EN
4
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/ COMMISSION OF THE EUROPEAN COMMUNITIESBrussels, 5.12.2006
SEC(2006) 1570
COMMISSION STAFF WORKING DOCUMENT
Annex to the
REPORT FROM THE COMMISSION
CONVERGENCE REPORT DECEMBER 2006
(prepared in accordance with Article 122(2) of the Treaty)
{COM(2006) 762 final}
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European Economy
Convergence Report – Technical annex
A Commission services working paper
SEC(2006) 1570
Contents
1. Introduction 1
1.1. Role of the report 1
1.2. Application of the criteria 2
1.2.1. Compatibility of legislation 3
1.2.2. Price stability 3
1.2.3. Government budgetary position 6
1.2.4. Exchange rate stability 11
1.2.5. Long-term interest rates 11
1.2.6. Additional factors 12
2. Czech Republic 13
2.1. Legal compatibility 13
2.2. Price stability 14
2.2.1. Respect of the reference value 14
2.2.2. Recent inflation developments 14
2.2.3. Underlying factors and sustainability of inflation 15
2.3. Government budgetary position 17
2.3.1. The excessive deficit procedure for the Czech Republic 17
2.3.2. Developments until 2006 17
2.3.3. Medium-term prospects 18
2.4. Exchange rate stability 19
2.5. Long-term interest rates 20
2.6. Additional factors 21
2.6.1. Financial market integration 21
2.6.2. Product market integration 22
2.6.3. Development of the balance of payments 24
3. ESTONIA 25
3.1. Legal compatibility 25
3.2 Price stability 26
3.2.1. Respect of the reference value 26
3.2.2. Recent inflation developments 26
3.2.3. Underlying factors and sustainability of inflation 27
3.3 Government budgetary position 30
3.3.1. Developments until 2006 30
3.3.2. Medium-term prospects 30
3.4. Exchange rate stability 32
3.5. Long-term interest rates 33
3.6. Additional factors 34
3.6.1 Financial market integration 34
3.6.2 Product market integration 35
3.6.3 Development of the balance of payments 36
4. CYPRUS 38
4.1. Legal compatibility 38
4.2. Price stability 39
4.2.1. Respect of the reference value 39
4.2.2. Recent inflation developments 39
4.2.3. Underlying factors and sustainability of inflation 40
4.3. Government budgetary position 42
4.3.1. The excessive deficit procedure for Cyprus 42
4.3.2. Developments until 2006 43
4.3.3. Medium-term prospects 43
4.4. Exchange rate stability 45
4.5. Long term interest rates 46
4.6. Additional factors 47
4.6.1. Financial market integration 47
4.6.2. Product Market Integration 48
4.6.3. Development of the balance of payments 49
5. LatviA 51
5.1. Legal compatibility 51
5.2. Price stability 52
5.2.1. Respect of the reference value 52
5.2.2. Recent inflation developments 52
5.2.3. Underlying factors and sustainability of inflation 53
5.3. Government budgetary position 55
5.3.1. Developments until 2006 55
5.3.2. Medium-term prospects 56
5.4. Exchange rate stability 57
5.5. Long-term interest rates 58
5.6. Additional factors 59
5.6.1. Financial market integration 59
5.6.2. Product Market Integration 60
5.6.3. Development of the balance of payments 62
6. HUNGARY 64
6.1. Legal compatibility 64
6.2. Price stability 65
6.2.1. Respect of the reference value 65
6.2.2. Recent inflation developments 65
6.2.3. Underlying factors and sustainability of inflation 66
6.3. Government budgetary position 68
6.3.1. The excessive deficit procedure for Hungary 68
6.3.2. Developments until 2006 69
6.4. Exchange rate stability 71
6.5. Long term interest rates 72
6.6. Additional factors 73
6.6.1. Financial market integration 73
6.6.2. Product market integration 75
6.6.3. Development of the balance of payments 76
7. MALTA 78
7.1. Legal compatibility 78
7.2 Price stability 79
7.2.1. Respect of the reference value 79
7.2.2. Recent inflation developments 79
7.2.3. Underlying factors and sustainability of inflation 80
7.3 Government budgetary position 82
7.3.1. The excessive deficit procedure for Malta 82
7.3.2. Developments until 2006 82
7.3.3. Medium-term prospects 83
7.4. Exchange rate stability 84
7.5. Long-term interest rates 85
7.6. Additional factors 86
7.6.1. Financial market integration 86
7.6.2. Product market integration 88
7.6.3. Development of the balance of payments 89
8. POLAND 91
8.1. Legal compatibility 91
8.2. Price stability 92
8.2.1. Respect of the reference value 92
8.2.2. Recent inflation developments 92
8.2.3. Underlying factors and sustainability of inflation 93
8.3. Government budgetary position 95
8.3.1. The excessive deficit procedure for Poland 95
8.3.2. Developments until 2006 96
8.3.3. Medium-term prospects 96
8.4. Exchange rate stability 98
8.5. Long-term interest rates 98
8.6. Additional factors 99
8.6.1. Financial market integration 99
8.6.2. Product market integration 101
8.6.3. Development of the balance of payments 102
9. SLOVAKIA 104
9.1. Legal compatibility 104
9.2. Price stability 105
9.2.1. Respect of the reference value 105
9.2.2. Recent inflation developments 105
9.2.3. Underlying factors and sustainability of inflation 106
9.3. Government budgetary position 109
9.3.1. The excessive deficit procedure for Slovakia 109
9.3.2. Developments until 2006 109
9.3.3. Medium-term prospects 110
9.4. Exchange rate stability 111
9.5. Long-term interest rates 112
9.6. Additional factors 113
9.6.1. Financial market integration 113
9.6.2. Product market integration 115
9.6.3. Development of the balance of payments 116
10. SWEDEN 118
10.1 Legal situation 118
10.2 Price stability 119
10.2.1. Respect of the reference value 119
10.2.2. Recent inflation developments 119
10.2.3. Underlying factors and sustainability of inflation 120
10.3 Government budgetary position 122
10.3.1. Developments until 2006 122
10.3.2. Medium-term prospects 123
10.4 Exchange rate stability 124
10.5 Long-term interest rates 125
10.6 Additional factors 126
10.6.1. Financial market integration 126
10.6.2. Product market integration 127
10.6.3. Development of the balance of payments 129
List of Tables
Table 1.1 Inflation reference value in previous and current convergence reports
Table 1.2 Estimated cost on the government deficit of systemic pension reforms
Table 2.1 Czech Republic: Components of inflation
Table 2.2 Czech Republic: Other inflation and cost indicators
Table 2.3 Czech Republic: Budgetary developments and projections
Table 2.4 Czech Republic: Product market integration
Table 2.5 Czech Republic: Balance of payments
Table 3.1 Estonia: Components of inflation
Table 3.2 Estonia: Other inflation and cost indicators
Table 3.3 Estonia: Budgetary developments and projections
Table 3.4 Estonia: Product market integration
Table 3.5 Estonia: Balance of payments
Table 4.1 Cyprus: Components of inflation
Table 4.2 Cyprus: Other inflation and cost indicators
Table 4.3 Cyprus: Budgetary developments and projections
Table 4.4 Cyprus: Product market integration
Table 4.5 Cyprus: Balance of payments
Table 5.1 Latvia: Components of inflation
Table 5.2 Latvia: Other inflation and cost indicators
Table 5.3 Latvia: Budgetary developments and projections
Table 5.4 Latvia: Product market integration
Table 5.5 Latvia: Balance of payments
Table 6.1 Hungary: Components of inflation
Table 6.2 Hungary: Other inflation and cost indicators
Table 6.3 Hungary: Budgetary developments and projections
Table 6.4 Hungary: Product market integration
Table 6.5 Hungary: Balance of payments
Table 7.1 Malta: Components of inflation
Table 7.2 Malta: Other inflation and cost indicators
Table 7.3 Malta: Budgetary developments and projections
Table 7.4 Malta: Product market integration
Table 7.5 Malta: Balance of payments
Table 8.1 Poland: Components of inflation
Table 8.2 Poland: Other inflation and cost indicators
Table 8.3 Poland: Budgetary developments and projections
Table 8.4 Poland: Product market integration
Table 8.5 Poland: Balance of payments
Table 9.1 Slovakia: Components of inflation
Table 9.2 Slovakia: Other inflation and cost indicators
Table 9.3 Slovakia: Budgetary developments and projections
Table 9.4 Slovakia: Product market integration
Table 9.5 Slovakia: Balance of payments
Table 10.1 Sweden: Components of inflation
Table 10.2 Sweden: Other inflation and cost indicators
Table 10.3 Sweden: Budgetary developments and projections
Table 10.4 Sweden: Product market integration
Table 10.5 Sweden: Balance of payments
List of Charts
Chart 2.1 Czech Republic: Inflation criterion since May 2004
Chart 2.2 Czech Republic: HICP inflation
Chart 2.3 Czech Republic: Inflation, productivity and wage trends
Chart 2.4 Nominal effective exchange rate: CZK
Chart 2.5 Exchange rates: CZK/EUR
Chart 2.6 Czech Republic: 3-M Pribor spread to 3-M Euribor
Chart 2.7 Czech Republic: Long-term interest rate criterion
Chart 2.8 Czech Republic: Long-term interest rates
Chart 2.9a Czech Republic: Structure of financial system relative to EU-10, EU-15 and EU-25 in 2005
Chart 2.9b Czech Republic: Foreign ownership and concentration in the banking sector in 2005
Chart 2.9c Czech Republic: Domestic credit expansion
Chart 2.9d Czech Republic: Share of foreign currency loans
Chart 3.1 Estonia: Inflation criterion since May 2004
Chart 3.2 Estonia: HICP inflation
Chart 3.3 Estonia: Inflation, productivity and wage trends
Chart 3.4 Nominal effective exchange rate: EEK
Chart 3.5 Exchange rates: EEK/EUR
Chart 3.6 Estonia: 3-M Talibor spread to 3-M Euribor
Chart 3.7 Estonia: Long-term interest rate indicator (12-month moving averages)
Chart 3.8 Estonia: Long-term interest rate indicator
Chart 3.9a Estonia: Structure of financial system relative to EU-10, EU-15 and EU-25 in 2005
Chart 3.9b Estonia: Foreign ownership and concentration in the banking sector in 2005
Chart 3.9c Estonia: Domestic credit expansion
Chart 3.9d Estonia: Share of foreign currency loans
Chart 4.1 Cyprus: Inflation criterion since May 2004
Chart 4.2 Cyprus: HICP inflation
Chart 4.3 Cyprus: Inflation, productivity and wage trends
Chart 4.4 Nominal effective exchange rate: CYP
Chart 4.5a CYP: Spread vs central rate
Chart 4.5b Exchange rates: CYP/EUR
Chart 4.6 Cyprus: 3-M Nibor spread to 3-M Euribor
Chart 4.7 Cyprus: Long-term interest rate criterion
Chart 4.8 Cyprus: Long-term interest rates
Chart 4.9a Cyprus: Structure of financial system relative to EU-10, EU-15 and EU-25 in 2005
Chart 4.9b Cyprus: Foreign ownership and concentration in the banking sector in 2005
Chart 4.9c Cyprus: Domestic credit expansion
Chart 4.9d Cyprus: Share of foreign currency loans
Chart 5.1 Latvia: Inflation criterion since May 2004
Chart 5.2 Latvia: HICP inflation
Chart 5.3 Latvia: Inflation, productivity and wage trends
Chart 5.4 Nominal effective exchange rate: LVL
Chart 5.5a LVL: Spread vs central rate
Chart 5.5b Exchange rates: LVL/EUR
Chart 5.6 Latvia: 3-M Rigibor spread to 3-M Euribor
Chart 5.7 Latvia: Long-term interest rate criterion
Chart 5.8 Latvia: Long-term interest rates
Chart 5.9a Latvia: Structure of financial system relative to EU-10, EU-15 and EU-25 in 2005
Chart 5.9b Latvia: Foreign ownership and concentration in the banking sector in 2005
Chart 5.9c Latvia: Domestic credit expansion
Chart 5.9d Latvia: Share of foreign currency loans
Chart 6.1 Hungary: Inflation criterion since May 2004
Chart 6.2 Hungary: HICP inflation
Chart 6.3 Hungary: Inflation, productivity and wage trends
Chart 6.4 Nominal effective exchange rate: HUF
Chart 6.5 Exchange rates: HUF/EUR
Chart 6.6 Hungary: 3-M Bubor spread to 3-M Euribor
Chart 6.7 Hungary: Long-term interest rate criterion
Chart 6.8 Hungary: Long-term interest rates
Chart 6.9a Hungary: Structure of financial system relative to EU-10, EU-15 and EU-25 in 2005
Chart 6.9b Hungary: Foreign ownership and concentration in the banking sector in 2005
Chart 6.9c Hungary: Domestic credit expansion
Chart 6.9d Hungary: Share of foreign currency loans
Chart 7.1 Malta: Inflation criterion since May 2004
Chart 7.2 Malta: HICP inflation
Chart 7.3 Malta: Inflation, productivity and wage trends
Chart 7.4 Nominal effective exchange rate: MTL
Chart 7.5a MTL: Spread vs central rate
Chart 7.5b Exchange rates: MTL/EUR
Chart 7.6 Malta: 3-M Mibor spread to 3-M Euribor
Chart 7.7 Malta: Long-term interest rate criterion
Chart 7.8 Malta: Long-term interest rates
Chart 7.9a Malta: Structure of financial system relative to EU-10, EU-15 and EU-25 in 2005
Chart 7.9b Malta: Foreign ownership and concentration in the banking sector in 2005
Chart 7.9c Malta: Domestic credit expansion
Chart 7.9d Malta: Net foreign assets of the MFI's
Chart 8.1 Poland: Inflation criterion since May 2004
Chart 8.2 Poland: HICP inflation
Chart 8.3 Poland: Inflation, productivity and wage trends
Chart 8.4 Nominal effective exchange rate: PLN
Chart 8.5 Exchange rates: PLN/EUR
Chart 8.6 Poland: 3-M Wibor spread to 3-M Euribor
Chart 8.7 Poland: Long-term interest rate criterion
Chart 8.8 Poland: Long-term interest rates
Chart 8.9a Poland: Structure of financial system relative to EU-10, EU-15 and EU-25 in 2005
Chart 8.9b Poland: Foreign ownership and concentration in the banking sector in 2005
Chart 8.9c Poland: Domestic credit expansion
Chart 8.9d Poland: Share of foreign currency loans
Chart 9.1 Slovakia: Inflation criterion since May 2004
Chart 9.2 Slovakia: HICP inflation
Chart 9.3 Slovakia: Inflation, productivity and wage trends
Chart 9.4 Nominal effective exchange rate: SKK
Chart 9.5a SKK: Spread vs central rate
Chart 9.5b Exchange rates: SKK/EUR
Chart 9.6 Slovakia: 3-M Bribor spread to 3-M Euribor
Chart 9.7 Slovakia: Long-term interest rate criterion
Chart 9.8 Slovakia: Long-term interest rates
Chart 9.9a Slovakia: Structure of financial system relative to EU-10, EU-15 and EU-25 in 2005
Chart 9.9b Slovakia: Foreign ownership and concentration in the banking sector in 2005
Chart 9.9c Slovakia: Domestic credit expansion
Chart 9.9d Slovakia: Share of foreign currency loans
Chart 10.1 Sweden: Inflation criterion since May 2004
Chart 10.2 Sweden: HICP inflation
Chart 10.3 Sweden: Inflation, productivity and wage trends
Chart 10.4 Nominal effective exchange rate: SEK
Chart 10.5 Exchange rates: SEK/EUR
Chart 10.6 Sweden: 3-M Stibor spread to 3-M Euribor
Chart 10.7 Sweden: Long-term interest rate criterion
Chart 10.8 Sweden: Long-term interest rates
Chart 10.9a Sweden: Structure of financial system relative to EU-10, EU-15 and EU-25 in 2005
Chart 10.9b Sweden: Foreign ownership and concentration in the banking sector in 2005
Chart 10.9c Sweden: Domestic credit expansion
Chart 10.9d Sweden: Share of foreign currency loans
List of Boxes
Box 1.1 Article 122(2) of the Treaty
Box 1.2 Article 121(1) of the Treaty
Box 1.3 Assessment of price stability and the reference value
Box 1.4 The excessive deficit procedure
Box 1.5 Pension reforms – impact on government accounts, accounting considerations and specific SGP provisions
Box 1.6 Data for the interest rate convergence criterion
Abbreviations and symbols used
Member States
BE Belgium
CZ Czech Republic
DK Denmark
DE Germany
EE Estonia
EL Greece
ES Spain
FR France
IE Ireland
IT Italy
CY Cyprus
LV Latvia
LT Lithuania
LU Luxembourg
HU Hungary
MT Malta
NL The Netherlands
AT Austria
PL Poland
PT Portugal
SI Slovenia
SK Slovakia
FI Finland
SE Sweden
UK United Kingdom
EU10 European Union Member States that joined the EU on 1 May 2004 (CZ, EE, CY, LT, LV, HU, MT, PL, SI, SK)
EUR12 European Union Member States having adopted the single currency (BE, DE, EL, ES, FR, IE, IT, LU, NL, AT, PT, FI)