THE EURO — CONVERGENCE REPORTS AND
DECISION ON GREEK MEMBERSHIP
(a)
(21259)
8349/00
COM(00) 277
(b)
(21300)
8271/00
—
(c)
(21292)
8350/00
COM(00) 274
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Commission Convergence Report 2000.
European Central Bank Convergence Report 2000.
Draft Decision in accordance with Article 122(2) of the Treaty for the adoption by Greece of the single currency on 1 January 2001.
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| Legal base:
| Article 122(2) EC; consultation; qualified majority voting
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| |
| Document originated:
| (a) 3 May 2000
(b) —
(c) 3 May 2000
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| Forwarded to the Council:
| (a) 5 May 2000
(b) 28 April 2000
(c) 8 May 2000
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| Deposited in Parliament:
| (a) 25 May 2000
(b) 6 June 2000
(c) 5 June 2000
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| Department: |
HM Treasury |
| Basis of consideration:
| (a) and (c) EM of 9 June 2000
(b) EM of 12 June 2000
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| Previous Committee Report:
| None |
| To be discussed in Council:
| European Council on 19 June 2000, ECOFIN on 17 July 2000
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| Committee's assessment:
| Legally and politically important
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| Committee's decision:
| (all) Cleared; but further information requested
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Background
3.1 In May 1998, the Council, meeting as
Heads of State or Government, decided that eleven Member States
had met the convergence criteria and legal requirements for participating
in the third stage of Economic and Monetary Union (EMU) —
adoption of the euro as the single currency. The Council reached
its decision by qualified majority on the basis of convergence
reports by the Commission and the European Monetary Institute
(precursor of the European Central Bank). Denmark and the UK had
opt-out arrangements from the third stage of EMU and were not
the subject of formal assessment. Those Member States (Greece
and Sweden) assessed as not meeting the conditions for adoption
of the single currency are referred to under the Treaty as "Member
States with a Derogation".
3.2 Under Article 122(2) EC, 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) are required
to prepare new convergence reports on these States. Greece submitted
a request in March 2000, and both Sweden and Greece are due to
be re-examined under the two year rule.
The documents — overview
3.3 Both the Commission and the ECB have
produced convergence reports — documents (21259) and (21300)
respectively. The Commission has also put forward a proposal for
the adoption by Greece of the single currency on 1 January 2001
— document (21292).
3.4 The Commission and the ECB reports assess
the two countries separately against the same economic criteria:
- exchange rate stability; and
- long term interest rates.
3.5 In addition, the Commission's document
reports on the integration of markets, developments, and current
account balance of payments. Both reports assess the compatibility
of the respective national legislation with the Statute of the
European System of Central Banks (ESCB), and the Commission report
looks also at compatibility with the Treaty.
Price stability
3.6 Both reports note that the reference
value for the price stability criterion is the arithmetical average
of the three best performing Member States (France, Sweden and
Austria) over the previous year, plus 1.5 percentage points. This
figure was 2.4% in March 2000 when the inflation rate for Greece
at the time was 2% and for Sweden was 0.8%. The Commission concludes
that both countries meet the price stability criterion. The ECB
notes that recent reductions in inflation in Greece partly reflect
temporary factors such as cuts in indirect taxes and government
agreements in 1998 and 1999 with enterprises to reduce the retail
prices of some goods affecting the price index, and it suggests
that there are some upside risks to future price developments
in both Greece and Sweden.
Budgetary position
3.7 In 1998, Greece failed the criterion
on its budgetary position. The reference values for judging the
existence of an excessive deficit are 3% for the ratio of government
deficit to GDP, and 60% for the ratio of government debt to GDP,
unless the ratio is sufficiently diminishing.
3.8 The reports say that in 1999 the Greek
government deficit was 1.6% of GDP and the debt to GDP ratio was
104.4%. The Commission notes that the ratio of government debt
to GDP has declined from 112% in 1996 and was on a downward trend.
It also notes that the Council had decided on 17 December 1999
to abrogate its former position on an excessive deficit in Greece.
The Commission concludes that it is unnecessary to re-open the
excessive debt procedure. In Sweden, the reports note that there
was a surplus of 1.9% in 1998 and 1999. The government debt to
GDP ratio fell to 65.5% in 1999 and is expected to be 61.3% in
2000 with a further decline projected. The Commission notes that
in May 1998, the Council abrogated the earlier decision that Sweden
had an excessive debt situation and takes the view that Sweden
fulfils the criterion on budgetary position.
Exchange Rate Stability
3.9 Greece and Sweden both failed the exchange
rate criterion in 1998. The reports assess stability by reference
to the exchange rate of the national currency against the median
Exchange Rate Mechanism (ERM) currency before 1999, and against
the euro from then on. The Commission notes that the Greek drachma
deviated on average by 6.4% from its central rate against the
ERM/euro rates and has performed above its central parity rates
throughout the whole period of assessment and was not significantly
unsettled by the financial turbulence in the latter part of 1998.
It concludes that the drachma meets the exchange rate criterion.
Unlike Greece, Sweden has not participated in the ERM or ERM II
and the krona has floated in a flexible exchange rate régime.
Both reports note the relative volatility of the krona against
the reference currencies over the assessment period. The Commission
concludes that Sweden does not fulfil the exchange rate criteria.
The Commission report says that these include participation in
ERM/ERM II at the time of assessment, and that such participation
for at least two years is expected, although a period of non-participation
before entry to ERM/ERM II can be taken into account.
Long-term interest rates
3.10 In 1998, Greece failed the criterion
on convergence of long-term interest rates. The reference value
for the purposes of the assessment is given by the average of
long-term rates in the three best performing Member States in
terms of price stability (France, Austria, Sweden), plus 2 percentage
points. The reference value in March 2000 was 7.2%, the rate in
Greek benchmark bonds was 6.4% and in Sweden 5.4%. The Commission
concludes that both countries meet the criterion.
Compatibility of national legislation with the
Treaty and the Statute of the ESCB
3.11 Both reports note that legislation
in Sweden remains incompatible in a number of respects with the
requirements of the Treaty and the ESCB Statute, despite new legislation.
Greek legislation is deemed satisfactory.
3.12 Overall, the Commission notes that
although Greece failed on all four criteria in 1998, it has since
then made striking progress and has achieved a high degree of
sustainable convergence. Sweden fails only by reference to the
exchange rate criterion and the continuing incompatibility of
its legislation (though Sweden is not currently seeking membership
of the euro).
The Government's view
3.13 In her Explanatory Memoranda of 9 and
12 June the Economic Secretary to the Treasury (Miss Melanie Johnson)
says that, in the Government's view, both the Commission and the
ECB reports have been submitted properly, in accordance with their
Treaty obligations. She notes that the ECB and Commission reports
were considered at ECOFIN on 5 June 2000, and that "after
discussion by Heads of Government on 19 June (the Feira European
Council), ECOFIN will decide whether Greece fulfils the necessary
conditions (for joining the euro)". She gives no indication
of the UK view on the issue.
Conclusion
3.14 The Minister expresses no view on
the strength of the case for Greek membership of the euro. However,
there is nothing in these documents to suggest that the already
very clear expectation that Greece will join in January 2001 will
be frustrated by the Feira European Council and subsequent ECOFIN
decision, which we note is by qualified majority.
3.15 The reports prepared by the Commission
and the ECB are of interest in setting out how the Treaty obligations
for new admission to the euro-zone are being discharged by the
Commission and the ECB. As regards Greece, we note that, having
failed all four convergence tests in 1998, it is now deemed to
have met them. As regards Sweden, we note that the failure to
meet the exchange rate criterion appears to reflect not only a
judgement about the relative volatility of the krona against the
European benchmark currencies but also Sweden's non-participation
in ERM/ERM II. We ask the Minister to tell us whether she agrees
with that view, and if so, whether she considers that it has any
implications for the UK should it apply to join the euro following
a referendum. However, we do not think it necessary to hold up
these documents pending a reply to our question, and we clear
them all accordingly. In reaching that view, we had in mind that
the House has a debate on European affairs on 15 June, before
the Feira European Council.
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