From EU to euro area enlargement
Ad van RietHead of EU Countries Division
European Central Bank
October 2005
The views expressed in this presentation do not necessarily reflect those of the ECB.
2
• The 2004 EU enlargement: General background information
• The road to the euro
- ERM II
- Recent developments
- Main challenges
Outline
3
The 2004 enlargement: Population
EU-15 = 458 million New MS = 74 million
UK
Sweden
Denmark
Euro Area 311 mln
Hungary
Czech Republic
Poland
Slovakia
4
The 2004 enlargement: GDP
EU-15 = EUR 9798 bn New MS = EUR 475 bn
SlovakiaPoland
Hungary
Czech
Republic
Euro Area =
EUR 7614
bn
UK
SwedenDenmark
5
The 2004 enlargement: GDP per capita levels
GDP per capita in PPP terms(% of euro area average)
0
10
20
30
40
50
60
70
80
90
Cyprus Slovenia CzechRep.
Malta Hungary Estonia Slovakia Lthuania Poland Latvia
1993 2004
New MS weighted average 2004
Cyprus Slovenia CzechRep.
Malta Hungary Estonia Slovakia Lithuania Poland Latvia
= 53.1
6
The 2004 enlargement: real GDP growth
Real GDP growth in the EU and the new Member States, %
0
1
2
3
4
5
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005*
* European Commission Spring 2005 forecast
0
1
2
3
4
5
Euro area EU25 EU10
7
The 2004 enlargement: price levels
New MS weighted average 2003 = 54.8
Comparative price levels of final consumption by households (% of the euro area average)
0
10
20
30
40
50
60
70
80
90
100
Malta Cyprus Estonia Slovenia Latvia Lithuania Slovakia Hungary CzechRepublic
Poland
1995 2003
* For Malta 1999 and 2003 data
New MS weighted average 2003 = 54.8
8
The 2004 enlargement: HICP inflation
HICP inflation in the EU and the new Member States, %
0
4
8
12
16
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005*
* European Commission Spring 2005 forecast
0
4
8
12
16
Euro area EU25 EU10
9
The road to the euro
Accession to the EU
May 2004 Time t
Entry into ERM II
Time t + (min.) 2
years
Assessment of convergence, formal decision on entry and
conversion rate
Adoption of the
euro
ERM II membership
(at least 2 years)Pre-ERM II phase
(as stipulated in the EC Treaty)
ERM II membership
Technical preparations
10
ERM II
• ERM II membership voluntary but expected
• Case-by-case assessment based on equal treatment
• Fixed but adjustable exchange rates, standard fluctuation band ±15%
• Central parity and fluctuation bands mutually agreed
• Both the ECB and the Member State concerned can trigger a review of the central parity
• Central role of the euro / ECB
11
ERM II (cont’d)
• Entry is not subject to legal criteria, but– major policy adjustments (e.g. price liberalisation
and fiscal policy) to be undertaken prior to entry– need to follow credible fiscal consolidation path
• Length of participation– Minimum two-years prior to examination of
convergence– No restrictions on length of participation beyond
minimum period– Should be assessed on the basis of what is most
helpful to accompany the convergence process
12
ECB Convergence Report 2004
Common framework for analysis
• Treaty provisions (the convergence criteria) as regards price, fiscal, exchange rate, long-term interest rate developments and other factors
• A range of backward and forward-looking economic indicators considered useful for examining the sustainability of convergence
• Applied on a country-by-country basis
• Equal treatment principle (across countries and time)
13
ECB Convergence Report 2004
Reference values I• The criterion on price stability
– Average inflation rate of 3 best performers (FI, DK and SE; 0.9%) + 1.5 percentage points = 2.4%
– Price developments in Lithuania have been judged to be an outlier
• The criterion on the government budgetary position– The ratio of the government deficit to GDP
should not exceed 3% – The ratio of government debt to GDP should not
exceed 60%
14
ECB Convergence Report 2004
Reference values II• The exchange rate criterion
– ECB examines whether a Member State has participated in ERM II for at least two years prior to the examination without severe tensions, in particular, without devaluing its currency against the euro. Focus is put on the exchange rate being close to the central rate, while also taking into account factors that may have lead to an appreciation
• The long-term interest rate criterion– Average of long-term interest rates in FI, DK
and SE (4.4%) + 2 percentage points = 6.4%
15
ECB Convergence Report 2004 – price stability
-0.2
1.31.8 2.0 2.1
2.5 2.6
4.1
4.9
6.5
8.4
Reference value 2.4
-1
0
1
2
3
4
5
6
7
8
9
Lith
ua
nia
Sw
ed
en
Cze
chR
ep
ub
lic
Est
on
ia
Cyp
rus
Po
lan
d
Ma
lta
Slo
ven
ia
La
tvia
Hu
ng
ary
Slo
vaki
a
-1
0
1
2
3
4
5
6
7
8
9
Five countries complied with the reference valueHICP inflation
(annual average percentage change, Sept. 2003 – Aug. 2004)
16
HICP inflation(annual average percentage change, Sept. 2003 – Aug. 2004 and Sept.
2004 – Aug. 2005)
Price stability – recent developments
-1 0 1 2 3 4 5 6 7 8 9
Lithuania
Sweden
Czech Republic
Estonia
Cyprus
Poland
Malta
Slovenia
Latvia
Hungary
Slovakia
Sept. 2004-Aug. 2005
Sept.2003-Aug.2004
17
General government surplus (+) or deficit (-)
% of GDP, Eurostat data
0.3
3.1
-3.7
-12.6
-9.7
-6.4 -6.2
-3.9
-1.9-1.5 -2.0
-14-13-12-11-10-9-8-7-6-5-4-3-2-101234
Sweden Estonia Latvia Slovenia Lithuania Slovakia Czech
Rep.
Malta Cyprus Hungary Poland
ECB Convergence Report 2004 – government balances in 2003
Five countries complied with the reference value
Reference value = - 3.0 %
18
Government balances in 2005
General government surplus (+) or deficit (-)
% of GDP, European Commission Spring 2005 forecast0.9
-1.6
-2.9
-3.8 -3.9 -3.9-4.4 -4.5
0.8
-2.4-2.2
-5
-4
-3
-2
-1
0
1
Estonia Sweden Latvia Slovenia Lithuania Cyprus Slovakia Hungary Malta Poland Czech
Rep.
Reference value = -3.0%
19
General government gross debt
% of GDP, Eurostat data
5.3
14.421.4
29.4
37.8
45.4
59.1
70.9 71.1
52.0
42.6
0
20
40
60
80
Estonia Latvia Lithuania Slovakia Slovenia Czech
Rep.
Poland Sweden Hungary Cyprus Malta
ECB Convergence Report 2004 – government debt in 2003
Nine countries complied with the reference value
Reference value = 60.0%
20
Government debt in 2005
General government gross debt
% of GDP, European Commission Spring 2005 forecast
4.3
14.021.2
36.4
44.2 46.8
57.8
69.1
76.4
30.2
50.3
0
20
40
60
80
Estonia Latvia Lithuania Slovenia Czech
Rep.
Slovakia Poland Sweden Hungary Cyprus Malta
Reference value = 60.0%
21
Exchange rate criterion
• At the time of the ECB Convergence Report 2004, in October 2004, no country participated in ERM II for the full two-year reference period
• 3 countries joined ERM II in June 2004, 3 in May 2005, 4 new Member States are still outside ERM II
Participation in ERM II with effect from
Czech Republic No
Estonia Yes 28 June 2004
Cyprus Yes 2 May 2005
Latvia Yes 2 May 2005
Lithuania Yes 28 June 2004
Hungary No
Malta Yes 2 May 2005
Poland No
Slovenia Yes 28 June 2004
Slovakia No
Sweden No
22
Exchange rate developments in new ERM II countries
• A rise in a chart denotes an appreciation of the currency against the euro
23
ECB Convergence Report 2004 – long term interest rates
4.7 4.7 4.7 4.75.0 5.1 5.2 5.2
6.9
8.1
Reference value 6.4
0
1
2
3
4
5
6
7
8
9
Cze
chR
ep
ub
lic
Lith
ua
nia
Ma
lta
Sw
ed
en
La
tvia
Slo
vaki
a
Cyp
rus
Slo
ven
ia
Po
lan
d
Hu
ng
ary
0
1
2
3
4
5
6
7
8
9
Eight countries complied with the reference valueLong-term interest rates
(in percentages, annual average, Sept. 2003 – Aug. 2004)
N.B. No comparable long-term interest rate available for Estonia
24
Long term interest rates – recent developments
Long-term interest rates(in percentages, annual average, Sept. 2003 – Aug. 2004 and Sept.
2004 – Aug. 2005)
0 2 4 6 8
Sweden
Malta
Lithuania
Czech Republic
Latvia
Slovakia
Cyprus
Slovenia
Poland
Hungary
Sept. 2004-Aug. 2005
Sept.2003-Aug.2004
N.B. No comparable long-term interest rate available for Estonia
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ECB Convergence Report 2004 – legal assessment
Conclusions on the legal assessment
• All of the examined countries are well advanced in adapting their NCB statutes and other legislation to bring them in line with the Treaty and the ESCB statute
• Most, while fulfilling the basic requirements for NCB independence, still have legal provisions requiring further adaptation to safeguard effective independence of their NCBs
• As yet, none fulfil all of the legislative requirements for integration into the Eurosystem
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ECB Convergence Report 2004 - Main challenges identified
• Need to complete disinflation process in a few countries and to preserve it in others
• Fiscal policy still not providing sufficient support for price stability in a number of countries – need for more ambitious fiscal consolidation
• Need to participate in ERM II for at least two years without severe tensions
• Need to fulfil all legal requirements
• Next regular convergence examination in 2006
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Thank you for your Thank you for your attention!attention!
