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The Euro

Converging on Europe

For a single currency to work it is important that all the economies involved are reasonably close economically. Significant differences in their performance could destabilise the single currency. To try to ensure this the Maastricht Treaty set 5 convergence criteria that countries had to meet to be able to take part in the single currency. They were:

1. Inflation - no more than 1.5% above the average inflation rate of the lowest 3 inflation countries in the EU
2. Interest rates - the long-term rate should be no more than 2% above the average of the three countries with the lowest inflation rates
3. Budget deficit - no more than 3% of GDP
4. National debt - no more than 60% of GDP
5. Exchange rates - currency within the normal bands of the ERM with no re-alignments for at least 2 years

The reason that Greece didn't take part initially in the single currency was that they failed to meet all these convergence criteria. They have now managed to get inflation under better control and lowered the level of government borrowing and so they are applying to join.

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