Entry Criteria to the Euro :: Euro Finances Economics Essays

Entry Criteria to the Euro 1.Entry criteria The four entry criteria are set out in Article 121(1) of the EC Treaty. A Member State must satisfy all four criteria in order to be able to enter the euro area. (Treaty quotes Source: http://europa.eu.int/scadplus/leg/en/lvb/l25014.htm [02/02/2004]) 1.1. Price Stability The Treaty stipulates: "The achievement of a high degree of price stability [...] will be apparent from a rate of inflation which is close to that of, at most, the three best-performing Member States in terms of price stability." The inflation rate of a Member State must not exceed by more than 1.5% that of the three best-performing Member States in terms of price stability for a year preceding the test for criteria compliance. TEST PASSED ----------- 1.2. Government Finances The Treaty stipulates: "The sustainability of the government financial position [...] will be apparent from having achieved a government budgetary position without a deficit that is excessive [...]". This stipulation gave rise to two criteria being drawn up by the Commission for the Council of Finance Ministers. A. The annual government deficit must not exceed 3% of gross domestic product (GDP) at the end of the preceding financial year to the test for criteria compliance. B. Outstanding government debt must not exceed 60% of GDP at the end of the preceding financial year to the test for criteria compliance. TEST PASSED 1.3. Exchange Rates The Treaty stipulates: "the observance of the normal fluctuation margins provided for by the exchange-rate mechanism of the European Monetary System, for at least two years, without devaluing against the currency of any other Member State." A. The Member State must have controlled its exchange rate in line with the Euro within the normal margins of the exchange-rate mechanism, without any break during the two years preceding the test for criteria compliance. B. The Member State must not have devalued its currency against the Euro on its own initiative during the same period. The pound has been controlled in line with the normal margins of the ERM and there has been no devaluation in the last two years. TEST PASSED ----------- 1.4. Long-Term Interest Rates The Treaty stipulates: "the durability of convergence achieved by the Member State [...] being reflected in the long-term interest-rate levels". The nominal long-term interest rate must not exceed 2%of the three best-performing Member States in terms of price stability. The period taken into consideration is the year preceding the test for criteria compliance.