Despite claiming to be an expert, I had not heard of the Maastricht Convergence Criteria which define a readiness to join the Euro. I asked google gemini to summarise its role.
These include Price stability, Sound public finances, to ensure they are sustainable, Exchange-rate stability, to demonstrate that a Member State can manage its economy without recourse to excessive currency fluctuations, and Long-term interest rates, to assess the durability of any convergence.
The EU monitors and reports on the status of the EU’s non-Euro currencies and the convergence rules.
Google Gemini summarises them as divided into four main areas: [1]
- Price Stability (Inflation): The average inflation rate must not exceed by more than 1.5 percentage points the average of the three best-performing EU member states.
- Sound Public Finances (Deficit & Debt): The government deficit must not exceed 3% of GDP. The government debt must not exceed 60% of GDP. (If it exceeds this, it must be diminishing at a satisfactory pace).
- Exchange Rate Stability: The country must participate in the Exchange Rate Mechanism (ERM II) for at least two years without severe tensions or devaluing against the euro.
- Long-Term Interest Rates: The nominal long-term interest rate must not exceed by more than 2 percentage points that of the three best-performing EU member states in terms of price stability.
Another of the criteria is that there is a robustly independent central bank. I also asked if any of the Euro nation’s central banks had full employment, growth or exchange rate targets. Google AI Gemini says/said,
“Instead, they belong to the Eurosystem, and their policy is dictated entirely by the European Central Bank (ECB). The ECB has what is legally known as a hierarchical mandate, where price stability is the absolute, overriding priority:
- The Primary Mandate: Under Article 127(1) of the Treaty on the Functioning of the European Union (TFEU), the primary objective is explicitly to maintain price stability.
- The Secondary Mandate: Only “without prejudice to the objective of price stability,” can the Eurosystem support the general economic policies of the EU (such as full employment and balanced economic growth).
I asked Google to list the current ratios for me, which for some reasons misses the Netherlands and I inserted the UK. This is what it looks like.
As discussed elsewhere on this wiki/blog, the likelihood of default is predicted by the CDS price.