On July 23d 2014, the European Union General Affairs Council of Ministers has adopted the final decision on Lithuania’s participation in the Economic and Monetary Union (EMU) from 1 January 2015. From this date Lithuania will become the 19th full-fledged member of the eurozone, which will start using the euro as the single currency of the European Union.
All Member States of the European Union, except Denmark and the United Kingdom, are required to adopt the euro and join the euro area. To do this they must meet certain conditions known as ‘convergence criteria’.
All EU Member States are part of Economic and Monetary Union, which means they coordinate their economic policies for the benefit of the EU as a whole. However, not all EU Member States are in the euro area – only those having adopted the euro are members of the euro area.
Of the Member States outside the euro area, Denmark and the United Kingdom have ‘opt-outs’ from joining for reasons of economic sovereignty. These two countries can join in the future if they so wish.
Sweden is not yet in the euro area, as it has not made the necessary changes to its central bank legislation and it does not meet the convergence criterion related to participation in the Exchange Rate Mechanism (ERM II). However, under the Treaty, Sweden is required to adopt the euro.
The remaining non-participating Member States acceded to the Union in 2004 and 2007, after the euro was launched. At the time of their accession, they did not meet the conditions for entry to the euro area, therefore their Treaties of Accession allow them time to make the necessary adjustments – they are Member States with a ‘derogation’, as is Sweden. These Member States have committed to joining the euro area as soon as they fulfil the entry conditions. When this is the case, the ‘derogation’ is ‘abrogated’ by a decision of the Council, and the Member State concerned adopts the euro.
Why are there conditions for entry to the euro area?
The process of building Europe is one of progressive integration. The single market for goods, services, capital and labour, launched in 1986, was a major step in this direction. Economic and Monetary Union and the euro take economic integration even further, and to join the euro area Member States must fulfil certain economic and legal conditions.
Adopting the single currency is a crucial step in a Member State’s economy. Its exchange rate is irrevocably fixed and monetary policy is transferred to the hands of the European Central Bank, which conducts it independently for the entire euro area. The economic entry conditions are designed to ensure that a Member State’s economy is sufficiently prepared for adoption of the single currency and can integrate smoothly into the monetary regime of the euro area without risk of disruption for the Member State or the euro area as a whole. In short, the economic entry criteria are intended to ensure economic convergence – they are known as the ‘convergence criteria’ (or ‘Maastricht criteria’) and were agreed by the EU Member States in 1991 as part of the preparations for introduction of the euro.
In addition to meeting the economic convergence criteria, a euro-area candidate country must make changes to national laws and rules, notably governing its national central bank and other monetary issues, in order to make them compatible with the Treaty. In particular, national central banks must be independent, such that the monetary policy decided by the European Central Bank is also independent.
The Member States which were the first to adopt the euro in 1999 had to meet all these conditions. The same entry criteria apply to all countries which have since adopted the euro and all those that will in the future.
What are the convergence criteria?
The convergence criteria are formally defined as a set of macroeconomic indicators which measure:
- Price stability, to show inflation is controlled;
- Soundness and sustainability of public finances, through limits on government borrowing and national debt to avoid excessive deficit;
- Exchange-rate stability, through participation in the Exchange Rate Mechanism (ERM II) for at least two years without strong deviations from the ERM II central rate;
- Long-term interest rates, to assess the durability of the convergence achieved by fulfilling the other criteria.
The exchange-rate stability criterion is chosen to demonstrate that a Member State can manage its economy without recourse to excessive currency fluctuations, which mimics the conditions when the Member State joins the euro area and its control of monetary policy passes to the European Central Bank (ECB). It also provides an indication of the appropriate conversion rate that should be applied when the Member State qualifies and its currency is irrevocably fixed.