Convergence Criteria
Convergence Criteria in Europe
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Description of Convergence criteria
The Concise Publication of the European Union describes convergence criteria in the following terms: [1] Before joining the single currency, member states, according to the Maastricht Treaty, were supposed to achieve a 'high degree of sustainable economic convergence'. This entailed meeting four tests - the so-called 'convergence criteria':
Average inflation within 1.5% of that of the three best performing member states.
Elimination of excessive public sector debt, that is, budget deficit should be under 3% of GDP government debt should be under 60% of GDP.
Low exchange-rate variability (and no devaluation) against the other currencies in the Exchange Rate Mechanism.
Long-term interest rates within 2 percentage points of the average for the three best performing member states.
The criteria were criticised for omitting real economy yardsticks such as employment, productivity trends and unfunded pension liabilities. Some of the tests were also open to interpretation. Throughout 1997 the debate swung back and forth as different countries altered their budget forecasts, struggling to qualify. Germany initially took the position that the criteria (especially the 3% deficit ceiling) should be construed strictly and made permanent. Some, however, notably Italy and Belgium, could not come near to meeting the test relating to the amount of government debt, and relied on a clause permitting 'progress' towards an acceptable level to be treated as equivalent to compliance (see more in this European publication). In 1998, after a year's hard lobbying, both countries were admitted, the final decision being taken by heads of government under qualified majority voting.
In evaluating the suitability of the applicants, the European Council relied on data supplied by Eurostat and on evidence from numerous sources, including Ecofin, the Commission and central banks. The non-political witnesses for the most part expressed a jaundiced view of the measures taken by governments to manipulate budgets. Italy was alleged to have fallen short in several respects, chiefly by deferring liabilities and taking credit for a one-off tax. Belgium was accused of shuffling assets on and off balance sheet over the year-end, and France of assuming France Telecom's pension liabilities in return for an immediate cash payment. Even Germany had massaged its figures, having attempted in 1997 to accrue a special dividend from a revaluation of gold reserves, before the Bundesbank's frown induced a hasty retreat. The exposure of these exercises in creative accounting, however, weighed little against political considerations, and once the Commission had accepted nearly all the applicant states' numbers at face value it became clear that the only country that would be rejected was Greece. Denmark, Sweden and the UKwould certainly have been welcomed had they chosen to apply.
To ensure sustained fiscal discipline after the launch of the euro, the Maastricht Treaty tests for excessive deficit and excessive debt were incorporated into a formal 'Stability and Growth Pact', backed by sanctions for non-compliant eurozone countries (but not for countries with opt-outs). (See also EMU and Stability and Growth Pact.)
Description of Convergence criteria
The Concise Publication of the European Union describes convergence criteria in the following terms: [1] The British government has set out its own five convergence tests to be met before the UK enters EMU:
Compatibility of business cycles and economic structures
Sufficient flexibility to meet any problems
Better conditions for capital investment in the UK
Positive impact on the City
Promotion of growth, stability and jobs.
A sixth test is political: that the electorate should have approved abolishing the pound in a referendum.
A Treasury assessment in 1997 concluded that without sustainable convergence with Continental economies EMU (even if otherwise successful) would do the UK more harm than good, but that EMU has the potential to enhance growth and employment. In the Treasury's view, convergence did not at present exist. A curious omission both in the criteria and in the Treasury paper was that no mention was made of the risk of exchanging the pound for the euro at an uncompetitive rate - a flaw that had helped to undermine the UK's brief participation in the ERM in 1992. Discerning commentators have also noted that of the five criteria few are capable of objective measurement.
Resources
Notas y References
Based on the book "A Concise Publication of the European Union from Aachen to Zollverein", by Rodney Leach (Profile Books; London)
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See Also
Resources
Notas y References
Based on the book "A Concise Publication of the European Union from Aachen to Zollverein", by Rodney Leach (Profile Books; London)
Professional Content and Learning Tools
☑️ Lawi offers educational solutions and professional insight, integrating content, tools, and practical technology to promote lifelong learning, personal and professional improvement, and human progress through knowledge. Our collections feature resources and solutions from a wide range of subject areas, from management and finance to law and cybersecurity. This text is only a brief introduction. If you would like us to expand on this content, please let us know in the comments. If you’re finding our platform and publications valuable, share it with a colleague or friend, leave a comment and consider subscribing if you haven’t already (thanks!). There are group discounts, gift options, and referral bonuses available.