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From EU to euro area enlargement Ad van Riet Head of EU Countries Division European Central Bank October 2005 The views expressed in this presentation do not necessarily reflect those of the ECB. Outline • The 2004 EU enlargement: General background information • The road to the euro - ERM II - Recent developments - Main challenges 2 The 2004 enlargement: Population EU-15 = 458 million New MS = 74 million UK Sweden Slovakia Denmark Euro Area 311 mln Poland Hungary Czech Republic 3 The 2004 enlargement: GDP EU-15 = EUR 9798 bn Denmark New MS = EUR 475 bn Sweden UK Slovakia Poland Euro Area = EUR 7614 bn Hungary Czech Republic 4 The 2004 enlargement: GDP per capita levels GDP per capita in PPP terms (% of euro area average) 90 1993 2004 80 70 New MS weighted average 2004 = 53.1 60 50 40 30 20 10 0 Cyprus Slovenia Slovenia Cyprus Czech Czech Rep. Rep. Malta Malta Hungary Estonia Slovakia Hungary Slovakia Lthuania Lithuania Poland Poland Latvia Latvia 5 The 2004 enlargement: real GDP growth Real GDP growth in the EU and the new Member States, % Euro area EU25 EU10 5 5 4 4 3 3 2 2 1 1 0 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005* * European Commission Spring 2005 forecast 6 The 2004 enlargement: price levels Comparative price levels of final consumption by households (% of the euro area average) 100 90 1995 2003 80 70 New MS weighted average 2003 = 54.8 60 New MS weighted average 2003 = 54.8 50 40 30 20 10 0 Malta Cyprus Estonia Slovenia Latvia Lithuania Slovakia Hungary Czech Republic Poland * For Malta 1999 and 2003 data 7 The 2004 enlargement: HICP inflation HICP inflation in the EU and the new Member States, % Euro area EU25 EU10 16 16 12 12 8 8 4 4 0 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005* * European Commission Spring 2005 forecast 8 The road to the euro (as stipulated in the EC Treaty) Time t May 2004 Pre-ERM II phase Accession to the EU Time t + (min.) 2 years ERM II membership (at least 2 years) Entry into ERM II ERM II membership Technical preparations Adoption of the euro Assessment of convergence, formal decision on entry and conversion rate 9 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 10 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 11 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) 12 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% 13 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% 14 ECB Convergence Report 2004 – price stability Five countries complied with the reference value HICP inflation (annual average percentage change, Sept. 2003 – Aug. 2004) 9 8.4 8 8 6.5 7 7 6 6 4.9 5 4 5 4.1 4 Reference value 2.4 3 2 1.3 1.8 2.0 2.1 2.5 2.6 3 2 1 1 0 0 -0.2 Slovakia Hungary Latvia Slovenia Malta Poland Cyprus Estonia Czech Republic -1 Sweden Lithuania -1 9 15 Price stability – recent developments HICP inflation (annual average percentage change, Sept. 2003 – Aug. 2004 and Sept. 2004 – Aug. 2005) Slovakia Hungary Latvia Slovenia Malta Sept. 2004-Aug. 2005 Poland Sept.2003-Aug.2004 Cyprus Estonia Czech Republic Sweden Lithuania -1 0 1 2 3 4 5 6 7 8 9 16 ECB Convergence Report 2004 – government balances in 2003 Five countries complied with the reference value General government surplus (+) or deficit (-) 4 3 2 1 0 -1 -2 -3 -4 -5 -6 -7 -8 -9 -10 -11 -12 -13 -14 % of GDP, Eurostat data 3.1 0.3 -1.5 Reference value = - 3.0 % -2.0 -1.9 -3.7 -3.9 -6.4 -6.2 -9.7 -12.6 Sweden Estonia Latvia Slovenia Lithuania Slovakia Czech Malta Cyprus Hungary Poland Rep. 17 Government balances in 2005 General government surplus (+) or deficit (-) 0.9 0.8 1 % of GDP, European Commission Spring 2005 forecast 0 -1 -2 -1.6 -2.2 -3 -2.4 -2.9 -4 Reference value = -3.0% -3.8 -3.9 -3.9 -5 Estonia Sweden Latvia Slovenia Lithuania Cyprus Slovakia Hungary Malta -4.4 -4.5 Poland Czech Rep. 18 ECB Convergence Report 2004 – government debt in 2003 Nine countries complied with the reference value General government gross debt % of GDP, Eurostat data 80 70.9 59.1 Reference value = 60.0% 60 45.4 42.6 40 71.1 52.0 37.8 29.4 21.4 14.4 20 5.3 0 Estonia Latvia Lithuania Slovakia Slovenia Czech Poland Sweden Hungary Cyprus Malta Rep. 19 Government debt in 2005 General government gross debt % of GDP, European Commission Spring 2005 forecast 80 60 76.4 69.1 57.8 Reference value = 60.0% 44.2 46.8 Slovakia Poland 50.3 36.4 40 30.2 21.2 14.0 20 4.3 0 Estonia Latvia Lithuania Slovenia Czech Sweden Hungary Cyprus Malta Rep. 20 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 Poland No Slovenia Yes Slovakia No Sweden No 2 May 2005 28 June 2004 21 Exchange rate developments in new ERM II countries • A rise in a chart denotes an appreciation of the currency against the euro 22 ECB Convergence Report 2004 – long term interest rates Eight countries complied with the reference value Long-term interest rates (in percentages, annual average, Sept. 2003 – Aug. 2004) 9 8.1 8 8 Reference value 6.4 6.9 7 6 5 9 4.7 4.7 4.7 4.7 5.0 5.1 5.2 7 6 5.2 5 Hungary 0 Poland 0 Slovenia 1 Cyprus 1 Slovakia 2 Latvia 2 Sweden 3 Malta 3 Lithuania 4 Czech Republic 4 N.B. No comparable long-term interest rate available for Estonia 23 Long term interest rates – recent developments Long-term interest rates (in percentages, annual average, Sept. 2003 – Aug. 2004 and Sept. 2004 – Aug. 2005) Hungary Poland Slovenia Cyprus Sept. 2004-Aug. 2005 Slovakia Sept.2003-Aug.2004 Latvia Czech Republic Lithuania Malta Sweden 0 2 4 6 8 N.B. No comparable long-term interest rate available for Estonia 24 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 25 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 26 Thank you for your attention! 27