The process of convergence of EU Member States towards the euro area is assessed on the basis of convergence criteria referred to as the Maastricht criteria, fulfilment of which is a key prerequisite for a country’s entry to the euro area. These criteria are listed in Article 140(1) of the Treaty on the Functioning of the EU and Protocol No. 13 on the convergence criteria and Protocol No. 12 on the excessive deficit procedure.
- The criterion on price stability means 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 is measured by means of the Harmonised Index of Consumer Prices (HICP).
- The criterion on the sustainability of the government financial position means that a Member State is not the subject of a decision that an excessive deficit exists. The criterion has two parts:
- The criterion on the government budgetary position means that a Member State has a ratio of planned or actual government deficit to GDP at market prices that does not exceed 3%, unless the ratio has declined substantially and continuously and has reached a level that comes close to the reference value or, alternatively, the excess over the reference value was only exceptional and temporary and the ratio remains close to the reference value. “Government deficit” means general government, that is central government, regional or local government and social security funds, to the exclusion of commercial operations, as defined in the European System of Integrated Economic Accounts.
- The criterion on government debt means that a Member State has a ratio of government debt to GDP at market prices that does not exceed 60%, unless the ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace. “Government debt” means total gross debt at nominal value at the end of the year and consolidated between and within the sectors of general government.
- The criterion on exchange rate stability and participation in ERM II means 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 any other Member State’s currency (against the euro after the introduction of the euro) on its own initiative for the same period.
- The criterion on long-term interest rates means that over a period of one year before the examination, a Member State has had an average nominal long-term interest rate that does not exceed by more than 2 percentage points that of, at most, the three best performing Member States in terms of price stability. Interest rates are measured on the basis of long-term government bonds or comparable securities.
In addition to the above-mentioned economic convergence criteria, the Maastricht Treaty laid down institutional and legal criteria (Article 140 TFEU). Convergence in the legislative area contains a condition of central bank independence, including a prohibition of financing public institutions from central banks’ funds and a prohibition of privileged access to funds of credit institutions (Articles 123, 124, 130 and 131 of the Treaty on the Functioning of the EU).
The logic of the Maastricht criteria is based on the idea that low and predictable inflation not only creates a stable environment that is favourable for investment decisions and therefore leads to the development of the internal market, but also – when achieved in several countries simultaneously – prevents price contagion across those countries. The uniform thresholds for fiscal discipline and the rules of penalisation for breaching such thresholds are meant to block the tendency for countries with poor budget discipline to profit at the expense of more responsible ones. The Maastricht Treaty also contains a principle of responsibility of countries for their own finances in the form of a bail-out clause. Responsible management of public finances leads to long-term low and stable government bond rates and combined with the ability to maintain a relatively stable exchange rate over a defined period (besides the inability to “get rich at one’s neighbour’s expense” through competitive devaluations) demonstrates the ability of a euro candidate country to give up its own currency and monetary policy in a sustainable manner.