COMMISSION STAFF WORKING DOCUMENT CONVERGENCE REPORT 2024 Accompanying the document REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL CONVERGENCE REPORT 2024 (prepared in accordance with Article 140(1) of the Treaty on the Functioning of the European Union)
Date: 2024-06-26
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Bulgaria, Czechia, Economic and Monetary Union, Hungary, Poland, Romania, Sweden, convergence criteria, euro area

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 26.6.2024  SWD(2024) 270 final  COMMISSION STAFF WORKING DOCUMENT CONVERGENCE REPORT 2024  Accompanying the document REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL CONVERGENCE REPORT 2024         (prepared in accordance with Article 140(1) of the Treaty on the Functioning of the European Union) {COM(2024) 270 final}  
 
 
European Commission 

Directorate-General for Economic and Financial Affairs 

Convergence Report 

2024 

EUROPEAN ECONOMY 

Institutional Paper XXX 

 
 
 
ABBREVIATIONS 

Member States 

Bulgaria 
Czechia 
Hungary 
Poland 
Romania 
Sweden 
Euro area  

BG 
CZ 
HU 
PL 
RO 
SE 
EA 
EA-20   Euro area, 20 Member States 
EA-19   Euro area, 19 Member States before 2023 
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  
BGN 
HUF 
PLN 
RON 
SEK 
USD 

Euro 
Bulgarian lev 
Hungarian forint 
Polish zloty 
Romanian leu (ROL until 30 June 2005) 
Swedish krona 
United States dollar 

Central Banks 

BNB 
Bulgarska narodna banka (Bulgarian National Bank – central bank of Bulgaria) 
Česká národní banka (Czech National Bank – central bank of Czechia) 
ČNB 
MNB  Magyar Nemzeti Bank (Hungarian National Bank – central bank of Hungary) 
NBP 
BNR 

Narodowy Bank Polski (National Bank of Poland – central bank of Poland) 
Banca Naţională a României (National Bank of Romania – central bank of Romania) 

Other abbreviations 

AML       Anti-money laundering  
Alert Mechanism Report 
AMR 
Balance of Payments 
BoP 
Capital adequacy ratio 
CAR 
Currency board arrangement 
CBA 
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 
Excessive Deficit Procedure 
EDP 
EMU 
Economic and monetary union 
ERM II  Exchange rate mechanism II 
ESA 
ESCB 
EU 

European System of Accounts 
European System of Central Banks 
European Union 

iii 

 
 
 
In-Depth Review 
Monetary Financial Institution  
Macroeconomic Imbalance Procedure 

Foreign direct investment 
Funding for Growth Scheme 
Financial Supervisory Authority 
Gross domestic product 
Harmonised index of consumer prices 

Eurostat Statistical Office of the European Union 
FDI 
FGS 
FSA 
GDP 
HICP 
HFSA  Hungarian Financial Supervisory Authority 
IDR 
MFI 
MIP 
NCBs  National central banks 
NEER  Nominal effective exchange rate 
NIK 
NPL 
OJ 
OJL 
PIT 
PPS 
REER 
RRF 
RRP 
SGP 
TFEU 
ULC  
VAT 

Najwyższa Izba Kontroli (Poland's Supreme Chamber of Control) 
Non-performing loans 
Official Journal 
Official Journal Lex 
Personal Income Tax 
Purchasing Power Standard 
Real effective exchange rate 
Recovery and Resilience Facility  
Recovery and Resilience Plan 
Stability and Growth Pact 
Treaty on the Functioning of the European Union 
Unit labour costs 
Value added tax 

iv 

 
 
 
 
 
ACKNOWLEDGEMENTS 

The  Convergence  Report  and  its  Technical  Annex  were  prepared  in  the  Directorate-General  for 
Economic  and  Financial  Affairs.  The  main  contributors  were  Guillaume  Cousin,  Leonor  Coutinho, 
Morgane  Foret  Brayer,  Staffan  Linden,  Grzegorz  Janowicz,  Adriana  Reut,  Andras  Rezessy  and 
Virgilijus Rutkauskas.  

Other  contributors  were  Ronald  Albers,  Lucian  Albulescu,  Martin  Åström,  Cristiana  Belu  Manescu, 
Pedro  Cardoso,  Alessandra  Cepparulo,  Stefan  Ciobanu,  Angela  D’Elia,  Patrick  D’Souza,  Miroslav 
Florian, Nicola Gagliardi, Oskar Grevesmuhl, Valeska Gronert, Peter Harvan, James Hinton, Martjin 
Hoogeland,  Zuzanna,  Iskierka,  Willem  Kooi,  Zenon  Kontolemis,  Daniel  Kosicki,  Ingo  Kuhnert,  Ivan 
Lozev, Mihai Macovei, Robert Markiewicz, Jakub Mazur, Benedetta Martinelli, Philipp  Mohl, Laurent 
Moulin,  Stéphanie  Pamies,  Gábor  Pellényi,  Lucia  Piana,  Simona  Pojar,  Diana  Radu,  Alina  Radut, 
Ernesto Reitano, Thomas Roux, Arthur van Roest, Aneil Singh, Sara Stoyanova.    

Statistical  assistance  was  provided  by  Grzegorz  Janowicz  and  Giulia  Maravalli,  administrative 
assistance by Dicle Akbay, Emel Yavuz and Simona State. 

The  report  benefitted  from  comments  and  suggestions  by  Jakob  Wegener  Friis,  Isabel  Grilo, 
Charlotte van Hooydonk, Karl Scerri, Michael Stierle, Massimo Suardi, and Luc Tholoniat.  

The  report  was  coordinated  by  Adriana  Reut  under the  supervision  of  Eric  Ruscher,  Head  of  Unit 
and approved by Massimo Suardi, 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). 

v 

 
 
CONTENTS 

Convergence Report 2024 

Convergence Report 2024 - Technical annex 

1. 

Introduction 

1.1. 

1.2. 

ROLE OF THE REPORT 

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. 

LEGAL COMPATIBILITY 
Introduction 
2.1.1. 

2.1.2. 

Central bank independence 

2.1.3. 

Prohibition of monetary financing and privileged access 

2.2. 

2.3. 

2.4. 

2.5. 

2.6. 

2.1.4. 

Integration into the ESCB 

2.1.5. 

Assessment of compatibility 

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 

PUBLIC FINANCES 
2.3.1. 

Recent fiscal developments 

2.3.2. 

Medium-term prospects 

EXCHANGE RATE STABILITY 

LONG-TERM INTEREST RATES 

ADDITIONAL FACTORS 
2.6.1. 

Developments in the balance of payments 

2.6.2. 

Market integration 

3. 

Czechia 

3.1. 

LEGAL COMPATIBILITY 
Introduction 
3.1.1. 

vii 

1 

3 

5 

5 

7 
8 

8 

12 

17 

19 

22 

23 

23 
23 

23 

24 

24 

25 

25 
25 

25 

26 

30 
30 

30 

34 

35 

35 
37 

38 

43 

43 
43 

3.1.2. 

Central bank independence 

3.1.3. 

Prohibition of monetary financing and privileged access 

3.2. 

3.3. 

3.4. 

3.5. 

3.6. 

3.1.4. 

Integration into the ESCB 

3.1.5. 

Assessment of compatibility 

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 

PUBLIC FINANCES 
3.3.1. 

Recent fiscal developments 

3.3.2. 

Medium-term prospects 

EXCHANGE RATE STABILITY 

LONG-TERM INTEREST RATES 

ADDITIONAL FACTORS 
3.6.1. 

Developments in the balance of payments 

3.6.2. 

Market integration 

4. 

Hungary 

4.1. 

LEGAL COMPATIBILITY 
Introduction 
4.1.1. 

4.1.2. 

Central bank independence 

4.1.3. 

Prohibition of monetary financing and privileged access 

4.2. 

4.3. 

4.4. 

4.5. 

4.6. 

4.1.4. 

Integration into the ESCB 

4.1.5. 

Assessment of compatibility 

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 

PUBLIC FINANCES 
4.3.1. 

Recent fiscal developments 

4.3.2. 

Medium-term prospects 

EXCHANGE RATE STABILITY 

LONG-TERM INTEREST RATES 

ADDITIONAL FACTORS 
4.6.1. 

Developments in the balance of payments 

4.6.2. 

Market integration 

5. 

Poland 

5.1. 

LEGAL COMPATIBILITY 
Introduction 
5.1.1. 

43 

44 

44 

45 

45 
45 

46 

46 

50 
50 

51 

53 

54 

55 
56 

58 

63 

63 
63 

63 

64 

65 

66 

66 
66 

67 

68 

71 
71 

72 

74 

75 

76 
77 

78 

83 

83 
83 

viii 

 
5.1.2. 

Central bank independence 

5.1.3. 

Prohibition of monetary financing and privileged access 

5.2. 

5.3. 

5.4. 

5.5. 

5.6. 

5.1.4. 

Integration into the ESCB 

5.1.5. 

Assessment of compatibility 

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 

PUBLIC FINANCES 
5.3.1. 

Recent fiscal developments 

5.3.2. 

Medium-term prospects 

EXCHANGE RATE STABILITY 

LONG-TERM INTEREST RATES 

ADDITIONAL FACTORS 
5.6.1. 

Developments in the balance of payments 

5.6.2. 

Market integration 

6. 

Romania 

6.1. 

LEGAL COMPATIBILITY 
Introduction 
6.1.1. 

6.1.2. 

Central bank independence 

6.1.3. 

Prohibition of monetary financing and privileged access 

6.2. 

6.3. 

6.4. 

6.5. 

6.6. 

6.1.4. 

Integration into the ESCB 

6.1.5. 

Assessment of compatibility 

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 

PUBLIC FINANCES 
6.3.1. 

Recent fiscal developments 

6.3.2. 

Medium-term prospects 

EXCHANGE RATE STABILITY 

LONG-TERM INTEREST RATES 

ADDITIONAL FACTORS 
6.6.1. 

Developments in the balance of payments 

6.6.2. 

Market integration 

7. 

Sweden 

7.1. 

LEGAL COMPATIBILITY 
Introduction 
7.1.1. 

ix 

83 

85 

85 

86 

86 
86 

87 

87 

90 
90 

91 

93 

94 

95 
96 

97 

101 

101 
101 

101 

102 

103 

104 

104 
104 

104 

105 

108 
108 

109 

112 

113 

113 
114 

116 

121 

121 
121 

 
7.1.2. 

Central bank independence 

7.1.3. 

Prohibition of monetary financing and privileged access 

7.2. 

7.3. 

7.4. 

7.5. 

7.6. 

7.1.4. 

Integration into the ESCB 

7.1.5. 

Assessment of compatibility 

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 

PUBLIC FINANCES 
7.3.1. 

Recent fiscal developments 

7.3.2. 

Medium-term prospects 

EXCHANGE RATE STABILITY 

LONG-TERM INTEREST RATES 

ADDITIONAL FACTORS 
7.6.1. 

Developments in the balance of payments 

7.6.2. 

Market integration 

LIST OF TABLES 

2.1. 
2.2. 
2.3. 

2.4. 
2.5. 
2.6. 
2.7. 
3.1. 
3.2. 
3.3. 

3.4. 
3.5. 
3.6. 
3.7. 
4.1. 
4.2. 
4.3. 

4.4. 
4.5. 
4.6. 
4.7. 
5.1. 
5.2. 
5.3. 

5.4. 

Bulgaria - Components of inflation 
Bulgaria - Other inflation and cost indicators 
Bulgaria - Budgetary developments and projections (as % of GDP 
unless indicated otherwise) 
Bulgaria - Balance of payments 
Bulgaria - Market integration 
Bulgaria - Allocation of assets by financial sub-sector 
Bulgaria - Financing of the economy1) 
Czechia - Components of inflation 
Czechia - Other inflation and cost indicators 
Czechia - Budgetary developments and projections (as % of GDP 
unless indicated otherwise) 
Czechia - Balance of payments 
Czechia - Market integration 
Czechia - Allocation of assets by financial sub-sector 
Czechia - Financing of the economy1) 
Hungary - Components of inflation 
Hungary - Other inflation and cost indicators 
Hungary - Budgetary developments and projections (as % of GDP 
unless indicated otherwise) 
Hungary - Balance of payments 
Hungary - Market integration 
Hungary - Allocation of assets by financial sub-sector 
Hungary - Financing of the economy1) 
Poland - Components of inflation 
Poland - Other inflation and cost indicators 
Poland - Budgetary developments and projections (as % of GDP 
unless indicated otherwise) 
Poland - Balance of payments 

121 

122 

124 

125 

125 
125 

125 

126 

130 
130 

131 

133 

134 

135 
136 

137 

26 
28 

31 
37 
38 
40 
41 
46 
47 

51 
57 
58 
59 
60 
67 
68 

72 
77 
78 
79 
80 
87 
88 

91 
96 

x 

 
 
5.5. 
5.6. 
5.7. 
6.1. 
6.2. 
6.3. 

6.4. 
6.5. 
6.6. 
6.7. 
7.1. 
7.2. 
7.3. 

7.4. 
7.5. 
7.6. 
7.7. 

Poland - Market integration 
Poland - Allocation of assets by financial sub-sector 
Poland - Financing of the economy1) 
Romania - Components of inflation 
Romania - Other inflation and cost indicators 
Romania - Budgetary developments and projections (as % of GDP 
unless indicated otherwise) 
Romania - Balance of payments 
Romania - Market integration 
Romania - Allocation of assets by financial sub-sector 
Romania - Financing of the economy1) 
Sweden - Components of inflation 
Sweden - Other inflation and cost indicators 
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) 

LIST OF GRAPHS 

2.1. 
2.2. 
2.3. 
2.4. 
2.5. 
2.6. 
2.7. 
2.8. 
2.9. 
2.10. 
2.11. 

3.2. 
3.1. 
3.3. 
3.4. 
3.5. 
3.6. 
3.7. 
3.8. 
3.9. 
3.10. 
3.11. 

4.1. 
4.2. 
4.3. 
4.4. 
4.5. 
4.6. 
4.7. 
4.8. 
4.9. 

Bulgaria - Inflation criterion 
Bulgaria - HICP inflation 
Bulgaria - Inflation, productivity and wage trends 
Bulgaria - Fiscal stance and its components 
Bulgaria - BGN/EUR exchange rate 
Bulgaria - Annual effective interest rate spread to 1-M Euribor 
Bulgaria - Long-term interest rate criterion 
Bulgaria - Long-term interest rates 
Bulgaria - Effective exchange rates 
Bulgaria - World Bank's 2022 Worldwide Governance Indicators 
Bulgaria - Foreign ownership and concentration in the banking 
sector 
Czechia - HICP inflation 
Czechia - Inflation criterion 
Czechia - Inflation, productivity and wage trends 
Czechia - Fiscal stance and its components 
Czechia - CZK/EUR exchange rate 
Czechia - 3-M Pribor spread to 3-M Euribor 
Czechia - Long-term interest rate criterion 
Czechia- Long-term interest rates 
Czechia - Effective exchange rates 
Czechia - World Bank's 2022 Worldwide Governance Indicators 
Czechia - Foreign ownership and concentration in the banking 
sector 
Hungary - Inflation criterion 
Hungary - HICP inflation 
Hungary - Inflation, productivity and wage trends 
Hungary - Fiscal stance and its components 
Hungary - HUF/EUR exchange rate 
Hungary - 3-M Bubor spread to 3-M Euribor 
Hungary - Long-term interest rate criterion 
Hungary - Long-term interest rates 
Hungary - Effective exchange rates 

97 
98 
99 
105 
107 

110 
115 
117 
118 
119 
126 
128 

132 
136 
137 
138 
139 

25 
25 
28 
32 
34 
34 
35 
35 
38 
39 

42 
45 
45 
48 
52 
53 
53 
54 
54 
57 
58 

61 
67 
67 
70 
73 
75 
75 
76 
76 
78 

xi 

 
 
4.10. 
4.11. 

5.1. 
5.2. 
5.3. 
5.4. 
5.5. 
5.6. 
5.7. 
5.8. 
5.9. 
5.10. 
5.11. 

6.1. 
6.2. 
6.3. 
6.4. 
6.5. 
6.6. 
6.7. 
6.8. 
6.9. 
6.10. 
6.11. 

7.1. 
7.2. 
7.3. 
7.4. 
7.5. 
7.6. 
7.7. 
7.8. 
7.9. 
7.10. 
7.11. 

Hungary - World Bank's 2022 Worldwide Governance Indicators 
Hungary - Foreign ownership and concentration in the banking 
sector 
Poland - Inflation criterion 
Poland - HICP inflation 
Poland - Inflation, productivity and wage trends 
Poland - Fiscal stance and its components 
Poland - PLN/EUR exchange rate 
Poland - 3-M Wibor spread to 3-M Euribor 
Poland - Long-term interest rate criterion 
Poland - Long-term interest rates 
Poland - Effective exchange rates 
Poland - World Bank's 2022 Worldwide Governance Indicators 
Poland - Foreign ownership and concentration in the banking 
sector 
Romania - Inflation criterion 
Romania - HICP inflation 
Romania - Inflation, productivity and wage trends 
Romania - Fiscal stance and its components 
Romania - RON/EUR exchange rate 
Romania - 3-M Robor spread to 3-M Euribor 
Romania - Long-term interest rate criterion 
Romania - Long-term interest rates 
Romania - Effective exchange rates 
Romania - World Bank's 2022 Worldwide Governance Indicators 
Romania - Foreign ownership and concentration in the banking 
sector 
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 
Sweden - World Bank's 2022 Worldwide Governance Indicators 
Sweden - Foreign ownership and concentration in the banking 
sector 

LIST OF BOXES 

1.1. 
1.2. 
1.3. 
1.4. 
1.5. 

1.6. 
1.7. 

Article 140 of the Treaty 
Assessment of price stability and the reference value 
Excessive Deficit Procedures under the new EU fiscal framework 
Fiscal policy in the EU since the COVID-19 crisis 
A reinforced approach to ERM II participation by means of upfront 
policy commitments by the applicant Member States 
Data for the interest rate convergence 
The Macroeconomic Imbalance Procedure (MIP) 

79 

81 
86 
86 
89 
92 
94 
94 
94 
94 
97 
98 

100 
104 
104 
106 
111 
112 
112 
113 
113 
116 
117 

120 
125 
125 
128 
133 
133 
133 
134 
134 
137 
138 

140 

6 
9 
13 
15 

18 
20 
21 

xii 

 
 
 
 
 
xiii 

 
 
Convergence Report 2024 
(prepared in accordance with Article 140(1) of the Treaty) 

 
 
Report

2 

 
Convergence Report 2024 
Technical annex 

 
 
1. 

INTRODUCTION 

1.1.  ROLE OF THE REPORT 

The euro was introduced on 1 January 1999 by eleven Member States, namely by Austria, Belgium, 
Finland,  France,  Germany,  Ireland,  Italy,  Luxembourg,  the  Netherlands,  Portugal  and  Spain. 
Subsequently, Greece (2001), Slovenia (2007), Cyprus and Malta (2008), Slovakia (2009), Estonia 
(2011), Latvia (2014), Lithuania (2015) and Croatia (2023) 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 will not be 
the  subject  of  an  assessment  as  to  whether  it  fulfils  the  necessary  conditions  for  such  a 
participation. 

In 2022, the Commission and the ECB adopted their latest regular Convergence Reports (2). Croatia 
was the only Member State assessed as meeting the necessary conditions for adopting the euro. 
Following  those  convergence  reports  and  on  the  basis  of  a  proposal  by  the  Commission,  the 
Council  decided  in  July  2022  that  Croatia  fulfilled  the  necessary  conditions  for  adopting  the 
euro. Croatia  adopted  the  euro  on  1  January  2023  and  became  the  20th  member  of  the  euro 
area (3). This was the first enlargement since Lithuania joined in 2015.  

In  2024,  two  years  have  elapsed  since  the  last  regular  reports  were  prepared.  Denmark has not 
expressed a wish to enter the third stage of EMU. Therefore, this convergence assessment covers 
Bulgaria,  Czechia,  Hungary,  Poland,  Romania  and  Sweden.  This  Commission  Staff  Working 
Document  is  a  Technical  Annex  to  the  Convergence  Report  2024  and  includes  a  detailed 
assessment of the progress with convergence, as required by Article 140(1) of the Treaty. 

The  convergence  assessment  presented  in  this  report  has  been  influenced  by  several  major 
economic  shocks  and  policy  developments  over  the  past  2  years.  Russia’s  full-scale  invasion  of 
Ukraine on 24 February 2022 and the subsequent use of energy as a political weapon disrupted 
the global energy market and supply chains. Energy  prices reached  record highs in August 2022. 
The  EU  economy  has  shown  remarkable  resilience  in  this  challenging  environment.  It  has 
successfully  reduced  its  dependence  on  Russian  fossil  fuels  and  limited  the  adverse  impact  on 
economic  activity.  Nonetheless,  under  the  pressure  of  energy,  food  and  other  commodity  prices, 
headline  inflation  in  the  EU  peaked  at  11.5%  year-on-year  in  October  2022,  while  inflation 
divergences  across  the  EU  Member  States  also  reached  historic  highs.  the  EU  economy  lost 
momentum  in  2023,  weakened  by  the  erosion  of  households’  purchasing  power,  a  subdued 
external environment and tighter financing conditions. As energy prices retreated from their peaks 
and monetary tightening worked its way through the economy, annual HICP inflation fell sharply, 
reaching 2.7% in May 2024. The surge in energy prices in 2022 also led many Member States to 
take emergency energy support measures to cushion its economic and social effects. In 2023, the 
cost for the government deficit of those emergency measures is estimated at almost 1% of GDP 
for the EU as a whole, but a sizeable reduction in energy-related measures is projected in 2024 (by 
0.8 percentage point to 0.2% of GDP).  

(1)  Protocol (No 16) on certain provisions relating to Denmark. 
(2)  European  Commission,  Convergence  Report  2022,  COM(2022)  280  final,  1  June  2022;  European  Central  Bank, 

Convergence Report 2022, June 2022. 

(3)  Council Decision of 12 July 2022 (OJ L 187, 14.7.2022, p. 31–34). 

5 

 
Convergence Report 2024 - Technical annex 
Chapter 1 - Introduction 

At the same time, the steady implementation of the Recovery and Resilience Facility (RRF) and the 
Cohesion  Policy  programmes  is  continuing  to  support  major  reforms  and  investments  across  a 
wide range of policy areas in the EU and support fiscal sustainability.  

Designed  as  a  response  to  the  economic  and  social  fall-out  from  the  COVID-19  pandemic  and 
established  in  February  2021,  the  RRF  is  the  centrepiece  of  NextGenerationEU  (NGEU),  the  EU’s 
recovery instrument. It has also proven to be an agile instrument, helping Member States to deal 
with  the  above-mentioned  challenges  and  circumstances.  In  the  context  of  the  REPowerEU  plan, 
Member  States  benefitted  from  additional  resources  through  the  introduction  of  REPowerEU 
chapters  in  their  Recovery  and  Resilience  Plans  (RRP),  including  reforms  and  investments  that 
diversify  the  EU’s  energy  supplies,  accelerate  the  green  transition  and  support  vulnerable 

6 

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.’  
 
    
 
 
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households.  By  early  June  2024,  EUR  240.3  billion  had  been  disbursed  against  the  fulfilment  of 
milestones  and  targets  for  ambitious  reforms  and  investments.  Commission  modelling  suggests 
that  NGEU  has  the  potential  to  increase  EU  real  GDP  by  up  to  1.4%  in  2026  above  a  no-NGEU 
scenario (4).   

EU  Cohesion  Policy  funds  provide  EUR  378  billion  to  Member  States  for  the  2021-2027  period. 
Cohesion  policy  concentrates  in  fields  that  are  critical  for  promoting  convergence  and 
competitiveness  through  long-term  investment  in  line  with  EU  priorities.  Its  interventions  aim 
particularly  to  improve  productivity,  foster  sustainable  growth,  boost  innovation  and  develop  the 
skills  of  the  labour  force,  as  well  as  grant  better  access  to  public  services  and  foster  the 
integration in the single market through better infrastructure.  

Cohesion Policy has a strong positive impact on the structure of the EU economies. Recent model 
simulations  suggest  that  the  2014–2020  and  2021–2027  programmes,  taken  together,  could 
increase  EU  GDP  by  close  to  1% at  the  end of  their implementation.  The  impact  of  the  policy  is 
particularly high in the main beneficiaries of the policy, thereby supporting convergence of these 
countries. 

The general escape clause in the Stability and Growth Pact was deactivated at the end of 2023. In 
April  2024,  the  European  Parliament  and  the  Council  adopted  the  legislation  reforming  the  EU 
fiscal  rules (5).  Over  the  next  months,  the  Member  States  will  prepare  their  first  medium-term 
fiscal-structural plans, outlining fiscal, structural and investment policies for the next 4 to 5 years. 
The reformed framework promotes debt sustainability and economic growth. On 19 June 2024, as 
part  of  its  European  Semester  spring  2024  package,  the  Commission  published  a  report  under 
Article 126(3) TFEU assessing compliance with the deficit criterion of the Stability and Growth Pact 
in  twelve  EU  Member  States,  including  Czechia,  Hungary  and  Poland.  On  the  basis  of  the 
conclusions of its report, the Commission confirmed that in July, and after considering the opinion 
of  the  Economic  and  Financial  Committee,  it  will  propose  to  the  Council  to  adopt  decisions 
establishing  the  existence  of  excessive  deficit  situations  for  the  Member  States for which  this is 
warranted.  The  assessment  of  the  convergence  criterion  dealing  wit  the  government  budgetary 
position presented in this report therefore takes into account the conclusions of the report under 
Article 126(3) TFEU.   

The  remainder  of  the  first  chapter  presents  the  methodology  used  for  the  application  of  the 
assessment criteria. Chapters 2 to 7 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 
June 2024. 

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  to  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). 

(4)  QUEST is the global macroeconomic model that the Directorate General for Economic and Financial Affairs (DG ECFIN) 
uses  for  macroeconomic  policy  analysis  and  research,  see  https://economy-finance.ec.europa.eu/economic-research-
and-  databases/economic-research/macroeconomic-models/quest-macroeconomic-model_en.  See  the  Staff  Working 
Document  on  the  RRF  Mid-term  evaluation  for  further  information  on  QUEST’s  results  regarding  the  macroeconomic 
impacts of the RRF. 

(5)  OJ L, 2024/1264, 30.4.2024; OJ L, 2024/1263, 30.4.2024; and OJ L, 2024/1265, 30.4.2024. 

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1.2.1.  Compatibility of legislation 

In accordance with Article 140(1) of the Treaty, the legal examination includes an assessment of 
compatibility  between  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. 

•  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.  

•  Second, in accordance with Articles 123 and 124 of the Treaty, the compliance of the national 
legislation is verified against the prohibition of monetary financing 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, they do not constitute the appropriate means to meet the Treaty requirement that 
inflation must be measured on a comparable basis. To this end, the Council adopted on 23 October 
1995  a  framework  regulation (6)  setting  the  legal  basis  for  the  establishment  of  a  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. 

As has been the case in  past convergence reports, a  Member State’s average rate of inflation is 
measured  by  the  percentage  change  in  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 three ‘best-
performing EU Member States in terms of price stability’ plus 1.5 percentage points (see Box 1.2). 

(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. 

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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 may also be excessively volatile from month to month and excessively affected by temporary 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 taking 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 2024.  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 that is driving inflation in the euro area. Outliers were identified in the convergence reports of 2004, 2010, 2013, 2014, 2016 and 2022. 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  
 
 
  
 
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Box (continued) 

10 

(Continued on the next page) 

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 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. In 2022, Malta and Portugal were identified outliers as their average inflation rates in April 2022 were 2.2 percentage points and 1.7 percentage points below the euro area average of 4.4%. In the case of Malta, the comparatively low average inflation rate reflected broadly stably energy prices due to government measures in a context of surging international oil and gas prices and larger changes in the weights used to calculate the HICP than in most other EU Member States in 2021. In the case of Portugal, the comparatively very low average inflation rate reflected low energy inflation and the weaker cyclical position of the country compared with most of other EU Member States. In addition, the COVID-19 crisis had a prolonged negative impact on Portuguese activity and inflation. Table 1 lists the reference value in the convergence reports issued since 1998.  In May 2024, the three Member States with the lowest 12-month average inflation rates are: Denmark (1.1%), Finland (1.9%) and Belgium (1.9%). The next Member States with the lowest average inflation are the Netherlands (2.5%), Italy (2.6%) and Latvia (2.6%). It appears warranted to identify Denmark, Finland and Belgium 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 May 2024, the 12-month average inflation rates of Denmark, Finland and Belgium were respectively 2.3, 1.6 and 1.5 percentage points below the euro area average of 3.4%. In addition, the inflation performances of Denmark, Finland and Belgium were driven by country-specific factors. In the case of Denmark, the country-specific factors that drove in the relatively very low average inflation rate included a faster unwinding of the exceptional energy inflation shock than in the euro area that was mainly due to the fact that the most electricity contracts in Denmark have variable prices, which are adjusted either monthly or quarterly. This led to a much faster transmission of the drop in wholesale energy prices to retail prices in Denmark than the euro area average. A very low rate of inflation for food and non-energy industrial goods compared with the euro area also contributed to the low inflation rate in Denmark.  In the case of Finland, the relatively very low average inflation rate compared with the average inflation rate of the euro area as a whole reflected lower energy inflation and an adjustment by Statistics Finland to the price index of electricity because the rise in prices had been erroneously taken into account twice in the index  (1). The correction, which was introduced in August 2023, reduced the year-on-year HICP inflation rate by 0.7 percentage point in that month. It will continue to artificially reduce HICP inflation in Finland until July 2024. Furthermore, the 12-month average of HICP inflation excluding energy and food in Finland was significantly below the corresponding inflation rate for the euro area as a whole, reflecting a much weaker cyclical position and weaker wage growth than the euro area as a whole.  (1) Statistics Finland, Adjustment of the price index of electricity in the releases of the Consumer Price Index and the Harmonised Index of Consumer Prices for August 2023, August 2023. See https://stat.fi/en/revisionrelease/clm92f0dg5s810avvk7mlerjj.  
 
  
 
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Box (continued) 

Accordingly, the  reference  value  is currently  4.1%,  based  on  the  data  of  the  Netherlands (2.5)%, 
Italy  (2.6)%  and  Latvia  (2.6)%  over  the  12-month  period  covering  June  2022  –  May  2024. 
Denmark,  Finland  and  Belgium  were  identified  as  outliers,  as  their  inflation  rates  deviated  by  a 
wide margin from the euro area average reflecting country-specific economic circumstances (see 
Box 1.2).   

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

11 

           In the case of Belgium, the country-specific factors that drove the relatively very low average inflation rate include lower retail energy prices in 2023. After a rapid transmission of exceptionally high wholesale gas and electricity prices into retail prices in 2022, energy inflation fell sharply throughout 2023. A combination of factors weighed on energy inflation. Contract prices for gas and electricity are typically based on formulae that use the future gas and electricity prices. This led to a much faster transmission of the drop in wholesale energy prices to retail prices in Belgium than the euro area average. This effect was reinforced by (i) the HICP inflation being calculated on the basis of the prices of new contracts; and (ii) the new HICP weights for 2023 reflecting a strong increase in the size of the energy component, which amplified the effect of the very sizeable drop in energy prices on HICP inflation in 2023. 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, Greece4.94.42024May 2024Netherlands, Italy, Latvia4.13.41) 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. 
  
 
 
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Inflation sustainability implies that the satisfactory inflation performance must essentially be due 
to the adequate behaviour of input costs and other factors that influence price developments  in a 
structural manner, rather than reflecting the influence of cyclical or temporary 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 in 
labour productivity and nominal compensation per head, and of developments in import prices to 
assess how external price developments have impacted on domestic inflation. Similarly, the impact 
of administered prices and indirect taxes on headline inflation is also considered. 

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  most  recent  Commission  inflation  forecast.  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 convergence criterion dealing with the government budgetary position is defined in the second 
indent  of  Article  140(1)  of  the  Treaty  as ‘the  sustainability  of  the  government  financial  position; 
this will be apparent from having achieved a government budgetary position without a deficit that 
is excessive as determined in accordance with Article 126(6)’. Furthermore, Article 2 of the Protocol 
on  the  convergence  criteria  states that  this criterion  means  that  ‘at  the  time  of  the  examination 
the Member State is not the subject of a Council decision under Article 126(6) of the said Treaty 
that an excessive deficit exists’. 

The 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 2024 reform of the Stability and Growth Pact). The details of the excessive 
deficit procedure are defined in Regulation 1467/97 as amended in 2024 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). 

On 19 June 2024, the Commission adopted a report under Article 126(3) of the TFEU for twelve 
Member States, including for Czechia, Hungary and Poland. 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 Hungary and Poland. In the light 
of this assessment, and after considering the opinion of the Economic and Financial Committee as 
established  under  article  126(4)  TFEU,  the  Commission  will  propose  in  July  to  open  excessive 
deficit  procedures,  by  proposing  to  the  Council  to  adopt  a  Decision  under  Article  126(6) 
establishing the existence of an excessive deficit. 

Romania has been subject to an Excessive Deficit Procedure (EDP) since 2020, due to the planned 
non-compliance  with  the  deficit  criterion  in  2019.  Considering  the  deep  contraction  in  economic 
activity  linked  to  the  COVID-19  pandemic,  on  18  June  2021,  the  Council  adopted  a  revised 
Recommendation to put an end to the excessive deficit situation by 2024, at the latest. On 19 June  

(7)  Based on the Commission’s Spring 2024 Economic Forecast, the inflation reference value is forecast to stand at 3.0% 

in December 2024. 

(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 2002 
can be found at: http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/index_en.htm. 

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Box 1.3: Excessive Deficit Procedures under the new EU fiscal frameworkThe new EU fiscal framework was adopted on 29 April 2024. The rules on the opening of a deficit-based Excessive Deficit Procedure (EDP) remain unchanged while the rules on the opening of a debt-based EDP are changed and clarified in the amended Council Regulation (EC) 1467/97. (1)  In order to simplify the EU fiscal framework and increase transparency, a single operational indicator anchored in debt sustainability will serve as a basis for setting the fiscal path and for carrying out annual fiscal surveillance. That single operational indicator will be based on nationally financed net primary expenditure, i.e. government expenditure net of interest expenditure, discretionary revenue measures, expenditure on Union programmes fully matched by revenue from Union funds, national expenditure on co-financing of programmes funded by the Union, as well as cyclical elements of unemployment benefit expenditure. One-offs and other temporary measures will also be excluded from the net expenditure indicator.  The EDP is specified in Article 126 of the Treaty on the Functioning of the European Union (TFEU). Protocol 12 of the Treaty gives further details on the excessive deficit procedure, including the reference values on deficit and debt. Council Regulation (EC) 1467/97 on speeding up and clarifying the implementation of the EDP (the corrective arm of the Stability and Growth Pact) clarifies the implementation of the excessive deficit procedure. Together, these provisions determine the steps to be followed to reach a Council decision on the existence and correction of an excessive deficit. The Commission will produce reports under Article 126(3) of TFEU on the basis of the following criteria: • whether the ratio of the planned or actual government deficit to gross domestic product exceeds 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; • when the ratio of the government debt to GDP exceeds 60% of GDP, the budgetary position is not close to balance (2) or in surplus and when the deviations recorded in the control account (3) of the Member State exceed the established annual or cumulative thresholds (0.3% and 0.6% of GDP respectively).  When assessing the existence of an excessive deficit in accordance with Article 126(3) TFEU, the Commission should take into account all relevant factors. Substantial public debt challenges in the Member State concerned should be considered a key aggravating factor. The increase of government investment in defence, where applicable, should be considered as a relevant factor when assessing the existence of an excessive deficit. The Commission shall give due and express consideration to any other factors which, in the opinion of the Member State concerned, are relevant in order to comprehensively assess compliance with the deficit and debt criteria and which the Member State has put forward to the Council and the Commission. In that context, particular consideration shall be given to financial contributions to fostering international solidarity and achieving the common priorities of the Union  (1) OJ L, 2024/1264, 30.4.2024, Council Regulation (EU) 2024/1264 of 29 April 2024 amending Regulation (EC) No 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure (europa.eu). The consolidated version of Regulation No 1467/97 can be found at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A01997R1467-20240430. (2) The budgetary position shall be considered close to balance if the general government deficit does not exceed 0.5 % of GDP. (3) The Commission  will set up a control account for each Member State to keep track of annual and cumulative upward and downward deviations of the net expenditure observed from the net expenditure path as set by the Council pursuant to the new preventive arm Regulation (see footnote 5).  
 
 
  
 
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2024,  the  Commission  adopted  a  recommendation  for  a  Council  Decision  establishing  that  no 
effective action has been taken by Romania. 

In  the  context  of  the  European  Semester,  the  country-specific  recommendations  for  2024 
emphasised the need to ensure prudent fiscal policy, phase out the energy support measures and 
to preserve nationally-financed investment (see Box 1.4). 

14 

referred to in the new preventive arm Regulation. (4) For deficit-based EDPs, the relevant factors can be considered for i) those Member States with debt below 60% and ii) those Member States with debt exceeding 60% of GDP and satisfying the double condition of the overarching principle, i.e. that the general government deficit remains close to the 3% of GDP reference value and its excess over the reference value is temporary. In the next step of the procedure, the Economic and Financial Committee (EFC) shall formulate an opinion in accordance with Article 126(4) TFEU within two weeks of the adoption by the Commission of a report issued in accordance with Article 126(3) TFEU. Taking fully into account this opinion, the Commission, if it considers that an excessive deficit exists, shall address an opinion and a proposal to the Council in accordance with Article 126(5) and (6) TFEU and shall inform the European Parliament thereof. The Council shall then decide on the existence of an excessive deficit in accordance with Article 126(6) TFEU, as a rule within four months of the reporting dates established in Article 3(2) and (3) of Regulation (EC) No 479/2009. When it decides that an excessive deficit exists, the Council shall at the same time make recommendations to the Member State concerned in accordance with Article 126(7) TFEU.  In its recommendation, the Council shall request that the Member State implements a corrective net expenditure path which ensures that the general government deficit remains or is brought and maintained below the reference value within the deadline set in the recommendation. The corrective net expenditure path under the EDP would in principle be the one originally set by the Council under the preventive arm Regulation (5), taking into account the need to ensure a minimum structural adjustment of 0.5 % of GDP in case of a breach of the deficit criterion or the need to correct the deviation from that path in case of a breach of the debt criterion. In case the original path is no longer feasible, due to objective circumstances, the Council should be able to set a different path under the EDP.   (4) OJ L 1263, 30.4.2024, Regulation (EU) 2024/1263 of the European Parliament and of the Council of 29 April 2024 on the effective coordination of economic policies and on multilateral budgetary surveillance and repealing Council Regulation (EC) No 1466/97 (europa.eu). (5) Under the preventive arm Regulation (see footnote 5), following the assessment of the national medium-term fiscal-structural plans by the Commission, the Council should adopt - on the basis of a recommendation from the Commission, a recommendation setting out the net expenditure path and, as appropriate, endorse the reforms and investments underpinning the possible extension of an adjustment period.  
 
  
 
 
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Box 1.4: Fiscal policy in the EU since the 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 of the Stability and Growth Pact was deactivated at the end of 2023, as announced in the Commission Communication of 8 March 2023. (1) 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 allowed for a collective departure from the normal requirements of the Pact. This 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 between the activation of the general escape clause and its subsequent deactivation. Romania is the only EU Member State under an EDP since spring 2020. The situation created by the COVID-19 crisis first and by Russia's invasion of Ukraine in February 2022 created exceptional uncertainty, including for designing a detailed path for fiscal policy.  The fiscal outlook has overall improved in 2022-23. After reaching a historically high level of around 92% in 2020, the EU aggregate debt-to-GDP ratio fell significantly, reaching 84.8% in 2022 and 83% at the end of 2023 thanks to the strong post-pandemic economic recovery and high inflation. Seemingly, the EU deficit fell steadily from 6.7% of GDP in 2020 to around 3.5% in 2022-2023, also thanks to the complete phase-out of pandemic-related temporary measures. Fiscal developments in 2023 compared with Council’s recommendations The Council provided fiscal guidance for 2023 via qualitative recommendations on 12 July 2022. The fiscal recommendations were differentiated on the basis of debt levels: • High-debt Member States were recommended to 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 most vulnerable to energy price hikes and to people fleeing Ukraine.  • Low and medium-debt Member States were recommended to 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 most vulnerable to energy price hikes and to people fleeing Ukraine.  All Member States were recommended to stand ready to adjust current spending to the evolving situation and expand public investment for the green and digital transitions and for energy security taking into account the REPowerEU initiative, including by making use of the Recovery and Resilience Facility and other Union funds.  Romania, which is under an EDP, was recommended to pursue fiscal policies in line with the Council Recommendation of 18 June 2021 with a view to bringing an end to the situation of an excessive government deficit. The fiscal effort of Romania in 2023 was lower than recommended by the Council and the Commission is of the view that Romania did not take effective action in response to the June 2021 Council Recommendation under Article 126(7) TFEU.  The other countries examined in this report were considered low or medium-debt Member States.  (1) COM(2023) 141 final, 8.3.2023.  
 
 
  
 
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Based on the Commission 2024 spring forecast, the fiscal stance in 2023 was expansionary in Poland,  driven by the increase in nationally financed investment and expenditure financed by RRF grants and other EU funds. By contrast, the contribution to the fiscal stance of net primary current expenditure was neutral in Poland - which is in line with the Council recommendation – driven by the reduction in energy support measures. The 2023 fiscal stance was instead contractionary in Hungary and Czechia and broadly neutral in Bulgaria and Sweden. These Member States also preserved or increased their nationally-financed investment in 2023, in line with the Council recommendations. Fiscal projections for in 2024 compared with Council’s recommendations The fiscal recommendations for 2024 - adopted by the Council on 14 July 2023 - are fully consistent with the legislation in force at that time, but some aspects of the Commission's reform orientations have already been integrated to the possible extent. They are country-specific and formulated with a view to limiting the nominal increase in nationally-financed net expenditure for Member States not already at their medium-term budgetary objective (MTO). In all Member States, emergency energy support measures should be wound down as soon as possible in 2023 and 2024, and the related savings should be used to reduce the government deficit in Member States not already at their MTO. In addition, all Member States were recommended to continue preserve nationally financed public investment and ensure the effective absorption of grants under the Facility and of other Union funds, in particular to foster the green and digital transitions. Among the Member States examined in this report, Sweden was expected to be at its MTO in 2023 and, based on the Commission 2024 spring forecast, it is projected to remain at its MTO also in 2024. Bulgaria and Czechia are projected to comply with the increase in net expenditure recommended by the Council on 14 July 2023. Poland is projected to record a higher-than-recommended increase in net expenditure. As for nationally financed  investment, it is not expected to be preserved in 2024 in Bulgaria, Hungary and, to a lesser extent, Czechia. In Bulgaria and Hungary this decrease in nationally financed public investment risks being not in line with what was recommended by the Council. Finally, Hungary and Poland are both not expected to wind down energy support measures as soon as possible in 2023 and in 2024, as these measures are set to remain above 0.25% of GDP in 2024. This risks being not in line with what was recommended by the Council. Moreover,  in Poland savings from those measures are not expected to be used for deficit reduction. This also risks being not in line with the Council recommendation.  Fiscal guidance for 2025 The new EU framework adopted on 29 April 2024 will guide fiscal policy in 2025, considering country-specific debt sustainability risks and whether the general government deficit exceeds the Treaty reference value of 3% of GDP. The fiscal recommendations for 2025 proposed by the Commission on 19 June 2024 consist of a procedural part that invites all Member States to a timely submission of medium-term fiscal-structural plans. The net expenditure path put forward in those plans should then be implemented in 2025 (and in the other years covered by the plans) if endorsed by the Council in autumn 2024. Moreover, for countries with adjustment needs, on 19 June 2024 the Commission proposed qualitative fiscal recommendations, which for the countries examined in this report are as follows:  Hungary: In line with the requirements of the reformed Stability and Growth Pact, limit the growth in net expenditure  in 2025 to a rate consistent with putting the general government debt on a plausibly downward trajectory over the medium term and reducing the general government deficit towards the 3% of GDP Treaty reference value. Poland: In line with the requirements of the reformed Stability and Growth Pact, limit the growth in net expenditure  in 2025 to a rate consistent with reducing the general government deficit towards the 3% of GDP Treaty reference value and keeping the general government debt at a prudent level over the medium term.  
 
  
 
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Box (continued) 

1.2.4.  Exchange rate stability 

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

Article 3 of the Protocol on the convergence criteria 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’ (9). Based on the Council Resolution 
on the establishment of the ERM II (10), 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  its  assessment  of  the  exchange  rate  stability  criterion,  the  Commission  takes  into  account 
developments in auxiliary indicators such as foreign reserve developments and short-term interest 
rates,  as  well  as  the  role  of  policy  measures,  including  foreign  exchange  interventions,  and 
international financial assistance wherever relevant, in maintaining exchange rate stability. 

The  assessment  of  this criterion  verifies the  participation  in  ERM  II  and  examines exchange  rate 
behaviour  within  the  mechanism.  Currently  one  of  the  Member  States  assessed  in  this 
Convergence Report, namely Bulgaria, participates 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 June 2022 to 18 June 2024. 

(9) 

In  assessing  compliance  with  the  exchange  rate  criterion,  the  Commission  examines  whether  the  exchange  rate  has 
remained close to the ERM II central rate, while reasons for an appreciation may be taken into account, in accordance 
with the Common Statement on Acceding Countries and ERM II by the Informal ECOFIN Council, Athens, 5 April 2003. 

(10)  97/C 236/03 of 16 June 1997, OJ C 236, 2.8.1997, p.5. 

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Bulgaria and Czechia: In line with the requirements of the reformed Stability and Growth Pact, limit the growth in net expenditure  in 2025 to a rate consistent with maintaining the general government deficit below the 3% of GDP Treaty reference value and keeping the general government debt at a prudent level over the medium term. Sweden does not have fiscal adjustment needs and thus the Commission has not proposed a qualitative part in the fiscal recommendation.  
 
 
 
 
  
 
 
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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) 

1.2.5.  Long-term interest rates 

The  fourth  indent  of  Article  140(1)  of  the  Treaty  requires  that  ’the  durability  of  convergence 
achieved  by  the  Member  State  with  a  derogation  and  of  its  participation  in  the  exchange  rate 
mechanism’  is  ’reflected  in  the  long-term  interest  rate  levels’.  Article  4  of  the  Protocol  on  the 
convergence  criteria further 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  States  in  terms  of  price 
stability.  Interest  rates  shall  be  measured  on  the  basis  of  long-term  government  bonds  or 
comparable securities, taking into account differences in national definitions’ (see Box 1.6).  

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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 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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For  the  assessment  of  the  criterion  on  the  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 May 2024 is calculated as the simple average of the average long-term interest rates in 
the  Netherlands  (2.8%),  Italy  (4.1%)  and  Latvia  (3.7%)  plus  2  percentage  points,  yielding  a 
reference value of 5.5%. 

20 

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 10 years. For eleven Member States, the residual maturity of the benchmark bond is below 10 years, in particular for Bulgaria with the residual maturity slightly below 8 years. All yields are calculated on the basis of secondary market rates, where available. For Germany, Malta 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.  
 
    
 
 
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Box 1.7: The Macroeconomic Imbalance Procedure (MIP)Key elements of the MIP A key lesson from the global 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 economic governance 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, taking into account country-specific features, including those 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 as to 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. 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 following the AMR 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. In addition, when relevant, the IDRs include analysis of spillovers and exposures to from the Member State concerned and other Member States, and account is taken of vulnerabilities that carry cross-border relevance. 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. Over recent 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 revised EU economic governance framework, encompassing the MIP, is now being rolled out. A main objective is to have a more flexible and forward-looking MIP, including an enhanced preventive role for the MIP to be better able to deal with new risks to macroeconomic stability. Greater ownership by the Member States of their policies to address imbalances is another objective and a way to increase policy traction too. In particular, the medium-term fiscal-structural plans will also include the measures that Member States will take to address the MIP-relevant CSRs and tackle their imbalances or excessive imbalances, on the top of their fiscal policies. At the same time, enforcement is being stepped up as no implementation of those measures in the plans could lead to escalation of the procedure, including the opening of an Excessive Imbalance Procedure. Finally, a stronger EU and euro area dimension in  
 
 
         
 
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Box (continued) 

1.2.6.  Additional factors 

Article  140(1)  TFEU  also  requires  that  the  reports  take  into  account  other  factors  relevant  to 
economic  integration  and  convergence.  These  additional  factors  include  financial,  product  and 
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 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 (11).  Market  integration  is  assessed 
through  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. 

Starting  with  the  2012  Convergence  Report,  the  convergence  assessment  is  aligned  with  the 
broader  European  Semester  approach  which  takes  an  integrated  look  at  the  economic  policy 
challenges facing EMU in ensuring fiscal sustainability, competitiveness, financial market stability 
and economic growth. 

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 in EMU, and integrates its results into the assessment (see Box 1.7). 

(11)  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. 

22 

the MIP is sought. All those objectives under the MIP remit will be pursued within the existing legal provisions. The 2024 Alert Mechanism Report (AMR) and In-Depth Reviews (IDR) In its latest AMR from November 2023, the Commission concluded that IDRs were warranted for 12 Member States, which mostly coincided with the ones that had been identified with imbalances or excessive imbalances in the previous annual MIP cycle (1). Three of those Member States are covered in this Convergence Report (Hungary, Romania, and Sweden). On the basis of the most recent IDRs, in June 2024, the Commission concluded that Hungary and Sweden continue to experience imbalances while Romania is experiencing excessive imbalances after being identified with imbalances in 2023 (2).   (1) European Commission (2023), Alert Mechanism Report 2024, COM(2023) 902 final; and European Commission (2023), Alert Mechanism Report 2024, SWD(2023) 901 final. (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 and the European Investment Bank ‘2024 European Semester – Spring Package’, COM(2024) 600 final.  
 
 
 
 
         
 
 
2.  BULGARIA 

2.1.  LEGAL COMPATIBILITY 

2.1.1.  Introduction 

The legal basis for the Bulgarska Narodna Banka (the BNB – Bulgaria’s central bank), the Law on 
the  Bulgarian  National  Bank  (the  BNB  Law)  of  1997,  has  been  amended  since  the  2022 
Convergence Report. The new version of the BNB Law was adopted by the 49th National Assembly 
on 1 February 2024 and published in the State Gazette no 13 of 13 February 2024. In accordance 
with  paragraph  14  of  its  transitional  and  final  provisions,  it  shall  enter  into  force  on  the  date 
specified in the Council Decision on the adoption of the euro by Bulgaria (12). The entry into force 
would therefore be automatic and would not require further action from the Bulgarian authorities. 

The analysis contained in this convergence report is therefore based on the latest version of the 
BNB Law, as adopted and published in the Bulgarian official journal, even though it is not yet in 
force.  This  latest  version  of  the  BNB  Law  has  remedied  the  incompatibilities  and  imperfections 
highlighted 
in  the  Commission’s  2022  Convergence  Report’s  sections  on  central  bank 
independence, prohibition of monetary financing and privileged access, as well as integration into 
the  European  System  of  Central  Banks  (ESCB).  Notably,  the  new  BNB  Law  clearly  recalls  the 
applicability and primacy of EU law over national law by stating that the ‘reproduction of directly 
applicable provisions of EU law is merely declaratory and has been introduced in order to ensure 
consistency and comprehensibility for the persons concerned’ (paragraph 2  of the Supplementary 
provisions).  Overall,  the  amended  legislation  on  the  BNB  can,  once  it  enters  into  force,  be 
considered compatible with the relevant provisions of EU law. 

2.1.2.  Central bank independence 

The previous version of the BNB Law contained a  degree of ambiguity regarding the dismissal of 
the  Governor  of  the  BNB  and  could  be  understood  in  such  a  way  that  the  Governor  might  be 
dismissed under  conditions other than those mentioned in Article 14(2) of the ESCB/ECB Statute. 
The new BNB Law (Article 15) clearly refers to Article 14(2) of the ESCB/ECB Statute: ’The National 
Assembly may dismiss the Governor prematurely in accordance with Article 14(2) of the Statute’) 
Reading  it  together  with  paragraph  2  of  the  Supplementary  provisions,  which  recalls  the 
applicability  and  primacy  of  EU  law,  it  can  only  be  interpreted  in  a  way  that  does  not  allow  any 
additional grounds of dismissal, other than those stated in Article 14(2). On this condition, the new 
provision can be considered compatible with EU law. 

The new BNB Law (Article 15(3)) provides that the grounds for the early dismissal of a member of 
the Management Board, with the exception of the Governor, shall be established by a decision of 
the Management Board. A  member of the Management Board whose dismissal is proposed shall 
cease  to  exercise  their  powers  from  the  day  of  the  Management  Board’s  decision.  The 
Management Board’s decision is subject to appeal before the Supreme Administrative Court within 
7  days.  The  Supreme  Administrative  Court  gives  its  decision  within  14  days  of  receipt  of  the 
appeal.  This  decision  is  final.  Ensuring  personal  independence  requires  that  national  legislation 
should allow reasonable time for appealing a dismissal decision as well as for the judicial review 
to take place for appealing. The short time-limit for the appeal and the very constrained timeframe 
for  the  judicial  procedure  in  Article  15(3)  may  be  seen  as  a  residual  imperfection  that  Bulgaria 
should consider addressing.  

Article  14(2)  (former  Article  13(2))  of  the  new  BNB  Law  provides  that  the  Governor  of  the  BNB 
shall swear an oath before the National Assembly. The content of the oath laid down in paragraph 
1 of the same provision refers, inter alia, to abiding by the law and to assisting in the independent 
performance  of  the  functions  entrusted  to  the  BNB  and  to  maintaining  any  official,  banking, 
professional, commercial or other legal secrecy (including after the Governor’s have  ceased). The 

(12)  Decree No.26, 13.02.2024 

23 

 
Convergence Report 2024 - Technical annex 
Chapter 2 - Bulgaria 

imperfection identified in the previous convergence report was that the oath did not make a clear 
reference to central bank independence, as required by Article 130 TFEU. It was explained that the 
Governor of the BNB acts in a dual capacity, as a member of the relevant decision-making bodies 
of the ECB and of the BNB’s decision-making bodies. The oath therefore needs to reflect this dual 
membership and role. Although, in the new version of the BNB Law, Article 14 still does not refer 
specifically to Article 130 TFEU, Article 2(1) of the BNB Law does expressly specify that the BNB is 
part of the ESCB. The Law should therefore be understood in the sense that the Governor of the 
BNB is also a member of decision-making bodies of the ECB. On this understanding, the provision 
can  be  considered  compatible  with  EU  law.  The  new  provision  on  the  BNB’s  independence  from 
public  bodies,  Article  6  (the  former  Article  44(1)),  has  been  improved  by  including  a  specific 
reference to Article 130 TFEU, as was suggested in the previous convergence report. 

The Bulgarian Constitution has been amended in January 2024 in a matter that could  indirectly 
impact the BNB’s independence. The new Article 99(5) of the Bulgarian Constitution provides that, 
in  a  case  where  no  agreement  is  reached  on  the  formation  of  a  government,  the  President, 
following  consultations  with  the  parliamentary  groups  and  acting  on  a  motion  by  the  caretaker 
prime  minister-designate,  appoints  a  caretaker  cabinet,  and  schedules  new  elections  within  2 
months. A caretaker prime minister is to be appointed from among the Chairperson of the National 
Assembly, the Governor or a Deputy Governor of the BNB, the President or a Vice-President of the 
Bulgarian National Audit Office, and the Ombudsman (or a deputy thereof). 

The appointment as caretaker prime minister of the Governor or one of the Deputy Governors of 
the  BNB  could,  in  some  situations,  disrupt  its  effective  and  independent  functioning.  This  is 
potentially a serious cause for concern. The appointment would  only be for a limited period (until a 
regular  government  is  formed),  but  the  caretaker  government  could  be  reappointed  for  several 
successive periods as long as election results do not result in the formation of a government and 
new elections have to be scheduled. To avoid such potential disruption and its potential impact on 
the  BNB’s  independence,  one  possible  solution  could  be  to  amend  the  BNB  Law  to  provide 
sufficient and effective safeguards for the BNB’s independence as required by EU law. Firstly, any 
appointment  of  the  Governor  or  a  Deputy  Governor  of  the  BNB  as  a  caretaker  prime  minister 
should be conditional on their explicit consent and they  should be empowered to  refuse such an 
appointment.  Secondly,  if  such  consent  is  expressed,  the  rules  should  prevent  that  person  from 
holding both positions simultaneously, because this could  lead to conflicts of interest and lack of 
independence.  In  this  respect,  the  effective  and  independent  functioning  of  the  BNB  must  be 
preserved.  This could  be  ensured  through  the  person’s  resignation  from their  post  at  the  BNB at 
the time of their appointment as caretaker prime minister.  

2.1.3.  Prohibition of monetary financing and privileged access 

The current version of the BNB Law (Article 47) includes a statement that the BNB complies with 
the prohibition of monetary financing laid down in Article 123 TFEU. The provisions on extension of 
credit and purchase of public debt instruments (former Articles 45(1) - 45(3)), which were a cause 
for concern in the previous convergence report, have been repealed. Incompatibilities in the area of 
prohibition of monetary financing and privileged access have therefore been resolved. 

2.1.4.  Integration into the ESCB 

Objectives 

Article  2(2)  of  the  BNB  Law  provides  that  in  accordance  with  Article  127(1)  TFEU,  and  without 
prejudice  to  the  primary  objective  of  maintaining  price  stability,  the  BNB  shall  support  general 
economic policies within the EU in order to contribute to the achievement of the objectives of the 
EU  as  set  out  in  Article  3  TFEU.  The  BNB  shall  act  in  accordance  with  the  principles  of  an  open 
market  economy  with  free  competition,  supporting  the  efficient  allocation  of  resources  and  in 
accordance  with  the  principles  set  out  in  Article  119  TFEU.  Article  2(2)  of  the  BNB  Law  is 
compatible with Article 127(1) TFEU. 

24 

Convergence Report 2024 - Technical annex 
Chapter 2 - Bulgaria 

Article  2(1)  of  the  BNB Law,  which  reflects  that  the  BNB’s primary  objective  is to  maintain  price 
stability, has been amended to reflect the fact that the euro would replace the national currency. 
The wording ‘through ensuring the stability of the national currency’ has been deleted.  

Other remaining incompatibilities and imperfections have been resolved. In the current version, the 
BNB  Law  includes  a  reference  to  the  BNB  being  an  integral  part  of  the  ESCB  (Article  2)  and 
mentions the relevant provisions of EU law. 

Tasks 

The incompatibilities and imperfections in the BNB Law linked to ESCB/ECB tasks have been solved. 

2.1.5.  Assessment of compatibility 

The Bulgarian authorities have taken measures to remedy the incompatibilities and imperfections 
that were identified in the 2022 Convergence Report. Subject to the conditions and interpretations 
set out above, the BNB Law can be considered compatible with the relevant provisions of EU law 
regarding central bank independence, the prohibition of monetary financing and privileged access, 
and integration into 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 2022. The 12-
month average inflation rate increased from 5.9% in April 2022 to a high of 14.1% in March 2023, 
but then decreased throughout the rest of 2023 and the first months of 2024. In May 2024, the 
reference  value was  4.1%, calculated as the average of  the 12-month average inflation rates in 
the  Netherlands,  Italy  and  Latvia  plus  1.5  percentage  points.  The  corresponding  inflation  rate  in 
Bulgaria  was  5.1%  -  1.0  percentage  point  above  the  reference  value.  The  12-month  average 
inflation rate is projected to remain slightly above the reference value in the coming months but 
the gap is projected to close by the end of 2024 or early 2025. 

2.2.2.  Recent inflation developments 

After  early  signs  of  a  pick-up  in  2021,  the  annual  HICP  inflation  rate  continued  to  accelerate  in 
2022  to  reach  15.6%  in  September.  It  then  stabilised  at  14.3%  between  November  2022  and 
January 2023 before decelerating to 2.7% in May 2024. The direct contribution of energy prices to 
inflation gradually diminished from the last quarter of 2022 and turned negative as of April 2023. 
The contributions of the other HICP components to inflation continued to grow throughout 2022. In 
2023,  the  deceleration  in  inflation  was  broad  based,  with  an  important  contribution  from  food 

25 

-20246810121416Jan-18Jan-19Jan-20Jan-21Jan-22Jan-23Jan-24BulgariaReference 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 Bulgaria in December 2024. The reference values for 2018, 2020 and 2022 refer to the reference values calculated in the previous convergence reports.Source: Eurostat, Commission's Spring 2024 Economic Forecast.-2024681012141618201820192020202120222023BulgariaEuro areaGraph 2.2: Bulgaria -HICP inflation(y-o-y percentage change)Source: Eurostat. 
 
  
   
Convergence Report 2024 - Technical annex 
Chapter 2 - Bulgaria 

prices.  Overall, inflation  in  Bulgaria  has been  substantially  higher than  in  the  euro  area  over the 
past 2 years. Over this period the average annual inflation rate in Bulgaria was 10.9%, exceeding 
that of the euro area by 4 percentage points. 

HICP inflation excluding energy and food increased steadily throughout 2022, peaking at 11.1% in 
December 2022, and then came down to 3.0% in May 2024. Both non-energy industrial goods and 
services  prices  grew  on  an  annual  basis  less  strongly  than  overall  HICP  until  March  2023.  HICP 
inflation  excluding  energy  and  food  afterwards  exceeded  headline  inflation  until  March  2024, 
indicating its stronger persistence. The stronger than usual tourism season in the summer of 2023 
also temporarily held back disinflation in the related core price components. 

In  the  past  2  years,  services  inflation  has  been  driven  mainly  by  the  transport,  catering  and 
accommodation sectors. Prices in these sectors have been strongly influenced by food and energy 
input  prices,  as  well  as  by  strong  nominal  growth  in  wages  in  2022.  Some  wage  moderation  in 
these sectors  contributed to  the deceleration in services inflation after the first quarter of 2023. 
High inflation in non-energy industrial goods prices was broad-based throughout 2022, driven by 
high import prices and producer costs. Inflation in this product group persisted during 2023 due to 
the lagged increase in the  prices of  pharmaceutical  products that followed the indexation of the 
administratively determined price ceilings. 

2.2.3.  Underlying factors and sustainability of inflation 

Macroeconomic policy mix and growth developments 

Real GDP grew by 3.9% in 2022 and then slowed down to 1.8% in 2023. Household consumption 
growth  declined  markedly  in  the  first  half  of  2022  with  inflation  weighing  down  on  real  income. 
However, it grew rapidly in the second half, supported by a sizeable increase in nominal wages that 
restored the purchasing power of labour income. In a context of a tight labour market and falling 
inflation, real wages continued to expand in 2023, further supporting consumption. Nevertheless, 
the  growth  rate  of  households’  consumption  expenditures  slowed  down,  accompanied  by  a 
downward  trend  in  confidence  indicators  in  the  trade  and  services  sector.  At  the  same  time, 
household deposits increased by more than consumer credit in 2023, indicating a higher propensity 
to  save.  Investment  in  fixed  assets  rebounded  in  2022  as construction  firms  caught  up  with  the 
accumulated  delays  in  starting  and  finishing  construction  projects  during  the  COVID-19  crisis.  In 
2023,  investment  increased  by  3.3%  with  an  important  contribution  from  public  investment  and 
purchases  of  new  equipment.  Goods  exports  grew  particularly  strongly  in  the  first  half  of  2022, 
reflecting both higher prices and volumes of exported commodities. Goods exports then contracted 
in 2023, due to the deterioration of external demand, the strong negative base effect in 2022 and 
some one-off factors (13). Services exports expanded robustly in 2022 and 2023, benefiting from 
the  continued  recovery  in  the  tourism  sector  in  the  aftermath  of  the  COVID-19  crisis  and  the 

(13)  Notably planned maintenance in the steel industry and the nuclear power plant and the ban on exports of petroleum 

products processed from Russian oil. 

26 

Table 2.1:weights  Bulgaria - Components of inflation(percentage change)1)in total   201820192020202120222023May-242023HICP2.62.51.22.813.08.65.11000Non-energy industrial goods-0.50.2-0.10.77.18.55.2285Energy6.41.4-6.110.626.8-1.3-2.8130Unprocessed food 1.35.35.5-0.320.015.59.055Processed food2.34.04.12.917.212.06.3236Services4.33.22.32.08.29.46.8295HICP excl. energy, food, alcohol and tobacco2.11.81.21.47.68.96.0579HICP at constant tax rates 2.42.41.53.213.38.74.91000Administered prices HICP2.22.61.72.46.26.95.81641) 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 2024 - Technical annex 
Chapter 2 - Bulgaria 

further development of services outsourced to Bulgaria. The strong accumulation of inventories in 
2021  and  the  first  half  of  2022  turned  sharply  negative  in  the  second  half  of  2022  and  this 
decline  deepened  in  2023.  Imports  grew  strongly  in  2022,  driven  by  high  domestic  demand  and 
the  high  import  content  of  exports.  In  2023,  imports  contracted  sharply,  following  the  decline  in 
exports and inventories. 

Economic  growth  is  expected  to  increase  marginally  to  1.9%  in  2024,  before  reaching  2.9%  in 
2025.  Domestic  demand  is  expected  to  be  the  main  growth  driver  in  both  years.  Short-term 
indicators suggest that exports continued to contract at the beginning of 2024. Beyond Q1-2024, 
exports  are  projected  to  rebound,  driven  by  the  recovery  of  external  demand.  Household 
consumption  is  expected  to  keep  growing,  albeit  somewhat  less  strongly  than  in  2023  because 
employment is expected to remain largely constant and as saving rates gradually return to higher 
levels. Some indicators also point towards a slowdown in consumer spending growth at the start of 
2024. These dynamics depend crucially on the expectation of a good labour market performance 
and  the  assumption  that  the  pass-through  of  relatively  high  euro  area  interest  rates  to  the 
domestic credit market remains incomplete. 

Based on the Commission’s Spring 2024 Economic Forecast, Bulgaria is expected to move from a 
broadly  neutral  fiscal  stance (14)  in  2023  to  a  slightly  contractionary  one  in  2024  (0.3%  of  GDP) 
due to the impact of increased spending on pensions and wages, which is not fully compensated 
by (i) a drop in nationally financed investment; and (ii) a decrease in the fiscal impulse from EU-
funded  expenditure  following  the  last  year  of  implementation  of  the  2014-2020  programming 
period of the EU structural funds. The budgetary costs related to people fleeing Russia’s full-scale 
invasion of Ukraine are estimated at 0.1% of GDP. The no-policy-change forecast for 2025 reverts 
to a supportive stance (1.4% of GDP) driven by the impact of nationally financed investment and 
increasing expenditure financed by the Recovery and Resilience Fund and other EU grants. 

The  BNB  pursues  its  primary  objective  of  price  stability  through  an  exchange  rate  anchor  in  the 
context  of  a  currency  board  framework  with  the  lev  pegged  to  the  euro.  The  currency  board 
framework serves as a key macroeconomic policy anchor. The monetary tightening in the euro area 
has affected the non-financial corporations segment of the Bulgarian banking sector, but the pass-
through to the mortgage lending segment has been rather muted. Country-specific factors in the 
setting of interest rates, high domestic liquidity and competition in the sector explain the continued 
strong lending for house purchases. The deposit base continued to grow due to growing disposable 
income in a context of limited investment alternatives available to households. The ample liquidity 
in  the  banking  sector  provided  cheap  and  abundant  funding  for  credit  expansion.  Moreover, 
mortgage  lending  interest  rates  are  predominantly  linked  to  the  domestic  deposit  interest  rates, 
which has helped keep  down the lending  rates, against a backdrop of strong competition among 
leading banks. 

Given the  risks to the  debt-servicing capacity of borrowers, and the  quality  of banks’  assets, the 
BNB  decided  in  September  2022  to  raise  the  countercyclical  capital  buffer  rate  applicable  to 
domestic  credit  exposures  from  1.5%  to  2.0%  (effective  from  1  October  2023).  The  BNB  also 
reconfirmed the systemic risk buffer at 3% on 11 December 2023. Moreover, the BNB’s Governing 
Council increased the minimum required reserves on the funds attracted from non-residents from 
5%  to  10%  as  from  1  June  2023.  The  minimum  required  reserves  on  the  funds  attracted  from 
both  residents  and  non-residents  were  increased  from  10%  to  12%  as  from  1  July  2023.  The 
increased reserve requirements were motivated by high inflation, high consumer demand, dynamic 
credit activity, and slow and weak transmission from the monetary tightening in the euro area to 
the domestic financial market. 

(14)  The fiscal stance is measured as the change in primary expenditure (net of discretionary revenue measures), excluding 
COVID-19-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. 

27 

 
Convergence Report 2024 - Technical annex 
Chapter 2 - Bulgaria 

Wages and labour costs 

to 

The  labour  market  remained  tight  in  2022  and 
2023,  with  the  unemployment  rate  fluctuating 
between  4%  and  4.5%.  In  2022,  nominal  wages 
(by  14.2%), 
increase  strongly 
continued 
reflecting  both  labour  shortages  and  pressures 
from  high  inflation.  The  minimum  wage  was 
increased  by  9.2%  in  April  2022    and  then  by 
9.9%  at  the  beginning  of  2023,  still  below  the 
accumulated inflation since the preceding update 
on  1  January  2021.  In  2023,  nominal  wage 
growth moderated gradually to 13.3% as inflation 
pressures  subsided  and  firms  aimed  to  improve 
their  competitive  position  given  weakened 
external  demand.  The  average  monthly  wage 
reached BGN 2012 (EUR 1,029) in 2023. As from 
1  January  2024 
the  minimum  wage  was 
increased  by  19.6%,  to  BGN  933  (EUR  477), 
following  a  new  rule  in  the  Labour  Code  aligned  with  the  aims  of  Directive  (EU)  2022/2041  on 
adequate minimum wages. According to the amendments to the Labour Code, the minimum wage 
in  2024  should  be  50%of  the  average  wage  in  the  period  July  2022  -  June  2023.  Aggregate 
labour  productivity  improved  by  4.3%  in  2022,  driven  by  productivity  gains  in  manufacturing.  It 
then  decelerated  to  0.9%  in  2023,  reflecting  more  moderate  output  expansion  and  some 
employment gains. Overall, unit labour costs (ULC) increased by 9.5% in 2022 and 12.3% in 2023.  

The  aggregate  ULC  dynamics  in  2022  and  2023  conceal  important  sectoral  developments. 
Nominal  ULCs  in  manufacturing  declined  in  2022,  on  the  back  of  strong  productivity  gains  and 
output  growth.  The  tight  labour  market  and  high  inflation  caused  wages  in  service  sectors  (e.g., 
trade, transport and hospitality) to increase strongly in 2022. At the same time labour productivity 
stagnated, giving rise to rapid growth in nominal ULCs. In 2023, the processes that determined the 
ULC dynamics in 2022 partially reversed. Wage growth in manufacturing first accelerated (possibly 
reflecting  the  strong  productivity  gains  in  2022)  and  then  decelerated  as  firms  tried  to  gain 
competitiveness  in  export  markets.  Wages  in  key  service  sectors  (e.g.,  trade,  transport  and 

28 

Table 2.2:Bulgaria - Other inflation and cost indicators(annual percentage change)20182019202020212022202320241)20251)HICP inflationBulgaria2.62.51.22.813.08.63.12.6Euro area1.81.20.32.68.45.42.52.1Private consumption deflatorBulgaria2.42.0-0.66.016.26.93.02.7Euro area1.51.10.62.36.86.02.42.0Nominal compensation per employeeBulgaria9.76.97.211.314.213.310.49.4Euro area2.12.2-0.44.24.55.14.23.1Labour productivityBulgaria2.83.7-1.77.54.30.92.42.8Euro area0.10.2-4.74.41.1-1.00.10.9Nominal unit labour costsBulgaria6.73.19.03.69.512.37.96.4Euro area2.01.94.6-0.23.36.24.12.2Imports of goods deflatorBulgaria2.2-0.1-6.016.223.4-3.21.02.0Euro area2.6-0.6-3.89.721.6-4.90.41.81) Commission's Spring 2024 Economic Forecast.Source: Eurostat, Commission's Spring 2024 Economic Forecast.-30369121520182019202020212022202320242025Productivity (real GDP per person employed)Nominal compensation per employeeNominal unit labour costsHICP inflation(y-o-y % change)Source: Eurostat, Commission's Spring 2024 Economic Forecast.Graph 2.3: Bulgaria -Inflation, productivity and wage trends     
   
Convergence Report 2024 - Technical annex 
Chapter 2 - Bulgaria 

hospitality) have been growing much more moderately since the end of 2022. Wage increases in 
the public sector were also an important factor in the strong aggregate wage  dynamics in 2022 
and 2023. 

External factors 

Import  prices  are  an  important  channel  through  which  external  price  shocks  affect  the  domestic 
price dynamics. The price hikes in imported energy and other materials in 2021 and 2022 led to a 
surge in production costs. The cost-push factor has been more pronounced than on average in the 
EU  because  the  Bulgarian  economy  is  around  three  times  more  energy  intensive  than  the  EU 
average and is also more resource/material intensive than the EU. External inflation has also been 
directly  imported  through  consumer  goods  imports,  which  constituted  24%  of  total  imports  in 
2023. 

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  3.4%  in  2022  and  2%  in  2023.  The 
appreciations  were  strongly  influenced  by  the  depreciation  of  the  Turkish  lira  against  the  euro. 
Türkiye is Bulgaria’s most important trading partner outside the EU, accounting for 5.6% of total 
exports and 8.2% of total imports in 2023. 

Administered prices and taxes 

The  share  of  administered  prices in  the  HICP  basket  is  relatively  high  at  around 17%,  compared 
with 13% in the euro area. Regulated prices of electricity, heat and water follow a seasonal pattern 
because  they  are  usually  updated  at  the  beginning  of  the  year  or  in  the  summer  months. 
Administered  price  inflation  accelerated  to  6.2%  in  2022  and  to  6.9%  in  2023  on  the  back  of 
increasing  energy  prices.  Administered  price  inflation  remained  well  below  overall  HICP  in  2022 
and 2023. 

Changes  in  indirect  taxes  had  a  slight  negative  effect  on  inflation  in  2022  and  2023.  The  most 
important  measures  introduced  in  2022  were  the  reduction  of  VAT  rates  for  natural  gas  and 
central  heating  from  20%  to  9%  and  the  exemption  from  excise  duties  for  gas  and  electricity. 
These measures expired in mid-2023. Moreover, a temporary subsidy for car fuel of 0.25 leva per 
litre of fuel was introduced in mid-2022 and expired at the end of 2022. In 2023 and 2024, excise 
duty on cigars and cigarettes was increased cumulatively by almost 10% and with further similar 
increases  are  planned  for  2025  and  2026.  Annual  HICP  at  constant  tax  rates  was  0.3  of  a 
percentage  point  and  0.1  of  a  percentage  point  above  headline  inflation  in  2022  and  2023, 
respectively. Some of the support measures introduced in 2022 were still in place in 2023, which 
explains  the  persistence  in  the  positive  inflation  differential  between  HICP  at  constant  tax  rates 
and  headline  HICP  in  2023  through  the  carry-over  effect  from  2022.  In  the  euro  area,  annual 
constant-tax HICP exceeded headline inflation by 0.5 of a percentage point in 2022 and then  fell 
below  it  by  0.1  of  a  percentage  point  in  2023.  The  decision  to  reduce  co-payments  for  certain 
medicines in late March 2024 has also brought down the administered prices since April 2024.   

Medium-term prospects 

Looking  forward,  annual  HICP  inflation  is  expected  to  decrease  markedly  to  3.1%  in  2024,  and 
2.6%  in  2025.  Import  prices  are  set  to  exert  downward  pressure  on  the  energy  and  non-energy 
industrial goods components in 2024. Services price inflation is also projected to decelerate, driven 
by  second-round  effects  from  lower  input  prices  and  a  projected  moderation  in  wage  growth. 
Inflation in this category is nevertheless set to remain above overall HICP inflation, supported by 
nominal wage growth in the sector and the expiration of the reduced VAT measure for restaurant 
and catering services at the end of 2024. 

Increased inflation in 2022  and 2023 has brought the  consumer  price level in Bulgaria closer to 
the euro area average. The level of consumer prices in Bulgaria nevertheless stood at  about 55% 
of the euro area average in 2022. This suggests that there is potential for price level convergence 

29 

Convergence Report 2024 - Technical annex 
Chapter 2 - Bulgaria 

in  the  long  term,  as  GDP  per  capita  in  terms  of  purchasing  power  standards  (about  60%  of  the 
euro-area average in 2022) rises towards the euro area average. 

Medium-term inflation prospects will depend on the containment of price expectations and wage-
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 
ambitious investment and reform agenda of the Bulgarian RRP aims at expanding the productive 
potential, including via the green transition and digital transformation. The implementation of the 
planned measures that target energy savings, reduction in fossil fuel consumption, diversification 
of energy supplies and more renewable energy would improve the economy’s currently low energy 
efficiency, and its overall resilience and competitiveness. 

2.3.  PUBLIC FINANCES 

2.3.1.  Recent fiscal developments 

After  2  years  at  around  4%  of  GDP  in  2020  and  2021  due  to  the  pandemic-induced  shock,  the 
government deficit narrowed to 2.9% of GDP in 2022. It further decreased to 1.9% in 2023. The 
revenue-to-GDP ratio increased by 0.8 percentage point in 2022 to 38.5% of GDP before declining 
to 37.9% in 2023. The expenditure-to-GDP ratio fell from 41.4% in 2022 to 39.8% in 2023. 

In 2022, the budget introduced a gradual increase in excise duty on tobacco and fees for the use 
of the national paid road network (toll taxes and e-vignette).The increasing prices of products and 
growing labour income also increased tax revenues. The expenditure measures in the 2022 budget 
included  increases  in  the  minimum  wage  and  changes  in  pension  policy  parameters.  Some  key 
COVID-19  support  measures  continued  to  apply  in  2022,  including  the  provision  of  vaccines and 
medical  products,  pension  top-ups  and  business  support  schemes.  Further  measures  were 
introduced  to  support  displaced  persons  from  Ukraine.  These  included  the  provision  of 
humanitarian aid and had  a budgetary impact of 0.1% of GDP in 2022 and 0.4% in 2023 (based 
on  Commission  estimates).  In  addition,  in  2022  Bulgaria  implemented  measures  to  mitigate  the 
impact of high energy prices. These measures had a  net budgetary impact of 1.3% of GDP. They 
were almost fully phased out in 2023.  

In 2023, changes in income policy parameters such as minimum and maximum insurable income 
drove social contributions up even though the labour market was still tight. Revenues were further 
supported  by the introduction of a  100% dividend on SOEs,  with an estimated  budget impact of 
0.6% of GDP. In addition, the partial phasing-out in 2023 of the measures to moderate the impact 
of  high  energy  prices  helped  to  contain  the  deficit,  while  the  remaining  emergency  energy 
measures  were  fully  compensated  by  windfall  revenues  from  the  energy  sector.  The  deficit  also 
benefited  from  compensatory  measures  to  increase  revenue  collection,  including  in  the  area  of 
fiscal control of goods with high fiscal risk, with an estimated impact of 0.3% of GDP. Increases in 
wages and pensions that had been enacted in previous years started to have a budgetary impact 
estimated at almost 3% of GDP. However, the outturn deficit for 2023 was contained by a limited 
spending  capacity  in  2023,  which  caused  a  drop  in  intermediate  consumption,  as  well  as  by  the 
normalisation of energy prices, which contributed to a sharp decrease in subsidies (down by 46.7% 
from 2022, the equivalent of 2.2% of GDP). 

In 2022, the debt-to-GDP ratio fell by 1.3 percentage points to 22.6% of GDP but rose back up to 
23.1%  in  2023.  The  debt-increasing  impact  of  the  primary  deficit  in  2022  was  more  than 
compensated by a large snowball effect, reflecting the stronger impact of inflation and  real GDP 
growth on the debt ratio than the interest rate on government debt. Together with a small negative 
stock-flow adjustment, this led to decrease in the debt ratio. In 2023, the primary deficit of 1.4% 
of GDP was  fully compensated by real GDP  growth  and inflation, but the joint impact of interest 
expenditure and a positive stock-flow adjustment increased the debt ratio.  

30 

Convergence Report 2024 - Technical annex 
Chapter 2 - Bulgaria 

2.3.2.  Medium-term prospects 

The 2024 budget targets a general government deficit of 2.9% of GDP in 2024. According to the 
Commission’s Spring 2024 Economic Forecast, which is based on a no-policy-change assumption, 
the general government deficit is expected to be 2.8% of GDP in 2024.  

Supported by favourable labour market developments, changes in income policy such as increased 
minimum  and  maximum  insurable  income  are  expected  to  translate  into  higher  social  security 
contributions.  A  positive  impact  is  again  expected  from  a  package  of  measures  to  increase  the 
collection of VAT and corporate taxes, and the introduction of a domestic top-up tax in accordance 
with  Council  Directive  (EU)  2022/2523  on  ensuring  a  global  minimum  level  of  taxation  for 
multinational enterprise groups and large domestic groups in the Union (15). Projected increases in 
imports in 2024 will further increase revenues from indirect taxation. However, overall tax revenue 
increases are set to slow in line with the economic outlook and lowered inflation. 

The  growth  in  expenditure  is  set  to  outpace  revenue  growth.  The  budgetary  impact  of  pension 
expenditure and measures to increase the minimum wage and the guaranteed minimum income in 
line with the poverty line are only partly compensated by the full phasing out of the energy-related 
measures (0.8% of GDP in 2023), with pension measures alone driving an increase of more than 
1% of GDP. Compensation of employees and social transfers are therefore expected to increases 
the most. Public investment is expected to decrease, due in part to the full implementation of the 
2014-2020 EU funds programming period in 2023 and also due to a slowdown in national public 
investment. 

On 30 April 2024, Bulgaria submitted its 2024 Convergence Programme. In line with the outturn, 
the headline deficit in the Programme stands at 1.9% in 2023 and is projected to be 3% of GDP in 
2024 and 2025. The government deficit projected by the Commission is slightly lower but broadly 
in line with the planned deficit in the Convergence Programme, at 2.8% vs 3% in 2024. This is also 
due to different assumptions on the evolution of gross fixed capital formation.   

(15)  OJ L 328, 22.12.2022, p. 1–58. 

31 

Table 2.3:Bulgaria - Budgetary developments and projections (as % of GDP unless indicated otherwise)Outturn and forecast 1)20182019202020212022202320241)20251)General government balance1.72.1-3.8-3.9-2.9-1.9-2.8-2.9- Total revenue38.738.537.737.738.537.937.238.6- Total expenditure37.036.341.541.641.439.839.941.6   of which: - Interest expenditure0.70.60.50.50.40.40.50.5p.m.: Tax burden29.730.430.530.831.130.130.231.1Primary balance2.42.7-3.3-3.5-2.5-1.4-2.3-2.4Fiscal stance 2)-1.00.00.3-1.4Recommended growth in net nationally financed primary expenditure (%)4.6-Growth in net nationally financed primary expenditure (%)6.2-Government gross debt22.120.024.623.922.623.124.824.6p.m: Real GDP growth (%)2.74.0-4.07.73.91.81.92.91) Commission’s Spring 2024 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 2024 - Technical annex 
Chapter 2 - Bulgaria 

Based on the Commission’s estimates, the fiscal stance is projected to be slightly contractionary at 
0.3% of GDP in 2024, following a broadly neutral fiscal stance of 0.0% of GDP in 2023. The mildly 
contractionary  fiscal  stance  in  2024  is  primarily  being  driven  by  nationally  financed  investment 
and by EU-financed expenditure, which are contributing 0.6% and 0.4% of GDP respectively. The 
contribution of net nationally financed primary current expenditure is expansionary (0.07% of GDP) 
because  current  expenditure  is set  to  grow  above  medium-term  potential  growth.  This is despite 
the contraction driven by the full phasing-out of measures to moderate the impact of high energy 
prices.  Expenditure  financed  by  grants  from  the  RRF  and  other  EU  funds  also  has  a  slightly 
contractionary contribution of 0.4% of GDP. The general government debt-to-GDP ratio is forecast 
to  increase  to  24.8%  in  2024.  Declining  inflation,  paired  with  the  slow  picking-up  of  economic 
growth,  has  a  negative  impact  on  the  size  of  the  snowball  effect.  This  is  therefore  not  large 
enough to offset the impact of the primary balance, which is expected to increase the debt-to-GDP 
ratio by 1.8 percentage points.  

the 

This 

spending 

is  above 

On 14 July 2023, the Council recommended that 
in 
Bulgaria  ensures  a  prudent  fiscal  policy, 
particular  by  limiting  the  nominal  increase  in 
nationally  financed  net  primary  expenditure  in 
2024  to  not  more  than  4.6%.  According  to  the 
Commission’s  Spring  2024  Economic  Forecast, 
Bulgaria’s  net  nationally 
financed  primary 
expenditure  is  projected  to  increase  by  6.2%  in 
2024,  which 
recommended 
maximum  growth  rate  (although  base  effects 
the 
apply). 
excess 
in  net 
recommended  maximum  growth  rate 
nationally 
expenditure 
corresponds  to  0.6%  of  GDP  in  2024.  However, 
net expenditure in 2023 was lower than expected at the time of the recommendation (by 3.3% of 
GDP).  Therefore,  because  the  recommendation  for  2024  was  formulated  as  a  growth  rate,  the 
assessment  of  compliance  also  needs  to  take  into  account  the  base  effect  from  2023.  Had  net 
expenditure in 2023 been the same as expected at the time of the recommendation, the resulting 
growth rate of net expenditure in 2024 would have been below the recommended growth rate by 
2.7%  of  GDP.  Moreover,  the  Council  recommended  that  Bulgaria  takes  action  to  wind  down  the 
emergency energy support measures in force, using the related savings to reduce the government 
deficit as soon as possible in 2023 and 2024. The Council further specified that, if renewed energy 
price increases necessitate new or continued support measures, Bulgaria should ensure that these 
measures are targeted at protecting vulnerable households and firms, are fiscally affordable and 
preserve incentives for energy savings.  

financed 

primary 

over 

According to the Commission’s Spring 2024 Economic Forecast, the net budgetary cost of energy 
support measures is projected to be 0.0% of GDP in 2023, 2024 and 2025.  

The Council also recommended that Bulgaria preserves nationally financed public investment and 
ensures the effective absorption of RRF grants and other EU funds, in particular to foster the green 
and digital transitions. According to the Commission’s Spring  2024 Economic Forecast, nationally 
financed public investment is projected to decrease from 2.7% of GDP in 2023 to 2.1% of GDP in 
2024  and  is  therefore  not  expected  to  be  preserved.  This  is  also  due  to  the  timing  of  the 
programming periods of the EU structural funds and the related nationally financed contributions. 
Investments in 2024 (during the new programming period) are not expected to be fully replaced by 
investments which occurred in 2023 (during the previous programming period). This will lead to a 
decline  in  investment  expenditure  and  in  the  nationally  co-financed  part  of  the  investment 
expenditure.  These  risks  not  being  in  line  with  what  was  recommended  by  the  Council.  In  turn, 
public  expenditure  financed  from  revenues  from  EU  funds,  including  grants  from  the  RRF,  is 
expected to decrease to 0.8% of GDP in 2024 (from 1.2% of GDP in 2023). This decrease will be 
driven by the end of the 2014-2020 programming period of EU structural funds, for which funds 
were available until 2023. 

32 

-2-10122022202320242025Expenditure financed by RRF grants and EU funds (e)Other capital expenditure (d)Nationally financed investment (c)Net nationally financed  primary current expenditure (b)Fiscal stance (f=a+e) 2023 2024Net nationally financed  primary expenditure (a=b+c+d)ExpansionaryContractionarySource: Commission's Spring 2024 Economic Forecast.Graph 2.4: Bulgaria -Fiscal stance and its components(percent of GDP)   
Convergence Report 2024 - Technical annex 
Chapter 2 - Bulgaria 

In 2025, the fiscal stance is projected to be expansionary at 1.4% of GDP, with a positive impact 
on economic growth of (i) 0.8% of GDP coming from nationally financed investment and (ii) 0.8% 
of  GDP  from  expenditure  financed  by  grants  from  the  RRF.  The  general  government  deficit  is 
projected  to  remain  at  2.9%  of  GDP  in  2025,  including  the  impact  of  the  delivery  of  military 
equipment with a total temporary cost close to 0.8% of GDP, which contributes to a steep increase 
in  gross  fixed  capital  formation.  With  revenues  from  taxes  slowly  picking  up  from  2024  and  a 
broadly constant growth in social security contributions, projected increases in pensions and wages 
still outweigh the higher revenues, supported by a favourable labour market. 

The  general  government  debt-to-GDP  ratio  is  forecast  to  slightly  decrease  to  24.6%  in  2025, 
mainly  reflecting  a  stable  projected  primary  deficit,  a  moderate  debt-reducing  contribution  from 
the snowball effect, and an increased debt-reducing contribution from the stock-flow adjustment. 
Stable  interest  rates,  paired  with  declining  inflation  and  the  picking-up  in  economic  growth,  is 
forecast to result in a snowball effect in 2025 of -0.8% of GDP, which will only partly counter the 
debt-increasing  effect  of  the  primary  deficit  of  2.4%  of  GDP.  However,  a  relatively  high  debt-
reducing  stock-flow  adjustment,  reflecting  higher  expected  RRF  cash  inflows  during  the  year,  is 
expected to contribute to a moderate decrease in the debt-to-GDP ratio by 0.2 percentage point in 
2025 compared with 2024. 

Debt sustainability risks appear medium over the medium term. Government debt is projected to 
increase from around 25% in 2024 to around 41% of GDP in 2034. This projection assumes that 
the structural primary deficit (excluding changes in the cost of ageing) will remain constant at the 
level projected for 2024 of 2.3% of GDP (16). 

The sensitivity to possible macro-fiscal shocks contributes to this assessment. In particular, if the 
interest-growth rate differential were to be 1 percentage point higher than the baseline, then the 
projected debt ratio in 2034 would be around 3 percentage points higher than in the baseline (i.e. 
still well below 60% of GDP). The stochastic projections point to a large degree of uncertainty. 

Several  factors  are  mitigating  risks,  including  the  low  share  of  short-term  government  debt  and 
Bulgaria’s favourable positive net international investment position. Risk-increasing factors include 
(i)  the  substantial  share  of  public  debt  denominated  in  foreign  currencies,  although  this  is 
mitigated by the operation of the  currency board; (ii) the significant share of public  debt held by 
non-residents; (iii) and some contingent liability risks stemming from the banking sector. 

The  key  elements  of  a  robust  fiscal  framework  are  in  place  in  Bulgaria,  but  some  difficulties  in 
implementation  remain,  partly  due  to  shortcomings  in  public  investment  management.  Bulgaria 
has  a  complex  system  of  national  fiscal  rules  in  place,  as  indicated  in  the  Convergence  Report 
2022.  Several  rules  target  the  same  budget  aggregates  but  the  fact  that  they  are  expressed 
according  to  different  accounting  standards  (accrual  and  cash-based)  may  create  conflicting 
messages. Moreover, the capacity of the Ministry of Finance to monitor, plan, forecast and report 
on the general government budget in both accrual and cash terms remains a challenge, especially 
with  respect  to  the  management  and  planning  of  government  finances.  The  Ministry  does  not 
always have as much information or access to detailed data as would be desirable for budgetary 
planning.  In  particular,  information  is  lacking  on  the  operations  of  entities  outside  the  central 
administration  and  occasionally  even  of  some  other  ministries.  The  Ministry  of  Finance  also  has 
weaknesses  in  producing  projections  on  an  accrual  basis  (e.g.,  under  the  European  System  of 
National and Regional Accounts (ESA)). The Fiscal Council of Bulgaria has a narrow mandate that is 
focused  on  monitoring  fiscal  rules  and  assessing  macroeconomic  and  budgetary  forecasts.  Its 
policy dialogue with the Bulgarian government and parliament is also quite limited. The amended 
Budgetary  Framework  Directive  (2011/85/EU),  which  is  part  of  the  Economic  Governance  Review 
and was adopted on 29 April 2024, will affect some aspects of the Bulgarian fiscal framework and 
particularly  the  tasks  of  the  Fiscal  Council.  The  amended  Directive  extends  the  independence 
safeguards for independent fiscal institutions to all EU Member States and assigns some tasks to 

(16)  For  further  details  on  the  methodology,  see  European  Commission  (2024),  Debt  Sustainability  Monitor  2023, 

Institutional Paper 271, March 2024. 

33 

 
Convergence Report 2024 - Technical annex 
Chapter 2 - Bulgaria 

these  institutions.  Concerning  public  investment  management,  Bulgaria  displays  scope  for 
improvement  on  key  dimensions  such  as  (i)  aligning  investment  decisions  with  their  long-term 
strategic  goals;  (ii)  vertical  (between  levels  of  government)  and  horizontal  (across  sectors) 
coordination;  (iii)  the  application  of  consistent  project  selection  criteria  and  methodologies;  (iv) 
limiting the under-execution of capital expenditure; and (v) the carry-over of unspent funds. 

2.4.  EXCHANGE RATE STABILITY 

The  Bulgarian  lev  joined  the  Exchange  Rate  Mechanism II  (ERM II)  on  10 July 2020.The  Bulgarian 
National  Bank  (BNB)  entered  in  parallel  into  a  ‘close  cooperation’  agreement  with  the  ECB.  After 
joining,  Bulgaria  committed  to  pursue  a  set  of  policy  measures  (known  as  post-entry 
commitments) to ensure that its participation in the mechanism is sustainable and achieves a high 
degree of economic convergence before the adoption of the euro. The measures cover four policy 
areas:  (i)  the  non-banking  financial  sector;  (ii)  the  insolvency  framework;  (iii)  the  anti-money 
laundering framework; (iv) and governance of state-owned enterprises.  

Bulgaria introduced its currency board framework 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 
currency board framework, the BNB has to fully cover its monetary liabilities with foreign reserves. 
The BNB is obliged to exchange monetary liabilities and euro at the official exchange rate without 
any limit. 

Bulgaria’s international reserves increased from around EUR 35 billion at the beginning of 2022 to 
around EUR 38 billion at the end of 2022 and then to around EUR 42 billion by the end of 2023. 
Government securities issued on international financial markets accounted for most of the inflows 
in 2022 and 2023. Positive  contributions were  made  by  EU funds transfers in  2022  and reserve 
currency transactions in 2023. International reserves remained stable between 2022 and 2023 at 
around 45% of GDP. 

The  BNB  does  not  set  monetary  policy  interest  rates.  The  euro  area’s  monetary  policy  affects 
domestic interest rates directly through the operation of Bulgaria’s currency board framework. The 
BNB  discontinued the production of  short-term reference  rates (e.g. SOFIBOR) from 1  July 2018. 
The BNB now instead publishes a base interest rate (BIR) based on the LEONIA Plus (LEv OverNight 
Interest Average Plus) index, which is a reference rate of concluded and effected overnight deposit 
transactions in Bulgarian lev on the interbank market in Bulgaria. The BIR stood at  -0.6% in April 
2022,  which  was  close  to  an  all-time  low.  It  increased  in  the  second  half  of  2022  and  2023, 
reaching a peak of 3.9% in October 2023 and remains relatively stable at that level thereafter. The 
BIR’s  increase  in  the  second  half  of  2022  was  slower  than  that  of  the  1-month  Euribor  rate, 
resulting in a widening of the interest rate differential between the BIR and the 1-month Euribor to 
-30  basis  points  by  December  2022.  As  the  BIR  rose  throughout  2023,  the  interest  differential 
narrowed Since October 2023, and until April 2024, there has been no or a minimal interest rate 
differential.  

34 

1.81.92.02.1201820192020202120222023Graph 2.5: Bulgaria -BGN/EUR exchange rate(monthly averages)Source: ECB.-40-30-20-1001020201820192020202120222023Graph 2.6: Bulgaria -Annual effective interest rate spread to 1-M Euribor(basis points, monthly values)Source: Eurostat and National Bank of Bulgaria. 
 
  
  
Convergence Report 2024 - Technical annex 
Chapter 2 - Bulgaria 

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 8 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  2022  convergence  assessment  of 
Bulgaria.  The  average  interest  rate  has  since  increased  substantially.  It  increased  from  0.5%  in 
April 2022 to 1.5% at the end of 2022 and then to 3.75% at the end of 2023. In May 2024, the 
reference value, calculated as the average of long-term interest rates in the Netherlands, Italy and 
Latvia  plus 2  percentage  points,  was  5.5%.  In  that  month, the  12-month  moving  average  of  the 
yield on the Bulgarian benchmark bond was 4.0%, i.e. 1.5 percentage  points below the reference 
value. 

From a low rate at the beginning of 2022, the Bulgarian long-term interest rate has shown a trend 
of stepwise increases. It increased in the first 3 months of 2022 before remaining within a narrow 
band  of  1.6-1.9%,  from  April  2022  to  January  2023.  It  then  increased  again  substantially  in 
February and March 2023. However, throughout the rest of 2023, the interest rate remained in a 
very narrow  band of  4.0-4.2%. The higher long-term interest rate  reflects the  very high inflation 
that Bulgaria has experienced in the last 2 years and the tightening of monetary policy in the euro 
area. The stepwise increases resulted from the changes in the single benchmark bond used at any 
point  in  time  for  this  assessment  and  the  fact  that  the  bond  is  infrequently  traded  on  the 
secondary  market.  Financial  developments  are  therefore  not  seen  in  the  yields  until  the  bond  is 
either  traded  or  replaced  by  a  new  benchmark  bond.  The  German  long-term  interest  rate  also 
increased, but more gradually than the Bulgarian long-term interest rate. The difference between 
the Bulgarian and German long-term interest rates remained within a range of -0.4-0.9% from the 
beginning  of  2022  to  February  2023  before  increasing  to  a  range  of  1.2-1.9%  between  March 
2023 and May 2024. The increase in the spread reflects political uncertainty in Bulgaria and the 
effect this could have on the government budget. 

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, and 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 2023, the Commission published its 13th Alert Mechanism Report (AMR 2024) under 
the  Macroeconomic  Imbalance  Procedure.  This  concluded  that  it  was  not  necessary  to  carry  out 
further in-depth analysis on Bulgaria in the context of the Macroeconomic Imbalance Procedure. In 

35 

0246Jan-18Jan-19Jan-20Jan-21Jan-22Jan-23Jan-24BulgariaReference valueGraph 2.7:Bulgaria -Long-term interest rate criterion(percent, 12-month moving average)Source: European Commission.-20246201820192020202120222023BulgariaGermanyGraph 2.8:Bulgaria -Long-term interest rates(percent, monthly values)Source: Eurostat. 
 
  
  
Convergence Report 2024 - Technical annex 
Chapter 2 - Bulgaria 

the  past,  vulnerabilities  in  the  financial  sector  were  coupled  with  high  indebtedness  and  non-
performing  loans  in  the  corporate  sector.  However,  continued  policy  action  and  a  favourable 
macroeconomic  environment  reduced  risks  and  vulnerabilities  before  the  onset  of  the  COVID-19 
crisis.  Developments  related  to  cost  competitiveness,  dynamic  household  borrowing,  and  strong 
house-price growth require close monitoring, although associated macroeconomic risks appear to 
be limited. In particular, house prices remain a concern, despite some moderation. They have been 
growing more slowly than income since 2013 but  are estimated to  be overvalued by some  8%. 
Nominal  house-price  growth  increased  to  13.8%  in  2022,  reflecting  also  a  sharp  increase  in 
construction costs in the first quarter of the year that were linked to higher construction material 
prices due to Russia’s full-scale invasion of Ukraine. Prices nevertheless fell in real terms. The rise 
in house prices has moderated since the second half of 2022 and the number of  transactions of 
house sales has declined. 

Bulgaria’s  recovery  and  resilience  plan  (RRP)  includes  measures  to  address a  series of  structural 
challenges,  in  synergy  with  other  EU  funds,  including  cohesion  policy  funds,  by  reforming  in  the 
energy sector; investing in sustainable transport and green transition; promoting deployment of 5G 
networks;  reforming  the  legal  framework  to  promote  entrepreneurship  and  e-governance; 
improving  the  quality  and  inclusiveness  of  education;  and  reforming  the  minimum  income.  In 
addition  to  the  EUR 5.7  billion  of  RRF  funding,  cohesion  policy  provides  Bulgaria  with  EUR 10.7 
billion for the 2021-2027 period.  

Bulgaria has submitted two payment requests, corresponding to 84 milestones and targets in the 
plan and resulting in an overall disbursement of EUR 1.37 billion on 16 December 2022.   

While  some  reforms  (in  the  areas  of  anti-money  laundering,  education)  and  investments,  (e.g., 
energy  efficiency,  renewable  energy,  smart  industry,  healthcare)  have  already  started,  the 
implementation  of  the  Bulgarian  RRP  faces  significant  delays  and  substantial  challenges  to 
complete  all  the  measures  of  the  plan  by  August  2026.  Bulgaria  has  yet  to  implement  key 
business environment reforms under the RRP, including in the areas of rule of law, anti-corruption, 
governance  of  state-owned  enterprises  and  public  procurement. The  RRP  includes  major reforms 
for  the  decarbonisation  of  the  energy  sector,  but  delays  create  significant  risks  to  their 
implementation.  

Cohesion policy funding helps tackle Bulgaria’s growth and competitiveness challenges and aims to 
reduce  the  country’s  territorial  and  social  disparities.  In  the  current  2021-2027  programming 
period,  financing  aims  to  further  support  Bulgaria’s  competitiveness,  green  transition  and  social 
cohesion, improve the living and working conditions of Bulgaria’s people, and promote regional and 
social convergence. 

Bulgaria’s  recovery  and  resilience  plan  (RRP)  includes  measures  to  address a  series of  structural 
challenges,  in  synergy  with  other  EU  funds,  including  cohesion  policy  funds,  to  boost  its 
competitiveness  and  stimulate  sustainable  growth  and  reduce  the  country’s  territorial  and  social 
disparities.  The  RRF  funding  provides Bulgaria  with  EUR 5.7  billion  in  grants over the  2021-2026 
period. Bulgaria has submitted two payment requests resulting in an overall disbursement of EUR 
1.37 billion on 16 December 2022.   

While some reforms (in the areas of anti-money laundering, education, etc.) and investments, (e.g., 
energy  efficiency,  renewable  energy,  smart  industry,  healthcare)  have  already  started,  the 
implementation of the Bulgarian RRP faces significant delays. Bulgaria has yet to implement major 
reforms  and  investments  for  the  decarbonisation  of  the  energy  sector,  as  well  as  key  business 
environment  reforms  under  the  RRP,  including  in  the  areas  of  rule  of  law,  anti-corruption, 
governance of state-owned enterprises and public procurement. 

In  addition,  cohesion  policy  provides  Bulgaria  with  EUR 10.7  billion for  the  2021-2027  period. 
Cohesion  policy  financing  aims  particularly  to  further  support  Bulgaria’s  competitiveness,  green 
transition, including energy independence, the just transition and climate change resilience, as well 
as  upward  social  convergence,  including  by  addressing  labour  shortages,  further  developing 
educational  systems  and  skills  and  making  them  more  inclusive  for  disadvantaged  groups. 
Bulgaria has made progress in implementing cohesion policy but challenges remain. 

36 

Convergence Report 2024 - Technical annex 
Chapter 2 - Bulgaria 

2.6.1.  Developments in the balance of payments 

Bulgaria’s external balance (i.e. the combined current and capital accounts) improved to -0.5% and 
1.3% of GDP in 2022 and 2023 respectively. Net services exports improved throughout the last 2 
years,  benefiting  from  the  recovery  in  tourism  to  pre-pandemic  levels  and  the  development  of 
other  services,  including  those  outsourced  to  Bulgaria  (e.g.,  IT  and  business  services).  The  trade 
balance deteriorated in 2022 as buoyant exports and domestic demand (including the building-up 
of import-intensive inventories) drove up imports. The terms of trade improved in 2022 but then 
deteriorated in 2023. In 2022, the export deflator increased by 26% and the import deflator grew 
by 23.4%. The surge in energy prices weighed on the trade balance but its effect on the terms of 
trade  was  offset  by  export  price  increases  in  other  products  and  materials.  In  2023,  the  trade 
balance  improved,  as  imports  declined  more  steeply  than  exports.  The  capital  account  and 
secondary income balance remained positive and improved in 2022 and 2023. The primary income 
deficit shrank slightly to 3.2% of GDP in 2022 but then widened to 5% of GDP in 2023, driven by 
the decline and the subsequent rise in foreign direct investment (FDI) income. 

The  financial  account,  net  of  official  reserves,  improved  to  -0.5%  of  GDP  in  2022  but  then 
deteriorated to -2.3% of GDP in 2023. FDI, notably in the form of reinvested earnings, made the 
largest  negative  contribution  to  the  financial  account  balance  both  in  2022  (2.4%  of  GDP)  and 
2023 (3.3% of GDP). Net investments in debt securities abroad contributed 1.2% of GDP in 2022 
and 1.3% of GDP in 2023 to the financial account. The balance of other investments had a limited 
impact on the financial account balance, with gross inflows and outflows of currency and deposits 
roughly offsetting each other. The BNB’s reserve assets increased by 4.7% of GDP in 2022 and by 
3.5% of GDP in 2023. Given that external and financial accounts almost balanced each other out in 
2022,  the  accumulation  of  reserves  by  the  BNB  resulted  in  large  net  errors  and  omissions,.  In 
2023, the BNB accumulated further assets mostly due to the sizeable improvement in the external 
balance.  

37 

Table 2.4:Bulgaria - Balance of payments(percentage of GDP)201820192020202120222023Current account0.91.90.0-1.7-1.4-0.3of which: Balance of trade in goods-4.8-4.7-3.2-4.1-5.9-3.9               Balance of trade in services7.48.05.15.96.17.1               Primary income balance -4.8-4.2-3.5-4.7-3.2-5.0               Secondary income balance3.22.91.61.21.61.5Capital account1.11.41.40.70.91.6External balance 1)2.03.31.5-1.0-0.51.3Financial account5.63.93.43.84.11.2of which: Direct investment-1.3-2.0-4.5-1.8-2.4-3.3               Portfolio investment2.82.61.23.21.21.3               Other investment 2)1.74.2-2.7-2.80.7-0.4               Change in reserves2.4-0.99.45.14.73.5Financial account without reserves3.14.8-6.0-1.3-0.5-2.3Errors and omissions3.50.61.94.94.6-0.1Gross capital formation21.221.020.321.123.418.8Gross saving22.222.820.419.322.018.5Net international investment position-37.0-30.2-25.6-18.6-12.9-7.61) The combined current and capital account.2) Including financial derivatives.Sources: Eurostat, European Commission calculations, the Bulgarian National Bank. 
 
        
 
 
Convergence Report 2024 - Technical annex 
Chapter 2 - Bulgaria 

The negative net international investment position 
continued  to  shrink  as  a  share  of  GDP  in  2022-
2023, also due to the rapid  nominal GDP  growth 
during the period. Net external liabilities stood at 
7.6% in 2023 and consisted mostly of FDI equity, 
which has been relatively stable since the crisis of 
2009.  

In  2022-2023,  measures  of  competitiveness 
exhibited different dynamics depending on the set 
of trading  partners  considered. The real effective 
exchange  rate  deflated  by  the  HICP  appreciated 
with  respect  to  the  euro  area  on  account  of 
Bulgaria’s  higher  domestic 
rate. 
However, when considering an enlarged set of 36 
countries,  the  real  effective  exchange  rate  appreciated  by  less  in  2022  and  2023,  suggesting 
higher relative prices in the trading  partners outside the euro area. By contrast, the real effective 
exchange  rate  deflated  by  unit  labour  costs  (ULC)  accelerated,  as  domestic  wage  growth 
outstripped the wage dynamics abroad. 

inflation 

The  strong  export  performance  in  2022  suggests  that  the  exporters  were  able  to  exploit  market 
opportunities following Russia’s full-scale invasion of Ukraine, and more generally, the persistence 
of global supply bottlenecks. At the same time, exporting firms were able to pass on higher input 
costs (including energy costs), to foreign buyers due to the global hikes in international prices. With 
the  deterioration  of  external  demand  in  2023, exporters  sharply  reduced  inventory  accumulation 
and  cut  purchases  from  abroad.  Wage  growth  also  gradually  decelerated  throughout  2023, 
possibly  reflecting  firms’  efforts  to  secure  competitiveness  gains  against  the  backdrop  of 
deteriorated foreign demand. 

The  Commission’s Spring  2024  Economic  Forecast  projects  that  the  current  account  balance  will 
slightly  improve  in  2024  to  +0.3%  of  GDP,  on  account  of  lower  net  primary  income  and  current 
transfers, and then worsen due to imports expanding  faster than exports. 

2.6.2.  Market integration 

The economy is well-integrated with the euro area through trade and investment linkages. After a 
period  of  decline  between  2018  and  2020,  the  ratio  of  trade  openness  (see  Table  2.5  for  a 
definition) rebounded to close to 70.9% in 2022, which was a new peak. It decreased to 61.4% in 
2023. Bulgaria therefore remains a relatively open economy. Trade with the euro area was around 
27%  of  total  trade  in  2023.  France,  Germany,  Italy  and  Greece  were  the  main  trading  partners. 
Outside the euro area, Bulgaria’s main trading partners were Romania and Türkiye. 

38 

Table 2.5:Bulgaria - Market integration201820192020202120222023Trade openness 1) (%)66.564.256.862.070.961.4Trade with EA in goods & services 2)+3) (%)30.528.725.627.930.427.2IMD World Competitiveness Ranking 4)484848535357Internal Market Transposition Deficit 5) (%)0.70.61.62.21.81.7Real house price index 6)113.8118.3124.4127.5124.9128.3 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-20 / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics). 3) Trade in services with EA-20 (average credit and debit in % of GDP at current prices) (Balance of Payments). 4) International Institute for Management Development (IMD). 5) Percentage of internal market directives not yet communicated as having been transposed, relative to the total. 6) Deflated house price index (2015=100) (Eurostat). Sources: Eurostat, World Bank, International Institute for Management Development, European Commission calculations.95100105110115120125130201820192020202120222023Graph 2.9: Bulgaria -Effective exchange ratesNEERREER, HICP-deflatedREER, ULC-deflated(vs 36 trading partners; monthly averages;index numbers, 2018 = 100)Source: European Commission. 
 
    
 
 
 
  
Convergence Report 2024 - Technical annex 
Chapter 2 - Bulgaria 

Net FDI inflows increased but remained relatively 
low at 2.4% of GDP in 2022 and 3.1% of GDP in 
2023. The stock of inward FDI declined to 63% of 
GDP  in  2022  and  58%  in  2023.  This  decline  is 
due  to  the  high  nominal  GDP  growth.  In  2023, 
22% of the overall inward FDI stock was directed 
to  industry  (excluding  construction),  21%  to  real 
estate and 14% to the trade sector. 

investment  and 

The  business  environment  does  not  generally 
support 
institutional  quality 
remains  a  challenge.  According  to  the  World 
Bank’s  2022  Worldwide  Governance  Indicators, 
Bulgaria  ranks  lower  in  accountability,  government  effectiveness,  the  rule  of  law  and  control  of 
corruption  than  the  average  of  the  five  euro  area  Member  States  with  the  lowest  scores (17).  In 
addition,  the  first  pillar  (Institutions)  remains  among  the  least  performing  areas  in  the  Global 
Competitiveness  Index.  The  Bulgarian  RRP  includes  several  measures  to  improve  the  business 
environment:  an  ambitious  reform  of  the  judiciary;  an  anti-corruption  reform  including  whistle-
blowing regulation; the overhaul of public procurement practices; the liberalisation of the electricity 
market,  and  the  strengthening  the  frameworks  for  insolvency,  anti-money  laundering  and  the 
governance  of  state-owned  enterprises.  The  last  three  are  also  part  of  the  post-entry 
commitments for when Bulgaria entered the ERM II. The implementation of many of these reforms 
is experiencing delays. 

In  the  course  of  2023  and  the  first  half  of  2024  Bulgaria  has  taken  action  to  improve  the 
framework for preventing and fighting money laundering, its predicate offences and the financing 
of  terrorism  by  amending  the  Law  on  Measures  Against  Money  Laundering  and  updating  the 
national risk assessment of money laundering and terrorist financing, and by issuing sectoral risk 
assessments  relating  to  the  non-profit  organisations’  sector  and  virtual  assets.  Steps  are  also 
being taken to enhance the functioning of the beneficial ownership registers in Bulgaria; reinforce 
the  analytical  capacity  of  the  Financial  Intelligence  Unit  to  make  better  use  of  suspicious 
transaction reports and  develop financial intelligence; improve cooperation with investigative and 
prosecutorial authorities regarding the usefulness of the financial intelligence; and strengthen the 
capacity of Bulgaria’s anti-money laundering and countering the financing of terrorism (AML/CFT) 
supervisory  authorities to  take  action  where  obliged  entities fail  to  comply  with  their obligations 
stemming from the AML/CFT regime. Bulgaria underwent an assessment of the effectiveness of its 
framework  for  fighting  money  laundering  and  countering  the  financing  of  terrorism  against 
international standards developed by the Financial Action Task Force. The assessment has resulted 
in an action plan with recommendations to be addressed. 

Labour  and  skills  shortages  remain  a  significant  challenge  and  risk  worsening,  considering  the 
negative  demographic  trends.  This  in  turn  combined  with  the  high  inactivity  rates  for  Roma, 
persons  with  disability  and  those  not  in  education,  employment  or  training  poses  challenges  for 
economic growth and social outcomes.  

Bulgaria scores low on to digital skills. Only 35.5% of Bulgaria’s population has basic digital skills, 
which  is  among  the  lowest  rates  in  the  EU.  Bulgaria  scores  very  low  on  the  digitalisation  of 
businesses.  One  key  challenge  is  the  adoption  of  digital  technology  in  enterprises  (mainly  small 
and medium sized enterprises), where the percentage is  one of the lowest in the EU.  One of the 
priorities of Bulgaria’s RRP is to improve digital skills with significant investment to adapt the skill 
set  of  the  workforce.  Moreover,  the  RRP  includes  measures  such  as  a  voucher  scheme  for  the 
digitalisation  of  small  and medium sized  enterprises  and  is complemented  by  targeted  Cohesion 
Policy investments. 

(17)  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  point  lower  (higher)  than  that  of the 
average of this group of five euro area Member States. 

39 

-0.60.00.61.2Voice andaccountabilityPolitical stability andabsence ofviolence/terrorismGovernmenteffectivenessRegulatory qualityRule of lawControl of corruptionBulgariaEuro area average five lowestEuro area averageGraph 2.10:Bulgaria -World Bank's 2022 Worldwide Governance IndicatorsNote: Estimate of governance ranges from -2.5 (weak) to 2.5 (strong). Source: World Bank. 
  
Convergence Report 2024 - Technical annex 
Chapter 2 - Bulgaria 

Public and private R&D investments remain amongst the lowest in the EU. R&D intensity stood at 
0.77% in 2022, has remained at the same level since 2020 and is still well below the EU average. 
Limited  academia-business  linkages  remain  a  serious  obstacle  to  the  commercialisation  of 
research results and limits technology transfer and innovation activities.  

Challenges  also  remain  in  ensuring  quality  and  inclusive  education.  A  high  share  of  low 
achievement  combined  with  few  top  performers  in  the  Programme  for  International  Student 
Assessment reflects challenges to improving the quality and equity of education. Socio-economic 
background has a major impact on students’ performance. To tackle some of these challenges, the 
Bulgarian  RRP  is  supporting  the  ongoing  creation  of  STEM  learning  centres,  which  is  ongoing. 
Tertiary educational attainment also remains low. In 2022, 33.8% of Bulgarians aged 25-34 had a 
tertiary  degree,  significantly  below  the  EU  average  (42.0%).  The  rate  has  not  improved  much  in 
recent years.  

Regional disparities in GDP per capita remain very high in Bulgaria. At the beginning of the current 
decade,  regional  disparities remained  at  the  same  level  as in  the  previous  one.  They  are  can  be 
seen in terms of GDP and labour productivity, demographics, education and training, employment, 
infrastructure,  competitiveness,  and  research  and  innovation  performance.  Addressing  territorial 
disparities is one  of  the  high-level  objectives laid  down  in  the  Bulgaria’s 2021-2027  Partnership 
Agreement.  

The Bulgaria’s financial sector is smaller and less developed than the euro area’s. Assets managed 
by the financial sector amounted to 168% of GDP in 2022, which was much less than in the euro 
area  (715%  of  GDP)  but  similar  to  the  average  of  the  five  euro  area  Member  States  with  the 
smallest financial sectors. While it has grown in the euro area, the size of the financial sector as a 
share of  GDP has shrunk in  Bulgaria since  2018, as the  development of the financial sector has 
been outstripped by growth in GDP. Banking dominates the Bulgarian financial sector, making up 
54%  of  the  financial  sector’s  assets  in  2022.  The  BNB  is  the  second  largest  holder  of  financial 
assets  with  a  share  of  27%  in  2022,  more  than  all  non-banking  financial  intermediaries  taken 
together. These shares are larger than in the euro area, reflecting a relative underdevelopment of 
non-bank  financial  intermediaries  and  investment  funds,  similar  to  that  of  the  five  euro  area 

40 

Table 2.6:Bulgaria - Allocation of assets by financial sub-sectorRatio to GDP (%)BGEAEA 5 smallest201820222018202220182022Financial corporations (total)179168689715174190Central bank454553684652Monetary financial institutions97902662908793Other financial intermediaries17151811631618Non-MMF investment funds1)1210111345Insurance co. and Pension Funds181787812122Share of total (%)BGEAEA 5 smallest201820222018202220182022Central bank25278102727Monetary financial institutions545439405049Other financial intermediaries1092623910Non-MMF investment funds11151623Insurance co. and Pension Funds1010131112111) MMF stands for money market funds.Source: Eurostat. 
 
   
 
 
Convergence Report 2024 - Technical annex 
Chapter 2 - Bulgaria 

Member  States  with  the  smallest  financial  sectors.  At  the  same  time,  the  relative  share  of  the 
insurance and pension-fund sector in Bulgaria is similar to that in the euro area. 

As part of the commitments that Bulgaria made unilaterally upon entering the ERM II in July 2020, 
the  authorities  have  been  implementing  several  measures  to  ensure  the  sustainability  of  the 
Bulgarian  non-banking  financial  sector.  These  include  the  adequacy  of  the  level  of  technical 
provisions;  compliance  with  the  applicable  requirements  for  assets  and  liabilities  valuation;  the 
effectiveness of the system  of  governance; and the  proper handling and  settlement of claims in 
the Bulgarian Green Card system. Bulgaria has also adopted legislative changes to the Insurance 
Code to improve the claims handling process.   

As to the financing of the economy, outstanding liabilities are much lower than in the euro area 
(352% of  GDP in 2022 vs 696% of GDP in the euro area) but similar to those of the euro area 
Member States with the lowest financing needs. As in the euro area, loans are the dominant source 
of funding. However, Bulgaria has less developed bond and equity markets than the euro area and 
market  financing  (debt  securities  and  listed  shares)  is  relatively  underdeveloped.  Equity  and 
private-sector-debt  markets  represented  3%  of  liabilities  in  2022  (and  only  12%  of  GDP 
altogether), compared with 19% of liabilities in the euro area (where private-sector debt and listed 
stocks amounted to 70% and 63% of GDP respectively). Bulgaria is still broadly similar to the five 
euro area Member States with the smallest financial needs, except for the size of its bond market. 

41 

Table 2.7:Bulgaria - Financing of the economy1)Ratio to GDP (%)BGEAEA 5 smallest201820222018202220182022Liabilities (total)370352706696316304Loans12094228219109103Non-financial co. debt securities32121232Financial co. debt securities11665834Government debt securities191778714742Listed shares11960631210Unlisted shares73691761845453Other equity849653545658Trade credits and advances606334353132Share of total (%)BGEAEA 5 smallest201820222018202220182022Loans322732323433Non-financial co. debt securities112211Financial co. debt securities009811Government debt securities5511101514Listed shares339933Unlisted shares202025261919Other equity2327781718Trade credits and advances16185510111) 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 2024 - Technical annex 
Chapter 2 - Bulgaria 

The size of its bond market mostly reflects the low level of public debt in the country. Trade credits 
and advances play a bigger role in the financing of the economy in Bulgaria than in the euro area, 
even when compared with the five euro area Member States with the lowest financing needs.  

Bulgaria’s  banking  sector  is  well  integrated  into 
the  euro  area’s  financial  sector,  in  particular 
through  a  high  level  of  foreign  ownership  in  the 
banking  system.  The  ratio  of  foreign-owned 
institutions  to  total  bank  assets  was  72%  in 
2022,  which  is  a  decrease  from  78%  in  2018. 
Bank  concentration  (as  measured  by  the  market 
share of the five largest credit institutions in total 
assets)  has  increased  significantly  since  2018, 
and  reached  almost  68%  in  2022.  This  is  17 
percentage points above the euro area average in 
2022.  In  parallel  with  the  inclusion  of  the 
Bulgarian lev in the ERM II, the BNB entered into a 
close  cooperation  agreement  with  the  ECB, 
effectively joining the Banking Union. 

42 

020406080100BG, 2018BG, 2022EA, 2018EA, 2022Concentration 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.  
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  2022 Convergence Report, the ČNB Law was amended (18).  However, 
since  there  have  been  no  amendments  as  regards  the  incompatibilities  highlighted  in  the 
Commission’s 2022 Convergence Report, the comments made in the latter report remain relevant 
and are repeated in this year’s assessment. 

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,  administrative  authorities,  European  Union 
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 comply with the provisions of Article 130 
TFEU and Article 7 of the ESCB/ECB 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 that should be removed from the Act. 

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  judicial  review  before  the 
Court of Justice of the European Union. However, footnote 22 in the ČNB Law specifically points 
out  to  Article  14.2  of  the  ESCB/ECB  Statute.  Therefore,  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, an explicit clarification 
in the ČNB Law would be required to ensure legal certainty.  

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, to attend 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 or to appear to be able to influence the central 
bank when the latter is to adopt  decisions for which its independence is protected by Union law. 
The active participation of the Minister, even without voting rights, in discussions where monetary 
policy  is  set  would  structurally  give  to  the  Government  the  opportunity  to  influence  the  central 

(18)  The amendments stem from the Act. No. 277/2019 Coll., Act No. 417/2021 Coll., Act No. 129/2022 Coll. and Act No. 

462/2023 Coll. 

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bank when taking its key decisions, or to appear to be able to do so, casting doubts on the central 
bank’s  independence.  Therefore,  Article  11(1)  of  the  ČNB  Law  is  incompatible  with  Article  130 
TFEU. 

3.1.3.  Prohibition of monetary financing and privileged access 

Pursuant  to  Article  33a  of  the  ČNB  Law,  where  the  Financial  Market  Guarantee  System  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)  TFEU,  being  closely  dependent  on  the  public 
sector  entities  referred  to  in  Article  123(1)  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 System’s 
governing body 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 short-term credit to the Financial Market Guarantee System are not compatible with 
the  monetary  financing  prohibition  and  the  relevant  legal  framework  should  be  amended 
accordingly.  

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  bodies,  institutions  or  other  entities  of  the 
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)  TFEU and, 
therefore, must be amended. 

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

3.1.4.  Integration into the ESCB 

Objectives 

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  render  it  compatible  with  Article  127  TFEU  and  Article  2  of  the 
ESCB/ECB Statute. Compatibility with the ESCB’s objectives requires a clear statement to the effect 
that, as in Article 127(1) TFEU, the other objectives are ‘without prejudice’ to the primary objective 
of maintaining price stability. 

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); 

44 

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•  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);  

• 

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

•  There are also some imperfections regarding the following issues: 

• 

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 into the ESCB at the time of euro adoption, the ČNB Law is not fully 
compatible with the requirements of Article 131 TFEU for the reasons set out above. The above-
mentioned incompatibilities and imperfections should be remedied. 

3.2.  PRICE STABILITY 

3.2.1.  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  Czechia  in  2022.  From 
6.2% in April 2022, the 12-month average inflation rate increased steadily to 16.8% by April 2023.  

It  then  decreased  to  12.0%  by  the  end  of  2023.  In  May  2024,  the  reference  value  was  4.1%, 
calculated  as  the  average  of  the  12-month  average  inflation  rates  in  the  Netherlands,  Italy  and 

45 

-20246810121416182022201820192020202120222023CzechiaEuro areaGraph 3.2: Czechia -HICP inflation(y-o-y percentage change)Source: Eurostat.024681012141618Jan-18Jan-19Jan-20Jan-21Jan-22Jan-23Jan-24CzechiaReference 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 Czechia in December 2024. The reference values for 2018, 2020 and 2022 refer to the reference values calculated in the previous convergence reports.Source: Eurostat, Commission's Spring 2024 Economic Forecast. 
 
    
   
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Latvia  plus  1.5  percentage  points.  The  corresponding  inflation  rate  in  Czechia  was  6.3%,  i.e.  2.2 
percentage points above the reference value. The 12-month average inflation rate is projected to 
be below the reference value in the coming months.  

3.2.2.  Recent inflation developments 

HICP  inflation  in  Czechia  started  accelerating  in  the  end  of  2021  and  continued  growing  fast 
throughout 2022 averaging 14.8% that year. A peak value of 19.1% was reached in January 2023, 
followed by a gradual decrease throughout the year. The high inflation rate in 2022 and beginning 
of  2023  was  primarily  the  result  of  the  growth  in  energy  and  food  prices  (41.9%  and  19.6% 
annual  growth  respectively  in  January  2023),  triggered  by  Russia’s full-scale  invasion  of  Ukraine 
and  supply  bottlenecks.  Government  measures  to  mitigate  the  impact  of  high  energy  prices 
(including energy price caps, support to consumers to pay electricity bills, reductions in excises or 
reduction  in  the  electricity  tariff  component  that  covers  the  Renewable  Energy  Sources  support), 
were  effective  in  limiting  a  potentially  even  higher  growth  in  inflation  at  the  end  of  2022  and 
beginning of 2023. As energy and food  prices stabilized in the second half of 2023, the pace of 
growth  of  the  HICP  index  slowed  down  significantly  and  HICP  inflation  decelerated  throughout 
2023. Annual inflation reached 2.8% in May 2024, in spite of the annual repricing of administered 
prices in January (growth of 5.6% m-o-m).  

As  the  food  and  energy  prices  were  important  drivers  of  the  surge  in  inflation,  HICP  inflation 
excluding energy and food, alcohol and tobacco was lower than headline inflation in 2022 (12.0%) 
and  2023  (9.3%).  Still,  other  components  of  inflation  have  not  been  spared  of  spill-over  effects 
from  energy  and  commodity  price.  Price  increases  of  services  and  non-energy  industrial  goods 
were  more  pronounced  than  in  other  countries  in  the  region,  reflecting  some  of  these  spill-over 
effects  but  also  supply-side  bottlenecks  or  raw  materials  shortages.  Despite  declining  in  real 
terms, unit labour costs increased in nominal terms in 2022 and 2023 by an average of 6.5% per 
year,  adding  to  inflation  pressures.  Gross  operating  surplus  of  corporations  also  increased 
significantly  during  that  period,  reaching  30.5%  of  GDP  in  2023,  compared  to  28.3%  of  GDP  in 
2021.  In  line  with  headline  inflation,  HICP  inflation  excluding  energy  and  food  also  slowed  down 
significantly in the first 5 months of 2024, reaching 4.1% in May 2024.  

3.2.3.  Underlying factors and sustainability of inflation 

Macroeconomic policy mix and growth developments 

In  the  context  of  high  inflation  and  uncertainty,  the  Czech  economy  registered  a  sluggish 
performance in 2022-2023, with GDP growth at 2.4% in 2022 (almost entirely driven by the carry-
over effects from 2021) and at -0.4% in 2023. Household consumption decreased in both years as 
the  high  inflation  (especially  high  energy  and  food  prices)  dampened  the  purchasing  power  of 
consumers. Uncertainty about the future of inflation prompted lower income households to build-
up  precautionary  savings  at  the  detriment  of  current  consumption,  while  for  higher  income 
households, the opportunity cost to consume also increased due to the increase in interest rates. 
The tightening of financing conditions by the ČNB to maintain inflation under control also led to a 

46 

Table 3.1:weights  Czechia - Components of inflation(percentage change)1)in total   201820192020202120222023May-242023HICP2.02.63.33.314.812.06.31000Non-energy industrial goods0.60.52.64.312.37.23.3260Energy3.24.8-1.51.731.525.514.2130Unprocessed food 2.31.48.4-1.314.511.3-1.155Processed food1.72.75.04.313.310.13.8246Services2.63.43.63.111.811.18.4309HICP excl. energy, food, alcohol and tobacco1.82.23.13.612.09.36.1569HICP at constant tax rates 1.92.63.23.414.312.06.11000Administered prices HICP1.53.73.60.811.926.518.61341) 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. 
 
  
 
 
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contraction  in  residential  construction,  though  this  was  offset  by  an  increase  in  non-residential 
construction and equipment investments supported by the still high savings of companies and by 
the increased EU funds absorption. Thus, gross fixed capital formation grew over the period.  

Export  activity  slowed  down  in  2022-2023  due  to  a  depressed  external  demand  from  the  main 
trading partners. At the same time, growth in real imports was also low, as import prices, especially 
energy  prices,  surged.  Thus,  overall,  net  exports  still  contributed  positively  to  growth  in  the  two 
years.  

According to the Commission’s Spring 2024 Economic Forecast, real GDP is expected to increase by 
1.2% in 2024 and 2.8% in 2025 and reach the pre-pandemic output level during the third quarter 
of  2024.  While  consumer  confidence  was  still  below  the  long-term  average  in  the  beginning  of 
2024, a gradual recovery is visible. As a significant decline in inflation is forecasted for 2024, real 
wages and households’ real purchasing power are also expected to start growing again, driving up 
private  consumption  which  will  be  a  main  contributor  to  GDP  growth.  Investments  should  also 
contribute  to  economic  growth  in  2024  and  2025  as  the  easing  of  financing  conditions  helps 
restart the cycle in residential construction while public investments should benefit from the use of 
EU funds and an acceleration of RRP deployment. While exports are expected to recover gradually 
in 2024 and 2025 due to a slow growth in demand from the main trading partners, imports are 
forecast to accelerate more due to increasing domestic demand. Thus, net exports are expected to 
contribute  negatively  to  GDP  in  2025  and  risks  remain  from  the  uncertain  international  trade 
outlook.  

The overall fiscal stance turned from broadly neutral in 2022 to slightly contractionary in 2023 (19), 
as  the  expansionary  effect  of  measures  taken  to  mitigate  the  effect  of  the  energy  crisis  were 
offset by the introduction of windfall taxes and by the positive impact of high inflation on the tax 
base.  The  fiscal  stance  is  expected  to  be  more  contractionary  in  2024  as  the  government 

(19)  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. 

47 

Table 3.2:Czechia - Other inflation and cost indicators(annual percentage change)20182019202020212022202320241)20251)HICP inflationCzechia2.02.63.33.314.812.02.52.2Euro area1.81.20.32.68.45.42.52.1Private consumption deflatorCzechia2.52.82.92.915.09.33.02.4Euro area1.51.10.62.36.86.02.42.0Nominal compensation per employeeCzechia8.17.23.15.06.07.07.36.9Euro area2.12.2-0.44.24.55.14.23.1Labour productivityCzechia1.92.8-3.93.20.8-1.11.02.7Euro area0.10.2-4.74.41.1-1.00.10.9Nominal unit labour costsCzechia6.14.37.31.85.18.26.34.1Euro area2.01.94.6-0.23.36.24.12.2Imports of goods deflatorCzechia-0.60.6-0.84.914.2-4.03.93.3Euro area2.6-0.6-3.89.721.6-4.90.41.81) Commission's Spring 2024 Economic Forecast.Source: Eurostat, Commission's Spring 2024 Economic Forecast. 
 
 
 
    
 
 
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introduced a consolidation package envisaging higher taxes and a decrease in subsidies, including 
the  phase-out  of  energy  measures.  The  overall  fiscal  stance  is  thus  likely  to  contribute  to  the 
decline in inflation in 2024. Government consumption contributed positively to real GDP growth. It 
grew by 0.3% in 2022 and 3.5% in 2023 but the pace of growth is expected to slow down relative 
to 2023, to 1.8% in 2024 and 2.2% in 2025. Public investment reached a peak, as a percentage of 
GDP,  in  2023  with  the  help  of  EU  funds  (as  the  end  of  the  previous  programming  period 
overlapped with the start of the new one and with the RRF), but it is likely to be less dynamic in 
2024 and 2025. 

The  Czech  National  Bank  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.  To  fight  inflationary  pressures,  the  ČNB  continued  to  tighten  its  policy  in  2022,  hiking  its 
main policy rate (the 2-week repo rate) by 75 basis points in May 2022 and by 125 basis points in 
June to 7.00%. 

The  rate  was  kept  at  this  level  until  December  2023.  Due  to  the  easing  of  domestic  inflation 
pressures since April 2023, the ČNB Board lowered its policy rates by 25 basis points in December 
2023,  by  50  basis  points  in  February  2024,  by  50  basis  points in  March  2024, and  by  50  basis 
points  in  May  2024  to  5.25%.  From  early  March  to  October  2022,  the  ČNB  intervened  in  the 
exchange rate market to stabilise the Czech koruna in the aftermath of Russia’s full-scale invasion 
of Ukraine (20). 

Wages and labour costs 

Despite  economic  growth  being  depressed  in 
2022  and  2023,  the  labour  market  remained 
tight,  and  the  unemployment  rate  reached  the 
lowest level among EU countries in 2022 at 2.2% 
before  increasing  slightly  to  2.6%  in  2023.  The 
significant  inflow  of  people  fleeing  the  war  in 
Ukraine, which stood at one of the highest levels 
in  the  EU  (in  per  capita  terms),  did  not  alleviate 
much  of  the  labour  market  pressures.  Shortages 
of  workers  persisted  during  the  period  especially 
at  higher  skill  levels  and  added  also  to  the 
pressures  on  nominal  wages  stemming  from 
inflation.  Compensation  per  employee 
thus 
increased  at  rates  of  6-7%  per  year  in  2022-
2023.  Still,  due  to  the  high  inflation,  real  wage 
growth  was  negative  over  the  period.  The 
minimum wage also increased significantly, from 
15200 Czech korunas in 2021 to 18900 Czech korunas in 2024.  

Labour productivity increased only modestly in 2022 and declined in 2023. This allowed significant 
increases in nominal unit labour costs by 5.1% in 2022 and 8.2% in 2023. Still, the increase in unit 
labour  costs  was  below  the  high  rate  of  domestic  inflation  (as  measured  by  the  GDP  deflator) 
during  this  period.  Thus,  compensation  of  employees  decreased  as  percentage  of  nominal  GDP, 
while gross operating surplus increased. In terms of sectorial decomposition, the fastest increase in 
unit  labour  costs  was  observed  in  construction  and  other  non-tradable  segments,  due  to  a 
significant extent to the productivity decline in these sectors as a result of the growth slowdown. 

External factors 

As a country with a high degree of trade openness especially in goods trade, Czech domestic price 
formation is influenced by developments in import prices. The imports of goods deflator increased 

(20)  For details, see Section 3.4 on exchange rate stability. 

48 

-6-3036912151820182019202020212022202320242025Productivity (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 2024 Economic Forecast. 
    
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by 14.2% in 2022 before declining by 4.0% in 2023. The fluctuation followed the developments in 
international commodity prices (energy and food), which represent a significant explanatory factor 
of fluctuations in import deflators. The increase in the import deflator (cumulated 2022-2023) was 
however below that of other EU Member States. This is most likely due to the strengthening of the 
Czech  koruna  during  the  period,  a  comparatively  lower  degree  of  energy  dependency  on  energy 
imports of the Czech economy and the longer-term nature of gas contracts. Nevertheless, energy 
inflation  accounted  for  a  large  part  of  the  inflation  shock  in  2022-2023  and  this  was  reflected 
both  in  the  import  deflator  but  also  in  the  gross  operating  surplus  of  energy  companies  for  the 
part of energy that was locally produced. In terms of effects  stemming from the exchange rate, 
the nominal effective exchange rate (measured against the main 36 trading partners) appreciated 
significantly  over  2022  and  the  first  half  of  2023.  The  trend  reversed  afterwards  and  the 
announcement by the ČNB in August 2023 that it ended its intervention regime fuelled further the 
Czech koruna depreciation.  

Administered prices and taxes 

The share of administered prices in the HICP basket reached 13.4% in 2023, the same level as the 
EU average. The higher growth in 2022 and 2023 in administered prices, compared to the headline 
HICP, is explained by the fact that electricity and heating have the highest weight in the basket of 
administered  prices  and  were  among  the  items  with  the  highest  price  growth  in  the  period. 
Electricity  and  heating  administered  prices  were  lifted  by  the  price  of  energy  in  the  wholesale 
market, although the effect was mitigated by the measures taken by the government to limit the 
price  increases.  Among  these  measures,  the  largest  were  price  caps  on  electricity  and  gas 
applicable through-out 2023, a support to households covering part of the electricity bills (the so-
called ‘saving tariff’) in 2022-4Q, support for the electricity distributors to maintain lower network 
fees, and support for heating plants or a reduction in the support for renewables paid by end users. 
The  expiry  of  the  support  measures  on  1  January  2024  led  to  a  jump  in  administered  prices  by 
5.6%  and  to  a  1.8%  m-o-m  increase  in  the  HICP  that  month.  However, as  most  of  the  repricing 
was done in January, no major further hikes are expected during the remainder of the year.  

In  terms  of  taxation,  the  largest  impact  on  inflation  came  from  changes  in  excises  for  fuel  and 
alcohol  and  the  change  in  the  VAT  regime.  As  part  of  the  measures  to  mitigate  the  effects  of 
energy prices, the government reduced the excises for gasoline and diesel by 1.5 Czech koruna per 
litre (about 3.5% of the end price at that time) as from April 2022. The gasoline and diesel excises 
reverted  to  their  previous  levels  in  October  2022  and  December  2023  respectively.  Excises  for 
alcoholic beverages were increased in 2022, 2023 and 2024, and further increases are planned. 
Additional  tax  changes  that  could  impact  inflation  in  2024  include  the  increase  in  the  Corporate 
Income  Tax  in  January  2024  from  19%  to  21%,  which  could  be  passed  through  into  consumer 
prices for  some products or services. A series of changes in VAT rates from January  2024 (from 
15% to 12% for food and medicine, and an increase from 10% to 12% for transport, water and 
sewage,  accommodation,  and  catering)  had  an  impact  on  the  corresponding  HICP  items  but  the 
overall impact on headline inflation was muted. 

Medium-term prospects 

According to the Commission’s Spring 2024 Economic Forecast, annual HICP inflation is projected 
to  average  2.5%  in  2024  and  2.2%  in  2025.  The  significant  projected  decrease  compared  with 
2022 and 2023 is attributed to declining wholesale prices of energy and food, a high based effect 
and only modest recovery in internal demand. The biggest upward inflation impact in 2024 is likely 
to  be  limited  to  the  change  in  administrated  prices  after  the  expiry  of  the  energy  measures  in 
January  2024.  Energy  and  food  prices  have  been  on  a  decline  over  the  past  12  months  on 
wholesale markets, thus their corresponding HICP items are forecast to have a lower contribution 
to inflation.  

Further upside pressures come from the growth in salaries which are likely to outpace inflation for 
the first time in two years in 2024. Services inflation is thus forecast to be the component with the 
highest  growth  in  2024  and  2025,  as  it  is  also  the  component  that  is  the  most  sensitive  to 

49 

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salaries. According to the Commission’s Spring 2024 Economic Forecast, wage growth is likely to 
continue with 7.3% in 2024 and 6.9% in 2025. The labour market remains extremely tight, Czechia 
reporting  a  very  low  unemployment  rate  in  2023  (2.6%  vs  6.1%  in  EU)  and  high  general 
employment rates (81.7% vs 75.3% in EU), thus adding further pressures to salaries in the private 
sector. Conversely, a consolidation package introduced by the government is likely to keep wages 
growth  lower  in  the  public  sector  and  generate  a  contractionary  fiscal  stance  (also  due  to 
measures  like  cuts  in  subsidies  and  increased  taxation)  thus  further  contributing  to  maintaining 
inflation  under  control.  Considering  a  gradual  recovery  in  economic  activity  and  consequently  in 
productivity, the growth in nominal unit labour costs should be limited at 6.3% in 2024 and 4.1% 
in 2025. Additionally, the increase in salaries could be partly absorbed by companies’ profits which 
have been above average levels for the past 2 years. Unit profits are thus expected to grow slower 
after the high growth levels achieved in 2022-2023 and contribute less to inflation.  

The  long-term  convergence  of  prices  towards  the  EU  levels  also  plays  a  role  in  determining  the 
inflation levels in the coming years. The level of consumer prices in Czechia was about 80% of the 
euro  area  average  in  2022,  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 capita in PPS, to about 88% in 2023 (the COVID-19 pandemic brought about a 
small decrease from the 89% reached in 2020). 

Upside risks remain to the inflation outlook. An eventual rebound in energy or food prices could put 
additional  pressure  on  inflation  considering  that  the  consumer  basket  in  Czechia  has  a 
comparatively higher weight for these goods and considering that the Czech economy is one of the 
most energy intensive in the EU. An increase in wage growth beyond the baseline scenario could 
also further increase core inflation. However, for the moment, the risks of significant second-round 
effects of wage increases – a wage-price spiral – appear to be contained. 

3.3.  PUBLIC FINANCES 

3.3.1.  Recent fiscal developments 

After the withdrawal of the COVID-19 related programmes and the introduction of energy support 
measures, Czechia reported a deficit of the general government budget of 3.2% in 2022 and 3.7% 
in  2023.  Government  revenues  were  boosted  by  high  inflation,  with  the  revenue-to-GDP  ratio 
growing by 0.3 percentage point from 41.4% in 2021 to 41.7% in 2023. The expenditure-to-GDP 
ratio dropped from 46.5% in 2021 to 45.4% in 2023, driven by high nominal GDP growth. In 2022, 
temporary  COVID-related  measures  were  withdrawn.  In  2023,  among  the  largest  temporary 
measures  were  price  caps  on  energy  prices.  While  these  schemes  were  instrumental  in  helping 
households  and  the  industry  to  face  raising  energy  prices,  they  were  largely  untargeted.  In 
addition,  expenditure  increased  due  to  the  automatic,  albeit  reduced,  indexation  of  pensions  on 
inflation, and measures to support the inflow of people fleeing from Ukraine. These came on top of 
permanent fiscal measures taking effect from 2021, notably the decrease in personal income tax 
by about 1.8% of GDP per year. 

On 19 June 2024, the Commission adopted a report under Article 126(3) of the TFEU. The report 
assessed  the  budgetary  situation  of  Czechia,  as  its  government  deficit  in  2023  exceeded  the 
Treaty reference value of 3% of GDP. The report concluded that the deficit criterion of the Stability 
and Growth Pact is fulfilled by Czechia, taking into account the relevant factors brought forward by 
Czechia. While its  general  government deficit in  2023 exceeded and was not close to  the Treaty 
reference value of 3% of GDP, and the excess over the Treaty reference value is not considered to 
be exceptional, Czechia took consolidation measures in 2024 that should translate into a year-on-
year reduction in the deficit to well below 3% of GDP in 2024. The Commission concluded that it 
would not propose the opening of the excessive deficit procedure.  

The  2023  general  government  deficit  of  3.7%  of  GDP,  higher  than  3.2%  in  2022,  was  slightly 
worse than the estimate of 3.5% in the 2023 Convergence Programme. This is explained by lower 
revenue items like corporate income tax (linked to lower growth of the macroeconomic base, gross 

50 

Convergence Report 2024 - Technical annex 
Chapter 3 - Czechia 

operating  surplus)  or  lower  property  income  as  well  as  some  expenditure  items  like  public 
investment or subsidies growing slightly more than expected. 

Public debt is still low compared to the EU average despite its high pace of growth in 2020-2022. 
The  government  debt-to-GDP  ratio  rose  from  42.0%  in  2021,  to  44.0%  in  2023,  driven  by  the 
negative headline balance, only partly offset by nominal GDP growth. 

3.3.2.  Medium-term prospects 

The  2024  budget  approved  by  the  Czech  parliament  in  December  2023  envisages  a  central 
government deficit of 3.2% of GDP and aimed to continue correcting the high deficit registered in 
the previous years. The budget maintained the tax cuts taking effect from 2021 (e.g., the cut in the 
personal income tax) and focused instead on withdrawing measures to mitigate the impact of high 
energy  prices,  including  the  elimination  of  the  cap  on  energy  prices,  coupled  with  a  reduction  of 
government subsidies to renewable sources of energy. Raising the corporate income tax rate from 
19% to 21% and increasing some social security contributions will help increase related revenue. 
However, the budget saw increasing defence expenditure (to 2% of GDP) in line with international 
commitments.  In  addition,  due  to  high  inflation  in  previous  years,  pensions  were  set  to  continue 
increasing, thus continuing to add pressure on expenditure. 

The  2024  Convergence  Programme  was  approved  by  the  government  on  24  April  2024.  The 
Program  expects  the  general  headline  deficit  at  2.3%  in  2024  and  at  2.1%  in  2025.  The 
consolidation path is mostly based, in 2024, on the withdrawal of measures to mitigate the impact 
of high energy prices, additional expenditure and revenue measures introduced in the consolidation 
package, and, over 2025 – 2027, on the forecast of an economic recovery. 

In 2024, based on Commission estimates, the fiscal stance (21) is projected to be contractionary, at 
2.3%  of  GDP,  following  a  contractionary  fiscal  stance  of  0.9%  of  GDP  in  2023.  The  strong 

(21)  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. 

51 

Table 3.3:Czechia - Budgetary developments and projections (as % of GDP unless indicated otherwise)Outturn and forecast 1)20182019202020212022202320241)20251)General government balance0.90.3-5.8-5.1-3.2-3.7-2.4-1.9- Total revenue41.541.341.541.441.441.742.342.2- Total expenditure40.641.147.246.544.645.444.644.1   of which: - Interest expenditure0.70.70.80.81.11.31.41.5p.m.: Tax burden36.035.936.036.035.435.736.836.7Primary balance1.61.0-5.0-4.4-2.0-2.3-1.0-0.4Fiscal stance 2)-0.20.92.30.0Recommended growth in net nationally financed primary expenditure (%)6.0-Growth in net nationally financed primary expenditure (%)-1.1-Government gross debt32.130.037.742.044.244.045.245.5p.m: Real GDP growth (%)3.23.0-5.53.62.4-0.31.22.81) Commission’s Spring 2024 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 2024 - Technical annex 
Chapter 3 - Czechia 

contractionary fiscal stance in 2024 is primarily driven by net nationally financed primary current 
expenditure (2.1% of GDP). 

On 14 July 2023, the Council recommended that 
Czechia  ensures  a  prudent  fiscal  policy, 
in 
particular  by  limiting  the  nominal  increase  in 
nationally  financed  net  primary  expenditure  in 
2024  to  not  more  than  6%.  According  to  the 
Commission’s  Spring  2024  Economic  Forecast, 
Czechia’s  net  nationally 
financed  primary 
expenditure  is  projected  to  decrease  by  1.1%  in 
2024,  which  is  well  below  the  recommended 
maximum growth rate. 

In  addition,  the  Council  recommended  that 
Czechia takes action to wind down the emergency 
energy  support  measures  in  force,  using  the 
related savings to reduce the government deficit, 
as soon as possible in 2023 and 2024. The Council further specified that, should renewed energy 
price increases necessitate new or continued support measures, Czechia should ensure that these 
were  targeted  at  protecting  vulnerable  households  and  firms,  fiscally  affordable,  and  preserve 
incentives for energy savings. 

According to the Commission’s Spring 2024 Economic Forecast, the net budgetary cost of energy 
support  measures  is  projected  at  1.1%  of  GDP  in  2023,  0.2%  in  2024,  and  0%  in  2025.  If  the 
related savings were used to reduce the government deficit, as recommended by the Council, these 
projections  would  imply  a  fiscal  adjustment  of  1.1%  of  GDP  in  2024,  whereas  net  nationally 
financed primary expenditure provides a contractionary contribution to the fiscal stance of 2.1% of 
GDP in that year. Therefore,  the related savings from the winding  down of energy measures are 
projected to be fully used to reduce the government deficit. 

In  addition,  the  Council  also  recommended  that  Czechia  preserves  nationally  financed  public 
investment  and  ensures  the  effective  absorption  of  Recovery  and  Resilience  Facility  grants  and 
other  EU  funds,  in  particular  to  foster  the  green  and  digital  transitions.  According  to  the 
Commission’s  Spring  2024  Economic  Forecast,  nationally  financed  public  investment  is projected 
to  decrease  in  2024  and,  therefore,  it  is  not  expected  to  be  preserved.  The  general  government 
deficit  is  projected  to  decrease  gradually  to  1.9%  of  GDP  in  2025,  reflecting  accelerating  GDP 
growth.  In  turn,  the  general  government  debt  is  projected  to  stabilise  at  45.5%  of  GDP  in  2025, 
driven  by  the  negative  headline  balance  being  offset  by  nominal  GDP  growth.  The  general 
government investment is projected to settle at 4.9% of GDP in 2025. 

Further details can be found in the Commission’s recommendation for a Council recommendation 
on the 2024 Convergence Programme for Czechia. 

The  government  debt-to-GDP  ratio  is  forecast  by  the  Commission  to  increase  to  45.2%  in  2024 
and to 45.5% in 2025, which is more than 1 percentage point higher than in 2022, driven by the 
negative headline balance and being only partly offset by the nominal GDP growth. 

Debt sustainability risks appear medium over the medium term. Government debt is projected to 
slightly increase from around 45% of GDP in 2024 to around 48% of GDP in 2034. This projection 
assumes that the structural primary deficit is reduced from 1.6% in 2023 to 0.1% of GDP in 2024 
and remains at that level (excluding changes in the cost of ageing) over the projection period (22). 

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 2024  were to occur, 
the projected debt ratio in 2034 would be 8 percentage points of GDP higher than in the baseline. 

(22)  For details on the methodology see European Commission (2024), Debt Sustainability Monitor 2023, Institutional Paper 

271, March 2024. 

52 

-101232022202320242025Expenditure financed by RRF grants and EU funds (e)Other capital expenditure (d)Nationally financed investment (c)Net nationally financed  primary current expenditure (b)Fiscal stance (f=a+e) 2023 2024Net nationally financed  primary expenditure (a=b+c+d)ExpansionaryContractionarySource: Commission's Spring 2024 Economic Forecast.Graph 3.4: Czechia -Fiscal stance and its components(percent of GDP) 
    
Convergence Report 2024 - Technical annex 
Chapter 3 - Czechia 

Finally, several additional risk factors need to be considered in the assessment. On one hand, risk-
increasing factors are related to the recent increase of interest rates and the significant share of 
short-term debt. On the other hand, risk-mitigating factors include the stability of debt maturity in 
recent  years,  relatively  stable  financing  sources  (with  a  diversified  and  large  investor  base),  and 
the currency denomination of debt. 

The Czech national fiscal framework performs well but its robustness continues to be tested. The 
general  government  debt  rule  and  structural  balance  rule  have  been  complied  with  in  2022. 
However, in its report on compliance in 2022 (23), the Czech Fiscal Council underlined that, despite 
the  positive  assessment,  the  medium-term  plan  did  not  underpin  the  setting  of  expenditure 
framework for the State budget and State funds. Some practices, such as including in the forecast 
measures  that  are  not  adopted  or  credibly  announced,  using  State  entities  outside  the  regular 
budgets, changing the parameters underpinning the fiscal rule (i.e., the double amendment of the 
Act  23/2017  on  Budgetary  Responsibility  Rules),  tend  to  weaken  the  fiscal  framework.  The 
Committee  on  Budgetary  Forecasts,  tasked  with  assessing  the  macroeconomic  and  budgetary 
forecasts, confirmed the realism of the forecasts in all its 2023 assessments. Local governments’ 
finances are assessed by the Czech Fiscal Council as healthy with an overall positive contribution 
to the budget balance. However, about 10% of local municipalities failed to comply with the local 
governments’ debt rule to keep debt below 60% of the average local revenues of the last 4 years. 
10 municipalities could not implement the correction of 5% of the deviation but, despite that, the 
Finance Ministry did not suspend tax transfers towards these municipalities. The authorities should 
clarify  how  to  interpret  the  provisions  of  Act  23/2017  on  Budgetary  Responsibility  Rules  on  the 
correction  of  deviations  from  the  debt  rule  for  local  municipalities,  in  law  or  methodological 
documents. The amended Budgetary Framework Directive (2011/85/EU) may affect some aspects 
of  the  Czech  fiscal  framework.  Among  other  requirements,  the  amended  Directive  extends  the 
independence safeguards for independent fiscal institutions to all EU Member States and assigns 
some tasks to these institutions. 

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  floating  exchange  rate  regime,  that 
allows  for  foreign  exchange  market  interventions  by  the  central  bank (24).  The  ČNB  is  legally 
allowed  to  conduct  foreign  exchange  interventions  to  influence  the  Czech  koruna  exchange  rate 
and moderate excessive exchange rate volatility in exceptional situations (e.g., in 2022). 

(23)  https://rozpoctovarada.cz/en/publications/report-on-compliance-with-the-rules-of-budgetary-responsibility-for-2022/. 
(24)  Since 2010, the inflation target has been set at 2% with a tolerance band of +/- 1%. 

53 

22242628201820192020202120222023Graph 3.5: Czechia -CZK/EUR exchange rate(monthly averages)Source: ECB.0100200300400500600700800201820192020202120222023Graph 3.6: Czechia -3-M Pribor spread to 3-M Euribor(basis points, monthly values)Source: Czech national Bank, Eurostat and Thomson Reuters. 
      
 
   
    
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Chapter 3 - Czechia 

The  ČNB  terminated  its  exchange  rate  commitment  in  April  2017.  Following  a  period  of  relative 
stability in 2018-2019, the Czech koruna has experienced significant volatility since the COVID-19 
pandemic.  It  depreciated  significantly  in  2020,  due  to  an  economic  downturn  that  was  more 
pronounced than expected. This was then followed by a  moderate appreciation trend  up to early 
2022. In 2022, pressure for depreciation following Russia’s full-scale invasion of Ukraine triggered 
stabilising  interventions  by  the  ČNB  on  the  foreign  exchange  market  between  May  and  October 
2022.  In  October  2022,  the  Czech  koruna  was  trading  against  the  euro  at  around  24.5.  It  then 
slightly  appreciated  until  April  2023  but  started  to  depreciate  again  on  account  of  market 
expectations of a decline in interest rates. By May 2024, it had reached levels very close to those 
of 2022 and not far from pre-pandemic levels.  

The 3-month interest rate differential vis-à-vis the euro area reached a peak by mid-2022 before 
returning to close to pre-pandemic levels by the end of 2023. The strong tightening cycle by the 
ČNB from August 2021 till June 2022 led to a steady and large rise in the Czech 3-month PRIBOR 
and,  accordingly, in  the  spread  vis-à-vis the  euro  area, which  surpassed  720  basis points  in  July 
2022.  Subsequently,  the  ČNB  kept  its  main  policy  rate  (the  2-week  repo  rate)  unchanged  (till 
December  2023),  while  the  ECB  continued  its  monetary  policy  tightening  cycle  initiated  in  July 
2022, pushing the 3-month EURIBOR rate up. This allowed the three-month interest rate spread to 
decrease steadily from its peak, to reach 300 basis points by the end of 2023. As the ČNB Board 
lowered  its  policy  rates  three  times  in  first  five  months  of  2024  the  three-month  interest  rate 
spread fell bellow the 140 basis points in May. 

International reserves held by the ČNB decreased from EUR 153 billion at the end of 2021 (64% of 
GDP) to about EUR 134 billion (44% of GDP) at the end of 2023. The reserves increased in the first 
months of 2024 and stood at around EUR 136 billion in May 2024. The level of reserve assets was 
mainly  influenced  by  foreign  exchange  intervention  sales  by  the  ČNB’s  in  2022.  Since  October 
2022, the ČNB has not intervened in the foreign exchange market to affect the Czech koruna rate.  

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 an 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 slightly below the reference value at the time of the last convergence assessment in 
2022.  It  then  followed  a  gradual  upward  trend  up  to  April  2023  (4.7%)  and  started  to  decline 
thereafter,  reaching  4.4%  by  the  end  of  2023.  In  April  2024,  the  reference  value,  given  by  the 
average of long-term interest rates in the Netherlands, Italy and Latvia plus 2 percentage points, 
stood at 5.5%. In that month, the 12-month moving average of the yield on the Czech benchmark 
bond stood at 4.2%, i.e. 1.3 percentage points below the reference value. 

54 

0246Jan-18Jan-19Jan-20Jan-21Jan-22Jan-23Jan-24CzechiaReference valueGraph 3.7: Czechia -Long-term interest rate criterion(percent, 12-month moving average)Source: European Commission.-20246201820192020202120222023CzechiaGermanyGraph 3.8: Czechia-Long-term interest rates(percent, monthly values)Source: Eurostat. 
 
   
   
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Chapter 3 - Czechia 

The  long-term  interest  rate  of  Czechia  increased  rapidly  in  2022,  reaching  a  peak  of  5.5%  in 
October that year. The upward movement followed the ČNB’s sharp monetary tightening, a rapid 
increase  in  inflation  and  increased  economic  uncertainty  due  to  Russia’s  full-scale  invasion  of 
Ukraine. The stabilisation of the policy rate in the second half of 2022 and its decline in December 
2023, contributed to the fall in the long-term interest rate towards 4.0% at the end of 2023. The 
long-term interest rate was 4.2% in May 2024. The German long-term benchmark bond rate also 
increased in 2022, although by a lesser extent, allowing the long-term interest rate spread to climb 
to 370 basis points in June 2022. Subsequently the spread started to narrow as the ČNB kept key 
interest rates unchanged and the ECB continued its monetary tightening. By mid-2023 the spread 
had  narrowed  to  about  180  basis  points,  close  to  its  pre-pandemic  level.  It  subsequently  fell 
further on  the  back of  a  rapid  monetary  easing  by  the  ČNB,  reaching  about  164  basis points by 
May 2024.  

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  developments,  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 2023, the Commission published its 13th Alert Mechanism Report (AMR 2024) under 
the  Macroeconomic  Imbalance  Procedure  (MIP  –  see  also  Box  1.7),  which  highlighted  issues 
relating to price competitiveness and pressures in the housing market in Czechia.  However,  since 
overall risks remained limited, the report concluded that no In-Depth Review (IDR) was warranted 
for the country. Concerns in terms of price competitiveness are related to nominal unit labour costs 
(ULC), which have increased significantly in 2022 and 2023 as productivity was dampened by the 
slow  economic  activity  while  wages  continued  growing,  albeit  at  a  pace  below  inflation.  A 
slowdown in ULC growth is expected in  2024 and 2025 as economic activity recovers. While the 
current account was significantly negative in 2022, external sustainability concerns are receding as 
the trade balance became again positive in 2023. House prices grew faster than incomes over the 
past  decade  and  are  estimated  to  have  reached  an  overvaluation  of  some  30-40%  in  Q4-
2022 (25). However, since Q4-2022, house prices have been falling in nominal terms although at a 
moderate rate. A structural supply constraint remains which could continue to put upside pressures 
on house prices. 

Czechia’s  recovery  and  resilience  plan  (RRP)  includes  measures  to  address  a  series  of  structural 
challenges,  in  synergy  with  other  EU  funds,  including  cohesion  policy  funds,  to  boost  its 
competitiveness  and  stimulate  sustainable  growth  and  reduce  the  country’s  territorial  and  social 
disparities. The RRF funding provides Czechia with EUR 8.4 billion in grants and EUR 818 million in 
loans over the 2021-2026 period.   

Czechia  has  submitted  two  payment  requests  resulting  in  an  overall  disbursement  of  EUR  2.69 
billion on 2 April 2024.   

While  the  implementation  of  some  reforms  (digital  public  administration,  anti-corruption 
framework,  long-term  care,  permitting  of  renewable  energy  sources)  and  investments  (green 
transition,  the  digital  transition  of  public  services  and  business,  education,  healthcare,  social 
services) has already started, some potential delays are emerging. To deliver on the commitments 
of  the  plan  by  August  2026,  it  is  essential  for  Czechia  to  address  emerging  delays  while 
strengthening  absorption  capacity.  The  absorption  capacity  is  constrained  by  limitations  of 
administrative capacity at some of the implementing bodies and is particularly visible in areas that 
require more expertise, such as the digital and green transition.   

(25)  For details on the methodology, see European Commission (2023), ’In-Depth Review 2023 - Czechia’, Institutional Paper 

208, May 2023. 

55 

 
Convergence Report 2024 - Technical annex 
Chapter 3 - Czechia 

In addition to the RRF funding, cohesion policy provides Czechia with EUR 21.1 billion for the 2021-
2027  period.  Cohesion  policy  financing  aims  particularly  to  further  support  Czechia’s 
competitiveness,  by  facilitating  the  adaptation  to  the  digital  era  and  to  the  green  transition, 
including  energy  efficiency,  renewable  energy  and  just  transition  and  by  helping  workers  and 
businesses to adapt to change. 

3.6.1.  Developments in the balance of payments 

According to balance of payments data, Czechia’s external balance (i.e., the combined current and 
capital account) turned strongly negative in 2022, reaching  -4.2% of GDP before becoming again 
positive at 1.6% of GDP in 2023. Developments in the external balance were mainly driven by the 
changes in the current account, and in particular by the changes in the balance of trade in goods. 
Exports  increased  in  2022  and  2023  due  to  an  increase  in  export  prices  (the  export  deflator 
increased  by 8.9% in  2022  and decreased by 0.8% in 2023) but also in  volumes (7.2% in  2022 
and  2.8%  in  2023).  The  automotive  industry,  one  of  the  main  engines  of  growth,  recovered 
gradually after the drop suffered during the COVID-19 pandemic, when it was negatively affected 
by  the  shortages  in  the  semiconductors  supply.  Imports  also  increased  during  the  period,  driven 
especially by the high price of commodity imports (e.g., energy, food). However, in volume terms, 
imports had a more muted growth during the period (6.3% in 2022 and -0.7% in 2023), possibly 
due to savings in imports of energy products but also as local companies started unwinding high 
accumulated  inventories.  Import  prices  registered  a  significant  volatility  in  the  period, accounting 
for a significant part of the changes in the entire trade balance. Thus, high energy and commodity 
prices  led  to  an  increase  of  the  import  deflator  by  13.1%  in  2022,  followed  by  a  subsequent 
decline of 3.4% in 2023, as wholesale commodity prices started declining.  

The  services  balance  was  positive  in  both  years,  although  the  values  of  services  exported  and 
imported  are  significantly  lower  than  those  of  goods.  The  main  drivers  of  the  services  balance 
were  telecom  and  IT  services  (as  compared  to  transport  in  previous  years)  though  their 
contribution declined slightly in 2023. The primary income balance registered a slight dip in 2022 
(-5.4%  of  GDP  from  -5.1%  in  2021  and  -4.2%  in  2020)  as  the  profitability  of  foreign-owned 
enterprises  increased  and  higher  outflows  were  paid  in  the  form  of  dividends  (with  the  banking 
system, in particular, paying delayed dividends from the pandemic years).  

The capital account was also depressed in 2022 (0.7% of GDP compared to 1.7% in 2021) as high 
growth  in  the  utilisation  of  funds  from  the  EU  budget  was  offset  by  higher  net  payments  for 
emission allowances (ETS). The situation reversed in 2023 to 1.2% of GDP.  

External balance developments were mirrored by the financial account (-4.3% of GDP in 2022 and 
2.0%  of  GDP  in  2023).  The  drop  in  the  financial  account  balance  in  2022  was  driven  to  a  large 
extent by a fall in the reserves of the ČNB, which intervened in the foreign exchange markets. The 
effect  on  the  financial  account  was  significant  (4.5%  of  GDP),  partly  reversing  the  substantial 
reserves accumulation of  2021. Additional effects on the financial account came from the lower 
investments  of  residents  abroad  and  by  local  companies  increasing  the  financing  in  EUR-
denominated loans. The net international investment position (NIIP) worsened in 2022 to  -18.7% 
of GDP, due to a faster accumulation of liabilities relative to assets. The NIIP position improved to -
13.2%  of  GDP  in  2023  as  net  external  lending  improved  and  nominal  GDP  growth  remained 
positive, as the growth in the GDP deflator outweighed the decline in real GDP. 

56 

Convergence Report 2024 - Technical annex 
Chapter 3 - Czechia 

The  long-term  upward  trend  in  Czechia’s  export 
market  share  slowed  down  since  2018.  The 
export  market  share  in  volumes  even  declined 
during  the  pandemic  years,  but  started  showing 
some  rebound  in  2022-2023.  Several  measures 
are  signalling  losses  in  cost  competitiveness 
compared to trading partners. Nominal unit labour 
costs  increased  markedly  in  2022  and  2023  as 
weak  economic  activity  dampened  productivity 
while labour costs continued to grow even though 
at  a 
inflation.  Cost 
competitiveness  was  also  influenced  negatively 
by  the  movements  in  the  nominal  effective 
exchange  rate  (NEER),  as  the  Czech  koruna 
strengthened from 2020 until the first quarter of 
2023,  supported  also  by  the  ČNB  interventions.  The  koruna  reversed  the  trend  and  started  to 
depreciate in April 2023 as the ČNB stopped interventions and the official announcement of the 
central bank ending its intervention regime in August 2023 fuelled a further depreciation. Due to 
comparatively  higher  inflation  in  Czechia  in  2022  and  2023,  the  real  effective  exchange  rates 
based on HICP and core inflation appreciated even more than implied by the evolution of the NEER 
during the period. As inflation has declined significantly since the beginning of 2024, a reversal of 
the trend is expected. 

slower  pace 

than 

According  to  the  Commission’s  Spring  2024  Economic  Forecast,  the  external  balance  (based  on 
national  accounts  data)  is  expected  to  contribute  only  slightly  to  real  GDP  growth  in  2024  and 
2025  as  the  positive  effect  of  lower imports  growth  is  expected  to  fade  away  on  the  back  of  a 
recovery  of  internal  demand  and  the  growth  in  exports  is  hindered  by  the  still  depressed  global 
trade. Still, the balance of trade is expected to increase in nominal terms due to favourable terms 
of trade. 

57 

Table 3.4:Czechia - Balance of payments(percentage of GDP)201820192020202120222023Current account0.40.32.0-2.8-4.90.4of which: Balance of trade in goods3.74.14.91.1-0.34.0               Balance of trade in services2.21.81.81.71.41.3               Primary income balance -4.8-5.0-4.2-5.1-5.4-4.3               Secondary income balance-0.7-0.6-0.5-0.5-0.6-0.5Capital account0.20.41.21.70.71.2External balance 1)0.70.83.2-1.1-4.21.6Financial account1.10.12.9-0.7-4.32.0of which: Direct investment-0.9-2.4-2.6-0.5-1.2-0.2               Portfolio investment0.6-1.8-2.41.24.91.2               Other investment 2)0.62.47.0-6.3-3.50.5               Change in reserves0.91.90.84.8-4.50.5Financial account without reserves0.2-1.82.0-5.50.21.5Errors and omissions0.4-0.6-0.30.4-0.10.4Gross capital formation27.227.626.230.232.228.9Gross saving26.626.726.827.927.630.3Net international investment position-24.4-19.8-16.3-14.5-18.7-13.21) The combined current and capital account.2) Including financial derivatives.Sources: Eurostat, European Commission calculations, the Czech National Bank.9095100105110115120125130201820192020202120222023Graph 3.9: Czechia -Effective exchange ratesNEERREER, HICP-deflatedREER, ULC-deflated(vs 36 trading partners; monthly averages;index numbers, 2018 = 100)Source: European Commission. 
 
 
  
 
 
   
Convergence Report 2024 - Technical annex 
Chapter 3 - Czechia 

3.6.2.  Market integration 

The Czech economy is highly integrated with the euro area through trade and investment linkages. 
The  trade  openness  (see  Table  3.5  for  a  definition)  of  Czechia  decreased  in  2023  although  it 
remained close to its long term average at around 85% of GDP. The share of trade with euro area 
countries stood  at  around  52% of  GDP  in  2023  (57%  in  2022).  In  2023,  Czechia’s  main  trading 
partners within the euro area were Germany, Slovakia and the Netherlands, while the main trade 
partners outside the euro area were Poland and China.  

France, 

FDI inflows registered a small increase in 2022 to 
3.2% of GDP, before dropping to 2.4% of GDP in 
2023 (26).  However,  the  largest  part  of  the  FDI 
inflows  was  represented  by  reinvested  earnings 
while  new  capital  participations  remained  low. 
Nevertheless, the  stock  of  FDIs as  percentage  of 
GDP  reached  76%  in  2023.  Austria,  Belgium, 
and 
Germany, 
Luxembourg  are  the  biggest  investor  partners 
providing  more  than  half  of  the  stock  of  FDIs  at 
the 
services, 
manufacturing,  real  estate  and  trade  are  the 
main 
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. According to a 
ČNB  report,  Czechia  provided  the  highest  return  on  foreign  investments  in  2022  among  the 
Visegrad group of countries (Poland, Czech Republic, Slovakia, and Hungary). 

the  Netherlands 

target  sectors 

Financial 

for  FDI 

2021. 

end 

of 

Despite price competitiveness concerns persisting on the back of high growth in unit labour costs, 
in  the  IMD’s  World  Competitiveness  Index,  Czechia’s  position  improved  over  the  past  two  years, 
moving  up  from  34th  rank  in  2021  to  18th  in  2023.  The  improvements,  according  to  the  IMD’s 
World Competitiveness Index are especially in terms of government efficiency, business efficiency 
as  well  as  infrastructure  while  the  economic  performance  has  seen  a  deterioration  during  the 
period. According to the World Bank’s 2022 Worldwide Governance Indicators, Czechia ranks higher 
than  the  average  of  the  five  euro  area  Member  States  with  the  lowest  scores,  in  particular  in 
relation  to  indicators  that  measure  regulatory  quality,  political  stability  and  absence  of  violence, 
the  rule  of  law,  control  of  corruption  and  government  effectiveness (27).  According  to  the  2023 

(26)  See the database on foreign direct investment statistics of the Czech National Bank. 
(27)  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  point  lower  (higher)  than  that  of this 
group of five euro area Member States.  

58 

Table 3.5:Czechia - Market integration201820192020202120222023Trade openness 1) (%)89.086.083.187.393.485.1Trade with EA in goods & services 2)+3) (%)54.752.750.753.656.851.6IMD World Competitiveness Ranking 4)293333342618Internal Market Transposition Deficit 5) (%)0.70.81.52.41.40.9Real house price index 6)123.4131.0138.1160.7163.3147.0 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-20 / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics). 3) Trade in services with EA-20 (average credit and debit in % of GDP at current prices) (Balance of Payments). 4) International Institute for Management Development (IMD). 5) Percentage of internal market directives not yet communicated as having been transposed, relative to the total. 6) Deflated house price index (2015=100) (Eurostat). Sources: Eurostat, World Bank, International Institute for Management Development, European Commission calculations.0.00.61.21.8Voice and accountabilityPolitical stability andabsence ofviolence/terrorismGovernmenteffectivenessRegulatory qualityRule of lawControl of corruptionCzechiaEuro area average five lowestEuro area averageGraph 3.10:Czechia -World Bank's 2022 Worldwide Governance IndicatorsNote: Estimate of governance ranges from -2.5 (weak) to 2.5 (strong). Source: World Bank. 
 
 
 
  
 
 
  
Convergence Report 2024 - Technical annex 
Chapter 3 - Czechia 

Single Market Scoreboard, Czechia's transposition deficit of EU Directives was at 1.4%, down from 
2.4% in 2022. This is approaching the EU average (0.9%) and the target (0.5%) proposed by the 
European Commission in the Single Market Act (2011).  

Efforts  are  being  made  to  address  any  pending  corruption  issues  in  Czechia,  including  by  the 
reforms  from  the  Recovery  and  Resilience  Plan.  Legal  and  institutional  frameworks  to  address 
corruption  are  broadly  in  place,  while  the  Government  has  prioritised  some  anti-corruption 
measures.  According  to  Transparency  International,  Czechia  still  lags  below  the  EU  average  in 
terms of corruption although some improvements are taking place. The country ranks 41st among 
180  countries  evaluated  worldwide  (up  from  49th  in  2021).  Reforms  like  whistleblowing,  a 
lobbying  reform,  or  a  set  of  measures  to  strengthen  the  legislative  framework  in  the  areas  of 
courts, judges, prosecutors and bailiffs are part of the Recovery and Resilience Plan and some have 
already been approved but further efforts are needed.  

The  Czech  Republic  has  notified  a  complete  transposition  of  the  5th  Anti-Money  Laundering 
Directive. The Commission has assessed the transposition as complete and in conformity.  

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 
provide  quicker  access  to  bank  account  information.  The  Czech  authorities  have  achieved  a 
substantial  level  of  effectiveness  in  international  cooperation;  confiscation  of  proceeds  and 
instrumentalities of  crime;  and FT  investigations  and  prosecutions.  On  the  other  hand, the  Czech 
Republic  has  achieved  moderate  results  in  the  other  areas  covered  by  the  Financial  Action  Task 
Force (FATF) standards.  

59 

Table 3.6:Czechia - Allocation of assets by financial sub-sectorRatio to GDP (%)CZEAEA 5 smallest201820222018202220182022Financial corporations (total)248236689715174190Central bank594753684652Monetary financial institutions1311282662908793Other financial intermediaries32331811631618Non-MMF investment funds1)81110111345Insurance co. and Pension Funds181687812122Share of total (%)CZEAEA 5 smallest201820222018202220182022Central bank24208102727Monetary financial institutions535439405049Other financial intermediaries13142623910Non-MMF investment funds35151623Insurance co. and Pension Funds77131112111) MMF stands for money market funds.Source: Eurostat. 
Convergence Report 2024 - Technical annex 
Chapter 3 - Czechia 

The  Czech  labour  market  continued  to  remain  significantly  tight  in  2022  and  2023.  The 
unemployment rate decreased further in 2022 and reached the lowest level in EU, before a slight 
increase  to  2.6%  in  2023.  The  employment  rate  of  those  aged  between  20  and  64  increased 
constantly  over  the  past  years  and  reached  81.7%  in  2023,  which  was  seven  percentage  points 
above  the  EU  average.  Labour  shortages  and  skill  mismatches  are  pervasive  and  hamper 
Czechia´s growth potential. Cross-border migration flows have increased significantly in 2022 and 
2023  as  Czechia  was  one  of  the  countries  with  the  highest  number  of  people  displaced  from 
Ukraine per capita in the EU. However, the integration and impact on the labour market remained 
low, with 80% of Ukrainian born workers performing low-qualified jobs.  

The financial sector in Czechia continues to be smaller and somewhat less developed than in the 
euro  area.  Assets  managed  by  the  financial  sector  amounted  to  236%  of  GDP  in  2022.  This  is 
much  less  than  in  the  euro  area  (715%  of  GDP)  but  higher  than  in  the  five  euro  area  Member 
States  with  the  smallest  financial  sectors.  While  it  has  grown  in  the  euro  area,  the  size  of  the 
financial  sector  has  decreased  by  about  12  percentage  points  since  2018  in  Czechia.  Banks 
dominate the Czech financial sector and made up around 54% of the financial sector’s assets in 
2022.  The  central  bank  is  the  second  largest  holder  of  financial  assets  with  a  share  of  20%  in 
2022 (double that of the euro area average). The rest of financial intermediaries constituted about 
one quarter of the financial sector holdings in 2022, which is about half of the share observed for 
the  euro  area.  This  lower  share  is  similar  to  that  of  the  five  euro  area  Member  States  with  the 

60 

Table 3.7:Czechia - Financing of the economy1)Ratio to GDP (%)CZEAEA 5 smallest201820222018202220182022Liabilities (total)333335706696316304Loans10093228219109103Non-financial co. debt securities74121232Financial co. debt securities1616665834Government debt securities313578714742Listed shares111060631210Unlisted shares71711761845453Other equity606553545658Trade credits and advances394334353132Share of total (%)CZEAEA 5 smallest201820222018202220182022Loans302832323433Non-financial co. debt securities212211Financial co. debt securities559811Government debt securities91011101514Listed shares339933Unlisted shares212125261919Other equity1819781718Trade credits and advances12135510111) 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 2024 - Technical annex 
Chapter 3 - Czechia 

smallest  financial  sector  and  reflects  the  relative  underdevelopment  of  non-bank  financial 
intermediaries and investment funds.  

As to the financing of the economy, outstanding liabilities are much lower than in the euro area 
(225% of GDP vs. 696% of GDP in the euro area) but comparable to that of the euro area Member 
States  with  the  lowest  financing  needs.  Like  in  the  euro  area,  loans  are  the  dominant  source  of 
funding.  However,  Czechia  has less  developed  bond  and  equity  markets  than  the  euro  area,  and 
market financing (especially debt securities and listed shares) is relatively underdeveloped. Equity 
and  private  sector  debt  markets  represented  9%  of  liabilities  in  2022  (and  30%  of  GDP 
altogether), compared to 19% of liabilities in the euro area (where private sector debt and listed 
stocks amounted to 70% and 63% of GDP respectively). Czechia is still comparable to the five euro 
area Member States with the smallest national financing needs and it has a higher share of private 
debt securities in the financing of the economy than these Member States. 

Unlisted shares and other equity made up 40% of 
total liabilities in 2022, which is higher than in the 
euro area (34%). Trade credits and advances play 
a  bigger  role  in  the  financing  of  the  economy  in 
Czechia  than  in  the  euro  area.  Relative  to  GDP, 
the bond market is smaller in Czechia than in the 
euro area, which reflects the lower level of public 
debt in Czechia.  

The  Czech  financial  sector  is  highly  integrated 
the  euro  area’s  financial  sector.  This 
into 
integration is noticeable in the ownership linkages 
of  the  banking  system.  Foreign  institutions  held 
more than 80% of the banking sector's assets via 
their  local  branches  and  subsidiaries  in  2022. 
Concentration  in  the  banking  sector,  as  measured  by  the  market  share  of  the  largest  five  credit 
institutions  in  total  assets,  edged  up  from  64%  in  2020  to  66%  in  2022  and  thus  continued  to 
exceed the euro area average of 51% by 15 percentage points. 

61 

020406080100CZ, 2018CZ, 2022EA, 2018EA, 2022Concentration 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.  
  
4.  HUNGARY 

4.1.  LEGAL COMPATIBILITY 

4.1.1.  Introduction 

The  main  rules  governing  the  Magyar  Nemzeti  Bank  (MNB  –  Hungarian  national  bank,  hereafter 
MNB) are laid down in Article 41 of the Hungarian Fundamental Law and Act CXXXIX 2013 on the 
MNB (hereafter: MNB Act). The amendments passed with regard to MNB law (28) did not solve the 
incompatibilities  and  imperfections  mentioned  in  the  Commission’s  2022  Convergence  Report. 
Therefore,  the  issues  raised  in  the  Commission’s  2022  Convergence  Report  remain  relevant  and 
are repeated in this year's assessment. 

4.1.2.  Central bank independence 

Frequent  amendments  to  the  central  bank  Act  of  a  Member  State  can  create  instability  in  the 
central  bank’s  operations.  Therefore,  a  stable  legal  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 succession also implies the transfer of all 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 
TFEU  implies  that  the  MNB  must  have  sufficient  financial,  material,  and  human  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. 

Further to this principle, the MNB should be fully insulated from all financial obligations resulting 
from any HFSA 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 should 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  any  reference  to  the  principle  of  central  bank 
independence enshrined in Article 130 TFEU. What is more, the Fundamental Law only contains 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, the oath should include a 
clear  reference  to  the  requirement  of  central  bank  independence  enshrined  in  Article  130  TFEU. 
Therefore, the oath as it stands is an imperfection as regards the institutional independence of the 
MNB and the wording of the oath should be adapted to be in line with Article 130 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 

(28)  The assessment of the compatibility of the MNB Law takes into consideration the version of the law communicated by 

the Hungarian authorities on February 2024. 

63 

 
Convergence Report 2024 - Technical annex 
Chapter 4 - Hungary 

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 involved, including 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 
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  must  always  be  performed  in  compliance  with  Article  130 
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,  this  incompatibility  needs  to  be 
removed.  

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 Monetary Council members to six months following 
termination of their employment relationship with the MNB. However, an 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  asset  declarations  in  the  same 
manner  as  Members  of  Parliament,  pursuant  to  the  provisions  of  Article  90  of  the  Act  XXXVI  of 
2012 on the National Assembly. According to Article  157(1) of the  MNB Act and Article 90(2) of 
the  Act  XXXVI  of  2012,  the  obligation  to  submit  an  asset  declaration  extends  to  close  family 
members  (spouse,  domestic  partner,  and  children).  Pursuant  to  Article  90(3)  of  the  Act  XXXVI  of 
2012,  members  of  the  Monetary  Council  who  fail  to  submit  an  asset  declaration  will  not  be 
allowed  to  exercise  their  functions  and  will  receive  no  remuneration  until  they  comply  with  the 
obligation. This provision allows for the temporary removal from office of, inter alia, the Governor, 
a  removal  that  seems  to  follow  automatically  if  the  failure  to  submit  an  asset  declaration  as 
required  by  the  above  provisions  is  established  by  the  Parliament.  To  fully  preserve  the 
requirement  of  central  bank  independence,  a  two-step  approach  could  be  considered:  first,  to 
officially  notify  the  members  of  the  Monetary  Council,  including  the  Governor  and  the  Deputy 
Governors,  of  the  failure  of  submission  and  its  possible  legal  consequences  to  allow  for  its 
correction  within  a  set,  short  and  reasonable  timeframe;  second,  to  impose  proportionate 
sanctions, which could include dismissal or temporary removal for office if the failure to submit an 
asset  declaration  constitutes  serious  misconduct  within  the  meaning  of  Article  14.2  of  the 
ESCB/ECB  Statute.  In  any  case,  the  law  should  clarify  that  the  sanctions  for  the  breach  of  the 
obligation  to  file  asset  declarations  do  not  constitute  extra  grounds  for  dismissal  (including 
temporary removal from office) of the members of the Monetary Council, including the Governor 
and the Deputy Governors, in addition to those contained in Article 14.2 of the ESCB/ECB Statute. 

The Commission notes the provisions on restauration of capital of Article 166(3) of the MNB Act, 
which  aim  to  safeguard  the  financial  independence  of  the  central  bank.  This  implies  that  MNB 
should  always  be  sufficiently  capitalised  in  order  to  avoid  any  situations  which  may  negatively 
impact the central bank’s ability to perform its ESCB-related tasks but also its national tasks. 

4.1.3.  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 

64 

Convergence Report 2024 - Technical annex 
Chapter 4 - Hungary 

stability of the financial system. In order to comply with the prohibition of monetary financing of 
Article 123 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 future cash contributions, government securities, etc.) to secure the repayment of 
the  loan.  Therefore,  Article  37  is  incompatible  with  the  prohibition  of  monetary  financing  as  laid 
down in Article 123 TFEU. 

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  of  the  expenses.  Therefore,  the  reimbursement  under  Article  177(6)  of  the 
MNB  Act  is  not  accompanied  by  measures  that  would  fully  insulate  the  bank  from  all  financial 
obligations resulting from any activities and contractual relationships of the HFSA originating from 
prior to the transfer of tasks. In case of a  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 result 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 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 including those deriving from 
the automatic further employment of HFSA staff by the MNB. 

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 necessary for monitoring the application of EU law. 

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 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 TFEU. The exemption provided for in national law seems to 
imply that the prohibition of monetary financing enshrined in Article 123 TFEU may be disregarded 
by  members  of  the  Monetary  Council  (including  the  Governor)  when  acting  in  the  context  of  the 
foundations  and  business  associations  under  MNB  ownership.  This  incompatibility  needs  to  be 
removed. 

4.1.4.  Integration into 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 

65 

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Chapter 4 - Hungary 

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  should  be  aligned  to  the 
secondary  objective  of  the  ESCB enshrined  in  Article  127(1)  TFEU  and  Article  2  of  the  ESCB/ECB 
Statute  in  order to  embrace  the  support  of  the  general  economic  policies in  the  entire  European 
Union rather than in Hungary only. 

Tasks 

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

•  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  (Article  K  of  the 

Fundamental Law and Articles 1(2), 4(2) and (12), 9, 23, 26 and 171(1) of the MNB Act). 

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

•  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); 

•  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 field of international cooperation (Article 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). 

4.1.5.  Assessment of compatibility 

As regards the independence of the MNB, the prohibition of 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  ESCB/ECB  Statute  pursuant  to  Article  131  TFEU  for  the 
reasons  set  out  above.  The  Hungarian  authorities  should  remedy  the  above-mentioned 
incompatibilities and imperfections.  

4.2.  PRICE STABILITY 

4.2.1.   Respect of the reference value 

The  12-month  average  inflation  rate,  which  is  used  for  the  convergence  assessment,  has  been 
above the  reference  value since the  convergence assessment of Hungary in 2022. In May 2024, 
the reference value was 4.1%, calculated as the average of the 12-month average inflation rates 
in the Netherlands, Italy and Latvia, plus 1.5 percentage points. The corresponding inflation rate in 
Hungary  was  8.4%,  i.e.  4.3  percentage  points  above  the  reference  value.  The  12-month  average 
inflation rate is projected to remain above the reference value in the coming months. 

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4.2.2.  Recent inflation developments 

Over  the  last  two  years,  HICP  inflation  first  increased  substantially  peaking  at  26.2%  in  January 
2023 before easing steadily to 3.9% in May 2024. Average annual HICP inflation rose to 15.3% in 
2022  and  17.0%  in  2023, and  was  significantly  above  that  of  the  euro  area  in  both  years.  This 
inflation  differential  was  due  to  the  higher  HICP  weight  of  energy  and  food  in  Hungary,  a  more 
positive  output  gap  in  Hungary  in  2022  driven  by  expansionary  policies,  and  significant  currency 
depreciation in 2022. The inflation differential vis-à-vis the euro area narrowed until early 2022, 
then widened substantially until early 2023, and has narrowed again since then, mainly driven by 
energy  price  inflation  that  was  influenced  by  measures  aimed  at  reducing  the  effect  of  the 
inflation shock on households purchasing power. 

Energy price inflation reached double  digits in both 2022 and 2023. The pass-through of energy 
commodity  price  increases  to  HICP  was  delayed  by  temporary  price  caps and  regulated  prices.  A 
price  cap  on  motor  fuel  was  in  force  between  November  2021  and  December  2022.  Regulated 
residential  energy  prices  also  remained  unchanged  until  July  2022.  In  August  2022,  a  two-tier 
price  system  was  introduced  for  gas  and  electricity,  with  a  higher  price  level  for  additional 
consumption  beyond  a  certain  threshold.  As  a  result  of  these  policy  measures,  energy  inflation 
peaked  later  in  Hungary  than  in  the  euro  area.  Even  after  the  introduction  of  the  two-tier  price 
system, the price level of residential gas and electricity remained among the lowest in the EU, and 
the losses of utility companies were reimbursed from the budget, partly from temporary windfall 
profit  taxes  levied  on  certain  sectors.  At  the  same  time,  non-household  consumers  experienced 
some of the highest energy price increases in the EU in 2022-23, fuelling producer price inflation. 
Energy  inflation  fell  from  18.2%  in  2023  to  3.5%  in  May  2024,  driven  by  base  effects  and 
methodological  effects  that  reduced  the  measured  price  level  of  residential  energy  even  though 
regulated gas, electricity and heat energy prices have not changed since August 2022. 

67 

Table 4.1:weights  Hungary - Components of inflation(percentage change)1)in total   201820192020202120222023May-242023HICP2.93.43.45.215.317.08.41000Non-energy industrial goods0.41.11.23.211.310.85.6242Energy4.80.5-3.212.418.718.23.5133Unprocessed food 6.47.012.92.124.118.96.151Processed food4.15.75.96.621.722.07.8238Services2.44.03.83.810.216.312.7336HICP excl. energy, food, alcohol and tobacco1.62.92.83.510.714.09.7578HICP at constant tax rates 3.43.23.34.715.316.27.81000Administered prices HICP0.31.00.30.911.811.33.21441) 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.024681012141618202224Jan-18Jan-19Jan-20Jan-21Jan-22Jan-23Jan-24HungaryReference valueGraph 4.1: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 Hungary in December 2024. The reference values for 2018, 2020 and 2022 refer to the reference values calculated in the previous convergence reports.Source: Eurostat, Interim Spring 2024 Economic Forecast.-20246810121416182022242628201820192020202120222023HungaryEuro areaGraph 4.2: Hungary -HICP inflation(y-o-y percentage change)Source: Eurostat. 
 
 
 
 
  
 
 
  
      
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Chapter 4 - Hungary 

Food price inflation was high in 2022-23, reflecting the severe droughts of 2022, production cost 
increases, and indirect tax hikes. The price index of agricultural inputs rose by a cumulative 48.1% 
in  2022-23,  which  was  the  largest  increase  in  the  EU,  driven  particularly  by  higher  energy  and 
fertiliser prices. Tax measures increasing food prices included a windfall profit tax on retail firms, 
higher  excise  duties  on  alcohol  and  tobacco,  and  a  higher  public  health  product  tax  since  July 
2022, as well as higher packaging costs due to the Extended Producer Responsibility scheme since 
July 2023. Other government measures aimed to contain food inflation. A temporary price cap on 
some  basic  food  items  was  in  effect  between  1  February  2022  and  31  July  2023.  From August 
2023  until  30  June  2024,  retail  companies  are  required  to  keep  certain  products  on  sale  in  20 
predefined product categories. Food price inflation decreased in early 2024, mainly driven by lower 
agricultural commodity prices. 

HICP  inflation  excluding  energy  and  food  rose  sharply  to  17.4%  in  April  2023,  reflecting  rising 
production costs, and strong demand up to mid-2022. The inflation of non-energy industrial goods 
was  raised  by  the  higher  costs  of  labour  and  energy,  as  well  as  currency  depreciation.  Services 
inflation was boosted by strong demand, high wage growth and energy costs. In 2023 consumer 
demand  cooled  but  services  inflation  was  fuelled  further  by  the  automatic  indexation  of  certain 
products,  such  as  telecommunication  and  financial  services,  and  sector-specific  tax  hikes,  for 
example in air travel and telecommunication. HICP inflation excluding energy and food decreased 
gradually  since  April  2023  to  5.9%  in  May  2024,  due  to  falling  consumer  demand  and a  partial 
reversal of the currency depreciation in 2022. 

4.2.3.  Underlying factors and sustainability of inflation 

Macroeconomic policy mix and growth developments 

Hungary’s economy grew by 4.6% in 2022, boosted by expansionary policy measures that raised 
households’  income  and  temporarily  shielded  them  from  the  impact  of  rising  energy  prices  and 
interest  rates.  From  the  second  half  of  2022,  some  of  these  policies  were  reversed,  notably 
residential  energy  prices  were  raised  in  August  2022  and  the  motor  fuel  price  cap  was  lifted  in 
December  2022.  The  resulting  spike  in  inflation  held  back  consumption,  while  low  capacity 
utilisation,  rising  interest  rates  and  fiscal  consolidation  efforts  set  back  investment.  Exports  also 
faced headwinds from weak demand from trade partners. Consequently, the economy contracted 

68 

Table 4.2:Hungary - Other inflation and cost indicators(annual percentage change)20182019202020212022202320241)20251)HICP inflationHungary2.93.43.45.215.317.04.13.7Euro area1.81.20.32.68.45.42.52.1Private consumption deflatorHungary3.34.63.46.315.215.34.13.7Euro area1.51.10.62.36.86.02.42.0Nominal compensation per employeeHungary6.47.03.18.217.014.011.77.7Euro area2.12.2-0.44.24.55.14.23.1Labour productivityHungary3.03.7-3.35.83.0-1.12.32.8Euro area0.10.2-4.74.41.1-1.00.10.9Nominal unit labour costsHungary3.33.16.62.313.715.29.24.8Euro area2.01.94.6-0.23.36.24.12.2Imports of goods deflatorHungary4.01.22.711.831.8-6.53.82.0Euro area2.6-0.6-3.89.721.6-4.90.41.81) Commission's Spring 2024 Economic Forecast.Source: Eurostat, Commission's Spring 2024 Economic Forecast.  
Convergence Report 2024 - Technical annex 
Chapter 4 - Hungary 

by 0.9% in 2023. According  to the Commission’s Spring  2024 Economic Forecast,  GDP growth is 
projected to recover gradually in 2024-2025, as inflation and interest rates decrease.   

Hungary’s fiscal stance was expansionary in 2022 at -1.2 of GDP, driven largely by the measures 
in response to high energy prices (29) (30). In 2023, the fiscal stance was strongly contractionary, at 
4.7% of GDP, partly reflecting the phasing out of earlier, temporary stimulus measures. According 
to  the  Commission’s  Spring  2024  Economic  Forecast,  which  is  based  on  a  no  policy  change 
assumption, the fiscal stance is projected to be contractionary at 1.0% of GDP in 2024, reflecting 
primarily  the  contractionary  contributions  of  net  nationally  financed  primary  current  expenditure 
(1.0% of GDP), which is partly offset by the expansionary contribution of the expenditure financed 
by  RRF  grants  and  EU  funds  (-0.9%  of  GDP).  The  no  policy  change  forecast  for  2025  shows  an 
expansionary stance at -0.4% of GDP. 

Monetary  policy,  conducted  within  an  inflation  targeting  framework (31),  was  tightened  further  in 
2022 as inflation was rising fast. The MNB increased its base rate by 1060 basis points from 2.4% 
to  13%  throughout  2022.  The  gap  between  the  base  rate  and  interest  rate  on  the  one-week 
deposit was closed in June 2022 (32). The tightening was supported further by measures reducing 
excess liquidity in the banking system. This included increases in the mandatory reserve ratio and 
launching  central  bank  discount  bill  auctions  and  a  longer-term  deposit  instrument.  As  a  result, 
there  was  a  reallocation  of  excess  liquidity  from  the  one-week  deposit  facility  to  the  new 
instruments.  Amid  financial  market  turbulence  and  currency  depreciation  in  October  2022,  the 
central bank increased the overnight collateralised lending rate from 15.5% to 25% while leaving 
the base rate unchanged. It also introduced a one-day foreign exchange (FX) swap instrument and 
overnight quick deposit tenders on a daily basis. The interest rate on the overnight deposit tender 
was set at 18%, and it effectively became the key policy rate. The measures represented a further 
monetary tightening on the interbank market and the swap market.  

As  financial  markets  stabilised  in  2023,  the  MNB  started  reducing  the  overnight  lending  rate 
reducing  the  gap  vis-à-vis  the  base  rate  to  100  basis  points  by  September  2023.  Inflation  also 
started falling quickly in 2023, which allowed the central bank to start cutting the base rate from 
October 2023. The MNB also started reducing the interest rate on the overnight deposit tender and 
closed the gap between this and the base rate by September 2023. Since 1 October 2023 the base 
rate is also applicable to credit institutions' excess reserves held at MNB (33). This change made the 
base  rate  a  much  more  potent  tool, allowing  the  phase-out  of  the  overnight  deposit  tenders.  By 
May 2024, the base rate was reduced by 575 basis points to 7.25% from the peak of 13%. 

The  central  bank  continued  to  hold  FX  swap  tenders  regularly  throughout  2022-2023  to  provide 
euro liquidity and manage potential tensions in the foreign exchange swap market. These auctions 
aimed  to  ensure  the  effectiveness  of  the  central  bank's  monetary  policy  and  contributed  to 
maintaining price stability. The MNB started using one-day maturity swaps within quarters in July 
in  addition  to  the  existing  end-of-quarter  measures.  These  actions,  along  with  other  liquidity 
management tools, successfully maintained swap market stability. 

Wages and labour costs 

Employment continued to grow in 2022-2023, and the employment rate in the 20-64 age group 
rose to a historically high 80.7% in 2023, while the unemployment rate remained at around 4%. 

(29)  The  fiscal  stance  is  measured  as  the  change  in  general  government  primary  expenditure,  net  of  the  incremental 
budgetary  impact  of  discretionary  revenue  measures,  excluding  one-off  and  cyclical  unemployment  expenditure,  but 
including expenditure financed by non-repayable support (grants) from the Recovery and Resilience Facility and other 
EU funds, relative to medium-term (10-year) average potential GDP growth rate, expressed as a ratio to nominal GDP. 
(30)  The income tax refund for families (equal to 1.2% of GDP) was recorded in 2021 in accrual terms, but was paid out in 

early 2022, thus underestimating the extent of fiscal expansion in 2022. 

(31)  The Hungarian central bank set a target inflation of 3% with a symmetric tolerance band of ±1 percentage point. 
(32)  The main policy instrument used by MNB is the interest rate on the mandatory reserves deposited at the central bank 
by credit institutions. But since this instrument is small in volume, monetary conditions were rather influenced by the 
one-week deposit rate until the closure of the gap in interest rates. 

(33)  These  are  reserves  in  excess  of  the  mandatory  reserves,  which  is  different  from  the  one-week  deposit  mentioned 

earlier. 

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Chapter 4 - Hungary 

Employment  continued  to  increase  even  as  output  was  contracting  in  2023,  as  companies 
preferred  to  hoard  labour  in  a  tight  labour  market.  Nonetheless,  the  number  of  vacancies 
decreased  from  previous  high  levels.  The  projected  economic  recovery  is  set  to  restore  labour 
demand and keep unemployment low.  

Labour cost growth picked up compared to earlier 
years,  reflecting  the  tight  labour  market,  high 
inflation,  and  sizeable  minimum  wage  hikes.  In 
2022-23, the minimum wage rose by 59.3%, well 
above  the  31.9%  increase  in  the  consumer  price 
level. Wage growth  is projected to remain strong 
in  2024  against  a  backdrop  of  the  continuing 
tightness of the labour market, also bolstered by 
the recent 15% minimum wage hike in December 
2023.  Once  the  impact  of  this  measure  fades, 
lower  inflation  could  result  in  slower  nominal 
wage growth.  

Labour productivity growth, measured in terms of 
GDP  per  worker,  slowed  down  in  2022,  then 
in  2023  as  real  GDP  contracted. 
declined 
Productivity  growth  is  set  to  pick  up  in  2024-25 
as  the  economy  recovers  from  the  recession,  but  to  remain  subdued,  also  reflecting  structural 
barriers  such  as weak  product  market  competition,  skills shortages and  low  digitalisation.  Strong 
wage growth and weaker productivity dynamics led to a  spike in unit labour cost, which grew  by 
13.7%  in  2022  and  by  15.2%  in  2023.  As  wage  growth  is  projected  to  slow  down  while 
productivity is set to recover, ULC growth could ease in 2024-25. 

External factors 

Due to the high degree of openness of the Hungarian economy, developments in import prices play 
an important role in domestic price formation. Import prices contributed significantly to inflation in 
2022-23, both due to the pass-through of currency depreciation, and the rise of global commodity 
prices.  The  forint’s  nominal  effective  exchange  rate  (measured  against  a  group  of  36  trading 
partners) depreciated by 7.7% in 2022, followed by an appreciation of 3.6% in 2023. The nominal 
exchange rate reached its weakest level at the end of 2022, in the period when many companies 
were  preparing  business  plans  for  2023.  Therefore,  the  depreciation  in  2022  could  have  had  an 
oversized effect on inflation in 2023 (34).  

Administered prices and taxes 

The share of administered prices in the Hungarian HICP basket (14.4% in 2023) is close to the euro 
area average. Administered prices increased by 11.8% in 2022 and 11.3% in 2023, reflecting the 
introduction  of  the  two-tier  energy  price  scheme  for  households,  and  the  impact  of  high  overall 
inflation, for example through the automatic indexation of road tolls. However, the prices of certain 
major items, such as district heating or water supply, did not change despite rising  supply  costs, 
and the utility companies providing these services required increasing subsidies from the budget to 
cover losses. Administered prices contributed to headline inflation by 1.7 and 1.6 percentage points 
in 2022 and 2023 respectively. 

Changes in indirect taxation increased headline inflation by 0.8 percentage points in 2023, mainly 
due  to  rising  excise  duties  on  alcohol  and  tobacco.  Further  indirect  tax  measures  (notably  the 
sector-specific taxes on retail, telecommunication and airlines) could have had a significant impact 

(34)  Recent  research  by  the  Hungarian  central  bank also  points  to the  strengthening of  exchange  rate  pass-through,  see: 
Balatoni A. – Soós G. (2023): Változó világ, változó hatások  – Az árfolyam makrogazdasági hatásai. Magyar Nemzeti 
Bank. 

70 

-404812162020182019202020212022202320242025Productivity (real GDP per person employed)Nominal compensation per employeeNominal unit labour costsHICP inflationGraph 4.3: Hungary -Inflation, productivity and wage trends(y-o-y % change)Source: Eurostat, Commission's Spring 2024 Economic Forecast. 
  
         
Convergence Report 2024 - Technical annex 
Chapter 4 - Hungary 

on  inflation  in  both  2022  and  2023,  however  these  are  not  captured  by  the  difference  between 
headline inflation and HICP at constant tax rates. 

The  excise  duty  on  motor  fuel  fell  below  the  EU  minimum  rate  (which  is  set  in  euros)  due  to 
currency depreciation. In response, the duty was increased in January 2024. 

Medium-term prospects 

According to the Commission’s Spring 2024 Economic Forecast, inflation is forecast to decrease in 
2024  to  4.1%  and  2025  to  3.7%,  once  the  pass-through  of  commodity  price  increases  to 
consumer  prices  is  completed.  However,  high  labour  cost  growth  and  the  expected  recovery  of 
consumption are set to slow down disinflation in the coming quarters. 

There  are  upside  risks  to  the  inflation  outlook.  The  current  level  of  administered  utility  prices 
continues  to  create  losses  in  the  largely  state-owned  utility  sector.  If  wholesale  energy  prices 
increase  again,  the  pressure  to  raise  consumer  prices  could  also  increase  significantly.  The 
potential continuation of the expansionary economic policies, tight labour market and high inflation 
expectations are further sources of inflationary risk. 

The price level of household  final consumption in Hungary stood at about  64% of the euro area 
average in 2022, with the relative price gap significantly larger for services than for goods. Price 
convergence  appears  to  have  stalled  since  2019  among  industrial  goods  and  services  but 
continued  for  food.  The  low  aggregate  price  level  suggests  that  there  is  potential  for  price  level 
convergence in the long term, as GDP per capita in PPS (73% of the euro area average in 2023) 
increases towards the euro area average. 

Medium-term  inflation  prospects  will  depend  strongly  on  policies,  and  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. 

4.3.  PUBLIC FINANCES 

4.3.1.  Recent fiscal developments 

The general government deficit remained high over the 2022-2023 period, increasing from 6.2% 
in 2022 to 6.7% in 2023.  

Revenues as a share of GDP were below the pre-pandemic levels at 42.7% in 2022 and 42.4% in 
2023.  While  personal  income  tax  revenue  grew  robustly  on  the  back  of  rapidly  growing  nominal 
wages, the growth in social security contributions was hampered  by the tax cuts implemented in 
2022. The VAT revenue and excise duties fell as a share of GDP in 2023, in the context of weak 
consumption.  The  introduction  of  windfall  profit  and  sectoral  taxes  over  2022-2024,  levied  on 
companies in the energy, financial and retail sectors, has temporarily mitigated a steeper decline in 
the tax-to-GDP ratio.  

The  expenditure-to-GDP  ratio  remained  significantly  above  the  pre-pandemic  levels  at  48.9%  in 
2022 and 49.1% in 2023, due to elevated discretionary spending, and the impact of high inflation 
and high energy prices. The elevated expenditure levels in 2022 and 2023 were driven in particular 
by  a  significant  increase  in  interest  burden  in  the  context  of  high  inflation  and  high  nominal 
interest  rates  (from  2.8%  of  GDP  in  2022  to  4.7%  in  2023),  and  the  introduction  of  measures 
adopted to mitigate the economic and social impact of the increase in energy prices, in particular 
the subsidies to utility companies for the losses incurred due to caps on residential energy prices 
and support  schemes  for  energy-intensive  companies.  The  fiscal  impact  of  measures  adopted  to 
mitigate the economic and social impact of the increase in energy prices, net of the revenue from 
taxes on windfall profits of energy suppliers, was estimated at 1.0% of GDP in 2022 and 1.6% in 
2023.  The  Commission  assessed  that  these  measures  were  not  targeted  at  the  most  vulnerable 
households  or  firms,  and  most  of  them  did  not  fully  preserve  the  price  signal  to  reduce  energy 
demand and increase energy efficiency. 

71 

Convergence Report 2024 - Technical annex 
Chapter 4 - Hungary 

The  2023  budgetary  outturn  was  well  above  the  3.9%  GDP  deficit  target  set  in  the  2023 
Convergence  Programme  essentially  due  to  weaker-than  expected  growth,  persistently  high 
expenditure and the stronger-than-expected impact of high interest rates on public finances. The 
real GDP growth of -0.9% was well below 1.5% expected in the Convergence Programme. Overall, 
the large budget slippage in 2023 was driven mostly by: (i) the underperformance of tax revenue, 
in  particular  VAT,  (ii)  persistently  high  expenditure,  including  higher  spending  on  interest 
expenditure  due  to  high  nominal  interest  rates  and  high  coupon  payments  on  inflation-indexed 
retail bonds, (iii) and higher-than-expected pension expenditure due to inflation indexation. 

The  Commission  report  under  Article  126(3)  concludes  that,  after  considering  the  opinion  of  the 
Economic  and  Financial  Committee,  the  Commission  intends  to  propose  to  open  an  excessive 
deficit procedure for Hungary, by proposing to the Council to adopt a Decision under Article 126(6) 
establishing  the  existence  of  an  excessive  deficit.  On  19  June  2024,  the  Commission  adopted  a 
report under Article 126(3) of the TFEU. The report assessed the budgetary situation of Hungary, 
as its government deficit in 2023 exceeded the Treaty reference value of 3% of GDP. The report 
concluded that the general government deficit in 2023 exceeded and was not close to the Treaty 
reference value of 3% of GDP. The excess over the Treaty reference value was not considered to 
be exceptional and was not expected to be temporary. 

The  government  debt-to-GDP  ratio  ebbed  to  74.1%  in  2022  and  to  73.5%  at  the  end  of  2023, 
mainly due to favourable nominal GDP dynamics. However, the strong debt-decreasing impact of 
high inflation was offset by the large budget deficit and borrowing by a state-owned development 
bank to finance subsidised lending schemes. 

4.3.2.  Medium-term prospects 

The 2024 budget was adopted by the Hungarian Parliament on 7 July 2023. It targeted a headline 
deficit  of  2.9%  of  GDP  and  included  emergency  reserves  of  0.3%  of  GDP  to  cover  potential 
slippages based on risk scenarios.  

As in 2023, the budget included the Utility Bill Protection Fund (with the allocation of 1.7% of GDP 
down  from  3.3%  in  2023),  primarily  aimed  at  providing  subsidies  to  utility  companies  for  the 
losses  incurred  due  to  caps  on  residential  energy  prices  and  compensating  central  budgetary 

72 

Table 4.3:Hungary - Budgetary developments and projections (as % of GDP unless indicated otherwise)Outturn and forecast 1)20182019202020212022202320241)20251)General government balance-2.1-2.0-7.6-7.2-6.2-6.7-5.4-4.5- Total revenue44.044.043.841.242.742.442.942.4- Total expenditure46.146.151.448.448.949.148.346.9   of which: - Interest expenditure2.32.22.32.32.84.74.94.1p.m.: Tax burden36.936.436.033.935.235.135.735.0Primary balance0.30.2-5.2-4.9-3.4-2.0-0.5-0.4Fiscal stance 2)-1.24.71.0-0.4Recommended growth in net nationally financed primary expenditure (%)4.4-Growth in net nationally financed primary expenditure (%)3.6-Government gross debt69.165.379.376.774.173.574.373.8p.m: Real GDP growth (%)5.44.9-4.57.14.6-0.92.43.51) Commission’s Spring 2024 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 2024 - Technical annex 
Chapter 4 - Hungary 

organisations  for  rising  energy  costs.  The  cost  of  energy  measures  was  partly  financed  with 
proceeds from the windfall profit and sectoral taxes, which were extended to fiscal year of 2024. 
The  2024  budget  law  also  included  an  increase  in  the  allocation  for  the  National  Defence  Fund 
with the objective to increase expenditure on defence to above 2 per cent of GDP in order to meet 
military obligations under international treaties.  

On 30 April 2024, Hungary submitted its 2024 Convergence Programme. In light of the significant 
slippage of the 2023 budget deficit compared to official plans, the 2024 deficit target was revised 
up to 4.5%. The Programme projects the headline deficit to decline further to 3.7% in 2025.  

Based on the Commission’s Spring 2024 Economic Forecast, the deficit is projected to decrease to 
5.4% of GDP in 2024 and 4.5% in 2025, above the official target set out in the 2024 Convergence 
Programme, based on a no-policy change assumption and reflecting, robust growth in tax revenue, 
lower projected  subsidies to  utility  companies and a  decrease  in  public  investments.  The  general 
government debt is projected to remain at 73.8% of GDP in 2025, driven by high headline deficit 
that almost fully offsets the positive impact of high nominal GDP growth.  

in 

2024 

primarily 
of 

reflects 
contributions 

Based  on  the  Commission’s  estimates,  the  fiscal 
stance  is  projected  to  be  contractionary  at  1.0%  
of GDP in 2024, following a  contractionary fiscal 
stance  of  4.7%  of  GDP  in  2023 (35).  The  fiscal 
the 
stance 
contractionary 
nationally-
financed 
investments  0.6%  of  GDP  and 
nationally-financed  primary  current  expenditure 
1.0%  of  GDP,  which  are  partly  offset  by  the 
expansionary contribution of expenditure financed 
by  RRF  grants  and  EU  funds  (-0.9%  of  GDP). 
Under  the  no  policy-change  forecast,  the  fiscal 
stance  is  projected  to  be  expansionary  at  -0.4% 
of  GDP 
in  2025,  driven  primarily  by  the 
expansionary contribution of the expenditure financed by RRF grants and EU funds -0.5% of GDP.  

On  14  July  2023,  the  Council  recommended  that  Hungary  ensures  a  prudent  fiscal  policy,  in 
particular by limiting the nominal increase in nationally financed net primary expenditure in 2024 
to not more than 4.4%. According to the Commission’s 2024 Spring Economic Forecast, Hungary’s 
net  nationally  financed  primary  expenditure  is  projected  to  increase  by  3.6%  in  2024,  which  is 
below the recommended maximum growth rate. However, current estimates of net expenditure in 
2023 are higher than expected at the time of the recommendation (by 1.8% of GDP). Therefore, as 
the  recommendation  for  2024  was  formulated  as  a  growth  rate,  the  assessment  of  compliance 
also needs to take into account the base effect from 2023. If net expenditure in 2023 had been 
the  same  as  expected  at  the  time  of  the  recommendation,  the  resulting  growth  rate  of  net 
expenditure in 2024 would be above the recommended growth rate by 1.5% of GDP. 

Moreover,  the  Council  recommended  that  Hungary  takes  action  to  wind  down  the  emergency 
energy support measures in force, using the related savings to reduce the government deficit, as 
soon  as  possible  in  2023  and  2024.  The  Council  further  specified  that,  should  renewed  energy 
price increases necessitate new or continued support measures, Hungary should ensure that these 
are targeted toward vulnerable households and firms, fiscally affordable, and preserve incentives 
for  energy  savings.  According  to  the  Commission’s  2024  Spring  Economic  Forecast,  the  net 
budgetary cost of energy  support  measures is projected  at 1.6% of GDP in  2023, 0.9% in 2024, 
and 0.4% in 2025. The energy support measures are not projected to be wound down as soon as 
possible in 2023 and 2024. If the related savings were used to reduce the government deficit, as 
recommended by the Council, these projections would imply a fiscal adjustment of 0.6% of GDP in 

(35)  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. 

73 

-3-2-101234562022202320242025Expenditure financed by RRF grants and EU funds (e)Other capital expenditure (d)Nationally financed investment (c)Net nationally financed  primary current expenditure (b)Fiscal stance (f=a+e) 2023 2024Net nationally financed  primary expenditure (a=b+c+d)ExpansionaryContractionarySource: Commission's Spring 2024 Economic Forecast.Graph 4.4: Hungary -Fiscal stance and its components(percent of GDP) 
  
Convergence Report 2024 - Technical annex 
Chapter 4 - Hungary 

2024, whereas net nationally financed primary expenditure provides a contractionary contribution 
to the fiscal stance of 0.9% of GDP in that year. Therefore, the related savings from the winding 
down of energy measures are not projected to be fully used to reduce the government deficit. 

In  addition,  the  Council  also  recommended  that  Hungary  preserve  nationally  financed  public 
investment  and  ensure  the  effective  absorption  of  Recovery  and  Resilience  Facility  grants  and 
other  EU  funds,  in  particular  to  foster  the  green  and  digital  transitions.  According  to  the 
Commission’s  2024  Spring  Economic  Forecast,  nationally  financed  public  investment  is projected 
to decrease to 4.0% of GDP in 2024 (from 4.6% of GDP in 2023) and, therefore, it is not expected 
to  be  preserved.  This  is  due  to  the  cuts  and  postponements  in  nationally  financed  investment 
projects  implemented  by  the  government  in  response  to  rising  fiscal  pressures  related  to  high 
inflation and energy prices. The decrease in investment is not in line with what was recommended 
by  the  Council.  Further  details  can  be  found  in  the  Commission’s  recommendation  for  a  Council 
recommendation on the 2024 Convergence Programme for Hungary. 

Debt  sustainability  risks  appear  medium  over  the  medium  run.  Government  debt  is  projected  to 
slightly  increase  from  around  74%  in  2024  to  around  78%  of  GDP  in  2034.  This  projection 
assumes that the structural primary balance improves from a deficit of 1.3% of GDP in 2023 to a 
neutral position in 2024 and remains at that level (excluding changes in the cost of ageing)  over 
the projection period (36). 

The sensitivity to possible macro-fiscal shocks also contributes to this assessment. In particular, in 
case of permanently lower structural primary balance (if the improvement in the structural primary 
balance forecast for 2024 was halved), the projected debt ratio in 2034 would be only around 7 
percentage points of GDP higher than in the baseline. 

Some factors mitigate risks, including the high share of domestically held government debt. Risk-
increasing factors  include the significant shares of short-term  government debt and government 
debt held in foreign currency. Some contingent liability risks stemming from the banking sector, as 
well as Hungary’s negative net international investment position, pose additional fiscal risks. 

Hungary’s fiscal framework has gradually become more compliant with EU legal requirements, but 
it  has  not  fostered  transparency  and  a  prudent  fiscal  stance.  The  country’s  medium-term 
budgetary framework could be more binding on the national budgets, as every May and December 
new  figures  can  be  presented  for  all  years  covered  under  the  medium-term  plans  and  plans  in 
annual budgets can deviate from those in the medium-term plans. Additionally, the impact of the 
Fiscal Council of Hungary on the country’s fiscal policy could be further developed. This could for 
example  be  done  by  involving  the  fiscal  institution  in  the  evaluation  of  the  macroeconomic 
forecast  and  assessing  the  consistency  of  the  national  fiscal  framework.  The  remit  of  the  Fiscal 
Council of Hungary will be affected by the amended Budgetary Framework Directive (2011/85/EU), 
part of the soon-to-be adopted Economic Governance Review. The amended Directive extends the 
independence safeguards for independent fiscal institutions to all EU Member States and assigns 
some tasks to these institutions. 

4.4.  EXCHANGE RATE STABILITY 

The  Hungarian  forint  does  not  participate  in  ERM  II.  The  MNB  operates its  monetary  policy  in  an 
inflation targeting regime with the inflation target set at 3 percent with a tolerance band of +/-1 
percentage point. Since 26 February 2008, the exchange rate band was abolished and a floating 
exchange  rate  regime  was  adopted  that,  however,  allows  foreign  exchange  interventions  by  the 
MNB.  

In 2022, the HUF/EUR exchange rate was on a steep depreciation path that started at the end of 
February following Russia’s full-scale invasion of Ukraine. Starting from a level of around 355, the 
forint  fell  to  a  low  of  430  HUF/EUR  in  October  2022.  The  depreciation  of  the  forint  reflected 

(36)  For details on the methodology, see European Commission (2024), Debt Sustainability Monitor 2023, Institutional Paper 

271, March 2024. 

74 

 
Convergence Report 2024 - Technical annex 
Chapter 4 - Hungary 

general uncertainty related to the war, a deteriorating current account balance due to high energy 
prices, inflation rising much faster in Hungary than in the euro area and concerns about the future 
EU fund receipts for Hungary. Following the monetary policy measures of October 2022, the forint 
started  appreciating,  a  reversal  which  was  later  supported  further  by  favourable  developments 
regarding Hungary’s receipt of EU funds. Inflation also started falling rapidly further contributing to 
the improvement of the risk assessment of the HUF/EUR exchange rate. The HUF/EUR appreciated 
to around 370 by May 2023. Since mid-2023 the forint was on depreciating path again while the 
central bank continued its monetary policy easing. In May, it traded against the euro on average at 
about 387 HUF/EUR. 

International reserves of the central bank that had already reached EUR 38.4 billion end-2021 rose 
to 38.7 billion by the end of 2022. Reserves increased more sharply in 2023 and reached EUR 41.4 
billion by end 2023, which was around 21% of GDP. Reserves were increased by the issuance of 
foreign currency denominated government bonds and by inflows of EU funds, while debt servicing, 
foreign  exchange  expenditures  of  the  Treasury,  the  change  in  the  central  bank’s  forint  liquidity 
providing  FX  swap  holdings,  and  valuation  effects  of  central  bank  assets  mitigated  the  increase. 
International reserves increased to EUR 47.7 billion in May 2024.  

Short-term interest rate differentials measured by the 3-month interbank interest rate spread vis-
à-vis the  euro  area  increased  sharply  and  peaked  at  1400  basis  points at  the  end of  2022.  The 
increase  reflected  monetary  tightening  in  view  of  rapidly  rising  inflation.  Throughout  2023,  the 
interest rate differential fell substantially reaching a level of around 570 basis points by end 2023, 
as inflation fell and monetary easing started in Hungary while the ECB was tightening its monetary 
policy. The spread stood at around 343 basis points in May 2024. 

4.5.  LONG-TERM INTEREST RATES 

The  long-term  interest  rate  in  Hungary  used  for  the  convergence  assessment  reflects  the 
secondary 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  above  the  reference  value  at  the  time  of  the  2022  convergence 
assessment of Hungary. It increased from the 4.4% of May 2022 to reach 8.5% in June 2023 and 
then  started  to  decrease.  In  May  2024,  the  latest  month  for  which  data  are  available,  the 
reference  value,  given  by  the  average  of  long-term  interest  rates  in  the  Netherlands,  Italy,  and 
Latvia, plus 2 percentage points, stood at 5.5%. In that month, the 12-month moving average of 
the  yield  on  the  Hungarian  benchmark  bond  stood  at  6.8%,  i.e.  1.3  percentage  points  above  the 
reference value. 

75 

300320340360380400420440201820192020202120222023Graph 4.5: Hungary -HUF/EUR exchange rate(monthly averages)Source: ECB.0100200300400500600700800900100011001200130014001500201820192020202120222023Graph 4.6: Hungary -3-M Bubor spread to 3-M Euribor(basis points, monthly values)Source: National Bank of Hungary, Eurostat and Thomson Reuters. 
 
 
     
      
Convergence Report 2024 - Technical annex 
Chapter 4 - Hungary 

The long-term interest in Hungary rose steeply in 2022 reflecting rapidly rising inflation, monetary 
policy  tightening  and  heightened  risk  aversion  due  to  Russia’s  full-scale  invasion  of  Ukraine.  It 
peaked at  10.2% in October  2022 but then started declining on the  back of falling inflation and 
monetary easing. In May 2024, the long-term interest rate of Hungary was 6.8%.  

The long-term interest rate spread vis-à-vis the German benchmark bond widened substantially in 
2022 and peaked at around 800 basis points in October, reflecting markedly higher inflation and 
central  bank  policy  rates in Hungary as  well  as  higher sovereign  risk  in  a  context  of  emerging 
macroeconomic  imbalances,  as evidenced by  a widening  of  credit  default  swaps  spreads.  As 
inflation  started  falling  steeply,  the  Hungarian  central  bank  started  easing  at  the  end  of  2022, 
while German short-term rates edged upwards and then declined in 2023. The long-term interest 
rate spread narrowed to around 427 basis point by May 2024. 

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  May  2023,  the  Commission  published  its  In-Depth  Review  for  Hungary,  which  considered  that 
Hungary  was  experiencing  imbalances  with  vulnerabilities  that  relate  to  its  large  external  and 
government  financing  needs,  against  a  background  of  high  inflation.  In  November  2023,  the 
Commission  published  its  13th  Alert  Mechanism  Report  (AMR  2024)  under  the  Macroeconomic 
Imbalance  Procedure  (MIP  -  see  also  Box  1.7),  which  concluded  that  an  In-Depth  Review  was 
warranted for Hungary. In April 2024, the Commission published an In-Depth Review for Hungary. 
Taking into account the assessment in the In-Depth Review, the Commission, in its Communication 
‘European  Semester  –  2024  Spring  Package’ (37),  considers  that  Hungary  is  experiencing 
macroeconomic  imbalances.  The  2024  In-Depth  Review  found  that  external  factors  mitigated 
some vulnerabilities of the Hungarian economy.  Lower energy prices and the economic recession 
contributed  to  the  improvement  of  the  current  account  balance  and the  decrease  of  inflation.  At 
the  same  time,  the  recession  also  contributed  to  a  persistently  high  budget  deficit.  Policy 
inconsistencies  had  also  contributed  to  the  build-up  of  vulnerabilities,  but  progress  has  been 
limited in this regard, keeping Hungary vulnerable to potential external and domestic shocks.  

Hungary’s recovery  and  resilience  plan  (RRP)  includes measures  to  address a  series of  structural 
challenges,  in  synergy  with  other  EU  funds,  including  cohesion  policy  funds,  to  boost  its 

(37)  COM(2024) 600 final, 19.06.2024. 

76 

0246810Jan-18Jan-19Jan-20Jan-21Jan-22Jan-23Jan-24HungaryReference valueGraph 4.7: Hungary -Long-term interest rate criterion(percent, 12-month moving average)Source: European Commission.-2024681012201820192020202120222023HungaryGermanyGraph 4.8: Hungary -Long-term interest rates(percent, monthly values)Source: Eurostat. 
 
 
     
       
Convergence Report 2024 - Technical annex 
Chapter 4 - Hungary 

competitiveness  and  stimulate  sustainable  growth  and  reduce  the  country’s  territorial  and  social 
disparities. The RRF funding provides Hungary with EUR 10.4 billion over the 2021-2026 period.  

While  some  reforms (e.g.,  reducing  barriers  to  the  development  of  renewable  energy,  conducting 
regular  spending  reviews,  combatting  aggressive  tax  planning)  and  investments,  (e.g.,  energy 
efficiency,  renewable  energy)  have  already  started,  the  implementation  of  the  Hungarian  RRP 
faces  significant  delays.  Hungary  has  not  submitted  any  payment  requests  so  far.  Structural 
challenges  linked  to  implementing  the  necessary  measures  to  ensure  the  protection  of  the  EU’s 
financial interests call for swift action to ensure that reforms and investments can be completed 
on time.   

In  addition,  cohesion  policy  provides  Hungary  with  EUR 21.7  billion for  the  2021-2027  period. 
Cohesion policy financing aims to further support Hungary’s competitiveness, including innovation 
and  the  uptake  of  advanced  technologies,  green  transition,  and  upward  social  convergence, 
including  by  addressing  poverty  and  developingeducation  systems  and  skills.  While  Hungary  has 
made  progress  in  implementing  cohesion  policy,  challenges  remain  and  significant  social  and 
regional disparities persist. 

4.6.1.  Developments in the balance of payments 

Hungary’s external balance (i.e. the combined current and capital account) deteriorated from -1.6% 
of GDP in 2021 to -6.4% in 2022, when a multi-year trend deterioration, driven by strong domestic 
demand,  was  compounded  by  the  worsening  of  the  terms  of  trade.  Rising  energy  import  prices 
widened  the  energy  trade  deficit  to  10%  of  GDP  in  2022.  The  income  balance  also  deteriorated 
that  year  due  to  the  rising  financing  cost  of  external  debt.  Lower  energy  prices  and  the  fall  in 
import demand due to the economic recession led to a sharp improvement in the current account 
balance,  from  -8.4%  of  GDP  in  2022  to  0.3%  in  2023.  The  surplus  of  the  capital  account 
decreased somewhat in 2023 due to a slower absorption of EU funds, which overall resulted in the 
external balance reaching a surplus of 1.2% in 2023. 

77 

Table 4.4:Hungary - Balance of payments(percentage of GDP)201820192020202120222023Current account0.2-0.8-1.1-4.1-8.40.3of which: Balance of trade in goods-1.7-2.5-1.0-2.9-9.10.1               Balance of trade in services5.94.82.93.14.75.0               Primary income balance -3.7-2.5-2.5-3.2-2.9-3.5               Secondary income balance-0.4-0.6-0.5-1.1-1.0-1.3Capital account2.31.92.12.52.00.9External balance 1)2.51.11.0-1.6-6.41.2Financial account0.80.3-1.6-4.5-9.3-1.1of which: Direct investment-2.2-0.1-1.9-2.5-2.9-1.7               Portfolio investment-0.11.0-1.90.4-2.7-4.7               Other investment 2)0.5-0.8-2.2-4.7-4.53.9               Change in reserves2.70.24.52.40.71.3Financial account without reserves-1.90.1-6.1-6.9-10.0-2.4Errors and omissions-1.7-0.7-2.6-2.9-3.0-2.3Gross capital formation26.828.427.230.634.025.3Gross saving26.827.426.326.625.725.6Net international investment position-50.7-49.6-52.5-53.6-52.1-46.61) The combined current and capital account.2) Including financial derivatives.Sources: Eurostat, European Commission calculations, the Magyar Nemzeti Bank. 
 
  
 
 
Convergence Report 2024 - Technical annex 
Chapter 4 - Hungary 

The financial account showed a deficit of 9.3% in 2022, mainly reflecting a rise in debt-generating 
capital inflows. The share of non-residents in government financing increased in 2022, while high 
central  bank  policy  rates  attracted  deposits  by  non-residents.  These  trends  abated  in  2023, 
narrowing the financial account balance to -1.1% of GDP.  

cost 

competitiveness 

indicators 
Price  and 
improved  in  2022  but  worsened  in  2023.  The 
growth of ULC and consumer prices was higher in 
Hungary  than  in  its  trade  partners  in  both  years. 
depreciated 
The 
significantly  in  2022  but  appreciated  again  in 
2023.  Hungary’s  export  market  share  (measured 
at current prices) decreased in 2022-23. 

exchange 

nominal 

rate 

According  to  the  Commission’s  Spring  2024 
Economic  Forecast,  which  is  based  on  national 
accounts data, the external balance is expected to 
deteriorate  again  in  2024  and  2025.  This  is 
mainly  driven  by  the  recovery  of  domestic 
demand  following  the  2023  recession.  Large  FDI 
projects in manufacturing are set to improve the trade balance in the medium term but also lead 
to  higher  income  outflows,  mitigating  the  overall  impact  on  the  current  account  balance.  The 
current account deficit is projected to widen to 1.4% of GDP by 2025. 

As  the  budget  deficit  remained  persistently  high  in  2022-2023,  the  external  borrowing  of  the 
government  sector  also  rose,  leading  to  debt-generating  portfolio  investment  inflows,  and  rising 
gross external debt. Meanwhile, direct investments continued to register net inflows in 2022-2023. 
The net international investment position posted slight improvements in both years. 

4.6.2.  Market integration 

Hungary’s economy is highly integrated with the euro area through trade and investment linkages. 
The economy is strongly embedded into continental and global value chains. Trade openness (see 
Table 4.5 for a definition) increased in considerably in 2022 to 104.3%, but fell to 89.2% in 2023. 
Flows with the euro area dominate trade, accounting for more half of the total trade in goods and 
services  in  2023.  Hungary’s  main  euro  area  goods  trading  partners  in  2023  were  Germany, 
Slovakia,  Austria,  and  Italy.  Outside  the  euro  area,  the  main  trading  partners  were  China  and 
Poland. 

78 

Table 4.5:Hungary - Market integration201820192020202120222023Trade openness 1) (%)92.590.887.691.1104.389.2Trade with EA in goods & services 2)+3) (%)53.652.750.752.258.950.8IMD World Competitiveness Ranking 4)474747423946Internal Market Transposition Deficit 5) (%)0.90.51.00.71.50.2Real house price index 6)135.0150.9153.2167.9176.6163.0 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-20 / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics). 3) Trade in services with EA-20 (average credit and debit in % of GDP at current prices) (Balance of Payments). 4) International Institute for Management Development (IMD). 5) Percentage of internal market directives not yet communicated as having been transposed, relative to the total. 6) Deflated house price index (2015=100) (Eurostat). Sources: Eurostat, World Bank, International Institute for Management Development, European Commission calculations.758595105201820192020202120222023Graph 4.9: Hungary -Effective exchange ratesNEERREER, HICP-deflatedREER, ULC-deflated(vs 36 trading partners; monthly averages;index numbers, 2018 = 100)Source: European Commission.  
 
 
  
 
 
  
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The stock of FDI in Hungary amounted to about 60.1% of GDP in 2022 (excluding special purpose 
entities,  ‘SPEs’ (38)),  with  FDI  mainly  originating  from  Germany,  the  Netherlands  and  Austria. 
Manufacturing and services account for 47% and 42% of inward FDI, respectively, suggesting that 
FDI plays an important role in enhancing Hungary’s export capacity and contributes significantly to 
economic integration with the euro area. 

of 

features 

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.  According  to  the  2024  Country 
Report,  the  unpredictable  business  environment 
increases  the  cost  of  doing  business.  In  recent 
years,  there  has  been  increased  government 
intervention in the form of sector-specific taxes, tailor-made legislation and government decisions 
targeting  business  transactions.  Moreover,  specific  companies  and  industries  benefit  from 
generous state subsidies and supportive regulation. These interventions have reduced competition 
and hindered the growth of more efficient companies. Concerns remain about the anti-corruption 
framework  and  the  quality  of  lawmaking,  which  have  an  additional  bearing  on  the  business 
environment.  

(38)  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. 

79 

Table 4.6:Hungary - Allocation of assets by financial sub-sectorRatio to GDP (%)HUEAEA 5 smallest201820222018202220182022Financial corporations (total)229392689715174190Central bank243953684652Monetary financial institutions911072662908793Other financial intermediaries912221811631618Non-MMF investment funds1)131710111345Insurance co. and Pension Funds11887812122Share of total (%)HUEAEA 5 smallest201820222018202220182022Central bank11108102727Monetary financial institutions402739405049Other financial intermediaries40572623910Non-MMF investment funds64151623Insurance co. and Pension Funds52131112111) MMF stands for money market funds.Source: Eurostat.-0.60.00.61.2Voice andaccountabilityPolitical stability andabsence ofviolence/terrorismGovernmenteffectivenessRegulatory qualityRule of lawControl of corruptionHungaryEuro area average five lowestEuro area averageGraph 4.10: Hungary -World Bank's 2022 Worldwide Governance IndicatorsNote: Estimate of governance ranges from -2.5 (weak) to 2.5 (strong). Source: World Bank. 
 
  
 
 
 
  
Convergence Report 2024 - Technical annex 
Chapter 4 - Hungary 

According  to  the  World  Bank’s  2022  Worldwide  Governance  Indicators,  Hungary  performs  lower 
than the average five lowest euro area Member States in relation to indicators that measure voice 
and accountability, regulatory quality and control of corruption (39) (40). It also performs lower than 
the euro area average in terms of government effectiveness and the rule of law. According to the 
latest  data,  Hungary’s  transposition  deficit  of  EU  Directives increased  to  1.5%,  exceeding  the  EU 
average (0.7%) and the target (0.5%) proposed by the European Commission in the Single Market 
Act (2011). 

Transposition  of  the  4th  and  the  5th  Anti-Money  Laundering  Directive  by  Hungary  is  now 
considered  complete.  Concerning  conformity,  the  Commission  after  its  assessment  came  to  the 
conclusion  that  parts of  the  5th  Anti–Money  Laundering  Directive    had  not  been  transposed  in  a 

(39)  According  to the  World  Bank’s  methodology,  ‘voice  and  accountability’ captures  perceptions  of  the  extent  to  which  a 
country's citizens are able to participate in selecting their government, as well as freedom of expression, freedom of 
association, and a free media. See https://www.worldbank.org/content/dam/sites/govindicators/doc/va.pdf.  

(40)  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  point  lower  (higher)  than  that  of this 
group of five euro area Member States. 

80 

Table 4.7:Hungary - Financing of the economy1)Ratio to GDP (%)HUEAEA 5 smallest201820222018202220182022Liabilities (total)442603706696316304Loans123188228219109103Non-financial co. debt securities14121232Financial co. debt securities611665834Government debt securities675678714742Listed shares181360631210Unlisted shares49451761845453Other equity14124453545658Trade credits and advances364234353132Share of total (%)HUEAEA 5 smallest201820222018202220182022Loans283132323433Non-financial co. debt securities012211Financial co. debt securities129811Government debt securities15911101514Listed shares429933Unlisted shares11725261919Other equity3241781718Trade credits and advances875510111) 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 2024 - Technical annex 
Chapter 4 - Hungary 

conform manner. A Letter of Formal Notice was addressed to Hungary in that regard in September 
2023 and the infringement procedure is still pending. 

The Hungarian labour market has remained resilient to the recent weakness in economic activity, 
with  the  employment  and  participation  rates  rising  steadily  and  remaining  above  the  euro  area 
average  in  2022-2023.  Nonetheless,  challenges  remain  related  to  skills  shortages  and  the  low 
activation rate of certain groups, such as the low-skilled, Roma and persons with disabilities. Wage 
growth has been high, driven by labour shortages and sizeable minimum wage hikes. Overall, the 
minimum  wage  has  grown  faster  than  consumer  prices  in  2022-2023.  The  financial  sector  in 
Hungary  is  smaller  and  less  developed  than  in  the  euro  area.  Assets  managed  by  the  financial 
sector  amounted  to  392%  of  GDP  in  2022  and  to  182%  of  GDP  when  excluding  SPEs,  which 
perform no financial intermediation in the domestic economy. This is much less than  in the euro 
area  (715%  of  GDP)  and  comparable  to  the  euro  area  Member  States  with  the  least  developed 
financial sectors. At the same time, the financial sector has expanded faster than in the euro area 
since 2018, even when excluding SPEs. Due to the presence of SPEs, the structure of the financial 
sector is different from that of the euro area, where the banking sector is the largest sub-sector in 
the financial sector. In Hungary, the share of the banking sector in the total assets managed by the 
financial sector decreased from 40% in 2018 (close to the euro area average of 39% of GDP) to 
27% in 2022, while the share of other financial intermediaries, which include SPEs, increased from 
40% to 57% (41). However, when excluding SPEs, the banking sector represents a large and stable 
share  of  the  financial  sector,  with  61%  of  total  assets  in  2018  (and  59%  in  2022).  With  this 
correction, the financial system can  be assessed as more bank-based than in the euro area. The 
weight of the central bank is also higher than in the euro area when excluding SPEs (21% of total 
assets  in  2022).  Insurance  companies  and  pension  funds  are  clearly  underdeveloped  compared 
with the euro area and with its five Member States with the smallest financial sectors (2% of the 
total assets of the financial sector).  

As  to  the  financing  of  the  economy,  outstanding 
liabilities  stood  at  603%  of  GDP  in  2022    (vs. 
696% of GDP in the euro area). The  structure of 
the financial sector is reflected in the financing of 
the economy: with 41% of total liabilities in 2022 
(vs. 8% in the euro area), other equity is the main 
source of funding due to the presence of foreign 
holdings  and  SPEs (42).  Loans  are  the  second 
dominant  source  of  funding  (31%  of  total 
liabilities,  close  to  the  euro  area  average). 
However, the importance of loans is also inflated 
by  SPEs.  Debt  and  equity  markets  are  smaller 
than in the euro area and market financing (debt 
securities  and 
relatively 
listed  shares) 
underdeveloped.  Listed  equity  and  private-sector 
debt markets represented 2% and 3% of total liabilities respectively. This compares to 9% of total 
liabilities for listed stocks and 10% for private-sector debt in the euro area. Hungary is still broadly 
comparable  to  the  five  euro  area  Member  States  with  the  smallest  financial  needs.  The 
government bond market is relatively smaller than in the euro area, reflecting a lower debt-to-GDP 
ratio. 

is 

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 fell from 47% in 2018 to 40% in 2022, with the 
corresponding figure for the euro area being at around 18%. Bank concentration, as measured by 

(41)  As indicated above, this likely reflects the large presence of foreign holdings in Hungary for tax optimization purposes. 
(42)  The most important impact of SPEs on liabilities concern other equity (SPEs responsible for 63% of all other equity) and 

loans (SPEs responsible for 31% of all loans). 

81 

0102030405060HU, 2018HU, 2022EA, 2018EA, 2022Concentration in the banking sector (CR5 ratio)Share of foreign institutions as % of total assetsGraph 4.11: Hungary-Foreign ownership and concentration in the banking sector(in percent, weighted averages)Source: ECB, Structural financial indicators.         
 
  
Convergence Report 2024 - Technical annex 
Chapter 4 - Hungary 

the market share of the five largest credit institutions in total assets, increased from 50% in 2018 
to 56% in 2022, a somewhat higher value than the euro area average (51% in 2022).  

82 

 
 
 
 
 
5.  POLAND 

5.1.  LEGAL COMPATIBILITY 

5.1.1.  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 2022, 
item  2025.  The  NBP  Act  has  been  slightly  amended  since  the  Commission’s  2022  Convergence 
Report (43). In absence of any legislative action regarding the issues mentioned in the Commission’s 
2022  Convergence  Report,  the  comments  provided  in  the  latter  report  remain  relevant  and  are 
repeated in the 2024 assessment. 

5.1.2.  Central bank independence 

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 TFEU and Article 7 of the ESCB/ECB Statute or 
its  content  constitutes  a  clear  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 TFEU and Article 7 of the ESCB/ECB Statute 
applies.  Alternatively,  or  in  addition,  the  NBP  Act  could  also  be  amended  to  ensure  compatibility 
with the principle of central bank independence. 

The Commission recalls the 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 (44). The primacy of EU law is essential as regards the compatibility between the 
national  legislation,  including  the  statute  of  its  national  central  bank,  and  Articles  130  and  131 
TFEU  and  ESCB/ECB  Statute.  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  Commission  considers  that  the  Constitutional  Tribunal  of  Poland  no  longer 
meets the requirements of an independent and impartial tribunal previously established by law (45). 
It should therefore be ensured that the primacy of Union law, in particular of Articles 130 and 131 
TFEU  and  the  ESCB/ECB  Statute,  over  national  law  is  respected  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 and financial 
policy of the NBP and thus constitutes an incompatibility in the area of independence with Article 
130 TFEU and Article 7 of the ESCB/ECB Statute. Article 23(1)(2) of the NBP Act should be revised 
in order to ensure that the monetary policy guidelines are provided to the Council of Ministers and 

(43)  The  amendments  stem  from  the  Act  of  11  March  2022  on  Homeland  Defence  (Journal  of  Laws  2022,  item.  2305) 

amending the Act on Narodowy Bank Polski. 

(44)  Polish  Constitutional  Tribunal,  Judgment  No.  P  7/20  of  14  July  2021;  Polish  Constitutional  Tribunal,  Judgment  No. K 

3/21 of 7 October 2021. 

(45)  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. On 15 July 2022, the Commission decided to send a reasoned 
opinion  to  Poland,  to  which  Poland  replied  on  14  September  2022,  rejecting  the  reasoning  of  the  Commission.  The 
Polish  reply  did  not address  the Commission's concerns, therefore on  15  February 2023, the  Commission  decided to 
refer Poland to the Court of Justice of the European Union. 

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the Minister of Finance, if ever, only after their approval by the NBP and for information purposes 
only. 

Article 9(3) of the NBP Act provides that the Governor of the NBP shall assume his/her duties after 
taking an oath before the Parliament. This oath refers to the compliance with the provisions of the 
Polish Constitution and other laws, 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 of the ECB. Moreover, the oath does not contain 
any reference to the requirement of central bank independence as enshrined in Article 130 TFEU. 
The oath as it stands now is an imperfection and should be adapted to be 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.  In  addition,  under  Article  25(3)  in 
conjunction with Article 3 and Article 1(1)(3) of the State Tribunal Act (46), the Governor of the NBP 
may also be removed from office if he or she violates the Constitution or a law.  

To provide for legal certainty and ensure correctness, these provisions would need to be clarified in 
the  sense  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, and do not extend those grounds in any 
way. 

The  State  Tribunal  Act (47)  provides  for  the  suspension  of  the  Governor  from  his/her  duties 
following  a  procedure  that  contains  some  imperfections  as  regards  the  Union  law  principle  of 
central  bank  independence  and  Article  14.2  of  the  ESCB/ECB  Statute.  Pursuant  to  the  second 
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 provided for, the Governor concerned is always 
entitled to bring an action for annulment against such a temporary measure before the Court of 
Justice  of  the  European  Union  (CJEU)  pursuant  to  Article  14.2  of  the  ESCB/ECB  Statute.  In  that 
context,  the  Governor  may  also  request  the  CJEU  to  adopt  interim  measures  pursuant  to  Article 
279  TFEU.  The  purpose  of  such  an  action  pursuant  to  Article  14.2  of  the  ESCB/ECB Statute  is to 
enable the CJEU to review the legality of such a temporary prohibition of performing a Governor’s 
duties, which is only possible if there are sufficient indications that he/she has engaged in serious 
misconduct capable of justifying such a measure (48). Such a guarantee is a reflection of the Union 
law principle of central bank independence and is of significant importance, especially in case of a 
suspension  from  office  on  grounds  of  serious  misconduct  further  to  an  indictment  by  a 
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  Union  law  principle  of 
central bank independence, the NBP Act would need to recall that the Governor of the NBP has the 
possibility  to  seek  legal  redress  against  his/her  dismissal,  or  suspension  before  the  CJEU,  as 
enshrined in Article 14.2 of the ESCB/ECB Statute. 

According  to  Article  203(1)  of  Poland’s  Constitution,  the  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 

(46)  Ustawa o Trybunale Stanu of 26 March 1982. Consolidated version published in Dziennik Ustaw of 2024, item 95. 
(47)  State Tribunal Act, Dziennik Ustaw of 2019, item 2122. 
(48)  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. 

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Chapter 5 - Poland 

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  TFEU  and  Article  7  of  the 
ESCB/ECB Statute. Furthermore, the provision's relationship with 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 TFEU and Article 7 of the ESCB/ECB Statute. 

5.1.3.  Prohibition of monetary financing and privileged access 

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 of bank rehabilitation 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  refinancing  loans  to  banks  experiencing  rehabilitation 
proceedings which, however, could end in insolvency of the banks concerned. Effective preventive 
measures  and  more  explicit  safeguards  should  be  provided  in  the  NBP  Act  to  ensure  the 
compatibility of those provisions with Article 123 TFEU. 

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 forced restructuring (49) provides for NBP’s 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) 
TFEU. The Bank Guarantee Fund is closely dependent on public sector entities referred to in Article 
123(1) TFEU, as the majority of the members of the Bank Guarantee Fund’s Council are appointed 
by the Minister competent for financial institutions and 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  the  prohibition  of 
monetary financing. The relevant legal framework should be amended accordingly. 

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 rationale of Article 123 TFEU, this provision is not 
compatible  with  Article  123  TFEU.  At  the  occasion  of  a  future  amendment  to  the  Polish 
Constitution,  Article  220(2)  should  be  amended  to  ensure  compatibility  with  the  aforementioned 
principle. 

5.1.4.  Integration into 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, in line 
with  Article  127(1)  TFEU.  This  constitutes  an  incompatibility  with  respect  to  Article  127(1)  TFEU 
and Article 2 of the ESCB/ECB Statute. 

Tasks 

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

(49)  Ustawa o Bankowym Funduszu Gwarancyjnym, systemie gwarantowania depozytów oraz przymusowej restrukturyzacji 

of 10 June 2016. Consolidated version published in Dziennik Ustaw of 2024, item 487. 

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Convergence Report 2024 - Technical annex 
Chapter 5 - Poland 

• 

limitation of the NBP'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 (Articles 227(1) and (6) of the Constitution, 

Articles 3(2)(5), 12, 23, 38-50a, and 53 of the NBP Act); 

•  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  by  independent  external  auditors  recommended  by  the 
Governing  Council  and  approved  by  the  Council.  It  is  incompatible  with  Article  27.1  of  the 
ESCB/ECB Statute. 

There are also some imperfections regarding the following issues: 

•  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); 

•  non-recognition of the role of the ECB in the field of international cooperation (Article 5(1) and 

11(3) of the NBP Act). 

5.1.5.  Assessment of compatibility 

As  regards  the  independence  of  the  central  bank,  the  prohibition  of  monetary  financing  and  the 
central bank’s 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 is not fully compatible with 
the requirements of Article 131 TFEU, for the reasons set out above. The Polish authorities should 
remedy the abovementioned incompatibilities and imperfections. 

5.2.  PRICE STABILITY 

5.2.1.  Respect of the reference value 

86 

-20246810121416Jan-18Jan-19Jan-20Jan-21Jan-22Jan-23Jan-24PolandReference valueGraph 5.1: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 Poland in December 2024. The reference values for 2018, 2020 and 2022 refer to the reference values calculated in the previous convergence reports.Source: Eurostat, Commission's Spring 2024 Economic Forecast.-202468101214161820201820192020202120222023PolandEuro areaGraph 5.2:Poland -HICP inflation(y-o-y percentage change)Source: Eurostat. 
 
 
  
  
Convergence Report 2024 - Technical annex 
Chapter 5 - Poland 

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  2022.  It 
continued  to  increase  almost  uninterruptedly  to  reach  13.2%  by  end  2022  and  peaked  in  May 
2023 at 15.1%. This point marked the beginning of a disinflationary phase in the economy, with 
the rate dropping to 10.9% by end-2023. In May 2024, the reference value was 4.1%, calculated 
as the average of the 12-month average inflation rates in the Netherlands, Italy and Latvia plus 
1.5  percentage  points.  The  corresponding  inflation  rate  in  Poland  was  6.1%,  i.e.  2.0  percentage 
points  above  the  reference  value.  The  12-month  average  inflation  rate  is  projected  to  remain 
above the reference value in the coming months. 

5.2.2.  Recent inflation developments 

Poland recorded a significant and broad-based increase in annual HICP inflation in 2022 followed 
by  rapid  disinflation  in  the  second  half  of  2023.  Overall,  headline  inflation  averaged  13.2%  in 
2022 and 10.9% in 2023. In 2022, inflation was driven by rising energy and food prices as well as 
accelerating HICP inflation excluding energy and food. Consumer energy and food prices increased 
in spite of sizeable government measures aimed at curbing energy price increases and a reduction 
of the VAT rate on some food products (both were introduced at the beginning of the year). Annual 
inflation peaked in February 2023 at 17.2% and gradually fell to 6.2% by the end of 2023 on the 
back of an easing of energy and food price pressures. In 2022 and 2023, annual HICP inflation in 
Poland was persistently higher than in the euro area. 

HICP inflation excluding energy and food increased to 9.8% in 2022 and 9.3% in 2023. The upward 
trend  of  HICP  inflation  excluding  energy  and  food  in  2022  was  broadly  spread  across  all  HICP 
categories,  reflecting  the  secondary  effect  of  increasing  commodity  prices  and  persistent  supply 
chain  bottlenecks  on  production  costs.  Labour  shortages  and  a  large  increase  in  the  minimum 
wage of about 20% in 2023 also played a role, in particular for service inflation. Relatively strong 
demand allowed businesses to pass higher production costs to consumers. HICP inflation excluding 
energy and food peaked in the first quarter of 2023 and slowed gradually in the second half of the 
year in a context of declining producer prices, deceleration of economic activity, fall in consumption 
and demand pressures, as well as more restrictive monetary policy. 

5.2.3.  Underlying factors and sustainability of inflation 

Macroeconomic policy mix and growth developments 

While  the  economy  remained  resilient  in  2022  and  posted  a  real  GDP  growth  of  5.5%,  growth 
slowed  to  0.2%  in  2023.  The  main  growth  drivers  in  2022  were  domestic  demand,  in  particular 
private  consumption,  inventories  and  investment,  alongside  a  positive  contribution  from  net 
exports. Despite weakening sentiment and high inflation, private consumption was propped up by 
significant policy support, low unemployment, a drawdown of savings, and the inflow of displaced 
persons  from  Ukraine.  In  2023,  domestic  demand  including  inventories  decreased  significantly 
while  activity  was  held  up  by  resilient  net  exports  as  non-EU  exports  continued  to  increase  and 
imports  fell  reflecting  weak  domestic  demand.  Buoyant  investments  in  2023  benefitted  from 

87 

Table 5.1:weights  Poland - Components of inflation(percentage change)1)in total   201820192020202120222023May-242023HICP1.22.13.75.213.210.96.11000Non-energy industrial goods-0.30.40.92.47.77.94.4298Energy3.70.0-1.012.229.510.71.1134Unprocessed food 3.05.46.92.815.413.23.148Processed food1.83.73.92.711.915.09.4218Services0.83.57.87.312.310.78.2302HICP excl. energy, food, alcohol and tobacco0.21.94.34.89.89.36.3600HICP at constant tax rates 1.22.13.55.116.19.65.11000Administered prices HICP0.81.26.75.910.712.76.91451) Measured by the arithmetic average of the latest 12-monthly indices relative to the arithmetic average of the 12-monthly indices in the pevious period. Source: Eurostat, European Commission calculations. 
 
  
 
 
Convergence Report 2024 - Technical annex 
Chapter 5 - Poland 

continued  high  profitability  of  companies  and  the  culmination  of  EU  funding  from  the  2014-20 
programming period. Growth is set to pick up in 2024 and 2025. 

The fiscal stance was strongly expansionary in 2022 at –3.2% of GDP, driven by fiscal measures 
adopted  to  compensate  for  high  energy  prices  and  the  cost  of  aid  to  refugees (50).  The  energy 
support  measures  and  aid  to  refugees  continued  in  2023.  Indexation  of  pensions,  public  salary 
increases and growing expenditure on defence also contributed to higher public spending. In result, 
the fiscal stance remained expansionary at –0.8% of GDP in 2023. According to the Commission’s 
Spring 2024 Economic Forecast, the fiscal stance is expected to remain expansionary at -2.4% of 
GDP  in  2024,  due  to  growth  in  nationally-financed  primary  current  expenditure,  including  the 
impact  of  new  social  benefits  (pensions,  family  allowances),  public  salary  increases  (teachers, 
public  administration)  and  defence  expenditures  (continued  costs  related  to  investment  in 
increasing the potential of the army). In 2025, the fiscal stance is set to become contractionary at 
0.7% of GDP. 

Wages and labour costs 

Nominal  labour  costs  rose  rapidly  in  2022  and  2023  in  the  context  of  high  inflation  and a  tight 
labour  market  but  their  growth  is  set  to  ease  in  2024  and  2025.  Nominal  compensations  per 
employee, as well as nominal unit labour costs growth surpassed the euro area average in 2022 
and 2023. Labour productivity increased by 1.7% in 2022, which was above the euro area average 
(1.1%), and remained on the same level in 2023, while euro area productivity declined by 1%. At 
close to 3%, the unemployment rate remained historically low in both years, and was one of the 
lowest in the EU. Companies continued to report labour shortages, albeit the vacancy rate started 
to ease in the second half of 2023, suggesting some softening of labour demand. In 2024, wages 
of most public administration employees are set to increase by 20% and of teachers by 30%. 

(50)  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. 

88 

Table 5.2:Poland - Other inflation and cost indicators(annual percentage change)20182019202020212022202320241)20251)HICP inflationPoland 1.22.13.75.213.210.94.34.2Euro area1.81.20.32.68.45.42.52.1Private consumption deflatorPoland 1.52.23.55.414.010.84.54.2Euro area1.51.10.62.36.86.02.42.0Nominal compensation per employeePoland 7.68.65.34.79.113.410.17.1Euro area2.12.2-0.44.24.55.14.23.1Labour productivityPoland 5.44.5-2.04.31.70.02.83.3Euro area0.10.2-4.74.41.1-1.00.10.9Nominal unit labour costsPoland 2.13.97.50.47.313.37.03.6Euro area2.01.94.6-0.23.36.24.12.2Imports of goods deflatorPoland 2.91.7-0.412.324.3-6.7-1.52.0Euro area2.6-0.6-3.89.721.6-4.90.41.81) Commission's Spring 2024 Economic Forecast.Source: Eurostat, Commission's Spring 2024 Economic Forecast. 
 
   
 
 
 
Convergence Report 2024 - Technical annex 
Chapter 5 - Poland 

Minimum  wage  increased  by  close  to  20%  in 
2023  and  is  set  to  rise  by  about  20%  also  in 
2024. Looking ahead, labour productivity is set to 
grow  faster  than  the  euro  area  average  in  2024 
and  2025  as  economic  growth  accelerates, 
according  to  the  Commission’s  Spring  2024 
Economic Forecast. 

External factors 

in  2023.  Prices  of 

Buoyant  import  prices  have  played  a  critical  role 
in the acceleration of inflation in 2022 but slowed 
visibly 
imported  goods 
increased  rapidly  by  24.3%  in  2022  reflecting 
energy  and  food  price  hikes  and  surpassing  the 
euro  area  average  of  21.6%.  In  2023,  the 
imported goods inflation turned negative (-6.7%), 
as global  energy  and  commodity  price  pressures  eased,  while  the  imported  good  inflation  in  the 
euro area was –4.9%. 

The  zloty’s  nominal  effective  exchange  rate  (measured  against  a  group  of  36  trading  partners) 
depreciated  on  average  by  2.3%  in  2022,  contributing  to  push  up  import  prices,  but  appreciated 
strongly by 4.8% in 2023, more than reversing its inflationary effect of the previous year. 

Administered prices and taxes 

Administered  prices  rose  more  slowly  than  headline  HICP  inflation  in  2022,  but  faster  in  2023. 
While headline inflation slowed in 2023, administered prices accelerated from 10.7% in 2022 to 
12.7% in 2023. At the same time the weight of administered priced in the HICP basket increased 
from 12.4% in 2022 to 14.5% in 2023 and was above the euro area average (13% in 2023). 

The key driver of the growth of administered  prices in  2022 and 2023 were energy prices (51) in 
the  context  of  the  Russia’s  full-scale  invasion  of  Ukraine  and  turbulence  in  global  energy 
commodity prices. Administered energy prices contributed by 7.6 percentage points to the increase 
in  overall  administered  prices  in  2022  and  by  9.8  percentage  points  in  2023.  The  Polish 
government adopted a number of measures in 2022 and 2023 that reduced the passthrough of 
global energy price increases to household prices in Poland. These included lower VAT and excise 
duties  on  electricity  and  heat  energy  in  2022,  electricity  and  gas  prices  freezing  in  2023,  and  a 
possibility to buy coal for a set price introduced in 2022 and valid also in 2023. 

The impact of tax changes on headline inflation was more pronounced in 2022 and 2023 than in 
previous years. In 2022, the changes in taxes and excise duties reduced inflation by 2.9 percentage 
points,  while  in  2023  the  expiration  of  the  2022  measures  increased  headline  HICP  by  1.3 
percentage points. In 2022, new temporary measures included a reduced VAT rate on some food 
products,  electricity, gas,  heating, fuels,  as  well  as  a  decrease  in  excise  duties on  electricity, gas 
and  some  fuels.  The  lower  VAT  and  excise  rates  introduced  in  2022  expired  in  December  2022, 
apart from the VAT on basic food products, which has been extended beyond 2023. 

Medium-term prospects 

Looking ahead, inflation is expected to decelerate in 2024 and 2025 but remain high in a historical 
perspective. The Commission’s Spring 2024 Economic Forecast projects that annual HICP inflation 
will average  4.3% in 2024 and 4.2% in 2025,  and reflects a  more  gradual unfreezing of energy 
prices in  2024-H2 and high  services price  pressures amid large  wage increases. Core inflation is 

(51)  In  2022,  administered  energy  prices  included  electricity,  gas,  and  heat  energy  tariffs  and  were  set  by  the  Energy 
Regulatory  Office  reflecting  energy  providers’  costs  and  market  prices.  In  2023,  administered  energy  prices  also 
included coal due to government steps to keep consumer prices of coal low. 

89 

-30369121520182019202020212022202320242025Productivity (real GDP per person employed)Nominal compensation per employeeNominal unit labour costsHICP inflationGraph 5.3: Poland -Inflation, productivity and wage trends(y-o-y % change)Source: Eurostat, Commission's Spring 2024 Economic Forecast. 
   
     
Convergence Report 2024 - Technical annex 
Chapter 5 - Poland 

set  to  remain  elevated  with  a  visible  contribution  from  robust  services  prices  reflecting  strong 
wage growth and a sizeable minimum wage increase of about 20% in 2024. The inflation outlook 
remains uncertain due to downside risks from weaker than projected domestic demand and, on the 
upside, a tight labour market. 

The level of consumer prices in Poland was at around 57% of the euro area average in 2022. This 
suggests a potential for price level convergence in the long term, as GDP per capita in purchasing 
power  standards  (PPS),  representing  about  77%  of  the  euro  area  average  in  2023,  increases 
towards the euro area average. 

5.3.  PUBLIC FINANCES 

5.3.1.  Recent fiscal developments 

In 2022, the general government deficit amounted to 3.4% of GDP, up from 1.8% of GDP in 2021. 
Public finances were impacted by the cost of aid to  people fleeing Ukraine, which covered  social 
benefits,  accommodation  subsidies  as  well  as  expenditures  on  education  and  healthcare.  The 
government also took a series of measures to mitigate the impact of high energy prices, including 
lowering  VAT  rates  and  excise  duties,  cash  heating  subsidies  to  households  and  a  multi-annual 
support  scheme  for  energy-intensive  industries.  These  costs,  combined  with  the  decreased 
revenues resulting  from  the  personal  income  tax  reform (52),  put  pressure  on  public  finances.  On 
the other hand, the budgetary balance was supported by soaring revenues from corporate income 
taxes owing to the high profits of companies. The general government deficit further increased to 
5.1%  of  GDP  in  2023.  The  main  expenditure  measures  included:  increased  spending  on  defence, 
higher salaries in the public  sector and extraordinary  subsidies to farmers related to  turbulences 
on the local grain markets. Social benefits also increased, due to high indexation of pensions based 
on the high inflation in 2022. At the same time, lower than assumed nominal growth, which was 
driven  by  the  gradual  disinflation,  resulted  in  a  shortfall  of  revenues  from  indirect  taxes.  The 
estimated  net  cost  of  energy-related  support  measures  moderated  due  to  falling  commodity 
prices.  Besides,  the  electricity  and  gas  prices  freeze  schemes  were  partly  funded  by  levies  on 
windfall profits of energy producers. The total net cost of energy support was estimated at 1.9% 
of  GDP  in  2022  and 0.6%  of  GDP  in  2023.  Most  of  the  measures  were  not  targeted,  while  they 
tended to preserve price signals. 

The  Commission  report  under  Article  126(3)  concludes  that,  after  considering  the  opinion  of  the 
Economic  and  Financial  Committee,  the  Commission  intends  to  propose  to  open  an  excessive 
deficit procedure for Poland, by proposing to the Council to adopt a Decision under Article 126(6) 
establishing  the  existence  of  an  excessive  deficit.  On  19  June  2024,  the  Commission  adopted  a 
report under Article 126(3) of the TFEU. The report assessed the budgetary situation of Poland, as 
its  government  deficit  in  2023  exceeded  the  Treaty  reference  value  of  3%  of  GDP.  The  report 
concluded  that  the  general  government  deficit  in  2023  exceeded  and  was  not  close  the  Treaty 
reference value of 3% of GDP. The excess over the Treaty reference value was not considered to 
be exceptional and was not expected to be temporary.  

Despite a high general government deficit, the public debt ratio decreased in 2022 thanks to the 
debt-decreasing  snowball  effect  driven  by  high  nominal  growth, owing  both  to  inflation  and  real 
growth. The debt ratio declined by  4.4 percentage  points, down to 49.2% of GDP. In  2023, while 
the debt-decreasing contribution of inflation remained strong, the contribution of real GDP growth 
declined  significantly  in  line  with  the  economic  slowdown.  At  the  same  time,  both  the  primary 
deficit and interest expenditure increased, raising the debt ratio by 0.4 percentage point to 49.6% 
of GDP. 

(52)  The 2022 ‘Polish Deal’ and ‘Low Taxes‘ reforms overhauled personal income taxation in Poland, including raising of the 
tax-free amount to PLN 30 000, decreasing the lower personal income tax rate from 17% to 12% and increasing the 
threshold to PLN 120 000, from which the 32% upper tax rate applies. 

90 

 
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Chapter 5 - Poland 

5.3.2.  Medium-term prospects 

The  2024  budget  was  adopted  on  18  January  2024.  It  targets  a  general  government  deficit  of 
5.1% of GDP. According to the budget law, the key policies of the previous year will be continued, 
in  particular  regarding  social  benefits  (pensions,  family  allowances)  and  defence  (investments  in 
increasing  military  potential of  the  army).  By  a  revision  of  the  original  proposal  from  September 
2023,  the  new  coalition  government  added  to  the  2024  budget  new  measures  reflecting  its 
economic  programme.  These  include  a  30%  salary  increase  for  teachers,  a  20%  general  salary 
increase  in  the  public  administration  and  a  new  family  benefit  to  support  working  parents. 
Regarding energy support measures, the price freezing schemes for electricity and gas that were 
bound  to  be  phased  out  at  the  end  of  2023  were  extended  for  6  months,  however  without 
increasing net costs to the budget, as they were assumed to be fully financed by levies on energy 
producers. However, in April 2024 the government decided to extend the energy measures beyond 
June 2024, in form of price ceilings for electricity, gas and district heating, to ensure their gradual 
withdrawal. Total net cost of energy support is estimated at 0.5% of GDP in 2024. 

On  30  April  2024,  Poland  adopted  its  Multiannual  State  Financial  Plan  2024-2027,  no  more 
including  Convergence  Programme.  According  to  the  Plan,  the  headline  deficit  is  projected  to 
remain at 5.1% of GDP in 2024 and decline gradually to 4.4% in 2025, 3.8% in 2026 and 3.3% in 
2027.  The  public  debt  to  GDP  ratio  is  forecast  to  increase  to  53.4%  in  2024,  57.3%  in  2025, 
60.5% in 2026 and 61.3% in 2027. Poland is expected to submit its medium-term fiscal-structural 
plan,  including  additional  consolidation  measures,  under  the  EU’s  new  economic  governance 
framework by mid-October 2024. 

The  Commission’s  Spring  2024  Economic  Forecast,  which  is  based  on  a  no-policy  change 
assumption, projects a general government deficit of around 5.4% of GDP in 2024. The difference 
from the  planned  deficit  in  the  Multiannual  State  Financial  Plan  stems, in  particular,  from a  less 
optimistic  macroeconomic  scenario  with  lower  real  and  nominal  GDP  growth.  In  addition,  the 
Commission  forecast  includes  the  impact  of  the  extension  of  energy  support  measures  beyond 
their  earlier  planned  termination  in  June  2024,  which  is  not  reflected  in  the  macroeconomic 
scenario underpinning the Plan due to its earlier cut-off date. This leads to a lower inflation rate 

91 

Table 5.3:Poland - Budgetary developments and projections (as % of GDP unless indicated otherwise)Outturn and forecast 1)20182019202020212022202320241)20251)General government balance-0.2-0.7-6.9-1.8-3.4-5.1-5.4-4.6- Total revenue41.241.141.342.340.241.644.043.9- Total expenditure41.441.948.244.143.646.749.448.5   of which: - Interest expenditure1.41.41.31.11.52.12.22.4p.m.: Tax burden35.936.036.437.635.235.937.737.6Primary balance1.20.6-5.6-0.7-1.9-3.0-3.2-2.2Fiscal stance 2)-3.2-0.8-2.40.7Recommended growth in net nationally financed primary expenditure (%)7.8-Growth in net nationally financed primary expenditure (%)12.8-Government gross debt48.745.757.253.649.249.653.757.7p.m: Real GDP growth (%)5.94.5-2.06.95.60.22.83.41) Commission’s Spring 2024 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 2024 - Technical annex 
Chapter 5 - Poland 

and  higher  fiscal  costs  in  the  Commission  forecast.  The  Commission  projects  the  general 
government  debt at 57.7% of GDP in  2025 as the  projected deficits are higher and the nominal 
GDP lower than in the forecast of the Multiannual State Financial Plan. 

Based  on  the  Commission’s  estimates,  the  fiscal 
stance is projected to be strongly expansionary at 
-2.4% of GDP in 2024, following an expansionary 
fiscal  stance  of  –0.8%  of  GDP  in  2023.  The 
expansionary  fiscal  stance  in  2024  is  primarily 
driven  by net  nationally financed  primary current 
expenditure  (–1.8%  of  GDP)  and  expenditure 
financed by the RRF and the EU grants (–0.4% of 
GDP).  Nationally 
investment  also 
financed 
provides  an  expansionary  contribution  (-0.2%  of 
GDP)  while  other  capital  expenditure  provides  a 
neutral contribution (0.0% of GDP). 

On 14 July 2023, the Council recommended that 
Poland  ensures  a  prudent  fiscal  policy, 
in 
particular by limiting the nominal increase in nationally financed net primary expenditure in 2024 
to not  more than  7.8%. According to the Commission’s Spring 2024 Economic Forecast, Poland’s 
net  nationally  financed  primary  expenditure  is  projected  to  increase  by  12.8%  in  2024,  which  is 
above  the  recommended  maximum  growth  rate.  This  excess  spending  over  the  recommended 
maximum growth rate in net nationally financed primary expenditure corresponds to 2.0% of GDP 
in 2024. 

Moreover, the Council recommended that Poland takes action to wind down the emergency energy 
support measures in force, using the related savings to reduce the government deficit, as soon as 
possible  in  2023  and  2024.  The  Council  further  specified  that,  should  renewed  energy  price 
increases necessitate new or continued support measures, Poland should ensure that these were 
targeted at protecting vulnerable households and firms, fiscally affordable, and preserve incentives 
for energy savings. 

According to the Commission’s Spring 2024 Economic Forecast, the net budgetary cost of energy 
support  measures  is  projected  at  0.6%  of  GDP  in  2023,  0.5%  in  2024,  and  0.0%  in  2025.  The 
energy  support  measures  are  not  projected  to  be  wound  down  as  soon  as  possible  in  2023  and 
2024. If the related savings were used to reduce the government deficit, as recommended by the 
Council, these projections would imply a fiscal adjustment of 0.21% of GDP in 2024, whereas net 
nationally financed primary expenditure provides an expansionary contribution to the fiscal stance 
of  2.0%  of  GDP  in  that  year.  Therefore,  the  related  savings  from  the  winding  down  of  energy 
measures are not projected to be fully used to reduce the government deficit. 

In  addition,  the  Council  also  recommended  that  Poland  preserves  nationally  financed  public 
investment  and  ensures  the  effective  absorption  of  Recovery  and  Resilience  Facility  grants  and 
other  EU  funds,  in  particular  to  foster  the  green  and  digital  transitions.  According  to  the 
Commission’s  Spring  2024  Economic  Forecast,  nationally  financed  public  investment  is projected 
to  increase  to  4.0%  of  GDP  in  2024  compared  to  3.8%  of  GDP  in  2023  and,  therefore,  it  is 
expected  to  be  preserved.  In  turn,  the  total  public  expenditure  financed  from  revenues  from  EU 
funds, including Recovery and Resilience Facility grants, is expected to increase to 1.9% of GDP in 
2024 (from 1.5% of GDP in 2023). 

The  general  government  deficit  is  projected  to  decrease  gradually  to  4.6%  of  GDP  in  2025, 
reflecting no policy change in government expenditures and the increase of government revenues 
in  line  with  the  Commission’s  Spring  2024  Economic  Forecast.  In  turn,  the  general  government 
debt  is  projected  to  increase  gradually  to  57.7%  of  GDP  in  2025,  driven  by  the  high  budgetary 
deficits and substantial stock-flow adjustments related to the timing of payment and deliveries of 
military investments. General government investment is projected to increase gradually to 5.4% of 

92 

-4-3-2-10122022202320242025Expenditure financed by RRF grants and EU funds (e)Other capital expenditure (d)Nationally financed investment (c)Net nationally financed  primary current expenditure (b)Fiscal stance (f=a+e) 2023 2024Net nationally financed  primary expenditure (a=b+c+d)ExpansionaryContractionarySource: Commission's Spring 2024 Economic Forecast.Graph 5.4: Poland -Fiscal stance and its components(percent of GDP)   
Convergence Report 2024 - Technical annex 
Chapter 5 - Poland 

GDP in 2025, due to the high level of investments financed by the RRF and other EU funds as well 
as continued high level of national investments in defence. 

Debt  sustainability  risks  appear  high  over  the  medium  run.  Government  debt  is  projected  to 
increase  steadily  from  around  54%  in  2024  to  around  85%  of  GDP  in  2034.  This  projection 
assumes that the structural primary deficit slightly increases from 2.5% of GDP in 2023 to 2.6% 
of  GDP  in  2024  and  remains  at  that  level  (excluding  changes  in  the  cost  of  ageing)  over  the 
projection period (53). 

The sensitivity to possible macro-fiscal shocks also contributes to this assessment. In particular, if 
the interest-rate growth differential were 1 percentage point higher than in the baseline scenario, 
the projected debt ratio in 2034 would be more than 6 percentage points of GDP higher than in the 
baseline and breach the 90% of GDP threshold. 

Some  factors  increase  risks,  such  as  the  recent  increase  in  interest  rates,  potential  legal  costs 
associated with Swiss franc-denominated loans, the negative net international investment position 
and  some  exposure  to  non-performing  loans.  On  the  other  hand,  risk-mitigating  factors  include 
relatively  stable  financing  sources  (and  with  a  large  domestic  investor  base)  and  the  currency 
denomination of debt (about three-quarters of outstanding debt is denominated in local currency). 

The  fiscal  framework  in  Poland  has  been  revised  in  the  last  two  years,  including  via  measures 
included in the Recovery and Resilience Plan. The numerical fiscal rules remain 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. The latter was loosened in 2020 to allow for 
exclusions for pandemic-linked revenue loss; in addition, for 2020, the limit was lowered to 80% of 
the total revenue. The stabilising expenditure rule was broadened by including additional units and 
special  purpose  funds,  in  particular  the  National  Fund  for  Environmental  Protection  and  Water 
Management.  Unlike  until  2021,  any  newly  created  special  purpose  fund  is  now  automatically 
included  in  the  expenditure  rule.  Furthermore,  the  budget  acts  for  2023  and  2024  set  limits  on 
spending of a broader set of institutions including special purpose funds, thereby strengthening the 
parliamentary  and  public  scrutiny  during  the  budget  approval  process.  While  the  four-year 
Multiannual State Financial Plan serves as basis for the preparation of annual budgets, it does not 
provide  targets.  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. In late 2023, the new government announced plans to establish a fiscal 
council. The main features of the new institution are described in the Multiannual State Financial 
Plan. The fiscal council will initially play an advisory role to the Ministry of Finance and shall aim to 
fulfil  the  minimum  requirements  included  in  the  amended  Budgetary  Framework  Directive 
(2011/85/EU). The amended Directive extends the independence safeguards for independent fiscal 
institutions to all EU Member States and assigns some tasks to these institutions. In addition, the 
mandate  of  the  new  Polish  fiscal  council  is  expected  to  include  some  tasks  related  to  the 
implementation of the national stabilising expenditure rule. 

5.4.  EXCHANGE RATE STABILITY 

The Polish zloty does not participate in ERM II. Since April 2000, Poland has been operating a free-
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. 

Throughout 2022 the zloty continued to trade at its weakest levels against the euro in almost two 
decades in the  context of heightened risk aversion due to Russia’s full-scale invasion  of Ukraine. 
The exchange rate fluctuated between 4.60 and 4.80 PLN/EUR. This was followed by a period of 
appreciation during the first half of 2023, up to around 4.45 PLN/EUR between June and August. 
The appreciation phase was briefly interrupted mid-September when the currency weakened, likely 

(53)  For details on the methodology, see European Commission (2024), Debt Sustainability Monitor 2023, Institutional Paper 

271, March 2024. 

93 

 
Convergence Report 2024 - Technical annex 
Chapter 5 - Poland 

due to an unexpectedly large interest rate cut by NBP. The last quarter of 2023 was again marked 
by a gradual appreciation, with the exchange rate averaging 4.33 PLN/EUR in December, reflecting 
increased  investor  confidence,  expectations  of  EU  funds  inflow  and  changing  perceptions  on  the 
future directions of monetary policy. Since then, the currency has traded at around 4.30 PLN/EUR 
with  relatively  minor  fluctuations,  returning  to  its  pre-pandemic  levels.  In  May  2024,  zloty’s 
exchange rate against the euro averaged 4.28. 

International reserves held by the NBP increased from EUR 144 billion in early 2022 to around EUR 
192 billion in May 2024. The reserve-to-GDP ratio was at around 23.4% at end-2023. 

The short-term interest rate differential with the euro area peaked at over 700 basis points in June 
2022. The spread then gradually narrowed to 361 basis points by December 2022 as the three-
month euro rate experienced larger increases compared to the slightly upward trend of the Polish 
rate, with NBP’s final hike occurring in September 2022. In 2023, the euro area rate continued to 
rise,  while  the  Polish  3-month  rate  stabilised,  contributing  to  further  spread  decreases.  After  the 
NBP’s policy rate cuts in September and October 2023, the spread differential stabilized at around 
190 basis points – a level similar to that prevailing before the pandemic. In May 2024, the spread 
increased to 205 basis points, reflecting the cut in the key ECB interest rate. 

5.5.  LONG-TERM INTEREST RATES 

The  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. 

94 

4.04.55.0201820192020202120222023Graph 5.5:Poland -PLN/EUR exchange rate(monthly averages)Source: ECB.0100200300400500600700800201820192020202120222023Graph 5.6: Poland -3-M Wibor spread to 3-M Euribor(basis points, monthly values)Source: Polish National Bank, Eurostat and Thomson Reuters.02468Jan-18Jan-19Jan-20Jan-21Jan-22Jan-23Jan-24PolandReference valueGraph 5.7:Poland -Long-term interest rate criterion(percent, 12-month moving average)Source: European Commission.-20246810201820192020202120222023PolandGermanyGraph 5.8:Poland -Long-term interest rates(percent, monthly values)Source: Eurostat. 
 
 
 
  
  
  
  
Convergence Report 2024 - Technical annex 
Chapter 5 - Poland 

The  Polish  12-month  average  long-term  interest  rate  relevant  for  the  assessment  of  the  Treaty 
criterion was 0.4 percentage point above the reference value at the time of the last convergence 
assessment  in  April  2022.  It  gradually  increased  from  3.0% at  that  time  to  about  6.1% by  end-
2022, peaking at 6.5% in April 2023. Since then, it has been on a downward path, reaching 5.8% 
by  end-2023.  In  May  2024,  the  latest  month  for  which  data  are  available,  the  reference  value, 
given  by  the  average  of  long-term  interest  rates  in  the  Netherlands,  Italy  and  Latvia  plus  2 
percentage points, stood at 5.5%. In that month, the 12-month moving average of the yield on the 
Polish benchmark bond stood at 5.6%, i.e. 0.1 percentage point above the reference value. 

The long-term interest rate of Poland initially continued its upward trend in 2022, peaking at 7.8% 
in  October  –  the  highest  level  since  2002.  This  reflected  monetary  policy  rate  increases,  strong 
inflationary pressures and heightened risk aversion including due to Russia’s full-scale invasion of 
Ukraine. Over that period, the long-term interest rate spread vis-à-vis the German benchmark bond 
repeatedly reached record levels of over 560 basis points, albeit with strong fluctuations. October 
2022 marked a turning point, coinciding with the end of NBP’s hiking cycle, after which the long-
term interest rate entered a period of gradual decrease, reaching 5.7% in May 2024. As a result, 
the  spread  versus  the  German  benchmark  bond  narrowed  steadily  until  early  2024,  before 
stabilising at around 315 basis points. 

5.6.  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,  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 2023, the Commission published its 13th Alert Mechanism Report (AMR 2024) under 
the Macroeconomic Imbalance Procedure (MIP - see also Box 1.7), which assessed that overall risks 
in Poland remain limited  but highlighted developments related to unit labour costs. Nominal unit 
labour  costs  increased  in  2022  and  2023  in  excess  of  the  euro  area    average,  raising  cost 
competitiveness risks in the medium term. External sustainability concerns remain contained, and 
the current account balance improved to a surplus of 1.7% of GDP in 2023. A more robust growth 
of nominal house prices was broadly in line with fundamentals, as incomes rose sharply and house 
prices declined in real terms in both 2022 and 2023. The 2024 AMR concluded that no In-Depth 
Review was warranted. 

Poland’s  recovery  and  resilience  plan  (RRP)  includes  measures  to  address  a  series  of  structural 
challenges,  in  synergy  with  other  EU  funds,  including  cohesion  policy  funds,  to  boost  its 
competitiveness  and  stimulate  sustainable  growth  and  reduce  the  country’s  territorial  and  social 
disparities. The RRF funding provides Poland with EUR 59.8 billion over the 2021-2026 period.   

The  implementation  of  Poland’s  recovery  and  resilience  plan  is  underway,  however  timely 
completion requires increased efforts. Poland has submitted  one payment request, corresponding 
to 38 milestones and targets in the plan and resulting in a disbursement of EUR 6.3 billion on 15 
April 2024. The Commission  has so far  disbursed a total  of EUR 11.4 billion to Poland, of  which 
EUR  8.1  billion  in  loans,  including  EUR  5.1  billion  of  pre-financing  payments.  The  size  and 
complexity  of  the  plan,  and  challenges  linked  to  absorption  capacity,  call  for  accelerating 
investments  and  addressing  emerging  delays  while  strengthening  administrative  capacities  to 
ensure  that  reforms  and  investments  can  be  completed  on  time.  While  Poland  is  taking  some 
measures to address the lack of administrative capacity, challenges remain in particular in terms 
of finishing the largest investments within the lifetime of the RRF.  

In  addition,  cohesion  policy  provides  Poland  with  EUR 75.5  billion for  the  2021-2027  period. 
Cohesion policy financing aims particularly to further support Poland’s competitiveness by boosting 
R&D  investment  and  high-tech  exports,  digitalisation,  the  green  and  just  transition  and  the 
development of skills and  public services, including access to formal childcare for  children under 
three  years  of  age.  Poland  has  made  progress  in  implementing  cohesion  policy  but  challenges 

95 

Convergence Report 2024 - Technical annex 
Chapter 5 - Poland 

remain  and  regional  disparities  between  eastern  regions  and  the  rest  of  the  country  have 
continuously widened. 

5.6.1.  Developments in the balance of payments 

Poland’s external balance (i.e., the combined current and capital account) was volatile in 2022-23. 
The  2022  deficit  (-1.9%  of  GDP)  became  a  surplus  in  2023  (1.8%  ofGDP),  largely  driven  by 
developments  in  the  current  account.  The  current  account  deteriorated  in  2022  due  to  a  deeper 
negative  balance  of  trade  in  goods,  following  substantial  increase  in  imported  energy  prices.  In 
2023,  the  current  account  turned  positive  as  imported  energy  prices  fell,  leading  to  improved 
terms of trade and imports dropped in a context of weaker domestic demand including inventories. 
Exports  continued  to  increase  in  2023,  in  particular  to  non-EU  trading  partners.  The  balance  of 
trade in services remained positive in 2022 and 2023 with improvement including in IT services. 

The  income  balance  remained  negative  over  2022-2023  reflecting  negative  primary  and 
increasingly also secondary income balances. The negative primary income balance both reflected 
a negative income balance, particularly in relation to reinvested earnings on FDI, and, to a lesser 
extent, a negative balance of the compensation of employees. The secondary income balance was 
slightly negative in 2022 and 2023. 

The negative balance of the financial account deepened in 2022 before turning positive in 2023. 
The  volatility  was  mainly  due  to  portfolio  investments,  which  turned  negative  in  2022  (-0.4%  of 
GDP),  but  rebounded  swiftly  in  2023  (+0.6%  of  GDP).  The  direct  investment  balance  remained 
strongly negative, close to -2.3% of GDP. 

Poland’s  external  competitiveness  deteriorated  somewhat  in  2022  and  2023.  Poland’s  export 
performance (as measured by the growth of its exports relative to its foreign markets) stagnated 
in  2022  and  declined  in  2023.  The  nominal  effective  exchange  rate  depreciated  in  2022  but 
appreciated in 2023. 

96 

Table 5.4:Poland - Balance of payments(percentage of GDP)201820192020202120222023Current account-1.9-0.22.5-1.3-2.41.6of which: Balance of trade in goods-2.3-0.81.3-1.3-3.70.8               Balance of trade in services4.34.54.44.65.65.3               Primary income balance -4.2-4.2-3.8-4.5-3.9-4.2               Secondary income balance0.20.20.5-0.1-0.3-0.3Capital account1.61.71.80.70.50.2External balance 1)-0.31.44.2-0.6-1.91.8Financial account-0.11.03.4-0.5-1.81.3of which: Direct investment-2.8-2.0-2.4-3.8-3.6-2.3               Portfolio investment0.82.01.31.7-0.40.6               Other investment 2)0.8-0.71.4-1.10.30.4               Change in reserves1.21.73.12.82.02.5Financial account without reserves-1.3-0.70.3-3.2-3.8-1.3Errors and omissions0.3-0.4-0.80.10.1-0.5Gross capital formation21.520.518.821.822.118.1Gross saving19.520.221.120.419.620.1Net international investment position-54.7-48.8-43.9-39.8-33.3-31.41) The combined current and capital account.2) Including financial derivatives.Sources: Eurostat, European Commission calculations, the National Bank of Poland. 
 
  
 
 
Convergence Report 2024 - Technical annex 
Chapter 5 - Poland 

The  real  effective  exchange  rate  (REER)  was 
broadly  unchanged  in  2022  and  appreciated 
international 
in  2023.  The  net 
substantially 
investment  position  (NIIP)  as  a  share  of  GDP 
improved  significantly  from  -39.8%  in  2021  to  -
31.4%  in  2023.  It  is  now  below  the  indicative 
threshold  set  in  the  MIP  scoreboard  (-35%  of 
GDP).  Moreover,  external  vulnerabilities  remain 
contained,  as  major  part  of  the  NIIP  consists  of 
the  accumulated 
foreign  direct 
investments. 

stock  of 

5.6.2.  Market integration 

Poland’s  economy  is  well-integrated  with  the  euro  area,  through  both  trade  and  investment 
linkages. Trade openness (see Table 5.5 for a definition) decreased from 65% in 2022 to 57% of 
GDP in 2023. The share of trade with euro area partners expressed in percentage of  GDP saw a 
slightly  upward  trend  in  recent  years,  before  dropping  to  32.3%  in  2023.  Poland's  main  goods 
trading partners in 2023 were Germany, the Netherlands, Czechia, China and France. 

FDI  inflows  to  Poland  have  originated  mainly  from  the  Netherlands,  Germany,  Luxembourg  and 
France, which together provided more than a half of the FDI stock at the end of 2023. Reinvested 
earnings  constituted  a  big  part  of  the  capital  inflow  in  2023,  following  high  profitability  of 
companies.  Apart  from  the  significant  size  of  the  domestic  market  as  well  as  access  to  the  EU 
market,  efforts  to  increase  the  resilience  of  supply  chains  by  nearshoring  in  the  context  of  the 
geopolitical  tensions  might  have  also  contributed  to  Poland’s  attractiveness  as  a  place  for 
investment. 

On  the  basis  of  selected  indicators  relating  to  the  institutional  environment,  Poland  ranks  below 
the  average  of  euro  area  Member  States.  According  to  the  World  Bank's  2022  Worldwide 
Governance Indicators, Poland ranks lower than the average of the five euro area Member States 
with  the  lowest  scores  in  relation  to  indicators  that  measure  voice  and  accountability,  and 
government  effectiveness (54) (55).  Poland  ranks  higher  than  the  average  five  lowest  euro  area 
Member States for political stability and absence of violence/terrorism, and control of corruption. 

(54)  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  point  lower  (higher)  than  that  of the 
average of this group of five euro area Member States. 

97 

Table 5.5:Poland - Market integration201820192020202120222023Trade openness 1) (%)54.754.353.159.564.857.1Trade with EA in goods & services 2)+3) (%)31.130.730.534.236.232.3IMD World Competitiveness Ranking 4)343839475043Internal Market Transposition Deficit 5) (%)1.00.81.81.52.11.6Real house price index 6)109.9116.9124.8129.2126.8124.4 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-20 / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics). 3) Trade in services with EA-20 (average credit and debit in % of GDP at current prices) (Balance of Payments). 4) International Institute for Management Development (IMD). 5) Percentage of internal market directives not yet communicated as having been transposed, relative to the total. 6) Deflated house price index (2015=100) (Eurostat). Sources: Eurostat, World Bank, International Institute for Management Development, European Commission calculations.859095100105110115120201820192020202120222023Graph 5.9: Poland -Effective exchange ratesNEERREER, HICP-deflatedREER, ULC-deflated(vs 36 trading partners; monthly averages;index numbers, 2018 = 100)Source: European Commission. 
 
 
  
 
 
 
   
Convergence Report 2024 - Technical annex 
Chapter 5 - Poland 

the 

In 
Index, 
IMD’s  World  Competitiveness 
Poland’s position worsened in 2022 (placing 50th) 
before  improving  somewhat  in  2023  (placing 
43rd),  but  it  remained  weaker  than  in  the 
previous  years.  In  the  Single  Market  Scoreboard, 
according to the latest data, Poland lags behind in 
the  transposition  of  EU  directives  as  the  deficit 
was  at  1.6%  in  2023,  which  is  above  the  target 
(0.5%)  proposed  by  the  European  Commission  in 
the Single Market Act (2011). 

The  legal  and  institutional  framework  to  prevent 
and  combat  corruption  is  largely  in  place  and 
Poland  has  adopted  a  comprehensive  reform  of  the  disciplinary  regime  applicable  to  judges. 
Building on these reform measures, Poland has also committed to implement further reforms in an 
Action  Plan  on  the  rule  of  law.  Poland  presented  an  Action  Plan  on  ‘rule  of  law’  to  the  General 
Affairs  Council  in  February  2024.  This  plan  aims  to  address  concerns  raised  by  the  Commission 
under the Article 7(1) TEU procedure (relating the certain aspects of the independence of the Polish 
judiciary). 

Poland  has  notified  a  complete  transposition  of  the  5th  Anti-Money  Laundering  Directive.  The 
Commission  has  assessed  the  transposition  as  complete  and  in  conformity.  Poland  has  further 
achieved a satisfactory level of transparency of legal persons, arrangements, and their beneficial 
ownership, although deficiencies remain in the application of the requirement for determining and 
verifying the identity of beneficial owners. More efforts are required to identify and assess certain 
money  laundering  and  terrorism  financing  (ML/TF)  threats  and  vulnerabilities.  There  are 
shortcomings  in  applying  effective,  proportionate  and  dissuasive  sanctions  and  administrative 

(55)  According  to the  World  Bank’s  methodology,  ‘voice  and  accountability’ captures  perceptions  of  the  extent  to  which  a 
country's citizens are able to participate in selecting their government, as well as freedom of expression, freedom of 
association, and a free media. See https://www.worldbank.org/content/dam/sites/govindicators/doc/va.pdf. 

98 

Table 5.6:Poland - Allocation of assets by financial sub-sectorRatio to GDP (%)PLEAEA 5 smallest201820222018202220182022Financial corporations (total)154144689715174190Central bank212953684652Monetary financial institutions90822662908793Other financial intermediaries11101811631618Non-MMF investment funds1)151010111345Insurance co. and Pension Funds181387812122Share of total (%)PLEAEA 5 smallest201820222018202220182022Central bank14208102727Monetary financial institutions585739405049Other financial intermediaries772623910Non-MMF investment funds107151623Insurance co. and Pension Funds119131112111) MMF stands for money market funds.Source: Eurostat.0.00.61.2Voice and accountabilityPolitical stability andabsence ofviolence/terrorismGovernment effectivenessRegulatory qualityRule of lawControl of corruptionPolandEuro area average five lowestEuro area averageGraph 5.10:Poland -World Bank's 2022 Worldwide Governance IndicatorsNote: Estimate of governance ranges from -2.5 (weak) to 2.5 (strong). Source: World Bank. 
 
  
 
 
 
  
Convergence Report 2024 - Technical annex 
Chapter 5 - Poland 

penalties  for  breaches  of  anti-money  laundering  and  countering  the  financing  of  terrorism 
(AML/CFT) requirements. 

The labour market has performed well in 2022 and 2023 but challenges related to labour supply 
remain.  The  Commission’s  2024  Country  Report  for  Poland  highlighted  low  labour  market 
participation of some population groups, notably women, persons with disabilities and older people 
and  skills  mismatches.  Several  of  the  country’s  recovery  and  resilience  plan  (RRP)  reforms  are 
expected  to  improve  labour  market  participation,  strengthen  public  employment  services,  and 
improve access to childcare. 

The financial sector in Poland is smaller and less developed than in the euro area. Relative to GDP, 
assets  managed  by the financial sector amounted to 144% of  GDP in 2022, which is much less 
than in the euro area (715% of GDP). The financial sector’s size has decreased slightly since 2018, 
in contrast to the small increase registered in the euro area. Banking dominates the Polish financial 
sector and made up 57% of the financial sector’s assets in 2022. The central bank is the second 
largest holder of financial assets with a share of 20%. These shares are larger than for the euro 
area  and  reflect  the  relative  underdevelopment  of  non-bank  financial  intermediaries  and 
investment  funds.  They  are  comparable  to  that  of  the  five  euro  area  Member  States  with  the 
smallest  financial  sectors,  although  the  share  of  investment  funds  in  total  assets  is  more  than 
twice as high in Poland as it is in these Member States. Based on its relative size in the assets held 
by the financial sector, the insurance and pension-fund sector in Poland is comparable to the euro 

99 

Table 5.7:Poland - Financing of the economy1)Ratio to GDP (%)PLEAEA 5 smallest201820222018202220182022Liabilities (total)267237706696316304Loans9787228219109103Non-financial co. debt securities52121232Financial co. debt securities712665834Government debt securities433578714742Listed shares261860631210Unlisted shares26191761845453Other equity424153545658Trade credits and advances222334353132Share of total (%)PLEAEA 5 smallest201820222018202220182022Loans363732323433Non-financial co. debt securities212211Financial co. debt securities259811Government debt securities161511101514Listed shares1089933Unlisted shares10825261919Other equity1617781718Trade credits and advances8105510111) 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 2024 - Technical annex 
Chapter 5 - Poland 

area average, although it is much smaller relative to GDP (13% of GDP in 2022 vis-à-vis 81% of 
GDP in the euro area). 

As  to  the  financing  of  the  economy,  outstanding 
liabilities  are  much  lower  than  in  the  euro  area 
(237% of GDP in 2022 vis-à-vis  696% of GDP in 
the  euro  area)  and  lower  than  in  the  five  euro 
area  Member  States  with  the  lowest  financing 
needs.  Like  in  the  euro  area,  loans  are  the 
dominant source of funding (37% of outstanding 
liabilities  in  2022).  However,  Poland  has  less 
developed bond and equity markets than the euro 
area,  and  market  financing  (debt  securities  and 
listed  shares)  is  relatively  less  developed.  Equity 
and private sector debt markets represented 14% 
of  liabilities  in  2022  (and  only  32%  of  GDP 
altogether), compared to  19% of liabilities in the 
euro  area,  where  private-sector  debt  and  listed 
stocks  amounted  to  70%  and  63%  of  GDP  respectively.  However,  Poland  is  still  relatively 
comparable to the five euro area Member States with the smallest financing needs and its listed 
equity market is more developed than in these Member States. As a share of GDP, the government 
debt market is less than half as large as that of the euro area average, which reflects the lower 
level of public debt in Poland. 

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 44% in 2022. Bank concentration, as measured by the market share of 
the five largest  credit institutions in total assets, has increased notably  since  2018, and reached 
57% in 2022, almost 7 percentage points above the euro area average. 

100 

010203040506070PL, 2018PL, 2022EA, 2018EA, 2022Concentration in the banking sector (CR5 ratio)Share of foreign institutions as % of total assetsGraph 5.11:Poland -Foreign ownership and concentration in the banking sector(in percent, weighted averages)Source: ECB, Structural financial indicators.   
6.  ROMANIA 

6.1.  LEGAL COMPATIBILITY 

6.1.1.  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 Commission’s 2022 Convergence Report. Therefore, 
the  comments  provided  in  the  Commission’s  2022  Convergence  Report  remain  relevant  and  are 
repeated in this year’s assessment. 

6.1.2.  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. 

According  to  Article  33(10)  of  the  BNR  Law,  the  Minister  of  Finance  and  one  of  the  State 
Secretaries in 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 framed in such a way that the Government should not be in a position to 
influence  or  to  appear  to  influence  the  central  bank's  decision-making  in  areas  for  which  its 
independence  is  protected  by  Union  law.  The  active  participation  of  the  Minister  and  one  of  the 
State Secretaries, even without voting rights, in discussions of the BNR Board where BNR policy is 
set  could  structurally  offer to  the  Government  the  possibility  to influence  the  central  bank,  or to 
appear to be able to do so, when taking its key decisions. Against this background, Article 33(10) of 
the BNR Law is incompatible with Article 130 TFEU. 

Article 3(1) of the BNR Law needs to be amended with a view to ensuring full compatibility with 
Article 130 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, to ensure legal certainty, it should  be 
clarified that the BNR’s institutional independence is also protected vis-à-vis national, foreign and 
Union  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 provides 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  possibility  of  judicial 
review  by  the  Court  of  Justice  of  the  European  Union,  pursuant  to  Article  14.2  of  the  ESCB/ECB 
Statute, in the event of the Governor’s dismissal. This imperfection should be corrected. 

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 dignities, public 
functions and business relationships and for the prevention 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 

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and  require  them  to  report  on  their  interests  and  wealth.  For  the  sake  of  legal  certainty,  this 
imperfection  should  be  removed  and  it  should  be  clarified  that  the  sanctions  for  the  breach  of 
obligations  under  those  laws  do  not  constitute  extra  grounds  for  dismissal  of  the  Governor,  in 
addition to those contained in Article 33 of the BNR Law. 

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 Auditors is empowered to control the establishment, 
management  and  use  of  the  public  sector’s  financial  resources,  including  the  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 Statute and thus, to 
ensure  legal  certainty,  the  Law  should  state  clearly  that  the  scope  of  audits  by  the  Court  of 
Auditors is without prejudice to the activities of the BNR’s independent external auditors. 

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  might,  in  certain  circumstances,  be  seen  as  an  intra-year  credit  (see  Section  6.1.3.) 
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 Finance. The central bank must be 
free  to  independently  create  financial  provisions  to  safeguard  the  real  value  of  its  capital  and 
assets. Article 43 of the BNR Law is therefore incompatible with Article 130 TFEU and Article 7 of 
the  ESCB/ECB  Statute  and  should  be  amended  to  ensure  that  the  above  arrangements  do  not 
undermine the ability of the BNR to carry out its tasks in an independent manner. 

6.1.3.  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 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 TFEU. Article 26 of the BNR 
Law should be amended to preclude such lending operations. 

Articles 6(1) and 29(1) of the BNR Law prohibit 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 and other majority state-owned 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 Union 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  authorities,  autonomous  public  service  undertakings,  national 
societies, 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  TFEU 
(amongst  others,  a  reference  to  Union  institutions  is  missing).  In  consequence,  they  have  to  be 
amended.  

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.  Article  7(3)  of  the  BNR  Law  is 
incompatible with Article 123(2) TFEU, which only exempts publicly owned credit institutions ‘in the 
context of the supply of reserves by central banks’. The national provisions should be aligned. 

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As noted above in point 6.1.2., 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 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,  incompatible  with  the  Article  123  TFEU  and  must  be 
amended. 

6.1.4.  Integration into 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 objective of supporting ‘the general economic policies in the Union with 
a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of 
the Treaty on European Union’, as per Article 127(1) 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 being 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 foreign currency transactions (Articles 10 and 11 of the BNR Law); 

• 

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). 

There are also imperfections regarding the following issues: 

•  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). 

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6.1.5.  Assessment of compatibility 

As  regards  the  independence  of  the  BNR,  the  prohibition  of  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 requirements of Article 131 TFEU, for the reasons set out 
above.  The  Romanian  authorities  should  remedy  the  above-mentioned  incompatibilities  and 
imperfections. 

6.2.  PRICE STABILITY 

6.2.1.  Respect of the reference value 

At  the  time  of  the  last  convergence  assessment  of  Romania  in  2022,  the  12-month  average 
inflation rate, which is used for the convergence assessment, was above the reference value. From 
6.4% in April 2022, the 12-month average inflation rate increased steadily to 13.0% by April 2023. 
It  then  decreased  to  9.7%  by  the  end  of  2023.  In  May  2024,  the  reference  value  was  4.1%, 
calculated  as  the  average  of  the  12-month  average  inflation  rates  in  the  Netherlands,  Italy  and 
Latvia  plus  1.5  percentage  points.  The  corresponding  inflation  rate  in  Romania  was  7.6%,  which 
was 3.5 percentage points well above the reference value. The 12-month average inflation rate is 
projected to remain well above the reference value in the coming months. 

6.2.2.   Recent inflation developments 

Annual  HICP  inflation  in  Romania  stood  at  9.7%  in  2023,  down  from  12%  in  2022.  Already  in 
2021, HICP inflation had accelerated slightly above the upper band of the target of the National 
Bank  of  Romania,  already  driven  by  energy  prices.  In  2022,  the  sharp  rise  in  oil,  gas  and  food 
commodity prices in global markets was passed on to the domestic industry and to retail food and 
energy prices. Therefore, energy prices increased by close to 32%, while food prices rose by almost 
15% year-on-year in Romania. The  inflation shock from terms of trade was, however, less acute 
than in many other EU economies, partly due to less energy intensive imports and the energy price 
cap scheme introduced by the government in early 2022. HICP inflation soared to a peak of 14.6% 
in November 2022 and has decelerated since then due to the decline in energy prices and a tighter 
monetary  policy  and  financial  conditions.  Inflation  was  back  to  single-digits  by  mid-2023  and 
reached  7%  in  December  2023.  Yet,  the  disinflation  path  was  more  protracted  than  in  other  EU 
countries as the prices of services accelerated to close to 10% and food price continued growing at 
a high rate of about 14% year-on-year in 2023. Over the past two years, annual HICP inflation in 
Romania was higher than in the euro area by around 4 percentage points on average.  

HICP  inflation  excluding  energy  and  food  declined  too,  but  at  a  slower  pace  and  remains  well 
above  headline  inflation.  It  fell  from  a  high  of  12.6%  in  February  2022  to  10.4%  by  December 
2023. The persistence of core inflation is driven by strong price growth in services (6.3% and 9.9% 

104 

-4-202468101214Jan-18Jan-19Jan-20Jan-21Jan-22Jan-23Jan-24RomaniaReference valueGraph 6.1: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 Romania in December 2024. The reference values for 2018, 2020 and 2022 refer to the reference values calculated in the previous convergence reports.Source: Eurostat, Commission's Spring 2024 Economic Forecast.-20246810121416201820192020202120222023RomaniaEuro areaGraph 6.2:Romania -HICP inflation(y-o-y percentage change)Source: Eurostat. 
 
  
  
Convergence Report 2024 - Technical annex 
Chapter 6 - Romania 

in  2022  and  2023,  respectively)  and  non-energy  industrial  goods  (5.7%  and  9.6%  in  2022  and 
2023,  respectively).  High  HICP  inflation  excluding  energy  and  food  partly  reflects  rapid  wage 
increases, which averaged about 12% in 2022 and 15% in 2023, also fuelled by large minimum 
wage  hikes  (43%  cumulated  over  2022  and  2023)  and  still  high  energy  prices  feeding  into 
industrial goods prices. 

Lower energy demand and falling international energy prices resulted in a decrease in the energy 
component  of  HICP  inflation  in  2023.  After  having  increased  by  close  to  a  third  in  2022, energy 
prices  dropped  by  about  1%  in  2023.  The  only  other  categories  of  the  HICP  that  decelerated  in 
2023 were administered prices with growth down to 3.9% from 7.5% in 2022 and processed food 
inflation, which was marginally lower at 13.3% in 2023 from 14.6% in 2022. 

6.2.3.  Underlying factors and sustainability of inflation 

Macroeconomic policy mix and growth developments 

Romania  recorded  a  strong  post-pandemic  rebound  in  economic  activity,  favoured  by  easy 
monetary  and  financial  conditions,  a  high  government  deficit  and  robust  investment/expenditure 
financed by the RRF and other EU funds. Real GDP grew by 4.1% in 2022, which was still slightly 
higher than Romania’s potential growth rate, but lower than the 5.7% in 2021. The expansion was 
driven  by  robust  domestic  demand,  fuelled  by  rapid  credit  growth,  which  accelerated  to  almost 
18%  year-on-year  in  mid-2022,  and  very  rapid  nominal  wage  increases  at  about  12%  in  2022. 
Both private consumption and gross fixed capital formation increased by close to 6% year-on-year 
in  2022.  International  trade  posted  a  similar  buoyant  activity  with  both  exports  and  imports 
advancing  by  almost  10%  year-on-year.  Yet,  net  exports  had  a  negative  contribution  to  growth, 
while the current account deficit widened too. 

Real GDP continued to grow in 2023, but at a slower pace of around 2.1%. The slowdown reflected 
the impact of high inflation on real disposable incomes, tighter monetary and financial conditions, 
and the  weakening  of  global  demand.  Private  consumption  growth  decelerated  to  below  3.0% in 
2023.  Government  consumption  grew  stronger  by  almost  7.0%.  Gross  fixed  capital  formation 
accelerated by more than 14.0%, supported by EU-funded investment in public infrastructure and 
became the main contributor to growth. Exports and imports both declined by about 1.4% and net 
exports had a neutral contribution to real GDP growth. According to the Commission’s Spring 2024 
Economic Forecast, real GDP growth is projected to accelerate to 3.3% in 2024 and 3.1% in 2025, 
supported by solid increases in real disposable income, the prospect of easing financial conditions, 
stronger  private  credit  growth  and a  gradual  pick-up  in  external  demand.  Private  consumption  is 
expected to accelerate and public consumption will likely remain robust in 2024. At the same time, 
growth  in  gross  fixed  capital  formation  will  slow  from  2023  due  to  still  depressed  residential 
construction  and  subdued  private  investment  negatively  impacted  by  uncertainty  over  the  fiscal 
consolidation measures.  

105 

Table 6.1:weights  Romania - Components of inflation(percentage change)1)in total   201820192020202120222023May-242023HICP4.13.92.34.112.09.77.61000Non-energy industrial goods1.72.42.32.65.79.610.8276Energy12.22.7-7.415.231.7-0.9-1.5135Unprocessed food 5.36.25.31.814.614.97.7113Processed food3.75.55.04.014.613.37.1256Services2.73.62.72.76.39.99.8220HICP excl. energy, food, alcohol and tobacco2.22.92.52.66.09.710.3497HICP at constant tax rates 3.83.72.33.912.29.57.21000Administered prices HICP4.22.61.21.87.33.96.01401) 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. 
 
      
 
 
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Chapter 6 - Romania 

In 2023, the fiscal stance (56)  turned slightly contractionary, at  0.4% of  GDP, after being  broadly 
neutral (0.0%) in 2022. Going forward, the Commission’s Spring 2024 Economic Forecast projects 
a broadly neutral fiscal  stance of  -0.1% of GDP in 2024, reflecting an expansionary contribution 
from net nationally-financed primary current expenditure, as a result of the fast increase in current 
expenditure (see Section 6.3. below), and the contractionary impact of lower expenditure financed 
by the RRF and other EU funds. The no policy-change forecast for 2025 shows a broadly neutral 
fiscal stance of about -0.2% of GDP. 

In  response  to  rising  inflation,  Banca  Naţională  a  României  (BNR),  operating  within  an  inflation 
targeting framework (57), tightened its monetary policy stance by steadily raising the policy rate by 
a  total  of  400  basis  points  between  April  2022  and  January  2023.  Thereafter,  the  policy  rate 
remained stable at 7.0%, including by May 2024. In March 2023, the BNR resumed purchases of 
government  securities  in  the  secondary  market,  for  the  first  time  since  May  2022.  The  reserve 
requirement  ratio  on  accounts  opened  with  BNR  for  the  foreign  currency  holdings  of  the  credit 
institutions,  which  stood  at  6% in  February  2020,  was  reduced  to  5%  in  November  of  the  same 
year and has been kept unchanged since then. The reserve requirement ratio for leu denominated 
holdings has been unchanged since May 2015 at 8%.  

Wages and labour costs 

Labour market conditions improved steadily after 
their  deterioration  due  to  the  COVID-19  shock  in 
2020,  due  to  strong  growth  and the  phasing  out 
of  pandemic  restrictions,  which  allowed  the 
services  sector  to  scale  up  employment.  The 
employment rate increased from a low of 64% in 
the  second  quarter  of  2020  to  68.5%  in  2022 
and to  68.7% in  2023.  Despite  this increase,  the 
employment  rate  remains  below  the  EU  average 
(75.3% in 2023) and represents a challenge, also 
due  to  the  relatively  low  participation  to  the 
labour force. The unemployment rate continued to 
decrease from 6.7% in June 2020 to 5.6% in both 
2022 and 2023. The unemployment rate is below 
the EU average and is forecast to decline slightly 
in 2024 and 2025. 

The  relatively  low  employment  rate  reflects  a  larger  share  of  semi-subsistence  agricultural 
workers  (who  are  not  counted  in  the  labour  force  according  to  Eurostat  methodology),  high  net 
outward migration and a large contingent of people who work in other countries but maintain their 
residence in Romania (IMF, 2023, Selected issues). The labour force participation rate appears low 
across all population groups, but lower skilled women, older man with secondary education and the 
youth stand out. The latter groups also display higher unemployment rates on average. 

The decrease in labour market slack, coupled with the recovery in economic activity and the rise in 
inflation, increased wage pressures. As a result, nominal compensation per employee increased by 
13.3%  in  2022,  which  was  above  the  average  headline  inflation  of  12.0%.  In  2023,  wage 
pressures  increased  further  due  to  high  public  sector wage  increases  in  education  (albeit  from a 
low level in that sector), a tight labour market with skill shortages and large increases in minimum 
wages. The standard minimum wage was raised three times by a cumulated 43.5% during 2022 
and  2023.  The  nominal  compensation  per  employee  increased  by  around  18%  in  2023,  which 

(56)  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. 
(57)  As from 2013, the BNR follows a flat multi-annual inflation target of 2.5% (± 1 percentage point). 

106 

-404812162020182019202020212022202320242025Productivity (real GDP per person employed)Nominal compensation per employeeNominal unit labour costsHICP inflationGraph 6.3: Romania -Inflation, productivity and wage trends(y-o-y % change)Source: Eurostat, Commission's Spring 2024 Economic Forecast. 
  
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Chapter 6 - Romania 

corresponds  to  about  8%  growth  in  real  terms,  exceeding  labour  productivity.  Wage  growth  is 
forecast  to  remain  strong  at  a  double-digit  rate  in  2024  as  well,  driven  by  rapidly  rising  public 
sector  wages.  Romania  committed  in  the  RRP  to  create  a  new  mechanism  formula  to  set  the 
minimum wage level objectively.   

As  economic  output  grew  strongly  and  capital  deepening  advanced  further  in  Romania,  labour 
productivity per person increased by 4.0% in 2022, above the euro area average of 1.1%. In 2023, 
labour  productivity  improved  at  a  slower  rate  of  3.0%,  in  line  with  the  more  subdued  output 
growth.  As labour  compensation  grew  more  than  labour productivity, an  increase  in  nominal  unit 
labour  costs  (ULC)  took  place,  which  was  higher  than  the  euro  area  average  in  both  2022  and 
2023.  

External factors 

Due  to  the  openness  of  the  Romanian  economy  and  strong  trade  links  with  other  EU  member 
states,  import  prices  play  a  significant  role  in  domestic  price  formation.  As  Romania  is  a  net 
importer of energy and a large buyer of imported food products, the large volatility in energy and 
food prices on global markets in 2022 and 2023 was transmitted to inflation in Romania. Import 
price inflation (measured by the imports of goods deflator) accelerated to about 18% in 2022, in 
line with international prices and about 6 percentage points above  HICP inflation. But it was still 
lower than in the euro area because of a relatively smaller weight of the energy bill in imports. In 
2023,  however,  imported  price  inflation  decelerated  strongly  to  below  3%  and  drove  down  HICP 
inflation. Looking ahead, imported inflation is expected to continue contributing favourably to HICP 
inflation, reflecting the relatively higher domestic inflation pressures in Romania. 

After  having  depreciated  during  the  pandemic,  the  leu’s  nominal  effective  exchange  rate 
(measured  against  a  group  of  36  trading  partners)  started  to  appreciate  again.  Helped  by 
sustained capital inflows, including EU funds, net FDI and portfolio investment, it strengthened by 
more than 3% over 2022 and 2023. 

Administered prices and taxes 

The weight of administered prices in the 2023 Romanian HICP basket (14%) is slightly above the 
euro area average (13.2%). The average annual change in administered prices was 7.3% in 2022, 
below the headline inflation rate by 4.7 percentage points. A similar evolution took place in 2023 

107 

Table 6.2:Romania - Other inflation and cost indicators(annual percentage change)20182019202020212022202320241)20251)HICP inflationRomania4.13.92.34.112.09.75.94.0Euro area1.81.20.32.68.45.42.52.1Private consumption deflatorRomania3.95.42.34.614.59.86.84.7Euro area1.51.10.62.36.86.02.42.0Nominal compensation per employeeRomania13.010.94.06.413.318.211.56.9Euro area2.12.2-0.44.24.55.14.23.1Labour productivityRomania5.93.7-1.74.94.03.02.72.8Euro area0.10.2-4.74.41.1-1.00.10.9Nominal unit labour costsRomania6.76.95.81.48.914.78.64.0Euro area2.01.94.6-0.23.36.24.12.2Imports of goods deflatorRomania4.80.2-2.510.217.90.72.82.6Euro area2.6-0.6-3.89.721.6-4.90.41.81) Commission's Spring 2024 Economic Forecast.Source: Eurostat, Commission's Spring 2024 Economic Forecast. 
 
            
 
 
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when  administered  prices  increased  by  only  3.9%,  much  below  the  9.7%  headline  figure.  The 
favourable  impact  of  administered  prices  on  the  headline  inflation  rate  mainly  reflects  the 
measures adopted by the government in late 2021 to cap gas and electricity prices, with reduced 
tariffs for lower energy consumption brackets. The support measures were extended also in 2023. 
Other measures, such as a sharp increase in the price of medicines in August 2023, contributed to 
higher inflation. 

Tax changes had a marginal influence on inflation in Romania in the last two years. HICP inflation 
measured  at  constant  taxes  was  broadly  similar  to  headline  HICP  inflation.  In  2022,  the  former 
stood at 12.2%, 0.2 percentage point above the headline inflation figure. In 2023 it was 9.5%, 0.2 
percentage point lower than the headline HICP inflation rate. 

Medium-term prospects 

Prices  are  set  to  decelerate  further  over  the  forecast  horizon,  except  for  a  brief  pause  at  the 
beginning of 2024 as a result of some increases in indirect taxes. In the Commission’s Spring 2024 
Economic Forecast, average annual HICP inflation is projected at 5.9% in 2024 before slowing to 
4.0% in 2025 and thereby approaching the Central Bank inflation target band (2.5% ±1 percentage 
point).  The  disinflation  path  is  expected  to  be  supported  by  relatively  low  energy  prices  and 
moderate import prices. At the same time, the decline in HICP inflation excluding energy and food 
is expected to continue lagging behind, in particular due to high inflation for services and industrial 
goods, reflecting the tight labour market and large increases in real disposable incomes. 

Risks to the inflation outlook are tilted towards a more gradual reduction in headline HICP inflation 
if  salaries  and  pensions  continue  to  increase  fast.  Increases  in  public  wages  have  spread  from 
education to other sectors in 2024. Other aspects, such as potential additional changes in taxation 
due  to  fiscal  consolidation,  in  particular  in  2025,  and  the  easing  of  pressures  on  a  tight  labour 
market,  add  to  the  uncertainty  of  the  inflation  forecast.  According  to  the  Commission’s  Spring 
2024 Economic Forecast, the ULC growth rate in Romania is expected to decelerate moderately in 
2024 and more significantly in 2025. It will still remain above the average growth rates in the euro 
area, and the labour productivity differential, in particular in 2024.   

In  2022,  the  level  of  consumer  prices  in  Romania  increased  to  about  56%  of  the  euro  area 
average.  The  GDP  per  capita  further  converged  to  around  75%  of  the  euro  area  average  in  PPS 
terms  in  2023.  Due  to  the  process  of  catching-up  of  the  Romanian  economy,  price  level 
convergence is expected to continue over the next years. 

6.3.  PUBLIC FINANCES 

6.3.1.  Recent fiscal developments 

The  general  government  deficit  remained  high  in  2023,  reaching  6.6%  of  GDP,  up  from  6.3%  in 
2022.  This  is  2.2  percentage  points  of  GDP  above  the  level  planned  in  the  2023  budget  and  in 
Romania’s  2023  Convergence  Programme.  This  is  mainly  due  to  continued  high  government 
spending growth, particularly in goods and services, social transfers and personnel expenditure. A 
slowdown in government revenue, due to weaker than expected nominal GDP growth, also played a 
role but to a lesser extent since the deceleration in revenue started to intensify only in the second 
part  of  the  year.  In  a  context  of  declining  but  still  elevated  inflation,  government  expenditure 
increased  much  faster  than  planned  and  recommended  by  the  Council  on  18  June  2021  (see 
below). Net  primary expenditure growth (adjusted for one-offs and fiscal policy measures on the 
revenue side) increased by 11.8%, driven by faster than expected growth in personnel expenditure 
(particularly  reflecting  large  increase  in  wages  in  the  education  sector)  and  transfers  to 
households. 

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Romania is subject to an excessive deficit procedure (58). 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 2024. This was consistent with a nominal growth 
rate  of  net  primary  government  expenditure  of  3.4%  in  2021,  1.3%  in  2022,  0.9%  in  2023  and 
0.0% in 2024. It corresponded to an annual structural adjustment of 0.7% of GDP in 2021, 1.8% 
of  GDP  in  2022,  1.7%  of  GDP  in  2023  and  1.5%  of  GDP  in  2024.  The  recommendation  also 
specified  that  any  windfall  gains  should  be  used  to  reduce  the  general  government  deficit. 
Romania  was  also  asked  to  report  every  six  months  on  action  taken  to  implement  the 
recommendation, until the excessive deficit has been corrected. The headline deficit ratio in 2023 
was  well  above  that  recommended  by  the  Council.  According  to  the  Commission’s  Spring  2024 
Economic  Forecast,  the  growth  in  net  primary  expenditure  in  2023  is  estimated  at  11.8%,  well 
above the limit recommended by the Council, while the structural adjustment in 2023 is estimated 
at  -0.1  percentage  point  of  GDP.  Therefore,  on  19  June  2024,  the  Commission  recommended  a 
Council Decision establishing that Romania had not taken effective action in response to the Article 
126(7) recommendation. 

The  general  government  debt-to-GDP  ratio  rose  from  48.5% of  GDP  in  2021  to  48.8%  in  2023. 
The  increases  in  2022  and  2023  were  mainly  driven  by  the  high  primary  deficit.  The  snow-ball 
effect  contributed  to  the  decrease  in  the  debt  ratio  in  these  two  years,  while  stock-flow 
adjustments contributed to an increase. 

6.3.2.  Medium-term prospects 

The  budget  for  2024,  published  on  14  December  2023,  targeted  a  reduction  of  the  general 
government  deficit  to  4.9%  of  GDP  in  2024.  In  October  2023,  Romania  adopted  a  fiscal 
consolidation  package  worth  around  1.2%  of  GDP,  to  be  implemented  in  2024.  The  package 
included  spending  cuts,  generated  through  measures  to  streamline  public  administration  and 
tighter  eligibility  conditions  for  public  servants  to  benefit  from  holiday  vouchers  and  food 
allowances.  On  the  revenue  side,  new  measures  are  expected  to  yield  additional  revenue 
amounting  to  1%  of  GDP.  They  included  an  increase  in  corporate  taxation  (introduction  of  a 
minimum turnover tax  of  1%  for  non-financial  companies with  a  turnover of  more  than  EUR  50 
million and of a turnover tax for credit institutions), a phasing-out of preferential tax regimes for 
the  construction  and  agriculture  sectors,  and  the  elimination  of  reduced  VAT  rates  for  selected 
goods and services. 

This  package  supports  the  reduction  of  Romania’s  high  government  deficit  in  2024  but  is 
insufficient to reach the targets recommended by the Council. The reason for the still high deficit in 
2024 (see below) and 2025 is related to fast planned growth in public wages  and pensions. The 
latter reflects the short-term cost of the recently adopted pension reform. 

In November 2023, Romania adopted a broad reform of the general pension system which entails 
the  recalculation  of  pensions  through  a  new  formula  that  aims  at  significantly  increasing 
incentives  for  longer  working  lives.  The  reform  introduces  a  new  pension  indexation  rule,  a 
mechanism  against  ad-hoc  increases  in  pensions,  aligns  the  retirement  age  between  men  and 
women, tightens eligibility conditions to ’special working conditions’ status and associated benefits, 
and introduces a link between future changes in life expectancy and system parameters. Based on 
calculations  done  by  the  World  Bank,  acting  as  technical  advisor,  the  reform,  if  successfully 
implemented, is expected to generate large savings in the medium to long term, with total pension 
expenditure  to  peak  at  slightly  above  10%  of  GDP  in  the  reform  scenario,  compared  to  12%  of 
GDP in the baseline without the reform. 

(58)  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. 

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In  their  latest  report  on  ‘actions  taken  to  correct  the  excessive  deficit’,  Romania  confirmed  the 
2024  government  deficit  target  of  4.9%  of  GDP.  On  10  May  2024,  the  Romanian  authorities 
reported  on  ‘actions  taken  to  correct  the  excessive  deficit’.  This  report  confirmed  the  2024 
government deficit target of 4.9% of GDP included in the budget but also stressed that budgetary 
execution  in  the  first  three  months  of  the  year  resulted  in  a  government  budget  deficit  (cash 
definition) of 2.06% of GDP, 0.6 percentage point of GDP above the deficit recorded in the same 
period  last  year,  when  the  full-year  deficit  was  6.6%  of  GDP.  Over  the  first  four  months  of  the 
year, the cumulative deficit reached 3.3% of GDP, much higher than the 1.7% of GDP recorded in 
the same period of 2023. These developments are consistent with the Commission’s forecast of a 
government deficit approaching 7% of GDP in 2024. 

The  Commission’s  Spring  2024  Economic  Forecast,  which  is  based  on  a  no-policy  change 
assumption, projects a  general government deficit of  6.9% of GDP in 2024. The difference from 
the planned deficit in the budget stems, in particular, from a difference in some revenue items that 
are  not  fully  supported  by  enacted  measures  and  therefore  not  taken  into  account  in  the 
Commission’s forecast and from a much higher projected increase in current expenditure, mostly 
driven  by  public  wages.  The  Commission  projects  the  general  government  deficit  to  remain 
elevated  at  7.0%  of  GDP  in  2025.  The  short-term  cost  of  the  pension  reform  is  expected  to 
contribute to the higher deficit. However, some moderation in capital spending is likely and growth 
in current expenditure excluding pensions is expected to slow down. The 2025 deficit forecast does 
not  include  the  potential  additional  revenue  stemming  from  the  reform  of  the  tax  regime  of 
microenterprises  and  the  broad  tax  reform,  which  are  part  of  the  RRP  and  are  currently  being 
designed.  General  government  debt  is  projected  to  increase  to  about  51%  of  GDP  in  2024  and 
54% in 2025. 

In 2024, the fiscal stance is projected in the Commission’s Spring 2024 Economic Forecast to be 
broadly neutral, following a contractionary fiscal stance of 0.4% of GDP in 2023 (59). The neutral 
fiscal  stance  in  2024  reflects an  expansionary  contribution  from  net  nationally-financed  primary 

(59)  For  a  definition  of  the  fiscal  stance  used  in  this  report,  see  the  footnote  in  Section  6.2.3.  on  underlying  factors and 

sustainability of inflation.  

110 

Table 6.3:Romania - Budgetary developments and projections (as % of GDP unless indicated otherwise)Outturn and forecast 1)20182019202020212022202320241)20251)General government balance-2.8-4.3-9.3-7.2-6.3-6.6-6.9-7.0- Total revenue31.732.032.532.933.733.634.234.3- Total expenditure34.536.341.840.040.040.241.141.3   of which: - Interest expenditure1.01.21.41.51.52.02.02.0p.m.: Tax burden26.626.726.927.227.626.828.028.0Primary balance-1.9-3.2-7.9-5.7-4.8-4.6-4.9-5.0Fiscal stance 2)0.00.4-0.1-0.2Recommended growth in net nationally financed primary expenditure (%)7.5-Growth in net nationally financed primary expenditure (%)14.3-Government gross debt34.435.146.748.547.548.850.953.9p.m: Real GDP growth (%)6.03.9-3.75.74.12.13.33.11) Commission’s Spring 2024 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. 
 
       
 
 
 
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Chapter 6 - Romania 

current expenditure, as a result of the fast increase in current expenditure, and the contractionary 
impact of lower expenditure financed by the RRF and other EU funds.  

The no  policy-change forecast for 2025 shows a 
neutral fiscal stance of about  -0.2% 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  point of 
GDP.  Nationally  financed  investment  is  projected 
to  provide  an  contractionary  contribution  to  the 
fiscal  stance  of  0.3  percentage  point  of  GDP, 
in  nationally  financed 
whereas 
primary  current  expenditure 
is  projected  to 
provide  an  expansionary  contribution  of  -0.6 
percentage  point  of  GDP  to  the  overall  fiscal 
stance in 2025.  

the  growth 

Debt  sustainability  risks  appear  high  over  the  medium  term.  Government  debt  is  projected  to 
strongly increase rapidly from around 51% of GDP in 2024 to around 103% of GDP in 2034. This 
projection  assumes  that  the  structural  primary  deficit  increases  from  4.0%  of  GDP  in  2023  to 
4.4% of GDP in 2024 and remains at that level (excluding changes in the cost of ageing) over the 
projection period (60). 

The sensitivity to possible macro-fiscal shocks contributes to this assessment. In particular, if the 
interest-rate growth differential were 1 percentage point higher than in the baseline scenario, the 
projected debt ratio in 2034 would  be more than 6 percentage points of GDP higher than in the 
baseline. 

Finally, several additional risk factors need to be considered in the assessment. On the one hand, 
risk-increasing factors are related to the recent increase in interest rates and public debt ratio, the 
share of debt held by non-residents, the currency denomination of debt, and the country’s negative 
net international investment position. Though, the latter is low if non-defaultable instruments are 
excluded.  On  the  other  hand,  risk-mitigating  factors  include  the  lengthening  of  debt  maturity  in 
recent years, and the low share of external, private, and short-term debt. 

independent  fiscal  council.  However, 

While  the  key  elements  of  a  robust  fiscal  framework  are  in  place,  some  difficulties  in 
implementation  remain.  The  Romanian  fiscal  framework  includes  well-designed  fiscal  rules,  a 
the 
medium-term  budgetary  framework,  and  an 
implementation of the national fiscal rules and medium-term budgetary framework has generally 
been  weak,  as  indicated  in  past  Convergence  Reports  (2022  and  earlier).  The  Romanian  Fiscal 
Council  has  a  relatively  broad  mandate,  including  the  monitoring  of  fiscal  rules,  assessment  of 
macroeconomic  and  budgetary  forecasts,  and  costings  of  the  main  discretionary  revenues. 
However,  it  has  struggled  with  access  to  information  issues  and  poor  policy  dialogue  with  the 
government.  The  amended  Budgetary  Framework  Directive  (2011/85/EU),  part  of  the  Economic 
Governance  Review,  which  was  adopted  on  29  April  2024,  may  affect  some  aspects  of  the 
Romanian fiscal framework, such as the tasks of the fiscal council. The amended Directive extends 
the  independence  safeguards  for  independent  fiscal  institutions  to  all  EU  Member  States  and 
assigns some tasks to these institutions. 

(60)  For details on the methodology, see European Commission (2024), Debt Sustainability Monitor 2023, Institutional Paper 

271, March 2024. 

111 

-2-10122022202320242025Expenditure financed by RRF grants and EU funds (e)Other capital expenditure (d)Nationally financed investment (c)Net nationally financed  primary current expenditure (b)Fiscal stance (f=a+e) 2023 2024Net nationally financed  primary expenditure (a=b+c+d)ExpansionaryContractionarySource: Commission's Spring 2024 Economic Forecast.Graph 6.4: Romania -Fiscal stance and its components(percent of GDP) 
   
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Chapter 6 - Romania 

6.4.  EXCHANGE RATE STABILITY 

The Romanian leu does not participate in ERM II. Romania has been operating a managed floating 
exchange rate regime since 1991 with no preannounced path for the exchange rate (61). 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 ‘crawl-like’ exchange rate arrangement that 
allows foreign exchange market interventions by the central bank. Exchange rate stability has been 
used  by  the  BNR  as  an  important  mechanism  to  ensure  financial  stability  and  anchor  inflation 
expectations. The BNR has, nonetheless, stressed that currency intervention remains available as a 
policy instrument and has actively used it. 

The  leu  has  depreciated  steadily  against  the  euro  since  2018,  with  the  RON/EUR  exchange  rate 
increasing from an annual average of 4.65 in 2018 to 4.95 in 2023. The leu was relatively stable 
on  average  in  the  first  half  of  2022.  After  an  appreciation  of  around  0.9%  in  August  2022 
compared  to  the  previous  month,  the  leu  weakened  against  the  euro  by  around  1.5%  between 
August 2022 and September 2023. Over this period, the volatility of the leu’s inter-day exchange 
rate  was  moderate  compared  to  that  of  other  floating  currencies  in  Member  States  with  a 
derogation. The leu remained stable during the last  quarter of 2023, when it averaged around a 
RON/EUR  level  of  4.97.  In  May  2024,  the  leu’s  exchange  rate  against  the  euro  averaged  around 
4.98. 

The  gross  international  reserves  held  by  the  BNR  followed  an  upward  path  over the  2022-2023 
period. The reserves increased from EUR 46 billion in the first quarter of 2022 to around EUR 52 
billion at the end of 2022. The reserves continued to increase in the first half of 2023 to close to 
EUR  59  billion,  and  rose  further  to  a  new  high  of  around  EUR  66  billion  at  the  end  of  2023, 
reaching close to 20% of GDP. 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-  and  US  dollar-denominated  government 
bond  issuances  and  financing  payments  under  the  EU’s  Recovery  and  Resilience  Facility.  The 
reserves continued to increase in the first months of 2024 and stood at around EUR 72 billion in 
May 2024. 

Short-term  interest  rate  spreads  vis-à-vis  the  euro  area  increased  sharply,  by  around  400  basis 
points, between January and August 2022, reaching a high of around 760 basis points in August 
2022,  which  was  its  highest  level  since  2010.  This  increase  in  the  3-month  interest  rate  spread 
was driven by the early monetary policy tightening cycle in Romania compared to the euro area. In 
Romania,  the  key  policy  rate  was  raised  from  2.0%  in  January  2022  to  5.5%  in  August  2022, 

(61)  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. 

112 

4.64.74.84.95.0201820192020202120222023Graph 6.5: Romania -RON/EUR exchange rate(monthly averages)Source: ECB.0100200300400500600700800201820192020202120222023Graph 6.6: Romania -3-M Robor spread to 3-M Euribor(basis points, monthly values)Source: National Bank of Romania, Eurostat and Thomson Reuters. 
 
 
  
  
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whereas the ECB’s key interest rate was almost unchanged over this period. Subsequently, the 3-
month spread decreased steadily during the last 4 months of 2022 and throughout 2023 and in 
early 2024, reaching 216 basis points by April 2024. The significant narrowing of the short-term 
spread between August 2022 and April 2024 reflected the combined effects of the tightening of 
the euro area's monetary policy, with the ECB’s key interest rate increasing from 0.0% in August 
2022 to 4.0% in September 2023, and a fall in the 3-month interest rates in Romania, mirroring a 
smaller increase in the key policy rate in Romania and the sizeable liquidity surplus in Romania’s 
money  market.  The  3-month  interest  rate  spread  relative  to  the  euro  increased  to  around  225 
basis  points  in  May  2024,  close  to  levels  seen  in  late-2017,  reflecting  the  cut  in  the  key  ECB 
interest rate. 

6.5.  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 11 years.  

The Romanian 12-month moving average long-term interest rate relevant for the assessment of 
the Treaty criterion was above the reference value at the time of the last convergence assessment 
of Romania in 2022. From 4.7% in April 2022, it increased gradually to around 7.9% by April 2023 
but fell throughout the rest of 2023 and in the first months of 2024. In May 2024, the reference 
value, which is calculated as the average of long-term interest rates in the Netherlands, Italy and 
Latvia plus 2 percentage  points, stood at 5.5%. In that  month, the 12-month  moving average of 
the  yield  on  the  Romanian  benchmark  bond  was  at  6.4%,  i.e.  0.9  percentage  points  above  the 
reference value. 

The  long-term  interest  rate  in  Romania  increased  sharply  in  the  first  half  of  2022,  rising  from 
5.4% in January 2022 to 9.3% in July 2022, which was its highest level since 2009. This increase 
largely  reflected  the  above-mentioned  rise  in  the  policy  interest  rate  in  response  to  the  surge  in 
inflation and increased market risk aversion. The 10-year interest rate for the German government 
bond, which is the benchmark security in European financial markets, rose by 1 percentage point 
over this period. Romania’s long-term interest rate decreased steadily in the second half of 2022 
and  throughout  most  of  2023,  in  part  reflecting  the  outlook  for  lower  inflation.  The  long-term 
interest rate of Romania was broadly stable during the first 5 months of 2024, although at 6.3% 
in  May  2024,  it  remained  at  a  relatively  high  level.  The  long-term  spread  versus  the  German 
benchmark bond stood at 377 basis points in May 2024, down from 818 basis points in July 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 

113 

0246810Jan-18Jan-19Jan-20Jan-21Jan-22Jan-23Jan-24RomaniaReference valueGraph 6.7:Romania -Long-term interest rate criterion(percent, 12-month moving average)Source: European Commission.-20246810201820192020202120222023RomaniaGermanyGraph 6.8:Romania -Long-term interest rates(percent, monthly values)Source: Eurostat. 
 
  
  
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Chapter 6 - Romania 

additional  factors  –  including  balance  of  payments  developments,  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 2023, the Commission published its 13th Alert Mechanism Report (AMR 2024) under 
the  Macroeconomic  Imbalance  Procedure  (MIP  -  see  also  Box  1.7),  which  concluded  that  an  In-
Depth  Review  (IDR)  was  warranted  for Romania.  In  April  2024, the  Commission  published  an  In-
Depth  Review  for  Romania.  Taking  into  account  the  assessment  in  the  In-Depth  Review,  the 
Commission, in its Communication ‘European Semester – 2024 Spring Package’ (62), considers that 
Romania  is  experiencing  excessive  macroeconomic  imbalances.  Vulnerabilities  relate  to  external 
accounts and are mainly linked to large government deficits, while price and cost pressures have 
increased,  with  a  potential  negative  impact  on  cost  competitiveness.  At  the  same  time,  policy 
action has been weak. 

Romania’s current account deficit has remained high, in parallel with persistently large government 
deficits.  With  strong  price  dynamics,  concerns  grew  about  high  growth  in  wages  that  could 
undermine  cost  competitiveness.  As  of  2023,  there  has  been  some  positive  development  as 
external accounts have been improving and price dynamics moderating. The current account deficit 
has been partly financed by sizeable EU funds and foreign direct investment (FDI), strengthening 
Romania’s productivity and output growth. Policy action has been forthcoming in the monetary and 
financial supervision areas, but has not sufficiently tackled the large fiscal deficit., which continues 
to fuel the sizeable current account deficit. This may push up external indebtedness, albeit from a 
relatively  low  level,  leaving  Romania  vulnerable  to  change  in  investor  sentiment  and  exogenous 
shocks. In addition to fiscal consolidation, an acceleration of structural reforms is needed, including 
via  determined  implementation  of  Romania’s  RRP,  in  order  to  improve  competitiveness  and 
potential growth. 

Romania’s recovery and resilience plan (RRP) includes measures to address a series of structural 
challenges,  in  synergy  with  other  EU  funds,  including  cohesion  policy  funds,  to  boost  its 
competitiveness  and  stimulate  sustainable  growth  and  reduce  the  country’s  territorial  and  social 
disparities.  The  RRF  funding  provides Romania  with  EUR  28.5  billion  over  the  2021-2026  period. 
Romania has submitted three payment requests, resulting in an overall  disbursement of EUR  9.4 
billion on 29 September 2023.   

While some reforms (e.g., reducing the regulatory burden of the business environment and the size 
of  the  shadow  economy,  education,  improving  social  cohesion)  and  investments,  (e.g.,  energy 
renovation of buildings, digitalisation, financing of SMEs, sustainable transport infrastructure) have 
already  started,  the  implementation  of  the  Romanian  RRP  faces  significant  delays.]  Structural 
challenges  linked  to  limited  administrative  capacity  and  often  the  lack  of  involvement  of  other 
entities  governing  on  various  institutions,  and  different  stakeholder  in  general  call  for  specific 
actions to ensure that reforms and investments can be completed on time.  

including 

innovation  and  digitalisation,  the  green  and 

In  addition,  cohesion  policy  provides  Romania  with  EUR 31  billion for  the  2021-2027  period. 
Cohesion  policy  financing  aims  to  further  support  Romania’s  competitiveness  and  upward  social 
convergence, 
just  transition,  the 
modernisation of public employment services, the development of skills and increased quality and 
inclusiveness  of  education  and  training,  as  well  as  the  reduction  of  poverty.  Romania  has  made 
progress  in  implementing  cohesion  policy  but  challenges  remain  and  significant  territorial 
disparities in investment and employment persist between the capital region and the other regions, 
as well as between urban and non-urban areas. 

6.6.1.  Developments in the balance of payments 

Romania's  external  balance  (i.e.  the  combined  current  and  capital  account)  deteriorated  from  -
5.1% of GDP in 2021 to -6.7% in 2022, before improving to -4.9% in  2023. The worsening of the 
external balance in 2022 was driven by a large increase in the current account deficit by about 2 

(62)  COM(2024) 600 final, 19.06.2024. 

114 

 
Convergence Report 2024 - Technical annex 
Chapter 6 - Romania 

percentage points of GDP, while the surplus of the capital account also increased slightly. In 2023, 
the  capital  account  surplus  decreased  by  about  0.4  percentage  point  of  GDP  and  the  current 
account  deficit  shrank  by  around 2.2  percentage  points,  leading  to  the  large  improvement  in  the 
external balance. But, the current account deficit remains large, mainly due to high and increasing 
government deficits and is not forecast to improve this year and next. 

Despite the double-digit growth of export goods in 2022 following the economic recovery from the 
pandemic, nominal imports advanced even faster due to the surge in global energy and commodity 
prices.  As  a  result,  the  balance  of  trade  in  goods  deteriorated  markedly,  from  -9.6%  of  GDP  in 
2021 to -11.3% of GDP in 2022. It shrank again to -8.9% of GDP in 2023 on account of a lower 
external  energy  bill  and  overall  declining  imports  driven  by  a  sharp  deceleration  in  domestic 
demand.  The  balance  of  trade  in  services,  driven  mainly  by  exports  of  transportation  and  IT 
services,  remained  positive  at  4.6%  of  GDP  in  2022  and  4.2%  in  2023,  partially  offsetting  the 
large deficit in the external trade of goods. 

The  negative  balance  of  primary  income  widened  to  -3%  of  GDP  in  2022  and  -2.7%  of  GDP  in 
2023, reflecting mainly higher outflows of investment income linked to the country's negative net 
international  investment  position.  The  balance  of  secondary  income,  which  consists  primarily  of 
remittances,  continued  to  be  positive, with  a  slight  increase  to  about  0.5%  of  GDP  in  both  2022 
and  2023,  after  a  large  drop  in  2021.  The  capital  account  surplus  increased  to  2.5%  of  GDP  in 
2022  and  2.1%  of  GDP  in  2023,  benefiting  from  the  positive  impact  of  an  increased  uptake  of 
projects financed by EU funds and RRP financing flows. 

Net  FDI  inflows  rebounded  after  their  drop  to  1.3%  of  GDP  in  2020  due  to  the  pandemic  and 
increased  to  3%  of  GDP  in  2022,  but  decelerated  again  to  2%  of  GDP  in  2023.  Net  portfolio 
inflows  stood  at  1.7%  of  GDP  in  2022,  but  surged  to  4.4%  of  GDP  in  2023,  as  the  large 
government  deficit  was  increasingly  financed  from external  sources.  Other investments including 
financial derivatives remained positive to the tune of 2.9% of GDP in 2022, but almost halved to 
1.4% of GDP in 2023 on account of a strong deceleration in domestic private credit growth. Due to 
valuation  effects  and  strong  growth  in  nominal  GDP,  Romania's  net  international  investment 
position  fell  from  47%  of  GDP  in  2021  to  about  40%  of  GDP  in  2023.  The  NIIP  excluding  non-

115 

Table 6.4:Romania - Balance of payments(percentage of GDP)201820192020202120222023Current account-4.6-4.9-4.9-7.2-9.2-7.0of which: Balance of trade in goods-7.4-8.0-8.6-9.6-11.3-8.9               Balance of trade in services4.13.94.33.94.64.2               Primary income balance -1.8-1.4-1.5-2.0-3.0-2.7               Secondary income balance0.60.70.90.40.50.5Capital account1.21.31.92.22.52.1External balance 1)-3.4-3.6-3.1-5.1-6.7-4.9Financial account-2.5-2.3-3.5-6.1-5.4-3.7of which: Direct investment-2.4-2.2-1.3-3.7-3.1-2.0               Portfolio investment-1.4-1.1-6.1-1.4-1.7-4.4               Other investment 2)1.71.11.3-1.9-2.9-1.4               Change in reserves-0.4-0.12.50.92.34.1Financial account without reserves-2.1-2.2-6.1-7.0-7.7-7.8Errors and omissions0.91.3-0.5-1.01.31.2Gross capital formation23.324.324.526.327.125.7Gross saving18.919.717.818.918.219.0Net international investment position-43.4-43.4-47.6-47.0-40.8-39.81) The combined current and capital account.2) Including financial derivatives.Sources: Eurostat, European Commission calculations, the National Bank of Romania. 
 
      
 
 
Convergence Report 2024 - Technical annex 
Chapter 6 - Romania 

defaultable  instruments  (NENDI),  which  takes  into  account  Romania’s  large  stock  of  net  FDI, 
bolstering  Romania’s  economic  convergence  with  the  euro  area,  remained  low  at  about  -5%  of 
GDP in mid-2023. 

Romania’s  external  cost  competitiveness  started 
to  deteriorate  following  the  surge  in  inflation  in 
the  aftermath  of  the  pandemic  and  the  robust 
wage growth. The appreciation of the HICP-based 
REER  accelerated  in  2022  and  2023  as  inflation 
in  Romania  was  significantly  above  that  of  the 
euro  area,  while  the  RON  appreciated  slightly 
against the euro. The ULC-deflated real effective 
exchange  rate  (REER),  also  started  appreciating 
more  strongly  as  of  2023,  when  nominal  wages 
grew  by  about  18%  (by  8%  in  real  terms),  well 
above labour productivity. 

According  to  the  Commission’s  Spring  2024 
Economic  Forecast,  the  current  account  deficit  is 
expected to stay slightly below 7% of GDP in 2024 and 2025, boosted by a still large government 
deficit and an acceleration of domestic demand. This will be partially offset by robust dynamics in 
the capital account, due to hefty inflows of EU funds and FDI. 

6.6.2.  Market integration 

Romania's economy is well integrated with the euro area through trade and investment linkages. 
The  degree  of  trade  openness  (see  Table  6.5  for  a  definition)  decreased  somewhat  in  2023, 
reflecting the weak domestic demand from main trading partners, declining industrial output and a 
significant  deceleration  in  domestic  demand  affecting  imports.  Trade  openness  in  2022  stood  at 
48.9% of GDP and decreased in 2023 to 43.6% of GDP. In 2023, 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, Bulgaria and Türkiye. Trade with the euro area also decreased from 
26% of GDP in 2022 to below 24%% of GDP in 2023. 

Since it joined the European Union, Romania attracted substantial amounts of FDI. The total stock 
of inward FDI reached almost EUR 108 billion or 38% of GDP in 2022, up by 12% from 2021 (63). 
More than 86% of the FDI stock originated in the EU, mainly from euro area Member States, such 
as the Netherlands, Germany and Austria.   

judiciary  system,  poor 

Romania under-performs in international rankings of  competitiveness relative to many euro  area 
Member  States,  but  its  position  has  gradually  improved  in  recent  years.  Romania  has  advanced 
from the  51st place in  2022 to the 48th in  2023 from a total of 64 surveyed economies in the 
IMD’s World Competitiveness Index. A patchy and unpredictable legal and regulatory framework, an 
inefficient 
infrastructure  and  public  administration  capacity,  an 
uncompetitive  tax  regime  and,  at  times,  ineffective  corporate  governance  of  state-owned 
enterprises  are  some  of  the  main  obstacles  to  investment  and  productivity  growth.  According  to 
the World Bank's 2022 Worldwide Governance Indicators, Romania ranks below the average of the 
five  euro  area  Member  States  with  the  lowest  scores  in  terms  of  voice  and  accountability, 
government effectiveness, regulatory quality and control of corruption. At the same time, Romania 
ranks  higher  than  the  average  five  lowest  euro  area  Member  States  for  political  stability  and 
absence  of  violence  and  at  a  broadly  similar  level  in  terms  of  rule  of  law,  based  on  recent 
progress (64). On a more positive note, according to the 2023 Single Market Scoreboard, Romania's 
transposition  deficit  of  EU  Directives  declined  to  0.2%  in  2023, after  a  high  of  2.9%  in  2021.  It 

(63)  National Bank of Romania (2023), report on Foreign Direct Investment in Romania in 2022.  
(64)  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  point  lower  (higher)  than  that  of the 
average of this group of five euro area Member States. 

116 

95100105110201820192020202120222023Graph6.9: Romania -Effective exchange ratesNEERREER, HICP-deflatedREER, ULC-deflated(vs 36 trading partners; monthly averages;index numbers, 2018 = 100)Source: European Commission. 
  
Convergence Report 2024 - Technical annex 
Chapter 6 - Romania 

follows a stable result of 1.1% for three consecutive years, very close to the EU average (1%) and 
the target (0.5%) proposed by the European Commission in the Single Market Act (2011). 

As  part  of  the  2024  Country  Report,  the 
identified  several  obstacles 
Commission  has 
undermining  Romania’s  business  environment 
and  competitiveness,  among  which  labour  and 
skills  shortages  and  mismatches,  still  limited 
access  to  finance  for  SMEs,  volatile  tax  and 
regulatory  environment  holding  back  investment, 
certain  aspects  regarding  the  functioning  of  the 
judiciary, 
in  public 
insufficient  competition 
procurement,  continued  restrictions  on  access  to 
some  regulated  professions,  weak  administrative 
capacity,  especially  at  local  and  regional  level, 
poor quality of education and training, large gaps 
in transport infrastructure and low level of digitalisation.  

The 2024 Country Report highlights that the efficiency of justice has improved. Nevertheless, some 
remaining  aspects  as  regards  the  quality  and  independence  of  justice  need  further  action. 
Indicators on judiciary efficiency slightly worsened in 2022 from 2021, after a strong improvement 
in  2021.  The  quality  of  the  justice  system  is  good  overall,  despite  the  shortages  in  human 
resources. At the same time, the digitalisation of justice can be improved, though digital tools are 
widely used in courts. However, some concerns about judicial independence persist. The RRP aims 
to address these issues by increasing  the independence and efficiency of the justice system, and 
the quality of legislative process.  

Romania’s progress in strengthening the rule of law enabled the European Commission to close the 
Cooperation  and  Verification  Mechanism  (CVM)  which  had  been  overseeing  judicial  reforms.  The 
2023  Rule  of  Law  Report  recommends  to  Romania  to  complete  these  reforms,  in  line  with  the 
recommendations from the Venice Commission, and to take measures to address concerns about 
the investigation and prosecution of criminal offences in the judiciary. 

Romania has completed transposition of the 4th and the 5th Anti-Money Laundering Directive. As 
regards  the  conformity  of  the  transposition,  the  Commission  sent  two  letters  of  formal  notice 
concerning the transposition of different provisions related to beneficial ownership registers. One 
infringement procedure is still pending.  

In  May  2023,  the  5th  round  Mutual  Evaluation  Report  of  Romania  was  published.  On  matters  of 
international  cooperation,  Romania  has  been  rated  at  the  highest  level  of  effectiveness 
(‘Substantial’). In addition, Romania was rated as largely compliant or compliant on 25 of the 40 
Financial Action Task Force (FATF) Recommendations.    

117 

Table 6.5:Romania - Market integration201820192020202120222023Trade openness 1) (%)46.244.840.845.048.943.6Trade with EA in goods & services 2)+3) (%)26.225.123.024.825.623.9IMD World Competitiveness Ranking 4)494951485148Internal Market Transposition Deficit 5) (%)1.11.11.12.90.30.2Real house price index 6)110.5108.5110.9110.7103.697.5 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-20 / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics). 3) Trade in services with EA-20 (average credit and debit in % of GDP at current prices) (Balance of Payments). 4) International Institute for Management Development (IMD). 5) Percentage of internal market directives not yet communicated as having been transposed, relative to the total. 6) Deflated house price index (2015=100) (Eurostat). Sources: Eurostat, World Bank, International Institute for Management Development, European Commission calculations.0.00.61.2Voice and accountabilityPolitical stability andabsence ofviolence/terrorismGovernmenteffectivenessRegulatory qualityRule of lawControl of corruptionRomaniaEuro area average five lowestEuro area averageGraph 6.10:Romania -World Bank's 2022 Worldwide Governance IndicatorsNote: Estimate of governance ranges from -2.5 (weak) to 2.5 (strong). Source: World Bank. 
 
    
 
 
 
  
Convergence Report 2024 - Technical annex 
Chapter 6 - Romania 

The Romanian labour market continues to face significant challenges. Aging population, continued 
emigration  and  low  intra-country  labour  mobility  are  reducing  the  labour  supply.  Despite  recent 
improvements,  employment  and  activity  rates  remain  below  EU  averages.  Labour  and  skills 
shortages and job mismatches remain a pressing challenge for the labour market. High minimum 
wage  increases  above  inflation  and  productivity  growth  continued  in  2023, fuelling  overall  wage 
growth,  with  potential  adverse  consequences 
inflation  persistence  and  external 
competitiveness.  The  Romanian  recovery  and  resilience  plan  stipulates  the  creation  of  a  new 
mechanism for setting the minimum wage, based on objective criteria, consistent with job creation 
and competitiveness. 

for 

The financial sector in Romania is smaller and less developed than in the euro area.  The size of 
assets managed by the financial sector stood at 90% of GDP in 2022, which is much less than in 
the euro area (715% of GDP) and less than the average of the five euro area Member States with 
the  smallest  financial  sectors.  The  size  of  the  financial  sector  has  remained  broadly  unchanged 
since  2018  while  it  has  increased  in  the  euro  area.  Banking  dominates  the  Romanian  financial 
sector and made up 56% of the financial sector’s assets in 2022. The central bank is the second 
largest holder of financial assets with a share of 21% in 2022. These shares of financial assets 
held by banks and the central bank are larger than in the euro area but relatively similar to those 
of the five euro area  Member States with the smallest financial sectors.  They mostly reflect the 
relative  underdevelopment  of  non-bank  financial  intermediaries  and  investment  funds  compared 
to the euro area. Relative to GDP, the insurance and the pension-fund sector in Romania is eight-
times smaller than in the euro area. However, the sector’s share of the total financial sector assets 
stood at 11% in 2022, which is similar to that of the euro area. 

118 

Table 6.6:Romania - Allocation of assets by financial sub-sectorRatio to GDP (%)ROEAEA 5 smallest201820222018202220182022Financial corporations (total)8690689715174190Central bank191953684652Monetary financial institutions48502662908793Other financial intermediaries781811631618Non-MMF investment funds1)5310111345Insurance co. and Pension Funds81087812122Share of total (%)ROEAEA 5 smallest201820222018202220182022Central bank22218102727Monetary financial institutions565639405049Other financial intermediaries892623910Non-MMF investment funds54151623Insurance co. and Pension Funds911131112111) MMF stands for money market funds.Source: Eurostat. 
 
   
 
 
Convergence Report 2024 - Technical annex 
Chapter 6 - Romania 

As to the financing of the economy, outstanding liabilities are much lower in Romania than in the 
euro area (207% of GDP in  2022 vis-à-vis 696% of GDP in the euro area) and than in the euro 
area  Member  States  with  the  smallest  financing  needs.  Like  in  the  euro  area,  loans  are  the 
dominant source of funding. They amounted to 27% of total liabilities in 2022. Trade credits and 
advances play an important role in the financing of the economy (21% of outstanding liabilities in 
2022).  Romania  has  less  developed  bond  and  equity  markets  than  the  euro  area  and  market 
financing (debt securities and listed shares) is much less developed. Financing through private debt 
markets  is  practically  inexistent,  while  equity  markets  are  very  small  compared  to  those  of  the 
euro area. Equity and private sector debt  markets represented  5% of liabilities in 2022 (10% of 
GDP). This compares to 19% of liabilities in the euro area (70% of GDP for private-sector debt and 
63% of GDP for listed stocks). However, Romania is still comparable to the five euro area Member 
States with the smallest financial needs. The government bond market is smaller than in the euro 
area, reflecting the smaller debt-to-GDP ratio in the country.  

119 

Table 6.7:Romania - Financing of the economy1)Ratio to GDP (%)ROEAEA 5 smallest201820222018202220182022Liabilities (total)198207706696316304Loans5857228219109103Non-financial co. debt securities00121232Financial co. debt securities01665834Government debt securities303378714742Listed shares8960631210Unlisted shares28221761845453Other equity304153545658Trade credits and advances454334353132Share of total (%)ROEAEA 5 smallest201820222018202220182022Loans292732323433Non-financial co. debt securities002211Financial co. debt securities019811Government debt securities151611101514Listed shares449933Unlisted shares141125261919Other equity1520781718Trade credits and advances23215510111) 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 2024 - Technical annex 
Chapter 6 - Romania 

Romania’s  banking  sector  is  well  integrated  with 
the  euro  area’s  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 
68%  in  2022,  well  above  the  euro  area  average 
of  nearly  18%.  Bank  concentration,  as  measured 
by  the  market  share  of  the  five  largest  credit 
institutions  in  total  assets,  has  remained  stable 
since  2018,  and  stood  at  61%  in  2022.  This  is 
around 10 percentage points above the euro area 
average in 2022. 

120 

020406080RO, 2018RO, 2022EA, 2018EA, 2022Concentration in the banking sector (CR5 ratio)Share of foreign institutions as % of total assetsGraph 6.11:Romania -Foreign ownership and concentration in the banking sector(in percent, weighted averages)Source: ECB, Structural financial indicators.  
  
7.  SWEDEN 

7.1.  LEGAL COMPATIBILITY 

7.1.1.  Introduction 

The legal rules governing the Swedish Central Bank (Riksbank) have been amended since the 2022 
Convergence  Report.  Amendments  to  the  Instrument  of  Government  (as  part  of  the  Swedish 
Constitution),  have  been  made,  while  the  Riksbank  Act  from  1988,  as  amended,  (the  ‘Riksbank 
Act’), has been replaced with a new  central  bank Act (the ‘new Riksbank Act’) which entered into 
force on 1 January 2023. Also, the Law on Exchange Rate Policy from 1998 has been amended. 
Certain  incompatibilities  and  imperfections  highlighted  in  the  Commission’s  2022  Convergence 
Report have been remedied. Other issues remain unsolved. Therefore, certain comments provided 
in the 2022 Convergence Report remain relevant and are repeated in this year’s assessment, while 
new  issues  concerning,  in  particular,  the  central  bank  independence  and  privileged  access  are 
flagged. 

7.1.2.  Central bank independence 

Article 3 of Chapter 6 of the Riksbank Act obliged 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 the central bank and third parties was not prohibited 
as  such,  but  regular  upfront  information  of  government  representatives  about  monetary  policy 
decisions, especially when the Riksbank would have considered them as of major importance, could 
structurally  have  offered  to  the  government  an  incentive  and  the  possibility  to  influence  the 
Riksbank  when  taking  key  decisions,  or  to  appear  to  be  able  to  influence  it.  Therefore,  the 
obligation to inform the minister about a monetary policy decision of major importance prior to its 
approval  by  the  Riksbank  limited  or  appeared  to  limit  the  possibility  for  the  Riksbank  to  take 
decisions independently and offered the possibility for the Government to seek to influence them. 
Such  procedure  was  incompatible  with  the  prohibition  on  giving  instructions  to  the  central  bank, 
pursuant to Article 130 TFEU and Article 7 of the ESCB/ECB Statute. 

Article  3  of  Chapter  6  has  now  been  repealed.  Article  7  of  Chapter  2  of  the  new  Riksbank  Act 
provides  that  monetary  policy  decisions  of  major  importance  are  communicated  to  the  minister 
after  their  approval  by  the  Riksbank.  Thus,  the  above  incompatibility  with  Article  130  TFEU  and 
Article 7 of the ESCB/ECB Statute has been solved. 

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  covered  monetary  policy  issues.  The  provisions  did  not  provide  for  their 
independence  in  the  performance  of  ESCB-related  tasks  directly  entrusted  by  the  Treaties.  Both 
provisions,  therefore,  were  considered  incompatible  with  Article  130  TFEU  and  Article  7  of  the 
ESCB/ECB Statute. 

The  new  amendments  to  the  Instrument  of  Government  changed  Article  13  of  Chapter  9  which 
now  provides  that  the  Riksbank  is  responsible  for:  1.  formulating  and  implementing  monetary 
policy; 2. carrying out foreign exchange interventions; 3.  holding and managing foreign exchange 
reserves; 4. promoting the smooth operation of payment systems; 5. carrying out other basic tasks 
arising  from  a  specific  law.  Under  Article  15  of  Chapter  9  of  the  newly  amended  Instrument  of 
Government,  no  authority  may  decide  how  the  Riksbank  shall  decide  on  matters  for  which  it  is 
responsible under Article 13  of Chapter 9. In these areas of responsibility, the Riksbank  may not 
seek or take instructions from anyone. Therefore, the prohibition on the Riksbank to seek or take 
instructions  covers  the  ESCB-related  tasks,  and  the  incompatibility  with  Article  130  TFEU  and 
Article 7 of the ESCB/ECB Statute has been solved. 

Pursuant  to  Article  4  of  Chapter  10  of  the  Riksbank  Act,  the  Swedish  Parliament  approved  the 
central bank’s profit and loss account and its balance sheet and determined the allocation of the 
central bank’s profit. This practice impinged on the financial independence of the Riksbank and was 

121 

Convergence Report 2024 - Technical annex 
Chapter 7 - Sweden 

incompatible with Article 130 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. 

Pursuant to Article 6 of Chapter 8 of the new Riksbank Act, the Swedish Parliament determines the 
balance  sheet  and  the  profit  and  loss  account  and  approves  the  central  bank’s  decision  on  the 
allocation of the central bank’s profit. The Swedish Parliament may  refuse to approve a decision 
only if it is contrary to Chapter 8 of the new Riksbank Act. If approval is refused, the central bank 
shall take a new decision. Thus, the incompatibility has only been solved in part.  

Article 4 of Chapter 1 of the Riksbank Act provided for the replacement of the Governor, in case of 
absence  or  incapacity,  by  the  Vice-Governors  nominated  by  the  General  Council.  It  was  unclear 
whether the notion ‘absence’ in Article 4 also referred 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 
continuous  functioning  of  the  Riksbank,  the  Riksbank  Act  would  have  benefited  from  some 
improvement and should have provided for clear procedures and rules regarding the succession of 
the Governor in case the notion ’absence’ also referred to instances of termination of office as well 
as in case the Governor was incapacitated. 

According to Article 12 of Chapter 7 of the new Riksbank Act, the Council may determine the order 
in  which  the  Vice-Governors  have  to  serve  in  place  of  the  Governor.  The  preparatory  works 
accompanying the new Riksbank Act point out that Article 12 focuses on the need for replacement 
in different situations. This could include replacement in case of illness, but also replacement for a 
period  of  time  before  a  new  Governor  has  taken  up  his  duties.  A  replacement  may  also  be 
envisaged  if  the  current  Governor  is  no  longer  in  office,  for  example  because  he  or  she  has 
resigned at own request or has been removed from employment by a decision of the Council, even 
if the decision may be challenged. Statements in preparatory works are a source of law in Swedish 
law. Given that preparatory works have clarified that this Article refers to instances of termination 
of office, as well as in case the Governor is incapacitated, the issue has been solved.  

Article 3 of Chapter 2 of the new Riksbank Act provides that the central bank shall decide on the 
specification  of  the  price  stability  target,  after  approval  by  the  Swedish  Parliament.  The 
Parliament’s  right  to  approve  any  decision  taken  by  the  central  bank  on  the  design  of  the  price 
stability objective is incompatible with the prohibition on giving instructions to the central bank as 
set out in Article 130 TFEU and Article 7 of the ESCB/ECB Statute. 

The Commission notes the provisions on restauration of equity introduced in the new Riksbank Act. 
According  to  Article  15  of  Chapter  8,  if  the  equity  is  less  than  one  third  of  the  target  level,  the 
Riksbank shall make a submission to the Riksdag to restore equity. The submission shall be for an 
amount that restores equity to the base level unless unrealised gains on the balance sheet justify 
restoration  to  a  lower  level  or  not  at  all.  If  required  to  secure  the  Riksbank’s  ability  to  be  self-
financing  in  the  long  term,  the  submission  may  be  for  an  amount  corresponding,  at  most,  to  an 
amount that restores equity to the target level.  

These  provisions  aim  to  safeguard  the  financial  independence  of  the  central  bank  which  also 
implies  that  Riksbank  should  always  be  sufficiently  capitalised  in  order  to  avoid  any  situations 
which may negatively impact the central bank’s ability to perform its ESCB-related tasks but also 
its national tasks. 

7.1.3.  Prohibition of monetary financing and privileged access 

Under Article 8 of Chapter 6 of the Riksbank Act, the Riksbank could, in exceptional circumstances, 
grant  credits  or  provide  guarantees  on  special  terms  to  banking  institutions  and  Swedish 
companies that were under the supervision of the Financial Services Authority. In order to comply 
with the prohibition of monetary financing of Article 123 TFEU it should have been clearly specified 
that the loan was granted against adequate collateral to ensure that the Riksbank would not suffer 
any loss in case of the debtor's default.  

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Pursuant to Article 4 first paragraph point 2 of Chapter 2 of the new Riksbank Act, the Riksbank 
may,  in  relation  to  financial  undertakings,  provide  credit  in  Swedish  krona  and  foreign  currency 
against  adequate  security.  Also,  Article  6  point  1  of  Chapter 3  of  the  new  Riksbank  Act  provides 
that,  if  necessary  to  counteract  a  serious  disturbance  in  the  financial  system  in  Sweden,  the 
Riksbank may provide credit in Swedish krona or foreign currency against adequate security to: a) 
financial undertakings referred to in Chapter 1, Section 2(1); b) financial undertakings referred to in 
Chapter 1, Section 2(2) and operating from a branch in Sweden; c) financial undertakings referred 
to in Chapter 1, Section 2(1) and (2), which are central counterparties. Article 7 of Chapter 3 of the 
new  Riksbank  Act  provides  that  the  Riksbank  may,  against  collateral  and  under  other  specific 
conditions,  grant  credit  in  Swedish  krona  or  foreign  currency  to  a  viable  financial  company  as 
referred  to  in  Section  6  in  order  to  temporarily  satisfy  the  company’s  liquidity  needs,  if:  1)  it  is 
necessary  to  counteract  a  serious  disturbance  in  the  financial  sector  in  Sweden  or  2)  there  are 
other exceptional reasons.  

Therefore,  the  incompatibility  in  the  area  of  prohibition  of  monetary  financing  with  Article  123 
TFEU has been solved.  

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 did not enumerate the entities covered by the prohibition of monetary 
financing correctly. Therefore, Article 1 was incompatible with the wording of Article 123(1) TFEU 
and 21(1) of the ESCB/ECB Statute. 

Article 6 of Chapter 1 of the new Riksbank Act provides that the Riksbank may not extend credit or 
purchase  debt  instruments  directly  from:  1)  the  State,  municipalities,  regions  or  associations  of 
local  authorities or legal  persons  over  which  the  State, regions,  municipalities,  or  associations  of 
municipalities, separately or jointly, has a direct or indirect control; or 2) institutions, bodies, offices 
or agencies of the European Union, other central banks.  

While the incompatibility has been partially solved by reference to the ‘institutions, bodies, offices 
or agencies of the European Union’, the new Article 6 of Chapter 1 of the new Riksbank Act does 
not enumerate the entities covered  by the prohibition of monetary financing  correctly. Therefore, 
Article 6 of Chapter 1 of the new Riksbank Act is incompatible with the wording of Article 123(1) 
TFEU and 21(1) of the ESCB/ECB Statute. 

According to Article 1(4) of Chapter 8 of the Riksbank Act, the Riksbank could grant credit to and 
purchase debt instruments from financial institutions owned by the State or another public body. 
This  provision  of  Article  1  did  not  fully  comply  with  Article  123(2)  TFEU  and  Article  21.3  of  the 
ESCB/ECB  Statute  because  the  exemption  only  covered  publicly  owned  institutions.  Article  6  of 
Chapter 1 of the new Riksbank Act provides that the Riksbank may grant credit to or purchase debt 
instruments  directly  from  publicly  owned  credit  institutions  under  the  same  conditions  as  other 
credit institutions under the law. Thus, this incompatibility has been partially solved. For the sake of 
legal certainty, it should be added that, in the context of the supply of reserves by central banks, 
these  publicly  owned  credit  institutions  should  be  given  the  same  treatment  as  private  credit 
institutions. 

The  provisions  of  Article  4  of  Chapter  10  on  the  allocation  of  the  Riksbank’s  profit  were 
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 were not legally binding but accepted 
as a practice by Parliament for calculating profit allocation and as there was 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 TFEU. The law should 
have  ensured  that  the  reserve  capital  of  Riksbank  was  left  unaffected  in  any  case  and  that  the 
actual contribution to the State budget did not exceed the amount of the net distributable profit. 

The  new  Riksbank  Act  no  longer  refers  to  the  non-statutory  guidelines  on  profit  distribution. 
According  to  Article  4  of  Chapter  8  of  the  new  Riksbank  Act,  the  Council  shall  decide  on  the 

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Chapter 7 - Sweden 

allocation of the results of the year. Pursuant to Article 6 of Chapter 8 of the new Riksbank Act, the 
Swedish  Parliament  approves  the  central  bank’s  decision  on  the  allocation  of  the  central  bank’s 
profit. The Swedish Parliament may refuse to approve a decision only if it is contrary to Chapter 8 
of the new Riksbank Act. If approval is refused, the central bank shall take a new decision. 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. 

Pursuant to Article 4 first paragraph point 5 of Chapter 2 of the new Riksbank Act, the Riksbank 
may, in relation to financial undertakings, buy and sell Swedish sovereign debt. Pursuant to Article 
5 point 3 of Chapter 2 of the new Riksbank Act, the Riksbank may, if there are exceptional reasons, 
buy and sell financial instruments other than sovereign debt referred to in Article 4 first paragraph 
point 5 of Chapter 2. The restriction on Riksbank’s ability to purchase and sell financial instruments 
other than  Swedish  sovereign  debt  instruments  is  incompatible  with  the  prohibition  of  privileged 
access  under  Article  124.  Article  124  TFEU  prohibits  any  measure,  not  based  on  prudential 
considerations,  establishing  privileged  access  by,  inter  alia,  central  governments  to  financial 
institutions.  Under  Article  1(1)  of  Council  Regulation  (EC)  No  3604/93,  privileged  access  is 
understood  as  any  law,  regulation  or  other  binding  legal  instrument  adopted  in  the  exercise  of 
public  authority  which,  inter  alia,  obliges  financial  institutions  to  acquire  or  to  hold  liabilities  of, 
inter  alia,  central  governments,  or  confers  financial  advantages  that  do  not  comply  with  the 
principles of  a  market  economy,  in  order  to  encourage  those  institutions  to  acquire  or  hold  such 
liabilities.  Thus,  as  public  authorities,  national  central  banks  may  not  take  measures  granting 
privileged access to financial institutions by the public sector if such  measures are not based on 
prudential  considerations.  Article  2  of  Regulation 
‘prudential 
considerations’ as those which underlie national laws, regulations or administrative actions based 
on, or consistent with, Union law and designed to promote the soundness of financial institutions 
so  as  to  strengthen  the  stability  of  the  financial  system  as  a  whole  and  the  protection  of  the 
customers  of  those  institutions.  As  the  restriction  on  Sveriges  Riksbank’s  ability  to  purchase  and 
sell  financial  instruments  other  than  Swedish  sovereign  debt  instruments  is  not  based  on 
prudential  considerations  within  the  meaning  of  Article  124  TFEU,  the  restriction  on  Sveriges 
Riksbank’s  ability  to  purchase  and  sell  financial  instruments  other  than  Swedish  sovereign  debt 
instruments is incompatible with the prohibition on privileged access under Article 124 TFEU. 

(EC)  No  3604/93  defines 

7.1.4.  Integration into the ESCB 

Objectives 

Chapter 2, Article 1 of the new Riksbank Act should include a reference to the secondary objective 
of the ESCB to support the general economic policies in the Union in line with Article 127(1) TFEU. 

Tasks 

The incompatibilities with regard to the ESCB/ECB tasks are as follows: 

•  absence of a general reference to the Riksbank subordination to the ECB’s legal acts (Chapter 
1, Article 4 of the Act and Chapter 9, Article 13 of the Instrument of Government, as amended); 

•  definition of monetary policy and monetary functions, operations and instruments of the ESCB 
(Chapter 2 of the Act; Chapter 9, Article 13 of the Instrument of Government as amended); 

•  conduct of foreign exchange operations and the definition of foreign exchange policy (Chapter 
2,  Article  2  of  the  Act);  Articles  1  to  4  of  the  Law  on  Exchange  Rate  Policy  of  1998  as 
amended); 

• 

right  to  authorise  the  issue  of  banknotes  and  the  volume  of  coins  and  definition  of  the 
monetary unit (Chapter 4 of the Act; Chapter 9, Article 14 of the Instrument of Government as 
amended); 

•  ECB's right to impose sanctions.  

There are furthermore some imperfections regarding the: 

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Chapter 7 - Sweden 

•  non-recognition of the role of the ECB and of the EU in the collection of statistics (Chapter 1, 

Article 11 of the Act); 

•  non-recognition of the role of the ECB in the functioning of payment systems (Chapter 3 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 6 of the 

Act). 

7.1.5.  Assessment of compatibility 

As  regards  independence  of  the  central  bank,  the  prohibition  of  monetary  financing,  privileged 
access  and  integration  into  the  ESCB  at  the  time  of  euro  adoption,  the  legislation  in  Sweden,  in 
particular  the  new  Riksbank  Act,  the  newly  amended  Instrument  of  Government  as  part  of  the 
Swedish  Constitution  and  the  Law  on  Exchange  Rate  Policy  as  amended,  is  not  fully  compatible 
with the requirements of Article 131 TFEU for the reasons set out above. 

The Swedish authorities should remedy the above-mentioned incompatibilities and imperfections. 

7.2.  PRICE STABILITY 

7.2.1.  Respect of the reference value 

The  12-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 2022. The 12-
month average inflation rate in Sweden then gradually increased to a peak of 9.2% in  April 2023, 
after  which  it  gradually  decreased,  reaching  5.4%  in  January  2024.  In  May  2024,  the  reference 
value  was  4.1%,  calculated  as  the  average  of  the  12-month  average  inflation  rates  in  the 
Netherlands,  Italy  and  Latvia  plus  1.5  percentage  points.  The  corresponding  inflation  rate  in 
Sweden was 3.6%, i.e. below the reference value. The 12-month average inflation rate is projected 
to decrease and stay below the reference value in the coming months.  

7.2.2.  Recent inflation developments 

HICP inflation in Sweden started picking up from the middle of 2021 as the dampening impact of 
the  pandemic  on  prices  receded  and  energy  prices  in  particular  started  increasing.  Inflation 
continued to rise rapidly throughout 2022, driven by the sharp rise in energy prices in the wake of 
Russia’s full-scale invasion of Ukraine and by the emergence of supply bottlenecks. This resulted in 
price increases spreading broadly to a wide range of goods and services, partly also reflecting the 
lagged impact of a weaker effective exchange rate. 

125 

012345678910Jan-18Jan-19Jan-20Jan-21Jan-22Jan-23Jan-24SwedenReference valueGraph 7.1: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 Sweden in December 2024. The reference values for 2018, 2020 and 2022 refer to the reference values calculated in the previous convergence reports.Source: Eurostat, Commission's Spring 2024 Economic Forecast.-2024681012201820192020202120222023SwedenEuro areaGraph 7.2:Sweden -HICP inflation(y-o-y percentage change)Source: Eurostat. 
  
  
  
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Chapter 7 - Sweden 

This culminated  in  HICP  inflation  reaching  10.8%  in  December 2022, by  far the  highest  inflation 
rate on record since the harmonised consumer price index was first published in 1996. The average 
HICP inflation rate reached 8.1% in 2022, up from 2.7% in 2021. Subsequently, headline inflation 
rates started to fall steadily to 1.9% in December 2023 on the back of sharply lower energy prices 
and  negative  base  effects,  bringing  annual  average  HICP  inflation  to  5.9%.  However,  food  price 
increases  remained  above  5%  throughout  2023  while  services  inflation  only  moderated  slowly 
from its peak of 7.1% in July 2023 to slightly above 5% by year end. In 2022 and 2023, inflation 
in Sweden was on average broadly in line with that of the euro area.  

Following  the  increase  in  headline  inflation  with  a  lag,  HCIP  inflation  excluding  energy,  food, 
alcohol and tobacco climbed to 6.6% in 2023, from 1.8% in 2021. Compared with the euro area, 
underlying  labour  costs  were  more  moderate  on  the  back  of  moderate  multi-annual  wage 
agreements, which extend into 2025. Firms initially absorbed part of the cost increases caused by 
supply chain disruptions in their margins, but then proceeded passing them on to final consumer 
prices.  

From  the  third  quarter  of  2021  to  the  first  quarter  of  2024,  the  behaviour  of  the  HICP’s  main 
components  exhibited  pronounced  up  and  downswings,  along  with  noticeable  volatility.  This 
reflected  the  impact  of  a  combination  of  globally  induced  demand  and  supply  shocks  affecting 
Swedish supply chains and consumption patterns. These shocks included the COVID-19 pandemic 
and  its  unwinding  (with  asymmetric  supply  and  demand  and  price  effects  with  respect  to,  for 
example,  goods  and  contact-intensive  services),  the  impact  of  Russia’s  full-scale  invasion  of 
Ukraine,  notably  affecting  energy  markets,  as  well  as  the  emergence  of  additional,  sometimes 
associated, supply bottlenecks. Over the largest part of the period in focus, the lagged impact of 
the weakening of the effective exchange rate of the krona from 2021 to the last quarter of 2023 
contributed to price increases for imported goods and services. In the period of rising inflation, the 
pass-through of the exchange rate to consumer prices is estimated to have been particularly high, 
but  it  is  expected  to  have  normalised  after  inflation  peaked.  In  the  first  quarter  of  2024,  a  less 
strong  fall  in  energy  prices,  which  reflected  base  effects,  accounted  for  an  increase  in  headline 
inflation in January 2024, followed by resumed disinflation in the following months. In May 2024, 
annual HICP inflation stood at 2.5%. Non-energy industrial goods and food inflation continued to 
fall in the first months of 2024. By contrast, services inflation remained high and even increased 
somewhat in the first quarter of 2024, to just below 6%. In the period from January to May 2024, 
HICP inflation excluding energy and food continued to decrease. 

7.2.3.  Underlying factors and sustainability of inflation 

Macroeconomic policy mix and growth developments 

The  Swedish  economy  experienced  a  strong  but  unevenly  paced  recovery  from  the  pandemic. 
Overall, the economy expanded by 2.7% in 2022, driven by domestic demand, in particular private 
consumption  and  investment,  mirroring  the  rebound  in  contact-intensive  services  and  the 
progressive  easing  of  disruptions  in  global  supply  chains.  The  economy  stagnated  in  2023,  with 

126 

Table 7.1:weights  Sweden - Components of inflation(percentage change)1)in total   201820192020202120222023May-242023HICP2.01.70.72.78.15.93.61000Non-energy industrial goods0.00.30.91.05.67.44.5293Energy9.62.9-8.815.331.4-11.3-15.0108Unprocessed food 4.52.32.6-0.413.012.55.231Processed food1.82.81.90.98.911.15.6158Services1.82.01.82.54.15.75.9410HICP excl. energy, food, alcohol and tobacco1.01.31.41.84.86.65.4703HICP at constant tax rates 1.81.60.62.68.25.83.41000Administered prices HICP1.22.02.41.72.44.65.41351) 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. 
 
   
 
 
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Chapter 7 - Sweden 

real GDP contracting by 0.2% even as the labour market remained resilient. The slowdown reflects 
mainly sharply higher inflation, eroding disposable household income, in particular combined with 
higher interest rates. The latter affected the interest-rate sensitive Swedish economy to a greater 
extent  than  most  EU  countries,  given  the  combination  of  high  private  debt  ratios  and  the  short 
fixation period for interest on housing loans in particular. This exercised a particularly strong drag 
on  purchasing  power  and  residential  investment  but  also  weighed  on  business  and  consumer 
confidence.  

Real  GDP  even  contracted  slightly  in  the  first  quarter  of  2024  but  is  poised  to  recover  in  the 
second half of 2024, as the Swedish economy is set to benefit from falling inflation and interest 
rates supporting disposable income. However, the pace of expansion would remain comparatively 
modest with average real GDP growth for 2024 projected at 0.2%. Real GDP is forecast to grow by 
around 2% in 2025, as the recovery is projected to become more broad-based with lower inflation, 
and  easing  financial  conditions  set  to  support  the  cyclical  recovery.  Housing  construction,  which 
had plummeted when interest rates started to rise, is expected to stabilise only towards the end of 
the  forecast  horizon,  whereas  non-residential  construction  is  set  to  remain  resilient,  partly  on 
account of defence spending. Other business investment, on the other hand, is projected to remain 
lacklustre,  mirroring  low-capacity  utilisation.  Relatively  weak  demand  from  abroad  is  set  to 
dampen the growth of Swedish exports in the near term but exports are projected to contribute to 
growth in 2025. 

The  fiscal  stance  was  contractionary  in  2022,  on  account  of  the  unwinding  of  Covid-19  crisis-
related fiscal measures, while considerable support to households and enterprises to counter high 
energy  prices  was  financed  by  extraordinary  surpluses  made  by  the  state-owned  electricity  grid 
authority,  thus  not  directly  impacting  public  finances.  It  turned  expansionary  in  2023 (65)  but  is 
expected to turn contractionary again in 2024, despite a reduction in certain taxes, such as on fuel, 
as well as measures aimed at addressing the economic impact of inflation on regional government 
finances  and  strengthening  the  military  defence.  In  2025,  the  fiscal  stance  is  expected  to  be 
contractionary on the assumption of unchanged policies.  

Monetary policy, conducted within an inflation targeting framework (66), tightened substantially in 
the period covered by the report, as the Riksbank proceeded with the steepest increase in its policy 
rate in decades. Since April 2022, the Riksbank has raised its main policy rate eight times, from 0% 
to 4% in September 2023 in order to address high inflation and ensure that inflation expectations 
remained  anchored.  Furthermore,  the  Riksbank  started  normalising  its  balance  sheet  by  reducing 
the  stock  of  securities  it  accumulated  over  2015-2022  as  part  of  its  monetary  policy  easing 
policies.  The  Riksbank  stopped  purchasing  assets  at  the  end  of  2022.  In  February  2023,  the 
Riksbank Executive Board decided to start selling real and nominal government bonds in order to 
reduce its asset holdings further. The sales of government bonds started in April 2023 and initially 
amounted  to  SEK  3.5  billion  per  month.  Following  a  decision  taken  in  June  2023,  the  Riksbank 
increased the pace of sales to SEK 5 billion per month in September 2023, and then increased it 
further to SEK 6.5 billion per month in February 2024. While the Riksbank did not actively sell its 
holdings  of  non-government  bonds,  these  holdings  also  declined  due  to  the  maturing  of  the 
securities. Overall, the Riksbank’s securities holdings decreased from a SEK 1012 billion peak in Q1 
2022 to SEK 570 billion in May 2024. At its latest meeting in May 2024, the Riksbank cut its policy 
rate by 25 basis points, bringing it to 3.75 basis points. The Executive Board assessed that easing 
monetary  policy  was  appropriate  as  inflation  was  approaching  the  2%  target  while  economic 
activity was weak. In accordance with the updated central bank law, on 2 April 2024, the Riksbank 
made a submission to the Swedish parliament for a capital injection amounting to SEK 43.7 billion 

(65)  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. 

(66)  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). 

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Chapter 7 - Sweden 

to  restore  its  equity  to  the  statutory  level  following  the  losses  stemming  from  bond  portfolio 
purchases to  counter the impact of the  pandemic. On 13 June, the Swedish Parliament’s finance 
committee proposed that the Riksbank receive a capital injection of SEK 25 billion. At the cut-off 
date of this report, no final decision was taken on this issue.  

Wages and labour costs 

Employment  growth  was  quite  strong  in  Sweden 
in  the  last  decade.  The  labour force  participation 
rate is the highest in the EU. However, seen over 
the  last  decade  and  a  half,  healthy  employment 
growth  and  high  labour  force  participation  have 
not led to a marked decline in the unemployment 
rate,  which  stands  above  the  euro  area  average. 
This is  partly  due  to  the  relatively  strong  growth 
of  the  labour  force,  but  also  mirrors  significant 
mismatches and skill shortages (including among 
persons  from  disadvantaged  socio-economic  and 
migrant  backgrounds)  which  give  employers  an 
incentive  to  retain  labour  during  periods  of 
expected  short-lived  weakness 
in  economic 
activity. In the aftermath of the pandemic, risks to 
the labour market were countered by sizable and 
frontloaded policy support to households affected 
by temporary unemployment and to businesses suffering from turnover losses. In 2023, the labour 
market  remained  resilient  despite  the  broad  stagnation  in  economic  activity,  probably  partly  on 
account  of  firms  hoarding  labour  in  a  situation  with  tight  supply  of  skilled  personnel  and  partly 
enabled  by  high  corporate  profitability.  This  notwithstanding,  unemployment  is  expected  to  rise 
somewhat  in  line  with  the  usual  cyclical  lag.  The  unemployment  rate  is  set  to  peak  at  close  to 
8.5% in 2024, before falling somewhat in 2025 on the back of improved employment growth. 

The  growth  in  nominal  compensation  per  employee  stood  at  4.1%  on  average  in  2023,  up  from 
2.8% in 2022, that is well below inflation rates in both years. In Sweden, social partners typically 
first  negotiate  a  benchmark  agreement  for  exporting  sectors  aimed  at  maintaining  cost 

128 

Table 7.2:Sweden - Other inflation and cost indicators(annual percentage change)20182019202020212022202320241)20251)HICP inflationSweden2.01.70.72.78.15.92.01.8Euro area1.81.20.32.68.45.42.52.1Private consumption deflatorSweden2.52.10.81.86.86.32.71.0Euro area1.51.10.62.36.86.02.42.0Nominal compensation per employeeSweden3.92.92.54.62.84.14.13.0Euro area2.12.2-0.44.24.55.14.23.1Labour productivitySweden0.31.4-0.84.9-0.1-1.60.51.6Euro area0.10.2-4.74.41.1-1.00.10.9Nominal unit labour costsSweden3.61.53.4-0.32.85.83.61.3Euro area2.01.94.6-0.23.36.24.12.2Imports of goods deflatorSweden6.72.3-5.35.223.74.41.52.3Euro area2.6-0.6-3.89.721.6-4.90.41.81) Commission's Spring 2024 Economic Forecast.Source: Eurostat, Commission's Spring 2024 Economic Forecast.-4-20246820182019202020212022202320242025Productivity (real GDP per person employed)Nominal compensation per employeeNominal unit labour costsHICP inflationGraph 7.3:Sweden -Inflation, productivity and wage trends(y-o-y % change)Source: Eurostat, Commission's Spring 2024 Economic Forecast. 
 
        
 
 
  
Convergence Report 2024 - Technical annex 
Chapter 7 - Sweden 

competitiveness vis-a-vis major trading  partners.  Other sectors, including services, tend to follow 
this benchmark rather closely. The most recent multi-annual wage agreement extends into 2025. It 
provides for moderate compensation growth. Overall, the growth of compensation per employee is 
expected  to  moderate  somewhat  in  2025  on  the  back  of  falling  inflation.  The  current  collective 
agreements  should  not  contribute  to  upward  pressure  on  inflation  in  2024  and  into  the  first 
months of  2025.  However,  wage  demands,  and  wage  drift  might  react  with  a  certain  lag  to  the 
earlier peak in inflation. Still, the Swedish wage negotiation framework tends to deliver outcomes 
supporting  medium-term  price  stability  and  contributing 
firms’  price 
competitiveness.  Moreover,  overall  healthy  corporate  profitability  should  allow  firms  to  cushion 
some increases in compensation without adding to upward pressure on prices. Overall, the risks of 
significant second round effects of wage increase on inflation appear to be limited. 

to  maintaining 

Sweden  had  moderate  labour productivity  growth  in  the  years  before  2019.  In  the  period  2020-
2022 the pandemic induced strong swings in economic activity while employment was cushioned 
by  a  combination  of  labour  hoarding  and  various  support  schemes.  As  a  result,  aggregate 
measures of changes in labour productivity and unit labour costs were distorted. Unit labour costs 
growth rose subsequently to 5.8% in 2023 - similar to the euro area - reflecting a cyclical fall in 
overall  labour  productivity  as  employment  remained  resilient  in  the  face  of  sluggish  economic 
activity. Unit labour costs are set to fall markedly over the forecast horizon, to 1.3% by 2025.  

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 significantly over the past years. This was for a large part due to 
large  swings  in  energy  and  other  commodity  prices  in  the  wake  of  the  pandemic  and  military 
conflict,  most  prominently  Russia’s  full-scale  invasion  of  Ukraine.  However,  related  trade,  supply 
and demand disruptions increasingly played a role in pushing up import prices for a broader range 
of imports from 2022 onwards. The lagged effect of exchange rate movements also played a role, 
in particular the most recent phase of effective krona weakening during 2022 and most of 2023.  

In  all,  import  prices  have  been  among  the  significant  determinants  of  consumer  price  increases 
over the past couple of years. In 2022, the import deflator for goods rose by 23.7% and the  one 
for services by just over 11%. Despite decelerating, the import deflator for goods was still high in 
2023, at 4.4%. The impact of changes in import prices on consumer  price inflation is difficult to 
gauge. 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 the price effects 
of  supply  chain  disruptions,  exchange  rate  movements,  inventory  adjustments,  sales  restrictions, 
and  other  pandemic-related  factors.  There  is  evidence  that  suggests  that  the  pass-through 
strengthened significantly during the episode of high inflation but has normalised since. According 
to the Commission’s Spring 2024 Economic Forecast, import price gains are expected to moderate 
over the projection horizon, at around 2% in 2024 and 2025.  

The  nominal  as  well  as  various  measures  of  real  effective  exchange  rates  (measured  against  a 
group  of  36  trading  partners)  showed  a  very  similar  pattern  of  a  sustained  weakening  from  the 
beginning  of  2021  until  the  last  quarter  of  2023,  when  the  effective  exchange  rates  started 
strengthening before falling back slightly again in the last months covered by this report, closely 
reflecting movements in the nominal exchange rate. Over the period in focus 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  2024  and  2025,  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 

The share of administered prices in the Swedish HICP basket amounts to just below 14%, a value 
similar  to  the  euro  area  average.  The  most  important  item  in  the  administrated  price  basket  is 
rents,  which  react  to  interest  rates  with  a  lag.  Rent  increases  tend  to  be  concentrated  at  the 

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Chapter 7 - Sweden 

beginning of the year. In 2021 and 2022, overall administered price inflation remained well below 
headline HICP inflation. In 2023, administered price increases nearly doubled to 4.6% but remained 
below the overall inflation rate. Thus, administered prices have adjusted with a lag to the broad-
based price increases witnessed in the economy. This change is accounted for by marked increases 
in  both  rents  (which  increased  by  4.1%  in  2023  up  from  1.7%  in  2022)  and  fully  administered 
prices.  

Tax changes contributed only marginally to headline inflation in both 2022 and 2023, as the pace 
at which HICP at constant taxes increased was below the headline number for both years. With a 
delayed response to increases in consumer prices, rents are expected to exert some limited upward 
impact on administered prices and thus overall HICP inflation in 2024 and possibly 2025.  

Medium-term prospects 

According  to  the  Commission’s  Spring  2024  Economic  Forecast,  inflation  is  set  to  moderate  to 
close to 2% in 2024 and 2025 as the impact from previous inflationary shocks is set to fade and 
as the effect of trade and production bottlenecks should have withered. Firms’ pricing plans have 
started  to  markedly  adjust  downwards  against  the  background  of  weak  domestic  demand.  The 
profile  for  expected  inflation  is  further  affected  by  the  delayed  effect  of  past  swings  in  the 
effective  exchange  rate.  In  the  period  of  rising  inflation,  the  pass-through  is  estimated  to  have 
been  particularly  high,  but  it  is  expected  to  normalise  over  the  forecast  period.  Domestic  wage 
pressures  are  projected  to  remain  relatively  contained  over  the  forecast  horizon,  in  view  of 
moderate  increases  in  labour  costs.  Some  limited  upside  risks  to  the  labour  cost  outlook  might 
emerge with a prospective economic recovery taking hold.  

However,  the  country  has  a  long  tradition  of  social  partners  taking  competitiveness  and  price 
stability  into  account  in  their  wage  agreements.  Overall,  Sweden  should  not  experience  major 
changes  in  cost  competitiveness.  In  all,  HICP  inflation  is  forecast  to  average  1.9%  in  2024  and 
1.7%  in  2025.  HICP  inflation  excluding  energy  and  food  is  set  to  continue  to  fall  from  6.6%  in 
2023 to 3.0% in 2024 and 2.0% in 2025. 

As  of  2024,  inflation  is  expected  to  broadly  meet  the  Riksbank’s  target,  as  the  economy  is 
normalising,  despite  some  risks  of  persistence,  chiefly  for  services.  Risks  to  the  inflation  outlook 
appear broadly balanced for 2024 and 2025. Upside risks are related to weak productivity trends, 
the  costs  of  the  energy  transition,  structural  labour  and  skill  shortages,  and  renewed  supply 
disturbances  resulting  from  the  geopolitical  environment.  Downside  risks  could  stem  from 
commodity prices and a longer-than-expected period of weak economic activity. Surveys of market 
inflation  expectations  suggest  that  they  have  remained  well  anchored  at  close  to  the  Riksbank’s 
target over the medium term. 

The  level  of  consumer  prices  in  Sweden  relative  to  the  euro  area  has  increased  since  Sweden 
joined the EU in 1995. In 2022, the Swedish price level stood at 116% of the euro area average, 
down  from  121%  in  2021.  The  relative  real  GDP  per  capita  level  in  Sweden  has  also  slightly 
decreased since 2021, reaching about 113% of the euro area average in PPS terms in 2023. 

7.3.  PUBLIC FINANCES 

7.3.1.  Recent fiscal developments 

Sweden’s  general  government  balance  weakened  from  a  surplus  of  1.2%  of  GDP  in  2022  to  a 
deficit  of  0.6%  of  GDP  in  2023.  The  expenditure-to-GDP  ratio  increased  from  47.6%  of  GDP  in 
2022 to 48.0% in 2023 and the revenues-to-GDP ratio decreased from just below 49% of GDP in 
2022 to 47.4% in 2023. This reflected mainly the final phasing out of some remaining COVID-19 
measures  during 2022  but also emergency measures related to steeply increasing energy  prices 
and  the  situation  in  Ukraine.  The  main  emergency  energy  support  measures  consisted  in  the 
several  rounds  of  ex-post  electricity  cost  compensation  to  households  and  businesses.  Although 
these  measures  were  not  targeted  and  therefore  relatively  costly,  they  did  not  affect  the  fiscal 
balance  since  they  were  financed  by  the  exceptionally  high  income  generated  from  the  large 

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Chapter 7 - Sweden 

electricity transmission fees benefitting the state-owned enterprise Svenska Kraftnät (the national 
authority responsible for the electricity grid). 

The  general  government  debt-to-GDP  ratio  returned  to  its  downward  path  in  2021,  falling  to  a 
level of 31.2% of GDP in 2023, which is significantly lower than what it was before the pandemic. 
In addition to the effects of an improving nominal balance with the recovery in economic activity, 
some  of  the  decrease  in  the  general  government  debt-to-GDP  ratio  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.  

7.3.2.  Medium-term prospects 

The  2023  autumn  additional  budget  and  the  2024  annual  budget  taken  together  represented  a 
relatively modest spending increase, of which some is due to government investment targeted at 
the build-up of defence spending towards the objective of 2% of GDP. On the revenue side, central 
government  tax  revenue  remained  strong  and  has  kept  the  state  in  surplus.  By  contrast,  and 
despite an increase in government grants, the regional and municipal levels taken together run a 
deficit due in part to high  pension costs due to the  sharp increase in inflation. The 2024  budget 
includes spending on green and digital items financed by grants from the Recovery and Resilience 
Facility, amounting to 0.2% of GDP.  

On  26  April  2024,  Sweden  submitted  its  2024  Convergence  Programme.  According  to  the 
Programme, the headline deficit is projected to increase  somewhat to 1.2% of GDP in 2024 and 
decrease somewhat to 0.3% of GDP in 2025. Based on the Commission’s Spring 2024 Economic 
Forecast, the  remaining  measures  to  mitigate  the  impact  of  high  energy  prices  are  estimated  at 
less than 0.1% of  GDP in 2024. The annual  cost of humanitarian assistance to people displaced 
from Ukraine is projected at less than 0.1% of GDP. 

The Commission’s Spring 2024 Economic Forecast projects the general government deficit to reach 
1.4%  of  GDP  in  2024  and  0.9%  in  2025.  The  projections  for  public  finances  in  the  2024 
Convergence Programme are thus close to the Commission’s Spring 2024 Economic Forecast. 

For  2024,  the  Commission’s  Spring  2024  Economic  Forecast  projects  the  fiscal  stance  to  be 
slightly  expansionary  at  -0.6%  of  GDP (67).  The  growth  in  nationally  financed  primary  current 
expenditure  (net  of  new  revenue  measures)  in  2024  is  projected  to  provide  an  expansionary 
contribution of -0.5 percentage point of GDP to the overall fiscal stance. Expenditures financed by 
the Recovery and Resilience Facility grants and other EU funds are forecast to provide a positive 
contribution  to  economic  activity  amounting  at  0.2  of  a  percentage  point  of  GDP  in  2024, 
unchanged compared to 2023.  

On 14 July 2023, the Council recommended that Sweden maintain a sound fiscal position in 2024. 
According  to  the  Commission  Spring  2024  Economic  forecast,  Sweden’s  structural  balance  is 
projected  at  0.0%  of  GDP  in  2024,  from  0.1%  of  GDP  in  2023,  thereby  remaining  above  the 
country’s medium-term budgetary objective (MTO) of a structural balance of -1.0% of GDP. 

Moreover,  the  Council  recommended  that  Sweden  takes  action  to  wind  down  the  emergency 
energy  support  measures  in  force, using  the  related  savings  to  reduce  the  government  deficit  in 
2023  and  2024.  The  Council  further  specified  that,  should  renewed  energy  price  increases 
necessitate new or continued support measures, Sweden should ensure that these be targeted at 
protecting vulnerable households and firms, fiscally affordable, and preserve incentives for energy 
savings. According to the Commission’s Spring 2024 Economic Forecast, the net budgetary cost of 
such energy support measures is projected at 0.2% of GDP in 2023, and less than 0.1% in 2024, 
the year in which they will be fully phased out. This is in line with what was recommended by the 
Council.  

(67)  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. 

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Chapter 7 - Sweden 

In addition, the Council also recommended that Sweden should preserve nationally financed public 
investment  and  ensure  the  effective  absorption  of  Recovery  and  Resilience  Facility  grants  and 
other  EU  funds,  in  particular  to  foster  the  green  and  digital  transitions.  According  to  the 
Commission’s  Spring  2024  Economic  Forecast,  nationally  financed  public  investment  is projected 
to remain stable at 5.1% of GDP in 2024 (from 4.9% of GDP in 2023) and, therefore, it is expected 
to be preserved.  

In  2025,  under  the  assumption  of  unchanged  policy,  the  fiscal  stance  is  projected  to  turn 
contractionary,  at  0.9%  of  GDP.  The  positive  contribution  to  economic  activity  of  expenditure 
financed  by  Recovery  and  Resilience  Facility  grants  and  other  EU  funds  is  projected  to  remain 
stable at 0.1 of a percentage point of GDP in 2025. Nationally financed investment is projected to 
provide a neutral contribution to the fiscal stance (68). Under the assumption of unchanged policy, 
the  growth  in  net  nationally  financed  primary  current  expenditure  is  projected  to  provide  a 
contractionary GDP contribution to the overall fiscal stance in 2025. 

Debt sustainability risks appear low over the medium term. The general government debt ratio is 
projected  to  decrease  from  around  32%  of  GDP  in  2024  to  around  22%  of  GDP  in  2034.  This 
projection  assumes  that  the  structural  primary  surplus (excluding  changes in  the  cost  of  ageing) 
decreases slightly from 0.8% of GDP in 2023 to 0.7% of GDP in 2024 and remains at that level 
(excluding changes in the cost of ageing) over the projection period (69). 

The  low  sensitivity  to  possible  macro-fiscal  shocks  also  contributes  to  this  assessment.  In 
particular,  if  the  interest-rate  growth  differential  were  1  percentage  point  higher  than  in  the 
baseline scenario, the projected debt ratio in 2034 would be less than 2 percentage points of GDP 
higher than in the baseline. 

(68)  Other nationally financed capital expenditure is projected to provide a neutral GDP contribution. 
(69)  For details on the methodology, see European Commission (2024), Debt Sustainability Monitor 2023, Institutional Paper 

271, March 2024. 

132 

Table 7.3:Sweden - Budgetary developments and projections (as % of GDP unless indicated otherwise)Outturn and forecast 1)20182019202020212022202320241)20251)General government balance0.80.5-2.80.01.2-0.6-1.4-0.9- Total revenue50.649.749.349.248.847.447.647.1- Total expenditure49.949.252.149.247.648.049.048.0   of which: - Interest expenditure0.40.40.30.20.50.70.70.7p.m.: Tax burden44.543.543.143.342.441.441.641.3Primary balance1.20.9-2.60.21.70.1-0.7-0.2Fiscal stance 2)0.70.1-0.60.9Recommended growth in net nationally financed primary expenditure (%)n.a.-Growth in net nationally financed primary expenditure (%)5.9-Government gross debt39.635.640.236.733.231.232.031.3p.m: Real GDP growth (%)2.02.0-2.26.12.7-0.20.22.11) Commission’s Spring 2024 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 2024 - Technical annex 
Chapter 7 - Sweden 

Finally, several  additional  risk factors  need  to  be 
considered  in  the  assessment.  On  the  one  hand, 
risk-increasing  factors  include  the  relatively  high 
share  of  short-term  public  debt  and  contingent 
liability risks stemming from the elevated private 
debt.  On  the  other-hand,  risk-mitigating  factors 
include  the  stability  of  debt  maturity  in  recent 
years,  relatively  stable  financing  sources  (a 
relatively  low  share  of  public  debt  held  by  non-
residents  and  historically  low  borrowing  costs 
reflecting a long-standing strong  creditor status). 
In  addition,  Sweden’s  positive  net  international 
investment 
mitigating 
vulnerabilities. 

position 

helps 

In  December  2023,  the  government  initiated  a  review  of  the  fiscal  framework  with  a  view  of 
possibly adjusting the current net lending target. It was initiated because of the government debt 
ratio having resumed its downward path after the Covid-19 crisis and of lessons learned after a 
succession  of  macroeconomic  shocks  in  recent  years.  The  Parliamentary  Committee  tasked  with 
the  Review  is  to  report  its  findings  by  mid-November  2024.  The  latest  revisions  took  effect  in 
2019  and  implied, among  other changes,  the  introduction  of  a  debt  anchor,  set  at  35%  of  GDP, 
and  a  lowering  of  the  net  lending  target  from  1%  of  GDP  over  the  cycle  to  0.33%  of  GDP.  The 
government also decided to conduct regular reviews of the adequacy of the framework in the final 
year  of  every  second  4-year  legislature.  The  ongoing  Review  thus  takes  place  two  years  earlier 
than  envisaged.  However,  it  fits  well  with  the  expected  timeline  of  the  Economic  Governance 
Review,  in  particular  the  transposition  period  of  the  amended  Budgetary  Framework  Directive 
(2011/85/EU). The amended Directive may affect some aspects of the Swedish fiscal framework, 
such  as  the  tasks  and  status  of  the  independent  fiscal  institutions.  It  extends  the  independence 
safeguards for independent fiscal institutions to all EU Member States and assigns some tasks to 
these institutions. 

7.4.  EXCHANGE RATE STABILITY 

The  Swedish  krona  does  not  participate  in  ERM  II.  As  indicated  above,  the  Riksbank  pursues 
inflation  targeting  under  a  free-floating  exchange  rate  regime,  that  allows  foreign  exchange 
market interventions by the central bank. 

The long-term trend of the krona depreciating against the euro started in 2013. The Swedish krona 
depreciated  against  the  euro  by  more  than  40%  from  its  strongest  point  in  March  2013  to 
September 2023. This depreciation trend continued over 2022 and 2023 despite volatility that also 
resulted in temporary episodes of appreciation. In particular, from the end of 2021 to September 

133 

-10122022202320242025Expenditure financed by RRF grants and EU funds (e)Other capital expenditure (d)Nationally financed investment (c)Net nationally financed  primary current expenditure (b)Fiscal stance (f=a+e) 2023 2024Net nationally financed  primary expenditure (a=b+c+d)ExpansionaryContractionarySource: Commission's Spring 2024 Economic Forecast.Graph 7.4: Sweden -Fiscal stance and its components(percent of GDP)9.510.010.511.011.512.0201820192020202120222023Graph 7.5: Sweden -SEK/EUR exchange rate(monthly averages)Source: ECB.-40-20020406080100120201820192020202120222023Graph 7.6: Sweden -3-M Stibor spread to 3-M Euribor(basis points, monthly values)Source: Eurostat and Thomson Reuters. 
 
  
  
  
Convergence Report 2024 - Technical annex 
Chapter 7 - Sweden 

2023, the Swedish krona entered a depreciation cycle that culminated with the krona reaching an 
all-time low of 12 Swedish krona to the euro in September 2023. The krona then regained some of 
its  losses  during  the  last  quarter of  2023, reaching  11  Swedish  krona  to  the  euro  at  the  end of 
2023.  Since  the  beginning  of  2024,  the  Swedish  krona  has  continued  to  depreciate  against  the 
euro and the bilateral exchange rate stood at 11.6 Swedish krona to the euro in May 2024. Overall, 
the  volatility  in  the  exchange  rate  has  been  significant,  with  short-term  fluctuations  reflecting 
changes  in  risk  appetite  and  short-term  funding  flows,  as  well  as  changing  perceptions  of  the 
future  direction  of  monetary  policy  in  the  context  of  high  uncertainty  regarding  the  inflation 
outlook. 

The 3-month STIBOR-Euribor spread has been volatile over 2022-2023. While it stood around 50 
basis  points  in  2021,  it  increased  rapidly  in  2022  and  peaked  at  110  basis  points  in  July  2022, 
reflecting  an  earlier  monetary  policy  tightening  in  Sweden  than  in  the  euro  area.  The  3-month 
spread  then  decreased  until  the  end  of  2023  to  levels  around 10  basis  points.  It  has  decreased 
further since the beginning of 2024 and stood at just -2 basis points in May 2024. This decrease 
reflected that monetary conditions have become similar in Sweden and in the euro area. 

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.  At  the  end  of  2021, 
international reserves (foreign currency and gold) stood at SEK 461 billion. They increased to above 
SEK  570  billion  in  December  2022  before  returning  to  levels  around  SEK  510  billion  at  the 
beginning  of  2024  (8%  of  the  2023  GDP)  and  stood  at  SEK  540  billion  in  May  2024.  These 
changes  can  be  related  to  valuation  effects  and  fluctuations  could  also  be  related  to  the 
Riksbank’s decision to change the financing method for its foreign exchange reserves.  

7.5.  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  10 
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  2022  convergence 
assessment  of  Sweden.  After turning  positive  in  2021,  the  12-month  moving  average  long-term 
interest  rate  increased  steeply  in  2022  and  2023,  from  0.3%  in  December  2021  to  2.5%  in 
December 2023. In May 2024, the latest month for which data are available, the reference value, 
given  by  the  average  of  long-term  interest  rates  in  the  Netherlands,  ,  Italy  and  Latvia  plus  2 
percentage points, stood at 5.5%. In that month, the 12-month moving average of the yield on the 
Swedish benchmark bond stood at 2.5%, i.e. 3.0 percentage points below the reference value. 

As regards monthly data, long-term interest rates increased markedly over 2022-2023. The yield 
on the Swedish benchmark government bond increased from 0.1% at the end of 2021 to a peak of 

134 

-20246Jan-18Jan-19Jan-20Jan-21Jan-22Jan-23Jan-24SwedenReference valueGraph 7.7: Sweden -Long-term interest rate criterion(percent, 12-month moving average)Source: European Commission.-101234201820192020202120222023SwedenGermanyGraph 7.8: Sweden -Long-term interest rates(percent, monthly values)Source: Eurostat. 
 
  
  
Convergence Report 2024 - Technical annex 
Chapter 7 - Sweden 

3.0%  in  October  2023.  This  increase  mainly  reflects  the  actual  and  expected  tightening  of 
monetary policy by the Riksbank against persistent inflationary pressures. Long-term interest rates 
then  eased,  with  the  yield  on  the  Swedish  benchmark  government  bond  decreasing  to  2.2%  in 
January 2024 before rebounding. It stood at 2.4% in May 2024.  

The yields on 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,  the  long-term  interest  spread  vis-à-vis  the  German  benchmark  bond  increased  at  the 
beginning of 2022 and reached 82 basis points in May 2022 before decreasing to negative levels 
slightly below -10 basis points in December 2022 and January 2023. It stood at  -14 basis points 
in May 2024.  

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,  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 2023, the Commission published its 13th Alert Mechanism Report (AMR 2024) under 
the  Macroeconomic  Imbalance  Procedure  (MIP  -  see  also  Box  1.7),  which  concluded  that  an  In-
Depth Review was warranted for Sweden. In March 2024, the Commission published an In-Depth 
Review for Sweden. Taking into account the assessment in the In-Depth Review, the Commission, in 
its  Communication  ‘European  Semester  –  2024  Spring  Package’ (70),  considers  that  Sweden  is 
experiencing  macroeconomic  imbalances  with  vulnerabilities that  relate  to  its  real  estate  market 
and high private debt. Over the past decade, real estate prices have risen faster than income and 
rents, accompanied by a rise in private debt. This has exposed the Swedish economy to changes in 
monetary  and  financing  conditions.  The  household  debt-to-GDP  ratio  is  very  high  and  the  debt 
servicing  costs  have  increased,  leaving  households  and  the  corporate  sector  more  vulnerable  to 
adverse economic developments. House prices have declined but still remain high. Commercial real 
estate (CRE) has also seen a correction in its valuation and is an additional source of concern due 
to its high leverage. The financial sector is highly exposed to real estate but is financially sound, 
with  large  buffers  against  adverse  developments.  Policy  progress  has  been  limited,  and  without 
firmer policy action some of the structural features behind the identified vulnerabilities will persist. 
The tax system has continued to favour home ownership through low recurrent property taxation 
and  to  promote  debt-financed  housing  acquisition  through  the  generous  tax  deductibility  of 
mortgage interest payments. The rental market has seen limited reform and average rents are still 
well below market rents, resulting in long waiting lists and a very low vacancy rate relative to other 
EU  countries.  These  policy  factors  behind  the  macroeconomic  vulnerabilities  still  need  to  be 
addressed. 

Sweden’s  recovery  and  resilience  plan  (RRP)  includes  measures  to  address  a  series  of  structural 
challenges,  in  synergy  with  other  EU  funds,  including  cohesion  policy  funds,  to  boost  its 
competitiveness  and  stimulate  sustainable  growth  and  reduce  the  country’s  territorial  and  social 
disparities.  The  RRF  funding  provides  Sweden  with  EUR  3.4  billion  over  the  2021-2026  period. 
Sweden has not submitted any payment requests so far.  

While some reforms (energy efficiency, labour market, housing market and anti-money laundering) 
and  investments  (climate  action,  broadband  and  education)  have  been  effectuated,  the 
implementation of Sweden’s RRP is, overall, significantly delayed. 

In addition to the RRF funding, cohesion policy provides Sweden with EUR 1.7 billion for the 2021-
2027 period. Cohesion policy financing aims particularly to further improve conditions for research 
and  innovation,  create  opportunities  for  entrepreneurship  and  industrial  transformation,  and 

(70)  COM(2024) 600 final, 19.06.2024. 

135 

 
Convergence Report 2024 - Technical annex 
Chapter 7 - Sweden 

support  digitalisation,  internationalisation  and  competitiveness.  Sweden  has  made  progress  in 
implementing  cohesion  policy  but  challenges  remain  and  disparities  persist  between  the  capital 
region and the rest of the country. 

7.6.1.  Developments in the balance of payments 

According  to  Balance  of  Payments  data, Sweden's  current  account  surplus decreased  to  5.4%  of 
GDP  in  2022  as  domestic  demand  entered  a  phase  of  sustained  recovery  from  the  pandemic. 
Declines in the balance on goods and on services offset the further increase in the primary income 
balance that had trended up from 2017 onwards. In 2023, the current account surplus widened to 
6.8%  of  GDP,  driven  by  increasing  surpluses  in  the  trade  balance  and  despite  a  slightly  lower 
primary  income  balance  as  the  domestic  economy  stalled.  The  solid  export  performance  was 
supported by the strong competitive position of Swedish exporters. By contrast, as in earlier years, 
the  secondary  income  balance  continued  to  exert  a  negative  impact  on  the  current  account 
balance,  reflecting  Sweden's  foreign  aid  and  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 31% of GDP in 2022 and is 
expected to have improved further in 2023. Sweden's financial account (net of changes in reserve 
assets)  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. The balance of portfolio investments continues fluctuating appreciably from 
year to year, mirroring the interplay of financial market conditions and perceptions, exchange rate 
movements and relative cyclical positions. It registered deficits in 2022 and 2023.  

Since  the  early  2000s,  Sweden's  export  market  share  has  been  declining,  a  phenomenon  also 
witnessed in several other high-income countries. The trend decline in the export market shares is 
linked to changing global trade patterns and affects 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.  It  is  therefore  hard  to 
separate  specific  structural  factors  that  impact  trade  performance  from  cyclical  effects  and  the 

136 

Table 7.4:Sweden - Balance of payments(percentage of GDP)201820192020202120222023Current account2.55.35.97.15.46.8of which: Balance of trade in goods2.03.93.94.23.35.1               Balance of trade in services0.30.50.50.6-0.6-0.5               Primary income balance 1.82.83.54.04.43.8               Secondary income balance-1.6-1.9-2.1-1.8-1.8-1.6Capital account0.00.00.10.00.10.0External balance 1)2.55.45.97.15.56.8Financial account0.83.4-2.88.80.53.8of which: Direct investment2.51.20.71.42.63.0               Portfolio investment-1.82.2-1.610.6-3.7-1.9               Other investment 2)0.11.3-1.9-4.20.33.6               Change in reserves-0.1-1.3-0.10.91.3-0.9Financial account without reserves0.84.7-2.77.9-0.84.8Errors and omissions-1.8-2.0-8.71.7-5.0-2.9Gross capital formation26.025.125.125.928.526.8Gross saving28.630.431.132.934.033.5Net international investment position8.213.37.419.031.033.21) The combined current and capital account.2) Including financial derivatives.Sources: Eurostat, Statistics Sweden, European Commission calculations. 
Convergence Report 2024 - Technical annex 
Chapter 7 - Sweden 

idiosyncratic impact of supply and demand disturbances that have been affecting the global and 
Swedish economies in recent years. 

in 

by 

developments 

This  benign  conclusion  on  competitiveness  is 
buttressed 
cost 
competitiveness  indicators.  In  recent  years,  the 
real  effective  exchange  rates  mainly  mirrored 
changes  in  the  nominal  exchange  rate,  rather 
than major divergences in price or cost indicators 
between  Sweden  and  its  main  trading  partners. 
Various  measures  of  effective  exchanges  rates 
moved together. They weakened appreciably over 
most  of  the  period  2021  to  2023.  Then,  they 
strengthened  somewhat  in  the  last  months  of 
2023.  Unit labour costs exhibited large swings in 
recent  years  due  to  disparate  behaviours  in 
economic  activity  and  employment  metrics,  all 
affected  heavily  by  the  pandemic,  large-scale 
policy  intervention (71),  as  well  as  the  episode  of  high  inflation  and  rapid  monetary  tightening. 
Allowing for such volatility, the underlying trend is that unit labour costs have been falling over the 
past  number  of  years  compared  to  Sweden’s  main  trading  partners.  This  has  strengthened  the 
competitive position of Swedish exporters.  

7.6.2.  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 40% or more every year since 2005 (except 
in 2016, when it was just below that level). Trade openness (see Table  7.5 for a definition) fell in 
2020 but started to recover in 2021. It increased steeply to just above 50% in 2022 and broadly 
maintained that level in 2023. The main euro area trading partners are Germany, the Netherlands 
and Finland, while among non-euro area countries Norway, Denmark, and the United States are the 
main trade partners. 

(71)  Short-term  movements  in  REER  based on  unit  labour  costs  should  be  interpreted  with  prudence as  unit  labour  costs 
were distorted by various pandemic support schemes in several countries, including Sweden. The trend in this measure 
in recent years has, this notwithstanding, been very similar to price-based gauges of the REER. 

137 

Table 7.5:Sweden - Market integration201820192020202120222023Trade openness 1) (%)43.444.340.442.850.450.7Trade with EA in goods & services 2)+3) (%)19.019.317.619.022.022.8IMD World Competitiveness Ranking 4)996248Internal Market Transposition Deficit 5) (%)0.10.70.72.00.70.5Real house price index 6)108.7109.1112.7121.9118.2105.3 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-20 / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics). 3) Trade in services with EA-20 (average credit and debit in % of GDP at current prices) (Balance of Payments). 4) International Institute for Management Development (IMD). 5) Percentage of internal market directives not yet communicated as having been transposed, relative to the total. 6) Deflated house price index (2015=100) (Eurostat). Sources: Eurostat, World Bank, International Institute for Management Development, European Commission calculations.8090100110201820192020202120222023Graph 7.9: Sweden -Effective exchange ratesNEERREER, HICP deflatedREER, ULC deflated(vs 36 trading partners; monthly averages;index numbers, 2018 = 100)Source: European Commission. 
 
 
 
 
 
 
 
   
Convergence Report 2024 - Technical annex 
Chapter 7 - Sweden 

The  stock  of  inward  FDI  had  remained  broadly 
stable relative to GDP in recent years but went up 
to 78% of GDP in 2023, from around 70% of GDP 
in  2022.  As  regards  net  inward  FDI  the  largest 
share  originates  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. 

respect 

Regarding  the  business  environment,  Sweden 
regularly  scores  top  positions  in  international 
rankings,  well  above  most  euro  area  Member 
State and currently ranks in the top ten at global 
level,  with 
IMD  World 
Competitiveness  Ranking.  According  to  the  World  Bank's  2022  Worldwide  Governance  Indicators, 
Sweden  ranks  higher  than  the  average  of  the  euro  area  Member  States  in  all  six  categories, 
notably  voice  and  accountability,  political  stability  and  absence  of  violence,  government 
effectiveness, regulatory quality, rule of law and control of corruption (72). Sweden's deficit in the 
transposition of EU directives in 2023 stood at 0.5%, below the EU average and just at the 0.5% 
target as proposed by the European Commission in the Single Market Act (2011). 

the 

to 

Sweden  has  notified  a  complete  transposition  of  the  5th  Anti-Money  Laundering  Directive.  The 
Commission has assessed the transposition as complete and in conformity.  

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. Relatively modest nominal wage increases, even in recent years with high inflation 
have  contributed  to  the  ongoing  disinflation,  by  helping  to  avoid  the  emergence  of  wage-driven 

(72)  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 of five euro area Member States. 

138 

Table 7.6:Sweden - Allocation of assets by financial sub-sectorRatio to GDP (%)SEEAEA 5 smallest201820222018202220182022Financial corporations (total)558640689715174190Central bank192553684652Monetary financial institutions2733022662908793Other financial intermediaries59701811631618Non-MMF investment funds 1)8210010111345Insurance co. and Pension Funds12614487812122Share of total (%)SEEAEA 5 smallest201820222018202220182022Central bank348102727Monetary financial institutions494739405049Other financial intermediaries11112623910Non-MMF investment funds1516151623Insurance co. and Pension Funds2222131112111) MMF stands for money market funds.Source: Eurostat.0.00.61.21.82.4Voice and accountabilityPolitical stability andabsence ofviolence/terrorismGovernmenteffectivenessRegulatory qualityRule of lawControl of corruptionSwedenEuro area average five lowestEuro area averageGraph 7.10:Sweden -World Bank's 2022 Worldwide Governance IndicatorsNote: Estimate of governance ranges from -2.5 (weak) to 2.5 (strong). Source: World Bank. 
 
  
Convergence Report 2024 - Technical annex 
Chapter 7 - Sweden 

cost pressures. 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 industrial and green technology development poles (in particular in the north of the country) 
pose  challenges  to  labour  mobility.  Substantial  educational  gaps  depending  on  socio-economic 
status and geographical factors and early school leaving as well as the integration of low-skilled 
workers  remain  key  challenges  for  the  Swedish  labour  market.  Education,  competence  and  skills 
challenges  are  thus  broad-based.  Record  high  vacancy  rates  since  the  statistic  reporting  on  this 
variable  started  in  2009  were  registered  during  the  recovery  period  after  the  pandemic.  The 
vacancy ratio as reported by Eurostat slowly decreased in seasonally adjusted terms from a peak 
of 3.3% in the third quarter of 2022 to 2.5% in the fourth quarter of 2023. Relatively high vacancy 
rates persisting alongside high labour force participation in a period of cyclical weakness indicate a 
fairly  high  rate  of  labour  market  turnover  and  job-switching,  but  also  point  at  mismatches  and 
skills  shortages  extending  to  a  wide  range  of  branches  of  economic  activity.  Skills  shortages 
information  and 
remain  particularly  pronounced 
communication technology, industry and construction. 

in  education,  health  care,  social  work, 

139 

Table 7.7:Sweden - Financing of the economy1)Ratio to GDP (%)SEEAEA 5 smallest201820222018202220182022Liabilities (total)848907706696316304Loans252275228219109103Non-financial co. debt securities2526121232Financial co. debt securities9899665834Government debt securities302078714742Listed shares11914960631210Unlisted shares2392591761845453Other equity615753545658Trade credits and advances222134353132Share of total (%)SEEAEA 5 smallest201820222018202220182022Loans303032323433Non-financial co. debt securities332211Financial co. debt securities12119811Government debt securities4211101514Listed shares14169933Unlisted shares282925261919Other equity76781718Trade credits and advances325510111) 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 2024 - Technical annex 
Chapter 7 - Sweden 

The  financial  sector  in  Sweden  is  highly  developed  and  is  proportional  to  that  of  the  euro  area. 
Relative to GDP, assets managed by the financial sector stood at 640% of GDP (vs. 715% of GDP 
in the euro area). Since 2018, the Swedish financial sector has grown significantly more than in the 
euro area. Banking dominates the Swedish financial sector and made up around 47% of the assets 
of the financial sector in 2022, which is more than in the euro area. The sector for insurance and 
pension-fund is  the  second  largest  financial  assets  manager  in  Sweden.  It  made  up  22%  of  the 
assets held by the financial sector in 2022 (vs. 11% in the euro area). This reflects the high degree 
of development of the funded pension system. Non-money-market funds are at par with the euro 
area,  and  despite  its  past  extensive  asset-purchase  programme,  the  Riksbank  only  holds  a 
relatively small share of total financial assets (less than half of what the ECB accounts for). The 
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, outstanding liabilities are higher than in the euro area (907% 
of GDP in 2022 vs. 696% of GDP in the euro area). Like in the euro area, loans are the dominant 
source of funding (30% of total liabilities in 2022), partly reflecting the high degree of household 
indebtedness. Sweden has among the  most developed private-sector-debt and equity  markets in 
the EU. Equity and private-sector-debt markets represented 30% of total liabilities in 2022 (274% 
of GDP altogether), compared to 19% of liabilities in the euro area (132% of GDP). In particular, 
the relative higher importance of listed shares in total liabilities reflects the larger share of market 
funding  available  in  Sweden,  and  the  traditional  recourse  to  this  type  of  funding.  The  relatively 
smaller  size  of  the  Government  bond  market  in  Sweden  reflects  the  lower  level  of  general 
government debt in the country. 

Sweden's  banking  sector  is  well-integrated  into 
the  euro  area’s  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 
in  2022, 
total  bank  assets  stood  at  20% 
surpassing 
the  euro  area  average  by  2 
percentage  points.  The  share  decreased  by  2 
percentage points between 2018 and 2022. Bank 
concentration,  as  measured  by  the  market  share 
of  the  five  largest  credit  institutions  in  total 
assets,  has  increased  to  58%,  slightly  above  the 
euro area average, which was 51% at the end of 
2022. 

140 

010203040506070SE, 2018SE, 2022EA, 2018EA, 2022Concentration in the banking sector (CR5 ratio)Share of foreign institutions as % of total assetsGraph 7.11: Sweden -Foreign ownership and concentration in the                       banking sector(in percent, weighted averages)Source: ECB, Structural financial indicators.