3 January 2011
Criteria for euro introduction
The convergence criteria, or the Maastricht criteria, are the criteria that must be met by the EU Member States in order to go to the stage three of the Economic and Monetary Union (EMU) and introduce the euro. The Member States intending to introduce the euro must meet the following criteria:
sustainability of public finances
exchange rate stability
long-term interest rates
As regards price stability, the average rate of inflation of
an EMU candidate country
for the EMU, must not exceed by more than 1.5 percentage points that of the
three best-performing EU Member States in terms of price stability.
There are two sub-criteria applied by the European Commission to examine sustainability of public finances:
the ratio of the general government budget deficit to GDP must not exceed 3%.
the ratio of the general government debt to GDP must not exceed 60% at the end of the previous financial year, unless that ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace.
A stable exchange rate is also a precondition which a Member State must meet by participating in the Exchange Rate Mechanism II (ERM II) continuously for at least two years. In that period, fluctuation margins of the exchange rate of the euro against a Member State's currency must be ±15% around bilateral central parities.
Fulfilling the criterion of a long-term interest
rate (on government bonds) by a Member State implies that its average nominal
long-term interest rates must not exceed by more than 2 percentage points that
of the three best performing Member States in terms of price stability (i.e. these are the same states indicated under the price stability criterion).
Economic and Monetary Union members
The euro replaced the national currencies for non-cash transactions (in the economy and in banks) in the EMU countries as early as on 1 January 1999 (except in Greece where it was introduced for non-cash transactions on 1 January 2001). At the beginning of 2002, euro banknotes and coins began to be issued, which was the beginning of a changeover of the existing currencies of the EMU countries to the euro. Finally, on 1 March 2002, the euro became the sole legal tender in those countries. At that time, the euro was put into circulation as the single currency in 12 European countries, the first EMU members: Austria, Belgium, Finland, France, Greece, Ireland, Italy, Luxembourg, the Netherlands, Germany, Portugal and Spain.Among 12 new Member States, the euro was introduced so far by Slovenia (on 1 January 2007), Cyprus and Malta (on 1 January 2008), Slovakia (on 1 January 2009) and Estonia (1 January 2011.).
The euro has not been introduced so far by three old EU Member States - Great Britain, Denmark and Sweden.
The international role of the euro
Since its introduction, the euro has played an important role on the international scene. A contribution of the euro area, as such, is also important, since a significant portion of supply and demand for international securities denominated in euro can be associated with investors and borrowers from the euro-area countries. In view of the basic characteristics of money, the euro in the international environment can have a role in the public and private sector.
As regards the public sector, as many as 50 countries in the world tie their exchange rate regimes to euro. In most of these countries, euro is almost the only currency which the monetary authorities rely on when stabilising the exchange rates of their own currencies. Furthermore, assets denominated in euro account for a significant share of their international reserves.
Analysing the private sector, internationalisation of the euro is evident, to the greatest extent, in global capital markets, especially taking into account the role of euro in international finances. Since the onset of the EMU stage three, an increase in the share of securities denominated in euro in global capital markets can be observed from 20% in 1999 to more than 32% at end-2007, whereas the share of securities denominated in the US dollar has remained stable at approximately 45%.
In addition to global capital markets, the euro is used in trade between the euro-area countries and third countries, such as Great Britain, Sweden, Denmark and Japan.
In conclusion, since its introduction until today, the euro has maintained a considerable degree of stability on the international scene and a slight increase in its use as an international currency has been recorded. The euro-area citizens are also aware that euro is comparable with the US dollar and yen, which affects their perception of Europe as a significant and influential participant in global capital markets.
The Republic of Croatia and the Euro
Croatian citizens and companies are familiar with the euro as a currency. This is supported by several facts: 1) approximately two thirds of the citizens' bank savings is deposited in euro (or indexed to euro); 2) approximately two thirds of the citizens' bank loans is also indexed to euro; 3) in addition to savings and loans, familiarity with the euro can be explained by the significance of tourism in Croatia, where almost 80% of the registered tourist nights can be accounted for by tourists from EU Member States; 4) companies conduct 65% of Croatia's total international trade with the EU Member States; 5) in addition, over 90% of foreign direct investments in Croatia come from the EU Member States.
Taking into account the above mentioned facts, introduction of the euro in the Republic of Croatia, in economic terms, will undoubtedly set off the risks for the economy, arising from its euroisation, and reduce the costs of conversion of kuna to euro, and vice versa, associated with international merchandise trade and tourism. In addition, when travelling to the euro-area countries, the citizens will more easily compare the prices of products and services. On the other hand, it will take a certain period of time for the citizens to adjust to the fact that euro is the standard of value in purchases. This problem will not be so pronounced in purchases of goods such as cars and real estate, since in purchases of this type of goods the euro has already been used as the standard of value, but it will rather appear in day-to-day purchases. It should also be noted that the euro-area citizens perceive that the euro introduction has caused price increases, thus contributing to deterioration of the living standard. However, according to the statistical data on price movements in the euro-area countries after the euro introduction, this has proved to be a misperception.
Finally, as regards the euro introduction in the Republic of Croatia, it should be noted that, at present, it is not possible to precisely determine the date when the Republic of Croatia will introduce the euro. The Republic of Croatia first has to become an EU Member State to be in a position to demonstrate its readiness for the euro introduction, in terms of fulfilling the Maastricht criteria. It takes at least two years to demonstrate this readiness, which means, theoretically, that it is possible to introduce the euro two to three years after the EU accession. Nevertheless, an example of the countries that gained EU membership in 2004 shows that 4 out of 10 countries managed to introduce the euro in a period shorter than 5 years following the EU accession.