The provision conflicts with Article 
162(2)  of  the  MNB  Act,  which  provides  that  the 
MNB may only establish foundations and business 
associations  in  line  with  its  tasks  and  primary 
objective  of  ensuring  price  stability.  Moreover, 
central  bank  decision-making  duties  always  have 
to be performed in compliance with Article 130 of 
the  TFEU.  The  exemption  therefore  seems  to 
imply  that  the  latter  principles  of  primary  Union 
law  may  be  disregarded  by  members  of  the 
Monetary  Council  when  acting  in  the  context  of 
the  foundations  and  business  associations  under 
MNB  ownership.  Therefore,  the  incompatibility 
needs to be removed.  

termination  of 

In addition, Article 156(7) read in conjunction with 
Article  152(1)  of  the  MNB  Act,  extends  the 
application  of  conflict  of  interests  provisions  to 
to  six  months 
Monetary  Council  members 
following 
their  employment 
the  MNB.  However,  an 
relationship  with 
exemption  is  granted  as  regards  organisations 
covered by acts enumerated in Article 39 in which 
the  Hungarian  State  or  the  MNB  has  a  majority 
stake.  Such  an  exemption  could  create  situations 
where the privileged position of Monetary Council 
members  could  give  them  an  unfair  advantage  in 
obtaining  nominations  or  posts 
in  other 
organisations, putting them in a position of conflict 
of interest while still in employment at the MNB.   

Moreover,  Article  157  of  the  MNB  Act  provides 
for  an  obligation  for  members  of  the  Monetary 
Council,  including  the  Governor  and  the  Deputy 
Governors,  to  file  declarations  of  wealth  in  the 
same manner as Members of Parliament, pursuant 
to the provisions of Article 90 of the Law XXXVI 
of  2012  on  the  Parliament.  According  to  Article 
157(1)  of  the  MNB  Act  and  Article  90(2)  of  the 
Law  XXXVI  of  2012,  the  obligation  to  submit  a 
wealth  declaration  extends 
family 
members (spouse, domestic partner, and children). 
Pursuant  to  Article  90(3)  of  the  Law  XXXVI  of 
2012,  members  of  the  Monetary  Council  who  fail 
to submit a wealth declaration will not be allowed 
to  exercise  their  functions  and  will  receive  no 
remuneration until compliance with the obligation. 
This  provision  allows  for  the  temporary  removal 
from office of inter alia the Governor which seems 
to  automatically  fall  into  place  once  the  failure  to 
submit  a  wealth  declaration  as  required  by  the 
above  provisions is established by the Parliament. 

to  close 

80 

result 

substantial  time  gap  between  the  costs  arising  to 
the  MNB  and  the  reimbursement  by  the  state 
pursuant  to  Article  177(6)  of  the  MNB  Act,  the 
reimbursement  would 
in  an  ex-post 
financing scheme. Should the expenses incurred at 
the  MNB  exceed  the  value  of  assets  taken  over 
from the HFSA, such a scenario would constitute a 
breach  of  the  prohibition  of  monetary  financing 
laid down in Article 123 of the TFEU. In order to 
comply  with 
the  prohibition  of  monetary 
financing,  Articles  176  and  183  of  the  MNB  Act 
should  be  amended  in  order  to  insulate  the  MNB 
by appropriate means from all financial obligations 
resulting from the  HFSA's prior activities or legal 
relationships  and  obligations 
those 
deriving from the automatic further employment of 
HFSA staff by the MNB. 

including 

Article  162(3)  and  (4)  of  the  MNB  Act  lay  down 
the conditions of disclosure of data by a company 
related  to  the  MNB.  Furthermore,  Article  162(5) 
provides for supervision of  the  State  Audit Office 
of the operations of foundations established by the 
MNB.  Notwithstanding  the  limitations  regarding 
access to data of MNB companies, it is noted that 
pursuant  to  the  principle  of  sincere  cooperation 
(Article 4 TEU) a Member State is required, in full 
mutual  respect,  to  assist  the  Commission  and  the 
European Central Bank in carrying out tasks which 
flow  from  the  Treaties,  such  as  providing  the 
information 
the 
application of EU law. 

for  monitoring 

necessary 

Pursuant  to  Article  162(2)  of  the  MNB  Act,  the 
MNB  may  establish  business  associations  under 
majority  of  MNB  ownership,  or  foundations.  In 
order  to  dispel  any  concerns  from  the  perspective 
of  Article  123  of  the  TFEU,  the  provision  should 
be  amended  by  providing  for  a  clear  framework 
delimiting  the  operations  of  such  foundations  and 
the  volumes  or  resources  which  the  MNB  could 
endow them with, enabling them to purchase large 
volumes  of  Hungarian  government  securities. 
Moreover,  the  exemption  provided  under  Article 
153(6)  of  the  MNB  Act  to  the  rule  of  Article 
156(1)  of  the  MNB  Act  which  determines  that 
members  of  the  Monetary  Council  (including  the 
Governor) may only perform other activities which 
are  compatible  with  their  central  bank  decision-
making duties is incompatible  with Article 123 of 
the TFEU. The exemption provided for in national 
law  seems  to  imply  that  the  prohibition  of 
monetary financing enshrined in Article 123 of the 
TFEU  may  be  disregarded  by  members  of  the 
Monetary  Council  (including  the  Governor)  when 

Convergence Report 2022 - Technical annex 

Chapter 5 - Hungary 

acting  in  the  context  of  the  foundations  and 
business associations under MNB ownership. This 
incompatibility needs to be removed. 

5.1.4.  Integration in the ESCB 

Objectives 

Article  3(2)  of  the  MNB  Act  determines  that, 
without prejudice to the primary objective of price 
stability,  the  MNB  shall  uphold  to  maintain  the 
stability  of  the  financial  intermediary  system,  to 
increase  its  resilience,  to  ensure  its  sustainable 
contribution  to  economic  growth  and  support  the 
economic policy of the government. The objective 
laid  down  in  Article  3(2)  of  the  MNB  Act  is 
reduced  to  supporting  the  economic  policy  in 
Hungary.  The  provision  has  to  be  aligned  to  the 
secondary  objective  of  the  ESCB  enshrined  in 
Article  127(1)  of  the  TFEU  and  Article  2  of  the 
ESCB/ECB Statute in order to embrace the support 
of  the  general  economic  policies  in  the  entire  EU 
rather than in Hungary only. 

Tasks 

The  MNB  Act 
of 
incompatibilities  with  regard  to  the  following 
ESCB/ECB tasks: 

contains 

series 

a 

  definition of monetary policy and the monetary 
functions,  operations  and  instruments  of  the 
ESCB (Articles 1 (2), 4(1), 9, 16 – 21, 159 and 
171 of the MNB Act); 

  conduct  of 

foreign  exchange  operations 
(Articles 1(2), 4(3), (4) and (12), 9 and 159(2) 
of the  MNB Act) and the definition of foreign 
exchange  policy  (Articles  1(2),  4(4)  and  (12), 
9, 22 and 147 of the MNB Act); 

  competences of the ECB and of the Council for 
banknotes  and  coins 
the 
Fundamental  Law  and  Articles  1(2),  4(2)  and 
(12), 9, 23, 26 and 171(1) of the MNB Act). 

(Article  K  of 

There are also some imperfections in the MNB Act 
regarding the: 

  non-accurate  reflection  of  the  principle  of 
central  bank  independence  in  the  MNB  Act 
(Article 1(2) and (3) of the MNB Act);  

  non-recognition  of  the  role  of  the  ECB  in  the 
functioning  of  the  payment  systems  (Articles 
1(2),  4(5)  and  (12),  9,  27-28,  and  159(2),  171 
(2) of the MNB Act); 

81 

  non-recognition  of  the  role  of  the  ECB  and  of 
the  EU  in  the  collection  of  statistics  (Article 
1(2), 30(1) and 171(1) of the MNB Act); 

  non-recognition  of  the  role  of  the  ECB  in  the 
international  cooperation  (Article 

field  of 
135(5) of the MNB Act)); 

  absence  of  an  obligation  to  comply  with  the 
Eurosystem's regime for the financial reporting 
of NCB operations (Article 12(4)(b) and Law C 
of  2000/95  (IX.21.) 
in  conjunction  with 
Government Decree 221/2000 (XII.19.)); 

  non-recognition of the role of the ECB and the 
Council in the appointment of external auditors 
(Articles 6(1) (b), 15 and 144 of the MNB Act). 

5.1.5.  Assessment of compatibility 

As regards central bank independence of the MNB, 
the  prohibition  on  monetary  financing  and  the 
integration of the MNB into the ESCB at the time 
of euro adoption, existing Hungarian legislation is 
not  fully  compatible  with  the  Treaties  and  the 
Statute  of  the  ESCB  and  the  ECB  pursuant  to 
the  TFEU.  The  Hungarian 
Article  131  of 
the 
to 
invited 
are 
authorities 
abovementioned incompatibilities. 

remedy 

5.2. 

PRICE STABILITY 

5.2.1.  Respect of the reference value 

since 

reference  value 

in  December.  In  April  2022, 

The 12-month average inflation rate, which is used 
for  the  convergence  assessment,  has  been  above 
the  convergence 
the 
assessment  of  Hungary  in  2018.  It  has  remained 
above  3%  since  early  2019  and  started  moving 
further  up  in  spring  2021,  surpassing  the  5% 
the 
threshold 
reference  value  was  4.9%,  calculated  as  the 
average of the 12-month average inflation rates in 
France,  Finland  and  Greece,  plus  1.5  percentage 
in 
points.  The  corresponding 
Hungary  was  6.8%,  i.e.  2.9  percentage  points 
above  the  reference  value.  The  12-month  average 
inflation rate is projected to remain well above the 
reference value in the months ahead. 

inflation 

rate 

Convergence Report 2022 - Technical annex 

Chapter 5 - Hungary 

5.2.2.  Recent inflation developments 

Over the last two years, HICP inflation was on an 
upward  path  in  Hungary,  with  unprocessed  food 
and energy prices adding volatility to the headline 
figure.  Annual  HICP  inflation  accelerated  from 
3.4%  in  2020  to  5.2%  on  average  for  2021,  and 
was as high as 9.6% in April 2022. During the last 
two  years,  annual  HICP  inflation  in  Hungary 
remained  above  that  of  the  euro  area  with  the 
differential narrowing somewhat in 2021. 

Energy  price  inflation,  which  was  negative  for 
much of 2020, reached double digits in 2021, due 
to  rising  crude  oil  prices.  The  government 
introduced  a  temporary  price  cap  on  motor  fuel 
between  November  2021  and  July  2022.  Since 
residential energy is supplied at regulated prices to 
households and these remained unchanged in 2020 
and  2021,  the  recent  higher  prices  on  European 
wholesale gas and electricity markets have had no 
direct  effect  on  consumer  prices  yet.  Instead,  the 
higher  wholesale  price  have been absorbed by the 
(mostly  state-owned)  utility  sector,  creating  a 
fiscal burden. However, the wholesale energy price 
increases have had an indirect impact on consumer 
prices, through the rising costs of companies. 

Processed food price inflation accelerated in 2021, 
reflecting adverse commodity price developments. 
The  price  of  processed  food  was  also  affected  by 
successive increases of the excise duty on tobacco. 
As of 1 February 2022, the government introduced 
a temporary price cap on some basic food items in 
effect until July 1, 2022. 

inflation  (measured  as  HICP 

Core 
inflation 
excluding  energy  and  unprocessed  food)  eased 
slightly to 3.2% in March 2021 due to the COVID-
19 crisis, but then increased to 9.2% in April 2022, 
signalling broad-based price increases in the wake 

82 

0246810Jan-16Jan-17Jan-18Jan-19Jan-20Jan-21Jan-22HungaryReference valueGraph 5.1: Hungary -Inflation criterion(percent, 12-month moving average)Note: The dots at the right end of the chart show the projected reference value and 12-month average inflation rate of the country in December 2022.The reference values for 2016, 2018 and 2020 refer to the reference values calculated in the previous Convergence Reports.Source: Eurostat, Commission's Spring 2022 Economic Forecast.           
Convergence Report 2022 - Technical annex 

Chapter 5 - Hungary 

observed.  Service  inflation  was  also  affected  by 
various government measures (71).  

5.2.3.  Underlying  factors  and  sustainability  of 

inflation 

Macroeconomic  policy  mix  and  growth 
developments 

the  reopening  of 

the  economy  after 

of 
the 
pandemic, and also related to the indirect effects of 
the energy price increases. Rising excise duties on 
tobacco added to inflation in 2020 and 2021. 

the 

rise 

following 

The  prices  of  non-energy  industrial  goods  have 
been  on 
the  currency 
depreciation that has taken place since early 2020. 
More recently, supply chain disruptions and rising 
commodity prices further exacerbated these trends 
leading  to  increases  in  producer  and  consumer 
prices of industrial goods.  

Overall,  service  inflation  increased  in  2020-2021 
due  to  the  rapid  recovery  of  consumer  demand, 
fast  wage  growth  and  rising  energy  costs. 
However,  this  figure  has  to  be  taken  with  some 
caution.  The  measurement  of  service  prices  was 
temporarily  disrupted  by  the  pandemic-related 
restrictions  on  economic  activity  in  spring  2020, 
because the prices of several services could not be 

in 

policies 

Hungary’s  economy  rebounded  swiftly  after  the 
pandemic-induced  recession.  After  contracting  by 
4.7% in 2020, real GDP rose by 7.1% in 2021. The 
strong  recovery  was  partly  due  to  the  limited 
restrictions  related  to  the  COVID-19  crisis  after 
spring  2020,  and  strongly  accommodating  fiscal 
and  monetary 
2021.  Private 
consumption  was  boosted  by  strong  wage  and 
employment  growth.  Fiscal  stimulus  measures 
included  the  refund  of  2021  personal  income  tax 
payments  to  families  with  children  children  in 
February  2022,  the  reintroduction  of  the  13th 
month’s pension in 2021-2022 and wage increases 
in  the  public  sector.  Business  investment  was 
spurred by strong demand, low financing costs and 
investment  subsidies  from  the  budget.  Public 
investment also remained high. Exports recovered 
after  their  sharp  contraction  in  spring  2020,  but 
they  were  hampered  by  supply  chain  disruptions 
from the second half of 2021. 

Hungary’s  economic  prospects  are 
strongly 
affected  by  Russia’s  war  of  aggression  against 
Ukraine, due to Hungary’s geographical proximity, 
its  high  dependence  on  energy  imports  from 
Russia, and its relatively strong trade links to both 
countries.  High 
inflation  erodes  consumers’ 
purchasing power,  while investments are  hindered 
tighter 
by  weaker  demand,  uncertainty  and 

(71)  Examples are the temporary introduction of free parking in 
Budapest  during  the  pandemic,  and  the  extension  of  free 
school textbooks to secondary education. 

83 

-2024681012201620172018201920202021HungaryEuro areaGraph 5.2: Hungary -HICP inflation(y-o-y percentage change)Source: Eurostat.Table 5.1:weights  Hungary - Components of inflation(percentage change)1)in total   201620172018201920202021Apr-222022HICP0.42.42.93.43.45.26.81000Non-energy industrial goods1.00.40.41.11.23.25.0255Energy-3.74.24.80.5-3.212.413.2113Unprocessed food 0.01.46.47.012.92.15.755Processed food1.04.04.15.75.96.68.2265Services1.81.92.44.03.83.85.2312HICP excl. energy and unproc. food1.42.12.33.73.74.56.0832HICP at constant tax rates 0.62.93.43.23.34.76.51000Administered prices HICP0.30.30.31.00.30.92.01191) Measured by the arithmetic average of the latest 12 monthly indices relative to the arithmetic average of the 12 monthly indices   in the previous period.Source: Eurostat, European Commission calculations. 
        
                                                           
 
 
           
 
 
Convergence Report 2022 - Technical annex 

Chapter 5 - Hungary 

crisis, in particular via FX liquidity swaps (75) and 
long-term  collateralized 
loans,  asset  purchase 
programs and funding schemes. The base rate (76), 
which  had been cut by 30 basis points in the  first 
half  of  2020,  increased  from  0.6%  to  5.4% 
between  June  and  April  2022.  Since 
this 
instrument  is  limited  in  size,  monetary  conditions 
are  rather  influenced  by  the  interest  rate  on  the 
one-week  deposit  rate,  which  is  available  without 
limit. The one-  week deposit rate  was raised from 
0.75%  to  6.45%  between  June  2021  and  April 
2022.  

The  central  bank  also  took  steps  to  reduce  the 
excess liquidity in the financial sector, particularly 
to improve the transmission of higher interest rates 
to the currency  market. The FX swap tenders that 
boosted  forint  liquidity  were  discontinued  from 
November 2021. On the other hand, on March 28, 
in relation to the Russia’s invasion of Ukraine, the 
ECB has decided to extend its temporary bilateral 
repo  line  to  the  central  bank  of  Hungary,  which 
was due to expire at the end of March 2022, even 
if the size of the agreement will remain unchanged. 
By  the  end  of  2021,  the  central  bank  also  phased 
out 
policy 
instruments,  such  as  government  and  corporate 
bond  purchases  and  subsidised  lending  to  small 
and medium sized enterprises.  

unconventional  monetary 

its 

Wages and labour costs 

Domestic  employment  declined  by  4.7%  in  the 
second  quarter  of  2020,  but  recovered  quickly  in 
line  with  the  rebound  of  output.  The  employment 
rate  rose  to  a  historically  high  78.8%  in  2021, 
while  the  unemployment  rate  remained  at  4.1%. 

(75)  Given  the  limited  effectiveness  of  the  base  rate  explained 
in the next footnote, the MNB, in order to loosen monetary 
conditions  by  boosting  liquidity,  offered  to  banks  the 
possibility  to  use  swaps  to  buy  forint  in  exchange  for 
foreign  currency  from  2016  until  2021.  The  forints  then 
entered the money market providing liquidity and lowering 
market rates. Indeed market rates were well below the base 
rate until March 2020. Moreover, to support the liquidity in 
euros  where  needed,  the  MNB  offered  to  banks  the 
possibility  to  use  swaps to buy  foreign  currency  for  forint 
on  short  maturities,  to  help  them  meet  the  regulatory 
requirements  on  FX  position  and  liquidity  at  the  end  of 
each quarter. It should be noted that the MNB, in order to 
support FX liquidity for the companies and bank in need of 
foreign currency, has also established repo agreements with 
the  ECB  and  they  function  in  a  similar  manner  to  FX 
support in many countries. 

(76)  The  main  policy  instrument used by  MNB is the 3-month 
deposit, a liability of the central bank, and the base policy 
rate is the rate on 3-month central bank deposits. The size 
of  the  deposit  is  limited.  Therefore,  this  instrument  has 
limited  effectiveness  in  controlling  market  liquidity  and 
other instruments become necessary, among which the FX 
liquidity swaps discussed above.  

financing conditions. Exports face headwinds from 
weaker  global  growth,  sanctions  against  Russia, 
and recurring supply chain bottlenecks. According 
to 
the  Commission’s  Spring  2022  Economic 
Forecast,  GDP  growth  is  projected  slow  down  to 
3.6% in 2022 and by 2.6% in 2023. 

fiscal 

stance  was 

In  2020-2021,  the  government  provided  a  large 
fiscal  stimulus  that  helped  to  mitigate  the  health 
consequences  of 
the  COVID-19  pandemic, 
supported  households’  incomes,  provided  support 
to  companies  and  increased  public  investment 
activity.  The 
strongly 
expansionary  in  2021,  at  -3.4%  of  GDP (72). 
According  to  the  Commission’s  Spring  2022 
Economic Forecast, which is based on a no policy 
change assumption, the fiscal stance will continue 
to  be  broadly  neutral  in  2022  (at  -0.1%  of  GDP). 
The  positive  contribution  to  economic  activity  of 
expenditure  financed  by  Recovery  and  Resilience 
Facility  grants  and  other  EU  funds  is  projected  to 
decrease  by  1.0  percentage  point  of  GDP 
compared  to  2021  due  to  expected  slowdown  in 
the EU funds absorption (73). At the same time, the 
growth  in  nationally-financed  primary  current 
expenditure (net of new revenue measures) in 2022 
is  projected 
expansionary 
contribution of 0.4 percentage points to the overall 
fiscal stance. This includes the additional impact of 
the  measures  to  address  the  economic  and  social 
impact  of  the  increase  in  energy  prices  (0.1%  of 
GDP)  as  well  as  the  costs  to  offer  temporary 
protection  to  displaced  persons  from  Ukraine 
(0.2% of GDP).  The no policy-change forecast for 
2023 shows a contractionary stance (1.9%). 

to  provide 

an 

Monetary  policy,  conducted  within  an  inflation 
targeting  framework (74),  began 
in 
summer  2021  in  response  to  rising  inflation  after 
the  use  of  many  policy  instruments  had  ensured 
abundant  liquidity  in  response  to  the  COVID-19 

tightening 

(72)  The  fiscal  stance  is  measured  as  the  change  in  primary 
expenditure  (net  of  discretionary  revenue  measures), 
excluding  COVID-19  crisis-related  temporary  emergency 
measures  but  including  expenditure  financed  by  non-
repayable  support  (grants)  from 
the  Recovery  and 
Resilience Facility and other EU funds, relative to medium-
term  potential  growth.  A  negative  (positive)  sign  of  the 
indicator  corresponds  to  an  excess  (shortfall)  of  primary 
expenditure growth compared with medium-term economic 
growth,  indicating  an  expansionary  (contractionary)  fiscal 
policy. 

(73)  The  Commission  has  not  yet  assessed  the  Recovery  and 
Resilience  Plan  for  Hungary.  The  figures  in  the  text  are 
based on the projections by the European Commission. 
(74)  As explained below, the Hungarian central bank set a target 
inflation of 3% with a symmetric tolerance band of 1%. 

84 

                                                           
                                                           
After a temporary decrease in 2020, the number of 
vacancies  returned  to  earlier  levels  by  the  end  of 
2021.  

in  2021  as 

The growth of labour costs slowed down sharply in 
2020  partly  reflecting  the  lower  number  of  hours 
these 
worked.  They  rose  again 
temporary  factors  were  reversed  and 
labour 
shortages  began  to  re-emerge.  Wage  growth  is 
projected to remain strong in 2022 on the back of a 
20%  minimum  wage  rise,  and  salary  increases  in 
the  public  sector.  Wage  growth  in  manufacturing 
and  services  could  diverge,  with  manufacturing 
wages  held  back  by  trade  and  supply  chain 
disruptions,  while  service  sector  wages  lifted  to  a 
larger  extent  by  the  minimum  wage  increase  and 
also  boosted  by  strong  domestic  demand  in  2022. 
Employers’  social  contributions  were  cut  by  2 
percentage  points  in  2020,  and  by  another  4 
percentage points in 2022. However, the economic 
slowdown is forecast to lead to lower employment 
and wage growth in 2023. 

Labour  productivity,  measured  in  terms  of  GDP 
per  worker,  declined  temporarily  in  2020  because 
of labour hoarding during the economic downturn, 
but this trend was reversed in 2021 as the recovery 
gathered  steam.  These  trends  led  to  a  fast  growth 
of unit labour cost in 2020 (despite slowing  wage 
growth),  followed  by  a  slowdown  in  2021.  Large 
wage  increases  are  expected  to  boost  unit  labour 
cost  again  in  2022,  but  the  cooling  of  the  labour 
market is projected to moderate ULC growth again 
in 2023. 

External factors 

in 

Due  to  the  high  degree  of  openness  of  the 
Hungarian  economy,  developments 
import 
prices  play  an  important  role  in  domestic  price 
formation. Import prices contributed to inflation in 
2020  and  2021,  first  due  to  the  pass-through  of 
currency  depreciation,  and  later  reflecting  the  rise 
of  global  commodity  prices.  The  forint’s  nominal 
effective exchange rate (measured against a  group 
of  36  trading  partners)  depreciated  by  6.3%  in 
2020, and by a further 1.3% in 2021. 

Administered prices and taxes 

The share of administered prices in the Hungarian 
HICP basket (12.4%) is somewhat below the euro 
area  average.  The  share  has  decreased  over  past 
years  because  many  administered  prices,  notably 
for  residential  energy  and  other  utilities,  have 
years. 
remained 

unchanged 

several 

for 

Convergence Report 2022 - Technical annex 

Chapter 5 - Hungary 

Administered  prices  increased  by  0.3%  in  2020 
and 0.9% in 2021. Overall, administered prices had 
a  minor  effect  on  headline  inflation,  contributing 
between 0-0.1 percentage point in 2020 and 2021. 

Changes  in  indirect  taxation  increased  headline 
inflation  by  0.1  percentage  point  in  2020  and  by 
0.5 percentage point in 2021. This is mainly due to 
rising on excise duty on tobacco. 

Furthermore, 
the  excise  duty  on  motor  fuel 
temporarily rose in 2020  when the  crude oil price 
fell  persistently  below  50  USD/barrel.  This 
increase  was  reversed  in  2021,  in  line  with  the 
legislated  formula  for  the  excise  duty.  The  excise 
duty  on  motor  fuel  was  reduced  further  in  two 
steps in February and March 2022. This measure is 
set  to  remain  in  effect  until  the  expiration  of  the 
price  cap  on  motor  fuel  currently  foreseen  on  1 
July 2022. 

Medium-term prospects 

According 
the  Commission’s  Spring  2022 
Economic Forecast, inflation  is forecast  to remain 
high in 2022, reaching 9.0% on average. It is then 
projected  to  ease  to  4.1%  in  2023,  once  the  pass 
though of commodity price  increases to consumer 
prices is completed and slowing demand begins to 
weigh  on  core  inflation.  Inflation  is  projected  to 
return to the central bank’s target towards the end 
of 2023. 

Energy-related  policy  measures  have  a  significant 
impact  on  inflation  in  2022.  In  April  2022,  the 
price  cap  on  petrol  and  gasoline  was  estimated  to 
be on average 22% below the levels warranted by 
market 
by 
approximately  1.5  percentage  point  in  April.  The 
price  cap  on  certain  food  items  lowered  inflation 

conditions, 

reducing 

inflation 

85 

-40481220162017201820192020202120222023Productivity (real GDP per person employed)Nominal compensation per employeeNominal unit labour costsHICP inflationGraph 5.3: Hungary -Inflation, productivity and wage trends(y-o-y % change)Source: Eurostat, Commission's Spring 2022 Economic Forecast.   
Convergence Report 2022 - Technical annex 

Chapter 5 - Hungary 

5.3. 

PUBLIC FINANCES 

5.3.1.  Recent fiscal developments 

The  general  government  deficit  remained  high 
over the 2020-2021 period, reaching 7.8% of GDP 
in  2020  up  from  2.1  in  2019,  before  declining 
somewhat to 6.8% of GDP in 2021.  

Revenues  as  a  share  of  GDP  remained  broadly 
stable  in  2020  at  43.4%  but  dropped  to  41.1%  in 
2021. The considerable decline in the revenue ratio 
in  2021  reflects  largely  the  impact  of  deficit-
increasing recovery measures, such as a permanent 
cut  in  employers’  social  contribution  rate,  a  one-
off refund of income tax to families in early 2022, 
a lowering of the VAT rate for newly built houses 
and a cut in business tax. The expenditure-to-GDP 
ratio surged to 51.2% in 2020, from 46% in 2019, 
due to increased discretionary spending and lower 
GDP (denominator effect). The nominal growth of 
expenditure  moderated  in  2021  but  the  ratio 
remained  at  47.9%,  significantly  above  the  pre-
crisis  level.  The  increase  in  expenditure  in  2020 
reflected the introduction of temporary emergency 
measures in response to COVID-19 crisis (4.5% of 
GDP)  and  additional  spending  from  the  Country 
Protection  Fund.  In  2021,  spending  was  gradually 
directed  away  from  the  COVID-related  measures 
(only 0.6% of GDP in 2021) and towards recovery 
measures (0.4% of GDP).   

further,  although 
products is smaller in the HICP basket. 

the  weight  of 

the  affected 

There are upside risks to the inflation outlook. The 
current  level  of  administered  residential  energy 
prices creates significant losses in the largely state-
owned  utility  sector.  If  wholesale  energy  prices 
remain  persistently  high,  the  pressure  to  raise 
consumer  prices  could  also  increase  significantly. 
The 
inflation 
labour  market  and  high 
expectations are further sources of inflationary risk 
even if this was not visible yet. 

tight 

The level of consumer prices in Hungary  stood at 
about 63% of the euro area average  in 2020, with 
the  relative  price  gap  larger  for  services  than  for 
goods.  This  suggests  that  there  is  significant 
potential  for  price  level  convergence  in  the  long 
term, as GDP per capita in PPS (72.4% of the euro 
area  average  in  2021)  increases  towards  the  euro 
area average. 

Medium-term 
inflation  prospects  will  depend 
strongly  on  wage  and  productivity  developments, 
notably in the non-traded sector and on the success 
with anchoring inflation expectations at the central 
bank’s 3% target. 

86 

Table 5.2:Hungary - Other inflation and cost indicators(annual percentage change)20162017201820192020202120221)20231)HICP inflationHungary0.42.42.93.43.45.29.04.1Euro area0.21.51.81.20.32.66.12.7Private consumption deflatorHungary1.03.33.34.63.36.39.04.1Euro area0.41.31.51.10.52.35.82.7Nominal compensation per employeeHungary2.47.06.46.93.09.28.76.5Euro area1.21.72.12.1-0.74.13.63.5Labour productivityHungary-1.52.33.03.4-3.45.01.91.9Euro area0.41.00.20.3-4.94.21.41.5Nominal unit labour costsHungary4.04.63.33.46.64.06.74.5Euro area0.80.72.01.94.40.02.22.0Imports of goods deflatorHungary-2.51.94.01.22.711.710.4-1.7Euro area-3.33.32.6-0.5-3.89.613.20.81) Commission Spring 2022 Economic Forecast.Source: Eurostat, Commission's Spring 2022 Economic Forecast. 
 
          
 
 
Convergence Report 2022 - Technical annex 

Chapter 5 - Hungary 

5.3.2.  Medium-term prospects 

The  2022  budget  was  adopted  by  the  Hungarian 
Parliament on 15 June 2021. It targeted a headline 
deficit  of  5.9%  of  GDP,  and  included  emergency 
reserves  of  0.4%  of  GDP  to  cover  potential 
slippages based on risk scenarios. As in 2021, the 
2022  budget  included  large  budgetary  reserves  to 
finance  additional  investment  activity  and  support 
the economic recovery,  notably appropriations  for 
the  Investment  Fund  and  Economic  Restart 
the 
programmes.  The  budget  allowed 
continuation  of  several  debt-increasing  spending 
measures such as subsidies for housing renovation 
for  families  (0.3%  of  GDP),  partial  reinstatement 
of  the  13th  month’s  pension  and  increase  in 
doctors’  wages  (0.8%  of  GDP).  It  also  envisaged 
new 
to 
employers’  social  contributions  (0.3%  of  GDP) 
and exemption from personal income tax for those 
under 25 years old (0.2% of GDP).  

tax  measures,  notably 

further  cuts 

for 

to 

The  2021  budgetary  outturn  was  below  the  7.5% 
GDP  deficit  target  set  in  the  2021  Convergence 
stronger-than 
Programme  essentially  due 
expected  growth,  and  this  despite  significantly 
higher expenditure. The real GDP growth of 7.1% 
was well above 4.3% expected in the Convergence 
Programme.  The  stronger-than-expected  rebound 
in  economic  activity  was  broad-based,  with 
investments  and  exports  considerably  exceeding 
expectations.  However,  the  additional  fiscal  space 
revenues  and  higher 
generated  by  higher 
denominator  were  offset  by  higher-than-projected 
expenditure, 
social  benefits, 
intermediate  consumption  and  compensation  of 
employees. Additionally, following the submission 
of  the  Convergence  Programme,  the  authorities 
also  extended  some  of  the  temporary  tax  relief 
measures  and 
introduced  new  expansionary 
measures  such  as  a  refund  of  income  tax  to 
families  in  early  2022  and  a  one-off  income 
support for self-employed. 

especially  on 

The  government  debt-to-GDP  ratio  rose  from 
65.5% in 2019 to 79.8% in 2020 and stabilised at 
76.8%  by  the  end  of  2021.  The  increase  in  2020 
was driven mainly by the high primary balance and 
debt-increasing  stock-flow  adjustment  due 
to 
growing fiscal reserves in the form of government 
deposits  held  by  the  central  bank.  In  2021,  the 
debt-decreasing  impact  of  high  GDP  growth  and 
inflation  was  largely  offset  by  the  high  budget 
deficit. 

Since  the  adoption  of  the  budget,  several  new 
measures  have  been  introduced  by  government 
decrees  on  the  back  of  better-than  expected 
growth.  Those  include  further  cuts  to  social 
security  contributions  and  the  abolition  of  the 
training  levy  (0.9%  of  GDP),  a  full  reinstatement 
of the 13th month’s pension already in 2022 (0.6% 
of GDP), and a service benefit for military and law 
enforcement  employees  brought  forward  to  2022 
late  2021,  amid  rising 
(0.4%  of  GDP).  In 
macroeconomic  uncertainty, 
the  government 
revised  the  deficit  target  from  5.9%  to  4.9%.  The 
lower  deficit  target  was 
achievement  of 

the 

87 

Table 5.3:Hungary - Budgetary developments and projections (as % of GDP unless indicated otherwise)Outturn and forecast 1)20162017201820192020202120221)20231)General government balance-1.8-2.5-2.1-2.1-7.8-6.8-6.0-4.9- Total revenue45.044.344.043.943.441.141.341.4- Total expenditure46.846.746.146.051.247.947.346.4   of which: - Interest expenditure3.12.62.32.22.32.32.73.0p.m.: Tax burden39.238.036.936.536.233.835.034.9Primary balance1.30.20.20.1-5.5-4.4-3.3-1.9Fiscal stance 2)1.4-3.4-0.11.9Government gross debt74.872.169.165.579.676.876.476.1p.m: Real GDP growth (%)2.24.35.44.6-4.57.13.62.61) Commission’s Spring 2022 Economic Forecast. 2) A negative (positive) sign of the indicator corresponds to an excess (shortfall) of primary expenditure growth compared with medium-term economic growth, indicating an expansionary (contractionary) fiscal policy.Source: European Commission. 
 
  
 
 
supported  by  the  decision  to  postpone  investment 
projects  in  the  size  of  1.3%  GDP,  notably  those 
funded by the Investment Fund. 

The  government  deficit  in  2022  is  also  impacted 
by  the  fiscal  costs  of  the  measures  taken  by  the 
government  to  counter  the  social  and  economic 
impact of the increase in energy prices, as well as 
the  provision  of  humanitarian  assistance 
to 
refugees  from  Ukraine.  These  measures  mainly 
consist  of permanent  price  caps  on  retail  gas  and 
electricity  prices,  a  temporary  cut  in  excise  duties 
on  fuels,  a  temporary  cap  on  fuel  prices  and 
compensations for independent petrol stations.      

to 

On  29  April  2022,  Hungary  submitted  its  2022 
Convergence  Programme.  According 
the 
Programme,  the  headline  deficit  is  projected  to 
decline steadily to 4.9% of GDP in 2022 and 3.5% 
in  2023.  The  government  deficit  in  2022  is 
impacted  by 
several 
expansionary  measures, 
the full re-
introduction of the 13th monthly pension, a one-off 
service  benefit  for  military  and  law  enforcement 
employees,  cuts  to  social  security  contributions 
and abolition of the training levy.  

introduction  of 
notably 

the 

of 

several 

introduction 

Based on the Commission's Spring 2022 Economic 
Forecast,  the  deficit  is  projected  to  decrease  to 
6.0% of GDP in 2022, above the official target set 
out in the 2022 Convergence Programme reflecting 
expansionary 
the 
measures and  additional  spending  related  to  high 
energy  prices.  According  to  the  Commission’s 
Spring  2022  Economic  Forecast,  the  fiscal  stance 
is projected to be broadly neutral in 2022 at -0.1% 
of GDP (77).  The contribution to economic activity 
of  expenditure 
financed  by  Recovery  and 
Resilience  Facility  grants  and  other  EU  funds  is 
projected  to  be  contractionary  at  1.0%  percentage 
the 
point  of  GDP 
contribution of -0.4% in 2021. Nationally financed 
investments  are  projected  to  provide  a  slightly 
expansionary  contribution  to  the  fiscal  stance  of  -
0.2 percentage point of GDP in 2022.  At the same 
time,  the  growth  in  nationally  financed  primary 
current expenditure (net of new revenue measures) 
in  2022  is  projected  to  provide  an  expansionary 
contribution of -0.4 percentage point of GDP to the 
overall  fiscal  stance,  as  current  expenditure  is  set 
to  grow  at  a  faster  pace  than  medium-term 
potential growth. However, most of this expansion 

in  2022,  compared 

to 

Convergence Report 2022 - Technical annex 

Chapter 5 - Hungary 

is  due  to  measures  related  to  the  energy  crisis 
(1.2%  of  GDP)  and  the  humanitarian  aid  for 
people  fleeing  Ukraine  (0.2%  of  GDP).  The 
measures  in  response  to  rising  energy  prices 
mainly  consist  of permanent  price  caps  on  retail 
gas introduced in and electricity prices introduced 
in 2013, a temporary cut in excise duties on fuels, 
a temporary cap on fuel prices and compensations 
for  independent  petrol  stations.  The  large  fiscal 
impact of the energy measures in the Commission 
‘s Spring 2022 Economic Forecast stems from the 
assumption that the losses of the utility companies 
resulting  from  the  regulated  energy  prices  are 
compensated  by  the  government  with  capital 
transfers at the end of the year. All measures other 
than  the  permanent  price  caps  on  retail  gas  and 
electricity  prices  have  been  announced  as 
temporary. 
these 
measures are not targeted  in  nature,  notably the 
general  price  cap  on  retail  prices  of  energy  and 
cuts in excise duties. 

Some 

of 

The  phasing  out  of  several  temporary  measures 
and  an  expected  overall  decrease  in  nationally 
financed  current  expenditure 
in  2023  will 
contribute to a strongly contractionary fiscal stance 
of 1.9% of GDP in 2023.   

The  contribution 
to  economic  activity  of 
expenditure  financed  by  Recovery  and  Resilience 
Facility  grants  and  other  EU  funds  is  projected  to 
be  expansionary  at  -0.3  percentage  point  of  GDP 
in  2023.  Nationally 
is 
projected  to  provide  an  expansionary  contribution 
to  the  fiscal  stance  of  -0.4  percentage  point  of 
GDP,  whereas  the  growth  in  nationally  financed 
primary current expenditure is projected to provide 
a  contractionary  contribution  of  1.9  percentage 
point of GDP to the overall fiscal stance in 2023. 

investment 

financed 

(77)  For a definition of the fiscal stance used in this report, see 
footnote  in  in  Section  5.2.3  on  underlying  factors  and 
sustainability of inflation. 

Based  on 
the  Commission’s  Spring  2022 
Economic Forecast, the general government debt is 

88 

-5-4-3-2-101232020202120222023Net nationally financed  primary current expenditureNationally financed investmentOther capital expenditureExpenditure financed by RRF grants and EU fundsFiscal stanceExpansionaryContractionaryGraph 5.4: Hungary -Fiscal stance and its components(percent of GDP)Source: Commission's Spring 2022 Economic Forecast.                                                            
 
                   
Convergence Report 2022 - Technical annex 

Chapter 5 - Hungary 

still be improved in order to reduce the volatility of 
the  medium-term  plans.  The  link  between  the 
targets  in  annual  budgets  and  the  medium-term 
framework  can  be  strengthened,  as  well  as  the 
involvement  of  the  independent  fiscal  institution 
and  national  parliament  in  the  preparation  of  this 
medium-term framework. 

5.4. 

EXCHANGE RATE STABILITY 

The  Hungarian  forint  does  not  participate  in 
ERM II.  Between  mid-2001  and  early  2008,  the 
MNB operated a mixed framework that combined 
an  inflation  target  with  a  unilateral  peg  of  the 
forint  to  the  euro,  with  a  fluctuation  band  of  
+/-15%.  On  26  February  2008,  the  exchange  rate 
band  was  abolished  and  a  free-floating  exchange 
rate  regime  was  adopted  that  however  allows  for 
foreign exchange interventions by MNB. In March 
2015,  a  +/-1  percentage  point  ex  ante  tolerance 
band  was  designated  around 
the  continuous 
medium-term  inflation  target  of  3  percent  (that  is 
in place since 2005). 

set  to  decrease  gradually  from  79.2%  of  GDP  in 
2021  to  76.4%  in  2022  and  76.1%  in  2023.  The 
2022  Convergence  Programme  projects  a  more 
rapid decline in the debt-to-GDP ratio to 76.1% in 
2022 and 73.8% in 2023. The difference is driven 
by  higher  primary  deficit 
the 
Commission’s forecast.  

in  2023 

in 

Debt  sustainability  risks  appear  medium  over  the 
medium  run.  Government  debt  is  projected  to 
decrease  reaching  around  73%  of  GDP  in  2032. 
This projection assumes that the structural primary 
balance (except  for the impact of ageing) remains 
constant at the forecast level for 2023 of  -1.4% of 
GDP, which is close to its 2019 level. 

The sensitivity to possible macro-fiscal shocks also 
contributes to this assessment. In particular, if only 
half of the projected improvement in the structural 
primary  balance  in  2022-2023  were  to  occur,  the 
projected  debt  ratio  in  2032 would  be  close  to  13 
percentage  points  of  GDP  higher  than  in  the 
baseline,  and  would  not  be  on  a  decreasing  path 
anymore.  

risks, 

including 

factors  mitigate 

Some 
the 
lengthening  of  debt  maturity  in  recent  years 
(although  it  remains  relatively  low),  relatively 
stable  financing  sources  (with  a  diversified  and 
large investor base) a stable and moderate share of 
government debt denominated in foreign currency 
and  the  expected  positive  impact  on  long-term 
growth  of  reforms  under 
the  Recovery  and 
Resilience  Plan.  Risk-increasing  factors  include 
the  possible  materialisation  of  state  guarantees 
granted  to  firms  and  self-employed  during  the 
COVID-19 crisis (78). 

In  recent  years,  the  Hungarian  fiscal  framework 
has  seen  certain  improvements.  With  reforms 
starting  after  2011,  the  national  fiscal  rules  were 
brought  more  in  line  with  EU  requirements,  for 
example  on  the  way  the  public  debt  ratio  is 
calculated.  The  national  Hungarian  debt  rule  was 
later  reformed  in  order  to  include  a  stronger  role 
for  the  Fiscal  Council  (Hungary’s  independent 
fiscal  institution)  in  ensuring  compliance  with  the 
debt  rule.  In  some  cases  however,  the  role  of  the 
Fiscal  Council  in  shaping  fiscal  policies  could  be 
reinforced,  in  particular  when  it  comes  to  ex-post 
evaluations  and  endorsement  of  the  budgetary 
forecasts. The medium-term  budgetary  framework 
has  been  further  developed  since  2011,  but  could 

(78)  For  further  details  see  the  2021  Fiscal  Sustainability 

Report. 

The  long-term  depreciation  tendency  of  the  last 
years continued in 2020 and 2021. In particular, a 
steep  depreciation  movement  of  the  forint  against 
the  euro  started  in  spring  2019,  when  the  forint 
traded  below  320  HUF/EUR,  following  the  MNB 
signal  to  keep  loose  monetary  conditions  longer 
than other regional central banks. As a result of the 
COVID-19  crisis,  it  continued  until  October  2020 
when  the  forint  surpassed  the  360  HUF/EUR. 
Afterwards,  the  forint  oscillated  around  this  value 
until  Russia’s  invasion  of  Ukraine  in  February 
2022.  After  the 
invasion,  the  forint  initially 
depreciated  strongly  to  near  400  HUF/EUR  but  it 
then  returned  to  the  range  of  370-380  HUF/EUR 
after  the  central  bank  raised  interest  rates  further. 
In April 2022 it traded against the euro on average 
at about 375 HUF/EUR. 

89 

260280300320340360380400201620172018201920202021Graph 5.5: Hungary -HUF/EUR exchange rate(monthly averages)Source: ECB.                                                           
  
International  reserves  held  by  the  MNB  that  had 
already  reached  around  EUR  28bn  end-2019, 
moved  above  EUR  30bn  mid-2020  and  above 
EUR  38bn 
in  September  2021.  International 
reserves were lifted by successive foreign currency 
bond  issuances,  EU  fund  inflows  and  an  increase 
in  special  drawing  rights  by  some  EUR  2.3  bn  in 
August  2021.  At  the  same  time,  the  outstanding 
stocks  of  liquidity-providing  FX  swaps  in  euros 
are  gradually  unwinding,  which  reduces 
the 
international  reserves  at  the  central  bank (79). 
International  reserves,  decreased  to  EUR  34bn  in 
April  2022,  which  corresponded  to  about  22%  of 
GDP. 

increased 

substantially  after 

Short-term  interest  rate  differentials  vis-à-vis  the 
euro  area 
the 
beginning  of  the  COVID-19  crisis,  when  the 
previous 
strongly 
upward  movement  was 
accentuated.  The  spread  trespassed  the  100  basis 
points in March 2020, to reach the 130 basis points 
two  months  later.  After  a  temporary  decrease  in 
summer  2020,  the  spread  started  increasing  again 
and  it  came  back  to  130  basis  point  in  January 
2021.  There  it  stabilized  until  June  2021  when  it 
started increasing steeply, with euro area 3-months 
rates  remaining  at  around  -0.55%  while  the  3-
months  Bubor  was  increasing  very  fast,  reflecting 
the  rapid  tightening  of  monetary  policy  and  later 
the  interventions  following  Russia’s  invasion  of 
Ukraine.  The  spread  continued  reached  705  basis 
points in April 2022.  

Convergence Report 2022 - Technical annex 

Chapter 5 - Hungary 

market  yields  on  a  single  benchmark  bond  with  a 
residual maturity of about 10 years.  

The  Hungarian  12-month  moving  average  long-
term interest rate relevant for the assessment of the 
Treaty  criterion  was  below  the  reference  value  at 
the  time  of  the  2020  convergence  assessment  of 
Hungary. It decreased from the 3.3% of May 2019 
to  reach  2.1%  in  July  2020  and  then  started  to 
increase again. In April 2022, the latest month for 
which data are available, the reference value, given 
by  the  average  of  long-term  interest  rates  in 
France,  Finland  and  Greece,  plus  2  percentage 
points,  stood  at  2.6%.  In  April,  the  12-month 
moving  average  of  the  yield  on  the  Hungarian 
benchmark bond stood at 4.1%, i.e. 1.5 percentage 
points above the reference value. 

The  long-term  interest  rate  of  Hungary,  which 
stood just around 2.0% in January 2020, peaked in 
April  at  2.5%  and  has  been  oscillating  below  this 
level  until  January  2021,  reflecting  also  the 
monetary  easing  conducted  by  major  central 
banks.  Hungary's  long-term  interest  rate  started 
increasing  again  in  2021,  in  particular  since 
tightening  of 
September  2021,  reflecting 
monetary policy, to surpass 4% in November. This 
mirrored  the  rapid  tightening  of  monetary  policy 
and accelerating inflation pressures in Hungary. 

the 

5.5. 

LONG-TERM INTEREST RATES 

The long-term interest rate in Hungary used for the 
convergence  assessment  reflects  the  secondary 

(79)  The  reduction  concerns  the  swaps  used  by  banks  to  buy 
forint  in  exchange  for  foreign  currency  from  2016  until 
2021.  

90 

0100200300400500600700800201620172018201920202021Graph 5.6: Hungary -3-M Bubor spread to 3-M Euribor(basis points, monthly values)Source: National Bank of Hungary, Eurostat and Thomson Reuters.0246Jan-16Jan-17Jan-18Jan-19Jan-20Jan-21Jan-22HungaryReference valueGraph 5.7: Hungary -Long-term interest rate criterion(percent, 12-month moving average)Source: European Commission.     
                                                           
            
Convergence Report 2022 - Technical annex 

Chapter 5 - Hungary 

integration  and  convergence  to  be  taken  into 
account  in  the  assessment.  The  assessment  of  the 
additional factors – including balance of payments 
developments,  as  well  as  product,  labour  and 
financial  market  integration  –  gives  an  important 
indication  of  a  Member  State's  ability  to  integrate 
into the euro area without difficulties.  

In  November  2021,  the  Commission  published  its 
latest Alert Mechanism Report (AMR 2022) under 
the  Macroeconomic  Imbalance  Procedure  (MIP  - 
see also Box 1.6), which highlighted issues related 
to  unit  labour  costs,  government  debt  financing 
and  the  housing  market  in  Hungary.  Unit  labour 
cost  growth  is  projected  to  pick  up  after  the 
pandemic, as productivity growth continues to lag 
behind substantial wage rises that are driven by the 
tightening 
labour  market  and  administrative 
measures.  Although  the  maturity  of  government 
debt  increased,  the  gross  financing  need  remains 
high,  which  could  create  risks  if  global  financing 
conditions deteriorate. Real house prices continued 
to  grow  after  the  pandemic,  supported  by  various 
government  subsidies  for  home  buying.  A  debt 
moratorium  was  introduced  during  the  pandemic 
and a temporary cap on mortgage rates in the first 
half of 2022. They both expire on 1 July 2022. The 
phase-out of these measures could pose challenges 

The  increase  in  long-term  rates  continued,  and 
accelerated further since March 2022, on the back 
of  Russia’s  invasion  of  Ukraine.  The  long-term 
rate reached 6.6% in April 2022. Despite the slight 
increase  of  rates  on  the  German  benchmark  bond 
over  the  same  period,  the  long-term  spread  vis-à-
vis  the  German  benchmark  bond  increased  over 
the last two years and reached 584 basis points  in 
April 2022. 

5.6.  ADDITIONAL FACTORS 

The  Treaty  (Article  140  TFEU)  calls  for  an 
examination  of  other  factors  relevant  to  economic 

91 

-202468201620172018201920202021HungaryGermanyGraph 5.8: Hungary -Long-term interest rates(percent, monthly values)Source: Eurostat.Table 5.4:Hungary - Balance of payments(percentage of GDP)201620172018201920202021Current account4.52.00.2-0.7-1.0-2.9of which: Balance of trade in goods3.41.4-1.7-2.5-0.9-2.5                 Balance of trade in services5.35.55.94.92.93.2                 Primary income balance -2.6-3.9-3.7-2.5-2.5-3.0                 Secondary income balance-1.5-0.9-0.4-0.5-0.6-0.7Capital account0.00.82.31.92.02.5External balance 1)4.52.82.51.21.0-0.4Financial account3.01.40.80.2-1.7-3.1of which: Direct investment-2.3-1.6-2.2-0.2-1.9-1.3                Portfolio investment4.23.0-0.11.0-1.90.2                Other investment 2)6.40.00.5-0.8-2.4-4.4                Change in reserves-5.30.02.70.24.52.4Financial account without reserves8.31.4-1.90.0-6.2-5.5Errors and omissions-1.5-1.4-1.7-0.9-2.7-2.7Gross capital formation21.523.126.828.527.330.6Gross saving25.724.726.827.626.227.7Net international investment position -59.0-54.4-50.7-49.1-48.9-44.81) The combined current and capital account.2) Including financial derivatives.Sources: Eurostat, European Commission calculations, Magyar Nemzeti Bank.           
 
 
    
 
 
Convergence Report 2022 - Technical annex 

Chapter 5 - Hungary 

for some borrowers and thus for the banking sector 
whose  tier-1  capital  ratio  is  lower  than  the  EU 
average. The profitability of banks is also affected 
by  increasing  funding  costs  and  losses  on  their 
government bond holdings due to the rise in yields. 
Some  Hungarian  banks  have  Russian  and 
Ukrainian  exposures  either  directly  or  through 
their  parent companies, and this  might also  weigh 
on  the  banking  sector’s  profitability  and  capital 
situation.    . However, since overall risks remained 
limited, no In-Depth Review (IDR) was warranted. 

Hungary  submitted  its  Recovery  and  Resilience 
plan on 11/05/2021. The submitted plan has a total 
allocation of EUR 7.175bn and contains proposed 
investments  and  reforms  to  strengthen  primary 
care  and  hospitals, 
the  capacity  of 
increase  renewable  energy 
suburban  rail  and 
production  at  residential 
is 
currently  being  assessed  by  the  Commission  to 
make  sure  that  all  assessment  criteria  are  being 
fulfilled. 

level.  The  plan 

increase 

5.6.1.  Developments  of 

the  balance  of 

payments 

According to balance of payments data, the surplus 
of  Hungary’s  external  balance  (i.e.  the  combined 
current  and  capital  account)  turned  negative  in 
2020. It decreased from a surplus 0.2% of GDP in 
2018 to a deficit of 2.9% of GDP in 2021. Exports 
fell  in  2020  due  to  the  pandemic.  Goods  exports 
then  staged  a  robust  recovery  until  mid-2021,  but 
they  were  held  back  by  growing  supply  chain 
disruptions  (e.g.  semiconductor  shortages)  in  the 
second half of 2021. Service exports declined more 
than goods exports in 2020. Their rebound in 2021 
also  proved  slower  as  the  pandemic  hindered  the 
recovery  of 
Imports 
decreased in 2020 but robust domestic demand led 
to their strong recovery in 2021. Following global 
energy prices, the terms of trade improved in 2020 
but  worsened  in  2021.  The  primary  income 
balance  deteriorated  especially  in  2021,  as  the 
inward investment income flows recovered slower 
than outward flows. The capital account remained 
in surplus due to the absorption of EU funds. 

international 

tourism. 

92 

and 

cost 

competitiveness 

indicators 
Price 
improved in early 2020 due to a nominal currency 
depreciation  at  the  outbreak  of  the  COVID-19 
pandemic.  Apart  from  some  fluctuations,  real 
effective  exchange  rates  remained  stable  in  the 
remainder of 2020 and in 2021. While the growth 
of  ULC  and  consumer  prices  was  higher  in 
Hungary than in its trade partners, this was mostly 
offset  by  nominal  depreciation  over  the  course  of 
2020  and  2021 (80).   Hungary’s  export  market 
share increased in 2020 and 2021. 

According  to  the  Commission’s  Spring  2022 
Economic  Forecast,  which  is  based  on  national 
accounts  data,  the  external  balance  is  expected  to 
deteriorate in 2022 and 2023. This is mainly driven 
by 
rising  commodity  prices,  which  worsen 
Hungary’s  terms  of  trade  and  swell  its  net  energy 
imports  that  amounted  to  4.4%  of  GDP  in  2021. 
The current account deficit is projected to peak at 
5.5% of GDP in 2022 before improving to 3.6% in 
2023 due to somewhat lower energy import prices. 

As  the  deteriorating  external  balance  was  due  to 
higher  budget  deficits,  it  was  mostly  financed  by 
the  external  borrowing  of  the  government  sector. 
The  government  also  used  freshly  raised  funds  to 
bolster  foreign  currency  reserves.  Consequently, 
the inflows of portfolio and other investments rose 
in  2020  and  2021,  and  gross  external  debt 
rose.Meanwhile,  direct  investments  continued  to 
register  net  inflows  in  2020  and  2021.  The  net 
international  investment  position  posted  slight 
improvements in 2020 and 2021. 

(80)  REER based on unit labour costs should be interpreted with 
prudence  as  unit  labour  costs  were  distorted  by  labour 
retention schemes. 

8090100110201620172018201920202021Graph 5.9: Hungary -Effective exchange ratesNEERREER, HICP deflatedREER, ULC deflated(vs. 36 trading partners;  monthly averages;index numbers, 2016 = 100)Source: European Commission.    
                                                           
Convergence Report 2022 - Technical annex 

Chapter 5 - Hungary 

the 

postponed 

government 

States  with  the  lowest  scores.  Hungary  ranks 
higher  than  the  average  five  lowest  euro  area 
Member  States  for  political  stability  and  absence 
of violence. (83)  The Commission’s 2021 Rule of 
Law  Report,  elaborated  on  the  challenges  that 
Hungary  faces  in  areas  such  as  the  control  of 
corruption,  judicial  independence  and  the  quality 
of  decision-making.  Shortcomings  in  the  anti-
corruption  framework  include  the  unaddressed 
links between businesses and political actors, such 
as  the  lack  of  effective  checks  and  oversight  of 
asset  and  interest  declarations.  Concerns  remain 
over  cases  of  high-level  corruption.  In  December 
2021, 
the 
implementation  of  most  measures  in  its  anti-
corruption strategy for 2020-22, which would have 
helped to more effectively detect and prosecute of 
corruption  in  public  institutions  and  state-owned 
enterprises. Access to public information, which is 
essential for the independent oversight of decision-
making and anti-corruption  framework,  was  made 
more  difficult  by  special  rules  introduced  by 
Hungary during the state of danger.  These issues 
innovative 
can  be  particularly  detrimental 
companies.  In  addition,  several  barriers  hamper 
competition 
large 
number  of  regulated  occupations,  untransparent 
insolvency 
interventions  and 
state 
procedures.  According 
latest  data, 
Hungary’s  transposition  deficit  of  EU  Directives 
was at 1.0%, similar to the EU average  but above 
the  target  (0.5%)  proposed  by  the  European 
Commission in the Single Market Act (2011). 

inefficient 
the 
to 

in  services, 

including 

the 

to 

5.6.2.  Market integration 

is 

the 

strongly 

economy 

embedded 

Hungary’s  economy  is  highly  integrated  with  the 
euro  area  through  trade  and  investment  linkages. 
The 
into 
continental  and  global  value  chains.  Trade 
openness  increased  somewhat  in  2021  to  89.5%, 
strong  decrease  of  2020  when 
after 
international 
trade  and  Hungary’s  exports  of 
tourism and travel services were temporarily hit by 
the  pandemic.  Flows  with  the  euro  area  dominate 
trade, accounting for more half of the total trade in 
goods  and  services  in  2021. Hungary’s  main  euro 
area goods trading partners in 2021 were Germany, 
Austria, Slovakia and Italy. Outside the euro area, 
the main trading partners were China and Poland.   

The  stock  of  FDI  in  Hungary  amounted  to  about 
63%  of  GDP  in  2020  (excluding  special  purpose 
entities, ‘SPEs’ (81) ), with FDI mainly originating 
from  Germany,  the  Netherlands  and  Austria. 
Manufacturing  and  services  each  accounted  for 
about  45%  of  inward  FDI,  suggesting  that  FDI 
plays  an  important  role  in  enhancing  Hungary’s 
export  capacity  and  contributes  significantly  to 
economic integration with the euro area. 

features 

of  Hungary’s 

Concerning  the  business  environment,  Hungary 
performs  in  general  worse  than  many  euro-area 
Member  States  in  international  rankings,  even  if 
certain 
business 
environment, such as low corporate taxes, flexible 
labour  market  regulations  and  the  authorities’ 
supportive  attitude  towards  export-oriented  FDI, 
make  the  country  attractive  for  the  more  labour-
intensive  and  cost-sensitive  tasks  within  global 
value  chains.  However,  Hungary  scores  poorly 
according  to  the  World  Bank's  Ease  of  Doing 
Business  and  the  Global  Competitiveness  Index 
rankings  by 
for 
Management  Development (82).  According  to  the 
World  Bank's  Worldwide  Governance  Indicators 
(2020),  Hungary 
in  voice  and 
accountability, and control of corruption compared 
with  the  average  of  the  five  euro  area  Member 

International 

Institute 

ranks 

low 

the 

(81)  The  Hungarian  statistics  introduced  the  notion  of  special 
purpose  enterprise  (SPE)  for  those  passive  financial 
intermediaries  that have  financial  relations  only  with  non-
residents,  and  allocated  them  to  the  financial  corporations 
sector as private financial intermediaries (S.127).” They are 
typically  related  to  tax  optimization  by  holdings.  See  a-
nem-penzugyi-vallalatok-penzugyi-szamlai-en.PDF 
(mnb.hu), page 8. 

(82)  The  World  Bank  Doing  Business  (DB)  program  was 
paused in 2021. The programme will continue with a new 
governance  and  improved  accountability  and  transparency 
under  the  name  Business  Enabling  Environment  (BEE). 
The first edition of the BEE is expected in 2023. 

(83)  A  Member  State  is  considered  to  have  a  ‘low’  (‘high’) 
ranking compared with the average five euro area Member 
States with the lowest scores for each indicator if its score 
is at least 0.3 percentage points lower (higher) than that of 
the average of this euro area group. 

93 

0.00.40.71.11.4Voice and AccountabilityPolitical Stability and Absenceof Violence/TerrorismGovernment EffectivenessRegulatory QualityRule of LawControl of CorruptionHungaryEuro area average five lowestEuro area averageGraph 5.10: Hungary -2020 World Bank's Worldwide Governance IndicatorsNote: Estimate of governance ranges from -2.5 (weak) to 2.5 (strong). Source: World Bank.                                                           
    
 
                                                           
Convergence Report 2022 - Technical annex 

Chapter 5 - Hungary 

that 

The  4th  Anti-Money  Laundering  Directive 
imposed  transposition  by  26  June  2017,  and 
Hungary  notified  the  Commission  of  the  adopted 
measures within that deadline. New measures were 
notified  during  2019  and  2020.  The  Commission 
has  analysed  the  communicated  measures  and 
the  directive  has  been  fully 
concluded 
the  5th  Anti-Money 
transposed.  As  regards 
Laundering  Directive,  whose 
transposition 
deadline elapsed on 10 January 2020, Hungary has 
notified  national 
transposition  measures  and 
declared  a  partial  transposition.  In  view  of  some 
missing  transposition  measures  the  Commission 
has addressed a letter of formal notice (“LFN”) to 
Hungary  on  13/02/2020  and  a  Reasoned  Opinion 
on  09/06/2021  as  the  reply  to  the  LFN  was  not 
satisfactory.  At  the  same  time,  new  transposition 
measures  were  notified  in  June  2021  and  the 
Commission  is  currently  assessing  whether  they 
address the gaps in transposition. 

that  perform  no 

The  size  of  the  financial  sector,  measured  as  the 
ratio  of  assets  managed  by  the  financial  sector  to 
GDP, is in Hungary slightly more than half of the 
comparable  euro  area  average,  while  being  less 
than half in 2016, indicating a faster growth than in 
the  euro  area  in  recent  years.  However,  when 
excluding  SPEs 
financial 
intermediation  in  the  domestic  economy,  the  size 
of  the  total  financial  sector  grew  from  162%  of 
GDP  in  2016  to  193%  in  2020,  indicating  both  a 
much  lower  level  of  financial  development  and 
convergence  with  the  euro  area.  Taking  into 
account this correction, Hungary can be considered 
similar in terms of financial sector size to the euro 
area  members  with  the  least  developed  financial 
sectors. 

94 

Due  to  the  presence  of  SPEs,  the  structure  of  the 
financial  sector  is  different  from  the  euro  area 
average,  where  the  banking  sector  is  the  largest 
sub-sector  in  the  financial  sector.  In  Hungary 
banking  accounts  for  a  quarter  of  the  financial 
sector’s  assets  (109%  of  GDP),  decreasing  from 
almost 30% (98% of GDP) in 2016, against a 39% 
(311%  of  GDP)  in  the  euro  area.  Other  financial 
intermediaries,  which  cover  SPEs,  make  up  for 
60%  of 
total  financial  assets  and  259%  of 
GDP (84). Without SPEs, the banking sector shows 
a  large  and  relatively  stable  weight,  with  around 
60% of total assets in 2016 (around 160% of GDP) 
and  58%  in  2020  (around  190%  of  GDP).  With 
this  correction, 
the  financial  system  can  be 
assessed  as  even  more  bank-based  than  the  EU 
average.  The  weight  of  the  central  bank  is  also 
higher than the EU average if SPEs are excluded, 
as  it  accounted  for  16%  (27%  of  GDP)  of  total 

(84)  As indicated above, this likely reflects the large presence of 
foreign holdings in Hungary for tax optimization purposes. 

Table 5.6:Hungary - Allocation of assets by financial sub-sectorRatio to GDP (%)HUEAEA 5 smallest201620202016202020162020Financial corporations (total)335435722796177215Central bank274145783761Monetary financial institutions981092863119798Other financial intermediaries1852592021792028Non-MMF investment funds1)141410012745Insurance co. and Pension Funds1211901021823Share of total (%)HUEAEA 5 smallest201620202016202020162020Central bank896102129Monetary financial institutions292540395546Other financial intermediaries556028221112Non-MMF investment funds43141622Insurance co. and Pension Funds43121310111) MMF stands for money market funds.Source: Eurostat.Table 5.5:Hungary - Market integration201620172018201920202021Trade openness 1) (%)91.993.392.591.187.989.6Trade with EA in goods & services 2)+3) (%)53.153.252.351.749.850.5World Bank's Ease of Doing Business Index rankings 4)4148535252-IMD World Competitiveness Ranking 5)465247474742Internal Market Transposition Deficit 6) (%)0.80.30.90.51.0-Real house price index 7)112.3121.9135.0150.9153.4166.5 1) (Imports + Exports of goods and services / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics, Balance of Payments). 2) (Imports + Exports of goods with EA-19 / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics). 3) Trade in services with EA-19 (average credit and debit in % of GDP at current prices) (Balance of Payments). 4) Data not available for 2021. The Ease of Doing Business report by the World Bank was discontinued in September 2021.  5) International Institute for Management Development (IMD). 6) Percentage of internal market directives not yet communicated as having been transposed, relative to the total.    (November data, as of 2016 date refers to the year of publication). 7) Deflated house price index (2015=100) (Eurostat). Sources: Eurostat, World Bank, International Institute for Management Development, European Commission calculations. 
 
  
 
 
                                                           
 
 
  
 
 
Convergence Report 2022 - Technical annex 

Chapter 5 - Hungary 

non-consolidated  assets  in  2016,  which  rose  to 
21% by 2020 (40% of GDP).  

Insurance companies and pension funds are clearly 
underdeveloped  compared  to  the  euro  area,  with 
assets  representing  3%  of  total  assets  of  the 
financial  sector,  for  an  amount  of  11%  of  GDP. 
This  is  very  small  also  compared  to  the  countries 
with  the  smallest  shares  in  the  euro  area.  Since 
end-2016,  the  Hungarian  sector  has  decreased  its 
holdings  of  financial  assets  by  1  percentage  point 
of  GDP,  while  in  the  euro  area  it  increased  by 
more  than  12  percentage  points  of  GDP  to  reach 
13% of total assets. 

to 

and 

households 

This structure of the financial sector is reflected in 
the  financing  of  the  economy,  which  traditionally 
shows  relatively  low  intermediated  and  market 
credit 
non-financial 
corporations.  Funding  via  other  equity,  possibly 
reflecting the relevant presence of foreign holdings 
and  SPEs  in  Hungary,  remained  at  40%  of  total 
liabilities  in  2020,  representing  261%  of  GDP. 
This  compares  to  an  average  of  7%  for  the  euro 
area  (56%  of  GDP).  Considering  also  the  role  of 
unlisted  shares,  one  almost  reaches  50%  of  total 
liabilities, which are not allocated via the banking 
sector.  This  is  still  much  higher  than  the  average 
euro area and compares with countries like Estonia 
or Cyprus. 

For  the  rest,  loans  are  the  dominant  source  of 
funding  and  made  up  29%  of  total  liabilities, 
which  represented  almost  190%  of  GDP  in  2020, 
posting a very large increase compared to the 25% 
of 2016. This figure is inflated by the presence of 
SPEs, and is not only reflecting loans to Hungarian 
households and non-financial companies. Even so, 
this  compares  to  31%  in  the  euro  area,  where  it 
represents  more  than  235%  of  GDP.  Debt  and 
equity markets relative to GDP are smaller than the 
respective  average  in  the  euro  area  and  market 
financing  (debt  securities  and  listed  shares)  is 
relatively  underdeveloped,  with  the  market  for 
private debt smaller than in the smallest euro area 
members.  Equity  and  private-sector  debt  markets 
liabilities 
represent  3%  and  1%  of 
respectively.  This  compares 
total 
liabilities  for  both  listed  stocks  and  private-sector 
debt  in  the  euro  area.  Government  debt  is  also 
significantly lower than in the euro area. 

to  9%  of 

total 

The  Hungarian  banking  sector  is  well  integrated 
into  the  euro  area  financial  sector,  posting  a  level 
of foreign ownership in its banking system that is 
well  above  the  one  of  the  euro  area. The  share  of 
foreign-owned institutions in total bank assets was 
around  40%  both  in  2016  and  in  2020,  with  the 
corresponding  figure  for  the  euro  area  being  at 
around  16%.  Bank  concentration,  as  measured  by 
largest  credit 
the  market  share  of 
institutions  in  total  assets,  was  stable  at  around 
50% since 2016, and in 2020, a value comparable 
to the euro area average (53% in 2020).  

the  five 

In  2020,  the  banking  sector  in  Hungary  posted  a 
Core tier 1 ratio just above 16%,  one point below 
the  average  of  the  euro  area.  This  ratio  has  been 
decreasing  after  2018  and  has  been  accompanied 
in  2020  by  lower  profitability.  Nonetheless,  it 
remains  well  above  the  lows  of  the  2010s.  The 
ratio  of  non-performing  loans  to  total  loans  is 
slightly above the euro area average but continued 
to decrease. For these reasons, the unfolding of the 
COVID-19  crisis  and  of  the  consequences  of 
invasion  of  Ukraine  could  have  a 
Russia’s 

95 

Table 5.7:Hungary - Financing of the economy1)Ratio to GDP (%)HUEAEA 5 smallest201620202016202020162020Liabilities (total)550647743770324335Loans136189238236115112Non-financial co. debt securities23121534Financial co. debt securities5874681112Government debt securities747583955157Listed shares181765731718Unlisted shares52581861935556Other equity22926151564248Trade credits and advances343533352929Share of total (%)HUEAEA 5 smallest201620202016202020162020Loans252932313533Non-financial co. debt securities002211Financial co. debt securities1110933Government debt securities131211121617Listed shares339955Unlisted shares10925251818Other equity4240771314Trade credits and advances6545991) The table focuses on the financing needs of a country and how these are met by the financial system. The table is constructed from the liabilities of all economic sectors, but only considers loans, debt securities, equity and trade credits. The sum of liabilities in the table only reflects the total for the liabilities considered.Source: Eurostat.0102030405060HU, 2016HU, 2020EA, 2016EA, 2020Concentration in the banking sector (CR5 ratio)Share of foreign institutions as % of total assetsGraph 5.11: Hungary -Foreign ownership and concentration in the banking sector(in percent, weighted averages)Source: ECB, Structural financial indicators. 
 
  
 
 
  
Convergence Report 2022 - Technical annex 

Chapter 5 - Hungary 

significant  impact  on  the  financial  stability  and 
profitability indicators over the coming months. 

Measures  of  intra-EU  integration  in  equity  and 
debt  markets,  as  based  on  the  home  bias  in 
portfolio  investments,  indicate  that  the  level  of 
integration  of  Hungary  is  very  low  in  both 
segments  and  in  particular  in  debt  markets. (85) 
Although  intra-EU  financial  integration,  by  the 
same  measure,  is  in  general  relatively  low  across 
EU  Member  States,  Hungary’s  integration  is  well 
below  also  the  countries  where  the  home  bias  is 
the  largest  in  the  euro  area.  The  very  large  home 
bias  indicates  that  almost  all  investments  in 
financial markets takes place domestically. 

(85)  Home  bias  in  portfolio  investments  measures  the  average 
propensity  of  investors  in  a  Member  State  to  invest 
domestically  as  compared  with  investing  in  other  EU 
countries.  The  indicator  ranges  between  0  and  1,  with  a 
value  of  0  indicating  that  investors  prefer  domestic  over 
foreign  assets.  The  inverse  of  the  home  bias  can  be 
interpreted  as  one  measure  of  financial  integration  among 
EU countries. 

96 

0.00.20.4HU, 2016HU, 2020EA, 2016EA, 2020EA Low,2016EA Low,2020DebtEquityGraph 5.12: Hungary -Intra-EU integration in equity and debt portfolio investmentNote: The chart shows the extent of home bias in debt and equity markets. A value index of 1 implies ‘full integration’ with the financial markets of other Member States, while 0 denotes ‘no integration’.Source: FinFlows database: European Commission, Joint Research Centre (JRC). (index)   
                                                           
6. 

POLAND 

6.1. 

LEGAL COMPATIBILITY 

6.1.1.  Introduction 

The  main  rules  governing  the  Narodowy  Bank 
Polski  (NBP  –  Polish  national  bank,  hereafter 
NBP)  are  laid  down  in  the  Act  on  the  Narodowy 
Bank Polski (the NBP Act) which was adopted on 
29  August  1997.  The  consolidated  version  of  the 
NBP  Act  was  published  in  Dziennik  Ustaw  of 
2020,  item  2027.  The  NBP  Act  has  been  slightly 
2020 
amended 
Convergence  Report (86).  In  absence  of  any 
legislative action regarding the issues mentioned in 
the  Commission’s  2020  Convergence  Report,  the 
comments provided in the latter report are repeated 
also in the 2022 assessment. 

the  Commission’s 

since 

6.1.2.  Central Bank independence 

content 

constitutes 

The  Polish  Constitution  and  the  NBP  Act  do  not 
explicitly  prohibit  the  NBP  and  members  of  its 
decision-making  bodies  from  seeking  or  taking 
outside  instructions;  they  also  do  not  expressly 
prohibit the Government from seeking to influence 
members  of  NBP  decision-making  bodies 
in 
situations where this may have an impact on NBP's 
fulfilment  of  its  ESCB  related  tasks.  The  absence 
of such an explicit reference  to Article 130 of the 
TFEU  and  Article  7  of  the  ESCB/ECB  Statute  or 
its 
incompatibility. 
However,  the  Polish  Constitutional  Court  has 
recognised that  the central bank's independence  is 
based on Article 227(1) of the Constitution. In this 
respect,  it is noted that at the occasion of a  future 
amendment  to  the  Polish  Constitution  the  Polish 
authorities  should  seize  the  opportunity  to  clarify 
in  the  Constitution  that  the  principle  of  central 
bank  independence  as  enshrined  in  Article  130  of 
the TFEU and Article 7 of the ESCB/ECB Statute 
applies. Alternatively, or in addition, the NBP Act 
could also be amended to ensure full compatibility 
with the principle of central bank independence. 

an 

(86)  The  amendments  stem  from  the  Act  of  31  March  2020 
amending  the  Act  on  special arrangements  for preventing, 
counteracting  and  combating  COVID-19,  other  infectious 
diseases  and  crisis  situations  caused  by  them,  and  other 
laws (Dziennik Ustaw of 2020, item 568), the Act of 8 July 
2021  amending  the  Act  on  the  Bank  Guarantee  Fund, 
Deposit Guarantee Scheme and Resolution, and other laws 
(Dziennik  Ustaw  of  2021,  item  1598)  and  the  Act  of  17 
December  2021  amending  the  Act  on  Narodowy  Bank 
Polski  and  the  Executive  Penal  Code  (Dziennik  Ustaw  of 
2022, item 22). 

The  Commission  recalls  the  recent  rulings  of  the 
Polish  Constitutional  Tribunal  which  considered 
certain provisions of the EU Treaties incompatible 
with the Polish Constitution, expressly challenging 
the  primacy  of  EU  law (87).  The  primacy  of  EU 
law is instrumental for assessing the compatibility 
between  the  national  legislation,  including  the 
statute  of  its  national  central  bank,  and  Articles 
130  and  131  and  the  Statute  of  the  ESCB  and  of 
the  ECB.  The  Commission  considers  that  these 
rulings of the Constitutional Tribunal are in breach 
of  the  general  principles  of  autonomy,  primacy, 
effectiveness  and  uniform  application  of  Union 
law  and  the  binding  effect  of  rulings  of  the  Court 
of  Justice  of  the  European  Union.  Moreover,  the 
the  Constitutional 
Commission  considers 
Tribunal  no  longer  meets  the  requirements  of  an 
independent  and 
tribunal  previously 
impartial 
established  by  law (88).  It  should  be  ensured  that 
the  primacy  of  Articles  130  and  131  and  the 
Statute of the ESCB and of the ECB over national 
law  is  fully  observed  by  Polish  public  authorities 
and  courts.  Article  23(1)(2)  of  the  NBP  Act 
provides that the NBP's Governor has, inter alia, to 
provide  draft  monetary  policy  guidelines  to  the 
Council  of  Ministers  and  the  Minister  of  Finance. 
This procedure provides for the opportunity for the 
Government  to  exert  influence  on  the  monetary 
thus 
and  financial  policy  of 
constitutes  an  incompatibility  in  the  area  of 
independence  with  Article  130  of  the  TFEU  and 
Article 7 of the ESCB/ECB Statute.  

the  NBP  and 

that 

Article  9(3)  of  the  NBP  Act  foresees  that  the 
Governor  of  the  NBP  shall  assume  his/her  duties 
after  taking  an  oath  before  the  Parliament.  This 
oath  refers  to  the  observation  of  the  provisions  of 
the  Polish  Constitution  and  other 
the 
economic  development  of  Poland  and  the  well-
being of its citizens. The Governor of the NBP acts 
in  dual  capacity  as  a  member  of  NBP’s  decision-
making bodies and of the relevant decision-making 
bodies  of  the  ECB.  Article  9(3)  of  the  NBP  Act 
needs  to  be  adapted  to  reflect  the  status  and  the 
obligations and duties of the Governor of the NBP 
as member of the relevant decision-making bodies 

laws, 

(87)  Polish Constitutional Tribunal, Judgment No. P 7/20 of 14 
July 2021; Polish Constitutional Tribunal, Judgment No. K 
3/21 of 7 October 2021. 

(88)  On  22  December  2021,  the  Commission  launched  an 
infringement  procedure  concerning 
the  Constitutional 
Tribunal  and  its  case-law;  see  Commission  press  release 
IP/21/7070. The procedure is ongoing. 

97 

                                                           
                                                           
to  central  bank 

of the ECB. Moreover, the oath does not contain a 
reference 
independence  as 
enshrined in Article 130 of the TFEU. The oath as 
it  stands  now  is  an  imperfection  and  should  be 
adapted to be fully in line  with the TFEU and the 
ESCB/ECB Statute. 

The  wording  of  Article  9(5)  of  the  NBP  Act 
containing  grounds  for  dismissal  of  the  NBP's 
Governor could lead to interpretative issues and is 
an imperfection. The provision would benefit from 
a  clarification  that  these  grounds  correspond  to  a 
lack  of  fulfilment  of  conditions  required  for  the 
performance of the Governor’s duties or a  serious 
misconduct of which the Governor has been guilty, 
as  set  out  in  Article  14.2  of  the  ESCB/ECB 
Statute.  

to 

The  State  Tribunal  Act (89)  provides  for  the 
suspension  of  the  Governor  from  his/her  duties 
following  a  procedure,  which  raises  questions 
regarding  its  compatibility  with  the  principle  of 
central bank independence and Article 14.2 of the 
the  second 
ESCB/ECB  Statute.  Pursuant 
sentence of Article 11(1) of the State Tribunal Act 
read  in  conjunction  with  its  Articles  3  and  1.1(3), 
the  Governor  of  the  NBP  can  be  suspended  as  a 
result  of  an  indictment  by  the  Parliament  for 
violating  the  Constitution  or  an  act  of  law  when 
performing  his/her  duties  even  before  the  State 
Tribunal has delivered its judgment on the removal 
from the  office. While suspending a  Governor for 
the  purpose  of  a  (criminal)  investigation  may  be 
necessary, the Governor concerned should be able 
to  bring  an  action  for  annulment  of  a  temporary 
the 
measure  before  the  Court  of  Justice  of 
European  Union  (CJEU)  pursuant  to  Article  14.2 
of  the  ESCB/ECB  Statute.  The  purpose  of  such 
action  is  to  enable  the  CJEU  to  verify  that  a 
temporary prohibition of performing a Governor’s 
there  are  sufficient 
if 
duties 
indications  that  he/she  has  engaged  in  serious 
misconduct 
a 
measure (90). Such a guarantee is a reflection of the 
principle  of  central  bank  independence  and  of 
great 
in  case  of  a 
suspension  from  office  on  grounds  of  serious 

importance,  especially 

capable  of 

taken  only 

justifying 

such 

is 

Convergence Report 2022 - Technical annex 

Chapter 6 - Poland 

further 

misconduct 
indictment  by  a 
to  an 
parliamentary body depriving the Governor of the 
possibility to continue exercising the duties. In the 
absence  of  any  clear  reference  in  the  NBP  Act  or 
Constitution  to  the  principle  of  central  bank 
independence the NBP Act would benefit from an 
explicit clarification that the Governor of the NBP 
has  the  possibility  to  seek  legal  redress  against 
his/her  dismissal,  including  suspension  before  the 
CJEU,  as  enshrined 
the 
ESCB/ECB Statute. 

in  Article  14.2  of 

the 

to  Article  203(1)  of  Poland’s 
According 
Constitution, 
Supreme  Audit  Office 
(Najwyższa  Izba  Kontroli  (NIK))  is  entitled  to 
examine the NBP's activities as regards its legality, 
economic  prudence,  efficiency  and  diligence.  The 
NIK controls are not performed in the capacity of 
an  independent  external  auditor,  as  laid  down  in 
Article  27.1  of  the  ESCB/ECB  Statute  and  thus, 
should  for  legal  certainty  reasons  be  clearly 
defined  so  as  to  respect  Article  130  of  the  TFEU 
and  Article  7  of 
the  ESCB/ECB  Statute. 
the  provision's  relationship  with 
Furthermore, 
Article  69.1  of  the  NBP  Act  is  also  unclear.  The 
relevant  provision  of  the  Constitution  is  therefore 
incompatible  and  needs  to  be  adapted  in  order  to 
comply  with Article 130 of the TFEU  and Article 
7 of the ESCB/ECB Statute. 

6.1.3.  Prohibition  of  monetary  financing  and 

privileged access 

bank 

Article  42  in  conjunction  with  Article  3(2)(5)  of 
the NBP Act allow the NBP to extend refinancing 
loans  to  banks  in  order  to  replenish  their  funding 
and  also  extend  refinancing  to  banks  for  the 
implementation 
rehabilitation 
of 
programmes,  subject 
to  conditionality  under 
Article  42(4)  of  the  same  Act.  Against  this 
background,  the  current  wording  of  Article  42(3) 
and (4) can be interpreted as allowing an extension 
of 
to  banks  experiencing 
rehabilitation  proceedings  which,  however,  could 
the  banks  concerned. 
end 
Effective  preventive  measures  and  more  explicit 
safeguards  should  be  provided  in  the  NBP  Act  to 
clarify compatibility with Article 123 of the TFEU. 

insolvency  of 

refinancing 

loans 

in 

(89)  State Tribunal Act, Dziennik Ustaw of 2019, item 2122. 
(90)  Judgment  of  the  Court  of  Justice  of  the  EU  (Grand 
Chamber)  of  26  February  2019  Ilmārs  Rimšēvičs  and 
European Central Bank v Republic of Latvia, Joined Cases 
C-202/18  and  C-238/18,  ECLI:EU:C:2019:139.  In  this 
ruling,  the  CJEU  declared  it  has  jurisdiction  to  hear  and 
determine  an  action  of  annulment  brought  against  a 
temporary measure like a suspension of performing duties 
as  a  Governor  under  Article  14.2  of  the  ESCB/ECB 
Statute. 

Article  43  of  the  NBP  Act  in  conjunction  with 
Articles  270  and  306  of  the  Act  on  the  Bank 
Guarantee  Fund,  deposit  guarantee  system  and 
for  NBP’s 
forced 

restructuring (91)  provides 

(91)  system  and  forced  restructuring  of  10  June  2016. 
Consolidated  version  published  in  Dziennik  Ustaw  of 
2020, item 842, with further amendments. 

98 

                                                           
                                                           
powers  to  grant  short-term  credit  to  the  Bank 
Guarantee  Fund  related  to  the  financing  of  its 
deposit  guarantee  function,  if  a  threat  to  financial 
stability arises and in view of its urgent needs. The 
Bank  Guarantee  Fund  qualifies  as  a  “body 
governed  by  public  law”  within  the  meaning  of 
Article  123(1)  of  the  TFEU.  The  Bank  Guarantee 
Fund is closely dependent on public sector entities 
referred  to  in  Article  123(1)  of  the  TFEU,  as  the 
majority  of  the  members  of  the  Bank  Guarantee 
Fund’s  Council  are  appointed  by  the  Minister 
competent 
the 
Chairman  of  the  Financial  Supervisory  Authority 
(Article  7(4)  of  the  Act  on  the  Bank  Guarantee 
Fund,  deposit  guarantee  system  and 
forced 
restructuring). Therefore, the provisions laid down 
in the NBP Act and the Act on the Bank Guarantee 
Fund,  deposit  guarantee  system  and 
forced 
restructuring  regarding  the  possibility  of  NBP 
granting loans to the Bank Guarantee Fund are not 
compatible  with 
financing 
prohibition  and  the  relevant  legal  framework 
should be amended accordingly. 

institutions  and 

the  monetary 

financial 

for 

As  such,  there  is  also  no  direct  reference  to  the 
prohibition on monetary financing in the NBP Act. 
While  Article  220(2)  of  the  Polish  Constitution 
provides  that  the  budget  shall  not  provide  for 
covering  a  budget  deficit  by  way  of  contracting 
credit  obligations  to  the  State’s  central  bank,  and 
this  could  be  interpreted  as  a  reference  to  the 
this 
rationale  of  Article  123  of 
provision  is  not  compatible  with  Article  123 
TFEU.  At  the  occasion  of  a  future  amendment  to 
the  Polish  Constitution  the  Polish  authorities 
should  seize  the  opportunity  to  clarify  in  the 
Constitution  that  the  prohibition  on  monetary 
financing as enshrined in Article 123 of the TFEU 
and  Article  21  of  the  ESCB/ECB  Statute  applies. 
Alternatively, or in addition, the NBP Act could be 
amended  to  ensure  full  compatibility  with  the 
aforementioned principle. 

the  TFEU, 

6.1.4.  Integration in the ESCB 

Objectives 

Article 3(1) of the NBP Act sets the objectives of 
the  NBP.  It refers  to  the  economic  policies  of  the 
Government while it should make reference to the 
general  economic  policies  in  the  Union,  with  the 
latter  taking  precedence  over  the  former.  This 
constitutes an imperfection  with respect to Article 
the 
127(1)  of 
ESCB/ECB Statute. 

the  TFEU  and  Article  2  of 

Convergence Report 2022 - Technical annex 

Chapter 6 - Poland 

Tasks 

The  incompatibilities  in  the  NBP  Act  and  in  the 
Polish  Constitution  in  this  area  are  linked  to  the 
following ESCB/ECB/EU tasks: 

 

limitation of the NPB's activities to the territory 
of  the  Republic  of  Poland  (Article  2(3)  of  the 
NBP Act) and absence of a general reference to 
the  BNB  as  an  integral  part  of  the  ESCB 
(Article  227(1)  of  the  Constitution  and  Article 
1 of the NBP Act); 

  definition  and  implementation  of  monetary 
policy 
the 
Constitution,  Articles  3(2)(5),  12,  23,  38-50a, 
and 53 of the NBP Act); 

(Articles  227(1)  and 

(6)  of 

  holding  of  foreign  reserves;  management  of 
foreign  exchange  and  the  definition  of  foreign 
exchange  policy  (Articles  3(2)(2),  3(2)(3), 
17(4)(2), 24 and 52 of the NBP Act); 

  competences  of  the  ECB  and  of  the  EU  for 
banknotes  and  coins  (Article  227(1),  second 
sentence of the Constitution and Articles 4, 31-
37 of the NBP Act). The NBP shall exercise its 
responsibility for issuing currency as part of the 
ESCB/Eurosystem; 

  appointment  of  independent  auditors  -  Article 
69(1)  of  the  NBP  Act  foresees  that  NBP 
accounts  are  examined  by  external  auditors. 
The  NBP  Act  does  not  take  into  account  that 
the auditing of a central bank has to be carried 
out 
auditors 
recommended  by  the  Governing  Council  and 
approved  by  the  Council.  It  is  incompatible 
with Article 27.1 of the ESCB/ECB Statute.  

independent 

external 

by 

There are also some imperfections regarding: 

  non-recognition  of  the  role  of  the  ECB  in  the 
functioning  of  the  payment  systems  (Articles 
3(2)(1) of the NBP Act); 

 

incomplete  recognition  of  the  role  of  the  ECB 
and  of  the  EU  in  the  collection  of  statistics 
(Article 3(2)(7) and 23 of the NBP Act); 

99 

 
 
Convergence Report 2022 - Technical annex 

Chapter 6 - Poland 

  non-recognition  of  the  role  of  the  ECB  in  the 
field  of  international  cooperation  (Article  5(1) 
and 11(3) of the NBP Act). 

6.1.5.  Assessment of compatibility 

As  regards  the  independence  of  the  central  bank, 
the  prohibition  on  monetary  financing  and  the 
central bank integration into the ESCB at the time 
of  euro  adoption,  the  legislation  in  Poland,  in 
particular the NBP Act and the Constitution of the 
Republic  of  Poland  are  not  fully  compatible  with 
the  compliance  duty  under  Article  131  of  the 
TFEU. The Polish authorities are invited to remedy 
the abovementioned incompatibilities. 

6.2. 

PRICE STABILITY 

6.2.1.  Respect of the reference value 

The 12-month average inflation rate, which is used 
for  the  convergence  assessment,  was  above  the 
reference value at the time of the last convergence 
assessment  of  Poland  in  2020.  It  then  increased 
almost uninterruptedly to reach 3.7% by end 2020 
and  5.2%  by  end-2021.  In  April  2022,  the 
reference  value  was  4.9%,  calculated  as  the 
average of the 12-month average inflation rates in 
France,  Finland  and  Greece  plus  1.5  percentage 
points.  The  corresponding  inflation  rate  in  Poland 
was  7.0%,  i.e.  2.1  percentage  points  above  the 
reference  value.  The  12-month  average  inflation 
rate is projected to remain well above the reference 
value in the months ahead. 

6.2.2.  Recent inflation developments 

Poland  recorded  a  significant  and  broad-base 
increase in annual HICP inflation over the past two 
years.  Annual  inflation  fell  to  2.9%  in  April 
following the first wave of the pandemic. It picked 
up to 3.8% in June and remained broadly constant 
until  February  2021.  Annual 
then 
increased  sharply  throughout  2021,  driven  by 
food  prices  as  well  as 
rising  energy  and 
inflation.  Overall,  headline 
accelerating  core 
inflation averaged 3.7% in 2020 and 5.2% in 2021. 
During the last two years, annual HICP inflation in 
Poland  was  consistently  higher  than  in  the  euro 
area. 

inflation 

100 

-202468101214Jan-16Jan-17Jan-18Jan-19Jan-20Jan-21Jan-22PolandReference valueGraph 6.1: Poland -Inflation criterion(percent, 12-month moving average)Note: The dots at the right end of the chart show the projected reference value and 12-month average inflation rate of the country in December 2022.The reference values for 2016, 2018 and 2020 refer to the reference values calculated in the previous Convergence Reports.Source: Eurostat, Commission's Spring 2022 Economic Forecast.Table 6.1:weights  Poland - Components of inflation(percentage change)1)in total   201620172018201920202021Apr-222022HICP-0.21.61.22.13.75.27.01000Non-energy industrial goods-1.5-1.0-0.30.40.92.43.7332Energy-3.72.93.70.0-1.012.218.2145Unprocessed food 1.65.63.05.46.92.87.147Processed food0.72.71.83.73.92.74.5200Services1.82.40.83.57.87.37.6276HICP excl. energy and unproc. food0.31.20.62.34.24.25.3808HICP at constant tax rates -0.21.61.22.13.55.17.81000Administered prices HICP2.11.20.81.26.75.97.01241) Measured by the arithmetic average of the latest 12 monthly indices relative to the arithmetic average of the 12 monthly indices    in the previous period.Source: Eurostat, European Commission calculations. 
              
 
 
      
 
 
Convergence Report 2022 - Technical annex 

Chapter 6 - Poland 

by 6.0%, supported by a high level of accumulated 
savings and a strong recovery in the labour market, 
which  weathered  the  crisis  well  due  to  sizeable 
fiscal  support.  The  recovery  in  investment  was 
more  gradual,  with  investment  levels  still  below 
pre-crisis levels by the end of 2021. According to 
the  Commission’s  Spring  2022  Economic 
Forecast, GDP is projected to increase by 3.7% in 
2022,  as  the  effects  of  the  COVID-19  pandemic 
are  expected  to  ease  and  economic  activity  is 
expected  to  normalize.  In  2023,  GDP  is  expected 
to  continue  decelerating,  growing  by  a  projected 
3.0%.  

the  back  of 

The  fiscal  stance  was  strongly  expansionary  in 
2020, driven by fiscal measures adopted to contain 
the  economic  impact  of  the  pandemic,  but  it 
recovered  in  2021  as  the  expenditure  measures 
were  partially  withdrawn  and  revenues  increased 
the  economic  recovery (92). 
on 
According  to  the  Commission’s  Spring  2022 
Economic Forecast, the fiscal stance is expected to 
be  supportive  at  -3.4%  of  GDP  in  2022,  due  to 
growth  in  nationally-financed  primary  current 
expenditure,  including  the  impact  of  measures 
compensating  for  high  energy  prices  and  the  cost 
of aid to refugees.  

Monetary  policy,  conducted  within  an  inflation 
targeting framework (93) remained accommodative 
for  most  of  the  past  two  years,  before  tightening 
sharply from October 2021. The COVID-19 crisis 
led 
to  a  substantial  monetary  easing:  after 
decreasing the policy rate twice by 50 basis points 
in  March  and  in  April  2020,  the  Monetary  Policy 
Council (MPC) decreased the policy rate further to 
0.1% in May 2020. In addition, the MPC launched 
the  purchase  of  government  securities  and 
government-guaranteed  debt  securities  on 
the 
secondary  market.  It  also  started  the  provisioning 
of  additional  liquidity  to  the  banking  sector 
through  repo  operations  and  a  discount  facility. 
Yet,  as  inflation  accelerated,  the  Monetary  Policy 
Council  (MPC)  increased  the  reference  rate  from 

(92)  The  fiscal  stance  is  measured  as  the  change  in  primary 
expenditure  (net  of  discretionary  revenue  measures), 
excluding  Covid-19  crisis-related  temporary  emergency 
measures  but  including  expenditure  financed  by  non-
the  Recovery  and 
repayable  support  (grants)  from 
Resilience Facility and other EU funds, relative to medium-
term  potential  growth.  A  negative  (positive)  sign  of  the 
indicator  corresponds  to  an  excess  (shortfall)  of  primary 
expenditure growth compared with medium-term economic 
growth,  indicating  an  expansionary  (contractionary)  fiscal 
policy. 

(93)  Since  the  beginning  of  2004,  the  NBP  has  pursued  a 
continuous  inflation  target  of  2.5%  with  a  permissible 
fluctuation band of +/- 1 percentage point. 

101 

inflation  (measured  as  HICP 

inflation 
Core 
excluding energy and unprocessed food) increased 
significantly  in  the  first  half  of  2020,  reaching 
4.8% in June 2020. It remained significantly above 
headline  inflation  until  February  2021,  before 
decreasing  until  June  2021.  Core  inflation  then 
increased  steadily  again,  albeit  staying  below 
headline  inflation,  reaching  5.7%  in  December 
2021.  The  upward  trend  on  core  inflation  in  the 
past two years was broadly spread across all HICP 
categories.  Demand  and  supply  factors  such  as 
rising  wages,  higher  input  prices  and  booming 
domestic  demand  following 
the 
pandemic were the main contributors to this broad-
base increase. Labour shortages also played a role, 
in particular  for service  inflation,  which increased 
from  5.6%  in  March  2020  to  7.5%  in  December 
2021. After several years of low inflation, prices of 
increased 
industrial  goods  also 
non-energy 
significantly,  with  annual 
this 
for 
inflation 
category  reaching  4.2%  in  2021,  mainly  due  to 
global  supply  bottlenecks  and  rising  production 
costs.  Processed  food  inflation  decreased  steadily 
between  March  2020  and  May  2021,  and  then 
increased  at  a  fast  pace,  reaching  5.7% 
in 
December  2021,  reflecting  increasing  production 
costs, especially related to higher energy prices. 

the  end  of 

6.2.3.  Underlying  factors  and  sustainability  of 

inflation 

Macroeconomic  policy  mix  and  growth 
developments 

Following  the  start  of  the  COVID-19  pandemic, 
Poland’s  real  GDP  dropped  by  2.2%  in  2020,  the 
first  recession  in  nearly  two  decades.  It  then 
rebounded  by  5.9%  in  2021.  The  main  drivers  of 
the  recovery  were  domestic  demand,  in  particular 
private  consumption  and  investment.  After  a 
significant 
in  2020,  private 
consumption  recovered  swiftly  in  2021,  growing 

fall  of  2.8% 

-2024681012201620172018201920202021PolandEuro areaGraph 6.2: Poland -HICP inflation(y-o-y percentage change)Source: Eurostat.     
                                                           
Convergence Report 2022 - Technical annex 

Chapter 6 - Poland 

October  2021,  reaching  5.25%  in  May  2022,  i.e. 
levels last seen at the end of 2008.  

Wages and labour costs 

The impact of the crisis on the labour market was 
mostly  reflected  in  declining  hours  worked,  as 
public job retention schemes shielded employment. 
In line with this, the unemployment rate remained 
broadly  stable  around  3.0-3.5%  for  most  of  the 
past two years. As the recovery gathered pace, the 
labour  market  has  been  showing  signs  of 
overheating,  with  companies  reporting  significant 
labour  shortages  and  wage  growth  rising  strongly 
at the end of 2021 and beginning of 2022. 

Labour  productivity  decreased  by  2.1%  in  2020 
due  to  the  sharp  drop  in  economic  activity 
following  the  COVID-19  crisis.  It  then  increased 
sharply by 4.4% in 2021. Growth in compensation 
per  employee  decelerated  in  2020  to  5.6%  and  to 
5.0%  in  2021.  This  translated  into  nominal  ULC 
growth of 7.9% in 2020 and 0.6% in 2021.  Acute 
labour  shortages  are  expected  to  lead  to  a  rapid 
increase  in  compensation  per  employee  over  the 
forecast horizon, with a projected increase of 9.5% 
in 2022 and 8.0% in 2023. Labour productivity is 
expected  to  continue  posting  strong  growth  rates, 
increasing by 3.3% in 2022 and 2.7% in 2023. This 
is  expected  to  result  in  nominal  ULC  growth  of 
6.0%  and  5.1%  in  2022  and  2023,  respectively, 

102 

according 
Economic Forecast. 

to 

the  Commission’s  Spring  2022 

External factors 

Although external trade represents a lower share of 
GDP in Poland than in regional peers like Hungary 
or Czechia, prices of imported goods and services 
play an important role in domestic price formation. 
After  a  small  decrease  in  2020,  the  imports  of 
goods  deflator  raised  by  11.5%  in  2021,  driven 
inter  alia  by  an  increase  in  global  commodity 
prices. The zloty’s nominal effective exchange rate 
(measured  against  a  group  of  36  trading  partners) 
depreciated on average by 2.1% in 2020 and 2.3% 
in 2021 contributing to push up import prices. Low 
in  2020 
inflation 

trade  partners 

in  Poland’s 

-30369121520162017201820192020202120222023Productivity (real GDP per person employed)Nominal compensation per employeeNominal unit labour costsHICP inflationGraph 6.3: Poland -Inflation, productivity and wage trends(y-o-y % change)Source: Eurostat, Commission's Spring 2022 Economic Forecast.Table 6.2:Poland - Other inflation and cost indicators(annual percentage change)20162017201820192020202120221)20231)HICP inflationPoland -0.21.61.22.13.75.211.67.3Euro area0.21.51.81.20.32.66.12.7Private consumption deflatorPoland -0.42.01.72.43.45.411.87.3Euro area0.41.31.51.10.52.35.82.7Nominal compensation per employeePoland 4.85.88.17.35.65.09.58.0Euro area1.21.72.12.1-0.74.13.63.5Labour productivityPoland 2.33.44.84.8-2.14.43.32.7Euro area0.41.00.20.3-4.94.21.41.5Nominal unit labour costsPoland 2.42.33.22.47.90.66.05.1Euro area0.80.72.01.94.40.02.22.0Imports of goods deflatorPoland -0.31.32.91.7-0.411.515.55.0Euro area-3.33.32.6-0.5-3.89.613.20.81) Commission Spring 2022 Economic Forecast.Source: Eurostat, Commission's Spring 2022 Economic Forecast.         
 
 
 
     
 
 
weighted  on  import  price  increases  that  year. 
However, as inflation accelerated in Poland’s trade 
partners  and  the  zloty  kept  depreciating  in  2021, 
import  prices  excluding  commodity  prices  also 
hiked.  Imported  inflation  is  forecast  to  increase 
strongly during 2022-2023. 

Administered prices and taxes 

The increase in administered prices, with a weight 
of around 12% in the HICP basket (similar to that 
of the euro area), was above HICP inflation both in 
2020  and  2021.  The  average  annual  increase  in 
administered prices was 6.7% in 2020 and 5.9% in 
2021 against 3.7% and 5.2% for headline inflation, 
respectively.  The  fast  growth  of  administered 
prices was the result of increased waste collection 
fees,  sugar  tax,  capacity  fees  as  well  as  higher 
regulated energy prices.  

The  impact  of  tax  measures  on  overall  price 
developments  has  been  close  to  zero  as  constant 
tax inflation  was in line  with headline  inflation in 
both 2020 and 2021. 

Medium-term prospects 

Looking  ahead,  inflation  is  expected  to  accelerate 
significantly in 2022, peaking in the first quarter of 
the  year.  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 in November 2021 by the government 
to  reduce  rates  paid  in  energy  and  food  products. 
Processed  and  unprocessed 
food  prices  are 
projected  to  increase  from  mid-2022  onwards,  as 
rising  prices  of  fertilizers  are  set  to  increase 
production  costs,  especially 
for  agricultural 
products.  Core  inflation  is  set  to  remain  elevated 
on  the  back  of  acute  labour  shortages,  which  are 
set  to  put  upward  pressure  on  wage  growth.  The 
Commission’s  Spring  2022  Economic  Forecast 
projects annual HICP inflation to average 11.6% in 
2022 and 7.3% in 2023.  

Despite a number of policy measures introduced to 
lower tax rates paid on certain goods, strong price 
dynamics  are  forecast  to  persist  in  2022,  mainly 
due to surging energy prices and unit labour costs. 
The  inflation  outlook  remains  highly  uncertain, 
with  risks  appearing  to  be  tilted  to  the  upside. 
Wage  growth  is  expected  to  be  elevated  over  the 
forecast horizon, and risks of a stronger wage-price 
spiral  cannot  be  ruled  out,  which  could  put 
significant  upward  pressure  on  core  inflation. 

Convergence Report 2022 - Technical annex 

Chapter 6 - Poland 

More  fiscal  expansion  could  further  fuel  demand 
pressure  and  the  risk  of  higher  energy  prices 
stemming  from  poor  meteorological  conditions 
could increase energy prices even further. 

The  level  of  consumer  prices  in  Poland  was  at 
around 56% of the euro-area average in 2020. This 
suggests  a  significant  potential  for  price  level 
convergence in the long term, as GDP per capita in 
PPS (about 73% of the euro-area average in 2021) 
increases towards the euro-area average.  

Medium-term  inflation  prospects  in  Poland  will 
hinge upon wage and productivity trends as well as 
on  the  functioning  of  product  markets.  Further 
structural  measures  to  increase  labour  supply,  to 
make  better  use  of  increased  labour  immigration 
and  to  facilitate  the  effective  allocation  of  labour 
market  resources  will  play  an  important  role  in 
limiting  wage  pressures,  resulting  inter  alia  from 
negative  demographic  developments.  As 
to 
product  markets,  there  is  scope  to  enhance  the 
competitive environment, especially in the services 
and  energy  sectors.  At  the  macro  level,  an 
appropriate  monetary 
to 
macroeconomic developments and a prudent fiscal 
stance  will  be  essential  to  contain  inflationary 
pressures. 

response 

policy 

6.3. 

PUBLIC FINANCES 

6.3.1.  Recent fiscal developments 

others 

non-refundable 

The  general  government  deficit  increased  sharply 
in 2020 to 6.9% of GDP. The economic recession 
triggered  by  the  pandemic  had  a  negative  impact 
on  public  finances  via  two  main  channels:  it 
slowed  down  the  dynamics  of  the  revenue  due  to 
lower  economic  activity,  and  it  led  to  a  sharp 
increase in expenditure. Fiscal measures to contain 
the  economic  impact  of  the  pandemic  played  a 
significant  role  in  this  increase.  They  included 
amongst 
to 
companies, short-time work schemes, subsidies for 
businesses and a special allowance for parents. As 
a 
total  government  expenditure 
increased from 41.8% of GDP in 2019 to 48.2% of 
GDP in 2020, an increase close to the EU average. 
However, it should be noted that in nominal terms 
Poland  recorded  a  positive  GDP  growth  in  2020, 
thus  the  increase  in  expenditure  ratio  was  not 
driven  by  contracting  nominal  GDP.  In  turn,  as  a 
total  general  government 
share  of  GDP 
revenue  increased  slightly  as  compared  to  2019, 
despite 
the  general 
government  headline  deficit  narrowed  to  1.9%  of 

the  pandemic.  In  2021, 

result, 

loans 

the 

the 

103 

Convergence Report 2022 - Technical annex 

Chapter 6 - Poland 

6.3.2.  Medium-term prospects 

The  2022  budget  was  adopted  on  17  December 
2021.  It  targets  a  general  government  deficit  of 
2.9%  of  GDP.  Following  the  budget  law,  the 
support  to  the  economy  to  cushion  the  impact  of 
the  crisis  will  be  substantially  lower  than  in  the 
two previous years. At the same time, while the so-
called  14th  pension  benefit  was  only  a  one-off 
expenditure  item  in  2021,  the  budget  law  broadly 
assumes  a  continuation  of  major  policies  carried 
out  in  previous  years,  in  particular  in  the  area  of 
revenue  side,  an 
social  spending.  On 
implementation  of  a  major 
is 
tax  overhaul 
expected  to  lower  the  revenue  from  the  personal 
income tax. 

the 

to 

On  28  April  2022,  Poland  submitted  its  2022 
Convergence  Programme.  According 
the 
Programme,  the  headline  deficit  is  projected  to 
increase  to 4.3% of GDP in  2022 and decrease to 
3.7%  in  2023.  The  government  deficit  in  2022  is 
impacted  by  the  additional  measures  taken  by 
government  to  counter  the  social  and  economic 
impact of the increase in energy prices, as well as 
the  humanitarian 
expenditure 
following  the  war  in  Ukraine.  Based  on  the 
Commission’s  Spring  2022  Economic  Forecast, 
the measures to cushion the impact of the increase 
in  energy  prices  are  estimated  at  1.0%  of  GDP  in 
2022,  most  of  which  are  currently  expected  to  be 
temporary and to be withdrawn in 2023, while the 
annual cost of humanitarian assistance is assumed 
at 0.6% of GDP in 2022 and 0.8% of GDP in 2023. 

security 

and 

GDP.  Revenue  (mainly  from  taxes  and  social 
contributions)  increased,  driven  by  the  economic 
recovery,  a  good  situation  on  the  labour  market 
and  cyclical  factors.  On  top  of  this,  new  taxes 
implemented  in  2021  also  contributed  to  the 
revenue  growth.  In  turn,  expenditure  decreased. 
While  the  cost  of  fiscal  measures  to  contain  the 
impact  of  the  pandemic  was  lower  than  in  2020, 
this  was  partly  offset  by  some  new  expenditure 
items  (for  instance  an  additional  one-off  pension 
benefit payment in 2021). 

The  2021  headline  deficit  (1.9%  of  GDP)  turned 
out to be lower than forecast in the 2021 edition of 
the Convergence Programme (6.9% of GDP). This 
difference  stemmed  mainly  from  a  significant 
decrease  in  public  expenditure  (by  4.0%  of  GDP) 
and an increase in revenues (by 1.0% of GDP). 

debt 

general 

government 

The 
increased 
significantly  in  2020,  driven  by  a  high  deficit 
triggered  by  the  pandemic-driven  recession  (see 
above). It reached 57.1% of GDP, as compared to 
45.6% of GDP in 2019. It then decreased to 53.8% 
of GDP in 2021. The decrease of the debt-to-GDP 
ratio occurred despite a deficit of 1.9% of GDP in 
2021. This is explained by a  strong  nominal GDP 
growth  in  2021,  reaching  12.1%.  In  terms  of 
valuation  effects,  the  falling  share  of  Polish 
government 
foreign 
currencies  was  counterbalanced  by  weakening 
złoty.  

denominated 

debt 

in 

104 

Table 6.3:Poland - Budgetary developments and projections (as % of GDP unless indicated otherwise)Outturn and forecast 1)20162017201820192020202120221)20231)General government balance-2.4-1.5-0.2-0.7-6.9-1.9-4.0-4.4- Total revenue38.739.841.341.041.342.339.938.6- Total expenditure41.141.341.541.848.244.243.943.0   of which: - Interest expenditure1.71.61.41.41.31.11.51.8p.m.: Tax burden34.335.036.036.036.437.735.434.4Primary balance-0.70.11.20.6-5.6-0.8-2.5-2.6Fiscal stance 2)0.11.7-3.41.7Government gross debt54.250.648.845.657.153.850.849.8p.m: Real GDP growth (%)3.14.85.44.7-2.25.93.73.01) Commission’s Spring 2022 Economic Forecast. 2) A negative (positive) sign of the indicator corresponds to an excess (shortfall) of primary expenditure growth compared with medium-term economic growth, indicating an expansionary (contractionary) fiscal policy.Source: European Commission. 
 
             
 
 
The  Programme 
the 
government deficit to under 3% of GDP by 2025.  

targets  a  reduction  of 

The  Commission’s  Spring  2022  Economic 
Forecast, projects the general government headline 
deficit in 2022 at 4.0% of GDP. The deficit is set 
to  increase  to  4.4%  of  GDP  in  2023. The ratio  of 
general government debt to GDP is set to decrease 
to 49.8% in 2023. However, as above a quarter of 
the  sovereign  debt  is  denominated  in  foreign 
currencies,  the  debt  projections  are  subject  to 
uncertainty due to possible valuation effects. 

In  2022,  the  fiscal  stance  is  projected  in  the 
Commission’s  Spring  2022  Economic  Forecast  to 
be  supportive,  at  -3.4%  of  GDP (94).  The  positive 
contribution  to  economic  activity  of  expenditure 
financed  by  RRF  grants  and  other  EU  funds  is 
projected at 0.1 percentage point of GDP in 2022, 
the  first  year  of  expected  implementation  of  the 
Polish  Recovery  and  Resilience  Plan.  Nationally 
financed 
to  provide 
expansionary  contribution  to  the  fiscal  stance  of  -
0.3 percentage points of GDP in 2022. At the same 
time,  the  growth  in  nationally  financed  primary 
current expenditure (net of new revenue measures) 
in  2022  is  projected  to  provide  an  expansionary 
contribution  of  -2.7  percentage  points  of  GDP  to 
the  overall  fiscal  stance,  as  current  expenditure  is 
set  to  grow  at  a  faster  pace  than  medium-term 
potential growth. 

is  projected 

investment 

Convergence Report 2022 - Technical annex 

Chapter 6 - Poland 

projected  to  provide  a  contractionary  contribution 
to  the  fiscal  stance  of  0.3  percentage  points  of 
GDP (95),  whereas 
in  nationally 
financed  primary  current  expenditure  is  projected 
to  provide  a  contractionary  contribution  of  1.4 
percentage  points  of  GDP  to  the  overall  fiscal 
stance in 2023. 

the  growth 

Debt  sustainability  risks  appear  low  over  the 
medium  run.  Government  debt  is  projected  to 
remain below 60% of GDP, albeit on an increasing 
path  as  from  2027,  reaching  around  54%  of  GDP 
in 2032. This projection assumes that the structural 
primary balance (except  for the impact of ageing) 
remains constant at the forecast level for 2023 of -
2.3% of GDP, hence below the 2019 level.  

The  limited  sensitivity  to  possible  macro-fiscal 
shocks  also  contributes  to  this  assessment.  In 
particular, if only half of the improvforecastement 
in  the  structural  primary  balance  projected  for 
2022-2023  were to occur, the debt ratio  would be 
about 6 percentage points of GDP higher by 2032 
compared  with  the  baseline,  reaching  60%  of 
GDP.  

Some factors mitigate risks, including the currency 
denomination  of  debt  and  the  expected  positive 
impact  on  long-term  growth  of  reforms  under  the 
Recovery  and  Resilience  Plan.  Risk-increasing 
factors 
financing 
conditions, the share of  non-performing loans and 
Poland’s  negative  net  international  investment 
position (96). 

tightening  of 

include 

a 

The  fiscal  framework  in  Poland  is  overall  strong, 
but  recently  it  was  slightly  relaxed  to  take  into 
account the  pressures emerging  from the  COVID-
19 pandemic. The numerical fiscal rules are at the 
centre  of  the  framework.  While  the  debt  ceilings 
anchored  in  the  Constitution  cover  the  central 
government,  a  separate  debt  rule  concerns  local 
government  units  (LGUs).  The  latter  rule  was 
loosened  in  2020  by  allowing  LGUs  to  exclude 
from  their  calculations  liabilities  equivalent  to  the 
loss of revenue linked to the pandemic; in addition, 
for 2020, the debt limit was lowered to 80% of the 
total  revenue.  The  expenditure  rule  applied  to  the 
general  government,  which  aims  at  preventing 
overspending,  has  been  temporarily  suspended, 
with  a  mechanism  for  an  automatic  return  to  the 

(95)  Other  nationally  financed  capital  expenditure  is  projected 
to  provide  a  contractionary  contribution  of  0.1  percentage 
points of GDP. 

(96)  For  further  details  see  the  2021  Fiscal  Sustainability 

Report. 

105 

at  +1.7% 

In  2023,  the  fiscal  stance  is  projected  to  be 
contractionary 
of  GDP.  The 
expansionary  contribution  to  economic  activity  of 
expenditure financed by RRF grants and other EU 
funds  is  projected  to  be  -0.1  percentage  points  of 
GDP  in  2023.  Nationally  financed  investment  is 

(94)  The  measurement  of  the  fiscal  stance  is  explained  in 
section  6.2.3  on  underlying  factors  and  sustainability  of 
inflation. 

-4-3-2-101232020202120222023Net nationally financed  primary current expenditureNationally financed investmentOther capital expenditureExpenditure financed by RRF grants and EU fundsFiscal stanceExpansionaryContractionaryGraph 6.4: Poland -Fiscal stance and its components(percent of GDP)Source: Commission's Spring 2022 Economic Forecast.              
                                                           
                                                           
conventional rule over two to four years. Similarly, 
the  budget  balance  rule  applied  to  the  LGUs  has 
also been suspended. The constitutional debt limit 
was  circumvented  by  channelling  most  of  the 
pandemic  economy  support  measures  through  a 
special  off-the-budget  fund.  In  turn,  in  2021  the 
stabilising  expenditure  rule  was  strengthened  by 
covering all special purpose funds but its effective 
implementation  for  the  pandemic-specific  fund 
was  effectively  delayed  until  2022  (when  a  draft 
2023  budget  will  be  prepared).  Medium-term 
budgetary  planning  is  based  on  the  four  year 
Multiannual  State  Financial  Plan,  which  serves  as 
a  basis  for  the  preparation  of  annual  budgets  but 
does not provide targets for them. Poland does not 
have  a  fully-fledged  fiscal  council  and  activities 
related  to  the  monitoring  of  fiscal  rules  are 
scattered among several bodies, with the Supreme 
Audit Office taking a more central role. 

6.4. 

EXCHANGE RATE STABILITY 

The  Polish  zloty  does  not  participate  in  ERM  II. 
Since  April  2000,  Poland  has  been  operating  de 
jure a floating exchange rate regime, with the NBP 
preserving  the  right  to  intervene  in  the  foreign 
exchange  market,  if  it  deems  this  necessary,  in 
order to achieve the inflation target. 

Convergence Report 2022 - Technical annex 

Chapter 6 - Poland 

euro,  i.e.  the  highest  level  for  more  than  two 
decades. Moreover, at the end of March 2022 NBP 
entered a swap line arrangement with ECB in order 
to address potential euro liquidity needs.  

International  reserves  held  by  the  NBP  increased 
from  EUR  114  billion  in  early  2020  to  around 
EUR 147 billion by end-2021. The reserve-to-GDP 
ratio was at around 26% at end-2021. 

Short-term  interest  rate  differential  vis-à-vis  the 
euro  area  remained  stable  at  around  210  basis 
points up to early 2020. In March, the NBP began 
to ease monetary policy and cut interest rates three 
consecutive times to levels unseen before. This fed 
into  the  Polish  interbank  market  and  three-month 
rate fell to the lowest levels on record. Changes in 
euro money market were more limited as the three-
month euro rate picked-up only temporary in April 
and May and further continued its downward path 
to 
levels. 
Consequently,  short-term  interest  rate  differential 
shrank to 65 basis points in June and fluctuated at 
around  75  basis  points  until  October  2021  when 
NBP  started  to  tighten  monetary  policy.  After 
seven  consecutive  increases  of  interest  rates  the 
short-term  interest  rate  differential  reached  593 
basis points in April 2022. 

historically 

stabilise 

low 

at 

6.5. 

LONG-TERM INTEREST RATES 

Long-term  interest  rates  in  Poland  used  for  the 
convergence  assessment  reflect  secondary  market 
yields  on  a  single  benchmark  government  bond 
with a residual maturity of around 9 years. 

The  zloty  depreciated  sharply  after  the  onset  of 
COVID-19 crisis in early 2020. This was reflected 
in large by the easing of  monetary policy as NBP 
started  to  cut  interest  rates  until  levels  unseen 
before and substantially enlarged amounts of open 
market  operations.  Afterwards  it  went  through  a 
period of fluctuations but indicated no clear trend. 
Tightening  of 
the  NBP’s  monetary  policy 
strengthened  the  zloty  from  October  2021  up  to 
February  2022.  However,  the  outbreak  of  war  in 
Ukraine  weakened  the  zloty  substantially  as  in 
some days in March 2022 it reached 5.0 against the 

106 

3.03.54.04.55.0201620172018201920202021Graph 6.5: Poland -PLN/EUR exchange rate(monthly averages)Source: ECB.0100200300400500600700201620172018201920202021Graph 6.6: Poland -3-M Wibor spread to 3-M Euribor(basis points, monthly values)Source: Polish National Bank, Eurostat and Thomson Reuters.      
        
Convergence Report 2022 - Technical annex 

Chapter 6 - Poland 

then  contributed  to  a  considerable  increase  in  the 
long-term interest rate. Poland's long-term interest 
rate was around 6.0% 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  between 
April 2020 and April 2021. In mid-2021, it started 
to  increase  slightly  and  by  October,  when  NBP 
began  its  tightening  cycle,  the  spread  started  to 
widen. By the end-2021 the long-term interest rate 
spread reached around 373 basis points and during 
the  first quarter of 2022 continued to  widen  up-to 
521 basis points in April 2022. 

6.6.  ADDITIONAL FACTORS 

The  Treaty  (Article  140  TFEU)  calls  for  an 
examination  of  other  factors  relevant  to  economic 
integration  and  convergence  to  be  taken  into 
account  in  the  assessment.  The  assessment  of  the 
additional factors – including balance of payments 
financial 
developments,  product, 
market integration – gives an important indication 
of  a  Member  State's  ability  to  integrate  into  the 
euro area without difficulties.  

labour  and 

In  November  2021,  the  Commission  published  its 
eleventh  Alert  Mechanism  Report  (AMR  2021) 
under  the  Macroeconomic  Imbalance  Procedure 
(MIP – see also Box 1.7), which highlighted issues 
related  to  the  international  investment  position 
(NIIP)  and  house  price  growth 
in  Poland. 
However,  since  overall  risks  remain  limited,  the 
report  concluded  that  no  In-Depth  Review  (IDR) 
was  warranted.  External  vulnerabilities  remained 
contained,  given  that  foreign  direct  investment 
accounted  for  a  major  part  of  foreign  liabilities. 
The  growth  of  house  prices  was  strong  in  2021, 
reaching 9.2% in the last quarter of 2021, but risks 
of  overheating  were  seen  as  limited  with  price 
indicators  suggesting  almost  no  overvaluation.  At 
the  same  time,  household  debt  remains  low  at 
55.3% of income. Significant labour shortages are 
limiting  investment  growth  and  putting  upward 
pressure on unit labour costs, which might impact 
the  competitiveness  of  Polish  businesses  over  the 
medium term. 

Poland  submitted  its  recovery  and  resilience  plan 
on  3  May  2021,  which  is  equivalent  to  4.5%  in 
2019  GDP (97).  The  plan  has  a  total  allocation  of 
EUR  23.9  billion  in  grants  and  contains  proposed 

(97)  2019 GDP and RRP total amount in current prices. 

107 

The  Polish  12-month  average  long-term  interest 
rate  relevant  for  the  assessment  of  the  Treaty 
criterion was below the reference value at the time 
of  the  last  convergence  assessment  in  2020.  It 
gradually  decreased  from  2.2%  at  that  time  to 
about  1.3%  by  April-2021  and  started  to  increase 
reaching  2.0%  by  end-2021.  In  April  2022,  the 
latest  month  for  which  data  are  available,  the 
reference value, given by the average of long-term 
interest rates in France, Finland and Greece plus 2 
percentage  points,  stood  at  2.6%.  In  that  month, 
the  12-month  moving  average  of  the  yield  on  the 
Polish  benchmark  bond  stood  at  3.0%,  i.e.  0.4 
percentage point above the reference value. 

Developments in long-term interest rate  in Poland 
since  2020  reflect  in  large  part  changes  in  the 
monetary policy stance of the NBP. The easing of 
monetary policy after the onset of the pandemic in 
2020  contributed  to  a  significant  decrease  of  the 
long-term  interest  rates,  which  remained  at  the 
1.3% level until the end of 2020. In January 2021 
the long-term interest rate reached the lowest level 
on  the  record  (1.2%)  before  starting  to  increase 
moderately  until  the  summer.  The  tightening  of 
monetary  policy,  which  started  in  October  2021, 

0246Jan-16Jan-17Jan-18Jan-19Jan-20Jan-21Jan-22PolandReference valueGraph 6.7: Poland -Long-term interest rate criterion(percent, 12-month moving average)Source: European Commission.-202468201620172018201920202021PolandGermanyGraph 6.8: Poland -Long-term interest rates(percent, monthly values)Source: Eurostat.        
     
                                                           
Convergence Report 2022 - Technical annex 

Chapter 6 - Poland 

mainly  Ukrainians,  led  to  significantly  higher 
transfers abroad. 

the  financial  account  of 

the  balance  of 
In 
payments, 
investment 
the  balance  of  direct 
stabilised in 2020 before rebounding in 2021 with 
a  net  inflow  of  3.8%  of  GDP.  The  rebound  was 
driven by a recovery of reinvested earnings, which 
has  been  the  main  source  for  new  FDI  inflows  in 
recent  years.  In  2020,  net  portfolio  investment 
recorded an outflow of 1.2% of GDP,  most likely 
treasury 
driven  by  non-residents’ 
bonds,  and  in  2021  it  reached  1.7%  of  GDP. 
During  the  observed  period,  the  other  investment 
account  switched  from  net  outflow  of  1.7%  GDP 
in 2020 to a net inflow of 0.6% of GDP in 2021.  

investment 

According  to  the  Commission’s  Spring  2022 
Economic  Forecast,  which  is  based  on  national 
accounts  data,  the  external  balance  is  expected  to 
move into negative territory, with around -0.5% of 
GDP in 2022 and -0.2% in 2023. 

Poland’s  external  competitiveness  has  remained 
robust.  Poland’s export performance (as  measured 
by  the  growth  of  its  exports  relative  to  its  foreign 
markets)  improved  in  2020  and  2021,  driven  by 

the 

transport 

investments and reforms to decarbonize the Polish 
economy,  make 
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 
improve the resilience of the healthcare system.  

6.6.1.  Developments  of 

the  balance  of 

payments 

the  combined 
Poland’s  external  balance  (i.e. 
current  and  capital  account)  stayed  positive  for 
most  of  2020-2021,  before 
turning  slightly 
negative  at  the  end  of  2021.  The  current  account 
increased  visibly  throughout  2020  due  to  a  strong 
drop  in  imports,  which  boosted  the  trade  balance. 
However,  as  domestic  demand  recovered,  import 
growth  hiked,  causing  the  current  account  to  turn 
negative  from  May  2021  onwards.  The  income 
balance  turned  even  more  negative  over  2020-
2021. The primary income balance stayed negative 
and deteriorated throughout 2021, partly driven by 
an  improvement  in  the  profitability  of  foreign 
companies.  The 
income  balance 
secondary 
remained  negative  and  somewhat  deteriorated  as 
the  high  inflow  of  returning  foreign  workers, 

108 

Table 6.4:Poland - Balance of payments(percentage of GDP)201620172018201920202021Current account-0.8-0.3-1.30.52.9-0.6of which: Balance of trade in goods0.5-0.1-1.20.32.4-0.1                 Balance of trade in services3.23.84.34.54.34.6                 Primary income balance -4.1-4.1-4.0-4.0-3.5-4.4                 Secondary income balance-0.30.0-0.3-0.3-0.3-0.7Capital account1.01.32.12.02.31.6External balance 1)0.30.90.82.45.21.0Financial account0.3-0.50.21.13.80.2of which: Direct investment-0.9-1.4-2.6-2.0-2.1-3.6                Portfolio investment-0.8-0.90.82.01.31.7                Other investment 2)-2.83.40.8-0.71.6-0.6                Change in reserves4.8-1.51.31.73.12.8Financial account without reserves-4.51.1-1.0-0.70.8-2.6Errors and omissions0.1-1.4-0.5-1.4-1.4-0.8Gross capital formation19.719.920.819.717.520.3Gross saving19.419.619.820.620.321.9Net international investment position-61.5-61.2-55.9-49.8-44.3-39.91) The combined current and capital account.2) Including financial derivatives.Sources: Eurostat, European Commission calculations, National Bank of Poland. 
 
    
 
 
Convergence Report 2022 - Technical annex 

Chapter 6 - Poland 

Poland’s diversified export structure, which helped 
cushion  the  impact  of  the  crisis.  The  nominal 
effective  exchange  rate  depreciated  throughout 
2020 and 2021 but the real effective exchange rate 
remained broadly stable over the same  period and 
the  good  export 
can 
performance (98). 

therefore  not  explain 

Trade  openness  increased  from  51.4%  in  2016  to 
59.5%  of  GDP  in  2021.  The  share  of  trade  with 
euro-area partners expressed in percentage of GDP 
was  broadly  stable  in  recent  years,  although  in 
2021  it  increased  to  around  34%.  Poland's  main 
goods  trading  partners  in  2021  were  Germany, 
China, the Netherlands, Czechia and Italy. 

FDI  inflows  to  Poland  have  mainly  originated 
from the Netherlands, Germany,  Luxembourg and 
France,  which together provided nearly two-thirds 
of the FDI stock at the end of 2020. The significant 
size and growth of the domestic market as well as 
large  regional  markets  have 
good  access 
supported the attractiveness of the country for FDI. 

to 

On  the  basis  of  selected  indicators  relating  to  the 
business environment, Poland ranks slightly below 
the  average  of  euro-area  Member  States.  In  the 
2020 World Bank’s Ease of Doing Business index, 
Poland scored comparatively poorly with regard to 
starting  a  business,  followed  by  the  sub-index 
related  to  registering  property (99).  According  to 
the  World  Bank's  Worldwide  Governance 
Indicators  (2020),  Poland  ranks  low  in  voice  and 
accountability,  and  government  effectiveness 
compared  with  the  average  of  the  five  euro  area 
Member  States  with  the  lowest  scores.  Poland 
ranks higher than the average five lowest euro area 
Member  States  for  political  stability  and  absence 
of  violence,  and  control  of  corruption.  According 
to  the  latest  data,  Poland  lags  behind  in  the 

(99)  The  World  Bank  Doing  Business  (DB)  program  was 
paused in 2021. The programme will continue with a new 
governance  and  improved  accountability  and  transparency 
under  the  name  Business  Enabling  Environment  (BEE). 
The first edition of the BEE is expected in 2023. 

109 

The  net  international  investment  position  (NIIP) 
improved  significantly  from  -49.8%  in  2019  to  -
39.9% in 2021. Although this remains beyond the 
indicative  threshold  set  in  the  MIP  scoreboard  (-
35%  of  GDP),  external  vulnerabilities  remain 
contained, as major part of the NIIP consists of the 
accumulated stock of foreign direct investments.  

6.6.2.  Market integration 

Poland's economy is well integrated with the euro 
area  through  both  trade  and  investment  linkages. 

(98)  The REER based on unit labour costs should be interpreted 
with prudence as unit labour costs were distorted by labour 
retention schemes in some countries, including Poland. 

9095100105110201620172018201920202021Graph 6.9: Poland -Effective exchange ratesNEERREER, HICP deflatedREER, ULC deflated(vs. 36 trading partners;  monthly averages;index numbers, 2016 = 100)Source: European Commission.Table 6.5:Poland - Market integration201620172018201920202021Trade openness 1) (%)51.453.554.854.253.359.5Trade with EA in goods & services 2)+3) (%)29.230.431.030.430.533.9World Bank's Ease of Doing Business Index rankings 4)2427334040-IMD World Competitiveness Ranking 5)333834383947Internal Market Transposition Deficit 6) (%)1.51.41.00.81.8-Real house price index 7)102.3104.1109.2115.9124.0128.6 1) (Imports + Exports of goods and services / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics, Balance of Payments). 2) (Imports + Exports of goods with EA-19 / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics). 3) Trade in services with EA-19 (average credit and debit in % of GDP at current prices) (Balance of Payments). 4) Data not available for 2021. The Ease of Doing Business report by the World Bank was discontinued in September 2021.  5) International Institute for Management Development (IMD). 6) Percentage of internal market directives not yet communicated as having been transposed, relative to the total.    (November data, as of 2016 date refers to the year of publication). 7) Deflated house price index (2015=100) (Eurostat). Sources: Eurostat, World Bank, International Institute for Management Development, European Commission calculations.    
                                                           
                                                           
 
 
  
 
 
Convergence Report 2022 - Technical annex 

Chapter 6 - Poland 

to  be  very  strict  (as  also  measured  by  the  OECD 
employment  protection 
indicator).  However, 
structural challenges include a low participation of 
certain groups, especially women, the low-skilled, 
older people and persons with disabilities and their 
careers. A lack of labour market flexibility in some 
limited  use  of  part-time 
areas,  such  as  a 
employment  arrangements,  is  another  important 
challenge.  Disincentives  to  work  stemming  from 
the benefit system and limited access to long-term 
care and childcare are important barriers to labour 
market  participation.  Domestic  labour  mobility  is 
hampered by sector-specific arrangements, such as 
the  special  social  security  system  for  farmers,  as 
well as underdeveloped rental housing market and 
the  transport  infrastructure,  in  particular  in  rural 
areas.  Non-EU  workers, 
from 
Ukraine,  play  an  important  role  in  the  Polish 
labour market. 

in  particular 

The  financial  sector  in  Poland  is  smaller  and  less 
developed than in the euro area. Relative to GDP, 
assets managed by the financial sector are a fifth of 
that  of  the  euro  area.  The  financial  sector  has 
increased slightly since 2016, but considerably less 
than  in  the  euro  area.  Banking  dominates  the 
Polish  financial  sector  and  make  up  58%  of  the 
financial  sector’s  assets.  The  central  bank  is  the 
second  largest  holder  of  financial  assets  with  a 
share of 18%. Although these shares are larger and 
more  dominating  than  in  the  euro  area,  they 
compare  well  with  the  five  euro-area  Member 
States with the smallest financial sectors. 

The  insurance  and  the  pension-fund  sector  in 
Poland  is  much  smaller  than  in  the  euro  area, 
relative  to  GDP  and  it  has  decreased  contrary  to 
the  euro  area.  Since  end-2016,  it  has  decreased 
holdings  of  financial  assets  by  3.0  percentage 
points  in  relation  to  GDP,  in  the  euro  area  it 
increased  by  12.3  percentage  points.  The  sector’s 
share of the total financial sector has decreased as 

transposition of EU directives as the deficit was at 
1.8%  in  2020,  which  is  above  the  target  (0.5%) 
proposed  by  the  European  Commission  in  the 
Single Market Act (2011) (100).  

The  legal  and  institutional  framework  to  prevent 
and  combat  corruption  is  largely  in  place  in 
Poland, although with some weaknesses. The 2021 
Rule  of  Law  Report  points  to  several  risks 
regarding  the  effectiveness  of  the  fight  against 
high-level corruption in Poland, including a risk of 
undue  influence  on  corruption  prosecutions  for 
political  purposes.  Specifically, 
the  Report 
mentions  concerns  over  the  independence  of  the 
main anti-corruption bodies, with, for instance, the 
subordination  of 
the  Central  Anti-Corruption 
Bureau to the executive. Poland is lagging behind 
in addressing Sustainable Development Goal 16  – 
Peace,  Justice  and  Strong  Institutions,  although  it 
has seen some progress in recent years. 

Poland  has  achieved  a  satisfactory 
level  of 
transparency  of  legal  persons,  arrangements,  and 
their  beneficial  ownership.  However,  more  efforts 
are  required  to  identify  and  assess  certain  ML/TF 
threats  and  vulnerabilities.  The  authorities  should 
acknowledge  and  demonstrate  with  measures  that 
terrorism financing is a stand-alone crime, not just 
terrorism.  The  cash  control 
a  by-product  of 
mechanisms  at  the  border  should  be  strengthened 
by  providing  a  legal  basis  to  stop  and  restrain 
suspicious  assets.  A  supervisory  and  sanctioning 
system on proliferation financing must be urgently 
put in place. Its transposition of the 5th AMLD is 
not yet complete and still under assessment by the 
European Commission. 

Overall,  the  labour  market  appears  flexible  and 
employment protection legislation does not appear 

(100) A  Member  State  is  considered  to  have  a  ‘low’  (‘high’) 
ranking compared with the average five euro area Member 
States with the lowest scores for each indicator if its score 
is at least 0.3 percentage points lower (higher) than that of 
the average of this euro area group. 

110 

0.00.40.71.11.4Voice and AccountabilityPolitical Stability and Absenceof Violence/TerrorismGovernment EffectivenessRegulatory QualityRule of LawControl of CorruptionPolandEuro area average five lowestEuro area averageGraph 6.10: Poland -2020 World Bank's Worldwide Governance IndicatorsNote: Estimate of governance ranges from -2.5 (weak) to 2.5 (strong). Source: World Bank.Table 6.6:Poland - Allocation of assets by financial sub-sectorRatio to GDP (%)PLEAEA 5 smallest201620202016202020162020Financial corporations (total)163167722796177215Central bank263045783761Monetary financial institutions93972863119798Other financial intermediaries9102021792028Non-MMF investment funds1)161410012745Insurance co. and Pension Funds1916901021823Share of total (%)PLEAEA 5 smallest201620202016202020162020Central bank16186102129Monetary financial institutions575840395546Other financial intermediaries6628221112Non-MMF investment funds108141622Insurance co. and Pension Funds1210121310111) MMF stands for money market funds.Source: Eurostat.     
                                                           
 
 
      
 
 
well  and  widened  the  spread  with  the  euro  area. 
The investment-funds sector plays relevant role in 
the  Polish  financial  system  and  its  size  is  well 
above (by four times) to those of the five euro-area 
Member States with the smallest financial sectors. 

Convergence Report 2022 - Technical annex 

Chapter 6 - Poland 

liabilities,  loans  in  Poland  are  near  to  that  of  five 
euro-area  Member  States  with 
the  smallest 
financial sectors. For the securities, it is broadly in 
line with mentioned countries. 

Poland's banking  sector is  well integrated into the 
euro-area  financial  sector,  in  particular  through  a 
high  level  of  foreign  ownership  in  its  banking 
system. The share of foreign-owned institutions in 
total  bank  assets  stood  at  43%  in  2020.  Bank 
concentration, as measured by the market share of 
the  five  largest  credit  institutions  in  total  assets, 
has  increased  since  2016,  and  reached  54%  in 
2020,  which  equals  the  same  measure  as  of  euro 
area. 

As  to  the  financing  of  the  economy,  Poland  has 
less developed credit and equity markets relative to 
GDP  than  countries  in  the  euro  area,  and  market 
financing  (debt  securities  and  listed  shares)  is 
relatively  under  developed.  However,  Poland  is 
still fully comparable to the five euro-area Member 
States  with  the  smallest  national  capital  markets 
with  only  exception  of  the  unlisted  shares  is  it 
remained twice smaller in 2020.  

Intra-EU integration in equity and debt markets, as 
measured  by  the  home  bias (101)  in  portfolio 
investments,  are  in  general  relatively  low  across 
EU Member States. The integration levels of these 
markets in Poland are even smaller if compared to 
euro-area  Member  states  and  to  that  of  five  euro-
area  Member  States  with  the  smallest  financial 
sectors. Integration in the debt market segment has 
weakened  somewhat  between  2016  and  2020. 
Concerning  portfolio  investments  in  equity,  the 
home bias is remained unchanged and very strong 
in  Poland  relative  to  euro-area  Member  States. 
Almost  all  investments  in  equity  markets  takes 
place domestically. 

Loans  are  the  dominant  source  of  funding  and 
make up 99% of GDP in 2020, compared to 236% 
of GDP in the euro area. Equity and private sector 
debt  markets  are  very  small  compared  to  those  of 
the  euro  area  and  represent  36%  of  GDP 
altogether.  This  compares  to  83%  for  private-
sector  debt  and  73%  for  listed  stocks  in  the  euro 
area. Government debt is almost twice less than in 
the  euro  area.  In  terms  of  share  of  the  sum  of 

(101) Home  bias  in  portfolio  investments  measures  the  average 
propensity  of  investors  in  a  Member  State  to  invest 
domestically  as  compared  with  investing  in  other  EU 
countries.  The  indicator  ranges  between  0  and  1,  with  a 
value  of  0  indicating  that  investors  prefer  domestic  over 
foreign  assets.  The  inverse  of  the  home  bias  can  be 
interpreted  as  one  measure  of  financial  integration  among 
EU countries. 

111 

Table 6.7:Poland - Financing of the economy1)Ratio to GDP (%)PLEAEA 5 smallest201620202016202020162020Liabilities (total)288275743770324335Loans10599238236115112Non-financial co. debt securities74121534Financial co. debt securities71074681112Government debt securities485283955157Listed shares292265731718Unlisted shares27241861935556Other equity434451564248Trade credits and advances232133352929Share of total (%)PLEAEA 5 smallest201620202016202020162020Loans373632313533Non-financial co. debt securities212211Financial co. debt securities3410933Government debt securities171911121617Listed shares1089955Unlisted shares9925251818Other equity1516771314Trade credits and advances8845991) The table focuses on the financing needs of a country and how these are met by the financial system. The table is constructed from the liabilities of all economic sectors, but only considers loans, debt securities, equity and trade credits. The sum of liabilities in the table only reflects the total for the liabilities considered.Source: Eurostat.0102030405060PL, 2016PL, 2020EA, 2016EA, 2020Concentration in the banking sector (CR5 ratio)Share of foreign institutions as % of total assetsGraph 6.11: Poland -Foreign ownership and concentration in the banking sector(in percent, weighted averages)Source: ECB, Structural financial indicators. 0.00.20.4PL, 2016PL, 2020EA, 2016EA, 2020EA Low,2016EA Low,2020DebtEquityGraph 6.12: Poland -Intra-EU integration in equity and debt portfolio investmentNote: The chart shows the extent of home bias in debt and equity markets. A value index of 1 implies ‘full integration’ with the financial markets of other Member States, while 0 denotes ‘no integration’.Source: FinFlows database: European Commission, Joint Research Centre (JRC). (index) 
 
      
 
 
   
   
                                                           
7. 

ROMANIA 

7.1. 

LEGAL COMPATIBILITY 

7.1.1.  Introduction 

The  Banca  Naţională  a  României  (BNR  –
Romanian  national  bank,  hereafter  ‘BNR’)  is 
governed  by  Law  No.  312  on  the  Statute  of  the 
Bank of Romania of 28 June 2004 (hereinafter ‘the 
BNR  Law’)  which  entered  into  force  on  30  July 
2004. 

The  BNR  law  has  not  been  amended  since  the 
2020  Convergence  Report. 
Commission’s 
Therefore, 
the 
Commission’s  2020  Convergence  Report  are 
repeated also in this year's assessment. 

the  comments  provided 

in 

7.1.2.  Central Bank independence 

As regards central bank independence, a number of 
incompatibilities  and  imperfections  have  been 
identified  with  respect  to  the  TFEU  and  the 
ESCB/ECB Statute. 

in 

According to Article 33(10) of the BNR  Law, the 
Minister  of  Finance  and  one  of 
the  State 
Secretaries 
the  Ministry  of  Finance  may 
participate,  without  voting  rights,  in  the  meetings 
of the BNR Board. Although a dialogue between a 
central  bank  and  third  parties  is  not  prohibited  as 
such, this dialogue should be constructed in such a 
way  that  the  Government  should  not  be  in  a 
position  to  influence  the  central  bank's  decision-
making  in  areas  for  which  its  independence  is 
protected by the Treaty. The active participation of 
the Minister and one of the State Secretaries, even 
without  voting  right,  in  discussions  of  the  BNR 
Board  where  BNR  policy  is  set  could  structurally 
offer 
to 
influence  the  central  bank  when  taking  its  key 
decisions. Against this background, Article 33(10) 
of the  BNR Law is incompatible with  Article 130 
of the TFEU. 

the  Government 

the  possibility 

to 

Article 3(1) of the BNR Law needs to be amended 
with  a  view  to  ensuring  full  compatibility  with 
Article  130  of  the  TFEU  and  Article  7  of  the 
ESCB/ECB Statute. Pursuant to Article 3(1) of the 
BNR  Law,  the  members  of  the  BNR's  decision-
making  bodies  shall  not  seek  or  take  instructions 
from  public  authorities  or 
from  any  other 
institution  or  authority.  First,  for  legal  certainty 
reasons,  it  should  be  clarified  that  the  BNR's 

institutional  independence  is  also  protected  vis-à-
vis  national,  foreign  and  EU  institutions,  bodies, 
offices  or  agencies.  Moreover,  Article  3  should 
expressly  oblige  the  government  not  to  seek  to 
influence  the  members  of  the  BNR's  decision-
making bodies in the performance of their tasks. 

The  BNR  Law  should  be  supplemented  by  rules 
and procedures ensuring a smooth and continuous 
functioning  of  the  BNR  in  case  of  the  Governor's 
termination of office (e.g. due to expiration of the 
term  of  office,  resignation  or  dismissal).  So  far, 
Article 33(5) of the BNR Law provides that in case 
the  Board  of  BNR  becomes  incomplete,  the 
vacancies  shall  be  filled  following  the  procedure 
for  the  appointment  of  the  members  of  the  Board 
of BNR.  Article 35(5) of the  BNR  Law stipulates 
that in case the Governor is absent or incapacitated 
to act, the First Deputy Governor shall replace the 
Governor. 

Pursuant  to  Article  33(9)  of  the  BNR  Law,  the 
decision  to  recall  a  member  of  the  BNR  Board 
(including  the  Governor)  from  office  may  be 
appealed to the Romanian High Court of Cassation 
and  Justice.  However,  Article  33(9)  of  the  BNR 
Law remains silent on the right of judicial review 
by  the  Court  of  Justice  of  the  European  Union  in 
the  event  of  the  Governor's  dismissal  provided  in 
Article  14.2  of  the  ESCB/ECB  Statute.  This 
imperfection should be corrected. 

public 
and 

functions 
for 

and 
the  prevention 

Article  33(7)  of  the  BNR  Law  provides  that  no 
member  of  the  Board  of  BNR  may  be  recalled 
from  office  for  other  reasons  or  following  a 
procedure  other  than  those  provided  in  Article 
33(6)  of  this  Law.  Law  161/2003  on  certain 
measures for transparency in the exercise of public 
business 
dignities, 
relationships 
and 
sanctioning  of  corruption  and  the  Law  176/2010 
on the integrity in the exercise of public functions 
and  dignities  define  the  conflicts  of  interest 
incompatibilities  applicable  to  the  Governor  and 
other  members  of  the  Board  of  the  BNR  and 
require them to report on their interests and wealth. 
For the sake of legal certainty, it is recommended 
to  remove 
imperfection  and  provide  a 
clarification  that  the  sanctions  for  the  breach  of 
obligations  under  those  Laws  do  not  constitute 
extra grounds for dismissal of the Governor of the 

this 

113 

Convergence Report 2022 - Technical annex 

Chapter 7 - Romania 

results  in  the  provision  of  solvency  support  to  a 
credit institution that is facing financial difficulties 
and  thereby  would  breach  the  prohibition  of 
monetary  financing  and  be  incompatible  with 
Article  123  of  the  TFEU.  Article  26  of  the  BNR 
Law  should  be  amended  to  avoid  such  a  lending 
operation. 

Articles  6(1)  and  29(1)  of  the  BNR  Law  prohibit 
the  direct  purchases  by  the  BNR  in  the  primary 
market  of  debt  instruments  issued  by  the  State, 
national  and  local  public  authorities,  autonomous 
public  enterprises,  national  corporations,  national 
companies 
state-owned 
and  other  majority 
companies.  Article  6(2)  of  the  BNR  Law  extends 
this  prohibition  to  the  debt  instruments  issued  by 
other  bodies  governed  by  public  law  and  public 
undertakings  of  other  EU  Member  States.  Article 
7(2)  of  the  BNR  Law  prohibits  the  BNR  from 
granting  overdraft  facilities  or  any  other  type  of 
credit facility to the State, central and local public 
service 
authorities, 
undertakings, 
national 
companies  and  other  majority  state  owned 
companies.  Article  7(4)  of  the  BNR  Law  extends 
this prohibition to other bodies governed by public 
law  and  public  undertakings  of  Member  States. 
These  provisions  do  not  fully  mirror  the  entities 
listed in Article 123 of the TFEU (amongst others, 
a  reference  to  Union  institutions  is  missing)  and, 
therefore, have to be amended.  

autonomous 
national 

public 
societies, 

Pursuant to Article 7(3) of the BNR Law, majority 
state-owned  credit  institutions  are  exempted  from 
the prohibition on granting overdraft facilities and 
any other type of credit facility under Article  7(2) 
of the BNR Law and benefit from loans granted by 
the  BNR  in  the  same  way  as  any  other  credit 
institution  eligible  under  the  BNR's  regulations. 
The  wording  of  Article  7(3)  of  the  BNR  Law  is 
incompatible with the wording of Article 123(2) of 
the  TFEU,  which  only  exempts  publicly  owned 
credit  institutions  “in  the  context  of  the  supply  of 
reserves by central banks”, and should be aligned. 

As  noted  above  in  point  7.1.2.,  Article  43  of  the 
BNR Law provides  that the  BNR shall transfer to 
the  State  on  a  monthly  basis  80%  of  its  net 
revenues  left  after  deduction  of  the  expenses 
related to the financial year and the uncovered loss 
of the previous financial years. This provision does 
not  rule  out  the  possibility  of  an  intra-year 
anticipated profit distribution  under circumstances 
where  the  BNR  would  accumulate  profit  during 
the first half of a year, but suffer losses during the 

Board  of  BNR,  in  addition  to  those  contained  in 
Article 33 of the BNR Law. 

is 

to 

control 

empowered 

According  to  Articles  21  and  23  of  the  Law 
concerning the organisation and functioning of the 
Court  of  Auditors  (No  94/1992),  the  Court  of 
the 
Auditors 
establishment,  management  and  use  of  the  public 
sector’s  financial  resources, 
including  BNR's 
financial resources, and to audit the performance in 
the  management  of  the  funds  of  the  BNR.  Those 
provisions  constitute  an  imperfection  as  regards 
Article  27.1  of  the  ESCB/ECB  Statutes  and  thus, 
for  legal  certainty  reasons,  it  is  recommended  to 
define clearly in the Law that the scope of audit by 
the  Court  of  Auditors,  is  without  prejudice  to  the 
activities  of 
independent  external 
auditors. 

the  BNR’s 

Article 43 of the BNR Law provides that the BNR 
must transfer to the State budget an 80% share of 
the  net  revenues  left  after  deducting  expenses 
relating to the  financial  year,  including provisions 
for credit risk, and any losses relating to previous 
financial  years  that  remain  uncovered.  Such  a 
procedure could, in certain circumstances, be seen 
as  an  intra-year  credit  (see  Section  7.1.3.),  which 
negatively  impacts  on  the  financial  independence 
of  the  BNR.  A  Member  State  may  not  put  its 
central bank in a position where it has insufficient 
financial resources to carry out its ESCB tasks, and 
also  its  own  national  tasks,  such  as  financing  its 
administration  and  own  operations.  Article  43(3) 
of  the  BNR  Law  also  provides  that  the  BNR  sets 
up provisions for credit risk in accordance with its 
rules,  after  having  consulted  the  Ministry  of  
to 
Finance.  The  central  bank  must  be  free 
independently  create 
to 
financial  provisions 
safeguard  the  real  value  of  its  capital  and  assets. 
Article  43  of  the  BNR  Law  is  incompatible  with 
Article 130 of the TFEU and Article 7 of the ECB/ 
ESCB Statute and should, therefore, be adapted, to 
ensure 
the  above  arrangements  do  not 
undermine  the  ability  of  the  BNR  to  carry  out  its 
tasks in an independent manner. 

that 

7.1.3.  Prohibition  of  monetary  financing  and 

privileged access 

According to Article 26 of the BNR Law, the BNR  
under  exceptional  circumstances  and  only  on  a 
case-by-case  basis  may  grant  loans  to  credit 
institutions  which  are  unsecured  or  secured  with 
assets other than assets eligible to collateralise the 
monetary or foreign exchange policy operations of 
the  BNR.  It  cannot  be  excluded  that  such  lending 

114 

Convergence Report 2022 - Technical annex 

Chapter 7 - Romania 

There are also imperfections regarding the:  

  non-recognition of the role of the ECB and the 
EU in the collection of statistics (Article 49 of 
the BNR Law);  

  non-recognition  of  the  role  of  the  ECB  and  of 
the  Council  in  the  appointment  of  an  external 
auditor (Article 36(1) of the BNR Law);  

  absence  of  an  obligation  to  comply  with  the 
ESCB/ECB  regime  for  the  financial  reporting 
of  NCB  operations  (Articles  37(3)  and  40  of 
the BNR Law); 

  non-recognition  of  the  ECB's  right  to  impose 

sanctions (Article 57 of the BNR Law). 

7.1.5.  Assessment of compatibility 

As  regards  the  independence  of  the  BNR,  the 
prohibition  on  monetary  financing  and  the  BNR's 
integration  into  the  ESCB  at  the  time  of  euro 
adoption,  the  legislation  in  Romania,  in  particular 
the  BNR  Law,  is  not  fully  compatible  with  the 
compliance  duty  under  Article  131  of  the  TFEU. 
The  Romanian  authorities  are  invited  to  remedy 
the above-mentioned incompatibilities. 

7.2. 

PRICE STABILITY 

7.2.1.  Respect of the reference value 

the 

in  2020, 

At the  time  of the last convergence assessment of 
Romania 
twelve-month  average 
inflation  rate,  which  is  used  for  the  convergence 
assessment,  was  above  the  reference  value.  From 
3.6%  in  April  2020,  the  twelve-month  average 
inflation rate decreased steadily to 2.1% by March 
2021, but rose sharply to 4.1% by the end of 2021. 
In  April  2022,  the  reference  value  was  4.9%, 
calculated as the average of the 12-month average 
inflation  rates  in  France,  Finland  and  Greece  plus 
1.5 percentage points. The corresponding inflation 
rate  in  Romania  was  6.4%,  which  was  1.5 
percentage  points  above  the  reference  value.  The 
12-month  average  inflation  rate  is  projected  to 
remain  well  above  the  reference  value  in  the 
months ahead. 

second half. The adjustment would be made by the 
State  only  after  the  closure  of  the  financial  year 
and  would  thus  imply  an  intra-year  credit  to  the 
State,  which  would  breach  the  prohibition  on 
monetary  financing.  This  provision  is,  therefore, 
also  incompatible  with  the  Article  123  of  the 
TFEU and has to be amended. 

7.1.4.  Integration in the ESCB 

Objectives 

Pursuant  to  Article  2(3)  of  the  BNR  Law,  the 
secondary  objective  of  the  BNR  is  to  support  the 
State’s general economic policy. Article 2(3) of the 
BNR  Law  contains  an  imperfection  as  it  should 
contain  a  reference  to  the  general  economic 
policies  in  the  Union  as  per  Article  127(1)  of  the 
TFEU and Article 2 of the ESCB/ECB Statute. 

Tasks 

The  incompatibilities  in  the  BNR  Law  are  linked 
to the following ESCB/ECB tasks: 

  absence  of  a  general  reference  to  the  BNR  as 
an  integral  part  of  the  ESCB  (Article  1  of  the 
BNR Law); 

  definition  of  monetary  policy  and  monetary 
functions,  operations  and  instruments  of  the 
ESCB (Articles 2(2)(a), 5, 6(3), 7(1), 8, 19, 20, 
21 (1) and (2), 22(3) and 33(1)(a) and (e) of the 
BNR Law); 

  conduct of foreign exchange operations and the 
definition of  foreign exchange policy (Articles 
2(2)(a)  and  (d),  9  and  33(1)(a)  of  the  BNR 
Law); 

  holding  and  management  of  foreign  reserves 
(Articles 2(2)(e), 9(2)(c), 30 and 31 of the BNR 
Law); 

 

right to authorise the issue of banknotes and the 
volume  of  coins  (Articles  2(2)(c),  12  to  18  of 
the BNR Law); 

  non-recognition  of  the  role  of  the  ECB  and  of 
the  Council  in  regulating,  monitoring  and 
controlling 
transactions 
(Articles 10 and 11 of the BNR Law); 

currency 

foreign 

 

lack  of  reference  to  the  role  of  the  ECB  in 
payment  systems  (Articles  2(2)(b),  22  and 
33(1)(b) of the BNR Law). 

115 

Convergence Report 2022 - Technical annex 

Chapter 7 - Romania 

inflation  (measured  as  HICP 

Core 
inflation 
excluding  energy  and  unprocessed  food)  declined 
slightly from 3.3% in 2020 to 3.1% in 2021. If fell 
from  a  high  of  4.0%  in  January  2020  to  2.4%  by 
July  2021,  before  increasing  sharply  during  the 
subsequent  months  to  4.5%  in  November  2021. 
Higher prices for processed food, which increased 
by  more  than  4%  in  both  years,  contributed 
significantly  to  core  inflation,  while  the  annual 
price  changes  for  non-energy  industrial  goods 
(2.3%  and  2.6%  in  2020  and  2021  respectively) 
and services (2.7%  for both  2020 and 2021) were 
more  muted.  Wage  growth  was  moderate  in  2020 
due to falling economic activity, but went up again 
in  2021  against  the  background  of  a  robust 
economic recovery and high inflation. 

While lower energy demand resulted in a decrease 
in  the  energy  component  of  HICP  inflation  of 
almost  7.5%  in  2020,  relatively  high  increases 
were  recorded  in  the  prices  for  processed  and 
unprocessed  food  that  year,  by  5%  and  5.3% 
respectively.  In  2021  when  the  economy  fully 
recovered  and  pent-up  demand  was  released, 
inflation  picked  up  again.  Energy  price  inflation 
was particularly high in the second half of the year,  

7.2.2.  Recent inflation developments 

Annual  HICP  inflation  in  Romania  stood  at  4.1% 
in  2021,  up  from  2.3%  in  2020.  The  low  annual 
average  rate  of  inflation  in  2020  reflected  the 
restriction 
lockdown  and  mobility 
effect  of 
measures, which were felt throughout the economy 
in  terms  of  reduced  demand  for  goods  and 
services.  The  year-on-year  inflation  rate  fell  from 
3.9% in January 2020 to 1.8% in May 2020, which 
was  its  lowest  level  since  September  2017,  also 
reflecting  the  sharp drop in the international price 
of crude oil in the first four months of 2020. After 
a  temporary  rise  to  2.5%  in  July  2020,  reflecting 
strong food price inflation, it decreased to 1.7% by 
November  2020.  Subsequently, 
inflation  rose 
uninterruptedly, reaching 3.5% in June 2021, 5.2% 
in  September  2021  and  6.7%  in  November  2021, 
driven  by  high  energy  price  inflation  throughout 
2021 and, in the later part of 2021, also sustained 
by  higher  inflation  for  processed  food  and,  to  a 
lesser  extent,  non-energy  industrial  goods  and 
services.  Over  the  past  two  years,  annual  HICP 
inflation  in  Romania  was  higher  than  in  the  euro 
area by around 1.75 percentage points on average.  

116 

-4-20246810Jan-16Jan-17Jan-18Jan-19Jan-20Jan-21Jan-22RomaniaReference valueGraph 7.1: Romania -Inflation criterion(percent, 12-month moving average)Note: The dots at the right end of the chart show the projected reference value and 12-month average inflation rate of the country in December 2022.The reference values for 2016, 2018 and 2020 refer to the reference values calculated in the previous Convergence Reports.Source: Eurostat, Commission's Spring 2022 Economic Forecast.-4-202468101214201620172018201920202021RomaniaEuro areaGraph 7.2: Romania -HICP inflation(y-o-y percentage change)Source: Eurostat.Table 7.1:weights  Romania - Components of inflation(percentage change)1)in total   201620172018201920202021Apr-222022HICP-1.11.14.13.92.34.16.41000Non-energy industrial goods-0.70.91.72.42.32.63.1292Energy-4.40.412.22.7-7.415.223.7121Unprocessed food -2.53.95.36.25.31.85.3113Processed food-0.92.23.75.55.04.06.2251Services0.7-0.52.73.62.72.73.8223HICP excl. energy and unproc. food-0.20.92.73.83.33.14.3766HICP at constant tax rates 2.12.03.83.72.33.96.31000Administered prices HICP-2.50.54.22.61.21.83.0941) Measured by the arithmetic average of the latest 12 monthly indices relative to the arithmetic average of the 12 monthly indices   in the previous period.Source: Eurostat, European Commission calculations. 
                     
         
 
 
  
 
 
Convergence Report 2022 - Technical annex 

Chapter 7 - Romania 

up from 13.5% y-o-y in June to 25% in December. 
The  support  measures  addressed  to  vulnerable 
consumers,  households  and  SMEs  moderated  to  a 
certain  extent  the  increase  in  energy  prices,  as 
prices for electricity, gas, and heating energy were 
capped.  Nevertheless,  energy  prices  registered  a 
12-month  average  increase  of  21.7%  in  March 
2022. This was partly due to the fact that the HICP 
sub-component  for  liquid  fuels  and  fuels  and 
lubricants  for  personal  transport  equipment  was 
not  capped  and  recorded  a  12-month  average 
increase  of  29.5%  in  March.  International  trade 
bottlenecks  affecting  supply-chains,  as  well  as 
higher  energy  prices 
into  marked 
increases  in  producer  prices  in  manufacturing, 
averaging about 10.4% in 2021. 

translated 

7.2.3.  Underlying  factors  and  sustainability  of 

inflation 

Macroeconomic  policy  mix  and  growth 
developments 

Real GDP dropped by 3.7% in 2020, but recovered 
in 2021 with a 5.9% increase. In 2020, due to the 
COVID-19  crisis,  private  consumption,  imports 
and  exports  were  particularly  negatively  affected, 
but  investments  and  government  consumption 
continued to grow. In 2021, real GDP was back to 
pre-pandemic levels by the end of the first half of 

the year, but the growth momentum declined in the 
third quarter and turned negative in the final one. 

the  COVID-19  crisis. 

Private  consumption  and  investment  represented 
the  main  growth  drivers  in  2021.  After  a  5.1% 
drop  in  the  preceding  year,  private  consumption 
in  2021.  Gross  fixed  capital 
grew  at  7.9% 
formation maintained a steady positive trend, even 
during 
In  particular, 
equipment  investments  were  a  strong  growth 
driver as the economy quickly adapted to the new 
pandemic environment. Construction, on the other 
side, moderated its growth in 2020, but recorded a 
6.1%  increase  the  next  year.  Strong  domestic 
demand  in  2021  fuelled  import  growth.  As  a 
consequence,  despite  a  relatively  strong  export 
performance,  net  exports  made  a  negative 
contribution  to  real  GDP  growth  that  year.  The 
growing trade deficit worsened the current account 
balance.  According  to  the  Commission’s  Spring 
2022  Economic  Forecast,  real  GDP  growth  is 
expected  to  increase  by  2.6%  this  year,  as  private 
consumption  is  projected  to  be  more  subdued  on 
account of higher inflation and uncertainty. At the 
same time, investment, supported by the RRF and 
other  EU  funds,  is  set  to  increase  robustly.  For 
2023,  real  output  growth  is  projected  at  3.6%,  as 
inflationary  pressures  and  supply-side  bottlenecks 
are expected to gradually abate. 

117 

Table 7.2:Romania - Other inflation and cost indicators(annual percentage change)20162017201820192020202120221)20231)HICP inflationRomania-1.11.14.13.92.34.18.95.1Euro area0.21.51.81.20.32.66.12.7Private consumption deflatorRomania0.72.73.85.42.45.59.15.3Euro area0.41.31.51.10.52.35.82.7Nominal compensation per employeeRomania15.514.812.910.92.65.78.37.0Euro area1.21.72.12.1-0.74.13.63.5Labour productivity 2)Romania5.94.84.44.1-2.016.21.72.8Euro area0.41.00.20.3-4.94.21.41.5Nominal unit labour costs 2)Romania9.19.68.26.64.7-9.06.44.1Euro area0.80.72.01.94.40.02.22.0Imports of goods deflatorRomania-7.25.34.80.2-2.310.512.04.0Euro area-3.33.32.6-0.5-3.89.613.20.81) Commission's Spring 2022 Economic Forecast.2) Due to a break in the historical employment data for Romania in 2021, employment-related variables have been affected.Source: Eurostat, Commission's Spring 2022 Economic Forecast. 
 
         
 
 
Convergence Report 2022 - Technical annex 

Chapter 7 - Romania 

basis  throughout  2020,  2021  and  in  the  first 
months of 2022. The reserve requirement ratio on 
the  foreign 
accounts  opened  with  BNR  for 
currency  holdings  of  the  credit  institutions,  which 
stood at 6% in February 2020, has been reduced to 
5% since November of the same year. The reserve 
requirement ratio for leu denominated holdings has 
been unchanged since May 2015 at 8%. 

in  2020  and  2021, 

The  overall  credit  to  the  economy  continued  to 
sustained  by 
expand 
government  support  measures.  These  increases 
were  primarily  supported  by  the  expansion  of 
credit to households for housing (9.9% in 2020 and 
12.9% in 2021) and to Non-Financial Corporations 
(5.3%  in  2020  and  19.8%  in  2021).  Consumer 
loans to households were down by 2.2% at the end 
of 2020    compared to the preceding year, before 
rebounding by 4.9% by the end of 2021. Loans to 
the general government grew by close to 116% in 
2021, reflecting the overall need of the government 
to finance its sizeable budget deficit.  

Wages and labour costs 

the 

in  2021  after 

Labour  market  conditions  improved  in  the  second 
half  of  2020  and 
initial 
deterioration due to the COVID-19 shock in early 
2020,  in  line  with  robust  economic  growth  and 
government’s  support  measures.  Also  through  the 
help  of  measures  financed  from  SURE, 
the 
employment rate improved, from a low of 64% in 
the second quarter of 2020 to more than 67% at the 
end  of  2021,  while 
the  unemployment  rate 
continued  to  decrease  from  6.7%  in  June  2020  to 
5.7% 
is 
projected  to  decrease  and  stay  at  levels  close  to 
5.5%  in  the  next  two  years,  as  the  economy 
continues  to  grow (104).  Undeclared  work  remains 
a  challenge,  but  its  negative  impact  on  social 
contribution  system  and  government  revenues  is 
expected  to  be  partly  addressed  by  RRP  reforms 
such as the introduction of work cards for domestic 
work  and  improvements  of  tax  administration 
processes. 

in  December  2021.  Unemployment 

The increase in labour market slack, coupled with 
the  relatively  low  inflation  and  the  drop  in 
productivity  that  took  place  in  2020,  toned  down 
wage pressures. As a result, nominal compensation 
per  employee  increased  by  only  2.6%.  In  2021, 
wage  growth  remained  stable,  also  as  a  result  of 
the  freezing  of  public  sector  wages  (expected  to 

(104) Due 

to 

the  change 

the  Labour  Force  Survey 
methodology, the figures in the 2022 Convergence  Report 
are not comparable with the ones in the 2020 Report.   

in 

In 2020-2021, as part of the policy response to the 
COVID-19  crisis, 
the  government  provided 
support to the healthcare sector and to households 
and  companies  hit  by  the  pandemic,  including 
incentives  to  retain  the  workforce.  This  response 
was  facilitated  by  new  European  instruments, 
namely  loans  from  SURE  (Support  to  mitigate 
Unemployment Risks in an Emergency) and loans 
and grants from NextGenerationEU/RRF.  

In 2021, the fiscal stance (102), was contractionary, 
at  0.5%  of  GDP ,  after  a  supportive  stance  of  -
1.6%  in  2020.  Going  forward,  the  Commission’s 
Spring  2022  Economic  Forecast  projects  a 
supportive fiscal stance at  -1.0% of GDP in 2022, 
driven  by  higher  nationally-financed  investment, 
expenditure  financed  through  the  RRF  and  other 
EU  grants  and  the  temporary  support  to  mitigate 
the impact of high energy prices (estimated around 
0.7%  of  GDP.  The  budgetary  costs  related  to 
assisting  people  fleeing  Ukraine  is  assumed  at 
close  to  0.1%  of  GDP.  The  no  policy-change 
forecast  for  2023  shows  a  contractionary  stance 
(1.3%  of  GDP)  reflecting  the  withdrawal  of  the 
support  measures  introduced  in  response  to  the 
increase in energy prices. 

The  BNR,  operating  within  an  inflation  targeting 
framework (103),  gradually  reduced  the  key  policy 
rate  by 125 basis points between March 2020 and 
January  2021,  as  part  of  the  measures  taken  in 
response  to  COVID-19  crisis.  The  policy  rate 
remained  stable  at  1.25%  until  October  2021.  In 
response to rising inflation, the BNR tightened its 
monetary  policy  stance  by  steadily  raising  the 
policy  rate  by  a  total  of  250  basis  points  between 
October  2021  and  May  2022.  In  May  2022,  the 
policy rate stood at 3.75%.  

In  April  2020,  the  BNR  also  started  purchasing 
government  bonds  in  the  secondary  market  to 
consolidate  the  structural  liquidity  in  the  banking 
system,  thereby  supporting  favourable  financing 
conditions  for  the  economy.  It  continued  to 
purchase  government  securities  on  an  irregular 

(102) The  fiscal  stance  is  measured  as  the  change  in  primary 
expenditure  (net  of  discretionary  revenue  measures), 
excluding  Covid-19  crisis-related  temporary  emergency 
measures  but  including  expenditure  financed  by  non-
repayable  support  (grants)  from 
the  Recovery  and 
Resilience Facility and other EU funds, relative to medium-
term  potential  growth.  A  negative  (positive)  sign  of  the 
indicator  corresponds  to  an  excess  (shortfall)  of  primary 
expenditure growth compared with medium-term economic 
growth,  indicating  an  expansionary  (contractionary)  fiscal 
policy.  

(103) As  from  2013,  the  BNR  follows  a  flat  multi-annual 

inflation target of 2.5% (± 1 percentage point). 

118 

                                                           
                                                           
for  2022 

in  2022),  whereas 

continue 
the 
combination  of  a  tighter  labour  market,  skill 
shortages,  higher  productivity  and  inflationary 
pressures  are  expected  to  push  wages  up  again, 
especially in the services sector. On the other hand, 
supply  chain  bottlenecks  could  negatively  affect 
wages  in  the  manufacturing  sector.  Minimum 
wage increases of 3.1% in mid-2021 and 10.9% in 
January  2022  were 
to  compensate 
households for the loss of purchasing power due to 
higher  inflation.  As  of  2024,  Romania  committed 
in the RRP to create a new mechanism formula to 
objectively set the minimum wage level.   

legislated 

Labour productivity per person contracted by 2.2% 
in  2020,  reflecting  efforts  to  retain  workers  in 
employment  notwithstanding  the  contraction  in 
economic activity, but recorded an increase in the 
year after. In 2022, labour productivity  is forecast 
to  improve  by  just  2%,  in  line  with  the  more 
subdued  output  growth.  During  the  pandemic, 
while  wage 
labour 
compensation  still  grew  more  than  productivity, 
resulting  in  an  increase  in  nominal  unit  labour 
costs  (ULC).  According  to  the  Commission’s 
Spring  2022  Economic  Forecast,  the  ULC  growth 
rate  in  Romania  is  expected  to  slowly  pick-up  in 
2022  and  2023  and  to  remain  above  the  average 
growth  rates  in  the  euro  area,  mirroring  the 
projected  growth  in  wages  continuing  to  outpace 
productivity increases.   

growth  moderated, 

External factors 

Due  to  the  openness  of  the  Romanian  economy 
and its deep integration into the global and the EU 
economy,  developments  in  import  prices  play  a 
significant  role  in  domestic  price  formation.  In 
particular,  energy  and  food  import  prices  have 
been a significant determinant of price inflation in 

Convergence Report 2022 - Technical annex 

Chapter 7 - Romania 

the 

large  weight  of 

Romania,  given 
these 
categories in the Romanian HICP and the fact that 
Romania is a net importer of energy. Import price 
inflation  (measured  by  the  imports  of  goods 
deflator)  was  significantly  lower  than  consumer 
price  inflation  in  2020,  reflecting  the  reduction  in 
the  price  of  fuel  commodities.  In  2021,  however, 
import  price  inflation  exceeded  by  almost  6.4 
percentage points the HICP inflation, reflecting the 
sudden 
the  same 
commodities. 

the  prices  of 

increase 

in 

The 
rate 
leu’s  nominal  effective  exchange 
(measured  against  a  group  of  36  trading  partners) 
remained  broadly  stable  in  the  past  two  years, 
depreciating  only  moderately,  by  less  than  1% 
between  the  beginning  of  2020  and  the  end  of 
2021.  Looking  ahead, 
is 
expected to remain high and above HICP inflation, 
in  line  with  expected  developments  in  global 
commodity and energy prices. 

imported 

inflation 

Administered prices and taxes 

The  weight  of  administered  prices  in  the  2021 
Romanian  HICP  basket  (9.4%)  is  below  the  euro 
area  average  (15.5%). The  average  annual  change 
in  administered  prices  was  1.2%  in  2020,  below 
the headline inflation rate by 1.1 percentage points. 
In  2021,  administered  prices  increased  by  just 
1.8%,  which  was  much  below  the  4.1%  headline 
figure,  mainly  reflecting  the  slow  increase  in  the 
non-energy  administered  prices  component  and 
decreases of the energy one in the first half of the 
year. Following legislative changes adopted at the 
beginning  of  2020,  the  liberalisation  of  gas  and 
for  households  has  been 
electricity  prices 
completed  as  of  1  July  2020  and  1  January  2021, 
respectively.  However,  in  the  context  of  marked 
price  increases  in  late  2021,  the  government 
adopted  legislation  capping  gas  and  electricity 
prices,  with  reduced  tariffs  for  lower  energy 
consumption brackets. The support measures were 
extended until April 2023. 

Tax changes had a marginal influence on inflation 
in  Romania  in  the  last  two  years.  HICP  inflation 
measured at constant taxes was similar to headline 
HICP  inflation.  For  2020,  the  former  stood  at 
2.3%,  equal  to  the  headline  inflation  figure, 
whereas it was 3.9% in 2021, 0.2 percentage point 
lower than the headline HICP inflation rate. 

119 

-12-8-404812162020162017201820192020202120222023Productivity (real GDP per person employed)Nominal compensation per employeeNominal unit labour costsHICP inflationGraph 7.3: Romania -Inflation, productivity and wage trends(y-o-y % change)Source: Eurostat, Commission's Spring 2022 Economic Forecast.Note: Due to a break in the historical employment data for Romania in 2021, employment-related variables have been affected.                
Convergence Report 2022 - Technical annex 

Chapter 7 - Romania 

Medium-term prospects 

7.3. 

PUBLIC FINANCES 

According  to  the  Commission’s  Spring  2022 
Economic  Forecast,  annual  HICP  inflation  is 
projected  to  increase  further  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,  with  pass-through 
into  other 
components,  but  also  due  to  a  rise  in  food  prices. 
Services’  inflation  is  also  projected  to  pick-up, 
reflecting  a  surge  in  transport  services  inflation 
due  to  higher  fuel  prices.  Inflation  in  non-energy 
industrial  goods  is  projected  to  show  a  similar 
dynamic  as  HICP  energy  inflation,  but  of  a 
considerably lower magnitude. 

from 

Risks  to  the  inflation  outlook  are  mainly  on  the 
upside,  stemming 
implications  of 
Russian’s invasion of Ukraine for global food and 
such  as  an 
energy  prices.  Other  aspects, 
increasingly  tight  labour  market,  contribute  to  the 
uncertainty of the inflation forecast. 

the 

In 2020, the level of consumer prices in  Romania 
was about 52% of the euro area average. The GDP 
per  capita  was  around  70%  of  the  euro  area 
average  in PPS terms in 2021. Due  to the  process 
of  catching-up  of  the  Romanian  economy,  price 
level convergence is expected over the next years. 

120 

7.3.1.  Recent fiscal developments 

The  general  government  deficit  decreased  from 
9.3%  of  GDP  in  2020  to  7.1%  in  2021.  The 
markedly high deficit in 2020   was  mainly driven 
by a combination of additional expenditure due to 
the  COVID-19  outbreak  (healthcare  spending  and 
support  measures  to  the  economy  and  labour 
market)  and  a  denominator  effect  given  the  3.9% 
drop  in  real  output.  In  2021,  the  government 
enacted  some 
limited  consolidation  measures, 
including  a  freeze  in  public  sector  wages,  while 
revenues  increased  due  to  the  economic  recovery. 
Still,  COVID-19  support  measures  continued  in 
2021. 

is  subject 

Romania 
to  an  excessive  deficit 
procedure (105).  On  18  June  2021,  the  Council 
adopted a recommendation under Article 126(7) of 
the Treaty (TFEU), with a view to bringing an end 
to the situation of an excessive government deficit 
in  Romania  by  2024  at  the  latest.  Romania  was 
recommended  to  reduce  the  general  government 
deficit  to  8.0%  of  GDP  in  2021,  6.2%  of  GDP  in 
2022, 4.4% of GDP in 2023, and 2.9% of GDP in 
the  Commission 
2024.  On  23  May  2022, 
concluded  that  Romania’s  deficit  outturn  of  7.1% 
of  GDP  in  2021  and  the  fiscal  effort  are  in  line 
with  the  Article  126(7)  recommendation  of  the 

(105) Following  the  expansionary  fiscal  stance  and  the  high 
fiscal deficit recorded in 2019 and previous years, Romania 
entered an Excessive Deficit Procedure (EDP) in the spring 
of 2020. 

Table 7.3:Romania - Budgetary developments and projections (as % of GDP unless indicated otherwise)Outturn and forecast 1)20162017201820192020202120221)20231)General government balance-2.6-2.6-2.8-4.3-9.3-7.1-7.5-6.3- Total revenue32.030.832.031.932.732.833.633.3- Total expenditure34.633.534.836.242.039.941.139.6   of which: - Interest expenditure1.51.31.01.11.41.41.51.6p.m.: Tax burden26.725.826.826.827.127.327.927.7Primary balance-1.1-1.4-1.8-3.2-8.0-5.7-6.0-4.7Fiscal stance 2)-1.60.5-1.01.3Government gross debt37.335.134.735.347.248.850.952.6p.m: Real GDP growth (%)4.77.34.54.2-3.75.92.63.61) Commission's Spring 2022 Economic Forecast. 2) A negative (positive) sign of the indicator corresponds to an excess (shortfall) of primary expenditure growth compared with medium-term economic growth, indicating an expansionary (contractionary) fiscal policy.Source: European Commission.                                                           
 
 
  
 
 
Council  and, 
procedure was kept in abeyance.  

therefore, 

the  excessive  deficit 

The  general  government  debt-to-GDP  ratio  rose 
from 35.3% of GDP in 2019 to 47.2% in 2020 and 
48.8%  in  2021.  The  increases  in  2020  and  2021 
were  mainly  driven  by  the  high  primary  deficit. 
The  snow-ball  effect  and  stock-flow  adjustments 
both contributed to the increase in the debt ratio in 
2020,  whereas  in  2021  they  had  a  diminishing 
effect  on  the  debt  ratio.  Liquidity  support  for 
households  and  companies 
form  of 
guarantees  and  tax  deferrals  did  not  have  a  direct 
budgetary  impact,  but  the  guarantees  represent 
contingent liabilities, estimated by the Commission 
services  at  around  3.2%  of  GDP  as  of  December 
2021.  

the 

in 

7.3.2.  Medium-term prospects 

The 2022 budget, published on 28 December 2021, 
targets  a  reduction  of  the  general  government 
deficit  to  6.2%  of  GDP  in  2022.  Several  deficit-
increasing  expenditure  measures  were  announced, 
such as an increase in the pension point  value, an 
increase in minimum pensions by 20%, the one-off 
top-up  of  pensions  in  the  RON  1,600-2,200 
bracket for people with disabilities and the growth 
of  children’s  allowance  by  16%.  The  planned 
improvement  of  the  headline  budget  balance  for 
2022 is mainly due to automatic stabilisers, as the 
economy’s growth is set to stay robust, and to the 
expiry of the emergency health and labour market 
support  measures.  Moreover,  a  number  of  deficit-
reducing  measures  will  come  into  effect  in  2022, 
such as the levying of social security contributions 
for health for pensions higher than RON 4,000.   

to 

In  light  of  the  increase  in  energy  prices,  the 
government 
support 
approved  measures 
measures  to  particular  groups,  such  as  poorer 
households  and  SMEs,  to  shield  them  against  the 
increase 
in  energy  prices.  These  measures 
amounted to 0.7 of GDP in 2022 and consisted of 
allowances to vulnerable consumers, compensation 
schemes  for  households’  energy  bills,  and  energy 
and  gas  price  caps  on  the  expenditure  side,  and  a 
measure  to  tax  the  energy  and  gas  domestic 
producers’  windfall  revenues  on  the  revenue  side. 
In  view  of  the  humanitarian  crisis  following  the 
invasion  of  Ukraine  by  Russia,  the  Commission 
estimates a budgetary cost of the support measures 
adopted  by  the  Romanian  government  of  0.1%  of 
GDP in 2022 and 0.1% in 2023. 

Convergence Report 2022 - Technical annex 

Chapter 7 - Romania 

On  5  May  2022,  Romania  submitted  its  2022 
Convergence  Programme.  According 
the 
Programme,  the  headline  deficit  is  projected  to 
decline steadily to 6.2% of GDP in 2022 and 4.4% 
in 2023. The Programme targets a reduction of the 
government deficit to under 3% of GDP by 2024, 
in line with the Council recommendation.  

to 

projections, 

The Commission Spring 2022 Economic Forecast, 
which is based on a no-policy change assumption, 
projects  a  general  government  deficit  of  around 
7.5%  of  GDP  in  2022.  The  difference  from  the 
planned  deficit  in  the  Convergence  Programme 
stems,  in  particular,  from  a  difference  in  the 
underlying  macroeconomic 
an 
increase of some revenue items in the 2022 budget 
(and  the  Convergence  Programme)  that  are  not 
fully supported by enacted measures and therefore 
not  taken  into  account  in  the  Commission’s 
forecast,  increased  social  expenditure  and  support 
to the economy and the  measures to deal with the 
surge  in  energy  prices  and  the  flow  of  refugees. 
The  Commission  projects  the  general  government 
deficit to further decrease to around 6.3% of GDP 
in 2023, as revenues are expected to grow strongly 
on  the  back  of  the  economic  recovery,  while 
COVID-19  temporary  emergency  measures  are 
expected  to  be  phased  out  and  the  cost  of  the 
measures to deal with the surge of energy price are 
assumed  to  decrease.  Romania  is  at  risk  of  non-
compliance  with 
targets  for  2022 
the  fiscal 
established in the Council Recommendation of 18 
June 2021. 

In  2022,  the  fiscal  stance  is  projected  in  the 
Commission’s  Spring  2022  Economic  Forecast  to 
-1.0%  of  GDP (106).  The 
be  supportive,  at 
additional  positive  contribution 
to  economic 
activity  of  expenditure  financed  by  Recovery  and 
Resilience  Facility  grants  and  other  EU  funds  is 
projected  to  increase  by  0.3  percentage  point  of 
GDP  in  2022.  Nationally  financed  investment  is 
projected  to  provide  an  expansionary  contribution 
to  the  fiscal  stance  of  1.5  percentage  points  of 
GDP  in  2022.  At  the  same  time,  the  growth  in 
nationally  financed  primary  current  expenditure 
(net of new revenue measures) in 2022 is projected 
to  provide  a  contractionary  contribution  of  0.6 
percentage  point  of  GDP  to  the  overall  fiscal 
stance,  as  current  expenditure  is  set  to  grow  at  a 
slower  pace  than  medium-term  potential  growth. 
This contribution is contractionary notwithstanding 

(106) For a definition of the fiscal stance used in this report, see 
footnote  in  Section  7.2.3  on  underlying  factors  and 
sustainability of inflation.  

121 

                                                           
Convergence Report 2022 - Technical annex 

Chapter 7 - Romania 

the expansionary impact of the measures related to 
the energy crisis (0.7% of GDP) and the assistance 
to those fleeing Ukraine (less than 0.1% of GDP).  

In  2023,  the  fiscal  stance  is  projected  to  be 
contractionary  at  1.3%  of  GDP.  The  additional 
positive  contribution 
to  economic  activity  of 
expenditure  financed  by  Recovery  and  Resilience 
Facility  grants  and  other  EU  funds  is  projected  to 
decrease  by  0.1  percentage  points  of  GDP. 
Nationally  financed  investment  is  projected  to 
provide  an  expansionary  contribution  to  the  fiscal 
stance  of  0.2  percentage  point  of  GDP (107), 
whereas the growth in nationally financed primary 
current  expenditure  is  projected  to  provide  a 
contractionary contribution of 1.1 percentage point 
of GDP to the overall fiscal stance in 2023, as the 
support measures to face the energy crisis in 2022 
are assumed to be phased out.   

The  government  debt-to-GDP  ratio  is  forecast  by 
the Commission to increase to 50.9% in 2022 and 
52.6%  in  2023.  Debt  sustainability  risks  appear 
medium  over  the  medium  term.  Government  debt 
is  projected  to  increase  reaching  around  73%  of 
GDP  in  2032.  This  projection  assumes  that  the 
structural  primary  balance  (except  for  the  impact 
of ageing) remains constant at the forecast level for 
2023  of  -3.8%  of  GDP,  which  is  the  same 
compared to the 2019 level.  

The  sensitivity  to  possible  macro-fiscal  shocks 
contributes to this assessment. In particular, if only 
half of the projected percentage point improvement 
in  the  structural  primary  balance  in  2022-2023 
were  to  occur,  the  projected  debt  ratio  in  2032 
would be about 5 percentage points of GDP higher 
than in the baseline. 

(107) Other  nationally  financed  capital  expenditure  is  projected 
to  provide  a  contractionary  contribution  of  0.2  percentage 
point of GDP each year in 2022 and in 2023.  

122 

risks, 

including 

factors  mitigate 

financing  sources  and 

Some 
the 
lengthening  of  debt  maturity  in  recent  years  and 
the 
relatively  stable 
expected  positive  impact  on  long-term  growth  of 
reforms  under  the  Recovery  and  Resilience  Plan. 
Risk-increasing  factors  include  the  share  of  debt 
held  by  non-residents,  the  currency  denomination 
of  debt,  and 
the  country’s  negative  net 
international  investment  position.  An  additional 
risk-increasing 
possible 
materialisation of state guarantees granted to firms 
and  self-employed  during  the  COVID-19  crisis, 
though  this  risk  remains  currently  limited  due  to 
relatively low take-up (108). 

factor 

the 

is 

Romania  has  a  strong  fiscal  framework  in  place, 
consisting  of  in  principle  well-designed  fiscal 
rules, a medium-term budgetary framework and an 
independent  fiscal  council.  However,  the  track 
record  in  the  application  of  the  framework  has 
in  previous 
been  generally  poor,  as  noted 
Convergence  Reports 
In 
particular, the annual budget laws have repeatedly 
been in contradiction with national fiscal rules and 
the  medium-term  budgetary 
not  guided  by 
strategies  following  significant  delays 
the 
adoption  of  the  latter.  Faced  with  the  COVID-19 
shock in 2020, fiscal rules were equipped with the 
required  flexibility  to  allow  for  a  large  deviation 
from targets. 

(2020  and  2018). 

in 

7.4. 

EXCHANGE RATE STABILITY 

The Romanian leu does not participate in ERM II. 
Romania  has  been  operating  a  de  jure  managed 
floating  exchange  rate  regime  since  1991  with  no 
preannounced  path  for  the  exchange  rate (109).  De 
facto,  the  exchange  rate  regime  moved  gradually 
from a strongly managed float – including through 
the use of administrative measures until 1997 – to 
a more flexible one. In 2005, Romania shifted to a 
direct  inflation  targeting  framework  combined 
with  a  floating  exchange  rate  regime.  The  BNR 
has, 
currency 
remains  available  as  a  policy 
intervention 
instrument and has actively used this instrument. 

nonetheless, 

stressed 

that 

The  leu  has  depreciated  steadily  against  the  euro 
since  2017.  Between  the  beginning  of  2020  and 

(108) For  further  details  see  the  2021  Fiscal  Sustainability 

Report. 

(109) On 1 July 2005 the Romanian Leu (ROL) was replaced by 
the new  leu  (RON),  with a conversion  factor  of 1 RON = 
10,000  ROL.  For  convenience,  however,  the  text  of  this 
report  consistently  refers  to  leu,  meaning ROL  before  and 
RON after the conversion. 

-2-10122020202120222023Net nationally financed  primary current expenditureNationally financed investmentOther capital expenditureExpenditure financed by RRF grants and EU fundsFiscal stanceExpansionaryContractionaryGraph 7.4: Romania -Fiscal stance and its componentsSource: Commission's Spring 2022 Economic Forecast. (percent of GDP)                 
                                                           
                                                           
Convergence Report 2022 - Technical annex 

Chapter 7 - Romania 

April  2022,  the  leu  weakened  against  the  euro  by 
around 3.5%. Over this period, the volatility of the 
inter-day  exchange  rate  was  moderate 
leu’s 
compared  to  that  of  other  floating  currencies  in 
Member  States  with  a  derogation.  The 
leu 
weakened  against 
the  euro  by  around  1.0% 
between  January  and  April  2021.  It  remained 
relatively stable on average in the subsequent four 
months,  but  in  October  2021  the  leu  depreciated 
against  the  euro  by  0.5%.  It  averaged  around  a 
RON/EUR  level  of  4.95  during  the  rest  of  2021 
and  the  first  four  months  of  2022.  In  April  2022, 
the  leu’s  exchange  rate  against  the  euro  averaged 
around 4.94. 

The  gross  international  reserves  held  by  the  BNR 
declined to a low of around EUR 38bn in the third 
quarter  of  2020  and  recovered  to  around  EUR 
43bn at the end of 2020. The reserves continued to 
increase throughout most of 2021 to close to EUR 
46bn at the end of 2021, reaching close to 19% of 
GDP  and  stood  at  around  EUR  46bn  in  the  first 
quarter  of  2022.  Over  this  period,  movements  in 
the level of international reserves  were  influenced 
by  changes  in 
the  foreign  exchange  reserve 
requirements  of  credit  institutions,  sovereign  debt 
management  decisions,  such  as  euro-denominated 
government  bond  issuances  and,  towards  the  end 
of  2021  and  beginning  of  2022,  the  first  pre-
financing  payments  under  the  EU’s  Recovery  and 
Resilience Facility. 

Short-term  interest  rate  spreads  vis-à-vis  the  euro 
area decreased by around 120 basis points between 
March  2020  and  February  2021,  mirroring  the 
above-mentioned policy rate cuts by the Romanian 
central  bank  over  this  period.  The  three-month 
interest  rate  spread  stabilised  at  around  210  basis 
points  until  September  2021,  before  steadily 
increasing  to  almost  500  basis  points  by  March 
2022.  These  developments  in  part  reflected  the 
tightening  of  monetary  policy  by  the  BNR  in 
response  to  the  increasing  inflation,  with  the  key 
policy  rate  raised  from  1.25%  in  September  2021 
to  3.75%  in  May  2022.  The  three-month  interest 
rate spread relative to the euro stood at around 520 
basis  points  in  April  2022,  well  above  its  pre-
pandemic levels. 

7.5. 

LONG-TERM INTEREST RATES 

The  long-term  interest  rates  in  Romania  used  for 
the purpose of the convergence examination reflect 
secondary  market  yields  on  a  single  government 
benchmark  bond  with  a  residual  maturity  of 
around 10 years. 

123 

4.24.44.64.85.0201620172018201920202021Graph 7.5: Romania -RON/EUR exchange rate(monthly averages)Source: ECB.0100200300400500600201620172018201920202021Graph 7.6: Romania -3-M Robor spread to 3-M Euribor(basis points, monthly values)Source: National Bank of Romania, Eurostat and Thomson Reuters0246Jan-16Jan-17Jan-18Jan-19Jan-20Jan-21Jan-22RomaniaReference valueGraph 7.7: Romania -Long-term interest rate criterion(percent, 12-month moving average)Source: European Commission.   
         
    
 
Convergence Report 2022 - Technical annex 

Chapter 7 - Romania 

7.6.  ADDITIONAL FACTORS 

The  Treaty  (Article  140  TFEU)  calls  for  an 
examination  of  other  factors  relevant  to  economic 
integration  and  convergence  to  be  taken  into 
account  in  the  assessment.  The  assessment  of  the 
additional factors – including balance of payments 
developments,  product, 
financial 
market integration – gives an important indication 
of  a  Member  State's  ability  to  integrate  into  the 
euro area without difficulties. 

labour  and 

(IDR)  was  warranted 

In  November  2021,  the  Commission  published  its 
eleventh  Alert  Mechanism  Report  (AMR  2022) 
under  the  Macroeconomic  Imbalance  Procedure 
(MIP - see also Box 1.7), which concluded that an 
In-Depth  Review 
for 
Romania. In May 2022, the Commission published 
its  annual  country  report  on  Romania  and 
separately  an  In-Depth  Review.  These  reports 
confirmed 
the  existence  of  macroeconomic 
imbalances  in  Romania.  Vulnerabilities  relate  to 
external  accounts,  linked  to  large  fiscal  deficits, 
and to competitiveness issues that are re-emerging. 

risks 

losses  but  add 

The  high  current  account  deficit  further  worsened 
in 2021 and is  not  forecast to improve in 2022 or 
2023. Large fiscal deficits pre-date the COVID-19 
crisis  and  have  driven  up  the  current  account 
deficit  which  poses 
to  external  debt 
sustainability.  Sovereign  borrowing  costs  have 
since  early  2021.  The  expected 
increased 
acceleration in  wages could weigh  further on cost 
competitiveness.  Nominal  depreciation  could 
mitigate  competitiveness 
to 
inflationary  pressures  and  increase  the  burden  of 
serving  debts  in  foreign  currencies,  which  are 
significant  for  the  government  and  the  private 
sector.  The  negative  net  international  investment 
position  is  expected  to  remain  below  its  pre-
pandemic levels. The external position is expected 
to benefit from significant RRF funds but external 
financing can otherwise become  more challenging 
amid  tighter  global  financial  conditions.  Recent 
successful 
policy 
implementation  of  Romania’s  RRP,  can  address 
some  vulnerabilities,  still  further  action  is  needed 
to improve competitiveness and potential growth.   

initiatives, 

including 

the 

Romania submitted its recovery and resilience plan 
(RRP)  on  31  May  2021.  The  Commission’s 
positive assessment on 27 September 2021 and the 
Council’s approval on 29 October 2021 paved the 
way  for  the  implementation  of  the  RRP  and  the 
disbursement  of  EUR  14.25  billion  in  grants  and 

the 

the 

time  of 

The  Romanian  twelve-month  moving  average 
long-term  interest  rate  relevant  for  the  assessment 
of  the  Treaty  criterion  was  above  the  reference 
value  at 
last  convergence 
assessment  of  Romania  in  2020.  From  4.4%  in 
April 2020, it fell to around 3.1% by July 2021 but 
increased  again  throughout  the  rest  of  2021.  In 
April 2022, the reference value, which is measured 
as the average of long-term interest rates in France, 
Finland and Greece plus 2 percentage points, stood 
at  2.6%.  In  that  month,  the  twelve-month  moving 
average  of  the  yield  on  the  Romanian  benchmark 
bond was at 4.7%, i.e. 2.1 percentage points above 
the reference value. 

reflected 

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,  the  long-term  interest  rate 
decreased  steadily,  reaching  a  through  of  2.7%  in 
February  2021.  The  decline 
the 
widespread  monetary  policy  loosening  measures 
by  central  banks,  which  depressed  long-term 
yields.  Interest  rates  started  to  increase  again  in 
March  2021  and  were  on  an  upward  path 
throughout  2021,  rising  to  5.4%  in  December 
2021,  reflecting  higher  inflationary  pressures  and, 
as from October 2021, monetary policy tightening 
in  Romania.  The 
interest  rate  of 
long-term 
Romania  increased  further  during  the  first  four 
months  of  2022,  in  the  context  of  continued 
inflationary  pressures,  further  monetary  policy 
tightening, and heightened risk aversion following 
Russia’s  invasion  of  Ukraine.  It  reached  6.6%  in 
April  2022  and  the  long-term  spread  versus  the 
German benchmark bond reached 586 basis points 
in  that  month,  up  from  310  basis  points  in 
February 2021. 

124 

-202468201620172018201920202021RomaniaGermanyGraph 7.8: Romania -Long-term interest rates(percent, monthly values)Source: Eurostat.          
Convergence Report 2022 - Technical annex 

Chapter 7 - Romania 

14.97  billion  in  loans  over  the  period  2021-2026, 
which is equivalent to 13.1% in 2019 GDP. 

recommendations 

Romania’s  plan  includes  an  extensive  set  of 
mutually reinforcing reforms and investments (107 
investments and 64 reforms) that should contribute 
to effectively addressing all or a significant subset 
of  the  economic  and  social  challenges  outlined  in 
(CSRs) 
the  country-specific 
addressed  to  Romania  by  the  Council  in  the 
European  Semester  in  2019  and  2020.  The  plan 
will  address  key  macro-economic  challenges  such 
as  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. Investments will also focus on increasing 
the  quality  and  access  to  education,  including 
infrastructure.  Key 
digitalisation  and  overall 
reforms  aim  at  addressing  fiscal  sustainability, 
improving  access  to  financing,  strengthening  the 
public  administration  and  modernising  the  social 
the 
By 
benefits 
independence  and  increasing  the  efficiency  of  the 
judiciary, improving access to justice, and stepping 
up  the  fight  against  corruption,  the  plan  aims  to 

strengthening 

system. 

address  the  main  issues  related  to  respect  of  the 
rule  of  law  in  Romania  in  accordance  with  the 
relevant  case-law  of  the  Court  of  Justice  of  the 
European  Union  and 
into  account 
recommendations  made  in  the  Cooperation  and 
Verification  Mechanism 
the 
reports  by  the  Group  of  States  against  Corruption 
(GRECO), 
the  Venice 
opinions 
Commission, and the Rule of Law Reports. 

reports, 

(CVM) 

taking 

the 

of 

The  plan  devotes  41%  of  its  total  allocation  to 
measures  supporting  climate  objectives,  20.5%  to 
social 
the  digital 
expenditure,  all  while  respecting  the  ‘do  no 
significant harm’ principle. 

transition  and  25%  on 

The  implementation  of  the  investments  in  the 
Romanian  plan,  along  with  other  investments 
under  Next  Generation  EU  (NGEU),  is  estimated 
to  raise  Romania’s  GDP  by  2.9%  by  2026,  of 
which 0.2% due to the positive spillover effects of 
the  coordinated  implementation  of  NGEU  across 
Member  States (110).  This  does  not  take  into 

(110) See  Pfeiffer  P.,  Varga  J.  and  in  ’t  Veld  J.  (2021), 
“Quantifying  Spillovers  of  NGEU  investment”,  European 
Economy  Discussion  Papers,  No.  144  and  Afman  et  al. 
(2021),  “An  overview  of  the  economics  of  the  Recovery 

125 

Table 7.4:Romania - Balance of payments(percentage of GDP)201620172018201920202021Current account-1.6-3.1-4.6-4.9-5.0-7.0of which: Balance of trade in goods-5.7-6.8-7.5-8.0-8.7-9.6                 Balance of trade in services4.64.44.13.94.34.0                 Primary income balance -1.3-1.4-1.8-1.4-1.5-1.7                 Secondary income balance0.80.80.60.70.90.4Capital account2.51.21.21.31.92.2External balance 1)0.9-1.9-3.4-3.6-3.1-4.8Financial account1.6-1.7-2.5-2.3-3.6-5.4of which: Direct investment-2.7-2.6-2.4-2.2-1.4-3.0                Portfolio investment-0.6-1.6-1.4-1.1-6.1-1.3                Other investment 2)3.52.31.71.11.3-2.0                Change in reserves1.30.2-0.4-0.12.60.9Financial account without reserves0.2-1.9-2.1-2.2-6.1-6.3Errors and omissions0.60.30.91.3-0.5-0.6Gross capital formation23.423.422.823.624.425.9Gross saving22.220.318.318.418.618.9Net international investment position -49.2-47.4-43.8-43.6-47.9-45.71) The combined current and capital account.2) Including financial derivatives.Sources: Eurostat, European Commission calculations, National Bank of Romania.                                                           
 
 
     
 
 
account  the  positive  impact  of  structural  reforms 
on growth. 

7.6.1.  Developments  of 

the  balance  of 

payments 

Romania's  external  balance  (i.e.  the  combined 
current and capital account) improved from  -3.6% 
of  GDP  in  2019  to  -3.1%  in  2020,  before 
deteriorating to -4.8% in 2021. In 2021, the capital 
account 
surplus  and  actually 
increased,  but  this  was  more  than  offset  by  the 
worsening  of  the  current  account  deficit,  which 
increased from -5.0% of GDP in 2020 to -7.0% of 
GDP in 2021. 

remained 

in 

Despite  growth  in  export  market  shares  in  2021, 
the growth of imports spurred by booming private 
consumption  has  outpaced  that  of  exports.  The 
balance  of  trade  in  goods  deteriorated  markedly, 
particularly  in  2020  and  2021  when  it  reached  -
8.7% of GDP and -9.6%, respectively. The balance 
of  trade  in  services,  driven  mainly  by  exports  of 
transportation and IT services, remained positive at 
4.3%  of  GDP  in  2020  and  4.0%  in  2021,  but  did 
not offset the negative and widening deficit in the 
trade in goods. 

linked 

The balance of primary income remained negative, 
slightly  more  so  in  2020  compared  to  2019, 
the  outflow  of 
reflecting  mainly 
investment 
income 
the  country's  negative  net 
to 
international  investment  position.  The  balance  of 
secondary 
income,  which  consists  mainly  of 
remittances, continues to be positive, with a slight 
increase  in  2020.  The  latter  was  outweighed 
however  by  the  negative  balance  of  primary 
income. The capital account surplus stood at 1.9% 
of  GDP  in  2020,  an  improvement  compared  to 
2019,  reflecting  the  slight  increase  in  2020  of  the 
uptake of projects financed by EU funds under the 
2014-2020  programming  period.  In  2021,  the 
capital account surplus benefited from the positive 
impact of the RRP pre-financing flows received at 
the  end  of  the  year,  thus  increasing  slightly  to 
2.2% of GDP. 

Net  FDI  inflows  took  a  hit  in  2020  due  to  the 
COVID  crisis,  and  the  net  portfolio  inflows 
accounted  for  the  largest  contribution  to  the 
external  financing  of  the  current  account.  Over 
2020, net FDI inflows amounted to 1.3% of GDP, 
while  the  portfolio  investments  represented  6.1%. 

Convergence Report 2022 - Technical annex 

Chapter 7 - Romania 

a 

In  2021,  however,  the  mix  between  the  two 
sources  of  financing  reversed  again,  with  FDI 
to  3.0%  of  GDP  and  portfolio 
amounting 
investments  1.3%.  Other  investments  including 
financial  derivatives  continued 
to  record  net 
outflows.  Against  the  background  of  a  slight 
widening  current  account  deficit  in  2020  and  due 
to 
net 
international  investment  position  as  a  share  of 
GDP deteriorated by more the 4 percentage points. 
In  2021,  however,  and  despite  the  larger  current 
account  deficit,  the  net  international  investment 
position  (NIIP)  marginally  improved  due  to  the 
denominator  effect  of  a  high  GDP  growth  rate.  It 
rose  from  -47.8%  of  GDP  in  2020  to  -45.7%  in 
2021.  

effect,  Romania's 

denominator 

Romania’s  external  cost  competitiveness,  as 
measured by ULC-deflated real effective exchange 
rate (REER), plateaued and even recorded periods 
of  improvement  between  2020  and  2021,  after  a 
span of rapid deterioration from 2016 to 2019 (111). 
This  came  as  a  result  of  a  toning  down  of  wage 
pressures,  as public  sector  wages  were frozen and 
the private sector suffered reductions in earnings in 
the context of the pandemic. At the same time, the 
stable 
HICP-based  REER 
although 
external 
maintaining  a  spread  with  respect  to  the  nominal 
effective  exchange  rate,  reflecting  Romania’s 
positive inflation differential relative to its trading 
in 
partners 
competitiveness  from  the  moderate  nominal  RON 
depreciation. 

indicates  broadly 

competitiveness, 

offsetting 

broadly 

price 

gain 

the 

According  to  the  Commission’s  Spring  2022 
Economic Forecast, the external deficit is expected 
to widen in 2022, mainly due to price increase for 

and  Resilience  Facility”,  Quarterly  Report  on  the  Euro 
Area (QREA), Vol. 20, No. 3 pp. 7-16.   

(111) The REER based on unit labour costs should be interpreted 
with prudence as unit labour costs were distorted by labour 
retention schemes in some countries, including Romania. 

126 

90100110120130201620172018201920202021Graph 7.9: Romania -Effective exchange ratesNEERREER, HICP deflatedREER, ULC deflated(vs. 36 trading partners;  monthly averages;index numbers, 2016 = 100)Source: European Commission.                                                                                   
      
                                                           
Convergence Report 2022 - Technical annex 

Chapter 7 - Romania 

to the extraordinary measures that had to be taken 
against  the  pandemic)  and  decreased  to  145  in 
2021.  Frequent  legislative  changes  coupled  with 
inadequate  impact  assessments  harm  investments 
and  the  business  environment.  The  recovery  and 
resilience  plan  foresees  measures  enhancing  the 
capacity  of  the  central  government  to  better  steer 
and  monitor  the  legislative  process,  the  quality  of 
the  laws,  as  well  as  coherence  and  transparency 
throughout the regulatory framework. 

In 

the 

States. 

Romania’s  performance  in  international  rankings 
of  competitiveness  and  ease  of  doing  business  is 
relatively  weak  compared  to  many  euro-area 
Member 
IMD’s  World 
Competitiveness  Index,  Romania's  position  is  still 
low  although  it  has  slightly  improved  lately, 
moving from a placing of 51 in 2020 to 48 in 2021 
from  a  total  of  64  surveyed  economies.  A  patchy 
legal  and  regulatory  framework,  an  inefficient 
justice  system  and  at  times  opaque  corporate 
governance  of  State  Owned  Enterprises  are  some 
to  competitiveness. 
of 
According  to  the  World  Bank's  Ease  of  Doing 
Business  indicator,  Romania  maintained  the  same 
rank  in  2020,  as  in  2019,  i.e.  55,  but  a  relative 
worsening  can  be  noticed  with  respect  to  2018, 
when  it  ranked  52 (112).  According  to  the  World 
Bank's  Worldwide  Governance  Indicators  (2020), 
Romania  ranks  low  in  voice  and  accountability, 
government  effectiveness,  regulatory  quality  and 
control of corruption compared with the average of 
the  five  euro  area  Member  States  with  the  lowest 

the  main  obstacles 

(112) The  World  Bank  Doing  Business  (DB)  program  was 
paused in 2021. The programme will continue with a new 
governance  and  improved  accountability  and  transparency 
under  the  name  Business  Enabling  Environment  (BEE). 
The first edition of the BEE is expected in 2023. 

127 

is  a  net 

energy commodities, such as gas and oil, for which 
importer.  These  negative 
Romania 
dynamics  are  set 
to  be  partially  offset  by  
dynamics in the capital account, as the RRP funds 
will start flowing in.  

7.6.2.  Market integration 

in  supply  chains,  and 

Romania's  economy  is  well  integrated  with  the 
euro  area  through  both  trade,  including  through 
participation 
foreign 
investment. The relatively low trade openness (see 
Table  7.5  for  a  definition)  of  Romania  decreased 
further in 2020, reflecting the domestic and global 
contraction in demand due to the COVID-19 crisis. 
Trade  openness  in  2020  stood  at  41.1%  of  GDP 
and  increased  in  2021  to  around  45%  of  GDP.  In 
2021,  Romania's  main  trading  partners  within  the 
euro  area  were  Germany,  Italy  and  France,  while 
outside the euro area Romania mainly traded with 
Hungary,  Poland,  China  and  Turkey.  Trade  with 
the euro area increased from 23% of GDP in 2020 
to 24.6% of GDP in 2021.  

Romania  attracted  substantial  amounts  of  FDI  in 
the  past  decade.  Net  FDI  inflows,  originating 
mainly from euro-area Member States, such as the 
Netherlands,  Germany  and  Austria,  decreased 
markedly  by  close  to  40%  in  2020,  but  made  a 
strong comeback in 2021, recording an increase of 
almost 150%.  

Romania’s  regulatory  framework  has  scope  for 
improvements. The use of Government Emergency 
Ordinances  (GEOs)  -  for  which  there  is  neither 
mandatory  ex-ante  impact  assessment  nor  public 
consultations  -  is  still  widespread:  their  number 
increased from 91 in 2019 to 226 in 2020 (also due 

Table 7.5:Romania - Market integration201620172018201920202021Trade openness 1) (%)45.446.446.545.041.145.0Trade with EA in goods & services 2)+3) (%)25.726.226.325.123.024.6World Bank's Ease of Doing Business Index rankings 4)3645525555-IMD World Competitiveness Ranking 5)495049495148Internal Market Transposition Deficit 6) (%)2.01.51.11.11.1-Real house price index 7)105.2108.6110.5108.4110.8109.6 1) (Imports + Exports of goods and services / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics, Balance of Payments). 2) (Imports + Exports of goods with EA-19 / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics). 3) Trade in services with EA-19 (average credit and debit in % of GDP at current prices) (Balance of Payments). 4) Data not available for 2021. The Ease of Doing Business report by the World Bank was discontinued in September 2021.  5) International Institute for Management Development (IMD). 6) Percentage of internal market directives not yet communicated as having been transposed, relative to the total.    (November data, as of 2016 date refers to the year of publication). 7) Deflated house price index (2015=100) (Eurostat). Sources: Eurostat, World Bank, International Institute for Management Development, European Commission calculations.                                                           
 
 
   
 
 
Convergence Report 2022 - Technical annex 

Chapter 7 - Romania 

investments by the law and courts. The RRP aims 
to  address 
the 
independence and efficiency of the justice system, 
and the quality of legislative process. 

issues  by 

increasing 

these 

The 4th Anti-Money Laundering Directive (AML) 
imposed  transposition  by  26  June  2017.  After 
being  referred  before  the  Court  of  Justice  for  not 
having notified any transposition measures on July 
2018 
has 
(Case  C-2018/549),  Romania 
communicated to the Commission the adoption of 
transposition  measures,  which  ensure  a  complete 
transposition  of  the  Directive.  An  assessment  of 
the 
effective 
implementation 
application  of  the  4th  Anti  money  Laundering 
Directive in Romania is at present ongoing. 

concrete 

and 

to  conclude 

the  Commission 

As  regards 
the  5th  Anti-Money  Laundering 
Directive, whose transposition deadline elapsed on 
10 January 2020, a letter of formal notice from the 
Commission  was  sent  in  February  2020  regarding 
the absence of notification of national transposition 
measures by the expected date. Since then, further 
transposition  measures  have  been  notified, 
enabling 
that 
transposition  is  now  complete.  As  regards  the 
conformity of this transposition, a letter of formal 
notice  was  sent  on  18  February  2021  concerning 
the  transposition  of  the  provisions  related  to 
beneficial  ownership  registers  (Articles  30(1)  and 
30(3)  AMLD5).  Romania  formally  responded  on 
18  June  2021.  The  Commission  is  currently 
analysing this reply and the formal follow-up to be 
proposed.  At  the  same  time,  the  Commission  is 
assessing  whether 
there  are  any  potential 
conformity issues regarding the other provisions of 
the  5th  AML  Directive  or  effectiveness  issues  in 
the  transposition  or  implementation  of  the  entire 
legal act. 

structural 

The  Romanian  labour  market  continues  to  face 
significant 
challenges.  Adverse 
demographics  are  expected  to  worsen.  Aging 
population,  limited  internal  labour  mobility  and 
continued  emigration  are  a  drag  on  potential 
economic  growth.  Despite  recent  improvements, 
employment  and  activity  rates  remain  below  EU 
averages.  Skills  shortages  and  mismatches  also 
continue to affect the labour market. Although the 
latest minimum wage increases in 2020, 2021 and 
2022  were  based  on  several  economic  indicators, 
an objective mechanism has not yet been properly 
established. The Romanian recovery and resilience 
plan  contains  a  reform  setting  a  new  mechanism 
for  determining  the  minimum  wage,  based  on 

scores. Romania ranks higher than the average five 
lowest  euro  area  Member  States  for  political 
stability  and  absence  of  violence (113).  On  a  more 
positive note, according to the 2020 Single Market 
Scoreboard, Romania's transposition deficit of EU 
Directives  was at 1.1%, a stable result for the  3rd 
consecutive  year,  very  close  to  the  EU  average 
(1%)  and  the  target  (0.5%)  proposed  by  the 
European  Commission  in  the  Single  Market  Act 
(2011). 

the  2022  Country  Report, 

the 
As  part  of 
Commission  has  identified  four  main  obstacles 
undermining  Romania’s  competitiveness  and 
capacity  to  innovate.  First,  services  markets,  in 
particular  many  professions  servicing  companies 
(such as lawyers, accountants and notaries) remain 
highly  regulated.  This  may  translate  into  high 
low  quality  services.  Second,  the 
prices  for 
fragmented 
and 
Development  and  Innovation  policy  at  the  central 
level  and  weak  linkages  between  science  and 
industry discourage entrepreneurship and catching 
up. Third, the cadastre is  underdeveloped and can 
result  in  insufficient  protection  of  property  rights. 
Finally,  access  to  credit  especially  for  SMEs  and 
start-ups  remains  problematic,  both  because  of 
companies’  weak  balance  sheets  and  relatively 
underdeveloped capital markets.  

of  Research 

coordination 

are 

there 

The  2022  Country  Report  highlights  that  some 
concerns  remain  on  the  rule  of  law.  In  particular, 
the  justice  system  is  facing  efficiency  challenges, 
judicial 
and 
concerns 
independence. 
lengthy 
reflects 
low  clearance 
administrative  proceedings  and 
in  courts. 
rates,  and  a  relatively 
legislation 
Furthermore, 
companies’ 
undermine 

frequent  changes 
protection 

about 
on 

trust 
in 

This 

low 

the 

of 

(113) A  Member  State  is  considered  to  have  a  ‘low’  (‘high’) 
ranking compared with the average five euro area Member 
States with the lowest scores for each indicator if its score 
is at least 0.3 percentage points lower (higher) than that of 
the average of this euro area group. 

128 

-0.50.00.51.01.5Voice and AccountabilityPolitical Stability and Absence ofViolence/TerrorismGovernment EffectivenessRegulatory QualityRule of LawControl of CorruptionRomaniaEuro area average five lowestEuro area averageGraph 7.10: Romania -2020 World Bank's Worldwide Governance IndicatorsNote: Estimate of governance ranges from -2.5 (weak) to 2.5 (strong). Source: World Bank.        
                                                           
Convergence Report 2022 - Technical annex 

Chapter 7 - Romania 

objective  criteria, consistent  with job creation and 
competitiveness.  The 
social 
remains  weak  and  social  partners' 
dialogue 
involvement in policymaking continues to be very 
limited. 

functioning  of 

The financial sector in Romania is smaller and less 
developed than in the euro area. Relative to GDP, 
assets  managed  by  the  financial  sector  are  around 
12%  of  that  of  the  euro  area.  The  size  of  the 
financial  sector  has  remained  broadly  unchanged 
since  2016.  Banking  dominates  the  Romanian 
financial  sector  and  makes  up  around  56%  of  the 
financial sector’s assets in 2020. The central bank 
is the second largest holder of financial assets with 
a  share  of  21%.  Although  these  shares  are  larger 
than in the euro area, they are relatively similar to 
those of the five euro-area Member States with the 
smallest 
financial  sectors.  Non-money-market 
funds  and  other  financial  intermediaries  hold  a 
small share of total financial assets. 

relatively  underdeveloped.  However,  Romania  is 
still  comparable  to  the  five  euro-area  Member 
States  with  the  smallest  financial  sectors.  Loans 
are  the  dominant  source  of  funding  and  make  up 
60% of GDP in 2020, compared to 240% of GDP 
in  the  euro  area.  Trade  credits  and  advances  are 
another  important  source  of  funding  and  stand  at 
41% of GDP in 2020, compared to 35% in the euro 
area.  Financing  through  private  debt  markets  is 
practically  inexistent,  while  equity  markets  are 
very small compared to those of the euro area and 
represent  9%  of  GDP.  This  compares  to  83%  for 
private-sector debt and 73% for listed stocks in the 
euro  area.  Government  debt  is  also  lower  than  in 
the euro area. In terms of the share of the  sum of 
liabilities, loans in Romania are comparable to that 
of  the  euro  area,  while  the  government  debt  and 
trade  credits  and  advances  are  higher  than  in  the 
euro  area.  For  security  and  equity  financing,  the 
large  differences  reflect  the  smaller  share  of 
market funding available in Romania compared to 
the euro area. 

The  insurance  and  the  pension-fund  sector  in 
Romania  is  much  smaller  than  in  the  euro  area, 
relative to GDP. However, the sector’s share of the 
total financial sector assets, at around 10%, is only 
slightly  less  than  in  the  euro  area  (13%)  and 
comparable with the five euro-area Member States 
with the smallest financial sectors. Since end-2016, 
the  Romanian  sector  has  increased  its  holdings  of 
financial assets relative to GDP by 2.7 percentage 
points, compared to an increase by 12.3 percentage 
points  in  the  euro  area.  The  investment-funds 
sector  plays  a  very  small  role  in  the  Romanian 
financial  system,  but  its  size  relative  to  GDP  is 
comparable  to  that  of  the  five  euro-area  Member 
States with the smallest financial sectors. 

As to the financing of the economy,  Romania has 
less developed credit and equity markets relative to 
GDP  than  countries  in  the  euro  area,  and  market 
financing  (debt  securities  and  listed  shares)  is 

Romania’s  banking  sector  is  well  integrated  with 
the euro area financial sector, in particular through 
a  high  level  of  foreign  ownership  in  its  banking 
system.  Foreign-owned  banks,  the  majority  of 
which are subsidiaries of parent banks based in the 
euro area, had a share of assets in the total held by 
the  Romanian  banking  sector  of  58.9%  in  2020, 
well  above  the  euro  area  average  of  nearly  16%. 
Bank  concentration,  as  measured  by  the  market 
share  of  the  five  largest  credit  institutions  in  total 
assets,  has  increased  since  2016,  and  reached 
almost  62%  in  2020.  This  is  9  percentage  points 
above the euro area average in 2020. 

129 

Table 7.6:Romania - Allocation of assets by financial sub-sectorRatio to GDP (%)ROEAEA 5 smallest201620202016202020162020Financial corporations (total)9797722796177215Central bank232145783761Monetary financial institutions54542863119798Other financial intermediaries782021792028Non-MMF investment funds1)6410012745Insurance co. and Pension Funds710901021823Share of total (%)ROEAEA 5 smallest201620202016202020162020Central bank24216102129Monetary financial institutions565640395546Other financial intermediaries7828221112Non-MMF investment funds64141622Insurance co. and Pension Funds710121310111) MMF stands for money market funds.Source: Eurostat.Table 7.7:Romania - Financing of the economy1)Ratio to GDP (%)ROEAEA 5 smallest201620202016202020162020Liabilities (total)204220743770324335Loans6860238236115112Non-financial co. debt securities00121534Financial co. debt securities0074681112Government debt securities314483955157Listed shares9965731718Unlisted shares30291861935556Other equity273751564248Trade credits and advances394133352929Share of total (%)ROEAEA 5 smallest201620202016202020162020Loans332732313533Non-financial co. debt securities002211Financial co. debt securities0010933Government debt securities152011121617Listed shares449955Unlisted shares151325251818Other equity1317771314Trade credits and advances191945991) The table focuses on the financing needs of a country and how these are met by the financial system. The table is constructed from the liabilities of all economic sectors, but only considers loans, debt securities, equity and trade credits. The sum of liabilities in the table only reflects the total for the liabilities considered.Source: Eurostat. 
 
         
 
 
 
 
        
 
 
Convergence Report 2022 - Technical annex 

Chapter 7 - Romania 

Although  intra-EU  integration  in  equity  and  debt 
markets, as measured by the home bias in portfolio 
investments,  are  in  general  relatively  low  across 
levels  of 
EU  Member  States,  Romania  has 
integration  in  debt  markets  below  that  of  the 
average  euro-area  Member  State (114).  However, 
integration  in  this  market  segment  has  improved 
between  2016  and  2020.  Concerning  portfolio 
investments  in  equity,  the  home  bias  is  also 
significantly stronger in Romania relative to euro-
area  Member  States.  The  very  large  home  bias 
indicates  that  almost  all  investments  in  equity 
markets take place domestically. 

(114) Home  bias  in  portfolio  investments  measures  the  average 
propensity  of  investors  in  a  Member  State  to  invest 
domestically  as  compared  with  investing  in  other  EU 
countries.  The  indicator  ranges  between  0  and  1,  with  a 
value  of  0  indicating  that  investors  prefer  domestic  over 
foreign  assets.  The  inverse  of  the  home  bias  can  be 
interpreted  as  one  measure  of  financial  integration  among 
EU countries. 

130 

020406080RO, 2016RO, 2020EA, 2016EA, 2020Concentration in the banking sector (CR5 ratio)Share of foreign institutions as % of total assetsGraph 7.11: Romania -Foreign ownership and concentration in the banking sector(in percent, weighted averages)Source: ECB, Structural financial indicators. 0.00.20.4RO, 2016RO, 2020EA, 2016EA, 2020EA Low,2016EA Low,2020DebtEquityGraph 7.12: Romania -Intra-EU integration in equity and debt portfolio investmentNote: The chart shows the extent of home bias in debt and equity markets. A value index of 1 implies ‘full integration’ with the financial markets of other Member States, while 0 denotes ‘no integration’.Source: FinFlows database: European Commission, Joint Research Centre (JRC). (index)    
      
                                                           
8. 

SWEDEN 

8.1. 

LEGAL COMPATIBILITY 

8.1.1.  Introduction 

(as  part  of 

The  legal  rules  governing  the  Swedish  Central 
Bank  (Riksbank)  are  laid  down  in  the  Instrument 
of  Government 
the  Swedish 
Constitution),  the  Riksbank  Act  from  1988,  as 
amended,  and  the  Law  on  Exchange  Rate  Policy 
from  1998.  No  amendments  to  these  legal  acts 
were  passed  with  regard  to  the  incompatibilities 
the 
imperfections  mentioned 
the 
and 
Commission’s 
2020  Convergence  Report. 
Therefore,  this  year’s  assessment  repeats  the 
comments provided in the previous report. 

in 

8.1.2.  Central Bank independence 

Article 3 of Chapter 6 of the Riksbank Act obliges 
the  Riksbank  to  inform  the  minister  appointed  by 
the Swedish Government about a monetary policy 
decision of  major importance prior to its approval 
by  the  Riksbank.  A  dialogue  between  a  central 
bank and third parties is not prohibited as such, but 
information  of  government 
regular  upfront 
representatives  about  monetary  policy  decisions, 
especially when the Riksbank would consider them 
as of major importance, could structurally offer to 
the government an incentive and the possibility to 
influence the Riksbank when taking key decisions. 
Therefore,  the  obligation  to  inform  the  minister 
about  a  monetary  policy  decision  of  major 
importance  prior  to  its  approval  by  the  Riksbank 
limits  the  possibility  for  the  Riksbank  to  take 
decisions  independently  and  offers  the  possibility 
for  the  Government  to  seek  to  influence  them. 
Such  procedure 
the 
prohibition  on  giving  instructions  to  the  Central 
Bank,  pursuant  to  Article  130  of  the  TFEU  and 
Article  7  of  the  ESCB/ECB  Statute.  Article  3  of 
Chapter 6 should be revised in order to ensure that 
monetary policy decisions of major importance are 
communicated to the minister, if ever, only after its 
approval  by  the  Riksbank  and  for  information 
purposes only. 

incompatible  with 

is 

Pursuant to Article 2 of Chapter 3 of the Riksbank 
Act and Article 13 of Chapter 9 of the Instrument 
of Government, the prohibition on the members of 
the  Executive  Board  to  seek  or  take  instructions 
only covers monetary policy issues. The provisions 
do  not  provide  for  their  independence  in  the 
tasks  directly 
performance  of  ESCB-related 

to 

entrusted  by  the  Treaties.  By  means  of  broad 
interpretation through reference to the explanatory 
memorandum 
the  Law  (the  memorandum 
extends the coverage to all ESCB tasks), one could 
consider these tasks as tacitly encompassed by the 
principle  of  central  bank  independence.  However, 
the  principle  of 
institutional 
independence  cannot  be  considered  as  fully 
respected  as  long  as  the  legal  text  itself  does  not 
contain a clear reference to them. Both provisions, 
therefore,  are  considered  as  incompatible  with 
Article  130  of  the  TFEU  and  Article  7  of  the 
ESCB/ECB Statute. 

the  Riksbank's 

Pursuant  to  Article  4  of  Chapter  10  of  the 
Riksbank  Act,  the  Swedish  Parliament  approves 
the  Central  Bank's  profit  and  loss  account  and  its 
balance sheet and determines the  allocation of the 
Central  Bank's  profit.  This  practice  impinges  on 
the financial independence of the  Riksbank and is 
incompatible  with  Article  130  of  the  TFEU.  The 
Parliament  must  not  be  involved  in  the  relevant 
decision-making  process.  Its  right  should  be 
limited  to  approving  the  Central  Bank's  decision 
on the profit allocation. (115) 

Article  4  of  Chapter  1  of  the  Riksbank  Act 
provides  for  the  replacement  of  the  Governor,  in 
case  of  absence  or  incapacity,  by  the  Vice-
Governors nominated by the General Council. It is 
unclear  whether  the  notion  "absence"  in  Article  4 
also refers to cases such as the expiry of the term 
of  office,  resignation,  dismissal  or  other  cause  of 
termination  of  office.  To  ensure  the  smooth  and 
the 
continuous  functioning  of 
some 
Riksbank  Act  would  benefit 
for  clear 
improvement  and  should  provide 
procedures  and  rules  regarding  the  succession  of 
the  Governor  in  case  the  notion  "absence"  also 
refers to instances of termination of office as well 
as in case the Governor is incapacitated. 

the  Riksbank, 

from 

8.1.3.  Prohibition  of  monetary  financing  and 

privileged access 

Under Article 8 of Chapter 6 of the Riksbank Act, 
the  Riksbank  may,  in  exceptional  circumstances, 

(115) Legislative  proposals  to  tackle 

the  flaw  have  been 
submitted  by  the  Swedish  legislator  since  2013  but  those 
still provided for a decisive role of the Parliament in profit 
distribution and budget allocation, which are incompatible 
with the principle of financial independence as enshrined in 
Article 130 of the TFEU. 

131 

                                                           
to  banking 

grant  credits  or  provide  guarantees  on  special 
terms 
institutions  and  Swedish 
companies  that  are  under  the  supervision  of  the 
Financial  Services  Authority.  In  order  to  comply 
with  the  prohibition  on  monetary  financing  of 
Article  123  of  the  TFEU  it  should  be  clearly 
specified that the loan is granted against adequate 
collateral  to  ensure  that  the  Riksbank  would  not 
suffer  any  loss  in  case  of  the  debtor's  default. 
When  the  Swedish  Parliament  inserted  a  new 
article  8a  in  Chapter  6  of  the  Riksbank  Act 
obliging  the  Riksbank  to  provide  information  to 
the  Government  and  a  number  of  relevant  public 
authorities  on  implemented  liquidity  support,  the 
occasion  was  not  seized  to  amend  Article  8  as 
to 
suggested  above.  Therefore, 
constitute  an  incompatibility  with  the  prohibition 
on  monetary  financing  under  Article  123  of  the 
TFEU. 

it  continues 

Pursuant  to  Article  1(3)  of  Chapter  8  of  the 
Riksbank  Act,  the  Riksbank  shall  not  extend 
credits or purchase debt instruments "directly from 
the State, another public body or institution of the 
European Union". The Article does not enumerate 
the entities covered by the prohibition of monetary 
financing  correctly.  Therefore,  Article  1 
is 
incompatible with the wording of Article 123(1) of 
the TFEU and 21(1) of the ESCB/ECB Statute. 

According  to  Article  1(4)  of  Chapter  8  of  the 
Riksbank  Act,  the  Riksbank  may  grant  credit  to 
and  purchase  debt  instruments  from  financial 
institutions  owned  by  the  State  or  another  public 
body.  This  provision  of  Article  1  does  not  fully 
comply  with  Article  123(2)  of  the  TFEU  and 
Article 21.3 of the ESCB/ECB Statute because the 
exemption only covers publicly owned institutions. 
For  the  sake  of  legal  certainty  it  should  be  added 
that,  in  the  context  of  the  supply  of  reserves  by 
these  publicly  owned  credit 
central  banks, 
institutions should be given the same treatment as 
private credit institutions. 

of 

profit 

the  Riksbank’s 

The  provisions  of  Article  4  of  Chapter  10  on  the 
allocation 
are 
supplemented by non-statutory guidelines on profit 
distribution,  according  to  which  the  Riksbank 
should pay 80% of its profit to the Swedish State, 
after  adjustment  for  exchange  rate  and  gold 
valuation effects and based on a five-year average, 
with  the  remaining  20%  used  to  increase  its 
contingency  and  balancing  funds.  Although  these 
guidelines are not legally binding but accepted as a 
practice  by  Parliament  for  calculating  profit 

Convergence Report 2022 - Technical annex 

Chapter 8 - Sweden 

allocation  and  as  there  is  no  statutory  provision 
limiting the amount of profit that may be paid out, 
such  practice  could  constitute  an  incompatibility 
with  the  principle  on  the  prohibition  of  monetary 
financing under Article 123 of the TFEU. The law 
should ensure that the reserve capital of Riksbank 
is  left  unaffected  in  any  case  and  that  the  actual 
contribution  to  the  State  budget  does  not  exceed 
the amount of the net distributable profit. 

8.1.4.  Integration in the ESCB 

Objectives 

Chapter  1,  Article  2  of  the  Riksbank  Act  should 
include  a  reference  to  the  secondary  objective  of 
the  ESCB,  while  the  promotion  of  a  safe  and 
efficient  payment  system  as  a  task  should  be 
subordinated 
the  primary  and  secondary 
objectives of the ESCB. 

to 

Tasks 

The  incompatibilities  of  the  Riksbank  Act  with 
regard to the ESCB/ECB tasks are as follows: 

  absence of a general reference to the Riksbank 
as  an  integral  part  of  the  ESCB  and  to  its 
subordination to the ECB’s legal acts (Chapter 
1,  Articles  1  and  2  of  the  Act  and  Chapter  9, 
Article 13 of the Instrument of Government); 

  definition  of  monetary  policy  and  monetary 
functions,  operations  and  instruments  of  the 
ESCB  (Chapter  1,  Article  2  and  Chapter  6, 
Articles 2, 3 and 5 and 6, Chapter 11, Article 1 
and 2a of the Act; Chapter 9, Article 13 of the 
Instrument of Government); 

  conduct of foreign exchange operations and the 
definition of  foreign exchange policy (Chapter 
7 of the Act; Chapter 8, Article13 and Chapter 
9, Article 12 of the Instrument of Government); 
Articles  1  to  4  of  the  Law  on  Exchange  Rate 
Policy of 1998; 

 

right to authorise the issue of banknotes and the 
volume of coins and definition of the monetary 
unit  (Chapter  5  of  the  Act;  Chapter  9,  Article 
14 of the Instrument of Government); 

  ECB's  right  to  impose  sanctions  (Chapter  11, 

Articles 2a, 3 and 5 of the Act). 

are 

There 
regarding the: 

furthermore 

some 

imperfections 

132 

  non-recognition  of  the  role  of  the  ECB  and  of 
the EU in the collection of statistics (Chapter 6, 
Articles  4(2)  and  Article  9,  10  and  11  of  the 
Act); 

  non-recognition  of  the  role  of  the  ECB  in  the 
functioning  of  payment  systems  (Chapter  1, 
Article 2; Chapter 6, Article 7 of the Act); 

  non-recognition  of  the  role  of  the  ECB  and  of 
the  Council  in  the  appointment  of  an  external 
auditor; 

  non-recognition  of  the  role  of  the  ECB  in  the 
field  of  international  cooperation  (Chapter  7, 
Article 6). 

8.1.5.  Assessment of compatibility 

As regards the prohibition on monetary financing, 
the  independence  of  the  Riksbank  as  well  as  its 
integration  into  the  ESCB  at  the  time  of  euro 
adoption,  the  legislation  in  Sweden,  in  particular 
Instrument  of 
the  Riksbank  Act  and 
Government as part of the Swedish Constitution, is 
not  fully  compatible  with  the  compliance  duty 
under Article 131 of the TFEU. 

the 

The Swedish authorities are invited to remedy the 
abovementioned incompatibilities. 

8.2. 

PRICE STABILITY 

8.2.1.  Respect of the reference value 

The twelve-month average inflation rate,  which is 
used  for  the  convergence  assessment,  was  below 
the  reference  value  at  the  time  of  the  last 
convergence  assessment  of  Sweden  in  2020.  The 
twelve-month  average  inflation  rate  in  Sweden 
then  gradually  decreased  to  a  low  of  0.7%  in 
December  2020,  after  which 
increased 
throughout  2021.  In  April  2022,  the  reference 
value  was  4.9%,  calculated  as  the  average  of  the 
in  France, 
12-month  average 
Finland  and  Greece  plus  1.5  percentage  points. 
The  corresponding  inflation  rate  in  Sweden  was 
3.7%, i.e. below the reference value. The 12-month 
average  inflation  rate  is  projected  to  increase,  but 
stay  below  the  reference  value  in  the  months 
ahead. 

inflation  rates 

it 

Convergence Report 2022 - Technical annex 

Chapter 8 - Sweden 

8.2.2.  Recent inflation developments 

HICP inflation in Sweden dropped markedly at the 
beginning of 2020 as COVID-19 took hold, driven 
down  by  declining  energy  prices  and  moderating 
services  inflation.  This  resulted  in  an  average 
inflation  rate  of  0.7%  in  2020.  In  2021,  HICP 
inflation  rose  to  2.7%  on  average.  The  pick-up  in 
headline inflation began in early 2021, mainly due 
to the combined impact of markedly higher energy 
prices  dominating  strong  negative  base  effects  for 
unprocessed  food  prices,  while  other  inflation 
components showed marked volatility. After a few 
months  of  declining  inflation  in  the  middle  of 
2021,  the  inflation  rate  accelerated  from  August 
onwards, initially mainly driven by sharply higher 
energy prices — foremost electricity prices. In the 
second  half  of  2021,  price  increases  broadened 
across  various  categories  of  the  consumer  price 
index,  lifting  core  inflation.  In  the  first  part  of 
2022 headline HICP inflation picked up, with more 
broadly  entrenched  price  increases  for  a  wide 
range  of  other  goods  and  services.  In  April  2022, 
HICP  inflation  reached  6.6%,  the  highest  rate  on 
record since the harmonised consumer price index 
was first published in 1996, on the back of strong 
increases  across  a  wide  range  of  goods  and 
services in the consumption basket. 

In  2020  and  2021,  core  inflation  (measured  as 
HICP  inflation  excluding  energy  and  unprocessed 
food) remained relatively subdued at around 1.5%, 
despite  pandemic-induced  sharp  swings  in  import 
prices  and  nominal  unit  labour  costs,  the  latter 
temporary 
by 
affected 
unemployment 
schemes.  Underlying 
labour  costs  remained  muted  on  the  back  of 
moderate  multi-annual  wage  agreements,  which 
extend, into 2023. Firms absorbed part of the cost 
increases  caused  by  supply  chain  disruptions  in 
their  margins,  while  the  rate  of  increase  of 

the 
support 

impact 

of 

133 

01234567Jan-16Jan-17Jan-18Jan-19Jan-20Jan-21Jan-22SwedenReference valueGraph 8.1: Sweden -Inflation criterion(percent, 12-month moving average)Note: The dots at the right end of the chart show the projected reference value and 12-month average inflation rate of the country in December 2022.The reference values for 2016, 2018 and 2020 refer to the reference values calculated in the previous Convergence Reports.Source: Eurostat, Commission's Spring 2022 Economic Forecast.      
Convergence Report 2022 - Technical annex 

Chapter 8 - Sweden 

administered  prices  fluctuated  around  2%,  a 
similar rate as before the onset of the pandemic. 

8.2.3.  Underlying  factors  and  sustainability  of 

inflation 

Macroeconomic  policy  mix  and  growth 
developments 

Swedish 

in  private 

experienced 

consumption 

initial  downturn.  Sweden’s 

The 
an 
economy 
unprecedented, but relatively short-lived decline in 
real GDP in the immediate wake of the COVID-19 
pandemic,  followed  by  a  strong  but  unevenly 
paced  recovery  from  the  third  quarter  of  2020 
onwards, as the initial recovery was interrupted by 
new  COVID  waves.  Overall, 
the  economy 
in  2020,  driven  by  a 
contracted  by  2.9% 
simultaneous fall in domestic demand and exports, 
as  disruptions  in  global  supply  chains  aggravated 
the 
real  GDP 
rebounded strongly in the second half of 2020 with 
the recovery continuing in 2021, mainly driven by 
strong  gains 
and 
investment, while exports also recovered markedly 
and helped lift economic growth. Sweden returned 
to the pre-crisis output level in the second quarter 
of 2021. In the second half of 2021 demand picked 
up  for  contact-related  services  such  as  restaurant 
and  hotel  services  with  the  lifting  of  restrictions, 
facilitated  by  the  progress  in  vaccination.  Real 
GDP growth reached 4.8% for the year 2021. The 
slowdown  at  the  beginning  of  2022  reflects  the 
combined impact of another wave of the pandemic, 
elevated 
in  Ukraine  and 
the  war 
coincident  persistent  supply  chain  problems  that 
had its roots in the pandemic affecting purchasing 
power,  business  and  consumer  confidence.  This 
further lifted inflation with negative consequences 
for  household  purchasing  power  and  costs  to 
businesses.  Moreover,  it  also  induced  further 
supply  bottlenecks  and  falls  in  confidence  among 
households  and  businesses.  Real  GDP  growth  is 
poised  to  recover  in  the  course  of  2022,  as  the 
Swedish  economy  adjusts  to  the  changed  global 

inflation, 

increase 

in  prices 

From the second quarter of 2020 to the first quarter 
of  2022,  the  behaviour  of  inflation  components 
exhibited larger-than-usual volatility, reflecting the 
the  pandemic  on  supply  chains, 
impact  of 
consumption patterns (which in turn affected index 
weights) and seasonal patterns. The lagged impact 
of the strengthening of the effective exchange rate 
of the krona during most of 2020 helped achieve a 
moderate 
for  non-energy 
industrial goods. In 2020, unprocessed food prices 
registered  strong  gains  as  the  pandemic  started, 
while  in  2021  demand  for  and  prices  of  contact-
related  services  received  impetus  from  the  easing 
of  restrictions.  The  strong  initial  downturn  and 
subsequent acceleration in energy prices accounted 
for the largest part of the marked swings in HICP 
inflation from 2020 through 2021. These dynamics 
were  also  a  key  determinant  of  the  observed 
pattern for import and producer prices. In the first 
months of 2022, inflation rates increased markedly 
to the highest harmonised inflation rate on record, 
with price increases across a broad range of goods 
and services, mirrored in rising core inflation. 

134 

-202468201620172018201920202021SwedenEuro areaGraph 8.2: Sweden -HICP inflation(y-o-y percentage change)Source: Eurostat.Table 8.1:weights  Sweden - Components of inflation(percentage change)1)in total   201620172018201920202021Apr-222022HICP1.11.92.01.70.72.73.71000Non-energy industrial goods1.10.00.00.30.91.01.4322Energy1.05.39.62.9-8.815.322.796Unprocessed food 2.62.04.52.32.6-0.42.134Processed food0.52.01.82.81.90.91.8163Services1.32.31.82.01.82.52.7385HICP excl. energy and unproc. food1.11.51.21.61.51.62.0870HICP at constant tax rates 1.01.71.81.60.62.63.71000Administered prices HICP0.92.21.32.02.41.71.91601) Measured by the arithmetic average of the latest 12 monthly indices relative to the arithmetic average of the 12 monthly indices   in the previous period.Source: Eurostat, European Commission calculations. 
   
 
 
    
 
 
Convergence Report 2022 - Technical annex 

Chapter 8 - Sweden 

The Riksbank raised its main policy rate to 0% in 
January  2020,  and  has  not  changed  it  since. 
However,  in  response  to  the  COVID  crisis,  the 
Riksbank cut the interest rate on the standing loan 
facility,  which  is  defined  in  terms  of  a  deviation 
above the policy rate, i.e. the repo rate plus 0.2 of a 
percentage  point  to  the  repo  rate  plus  0.1  of  a 
percentage point. However, at its latest meeting on 
28 April 2022, the Riksbank raised its main policy 
rate,  the  repo  rate,  by  25  basis  points  to  0.25%. 
The Executive Board’s forecast is that the repo rate 
will be raised gradually going forward, and that it 
will be somewhat below 2 % in three year’s time. 

in  view  of 

The Riksbank  maintained an  expansionary policy, 
also 
its  extensive  purchases  of 
government bonds. In order to limit the impact of 
the COVID-19 crisis, the Riksbank took a series of 
measures  in  several  monetary  policy  meetings  in 
March  2020. These  decisions  involved:  (i)  further 
purchases  of  securities  up  to  SEK  300  billion  in 
2020, 
including  government,  municipal  and 
mortgage bonds; (ii) a first reduction in the lending 
rate for overnight loans to banks from 0.75 to 0.20 
the  repo  rate;  (iii) 
percentage  points  above 
allowing banks to borrow unlimited amounts on a 
weekly  basis  against  collateral  at  three  months’ 
maturity  at  an  interest  rate  of  0.20  percentage 
the  repo  rate;  (iv)  purchasing 
points  above 
commercial  paper  issued  in  Swedish  kronor  by 
Swedish  non-financial  corporations;  and 
(v) 
offering  loans  in  dollars  thanks  to  the  swap 

135 

environment.  However,  the  pace  of  expansion, 
would  remain  comparatively  modest  in  2023. 
Overall,  real  GDP  is  forecast  to  grow  by  around 
2¼% in 2022 and 1½% in 2023. 

The fiscal stance turned contractionary in 2020 and 
in  2021 (116).  It  is 
remained  broadly  neutral 
expected  to  turn  expansionary  in  2022,  due  to 
additional  expenditure  aimed  at  addressing  the 
economic  impact  of  the  pandemic,  strengthening 
health  care,  easing  some  of  the  consequences  of 
the 
higher  energy  prices,  and  strengthening 
military  defence.  In  2023,  the  fiscal  stance  is 
expected to be contractionary. 

Monetary  policy,  conducted  within  an  inflation 
remained 
targeting 
expansionary  in  the  period  covered  by  the  report. 

framework (117), 

has 

(116) The  fiscal  stance  is  measured  as  the  change  in  primary 
expenditure  (net  of  discretionary  revenue  measures), 
excluding  Covid-19  crisis-related  temporary  emergency 
measures  but  including  expenditure  financed  by  non-
repayable  support  (grants)  from 
the  Recovery  and 
Resilience Facility and other EU funds, relative to medium-
term  potential  growth.  A  negative  (positive)  sign  of  the 
indicator  corresponds  to  an  excess  (shortfall)  of  primary 
expenditure growth compared with medium-term economic 
growth,  indicating  an  expansionary  (contractionary)  fiscal 
policy. 

(117) Since  1995,  the  Riksbank  has  targeted  increases  in  the 
domestic  CPI  with  the  aim  of  keeping  inflation  at  2%.  In 
September  2017,  the  Riksbank  changed  its  target  from 
measuring inflation in terms of CPI to CPIF (CPI with the 
interest rate component kept unchanged). 

Table 8.2:Sweden - Other inflation and cost indicators(annual percentage change)20162017201820192020202120221)20231)HICP inflationSweden1.11.92.01.70.72.75.33.0Euro area0.21.51.81.20.32.66.12.7Private consumption deflatorSweden0.91.82.52.11.11.95.74.0Euro area0.41.31.51.10.52.35.82.7Nominal compensation per employeeSweden2.62.13.83.02.54.32.73.7Euro area1.21.72.12.1-0.74.13.63.5Labour productivitySweden0.20.10.31.4-1.73.50.10.5Euro area0.41.00.20.3-4.94.21.41.5Nominal unit labour costsSweden2.41.93.51.54.30.82.63.2Euro area0.80.72.01.94.40.02.22.0Imports of goods deflatorSweden-2.24.66.72.3-5.45.114.55.5Euro area-3.33.32.6-0.5-3.89.613.20.81) Commission Spring 2022 Economic Forecast.Source: Eurostat, Commission's Spring 2022 Economic Forecast.                                                           
 
 
        
 
 
Convergence Report 2022 - Technical annex 

Chapter 8 - Sweden 

agreement  was  reached,  which  extends  into  2023 
and  provides  for  relatively  moderate  overall 
compensation  growth.  The  current  collective 
agreements  should  be  a  dampening  factor  for 
underlying  inflation  in  2022  and  into  the  first 
months  of  2023.  Notwithstanding 
this,  wage 
demands  and  wage  drift  might  rise  in  response  to 
the tightening labour market and the sharp increase 
in inflation that started in the second half of 2021, 
and  gathered  pace  in  the  first  months  of  2022. 
Overall,  the  risks  of  significant  second  round 
effects of wage increases on inflation appears to be 
contained. 

Sweden  had  moderate  labour  productivity  growth 
in  the  years  before  2019.  In  2020  and  2020,  the 
pandemic  induced  strong  swings  in  economic 
activity  while  employment  was  supported  by 
temporary  unemployment  schemes  and  various 
support  schemes.  As  a  result,  aggregate  measures 
of  changes  in  labour  productivity  and  unit  labour 
costs for 2020 and 2021 are distorted. 

External factors 

Given  the  openness  of  the  Swedish  economy, 
developments in import prices traditionally play an 
important role in domestic price formation. Import 
price growth (measured by the deflator of imports 
of  goods)  has  fluctuated  markedly  over  the  past 
years.  This  was  chiefly  due  to  large  swings  in 
energy  and  other  commodity  prices,  but  also 
mirrors the price effects of pandemic-related trade, 
supply  and  demand  disruptions,  as  well  as 
exchange  rate  fluctuations.  In  2020,  the  import 
deflator  for  goods  fell  sharply  by  5.4%,  due  to 
lower  commodity  prices.  This  development  was 
reversed  in  2021,  as  import  prices  grew  by  5.1%, 
largely  because  of  energy  prices,  even  though  the 
rate of increase stayed below that in the euro area, 
which in turn was partly due to the lagged effect of 

the  US 

agreed  with 

arrangement  of  up  to  60  billion  USD  that  the 
Riksbank 
Federal 
Reserve (118).  The  Riksbank  also  increased  the 
flexibility  of  the  collateral  framework,  giving 
banks  more  scope  to  use  mortgage  bonds  as 
collateral  and  subsequently  temporarily  enlarged 
the  circle  of  monetary  policy  counterparties.  The 
Riksbank  extended 
the  framework  for  asset 
purchases  from  SEK  300  billion  to  SEK  500 
billion in July 2020, and again to SEK 700 billion 
in  November  2020.  The  Riksbank's  total  holdings 
of domestic government bills and bonds amounted 
to a cumulative SEK 415 billion in January 2022, 
more than 40% of the outstanding stock of central 
government  debt  instruments.  The  Riksbank  also 
held SEK 420 billion of covered bonds, about one 
fifth of the market. However, on 28 April 2022, the 
Executive Board decided to reduce the pace of the 
Riksbank’s asset purchases during the second half 
of  2022,  so  that  the  holdings  starts  to  decrease. 
Moreover, 
the  Riksbank  ceased  purchasing 
treasury bills as of 28 April 2022. 

Wages and labour costs 

In the years before 2019, employment growth had 
been quite strong. However, this did not lead to a 
marked  decline  in  the  unemployment  rate,  due  to 
the  relatively  strong  growth  of  the  labour  force. 
The  initial  slump  in  the  labour  market  after  the 
pandemic had started was countered by sizable and 
frontloaded  policy  support,  including  support  to 
households  affected  by  temporary  unemployment 
and  to  businesses  suffering  from  turnover  losses. 
the  pandemic, 
During 
the 
employment 
up  markedly, 
unemployment  fell,  and  the  number  of  vacancies 
rose to all-time highs by the first quarter of 2022 as 
employed  shifted  away  from  contact-intensive 
services 
to  other  branches  of  activity.  The 
unemployment  rate  is  expected  to  fall  to  7%  on 
average in 2023, around the 2019 level. 

recovery 
growth 

from 
picked 

The  growth 
in  nominal  compensation  per 
employee stood at close to 3% on average in 2019. 
In Sweden, social partners typically first negotiate 
a  benchmark  agreement  for  exporting  sectors 
aimed  at  maintaining  cost  competitiveness  vis-a-
vis major trading partners; other sectors, including 
services,  tend  to  follow  this  benchmark  rather 
closely.  Against  the  backdrop  of  the  COVID-19 
crisis,  social  partners  deferred 
the  collective 
bargaining  round  foreseen  for  the  first  half  of 
2020.  With  a  delay,  a  new  multi-annual  wage 

(118) The Riksbank has a standing swap line with the ECB. 

136 

-4-20246820162017201820192020202120222023Productivity (real GDP per person employed)Nominal compensation per employeeNominal unit labour costsHICP inflationGraph 8.3: Sweden -Inflation, productivity and wage trends(y-o-y % change)Source: Eurostat, Commission's Spring 2022 Economic Forecast.                                                           
        
Convergence Report 2022 - Technical annex 

Chapter 8 - Sweden 

Medium-term prospects 

According  to  the  Commission’s  Spring  2022 
Economic  Forecast,  inflation  is  set  to  remain 
elevated  in  2022,  mirroring  broad-based  price 
increases  across  a  range  of  goods  and  services  as 
trade and production bottlenecks persist. Domestic 
wage  pressures  are  projected  to  remain  relatively 
contained  over  the  forecast  period,  despite  the 
sharp  increase  in  headline  inflation,  and  some 
expected  rise  in  compensation  growth  in  2023, 
reflecting  the  upcoming  round  of  collective  wage 
bargaining. Risks to the labour cost outlook appear 
skewed to the  upside. However, the  country has a 
long tradition of social partners taking into account 
competiveness  in  their  wage  agreements.  Overall, 
Sweden  should  not  experience  major  changes  in 
cost  competitiveness.  However, 
in 
energy  and  food  prices  in  particular,  along  with 
broad-based increases in other components of core 
inflation are expected to keep headline inflation at 
a  relatively  elevated  rate.  In all,  HICP  inflation  is 
forecast  to  average  5.3%  in  2022  and  decrease  to 
3%  in  2023.  Underlying  inflation  is  set  to  rise 
markedly  from  1.6%  in  2021  to  4.1%  in  2022, 
before  decreasing  to  3%  in  2023  on  the  back  of 
base effects. 

increases 

The  amending  budgets  for  2022  contain  measures 
to  compensate  households  and,  in  particular,  the 
agricultural  sector  for  increases  in  energy  prices 
(energy  tax  deductions  as  well  as  an  electricity 
allowance) amounting to 0.4% of GDP. 

some 

despite 

the  economy 
persistence 

Overall,  as  of  2023  inflation  is  expected  to  meet 
the  Riksbank’s 
is 
target,  as 
in 
normalising, 
underlying  price  pressures.  Risks  to  the  inflation 
outlook  are  on  the  upside,  in  view  of  a  stronger-
than-expected  pass-through  of  cost  increases  and 
war-related  supply  disruptions,  possibly  coupled 
with higher wage increases due to the tight labour 
market.  While  it  is  hard  to  interpret  surveys  on 
inflation  expectations  at  this  juncture,  market 
expectations  show  a  progressive  rise  of  inflation 
above the Riksbank’s target over the medium term. 

exchange rate appreciation. The impact of changes 
in  import  prices  on  consumer  price  inflation  is 
difficult to gauge. There is evidence that the pass-
through  had  been  weakening  before  the  pandemic 
in  view  of,  for  instance,  changes  in  competitive 
conditions  related  to  the  rise  of  global  value 
chains.  However,  during  the  pandemic  it  became 
very  difficult  to  assess  the  pass-through  of  trade 
prices to consumer price inflation, given their high 
volatility  and  complex  interactions  with  price 
effects  of  supply  chain  disruptions,  exchange  rate 
movements, 
sales 
restrictions,  and  other  pandemic-related  factors. 
Nevertheless, 
in 
the  recent  marked 
inflation  indicates  that  import  prices  have  been 
among  the  significant  determinants  of  consumer 
price increases. 

adjustments, 

inventory 

increase 

After  an  initial  weakening  at  the  onset  of  the 
COVID-19  crisis,  the  real  effective  exchange  rate 
of  the  krona  (measured  against  a  group  of  36 
trading  partners)  strengthened  in  the  course  of 
2020,  having  fallen  over  a  number  of  previous 
years.  The  real  effective  exchange  rate  then 
slightly weakened in the course of 2021. For both 
years,  there  were  no  major  discrepancies  between 
the  growth  in  domestic  prices  and  the  growth  in 
domestic prices of Sweden’s main trading partners. 
Likewise,  for 2022 and 2023, major discrepancies 
between nominal and real effective exchange rates 
are  not  expected  to  occur.  Overall,  Swedish  cost 
developments  do  not  pose  major  challenges  to 
competitiveness. 

Administered prices and taxes 

in 

item 

important 

The  share  of  administered  prices  in  the  Swedish 
HICP  basket  amounts  to  just  above  15%,  a  value 
more than 2 percentage points above the euro-area 
average.  The  most 
the 
administrated  price  basket  is  rents.  In  2020,  at 
2.4%,  administered  price 
inflation  exceeded 
headline  HICP  inflation.  By  contrast,  in  2021 
administered price increases were more subdued at 
1.7%  and  fell  appreciably  below  the  overall 
inflation  rate.  The  changes  in  this  component  are 
largely accounted for by a marked increase in fully 
administered prices. 

Tax  changes  contributed  only  marginally  to  in 
headline  inflation  in  both  2020  and  2021,  as  the 
pace  at  which  HICP  at  constant  taxes  increased 
over  these  two  years  was  just  below  the  headline 
number. 

137 

Convergence Report 2022 - Technical annex 

Chapter 8 - Sweden 

period.  This  reflected  mainly  the  phasing  out  of 
several COVID-19 measures during the autumn of 
2021, dominating continued expenditure support in 
some  areas,  as  well  as  a  denominator  effect  as 
growth rebounded strongly in 2021. 

After an increase of close to 5 percentage points in 
the  public  debt-to-GDP  ratio  from  2019  to  2020, 
the debt level resumed its downward path in 2021, 
falling back to 36.7% of GDP, which is lower than 
what  it  was  in  2018.  Apart  from  the  impact  of  an 
improving  nominal  balance  with  the  recovery  in 
economic  activity,  some  of  the  decrease  reflects 
the  stepwise  debt-reducing 
repayment  of  a 
Riksbank loan for foreign currency reserves during 
the  2021-2023  period,  equivalent  to  around  3.5% 
of GDP. 

8.3.2.  Medium-term prospects 

side, 

it  contains  measures 

The  2022  budget,  adopted  in  November  2021, 
includes  new  spending  and  revenue  measures 
amounting  to  around  1.5%  of  GDP.  On  the 
to 
expenditure 
strengthen  social  benefits  (notably  during  sick 
leave),  increased  grants  to  local  governments  and 
cover  pandemic-related 
regions 
costs), 
(to 
active 
labour  market  policies 
strengthened 
(focused  on 
long-term 
the 
the  young  and 
unemployed),  and  measures  to  strengthen  law 
enforcement.  Significant  outlays  also  stem  from 
extended COVID support in the first months of the 
year,  including  in  sick  pay.  In  addition,  the  2022 
budget  includes  spending  on  green  and  digital 
items  financed  by  grants  from  the  Recovery  and 

The level of consumer prices in Sweden relative to 
the  euro  area  has  increased  since  Sweden  joined 
the  EU  in  1995.  In  2020,  the  Swedish  price  level 
stood  at  123%  of  the  euro-area  average.  At  the 
same time, the relative real GDP per capita level in 
Sweden has risen since 2019, reaching about 117% 
of the euro-area average in PPS terms in 2021. 

supply 

In  the  medium  term,  inflation  could  prove  to 
remain  relatively  high  for  longer,  given  the  size 
and possible persistence of price and cost pressures 
(also  reflecting  the  energy  transition),  possible 
of 
persistence 
constraints,  weak 
productivity 
trends,  high  vacancy  rates,  and 
reported  skill  shortages.  However,  as  resource 
utilisation is expected to abate somewhat over the 
forecast  period,  there  is  uncertainty  on  how 
resource  pressures  will  feed  into  inflation.  In 
particular,  if  wage  expectations  would  remain 
relatively  moderate  in  their  response  to  upside 
inflation  surprises,  which has been the case  in the 
prevailing  wage  bargaining  system,  there  is  no 
reason  to  believe  that  wage  increases  will  add  a 
push towards higher inflation. 

8.3. 

PUBLIC FINANCES 

8.3.1.  Recent fiscal developments 

Sweden’s  general  government  balance  improved 
from a deficit of 2.7% of GDP in 2020 to a deficit 
of 0.2% of GDP in 2021. The expenditure-to-GDP 
ratio  decreased  from  52.6%  of  GDP  in  2020  to 
50.2% in 2021, whereas the revenues-to-GDP ratio 
stabilised at around 50% of GDP during the same 

138 

Table 8.3:Sweden - Budgetary developments and projections (as % of GDP unless indicated otherwise)Outturn and forecast 1)20162017201820192020202120221)20231)General government balance1.01.40.80.6-2.7-0.2-0.50.5- Total revenue50.750.650.749.749.950.048.747.7- Total expenditure49.749.249.849.152.650.249.147.2   of which: - Interest expenditure0.50.40.50.40.30.20.10.2p.m.: Tax burden44.744.744.443.543.643.742.742.2Primary balance1.51.91.31.0-2.40.0-0.30.7Fiscal stance 2)1.50.1-0.61.3Government gross debt42.340.738.934.939.636.733.830.5p.m: Real GDP growth (%)2.12.62.02.0-2.94.82.31.41) Commission’s Spring 2022 Economic Forecast. 2) A negative (positive) sign of the indicator corresponds to an excess (shortfall) of primary expenditure growth compared with medium-term economic growth, indicating an expansionary (contractionary) fiscal policy.Source: European Commission. 
 
  
 
 
Resilience  Facility,  amounting  to  0.2%  of  GDP. 
On  the  revenue  side,  the  draft  budget  entails  a 
generalised  income  tax  cut  as  well  as  targeted 
reductions  for  people  on  sickness  and  disability 
benefits. Nevertheless, tax receipts are expected to 
hold up, in line with the resilient labour market and 
healthy corporate profitability. 

to  be  adopted.  On  balance, 

In  addition,  the  parliament  adopted  a  set  of 
amending  budgets  in  the  first  months  of  the  year. 
Further  measures  were  announced  on  19  April 
2022  in  the  Spring  amending  budget  bill,  which 
remains 
these 
additional  measures  amount  to  an  increase  in  net 
expenditures  of  close  to  1.5%  of  GDP  to  address 
the  continuing  impact  of  the  pandemic,  introduce 
extraordinary  compensation  to  households  and 
firms for soaring energy prices, cover the costs of 
refugees from Ukraine, and provide for structurally 
higher  spending  on  defence.  In  all,  the  general 
government balance is expected to register a small 
deficit  of  0.5%  of  GDP  in  2022,  in  light  of  the 
planned expenditure increases. 

to 

On  29  April  2022,  Sweden  submitted  its  2022 
Convergence  Programme.  According 
the 
Programme,  the  headline  deficit  is  projected  to 
increase  somewhat  to  0.5%  of  GDP  in  2022  and 
turn  into  a  surplus  of  0.7%  of  GDP  in  2023.  The 
government  deficit  in  2022  is  impacted  by  the 
additional  measures  taken  by  the  government  to 
counter  the  social  and  economic  impact  of  the 
pandemic and the increase in energy prices. Based 
on  the  Commission’s  Spring  2022  Economic 
Forecast, the measures to cushion the impact of the 
increase in energy prices are estimated at 0.4% of 
GDP  in  2022,  which  are  currently  expected  to  be 
temporary  and  to  be  withdrawn  in  2023.  The 
annual cost of humanitarian assistance is projected 
at 0.1% of GDP in 2022 and 2023. 

The  Commission’s  Spring  2022  Economic 
Forecast projects the general government deficit to 
reach 0.5% of GDP in 2022 and turn into a surplus 
of  0.5%  of  GDP  in  2023.  The  projections  for 
public 
the  2022  Convergence 
Programme  are  thus  close  to  the  Commission’s  
Spring 2022 forecast. 

finances 

in 

For  2022, 
the  Commission’s  Spring  2022 
Economic Forecast projects the fiscal stance to be 
supportive  at  0.6%  of  GDP (119).  The  Forecast 

Convergence Report 2022 - Technical annex 

Chapter 8 - Sweden 

financed  by 

that  expenditures 

projects 
the 
Recovery  and  Resilience  Facility  grants  and  other 
EU  funds  will  contribute  positively  to  economic 
activity  at  0.2  of  a  percentage  point  of  GDP  in 
2022, higher by 0.1 of a percentage point of GDP 
compared to 2021. Nationally financed investment 
is projected to provide a neutral contribution to the 
fiscal  stance.  At  the  same  time,  the  growth  in 
nationally  financed  primary  current  expenditure 
(net of new revenue measures) in 2022 is projected 
to provide an expansionary contribution of 0.4 of a 
percentage  point  of  GDP  to  the  overall  fiscal 
stance,  as  current  expenditure  is  set  to  grow  at  a 
faster  pace  than  medium-term  potential  growth. 
However,  much  of  this  expansion  is  due  to 
temporary  measures  to  support  the  economy  in 
facing current headwinds.  

In  2023,  the  fiscal  stance  is  projected  to  turn 
contractionary  at  1.3%  of  GDP.  The  positive 
contribution  to  economic  activity  of  expenditure 
financed  by  Recovery  and  Resilience  Facility 
grants and other EU funds is projected at 0.1 of a 
percentage  point  of  GDP  in  2023,  reflecting  the 
frontloaded  financial  support  from  the  Recovery 
and  Resilience  Facility 
in  2021  and  2022. 
Nationally  financed  investment  is  projected  to 
provide  a  slightly  contractionary  contribution  to 
the  fiscal  stance (120).  The  growth  in  nationally 
financed  primary  current  expenditure  is  projected 
to  provide  a  contractionary  GDP  contribution  to 
the overall fiscal stance in 2023. 

Debt  sustainability  risks  appear  low  over  the 
medium  term.  Government  debt  is  projected  to 
decrease  reaching  around  11%  of  GDP  in  2032. 
This projection assumes that the structural primary 
balance (except  for the impact of ageing) remains 
constant  at  the  forecast  level  for  2023  of  1.3%  of 

(119) For a definition of the fiscal stance used in this report,  see 
footnote  in  Section  8.2.3  on  underlying  factors  and 
sustainability of inflation.  

(120) Other  nationally  financed  capital  expenditure  is  projected 

to provide a neutral GDP contribution. 

139 

-10122020202120222023Net nationally financed  primary current expenditureNationally financed investmentOther capital expenditureExpenditure financed by RRF grants and EU fundsFiscal stanceExpansionaryContractionaryGraph 8.4: Sweden -Fiscal stance and its components(percent of GDP)Source: Commission's Spring 2022 Economic Forecast.                                                            
         
                                                           
Convergence Report 2022 - Technical annex 

Chapter 8 - Sweden 

tasked 

to  evaluate 

Council  was 
the  official 
macroeconomic  forecasts  and  to  perform  costing 
of  reform  proposals.  It  also  received  the  explicit 
task to assess whether there is a deviation from the 
net  lending  target  and,  if  so,  to  assess  the  reasons 
for  the  deviation,  and  to  propose  how  fast  the 
government  should  eliminate  it.  Furthermore,  in 
order  to  increase  the  diversity  of  the  Council,  the 
member selection process was changed. Instead of 
current  Council  members  nominating  new 
candidates, this task now resides with a nomination 
committee,  which  among  its  members  has  the 
Chair  and  Deputy  Chair  of  the  parliamentary 
Finance Committee. It is still the government that 
formally appoints the new members. 

Some of the new elements in the fiscal framework 
contribute  to  bringing  the  framework  in  line  with 
the Budgetary Frameworks Directive (122), such as 
introducing  the  debt  anchor  as  an  explicit  multi-
annual  debt  objective,  or  mandating  the  Fiscal 
Council  with 
the 
government's economic forecasts. 

the  regular  assessment  of 

8.4. 

EXCHANGE RATE STABILITY 

The Swedish krona does not participate in ERM II. 
As indicated above, the Riksbank pursues inflation 
targeting  under  a  de  jure  floating  exchange  rate 
regime. 

The  long-term  trend  of  the  krona  depreciating 
against the euro started in 2013 and ended in early 
April 2020, after a cumulated depreciation of more 
than 30%. With the onset of the COVID-19 crisis, 
the  krona  first  weakened,  but  then  started  to 
appreciate,  on  the  back  of  the  resilience  of  the 
economy,  with  Sweden  implementing  less  strict 

(122) The Council Directive 2011/85/EU of 8 November 2011 on 
requirements  for  budgetary  frameworks  of  the  Member 
States, 
https://eur-lex.europa.eu/legal-
content/EN/ALL/?uri=CELEX:32011L0085 

available 

at: 

GDP, which constitutes an improvement compared 
to the 2019 level. 

The low sensitivity to possible macro-fiscal shocks 
also contributes to this assessment. In particular, if 
only  half  of  the  projected  improvement  in  the 
structural  primary  balance  in  2022-2023  were  to 
occur,  the  projected  debt  ratio  in  2032  would  be 
only some 1 percentage points of GDP higher than 
in the baseline, i.e. still substantially below 60% of 
GDP. 

Some factors mitigate risks, including the stability 
of  debt  maturity  in  recent  years,  relatively  stable 
financing  sources  (with  a  diversified  and  large 
investor  base),  historically  low  borrowing  costs 
reflecting  a  long-standing  strong  creditor  status, 
Sweden’s  positive  net  international  investment 
position and the expected positive impact on long-
term  growth  of  reforms  under  the  Recovery  and 
Resilience  Plan.  Risk-increasing  factors  include 
the  possible  materialisation  of  state  guarantees 
granted  to  firms  and  self-employed  during  the 
this  risk 
COVID-19  crisis, 
remains limited due to relatively low take-up (121). 

though  currently 

in  2019.  Among 

took  effect 
the  government 

Building  on  a  strong  institutional  set-up  and  a 
robust  fiscal  track-record,  revisions  to  the  fiscal 
framework 
the 
novelties, 
introduced  a  debt 
anchor,  set  at  35%  of  GDP  with  a  5-percentage-
point  tolerance  margin,  and  the  net  lending  target 
was  lowered  from  1%  of  GDP  over  the  cycle  to 
0.33%  of  GDP.  The  expenditure  ceiling  and  the 
balanced  budget  requirement  for  local  authorities 
were  left  unchanged.  The  fulfilment  of  the  net 
lending  target  will  be  assessed  based  on  a  single 
indicator, the structural balance in the  current and 
subsequent  year,  replacing  a  system  of  several 
indicators  with 
The 
to  conduct  regular 
government  also  decided 
reviews  of  the  adequacy  of  the  framework  every 
eight  years,  in  the  final  year  of  every  second 
parliament. Despite the relaxation of the target, the 
authorities  still  consider  there  to  be  an  adequate 
safety  margin  to  allow  for  normal  economic 
fluctuations  without  breaching  the  3%  of  GDP 
deficit  benchmark  of  the  Stability  and  Growth 
Pact. 

undefined  weights. 

The revisions to the fiscal framework also entailed 
a  widened  mandate  for  the  Fiscal  Policy  Council 
in  2007.  The 
(Finanspolitiska  rådet),  set  up 

(121) For  further  details  see  the  2021  Fiscal  Sustainability 

Report. 

140 

8.08.59.09.510.010.511.011.5201620172018201920202021Graph 8.5: Sweden -SEK/EUR exchange rate(monthly averages)Source: ECB.                                                           
    
                                                           
measures  than  most  euro-area  Member  States  in 
response to the pandemic. Between April 2020 and 
November  2021,  the  krona  appreciated  by  almost 
8%  against  the  euro,  and  reached  a  new  peak  at 
10.05  SEK/EUR.  As 
the  euro-area  economy 
recovered,  and  Member  States  gradually  loosened 
their  restrictions,  the  krona  fell  back  by  3%  in 
December 2021 and January 2022. In February and 
March  2022,  the  krona  depreciated  by  another 
1.8%,  as  Russia’s  invasion  of  Ukraine  spurred 
safe-haven  flows.  This  was  followed  by  a  2.2% 
reversal in April. Volatility in the exchange rate is 
significant,  where  short-term  fluctuations  reflect 
changes  in  risk  appetite  and  short-term  funding 
flows,  as  well  as  changing  perceptions  of  the 
future direction of monetary policy. 

The  3-month  STIBOR-EURIBOR  spread  has 
remained  broadly  stable  since  June  2020.  The 
spread  averaged  50  basis  points  in  2020  and 
51 basis  points  in  2021.  Since  June  2020,  the 
spread  has  remained  in  a  range  of  43-56  basis 
points, without any large swings. Thus, the episode 
of appreciation and subsequent depreciation of the 
Swedish  krona  between  2020  and  early  2022 
cannot be accounted for by changes in the spreads 
on short-term interest rates. 

Since December 2015, the Riksbank can intervene 
on foreign exchange markets in order to prevent a 
de-anchoring  of  inflation  expectations  due  to  a 
strengthening krona. The level of foreign currency 
reserves and gold decreased by almost 9% in krona 
between  December  2019  and  December  2020  and 
increased  by  more  than  5%  between  December 
2020 and December 2021, when it stood at around 
SEK  461  billion.  At  the  beginning  of  2022, 
international reserves stood just below the level of 
SEK  460  billion,  or  around  8.5%  of  GDP.  The 
change  in  2020  reflects  changes  in  the  exchange 
rate and the Riksbank decisions to lower the level 

Convergence Report 2022 - Technical annex 

Chapter 8 - Sweden 

of foreign exchange reserves, which had increased 
substantially  after  the  global  financial  crisis.  The 
post-crisis increase was financed by loans from the 
Swedish  National  Debt  Office.  However,  the 
Riksbank  has  decided  to  repay  the  loans  and 
instead  obtain  dollars  and  euros  using  Swedish 
krona. 

8.5. 

LONG-TERM INTEREST RATES 

Long-term  interest  rates  used  to  assess  adherence 
to  the  convergence  criterion  reflect  secondary 
market  yields  on  a  single  benchmark  government 
bond with a residual maturity of around ten years. 

The Swedish 12-month moving average long-term 
interest  rate,  relevant  for  the  assessment  of  the 
Treaty  criterion  was  well  below  the  reference 
value  at  the  time  of  the  2020  convergence 
assessment  of  Sweden.  The  12-months  average 
continued  to  stay  below  1%  over  the  last  two 
years,  where  it  has  been  since  June  2015.  It 
remained  stable  during  2020,  and  the  first  quarter 
of 2021 at around  -0.04%. Since March 2021, the 
12-month  average  interest  rate  has  edged  up  into 
positive  territory  and  reached  0.3%  in  January 
2022.  In  April  2022,  the  latest  month  for  which 
data are available, the reference value, given by the 
average  of  long-term  interest  rates  in  France, 
Finland and Greece plus 2 percentage points, stood 
at  2.6%.  In  that  month,  the  12-month  moving 
average  of  the  yield  on  the  Swedish  benchmark 
bond  stood  at  0.4%,  i.e.  2.2  percentage  points 
below the reference value. 

As  regards  monthly  data,  long-term  interest  rates 
were  very  stable  during  2020,  with  small 
fluctuations  around  0%.  The  highest  rate  in  2020 
was  0.1%  and  the  lowest  was  -0.2%.  Since  the 
beginning  of  2021,  the  interest  rate  has  been 
fluctuating around a slightly higher level of 0.3%. 

141 

-40-20020406080201620172018201920202021Graph 8.6: Sweden -3-M Stibor spread to 3-M Euribor(basis points, monthly values)Source: Eurostat and Thomson Reuters.-20246Jan-16Jan-17Jan-18Jan-19Jan-20Jan-21Jan-22SwedenReference valueGraph 8.7: Sweden -Long-term interest rate criterion(percent, 12-month moving average)Source: European Commission.     
    
Convergence Report 2022 - Technical annex 

Chapter 8 - Sweden 

Volatility increased somewhat in 2021, but overall 
the long-term interest rate continued to be broadly 
stable in a range of 0.1-0.4%. The compression of 
Swedish  long-term  interest  rates  in  2020-2021 
reflected  the  continuation  of  the  non-standard 
monetary  policy  measures,  with 
continued 
acquisition  and  reinvestment  of  governments 
bonds  as  a  response  to  the  low  domestic  inflation 
environment. The Riksbank decided to increase its 
asset-purchase  programme  in  response  to  the 
COVID-19  crisis.  The  yields  of  the  Swedish 
benchmark  government  bond  remained  relatively 
closely aligned to the German benchmark bond, in 
line  with 
the  safe-haven  status  of  Swedish 
government  bonds.  However,  long-term  interest 
spreads  vis-à-vis  the  German  benchmark  bond 
increased during 2020 and 2021, from a low of 37 
basis points to a high of 76 basis points in March 
2021.  Since 
the  spread  declined  until 
February 2002, before increasing to 72 basis points 
in April 2022. 

then 

8.6.  ADDITIONAL FACTORS 

The  Treaty  (Article  140  TFEU)  calls  for  an 
examination  of  other  factors  relevant  to  economic 
integration  and  convergence  to  be  taken  into 
account  in  the  assessment.  The  assessment  of  the 
additional 
including  balance  of 
factors  — 
labour  and 
payments  developments,  product, 
financial market integration  — gives an important 
indication  of  a  Member  State's  ability  to  integrate 
into the euro area without difficulties. 

In  November  2021,  the  Commission  published  its 
latest Alert Mechanism Report (AMR 2022) under 
the  Macroeconomic  Imbalance  Procedure  (MIP  - 
see  also  Box  1.7),  which  concluded  that  an  In-
Depth Review  was  warranted for Sweden. Taking 
its  In-Depth 
into  account 

the  assessment 

in 

142 

Review,  the  Commission,  in  its  Communication 
‘European  Semester  – 2022 Spring Package’ (123), 
considers  that  Sweden  is  experiencing  imbalances 
with  vulnerabilities  that  relate  to  high  and  rising 
house  prices  and  high  household  indebtedness.  In 
2021,  house  prices  moved  further  away  from 
fundamental  values  with  supportive  financial 
conditions  continuing  to  fuel  housing  demand. 
High household debt 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. 
Private  debt  has  risen  further,  a  large  share  of 
which 
real  estate,  both 
commercial  and  housing,  and  most  of  household 
mortgage  debt  is  at  variable  interest  rates.  Policy 
sufficiently 
measures 
addressed 
to  housing  debt  and 
vulnerabilities 
potential 
overvaluations.  Tax 
incentives for debt-financed housing remain, along 
with 
identified 
shortcomings  in  the  functioning  of  the  rental 
market.  Measures  in  the  RRP  only  address  the 
vulnerabilities in a partially satisfactory manner. 

not 
relating 

is  concentrated 

shortages 

supply 

house 

price 

have 

and 

in 

in 

Sweden submitted its recovery and resilience plan 
(RRP)  on  28  May  2021.  The  Commission’s 
positive  assessment  on  29  March  2022  and 
Council’s approval on 4 May 2022 paved the way 
for  the  implementation  of  the  RRP  and  the 
disbursement  of  EUR  3.3  billion  in  grants,  which 
is  equivalent  to  0.7%  of  2019  GDP,  over  the 
period 2022-2026. 

and 

reforms 

investments 

includes  a  set  of  mutually 
Sweden’s  plan 
(12 
reinforcing 
investments  and  15  reforms)  that  contribute  to 
effectively addressing all or a significant subset of 
the economic and social challenges outlined in the 
country-specific 
(CSRs) 
addressed  to  Sweden  by  the  Council  in  the 
European Semester in 2019 and 2020. 

recommendations 

The  plan  addresses  among  others  key  macro-
economic  challenges  such  as  green  and  digital 
transition, demographic change, and strengthening 
the  education  and  healthcare  systems.  Key 
investments are included to support the low carbon 
and  energy  transitions,  as  well  as  sustainable 
infrastructure,  such  as  broad  subsidy  schemes 
aimed  at  speeding  up  the  decarbonisation  of 
industry  and  transport  via  the  promotion  of 
investment  in  the  development  and  application  of 
innovative  technologies  for  fossil-free  solutions, 

(123) COM(2022)600 final. 

-1012201620172018201920202021SwedenGermanyGraph 8.8: Sweden -Long-term interest rates(percent, monthly values)Source: Eurostat.    
                                                           
Convergence Report 2022 - Technical annex 

Chapter 8 - Sweden 

Member  States  (Pfeiffer  et  al.  2021) (124).  This 
does  not  take  into  account  the  positive  impact  of 
structural reforms on growth. 

8.6.1.  Developments  of 

the  balance  of 

payments 

According to Balance of Payments data,  Sweden's 
current account surplus increased to 6% of GDP in 
2020,  as  domestic  demand  retrenched  and  goods 
trade  held  up  comparatively  well,  despite  plant 
closures  and  other 
supply  and  production 
disruptions in the wake of the pandemic. A decline 
in  the  balance  on  services  offset  the  further 
increase  in  the  primary  income  balance  that  had 
trended  up  from  2015  onwards.  In  2021,  the 
current account broadly stabilised at 5.5% of GDP, 
driven  by  high  surpluses  in  the  goods  and  the 
primary 
income  balances.  The  solid  export 
performance in goods was supported by the strong 
competitive  position  of  Swedish  exporters.  By 
contrast,  as  in  2020,  current  transfers  delivered  a 
negative  impact  on  the  current  account  balance, 

(124) See  Pfeiffer  P.,  Varga  J.  and  in  ’t  Veld  J.  (2021), 
“Quantifying  Spillovers  of  NGEU  investment”,  European 
Economy  Discussion  Papers,  No.  144  and  Afman  et  al. 
(2021),  “An  overview  of  the  economics  of  the  Recovery 
and  Resilience  Facility”,  Quarterly  Report  on  the  Euro 
Area (QREA), Vol. 20, No. 3 pp. 7-16. 

143 

the 

roll  out  of  high-speed 
acceleration  of 
broadband 
in  sparsely  populated  areas  and 
investing in continuous learning and digital skills. 
Key reforms include promoting decarbonisation by 
requiring  fuel  suppliers  to  blend  in  sustainable 
biofuels in petrol, diesel and jet fuel, improving the 
sustainability  of  the  pension  and  social  security 
system,  combating  money  laundering,  increasing 
the  health 
the  accessibility  and  capacity  of 
care system, 
training  of 
through 
elderly care providers, as well as measures that aim 
to promote housing supply by reducing bottlenecks 
in permit procedures. 

in  particular 

The  plan  devotes  44.4%  of  its  total  allocation  to 
measures  supporting  climate  objectives,  20.5%  to 
transition  and  38.1%  on  social 
the  digital 
expenditure,  all  while  respecting 
the  do  no 
significant harm principle. 

The  implementation  of  the  investments  in  the 
Swedish plan, along  with other investments under 
NextGenerationEU, is estimated to raise Sweden’s 
GDP by 0.6% by 2026, of which 0.3% due  to the 
the  coordinated 
positive  spillover  effects  of 
implementation  of  NextGenerationEU  across 

Table 8.4:Sweden - Balance of payments(percentage of GDP)201620172018201920202021Current account2.43.02.75.56.15.5of which: Balance of trade in goods1.62.12.03.94.64.5                 Balance of trade in services1.50.60.30.60.0-0.1                 Primary income balance 0.51.72.02.93.53.0                 Secondary income balance-1.3-1.5-1.6-1.9-2.1-1.9Capital account0.00.00.00.00.10.2External balance 1)2.32.92.85.56.15.7Financial account-4.94.11.64.5-9.51.7of which: Direct investment-2.82.72.51.30.9-1.1                Portfolio investment1.10.6-1.82.2-11.07.1                Other investment 2)-4.00.70.92.20.5-5.2                Change in reserves0.80.1-0.1-1.20.11.0Financial account without reserves-5.74.11.65.7-9.70.8Errors and omissions-7.21.2-1.2-1.0-15.7-3.9Gross capital formation24.725.726.025.124.825.6Gross saving27.128.528.630.330.831.1Net international investment position -3.5-0.98.116.214.117.81) The combined current and capital account.2) Including financial derivatives.Sources: Eurostat, Statistics Sweden, European Commission calculations.                                                           
 
 
  
 
 
reflecting  Sweden's  foreign  aid  and  positive  net 
contributions to international organisations, as well 
as  remittances  transferred  by  foreign  workers  in 
Sweden to their home countries. 

Sweden's  net  international  investment  position 
improved  markedly  to  nearly  15%  of  GDP  in 
2020, and is expected to have improved further in 
2021. Sweden's financial account shows relatively 
large fluctuations over time. However, seen over a 
longer  period,  the  financial  account  balance  has 
been  mostly 
in  surplus  and  mainly  reflects 
Sweden's  role  as  a  net  FDI  investor  abroad. 
Similarly,  the  balance  of  portfolio  investments 
fluctuated appreciably from year to year, mirroring 
the  interplay  of  financial  market  conditions  and 
perceptions,  exchange  rates  and  relative  cyclical 
positions but remained mostly in surplus. External 
debt  was  on  a  declining  trend,  and  decreased  by 
more than 20 percentage points between 2014 and 
2019,  to  around  170%  of  GDP  in  the  latter  year. 
The  strong  fiscal  position  with  the  concurrent 
decline in gross government debt has been a factor 
behind this decline. In 2020 and 2021, the ratio of 
external debt to GDP remained broadly stable. 

Sweden's  export  market  share  has  been  declining 
overall  since  the  early  2000s,  a  phenomenon 
shared  with  several  other  high-income  countries. 
The  trend  decline  in  the  export  market  shares  is 
linked  to  changing  global  trade  patterns,  which 
affect  most  mature,  industrialised  economies  with 
a similar focus on high-value-added exports. Thus, 
this  downward 
trend  does  not  suggest  any 
underlying  competitiveness  issues  per  se.  It  is 
difficult to assess short-term fluctuations in export 
shares given the high degree of volatility in global 
trade  since  2020.  These  make  it  even  harder  than 
in  more  stable  phases  of  the  cycle  to  separate 
specific factors that impact trade performance from 
export 
cyclical 
specialisation  and  from  changes  in  structural 
features. 

composition 

effects 

of 

in 

by 

the 

developments 

This  benign  conclusion  on  competitiveness  is 
buttressed 
cost 
competitiveness  indicators.  The  nominal  and  real 
effective  exchange  rates  strengthened  over  2020, 
in  2021.  Unit  labour  costs 
but  fell  slightly 
exhibited large swings in 2020 and 2021 in view of 
the  disparate  behaviour  of  economic  activity  and 
employment  metrics,  all  affected  heavily  by  the 
policy 
as 
pandemic 

large-scale 

as  well 

Convergence Report 2022 - Technical annex 

Chapter 8 - Sweden 

intervention (125). Allowing  for such volatility, the 
underlying trend is that unit labour costs have been 
growing fairly moderately over the past number of 
years  and  broadly  in  line  with  Sweden's  main 
trading partners. 

According  to  the  Commission’s  Spring  2022 
Economic  Forecast,  which  is  based  on  National 
Accounts  data,  the  current  account  surplus  is 
projected to fall further in 2022, to 4.8% of GDP, 
in  National  Account  terms,  before  rising  again  to 
5.8% of GDP in 2023. 

8.6.2.  Market integration 

Sweden  is  well  integrated  with  the  euro  area 
through  trade  and  investment  linkages.  Trade 
openness  of  the  Swedish  economy  has  been  high, 
at  over  40%  (except  in  2016,  when  it  was  just 
below  that  level)  or  more  every  year  since  2005, 
although  falling  back  in  2020  to  somewhat  over 
the 2016 level. However, trade openness recovered 
in  2021.  The  main  euro-area  trading  partners  are 
Germany,  the  Netherlands  and  Finland,  while 
among  non-euro-area  countries  Norway  and 
Denmark are the main trade partners. 

The stock of inward FDI has remained fairly stable 
relative  to  GDP  in  recent  years  (equivalent  to 
92.2%  of  GDP  in  2020  and  92.9%  in  2021).  As 
regards  net  inward  FDI  in  2021,  close  to  56% 
originated  from the euro area,  whereas substantial 
flows  originate  from  non-euro-area  countries, 
primarily  Denmark,  Norway  and  the  UK,  a  well-
established pattern over a longer period. 

Regarding 
the  business  environment,  Sweden 
regularly  scores  top  positions  in  international 

(125) The REER based on unit labour costs should be interpreted 
with prudence as unit labour costs were distorted by labour 
retention schemes in some countries, including Sweden. 

144 

8090100110201620172018201920202021Graph 8.9: Sweden -Effective exchange ratesNEERREER, HICP deflatedREER, ULC deflated(vs. 36 trading partners;  monthly averages;index numbers, 2016 = 100)Source: European Commission.    
                                                           
Convergence Report 2022 - Technical annex 

Chapter 8 - Sweden 

The  Swedish  labour  market,  largely  governed  by 
negotiations  between  social  partners  at  sectorial 
level,  is  characterised  by  high  employment  rates. 
Sweden  has  the  largest  labour  force  participation 
rate  in  the  EU.  Low  nominal  wage  increases  in 
recent  years  have  been  a  factor  behind  muted 
underlying  inflation.  In  the  wake  of  the  COVID-
pandemic,  modest  multi-year  wage  agreements 
among  social  partners  (which  extend  into  2023) 
have  helped  contain  wage-induced  inflation  risks. 
Sweden has one of the lowest wage dispersions in 
the EU, with high entry wages and relatively little 
wage  progression.  According  to  the  2019  OECD 
employment  protection  indicator,  the  employment 
protection  of  permanent  workers  is  rather  high 
compared  to  that  of  temporary  workers.  The 
dispersion  of  regional  unemployment  rates  is 
relatively  low,  but  persistent  imbalances  in  the 
housing market and high costs of housing, not only 
in  the  larger  cities  but  also  in  new  development 
poles,  like  in  the  north  of  the  country,  pose 
challenges  to  labour  mobility.  The  integration  of 
low-skilled workers and those born outside the EU 
remain  a  key  challenge  for  the  Swedish  labour 
market,  though,  as  the  employment  rate  of  both 
the  overall 
significantly  below 
groups 

is 

145 

to 

the 

indicator  and 

rankings, well above most euro-area Member State 
and  currently  ranks  in  the  top  ten  at  global  level, 
with  respect  to  the  World  Bank's  Ease  of  Doing 
Business 
IMD  World 
Competitiveness  Ranking (126).  According  to  the 
World  Bank's  Worldwide  Governance  Indicators 
(2020),  Sweden  ranks  higher  than  the  average  of 
the  euro-area  Member  States  in  all  six  categories, 
notably voice and accountability, political stability 
government 
and 
effectiveness,  regulatory  quality,  rule  of  law  and 
control  of  corruption. (127)  Sweden's  deficit  in  the 
transposition  of  EU  directives  in  2020  was  at 
0.7%,  below  the  EU  average  and  just  above  the 
0.5% 
the  European 
Commission in the Single Market Act (2011). 

target  as  proposed  by 

violence, 

absence 

of 

Sweden  has  notified  a  complete  transposition  of 
the 5th Anti-Money Laundering Directive, and the 
Commission  is  currently  assessing  whether  there 
are any potential conformity or effectiveness issues 
in the transposition or implementation of the legal 
act. 

(126) The  World  Bank  Doing  Business  (DB)  program  was 
paused in 2021. The programme will continue with a new 
governance  and  improved  accountability  and  transparency 
under  the  name  Business  Enabling  Environment  (BEE). 
The first edition of the BEE is expected in 2023. 

(127) A  Member  State  is  considered  to  have  a  ‘low’  (‘high’) 
ranking compared with the average five euro area Member 
States with the lowest scores for each indicator if its score 
is at least 0.3 percentage points lower (higher) than that of 
the average of this euro area group. 

0.00.61.21.82.4Voice and AccountabilityPolitical Stability and Absenceof Violence/TerrorismGovernment EffectivenessRegulatory QualityRule of LawControl of CorruptionSwedenEuro area average five lowestEuro area averageGraph 8.10: Sweden -2020 World Bank's Worldwide Governance IndicatorsNote: Estimate of governance ranges from -2.5 (weak) to 2.5 (strong). Source: World Bank.Table 8.5:Sweden - Market integration201620172018201920202021Trade openness 1) (%)39.841.243.444.340.742.4Trade with EA in goods & services 2)+3) (%)17.418.219.019.217.718.6World Bank's Ease of Doing Business Index rankings 4)910121010-IMD World Competitiveness Ranking 5)599962Internal Market Transposition Deficit 6) (%)1.40.30.10.70.7-Real house price index 7)107.3112.4108.7109.1112.4121.5 1) (Imports + Exports of goods and services / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics, Balance of Payments). 2) (Imports + Exports of goods with EA-19 / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics). 3) Trade in services with EA-19 (average credit and debit in % of GDP at current prices) (Balance of Payments). 4) Data not available for 2021. The Ease of Doing Business report by the World Bank was discontinued in September 2021.  5) International Institute for Management Development (IMD). 6) Percentage of internal market directives not yet communicated as having been transposed, relative to the total.    (November data, as of 2016 date refers to the year of publication). 7) Deflated house price index (2015=100) (Eurostat). Sources: Eurostat, World Bank, International Institute for Management Development, European Commission calculations. 
                                                           
   
 
 
    
 
 
Convergence Report 2022 - Technical annex 

Chapter 8 - Sweden 

investment-funds sector is of roughly equal size as 
in the euro area, and plays a similar role. 

As  to  the  financing  of  the  economy,  Sweden  has 
among  the  most  developed  credit  and  equity 
markets  relative  to  GDP,  and  market  financing 
(debt  securities  and  listed  shares)  is  among  the 
highest  in  the  EU.  Loans  are  still  an  important 
source  of  funding  and  make  up  276%  of  GDP  in 
2020, compared to 240% of GDP in the euro area. 
This partially reflect the high degree of household 
indebtedness.  Equity 
and  private-sector-debt 
markets  are  very  large  compared  to  those  of  the 
euro  area.  Private-sector  debt  markets  represent 
134%  of  GDP,  and  listed  stocks  represents  182% 
of  GDP.  This  compares  to  83%  for  private-sector 
debt  and  73%  for  listed  stocks  in  the  euro  area. 
Government debt is significantly lower than in the 
euro  area.  In  terms  of  share  of  the  sum  of 
liabilities, loans in Sweden are comparable to that 
of  the  euro  area.  For  securities,  the  differences 
reflect the larger share of market funding available 
in Sweden, and the traditional recourse to this type 
of funding. 

employment  rate.  During  the  recovery  from  the 
initial  COVID-19  shock,  the  number  of  unfilled 
vacancies rose sharply. In the first quarter of 2022, 
the  vacancy  ratio  rose  to  the  highest  level  on 
record since the statistic reporting on this variable 
started in 2009. While this high ratio partly reflects 
transitory  shortages,  given  the  high  rate  of  labour 
market  turnover  and  job-switching  in  the  wake  of 
the  pandemic, 
it  also  points  at  mismatches 
extending to a wide range of branches of economic 
remain  particularly 
activity.  Skills  shortages 
pronounced in education, health care, social work, 
information 
technology, 
industry and construction. 

communication 

and 

The financial sector in Sweden is highly developed 
and  is  commensurate  to  that  of  the  average  in  the 
euro area. Relative to GDP, assets managed by the 
financial  sector  are  about  85%  of  that  of  the  euro 
area. Since 2016, the Swedish financial sector has 
grown  significantly  more  than  it  has  in  the  euro 
area.  Banking  dominates  the  Swedish  financial 
sector  and  makes  up  around  45%  of  the  assets  of 
the financial sector, which is more than in the euro 
area. Non-money-market funds are at par with the 
euro  area,  and  despite  the  Riksbank’s  extensive 
asset-purchase  programme, 
it  only  holds  a 
relatively small share of total financial assets (less 
than half of what the ECB accounts for). 

The  insurance  and  pension-fund  sector  in  Sweden 
is the second largest manager of financial assets. It 
is  almost  twice  as  big  as  it  is  in  the  euro  area, 
relative  to  GDP.  This  reflects  the  high  degree  of 
development  of  the  funded  pension  system.  Since 
end-2016,  the  sector  has  increased  its  holdings  of 
financial  assets  by  almost  29  percentage  points  in 
relation to GDP, while in the euro area it increased 
by only 12 percentage points. However, as a share 
financial 
of 
corporations  in  the  economy,  the  insurance  and 
pension  fund  sector  has  been  broadly  stable.  The 

total  assets  managed  by  all 

Sweden's banking sector is well integrated into the 
euro-area  financial  sector,  through  a  high  level  of 
foreign  ownership  in  its  banking  system,  and 
because  Stockholm  acts  as  regional  financial  hub. 
The  share  of  foreign-owned  institutions  in  total 
bank  assets  stood  at  21%  in  2020,  surpassing  the 
euro-area  average  by  5  percentage  points.  The 
share  more than doubled between 2016 and 2020, 
when  Nordea’s  headquarter  moved  to  Finland  in 
2018.  Bank  concentration,  as  measured  by  the 
market  share  of  the  five  largest  credit  institutions 

146 

Table 8.6:Sweden - Allocation of assets by financial sub-sectorRatio to GDP (%)SEEAEA 5 smallest201620202016202020162020Financial corporations (total)577677722796177215Central bank192645783761Monetary financial institutions2853022863119798Other financial intermediaries65832021792028Non-MMF investment funds1)8110810012745Insurance co. and Pension Funds126158901021823Share of total (%)SEEAEA 5 smallest201620202016202020162020Central bank346102129Monetary financial institutions494540395546Other financial intermediaries111228221112Non-MMF investment funds1416141622Insurance co. and Pension Funds2223121310111) MMF stands for money market funds.Source: Eurostat.Table 8.7:Sweden - Financing of the economy1)Ratio to GDP (%)SEEAEA 5 smallest201620202016202020162020Liabilities (total)8931016743770324335Loans247278238236115112Non-financial co. debt securities2130121534Financial co. debt securities11511274681112Government debt securities363083955157Listed shares13918265731718Unlisted shares2502911861935556Other equity647351564248Trade credits and advances212233352929Share of total (%)SEEAEA 5 smallest201620202016202020162020Loans282732313533Non-financial co. debt securities232211Financial co. debt securities131110933Government debt securities4311121617Listed shares16189955Unlisted shares282925251818Other equity77771314Trade credits and advances2245991) The table focuses on the financing needs of a country and how these are met by the financial system. The table is constructed from the liabilities of all economic sectors, but only considers loans, debt securities, equity and trade credits. The sum of liabilities in the table only reflects the total for the liabilities considered.Source: Eurostat. 
 
    
 
 
 
 
   
 
 
Convergence Report 2022 - Technical annex 

Chapter 8 - Sweden 

in total assets, has remained broadly stable at 55%, 
slightly  above  the  euro-area  average,  which  was 
53% at the end of 2020. 

In 

of 

the 

lowest 

level  of 

Intra-EU integration in equity and debt markets, as 
measured  by 
in  portfolio 
the  home  bias 
investments,  are  in  general  relatively  low  across 
EU Member States, but Sweden scores well below 
the  euro-area  averages  for  both  equity  and  debt 
holdings. (128) 
equity-market 
terms 
integration, Sweden reaches a comparable level of 
integration  to  those  of  the  five  euro-area  Member 
States  with 
integration. 
Concerning  portfolio  investments  in  debt,  the 
home  bias  is  very  strong  in  Sweden  relative  to 
euro-area  Member  States.  The  level  of  home  bias 
in Sweden has not changed by much between 2016 
and 2020. To some extent, these results reflect the 
high  degree  of  development  of  Swedish  financial 
markets  and  the  country’s  large  and  diverse 
industry  sector.  This  allows  Swedish  investors  to 
hold  liquid  assets  in  a  broad  set  of  companies 
operating  on  world  markets,  letting  them  hold 
diversified portfolios exposed to world market risk 
without investing abroad. 

(128) Home  bias  in  portfolio  investments  measures  the  average 
propensity  of  investors  in  a  Member  State  to  invest 
domestically  as  compared  with  investing  in  other  EU 
countries.  The  indicator  ranges  between  0  and  1,  with  a 
value  of  0  indicating  that  investors  prefer  domestic  over 
foreign  assets.  The  inverse  of  the  home  bias  can  be 
interpreted  as  one  measure  of  financial  integration  among 
EU countries. 

147 

0102030405060SE, 2016SE, 2020EA, 2016EA, 2020Concentration in the banking sector (CR5 ratio)Share of foreign institutions as % of total assetsGraph 8.11: Sweden -Foreign ownership and concentration in the banking sector(in percent, weighted averages)Source: ECB, Structural financial indicators.0.00.20.4SE, 2016SE, 2020EA, 2016EA, 2020EA Low,2016EA Low,2020DebtEquityGraph 8.12: Sweden -Intra-EU integration in equity and debt portfolio investmentNote: The chart shows the extent of home bias in debt and equity markets. A value index of 1 implies ‘full integration’ with the financial markets of other Member States, while 0 denotes ‘no integration’.Source: FinFlows database: European Commission, Joint Research Centre (JRC). (index)