EUROPEAN COMMISSION Brussels, 10.6.2020 SWD(2020) 107 final COMMISSION STAFF WORKING DOCUMENT CONVERGENCE REPORT 2020 Accompanying the document REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL CONVERGENCE REPORT 2020 (prepared in accordance with Article 140(1) of the Treaty on the Functioning of the European Union) {COM(2020) 237 final} EN EN ABBREVIATIONS Member States BG Bulgaria CZ Czechia HR Croatia HU Hungary PL Poland RO Romania SE Sweden EA Euro area EA-19 Euro area, 19 Member States EA-18 Euro area, 18 Member States before 2015 EA-17 Euro area, 17 Member States before 2014 EU-28 European Union, 28 Member States EU-27 European Union, 27 Member States before July 2013 (i.e. EU-28 excl. HR) and from February 2020 (i.e. EU-28 excl. UK) EU-25 European Union, 25 Member States before 2007 (i.e. EU-28 excl. BG, RO and HR) EU-15 European Union, 15 Member States before 2004 Currencies EUR Euro BGN Bulgarian lev CZK Czech koruna HRK Croatian kuna HUF Hungarian forint PLN Polish zloty RON Romanian leu (ROL until 30 June 2005) SEK Swedish krona USD United States dollar Central Banks BNB Bulgarska narodna banka (Bulgarian National Bank – central bank of Bulgaria) ČNB Česká národní banka (Czech National Bank – central bank of Czechia) HNB Hrvatska narodna banka (Croatian National Bank – central bank of Croatia) MNB Magyar Nemzeti Bank (Hungarian National Bank – central bank of Hungary) NBP Narodowy Bank Polski (National Bank of Poland – central bank of Poland) BNR Banca Naţională a României (National Bank of Romania – central bank of Romania) Other abbreviations AMR Alert Mechanism Report BoP Balance of Payments CAR Capital adequacy ratio CBA Currency board arrangement CEE Central and Eastern Europe CIT Corporate Income Tax CPI Consumer price index CR5 Concentration ratio (aggregated market share of five banks with the largest market share) EC European Community ECB European Central Bank EDP Excessive Deficit Procedure EMU Economic and monetary union i ERM II Exchange rate mechanism II ESA European System of Accounts ESCB European System of Central Banks EU European Union Eurostat Statistical Office of the European Union FDI Foreign direct investment FGS Funding for Growth Scheme FSA Financial Supervisory Authority GDP Gross domestic product HICP Harmonised index of consumer prices HFSA Hungarian Financial Supervisory Authority IDR In-Depth Review MFI Monetary Financial Institution MIP Macroeconomic Imbalance Procedure MTO Medium-term objective NCBs National central banks NEER Nominal effective exchange rate NIK Najwyższa Izba Kontroli (Poland's Supreme Chamber of Control) NPL Non-performing loans OJ Official Journal OJL Official Journal Lex PIT Personal Income Tax PPS Purchasing Power Standard REER Real effective exchange rate SGP Stability and Growth Pact TFEU Treaty on the Functioning of the European Union ULC Unit labour costs VAT Value added tax ii ACKNOWLEDGEMENTS The Convergence Report and its Technical Annex were prepared in the Directorate-General for Economic and Financial Affairs. The main contributors were Lucian Briciu, Balázs Forgó, Adriana Reut, Matteo Salto and Ulrike Stierle-von Schütz. Other contributors were Ronald Albers, Laura Bardone, Wojciech Balcerowicz, Barbara Bernardi, Stefan Ciobanu, Karl Croonenborghs, Patrick D'Souza, Enache Enache, Isabel Grilo, Leire Ormaetxea Igarzabal, László Jankovics, Andreas Kappeler, Willem Kooi, Ivan Kusen, Júlia Lendvai, Ivan Lozev, Maria Maierean, Allen Monks, Sylwia Nowak, Mona Papadakou, Gábor Pellényi, Arian Perić, Francesco Perticari, Lucia Piana, Diana Radu, Hugo Ferradans Ramonde, Juan Antonio Salazar Romero, Maja Šamanović, Michael Stierle, Septimiu Szabo, Henk Van Noten, Martina von Terzi, Bartlomiej Wiczewski, Rafał Wielądek, Marcin Zogala. Statistical assistance was provided by Ulrike Stierle-von Schütz, Eric McCoy and André Verbanck, administrative assistance by Erdemia Malagrida and Sien Vangompel. The report was coordinated by Balázs Forgó and Lucian Briciu under the supervision of Eric Ruscher, Head of Unit and approved by Lucio Pench, Director, Declan Costello, Deputy Director General, and Maarten Verwey, Director General. Questions and comments may be referred to Balázs Forgó ([email protected]). iii CONTENTS Convergence Report 2020 1 Convergence Report 2020 - Technical annex 3 1. Introduction 5 1.1. ROLE OF THE REPORT 5 1.2. APPLICATION OF THE CRITERIA 6 1.2.1. Compatibility of legislation 7 1.2.2. Price stability 7 1.2.3. Public finances 11 1.2.4. Exchange rate stability 12 1.2.5. Long-term interest rates 12 1.2.6. Additional factors 15 2. Bulgaria 17 2.1. LEGAL COMPATIBILITY 17 2.1.1. Introduction 17 2.1.2. Central Bank independence 17 2.1.3. Prohibition of monetary financing and privileged access 18 2.1.4. Integration in the ESCB 18 2.1.5. Assessment of compatibility 19 2.2. PRICE STABILITY 19 2.2.1. Respect of the reference value 19 2.2.2. Recent inflation developments 19 2.2.3. Underlying factors and sustainability of inflation 20 2.3. PUBLIC FINANCES 22 2.3.1. Recent fiscal developments 22 2.3.2. Medium-term prospects 23 2.4. EXCHANGE RATE STABILITY 24 2.5. LONG-TERM INTEREST RATES 25 2.6. ADDITIONAL FACTORS 25 2.6.1. Developments of the balance of payments 26 2.6.2. Market integration 27 3. Czechia 31 3.1. LEGAL COMPATIBILITY 31 3.1.1. Introduction 31 3.1.2. Central Bank independence 31 3.1.3. Prohibition of monetary financing and privileged access 32 3.1.4. Integration in the ESCB 32 3.1.5. Assessment of compatibility 32 3.2. PRICE STABILITY 33 3.2.1. Respect of the reference value 33 3.2.2. Recent inflation developments 33 3.2.3. Underlying factors and sustainability of inflation 33 3.3. PUBLIC FINANCES 36 3.3.1. Recent fiscal developments 36 3.3.2. Medium-term prospects 37 3.4. EXCHANGE RATE STABILITY 37 3.5. LONG-TERM INTEREST RATES 38 3.6. ADDITIONAL FACTORS 39 3.6.1. Developments of the balance of payments 39 v 3.6.2. Market integration 40 4. Croatia 43 4.1. LEGAL COMPATIBILITY 43 4.1.1. Introduction 43 4.1.2. Central Bank independence 43 4.1.3. Prohibition of monetary financing and privileged access 43 4.1.4. Integration in the ESCB 43 4.1.5. Assessment of compatibility 43 4.2. PRICE STABILITY 43 4.2.1. Respect of the reference value 43 4.2.2. Recent inflation developments 44 4.2.3. Underlying factors and sustainability of inflation 44 4.3. PUBLIC FINANCES 46 4.3.1. Recent fiscal developments 46 4.3.2. Medium-term prospects 47 4.4. EXCHANGE RATE STABILITY 48 4.5. LONG-TERM INTEREST RATES 49 4.6. ADDITIONAL FACTORS 49 4.6.1. Developments of the balance of payments 50 4.6.2. Market integration 51 5. Hungary 55 5.1. LEGAL COMPATIBILITY 55 5.1.1. Introduction 55 5.1.2. Central Bank independence 55 5.1.3. Prohibition of monetary financing and privileged access 56 5.1.4. Integration in the ESCB 58 5.1.5. Assessment of compatibility 58 5.2. PRICE STABILITY 58 5.2.1. Respect of the reference value 58 5.2.2. Recent inflation developments 59 5.2.3. Underlying factors and sustainability of inflation 60 5.3. PUBLIC FINANCES 62 5.3.1. Recent fiscal developments 62 5.3.2. Medium-term prospects 62 5.4. EXCHANGE RATE STABILITY 64 5.5. LONG-TERM INTEREST RATES 64 5.6. ADDITIONAL FACTORS 65 5.6.1. Developments of the balance of payments 65 5.6.2. Market integration 67 6. Poland 69 6.1. LEGAL COMPATIBILITY 69 6.1.1. Introduction 69 6.1.2. Central Bank independence 69 6.1.3. Prohibition of monetary financing and privileged access 70 6.1.4. Integration in the ESCB 70 6.1.5. Assessment of compatibility 71 6.2. PRICE STABILITY 71 6.2.1. Respect of the reference value 71 6.2.2. Recent inflation developments 71 6.2.3. Underlying factors and sustainability of inflation 72 6.3. PUBLIC FINANCES 74 vi 6.3.1. Recent fiscal developments 74 6.3.2. Medium-term prospects 75 6.4. EXCHANGE RATE STABILITY 76 6.5. LONG-TERM INTEREST RATES 77 6.6. ADDITIONAL FACTORS 77 6.6.1. Developments of the balance of payments 77 6.6.2. Market integration 79 7. Romania 83 7.1. FLEGAL COMPATIBILITY 83 7.1.1. Introduction 83 7.1.2. Central Bank independence 83 7.1.3. Prohibition of monetary financing and privileged access 84 7.1.4. Integration in the ESCB 85 7.1.5. Assessment of compatibility 85 7.2. PRICE STABILITY 85 7.2.1. Respect of the reference value 85 7.2.2. Recent inflation developments 86 7.2.3. Underlying factors and sustainability of inflation 87 7.3. PUBLIC FINANCES 90 7.3.1. Recent fiscal developments 90 7.3.2. Medium-term prospects 90 7.4. EXCHANGE RATE STABILITY 91 7.5. LONG-TERM INTEREST RATES 91 7.6. ADDITIONAL FACTORS 92 7.6.1. Developments of the balance of payments 93 7.6.2. Market integration 94 8. Sweden 99 8.1. LEGAL COMPATIBILITY 99 8.1.1. Introduction 99 8.1.2. Central Bank independence 99 8.1.3. Prohibition of monetary financing and privileged access 99 8.1.4. Integration in the ESCB 100 8.1.5. Assessment of compatibility 101 8.2. PRICE STABILITY 101 8.2.1. Respect of the reference value 101 8.2.2. Recent inflation developments 101 8.2.3. Underlying factors and sustainability of inflation 102 8.3. PUBLIC FINANCES 106 8.3.1. Recent fiscal developments 106 8.3.2. Medium-term prospect. 106 8.4.