REPORT on the proposal for a Council decision in accordance with Article 122(2) of the Treaty on the adoption by Slovakia of the single currency on 1 January 2009

5.6.2008 - (COM(2008)0249 – C6‑0198/2008 – 2008/0095(CNS)) - *

Committee on Economic and Monetary Affairs
Rapporteur: David Casa

DRAFT EUROPEAN PARLIAMENT LEGISLATIVE RESOLUTION

on the proposal for a Council decision on in accordance with Article 122(2) of the Treaty on the adoption by Slovakia of the single currency on 1 January 2009

(COM(2008)0249 – C6‑0198/2008 – 2008/0095(CNS))

(Consultation procedure)

The European Parliament,

–   having regard to the Commission proposal to the Council (COM(2008)0249),

–   having regard to the Commission Convergence Report 2008 (COM(2008)0248) as regards Slovakia and the European Central Bank (ECB) Convergence Report of May 2008,

–   having regard to the Recommendation for a Council Decision abrogating Decision 2005/182/EC on the existence of an excessive deficit in Slovakia (SEC(2008)0572),

–   having regard to its resolution of 12 July 2007 on the 2007 annual report on the eurozone[1],

–   having regard to its resolution of 20 June 2007 on improving the method for consulting Parliament in procedures relating to enlargement of the euro area[2],

–   having regard to its resolution of 1 June 2006 on the enlargement of the euro zone[3],

–   having regard to Council Decision 2003/223/EC of 21 March 2003 on an amendment to Article 10(2) of the Statute of the European System of Central Banks and of the European Central Bank[4],

–   having regard to its resolution of 13 March 2003 on the recommendation of the European Central Bank for a proposal for a Council decision on an amendment to Article 10(2) of the Statute of the European System of Central Banks and of the European Central Bank[5],

–   having regard to Article 122(2) of the EC Treaty, pursuant to which the Council consulted Parliament (C6‑0198/2008),

–   having regard to Rule 51 of its Rules of Procedure,

–   having regard to the report of the Committee on Economic and Monetary Affairs (A6‑0231/2008),

A. whereas Slovakia has complied with the Maastricht criteria in accordance with Article 121 of the EC Treaty and the Protocol on the convergence criteria referred to therein,

B.  whereas, for the first time, a delegation from its Committee on Economic and Monetary Affairs visited Slovakia to assess the readiness of that country to enter the euro area,

C. whereas ten years after the establishment of the Economic and Monetary Union, experience has shown that incentives to conduct structural reform decrease after joining the euro area, and that the issue of sustainability has increased in importance,

1.  Approves the Commission proposal;

2.  Favours the adoption of the euro by Slovakia on 1 January 2009;

3.  Notes that Article 121 of the EC Treaty defines the achievement of a high degree of sustainable convergence by reference to the fulfilment by each Member State of the following criteria: the achievement of a high degree of price stability; the sustainability of the government's financial position; the observance of the normal fluctuation margins provided for by the exchange rate mechanism; and the durability of convergence achieved by the Member State and of its participation in the exchange-rate mechanism of the European Monetary System being reflected in the long-term interest-rate levels;

4.  Notes that the ECB's 2008 Convergence Report identifies risks concerning the sustainability of the low inflation rate achieved and urges the necessary steps to be taken to avoid inflation;

5.  Is concerned about the discrepancies between the convergence reports of the Commission and the ECB as regards the sustainability of inflation;

6.  Recommends that the Slovak Government set up an observatory to monitor the price of a selected number of basic goods on a weekly basis so as to fight false perceptions about price increases;

7.  Calls on the government of Slovakia to ensure the continuation of necessary structural reforms in labour, services and product markets, ensuring, in particular, increased labour mobility and investment in human capital; calls on the Slovak Government to ensure competition, particularly in sensitive sectors such as energy;

8.  Calls on the Slovak Government to ensure, with the cooperation of the Slovak central bank, a stable low-inflation environment, which can be achieved through further fiscal consolidation, and a sufficiently tight fiscal policy with the aim of balancing the budget in the medium term; calls on the social partners in Slovakia to keep wage growth in line with productivity growth in the foreseeable future;

9.  Emphasises that taxation policies of Member States participating in the euro area need to be consistent with the principles of good governance in tax matters;

10. Reiterates its strongly held opinion that the Council and the Commission should adopt the position that an excessive deficit procedure concerning a Member State must have been closed before compliance with the Maastricht criteria is assessed as prescribed in Article 2 of the Protocol on the convergence criteria; regrets that the Commission has, once again, failed correctly to apply the Treaty in this regard;

11. Calls on the Member States to allow the Commission to assess compliance with the Maastricht criteria on the basis of definite, current, reliable, and high-quality data;

12. Is concerned about low support for the euro among Slovak citizens; calls on the authorities of Slovakia, therefore, to step up public information campaign aimed at explaining the benefits of the single currency and undertake all necessary steps in order to minimise price increases during the changeover period;

13. Takes note of the efforts undertaken by all parties to improve the conditions under which Parliament exercises its right of consultation under Articles 121 and 122 of the EC Treaty in terms of information and timing and welcomes the initiative of the Committee on Economic and Monetary Affairs to organise a study visit to Slovakia to make its own assessment of the situation;

14. Calls on the Commission and the ECB to consider all aspects when recommending the final exchange rate for the Slovak koruna;

15. Calls on the Council to notify Parliament if it intends to depart from the text approved by Parliament;

16. Asks the Council to consult Parliament again if it intends to amend the Commission proposal substantially;

17. Instructs its President to forward its position to the Council, the Commission, the European Central Bank, the Eurogroup and the governments and parliaments of the Member States.

• [1]      Texts adopted, P6_TA(2007)0348.
• [2]       Texts adopted, P6_TA(2007)0276.
• [3]       OJ C 298 E, 8.12.2006, p. 249.
• [4]       OJ L 83, 1.4.2003, p. 66.
• [5]        OJ C 61 E, 10.3.2004, p. 374.

EXPLANATORY STATEMENT

On 4 April 2008, Slovakia requested an assessment of the fulfilment of the necessary conditions to adopt the euro on 1 January 2009, pursuant to Article 122(2) of the EC Treaty. The substance of the Convergence Reports to be drawn up by the Commission and the ECB is governed by Article 121(1) of the EC Treaty and the Protocol on the convergence criteria annexed to the Treaty. Slovakia is currently a “Member State with a derogation”, thereby not a member of the euro zone.

Article 122(2) of the EC Treaty states that the Council, on the basis of the reports from the Commission and the ECB, after consulting the European Parliament and after discussion in the Council, meeting in the composition of the Heads of State or Government, shall, acting by a qualified majority on a proposal from the Commission, decide which Member States with a derogation fulfil the necessary conditions on the basis of the criteria set out in Article 121(1), and abrogate the derogations of the Member States concerned. On 7 May 2008 the Commission proposed that Slovakia adopts the euro in 2009.

The European Parliament has to examine the Convergence Report submitted and issue an opinion. In spite of considerable reservations on individual issues, your rapporteur recommends that the derogation be lifted with effect from 1 January 2009.

On the Convergence Criteria under Article 121(1) of the EC Treaty and detailed compliance with those criteria, particularly whether a high level of durable convergence has been reached:

1.  Compatibility of national legislation with Articles 108 and 109 and with the ESCB Statute

In order to eliminate incompatibilities highlighted in the 2006 Convergence Report, the Act on the National Bank of Slovakia was adjusted accordingly. The legal assessment carried out by the ECB and the Commission came to the conclusion that these changes have made the provisions fully compatible with the Treaty and the ESCB Statute. The criterion is met.

2.  Achievement of a high level of price stability

With an average inflation rate of 2.2% in the reference period (April 2007 to March 2008), Slovakia is clearly below the reference value of 3.2%. The criterion is fully met. However there remain doubts as regards the sustainability of a low inflation rate in Slovakia: Firstly, some factors that have contributed to a low inflation rate up to now might turn out to be of temporary nature. Inflation increased already to 3.6% in the March 2008. Secondly, the appreciation of the nominal exchange rate of the Slovak koruna has had a disinflationary effect which will end once the euro is adopted. Thirdly, the relatively low price level in Slovakia (58% of EU average in 2006) suggests potential for price rises in the long term. Against this background, your rapporteur considers it essential that the policy commitments adopted, such as the Declaration between employers and trade unions to keep wage growth in line with productivity growth and the government's commitment to reach a balanced general government budget by 2011, are adhered to.

3.  Sustainability of the government financial position

Slovakia's state deficit has been reduced in recent years and was in 2007, standing at 2.2% of GDP (forecast for 2008: 2.0%), well below the reference value of 3%. However doubts remain as to whether the low budget deficits in Slovakia are sustainable, in particular as against the background of robust growth rates in the last years, a tighter fiscal stance could have been possible, and expected lower growth rates in the future. The forecast for 2009 at 2.3% is already significantly above the national target of 1.7% of GDP. Moreover, the structural deficit is expected to deteriorate between 2007 and 2008, which is not in line with the Stability and Growth Pact.

The government debt-to-GDP ratio has declined significantly since 2000, mainly thanks to privatisation revenues, and stands, at 29.4% in 2007, well below the reference value of 60%.

A Council decision is currently in force to the effect that an excessive deficit exists in Slovakia. Under Article 2 of the Protocol on the Convergence Criteria, it is necessary that “at the time of the examination” the Member State concerned should not be the subject of a decision of the Council under Article 104(6) of the Treaty that an excessive deficit exists. The criterion will only be met if the Council decides to abrogate the excessive deficit procedure for Slovakia, which means that at the moment, and at the time of examination, the criterion is not met.

In its resolution of 18 June 2007 on improving the method for consulting the Parliament in procedures relating to enlargement of the euro zone, the European Parliament called on the Commission and the Council to adopt the position that any deficit procedure concerning a Member State must have been closed before compliance with the Maastricht criteria is assessed. Not being subject to an excessive deficit procedure is a significant test for Member States to prove they are able and willing to adhere to the Stability and Growth Pact which in itself is a fundamental part of EMU governance. The fact that once again an excessive deficit procedure had not been lifted prior to proposing the lifting of an abrogation for a Member State should therefore not be taken lightly.

4.  Compliance with the normal fluctuation margins of the Exchange Rate Mechanism II for at least the past 2 years

Slovakia has participated in the ERM II since 28 November 2005. The Slovak koruna has since then appreciated against the euro. With effect from 19 March 2007, the central rate of the Slovak koruna in the ERM II was revalued by 8.5% to reflect the appreciation. The Slovak koruna has further appreciated since and trades within the fluctuation margins but significantly above the current central parity. However, as in the last two years there has been no devaluation, the criterion is met.

5.  Durability of convergence, as reflected in long-term interest-rate levels

The average long-term interest rate in the reference period stood at 4.5%, clearly below the reference value of 6.5%. The criterion is met.

6.  Economic integration and convergence

According to Article 121(1), last section, also other factors relevant to economic integration and convergence, e.g. financial and product market integration and the balance of payments developments, must be examined.

The Slovakian economy is highly integrated into the EU, showing extensive trade and FDI relations with other Member States, and a financial sector that is substantially integrated into the EU economy. The external balance (i.e. the combined current and capital account of the balance of payments) has been highly volatile in recent years, while deficits could always be financed by large net FDI inflows. In 2006, Slovakia achieved a per-capita GDP in terms of purchasing power of 63.7% of the average for the EU-27. The criterion is met.

7.  Voting modalities in the Governing Council of the ECB

According to Article 10.2 of the ESCB Statute, the voting modalities in the Governing Council of the ECB shall change when the number of governors representing the National Central Banks (NCBs) of the euro area exceeds 15, which will be the case if Slovakia enters the euro zone.

The Council adopted in 2003 the Decision regarding the new voting modalities, based on an ECB Recommendation, providing for this change with the aim to maintain the ECB's Governing Council capacity for efficient and timely decision-making in an enlarged euro area. The Decision introduces a rotation system, based on a classification of countries into three categories depending on their size, as defined by GDP and banking activity. However the European Parliament in its resolution rejected the ECB Recommendation, reaffirming the existing rule whereby all governors of the NCBs in the euro area have full and unrestricted voting rights or alternatively introduce a system where operational decisions such as the setting of interest rates would be taken by an Executive Board enlarged to nine Members. The latter solution would however require a change of the EC Treaty.

Although the Governing Council of the ECB could decide by a two-thirds majority to postpone the start of the rotation system until the date on which the number of governors exceeds 18, your rapporteur is of the opinion that the modalities for the rotation system, e.g. in which order the voting rights will be rotating and the frequency of rotation, should be specified as soon as possible, in order to be prepared for further enlargements of the euro area.

8.  Consultation of the European Parliament

After finding it hard to carry out an unreserved, objective examination of the convergence criteria in line with the conditions set out in the EC Treaty on the adoption of the euro by Slovenia, Cyprus and Malta, the European Parliament adopted a resolution on improving the method for consulting the European Parliament in procedures relating to the enlargement of the euro zone. The Commission made some effort to give the European Parliament more time for its deliberation, by adopting the 2008 convergence report as soon as possible after the publication of deficit and debt data by Eurostat, that also consented to publish this data ahead of the legal deadline. These efforts are highly appreciated, nonetheless the timeframe for the European Parliament is still demanding.

PROCEDURE

Title	Adoption by Slovakia of the single currency on 1 January 2009
References	COM(2008)0249 – C6-0198/2008 – 2008/0095(CNS)
Date of consulting Parliament	19.5.2008
Committee responsible        Date announced in plenary	ECON 22.5.2008
Rapporteur(s)        Date appointed	David Casa 10.7.2007
Discussed in committee	19.5.2008		2.6.2008
Date adopted	3.6.2008
Result of final vote	+: –: 0:	33 4 8
Members present for the final vote	Mariela Velichkova Baeva, Zsolt László Becsey, Pervenche Berès, Sharon Bowles, Udo Bullmann, David Casa, Manuel António dos Santos, Jonathan Evans, Elisa Ferreira, José Manuel García-Margallo y Marfil, Donata Gottardi, Dariusz Maciej Grabowski, Benoît Hamon, Karsten Friedrich Hoppenstedt, Sophia in ‘t Veld, Othmar Karas, Piia-Noora Kauppi, Wolf Klinz, Christoph Konrad, Guntars Krasts, Kurt Joachim Lauk, Andrea Losco, Astrid Lulling, Florencio Luque Aguilar, Hans-Peter Martin, John Purvis, Alexander Radwan, Bernhard Rapkay, Dariusz Rosati, Eoin Ryan, Antolín Sánchez Presedo, Olle Schmidt, Peter Skinner, Margarita Starkevičiūtė, Ivo Strejček, Ieke van den Burg, Cornelis Visser
Substitute(s) present for the final vote	Dragoş Florin David, Mia De Vits, Ján Hudacký, Janusz Lewandowski, Vladimír Maňka, Theodor Dumitru Stolojan
Substitute(s) under Rule 178(2) present for the final vote	Edit Bauer, Tobias Pflüger