Convergence Criteria for Euro
The Euro is an ambitious project to develop monetary union and a single currency. The Euro involves a common currency and also common monetary policy. Therefore, for membership to be successful, countries have to meet certain convergence criteria which include:
1. Inflation rate: No more than 1.5 percentage points higher than the average of the three best performing (lowest inflation) member states of the EU.
2. Government finance:
- Annual government deficit: The ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3% at the end of the preceding fiscal year. If not, it is at least required to reach a level close to 3%. Only exceptional and temporary excesses would be granted for exceptional cases.
- Government debt: The ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year. Even if the target cannot be achieved due to the specific conditions, the ratio must have sufficiently diminished and must be approaching the reference value at a satisfactory pace.
3. Exchange rate: Applicant countries should have joined the exchange-rate mechanism (ERM II) under the European Monetary System (EMS) for two consecutive years and should not have devaluated its currency during the period.
4. Long-term interest rates: The nominal long-term interest rate must not be more than 2 percentage points higher than in the three lowest inflation member states.
In practice many European countries were allowed to join the Euro even though they didn’t meet the strict convergence criteria. Others such as the UK, met the criteria but decided not to join.
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