EUROPEAN COMMISSION Brussels, 30.5.2012 SWD(2012) 144 final COMMISSION STAFF WORKING DOCUMENT CONVERGENCE REPORT 2012 - TECHNICAL ANNEX Accompanying the document REPORT FROM THE COMMISSION CONVERGENCE REPORT 2012 (Prepared in accordance with Article 140(1) of the the Treaty on the functioning of the European Union) {COM(2012) 257 final} EN EN European Commission Directorate-General for Economic and Financial Affairs Convergence Report 2012 EUROPEAN ECONOMY xxx/2012 ABBREVIATIONS Member States BG Bulgaria CZ Czech Republic LV Latvia LT Lithuania HU Hungary PL Poland RO Romania SE Sweden EA Euro area EU-27 European Union, 27 Member States 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 ECU European currency unit BGN Bulgarian lev CZK Czech koruna LVL Latvian lats LTL Lithuanian litas HUF Hungarian forint PLN Polish zloty RON Romanian leu (ROL until 30 June 2005) SKK Slovak koruna SEK Swedish krona DEM Deutsche Mark USD US dollar SDR Special Drawing Rights 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) 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 BPO Business process outsourcing CAR Capital adequacy ratio CBA Currency board arrangement CDS Credit Default Swaps CEE Central and Eastern Europe CIS Commonwealth of Independent States CIT Corporate Income Tax ii 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 EERP European Economic Recovery Plan EMI European Monetary Institute EMS European Monetary System EMU Economic and monetary union ERM II Exchange rate mechanism II ESA 95 European System of Accounts ESCB European System of Central Banks EU European Union Eurostat Statistical Office of the European Union FESE Federation of European Securities Exchanges FDI Foreign direct investment FSA Financial Supervisory Authority FSAP Financial Sector Action Plan GDP Gross domestic product HICP Harmonised index of consumer prices KNF Komisja Nadzoru Finansowego (Polish Financial Supervision Authority) MFI Monetary Financial Institution MIP Macroeconomic Imbalance Procedure MTO Medium-term objective NCBs National central banks NEER Nominal effective exchange rate NIK Najwyzsza 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 PPP Purchasing Power Percentage R&D Research and development REER Real effective exchange rate SITC Standard International Trade Classification SKOK Spółdzielcze Kasy Oszczędnościowo-Kredytowe (Credit Union) TEC Treaty establishing the European Community TFEU Treaty on the Functioning of the European Union ULC Unit labour costs VAT Value added tax VSE Vilnius Stock Exchange WSE Warsaw Stock Exchange iii ACKNOWLEDGEMENTS The Convergence Report and its Technical Annex were prepared in the Directorate-General for Economic and Financial Affairs. The main contributors were Zdeněk Čech, Balazs Forgo, Anton Jevcak, Sara Tägtström and Ewa Klima. Other contributors were Benjamin Angel, Piotr Bogumil, Carlos Cuerpo Caballero, Jonas Fischer, Olivia Galgau, Nikolay Gertchev, Gabriele Giudice, Oskar Grevesmuhl, Isabel Grilo, Zoltan Gyenes, Renata Hruzova, Laszlo Jankovics, Barbara Kauffmann, Filip Keereman, Julda Kielyte, Daniel Kosicki, Bozhil Kostov, Joost Kuhlmann, Sven Langedijk, Martin Larch, Karolina Leib, Milan Lisický, Lucia Piana, Bartoz Przywara, Elena Reitano, Stéphanie Riso, Dominique Simonis, Michal Strojwas, Ingrid Toming, Ruediger Voss, Corina Weidinger Sosdean, Markus Wintersteller and Pavlína Žáková. Statistical assistance was provided by Gerda Symens and André Verbanck, administrative assistance by Maya Philippé. The report was coordinated by Zdeněk Čech under the supervision of Paul Kutos, Head of Unit and approved by Sean Berrigan, Director, Maarten Verwey, Deputy Director General, and Marco Buti, Director General. Questions and comments may be referred to Zdeněk Čech ([email protected]). iv CONTENTS Convergence Report 2012 1 Convergence Report 2012 - Technical annex 3 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 12 1.2.4. Exchange rate stability 12 1.2.5. Long-term interest rates 14 1.2.6. 15 1.2.7. Additional factors 16 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 17 2.1.4. Integration in the ESCB 18 2.1.5. Assessment of compatibility 18 2.2. PRICE STABILITY 18 2.2.1. Respect of the reference value 18 2.2.2. Recent inflation developments 19 2.2.3. Underlying factors and sustainability of inflation 19 2.3. PUBLIC FINANCES 22 2.3.1. The excessive deficit procedure for Bulgaria 22 2.3.2. Recent fiscal developments 23 2.3.3. Medium-term prospects 23 2.4. EXCHANGE RATE STABILITY 24 2.5. LONG-TERM INTEREST RATES 25 2.6. ADDITIONAL FACTORS 26 2.6.1. Developments of the balance of payments 26 2.6.2. Product market integration 27 2.6.3. Financial market integration 29 3. Czech Republic 31 3.1. LEGAL COMPATIBILITY 31 3.1.1. Introduction 31 3.1.2. Independence 31 3.1.3. Prohibition of monetary financing 32 3.1.4. Integration in the ESCB 32 3.1.5. Assessment of compatibility 32 3.2. PRICE STABILITY 32 3.2.1. Respect of the reference value 32 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. The excessive deficit procedure for the Czech Republic 36 3.3.2. Recent fiscal developments 36 3.3.3. Medium-term prospects 37 3.4. EXCHANGE RATE STABILITY 38 v 3.5. LONG-TERM INTEREST RATES 39 3.6. ADDITIONAL FACTORS 40 3.6.1. Developments of the balance of payments 40 3.6.2. Product market integration 41 3.6.3. Financial market integration 43 4. Latvia 45 4.1. LEGAL COMPATIBILITY 45 4.1.1. Introduction 45 4.1.2. Central bank independence 45 4.1.3. Prohibition of monetary financing and privileged access 46 4.1.4. Integration in the ESCB 46 4.1.5. Assessment of compatibility 46 4.2. PRICE STABILITY 46 4.2.1. Respect of the reference value 46 4.2.2. Recent inflation developments 47 4.2.3. Underlying factors and sustainability of inflation 48 4.3. PUBLIC FINANCES 51 4.3.1. The excessive deficit procedure for Latvia 51 4.3.2. Recent fiscal developments 51 4.3.3. Medium-term prospects 52 4.4. EXCHANGE RATE STABILITY 53 4.5. LONG-TERM INTEREST RATES 54 4.6. ADDITIONAL FACTORS 55 4.6.1. Developments of the balance of payments 56 4.6.2. Product market integration 57 4.6.3. Financial market integration 59 5. Lithuania 61 5.1. LEGAL COMPATIBILITY 61 5.1.1. Introduction 61 5.1.2. Central bank independence 61 5.1.3. Prohibition of monetary financing and privileged access 61 5.1.4. Integration in the ESCB 61 5.1.5. Assessment of compatibility 61 5.2. PRICE STABILITY 61 5.2.1. Respect of the reference value 61 5.2.2. Recent inflation developments 61 5.2.3. Underlying factors and sustainability of inflation 62 5.3. PUBLIC FINANCES 64 5.3.1. The excessive deficit procedure for Lithuania 64 5.3.2. Recent fiscal developments 65 5.3.3. Medium-term prospects 65 5.4. EXCHANGE RATE STABILITY 67 5.5. LONG-TERM INTEREST RATES 68 5.6. ADDITIONAL FACTORS 68 5.6.1. Developments of the balance of payments 69 5.6.2. Product market integration 70 5.6.3. Financial market integration 71 6. Hungary 75 6.1. LEGAL COMPATIBILITY 75 6.1.1. Introduction 75 6.1.2. Central bank independence 75 vi 6.1.3. Prohibition of monetary financing and privileged access 76 6.1.4. Integration in the ESCB 76 6.1.5. Assessment of compatibility 76 6.2. PRICE STABILITY 77 6.2.1. Respect of the reference value 77 6.2.2. Recent inflation developments 77 6.2.3. Underlying factors and sustainability of inflation 77 6.3. PUBLIC FINANCES 80 6.3.1. The excessive deficit procedure for Hungary 80 6.3.2. Recent fiscal developments 81 6.3.3. Medium-term prospects 82 6.4. EXCHANGE RATE STABILITY 83 6.5. LONG-TERM INTEREST RATES 84 6.6. ADDITIONAL FACTORS 84 6.6.1. Developments of the balance of payments 85 6.6.2. Product market integration 86 6.6.3. Financial market integration 88 7. Poland 89 7.1. LEGAL COMPATIBILITY 89 7.1.1. Introduction 89 7.1.2. Central bank independence 89 7.1.3. Prohibition of monetary financing and privileged access 89 7.1.4. Integration in the ESCB 90 7.1.5. Assessment of compatibility 90 7.2. PRICE STABILITY 90 7.2.1. Respect of the reference value 90 7.2.2. Recent inflation developments 90 7.2.3. Underlying factors and sustainability of inflation 91 7.3. PUBLIC FINANCES 93 7.3.1. The excessive deficit procedure for Poland 93 7.3.2. Recent fiscal developments 94 7.3.3. Medium-term prospects 94 7.4. EXCHANGE RATE STABILITY 96 7.5. LONG-TERM INTEREST RATES 96 7.6. ADDITIONAL FACTORS 97 7.6.1.