No prospective euro members meet criteria to join, ECB says

None of the countries that have yet to join the euro meet all accession criteria and many have even diverged from the long-set rules of euro membership, the European Central Bank has said in a report on prospective members.

All EU members except for Denmark are required to adopt the common currency but non-compliance is not penalized, so only a few are actively working on joining, with most others preferring to retain the leverage yielded by independent monetary policy.

“Reflecting challenging economic conditions, limited progress has been made as regards compliance with the convergence criteria,” the ECB said in a biennial progress report on Bulgaria, the Czech Republic, Hungary, Poland, Romania and Sweden.

But the issues are far deeper than just meeting economic criteria, the ECB added.

“The quality of institutions and governance is relatively weak in all the central and eastern European countries under review – especially in Bulgaria, Romania and Hungary,” it said.

The divergence from euro criteria was due in great part to the economic fallout of Russia’s war in Ukraine, since most prospective euro members have long depended on Russia for their energy needs.

Hungary appeared to be among the weakest performers.

It did not meet rules on inflation, debt, the budget deficit and long-term borrowing costs, while its currency was highly volatile and it also failed to comply with rules on central bank independence and the prohibition on monetary financing, the ECB said.

Poland and Romania were not much better either as they all missed the inflation, deficit and long-term borrowing costs criteria, even if their debt levels were well below the reference rates.

Poland and Romania also do not comply with rules on central bank independence and the prohibition of monetary financing of the government, the ECB added.

Bulgaria, which is actively trying to adapt the euro and still hopes to get in next year, failed on the inflation criteria and the ECB said it was worried about the outlook further out.

“Over the longer term there are concerns about the sustainability of inflation convergence in Bulgaria,” the ECB said. “Sustainable convergence in Bulgaria requires stability-oriented economic policies and wide-ranging structural reforms.” [Reuters]