Joaquín Almunia
Member of the European Commission for Economic and Monetary Affairs

Introductory remarks to press conference on 2004 Convergence Report

Press conference on 2004 Convergence Report
Breydel Press Room, 20 October 2004

Ladies and gentlemen,

The Commission adopted today the 2004 Convergence Report which examines the progress that non euro area member states have made towards meeting the conditions for the adoption of the euro. This year's report in addition to Sweden covers, for the first time, the ten new member states that joined the Union on 1 May 2004. It does not cover the member states with an opt-out for euro membership; that is the UK and Denmark.

According to the Treaty convergence reports must be prepared at least once every two years. The criteria to assess the readiness for adopting the single currency are included in the Treaty which also makes clear that adoption of the euro is not an option but an obligation.

In short the convergence report examines the compatibility of national legislation with the euro and assesses whether the Member States have achieved a high degree of sustainable convergence by reference to the four convergence criteria of the Treaty.

The conclusion of the 2004 report is that none of the countries examined fulfils all the conditions for adopting the euro. This should not be a surprise to anyone. I would like now to make some comments about each criterion assessed.

First, the examination of the Member State's legislation mainly covers three areas:

• First, the objectives of the national central banks;
• Second, the independence of the national central banks and of the members of their decision-making bodies;
• Third, the integration of the national central banks into the European System of Central Banks.

As far as the new Member States are concerned, the independence of their respective national central banks and the latter's compliance with the ESCB's objectives have been taken care of as part of the pre-accession requirements. Nevertheless, the correction of some residual imperfections is recommended. However, in order to ensure the full integration of the different national central banks into the European System of Central Banks (ESCB) before the countries concerned join the euro area, incompatibilities need to be resolved in the legislation of all countries.

In Sweden there continues to exist an incompatibility related to the Riksbank's independence as already pointed out in the 2002 Convergence Report.

With regard to the convergence criteria, the situation varies across member states. On the price stability criterion, Member States must have an average inflation rate that does not exceed by more than 1.5 percentage points that of the three best performing Member States in terms of price stability. Based in HICP data up to August 2004, Finland, Denmark and Sweden were the three best performers and the reference value was established 2.4%. Member states in deflation, like Lithuania, were not included in our calculation as, in the Commission's view, they cannot be considered "best performers". Five countries had inflation rates below the reference value, namely the Czech Republic, Estonia, Cyprus, Lithuania and Sweden.

The criterion on the government budgetary position is met when a country is not the subject of a Council decision on the existence of an excessive deficit under Article 104(6) of the Treaty. In 2003, the Czech Republic, Cyprus, Hungary, Malta, Poland and Slovakia all recorded a general government deficit in excess of the 3 % of GDP reference value. Cyprus and Malta also posted debt ratios above the 60 % of GDP reference value. These Member States were placed in excessive deficit and were issued recommendations under Article 104(7) by the Council on 5 July 2004. The remaining five Member States, namely Estonia, Latvia, Lithuania, Slovenia and Sweden, fulfil this criterion.

The exchange rate criterion includes the observance of the normal fluctuation margins of the exchange rate mechanism (ERM II) of the European Monetary System for at least two years without severe tensions and in particular without devaluing against the euro. On 28 June 2004, the Estonian kroon, Lithuanian litas and Slovenian tolar joined ERM II. Estonia and Lithuania have successfully maintained their currency board within ERM II while the Slovenian tolar has remained very stable since that date.

The other currencies are characterised by different exchange rate regimes. Three out of four pegged currencies, namely the Cyprus pound, the Latvian lats and the Maltese lira, have been very stable against their reference currency. The unilateral peg of the Hungarian forint to the euro has been rather stable despite increasing inflation and substantial fiscal deficits. Among the floating currencies, the Czech koruna and Swedish krona were relatively stable against the euro in the last two years, while the Slovak koruna strengthened. The Polish zloty depreciated from mid 2001 until the spring of this year. It has since appreciated.

None of the eleven countries examined has participated in ERM II for the required period and therefore none of them fulfils the exchange rate criterion.

The criterion on the durability of convergence is based on the assessment of interest rates on 10-year government benchmark bonds. Due to the absence of harmonised benchmark bonds or comparable securities in Estonia, an interest rate indicator has been identified.

In August 2004, the reference value was 6.4%, which is respected by eight of the ten Member States for which long-term interest data are available: the Czech Republic, Latvia, Lithuania, Cyprus, Malta, Slovenia, Slovakia and Sweden. For Estonia, based on the analysis of developments in the interest rate indicator (4.6% in August 2004) and taking into account, inter alia, the low level of government debt, there are no reasons to conclude that Estonia would not fulfil the long-term interest criterion.

Long-term interest rates in Sweden have been relatively stable, while in the new Member States, they generally declined in the last two years reflecting success in macroeconomic stabilisation. In Hungary and Poland, the process of interest rate convergence has been interrupted in the second half of 2003 on concerns about the authorities' resolve to tackle the mounting government deficits.

Finally, with respect to other factors relevant for the assessment of sustainable convergence, the Commission stresses the following points:

• Financial systems in the countries under review vary considerably, but financial integration is quite advanced as, for example, reflected in a high degree of foreign ownership in the banking sector.
• Product market integration as measured, for example, through trade or foreign direct investment is well advanced and this should contribute to greater competition, though there is still some way to go, and should facilitate economic stabilisation in case of asymmetric shocks.
• Finally, current accounts deteriorated in most of the new Member States, but sustainability does not appear in general to be an issue as the deficits have been linked to a strong investment activity underlying the catching-up process and improving the export potential.

In conclusion, I would like to say that satisfying the accession criteria has required a huge effort by all new member states. A lot of progress has been made with convergence but the road to euro membership requires further efforts. I hope that the next report in 2006 provides a good incentive for further progress.

Let me now say a few words about statistics. I presented today to the College two Information Notes; one on the Greek deficit and debt data and one on EU action in order to reinforce the governance of budgetary statistics.

First regarding Greece. On 23 September, following the Greek government notification, Eurostat released strongly revised data on the deficit and debt for the period 2000-2003, which show sizeable variations and a continued breach of the 3% deficit reference value. The deviations relative to the previous notifications result both from understatements by the Greek authorities and from estimation errors. As have already explained to the European Parliament and to you, the media, the revisions in the deficit figures concern primarily but not only two issues: military expenditure and the social security accounts.

Given the sizeable revisions for the data concerning the period 2000-2003, I instructed Eurostat to analyse also the fiscal data for the period prior to 2000. Last week, Eurostat undertook a mission to Athens in order to re-examine the data for this period. However, the mission could not yet reach a conclusion, and it requested the Greek authorities to provide additional information. Until now, this information has only been provided in part. I cannot exclude that another mission to Athens will be necessary so as to enable Eurostat to complete the information it needs to finalise its analysis. It is therefore much too early for me to present you with any conclusions in this regard.

The Greek case raises justified concerns about the quality of the functioning of national statistical offices, the surveillance mechanism and the Commission's validation tasks.

How do I intend to take this matter forward? First, I have asked the Commission's Legal Service to advise me on whether the continued understatements by the Greek authorities of data on deficit and debt - as much as their estimation errors - constitute a breach of the obligations of Greece under the Treaties and, consequently, on whether the Commission should initiate urgent infringement procedures.

Second, and this fits in as well with the call made by the Council for an improvement in the quality of the fiscal statistics, I have instructed the Commission services to prepare proposals to reinforce the monitoring of public finance data, along the following lines:

First, to develop the relevant legal provisions. The proposals will supplement the existing set of rules by strengthening data monitoring mechanisms. Under existing law, the Commission lacks the power to monitor public accounts directly. The existing set of rules needs to be extended to ensure that Eurostat, as the statistical authority, can carry out effective checks on the data notified by Member States.

Second, I want to increase the operational capacity of Eurostat and the Directorate-General for Economic and Monetary Affairs in this area. To achieve this, systematic planning of existing missions, plus longer and more in depth verification missions, are required. There is also a need to mobilise all existing expertise, including that at national level.

Third, there is a need to establish Europe wide standards as regards the independence of the national statistical institutes. The Commission will respond to the Council's request that it propose institutional standards that will ensure that the national statistical institutes can operate in line with the principles of integrity, independence and responsibility.

These proposals will be incorporated in a forthcoming Commission communication to the Council and the European Parliament which will establish a global governance strategy for statistics. The Commission should adopt this communication by the end of 2004, thereby complying with the ECOFIN Council's request for an improvement in the monitoring of the quality of budgetary statistics.

The necessary legislative proposals will be put forward as soon as possible. They will complete the existing set of rules governing statistics for the excessive deficit procedure and could also deal with minimum standards for the institutional organisation of the authorities responsible for statistics. This last aspect relates directly to the ECOFIN Council's request to the Commission to submit a proposal on this matter to it by June 2005.

All in all, I would hope that the seriousness of the current problems encountered with the Greek public finance data would help us in building a more reliable framework for the analysis and monitoring of fiscal statistics.