ISSN 2443-8014 (online) Convergence Report 2018 INSTITUTIONAL PAPER 078 | MAY 2018 EUROPEAN ECONOMY Economic and Financial Affairs European Economy Institutional Papers are important reports analysing the economic situation and economic developments prepared by the European Commission's Directorate-General for Economic and Financial Affairs, which serve to underpin economic policy-making by the European Commission, the Council of the European Union and the European Parliament. Views expressed in unofficial documents do not necessarily represent the views of the European Commission. LEGAL NOTICE Neither the European Commission nor any person acting on behalf of the European Commission is responsible for the use that might be made of the information contained in this publication. This paper exists in English only and can be downloaded from https://ec.europa.eu/info/publications/economic-and-financial-affairs-publications_en. Luxembourg: Publications Office of the European Union, 2018 PDF ISBN 978-92-79-77459-1 ISSN 2443-8014 doi:10.2765/22122 KC-BC-18-010-EN-N © European Union, 2018 Reuse is authorised provided the source is acknowledged. The reuse policy of European Commission documents is regulated by Decision 2011/833/EU (OJ L 330, 14.12.2011, p. 39). For any use or reproduction of material that is not under the EU copyright, permission must be sought directly from the copyright holders. European Commission Directorate-General for Economic and Financial Affairs Convergence Report 2018 EUROPEAN ECONOMY Institutional Paper 078 ABBREVIATIONS Member States BG Bulgaria CZ Czech Republic 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) EU-25 European Union, 25 Member States before 2007 (i.e. EU-27 excl. BG and RO) 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 the Czech Republic) 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 ERM II Exchange rate mechanism II 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 TFEU Treaty on the Functioning of the European Union ULC Unit labour costs VAT Value added tax iii ACKNOWLEDGEMENTS The Convergence Report and its Technical Annex were prepared in the Directorate-General for Economic and Financial Affairs. The main contributors were Maja Ferjančič, Balázs Forgó, Anton Jevčák and Matteo Salto. Other contributors were Wojciech Balcerowicz, Laura Bardone, Cristiana Belu Manescu, Nicolae-Dragoș Bîea, Stefan Ciobanu, Karl Croonenborghs, Iván Csaba, Patrick D'Souza, Mateja Gabrijelčič, Juan González Fernández, Julien Hartley, Michal Havlát, László Jankovics, Isabelle Justo, Robert Kuenzel, Ivan Kusen, Wojciech Paczynski, Mona Papadakou, Gábor Pellényi, Leonardo Pérez-Aranda, Arian Perić, Mario Pletikosa, Marc Puig, Diana Radu, Maximilian Reßing, Ralph Schmitt-Nelson, Outi Slotboom, Michael Stierle, Márton Szili, Maja Šamanović, Geert Vermeulen, Bartlomiej Wiczewski, Rafał Wielądek, Ana Xavier and Marcin Zogala. Statistical assistance was provided by Gerda Symens and André Verbanck, administrative assistance by Erdemia Malagrida and Sien Vangompel. The report was coordinated by Balázs Forgó under the supervision of Eric Ruscher, Head of Unit and approved by Lucio Pench, Director, Servaas Deroose, Deputy Director General, and Marco Buti, Director General. Questions and comments may be referred to Balázs Forgó ([email protected]). iv CONTENTS Convergence Report 2018 1 Convergence Report 2018 - Technical annex 23 1. Introduction 25 1.1. ROLE OF THE REPORT 25 1.2. APPLICATION OF THE CRITERIA 26 1.2.1. Compatibility of legislation 27 1.2.2. Price stability 27 1.2.3. Public finances 30 1.2.4. Exchange rate stability 30 1.2.5. Long-term interest rates 33 1.2.6. Additional factors 33 2. Bulgaria 37 2.1. LEGAL COMPATIBILITY 37 2.1.1. Introduction 37 2.1.2. Central Bank independence 37 2.1.3. Prohibition of monetary financing and privileged access 38 2.1.4. Assessment of compatibility 38 2.2. PRICE STABILITY 39 2.2.1. Respect of the reference value 39 2.2.2. Recent inflation developments 39 2.2.3. Underlying factors and sustainability of inflation 40 2.3. PUBLIC FINANCES 42 2.3.1. Recent fiscal developments 42 2.3.2. Medium-term prospects 43 2.4. EXCHANGE RATE STABILITY 44 2.5. LONG-TERM INTEREST RATES 45 2.6. ADDITIONAL FACTORS 45 2.6.1. Developments of the balance of payments 46 2.6.2. Market integration 47 3. Czech Republic 51 3.1. LEGAL COMPATIBILITY 51 3.1.1. Introduction 51 3.1.2. Central Bank independence 51 3.1.3. Prohibition of monetary financing and privileged access 51 3.1.4. Integration in the ESCB 52 3.1.5. Assessment of compatibility 52 3.2. PRICE STABILITY 52 3.2.1. Respect of the reference value 52 3.2.2. Recent inflation developments 53 3.2.3. Underlying factors and sustainability of inflation 53 3.3. PUBLIC FINANCES 56 3.3.1. Recent fiscal developments 56 3.3.2. Medium-term prospects 56 3.4. EXCHANGE RATE STABILITY 57 3.5. LONG-TERM INTEREST RATES 57 3.6. ADDITIONAL FACTORS 58 v 3.6.1. Developments of the balance of payments 58 3.6.2. Market integration 60 4. Croatia 63 4.1. LEGAL COMPATIBILITY 63 4.1.1. Introduction 63 4.1.2. Central Bank independence 63 4.1.3. Prohibition of monetary financing and privileged access 63 4.1.4. Integration in the ESCB 63 4.1.5. Assessment of compatibility 63 4.2. PRICE STABILITY 63 4.2.1. Respect of the reference value 63 4.2.2. Recent inflation developments 64 4.2.3. Underlying factors and sustainability of inflation 64 4.3. PUBLIC FINANCES 66 4.3.1. Recent fiscal developments 66 4.3.2. Medium-term prospects 67 4.4. EXCHANGE RATE STABILITY 68 4.5. LONG-TERM INTEREST RATES 69 4.6. ADDITIONAL FACTORS 69 4.6.1. Developments of the balance of payments 69 4.6.2. Market integration 71 5. Hungary 75 5.1. LEGAL COMPATIBILITY 75 5.1.1. Introduction 75 5.1.2. Central Bank independence 75 5.1.3. Prohibition of monetary financing and privileged access 76 5.1.4. Integration in the ESCB 78 5.1.5. Assessment of compatibility 78 5.2. PRICE STABILITY 78 5.2.1. Respect of the reference value 78 5.2.2. Recent inflation developments 79 5.2.3. Underlying factors and sustainability of inflation 79 5.3. PUBLIC FINANCES 82 5.3.1. Recent fiscal developments 82 5.3.2. Medium-term prospects 83 5.4. EXCHANGE RATE STABILITY 84 5.5. LONG-TERM INTEREST RATES 85 5.6. ADDITIONAL FACTORS 85 5.6.1. Developments of the balance of payments 86 5.6.2. Market integration 87 6. Poland 91 6.1. LEGAL COMPATIBILITY 91 6.1.1. Introduction 91 6.1.2. Central Bank independence 91 6.1.3. Prohibition of monetary financing and privileged access 92 6.1.4. Integration in the ESCB 92 6.1.5. Assessment of compatibility 93 6.2. PRICE STABILITY 93 6.2.1. Respect of the reference value 93 6.2.2. Recent inflation developments 93 6.2.3. Underlying factors and sustainability of inflation 95 vi 6.3. PUBLIC FINANCES 96 6.3.1. Recent fiscal developments 96 6.3.2. Medium-term prospects 97 6.4. EXCHANGE RATE STABILITY 98 6.5. LONG-TERM INTEREST RATES 98 6.6. ADDITIONAL FACTORS 99 6.6.1. Developments of the balance of payments 100 6.6.2. Market integration 101 7. Romania 105 7.1. LEGAL COMPATIBILITY 105 7.1.1. Introduction 105 7.1.2. Central Bank independence 105 7.1.3. Prohibition of monetary financing and privileged access 106 7.1.4. Integration in the ESCB 107 7.1.5. Assessment of compatibility 107 7.2. PRICE STABILITY 107 7.2.1. Respect of the reference value 107 7.2.2. Recent inflation developments 108 7.2.3. Underlying factors and sustainability of inflation 108 7.3.