Introduction Of Euro In Europe

CHAPTER 1 -> teoria integrarii monetare, criterii convergenta reala si nominala, istoricul integrarii monetare in Europa

1 INTRODUCTION

The euro was introduced on 1 January 1999 in 11 EU Member States. Since then, seven other EU Member States have adopted the single currency, the most recent being Latvia on 1 January 2014. Following Croatia’s accession to the EU on 1 July 2013, there are ten EU countries that do not yet participate fully in EMU, i.e. they have not yet adopted the euro. Two of these, Denmark and the United Kingdom, gave notification that they would not participate in Stage Three of EMU. As a consequence, Convergence Reports only have to be provided for these two countries if they so request. Given the absence of such a request from either country, this report examines eight countries: Bulgaria, the Czech Republic, Croatia, Lithuania, Hungary, Poland, Romania and Sweden. All eight countries are committed under the Treaty on the Functioning of the European Union (hereinafter the “Treaty”)1 to adopt the euro, which implies that they must strive to fulfil all the convergence criteria. In producing this report, the ECB fulfils its requirement under Article 140 of the Treaty to report to the Council of the European Union (EU Council) at least once every two years or at the request of an EU Member State with a derogation “on the progress made by the Member States with a derogation in fulfilling their obligations regarding the achievement of economic and monetary union”. The eight countries under review in this report have therefore been examined as part of this regular two-year cycle. The same mandate has been given to the European Commission, which has also prepared a report, and both reports are being submitted to the EU Council in parallel. In this report, the ECB uses the framework applied in its previous Convergence Reports. It examines, for the eight countries concerned, whether a high degree of sustainable economic convergence has been achieved, whether the national legislation is compatible with the Treaties and the Statute of the European System of Central Banks and of the European Central Bank (Statute), and whether the statutory requirements are fulfilled for the relevant NCB to become an integral part of the Eurosystem. In this report, Lithuania is assessed in more depth than the other countries under review, since the Lithuanian authorities have on various occasions announced their intention to adopt the euro as of 1 January 2015. The examination of the economic convergence process is highly dependent on the quality and integrity of the underlying statistics. The compilation and reporting of statistics, particularly government finance statistics, must not be subject to political considerations or interference. EU Member States have been invited to consider the quality and integrity of their statistics as a matter of high priority, to ensure that a proper system of checks and balances is in place when these statistics are compiled, and to apply minimum standards in the domain of statistics. These standards are of the utmost importance in reinforcing the independence, integrity and accountability of the national statistical institutes and in supporting confidence in the quality of government finance statistics (see Section 9 of Chapter 5). Moreover, from 4 November 2014 onwards2 each country whose derogation is abrogated will join the Single Supervisory Mechanism (SSM) at the latest on the date on which it adopts the euro. From that date, all SSM-related rights and obligations apply to that country. It is, therefore, of utmost importance that it makes the necessary preparations. In this respect, the ECB attaches great importance to the comprehensive assessment of credit institutions, including the balance 1 See also the clarification of the terms “Treaty” and “Treaties” in the Glossary. 2 This is the date when the ECB assumes the tasks conferred on it by Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions, Article 33(2). 6 ECB Convergence Report June 2014 sheet assessment that it must carry out before the assumption of its tasks. This is an assessment of the banking system in the Member States participating in the SSM and is carried out by the ECB in cooperation with the national competent authorities of the participating Member States. This assessment, which is not the subject of this report, is to be concluded prior to the assumption by the ECB of its supervisory responsibilities. It includes an asset quality review and a stress test. The objective is to foster transparency, repair balance sheets where needed and enhance confidence in the banking sector. The banking system of any Member State joining the euro area and therefore joining the SSM after the date for the commencement of supervision will be subject to a comprehensive assessment.3 This report is structured as follows. Chapter 2 describes the framework used for the examination of economic and legal convergence. Chapter 3 provides a horizontal overview of the key aspects of economic convergence. Chapter 4 contains the country summaries, which provide the main results of the examination of economic and legal convergence. Chapter 5 examines in more detail the state of economic convergence in each of the eight EU Member States under review and provides an overview of the convergence indicators and the statistical methodology used to compile them. Finally, Chapter 6 examines the compatibility of the national legislation of the Member States under review, including the statutes of their NCBs, with Articles 130 and 131 of the Treaty.

2 FRAMEWORK FOR ANALYSIS 2.1 ECONOMIC CONVERGENCE To examine the state of economic convergence in EU Member States seeking to adopt the euro, the ECB makes use of a common framework for analysis. This common framework, which has been applied in a consistent manner throughout all EMI and ECB Convergence Reports, is based, first, on the Treaty provisions and their application by the ECB with regard to developments in prices, fiscal balances and debt ratios, exchange rates and long-term interest rates, as well as in other factors relevant to economic integration and convergence. Second, it is based on a range of additional backward and forward-looking economic indicators which are considered to be useful for examining the sustainability of convergence in greater detail. The examination of the Member State concerned based on all these factors is important to ensure that its integration into the euro area will proceed without major difficulties. Boxes 1 to 5 below briefly recall the legal provisions and provide methodological details on the application of these provisions by the ECB. This report builds on principles set out in previous reports published by the ECB (and prior to this by the EMI) in order to ensure continuity and equal treatment. In particular, a number of guiding principles are used by the ECB in the application of the convergence criteria. First, the individual criteria are interpreted and applied in a strict manner. The rationale behind this principle is that the main purpose of the criteria is to ensure that only those Member States having economic conditions that are conducive to the maintenance of price stability and the coherence of the euro area can participate in it. Second, the convergence criteria constitute a coherent and integrated package, and they must all be satisfied; the Treaty lists the criteria on an equal footing and does not suggest a hierarchy. Third, the convergence criteria have to be met on the basis of actual data. Fourth, the application of the convergence criteria should be consistent, transparent and simple. Moreover, when considering compliance with the convergence criteria, sustainability is an essential factor as convergence must be achieved on a lasting basis and not just at a given point in time. For this reason, the country examinations elaborate on the sustainability of convergence. In this respect, economic developments in the countries concerned are reviewed from a backward-looking perspective, covering, in principle, the past ten years. This helps to better determine the extent to which current achievements are the result of genuine structural adjustments, which in turn should lead to a better assessment of the sustainability of economic convergence. In addition, and to the extent appropriate, a forward-looking perspective is adopted. In this context, particular attention is paid to the fact that the sustainability of favourable economic developments hinges critically on appropriate and lasting policy responses to existing and future challenges. Strong governance and sound institutions are also essential for supporting sustainable output growth over the medium to long term. Overall, it is emphasised that ensuring the sustainability of economic convergence depends on the achievement of a strong starting position, the existence of sound institutions and the pursuit of appropriate policies after the adoption of the euro. The common framework is applied individually to the eight EU Member States under review. These examinations, which focus on each Member State’s performance, should be considered separately, in line with the provisions of Article 140 of the Treaty. The cut-off date for the statistics included in this Convergence Report was 15 May 2014. The statistical data used in the application of the convergence criteria were provided by the European Commission (see Section 9 of Chapter 5 as well as the tables and charts), in cooperation with the ECB in the case of exchange rates and long-term interest rates. Convergence data on price and 8 ECB Convergence Report June 2014 long-term interest rate developments are presented up to April 2014, the latest month for which data on HICPs were available. For monthly data on exchange rates, the period considered in this report ends in April 2014. Historical data for fiscal positions cover the period up to 2013. Account is also taken of forecasts from various sources, together with the most recent convergence programme of the Member State concerned and other information relevant to a forward-looking examination of the sustainability of convergence. The European Commission’s spring 2014 forecast and the Alert Mechanism Report 2014, which are taken into account in this report, were released on 2 May 2014 and 13 November 2013 respectively. This report was adopted by the General Council of the ECB on 2 June 2014. With regard to price developments, the legal provisions and their application by the ECB are outlined in Box 1. Box 1 PRICE DEVELOPMENTS 1 Treaty provisions Article 140(1), first indent, of the Treaty requires the Convergence Report to examine the achievement of a high degree of sustainable convergence by reference to the fulfilment by each Member State of the following criterion: “the achievement of a high degree of price stability; this will be apparent from a rate of inflation which is close to that of, at most, the three best performing Member States in terms of price stability”. Article 1 of Protocol (No 13) on the convergence criteria referred to in Article 140 of the Treaty stipulates that: “The criterion on price stability referred to in the first indent of Article 140(1) of the Treaty on the Functioning of the European Union shall mean that a Member State has a price performance that is sustainable and an average rate of inflation, observed over a period of one year before the examination, that does not exceed by more than 1½ percentage points that of, at most, the three best performing Member States in terms of price stability. Inflation shall be measured by means of the consumer price index on a comparable basis taking into account differences in national definitions”. 2 Application of Treaty provisions In the context of this report, the ECB applies the Treaty provisions as outlined below. First, with regard to “an average rate of inflation, observed over a period of one year before the examination”, the inflation rate has been calculated using the change in the latest available 12-month average of the HICP over the previous 12-month average. Hence, with regard to the rate of inflation, the reference period considered in this report is May 2013 to April 2014. 9 ECB Convergence Report June 2014 2 FRAMEWORK FOR ANALYSIS To allow a more detailed examination of the sustainability of price developments in the country under review, the average rate of HICP inflation over the 12-month reference period from May 2013 to April 2014 is reviewed in the light of the country’s economic performance over the last ten years in terms of price stability. In this connection, attention is paid to the orientation of monetary policy, in particular to whether the focus of the monetary authorities has been primarily on achieving and maintaining price stability, as well as to the contribution of other areas of economic policy to this objective. Moreover, the implications of the macroeconomic environment for the achievement of price stability are taken into account. Price developments are examined in the light of supply and demand conditions, focusing on, inter alia, factors influencing unit labour costs and import prices. Finally, trends in other relevant price indices (such as the HICP excluding unprocessed food and energy, the HICP at constant tax rates, the national CPI, the private consumption deflator, the GDP deflator and producer prices) are considered. From a forward-looking perspective, a view is provided of prospective inflationary developments in the coming years, including forecasts by major international organisations and market participants. Moreover, institutional and structural aspects relevant for maintaining an environment conducive to price stability after adoption of the euro are discussed. Second, the notion of “at most, the three best performing Member States in terms of price stability”, which is used for the definition of the reference value, has been applied by taking the unweighted arithmetic average of the rates of inflation of the following three Member States: Latvia (0.1%), Portugal (0.3%) and Ireland (0.3%). As a result, the average rate is 0.2% and, adding 1½ percentage points, the reference value is 1.7%. The inflation rates of Greece, Bulgaria and Cyprus have been excluded from the calculation of the reference value. Price developments in these countries over the reference period resulted in a 12-month average inflation rate in April 2014 of -1.2%, -0.8% and -0.4%, respectively. These three countries have been treated as “outliers” for the calculation of the reference value. In all these countries, inflation rates were significantly lower than the comparable rates in other Member States over the reference period and, in all of them, this was due to exceptional factors. Greece and Cyprus have been undergoing an extraordinarily deep recession, with the result that their price developments have been dampened by exceptionally large negative output gaps. With respect to Bulgaria, an accumulation of country-specific factors has exerted significant downward pressure on inflation. These factors include substantial administered price cuts – mostly relating to electricity prices – and substantially negative contributions from transport and health services. It should be noted that the concept of “outlier” has been referred to in previous ECB Convergence Reports (see, for example, the 2010, 2012 and 2013 reports) as well as in the Convergence Reports of the EMI. In line with those reports, a Member State is considered to be an “outlier” if two conditions are fulfilled: first, its 12-month average inflation rate is significantly below the comparable rates in other Member States; and second, its price developments have been strongly affected by exceptional factors. The identification of outliers does not follow any mechanical approach. The approach used was introduced to deal appropriately with potential significant distortions in the inflation developments of individual countries. Inflation has been measured on the basis of the HICP, which was developed for the purpose of assessing convergence in terms of price stability on a comparable basis (see Section 9 of Chapter 5). For information, the average euro area inflation rate is shown in the statistical part of this report. 10 ECB Convergence Report June 2014 With regard to fiscal developments, the legal provisions and their application by the ECB, together with procedural issues, are outlined in Box 2. Box 2 FISCAL DEVELOPMENTS 1 Treaty and other legal provisions Article 140(1), second indent, of the Treaty requires the Convergence Report to examine the achievement of a high degree of sustainable convergence by reference to the fulfilment by each Member State of the following criterion: “the sustainability of the government financial position; this will be apparent from having achieved a government budgetary position without a deficit that is excessive as determined in accordance with Article 126(6)”. Article 2 of Protocol (No 13) on the convergence criteria referred to in Article 140 of the Treaty stipulates that: “The criterion on the government budgetary position referred to in the second indent of Article 140(1) of the said Treaty shall mean that at the time of the examination the Member State is not the subject of a Council decision under Article 126(6) of the said Treaty that an excessive deficit exists”. Article 126 sets out the excessive deficit procedure (EDP). According to Article 126(2) and (3), the European Commission prepares a report if a Member State does not fulfil the requirements for fiscal discipline, in particular if: (a) the ratio of the planned or actual government deficit to GDP exceeds a reference value (defined in the Protocol on the EDP as 3% of GDP), unless either: – the ratio has declined substantially and continuously and reached a level that comes close to the reference value; or, alternatively, – the excess over the reference value is only exceptional and temporary and the ratio remains close to the reference value; (b) the ratio of government debt to GDP exceeds a reference value (defined in the Protocol on the EDP as 60% of GDP), unless the ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace. In addition, the report prepared by the Commission must take into account whether the government deficit exceeds government investment expenditure and all other relevant factors, including the medium-term economic and budgetary position of the Member State. 11 ECB Convergence Report June 2014 2 FRAMEWORK FOR ANALYSIS The Commission may also prepare a report if, notwithstanding the fulfilment of the criteria, it is of the opinion that there is a risk of an excessive deficit in a Member State. The Economic and Financial Committee formulates an opinion on the Commission’s report. Finally, in accordance with Article 126(6), the EU Council, on the basis of a recommendation from the Commission and having considered any observations which the Member State concerned may wish to make, decides, acting by qualified majority and excluding the Member State concerned, and following an overall assessment, whether an excessive deficit exists in a Member State. The Treaty provisions under Article 126 are further clarified by Council Regulation (EC) No 1467/97,1 which among other things: • confirms the equal footing of the debt criterion with the deficit criterion by making the former operational, while allowing for a three-year period of transition. Article 2(1a) of the Regulation provides that when it exceeds the reference value, the ratio of the government debt to GDP shall be considered sufficiently diminishing and approaching the reference value at a satisfactory pace if the differential with respect to the reference value has decreased over the previous three years at an average rate of one twentieth per year as a benchmark, based on changes over the last three years for which the data are available. The requirement under the debt criterion shall also be considered to be fulfilled if the required reduction in the differential looks set to occur over a defined three-year period, based on the Commission’s budgetary forecast. In implementing the debt reduction benchmark, the influence of the economic cycle on the pace of debt reduction shall be taken into account; • details the relevant factors that the Commission shall take into account when preparing a report under Article 126(3) of the Treaty. Most importantly, it specifies a series of factors considered relevant in assessing developments in medium-term economic, budgetary and government debt positions (see Article 2(3) of the Regulation and, below, details on the ensuing ECB analysis). Moreover, the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG), which builds on the provisions of the enhanced Stability and Growth Pact, was signed on 2 March 2012 by 25 EU Member States (all EU Member States except the United Kingdom, the Czech Republic and Croatia) and entered into force on 1 January 2013.2 Title III (Fiscal Compact) provides, inter alia, for a binding fiscal rule aimed at ensuring that the general government budget is balanced or in surplus. This rule is deemed to be respected if the annual structural balance meets the country-specific medium-term objective and does not exceed a deficit – in structural terms – of 0.5% of GDP. If the government debt ratio is significantly below 60% of GDP and risks to long-term fiscal sustainability are low, the medium-term objective can be set at a structural deficit of at most 1% of GDP. The TSCG also includes the debt reduction benchmark rule referred to in Council Regulation (EU) No 1177/2011, which has amended Council Regulation (EC) 1467/97.3 The signatory Member States are required to 1 Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure, OJ L 209, 2.8.1997, p. 6. 2 The TSCG applies also to those EU Member States with a derogation that have ratified it, as from the date when the decision abrogating that derogation takes effect or as from an earlier date if the Member State concerned declares its intention to be bound at such earlier date by all or part of the provisions of the TSCG. 3 Council Regulation (EU) No 1177/2011 of 8 November 2011 amending Regulation (EC) No 1467/97 on speeding up and clarifying the implementation of the EDP, OJ L 306, 23.11.2011, p. 33. 12 ECB Convergence Report June 2014 introduce in their constitution – or equivalent law of higher level than the annual budget law – the stipulated fiscal rules accompanied by an automatic correction mechanism in case of deviation from the fiscal objective. With respect to the Treaty establishing the European Stability Mechanism (“ESM Treaty”), recital 7 provides that as a consequence of joining the euro area, an EU Member State should become an ESM Member with full rights and obligations. Article 44 sets out the procedure for application and accession to the ESM.4 2 Application of Treaty provisions For the purpose of examining convergence, the ECB expresses its view on fiscal developments. With regard to sustainability, the ECB examines key indicators of fiscal developments from 2004 to 2013, the outlook and the challenges for general government finances, and focuses on the links between deficit and debt developments. The ECB provides an analysis with respect to the effectiveness of national budgetary frameworks, as referred to in Article 2(3)(b) of Council Regulation (EC) No 1467/97 and in Council Directive 2011/85/EU.5 Moreover, the expenditure benchmark rule as set out in Article 9(1) of Council Regulation (EC) No 1466/976 aims to ensure a proper financing of expenditure increases. Under the rule, inter alia, EU Member States that have not yet reached their medium-term budgetary objective should ensure that the annual growth of relevant primary expenditure does not exceed a reference medium-term rate of potential GDP growth, unless the excess is matched by discretionary revenue measures. With regard to Article 126, the ECB, in contrast to the Commission, has no formal role in the EDP. The ECB report only states whether the country is subject to an EDP. With regard to the Treaty provision that a debt ratio of above 60% of GDP should be “sufficiently diminishing and approaching the reference value at a satisfactory pace”, the ECB examines past and future trends in the debt ratio. For EU Member States in which the debt ratio exceeds the reference value, the ECB provides, for illustrative purposes, a debt sustainability analysis, including with reference to the aforementioned debt reduction benchmark laid down in Article 2(1a) of Council Regulation (EC) No 1467/97. The examination of fiscal developments is based on data compiled on a national accounts basis, in compliance with the ESA 95 (see Section 9 of Chapter 5). Most of the figures presented in this report were provided by the Commission in April 2014 and include government financial positions from 2004 to 2013 as well as Commission forecasts for 2014. 4 In Opinion CON/2012/73, the ECB noted that Article 44 of the ESM Treaty provides that “the ESM Treaty shall be open for accession by other Member States of the EU upon their application for membership. These ‘other’ Member States are those which have not adopted the euro at the time of signature of the ESM Treaty. Article 44 of the ESM Treaty provides further that the Member State shall file with the ESM its application for membership after the adoption by the Council of the European Union of the decision to abrogate the Member State’s derogation from adopting the euro in accordance with Article 140(2) of the Treaty. Article 44 of the ESM Treaty also provides that, following the approval of the application for membership by the ESM’s Board of Governors, the new ESM Member shall accede upon deposit of the instruments for accession with the Depository”. ECB opinions are available on the ECB’s website at www.ecb.europa.eu. 5 Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the Member States, OJ L 306, 23.11.2011, p. 41. 6 Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies, OJ L 209, 2.8.1997, p.1. 13 ECB Convergence Report June 2014 2 FRAMEWORK FOR With regard to the sustainability of public finances, the outcome in the reference year, 2013, is ANALYSIS reviewed in the light of the performance of the country under review over the past ten years. First, the development of the deficit ratio is investigated. It is considered useful to bear in mind that the change in a country’s annual deficit ratio is typically influenced by a variety of underlying forces. These influences are often divided into “cyclical effects” on the one hand, which reflect the reaction of deficits to changes in the economic cycle, and “non-cyclical effects” on the other, which are often taken to reflect structural or permanent adjustments to fiscal policies. However, such non-cyclical effects, as quantified in this report, cannot necessarily be seen as entirely reflecting a structural change to fiscal positions, because they include temporary effects on the budgetary balance stemming from the impact of both policy measures and special factors. Indeed, assessing how structural budgetary positions have changed during the crisis is particularly difficult in view of uncertainty over the level and growth rate of potential output. As regards other fiscal indicators, past government expenditure and revenue trends are also considered in more detail. As a further step, the development of the government debt ratio in this period is considered, as well as the factors underlying it, namely the difference between nominal GDP growth and interest rates, the primary balance and the deficit-debt adjustment. Such a perspective can offer further information on the extent to which the macroeconomic environment, in particular the combination of growth and interest rates, has affected the dynamics of debt. It can also provide more information on the contribution of fiscal consolidation efforts, as reflected in the primary balance, and on the role played by special factors, as included in the deficit-debt adjustment. In addition, the structure of government debt is considered, by focusing in particular on the shares of debt with a short-term maturity and foreign currency debt, as well as their development. By comparing these shares with the current level of the debt ratio, the sensitivity of fiscal balances to changes in exchange rates and interest rates can be highlighted. Turning to a forward-looking perspective, national budget plans and recent forecasts by the European Commission for 2014 are considered, and account is taken of the medium-term fiscal strategy, as reflected in the convergence programme. This includes an assessment of the projected attainment of the country’s medium-term budgetary objective, as foreseen in the Stability and Growth Pact, as well as of the outlook for the debt ratio on the basis of current fiscal policies. Finally, long-term challenges to the sustainability of budgetary positions and broad areas for consolidation are emphasised, particularly those related to the issue of unfunded government pension systems in connection with demographic change and to contingent liabilities incurred by the government, especially during the financial and economic crisis. In line with past practices, the analysis described above also covers most of the relevant factors identified in Article 2(3) of Council Regulation (EC) No 1467/97 as described in Box 2. With regard to exchange rate developments, the legal provisions and their application by the ECB are outlined in Box 3. 14 ECB Convergence Report June 2014 Box 3 EXCHANGE RATE DEVELOPMENTS 1 Treaty provisions Article 140(1), third indent, of the Treaty requires the Convergence Report to examine the achievement of a high degree of sustainable convergence by reference to the fulfilment by each Member State of the following criterion: “the observance of the normal fluctuation margins provided for by the exchange-rate mechanism of the European Monetary System, for at least two years, without devaluing against the euro”. Article 3 of Protocol (No 13) on the convergence criteria referred to in Article 140 of the Treaty stipulates that: “The criterion on participation in the Exchange Rate mechanism of the European Monetary System referred to in the third indent of Article 140(1) of the said Treaty shall mean that a Member State has respected the normal fluctuation margins provided for by the exchangerate mechanism on the European Monetary System without severe tensions for at least the last two years before the examination. In particular, the Member State shall not have devalued its currency’s bilateral central rate against the euro on its own initiative for the same period.” 2 Application of Treaty provisions With regard to exchange rate stability, the ECB examines whether the country has participated in ERM II (which superseded the ERM as of January 1999) for a period of at least two years prior to the convergence examination without severe tensions, in particular without devaluing against the euro. In cases of shorter periods of participation, exchange rate developments are described over a two-year reference period. The examination of exchange rate stability against the euro focuses on the exchange rate being close to the ERM II central rate, while also taking into account factors that may have led to an appreciation, which is in line with the approach taken in the past. In this respect, the width of the fluctuation band within ERM II does not prejudice the examination of the exchange rate stability criterion. Moreover, the issue of the absence of “severe tensions” is generally addressed by: i) examining the degree of deviation of exchange rates from the ERM II central rates against the euro; ii) using indicators such as exchange rate volatility vis-à-vis the euro and its trend, as well as short-term interest rate differentials vis-à-vis the euro area and their development; iii) considering the role played by foreign exchange interventions; and iv) considering the role of international financial assistance programmes in stabilising the currency. The reference period in this report is from 16 May 2012 to 15 May 2014. All bilateral exchange rates are official ECB reference rates (see Section 9 of Chapter 5). 15 ECB Convergence Report June 2014 2 FRAMEWORK FOR In addition to ERM II participation and nominal exchange rate developments against the euro ANALYSIS over the period under review, evidence relevant to the sustainability of the current exchange rate is briefly reviewed. This is derived from the development of the real bilateral and effective exchange rates, export market shares and the current, capital and financial accounts of the balance of payments. The evolution of gross external debt and the net international investment position over longer periods are also examined. The section on exchange rate developments further considers measures of the degree of a country’s integration with the euro area. This is assessed in terms of both external trade integration (exports and imports) and financial integration. Finally, the section on exchange rate developments reports, if applicable, whether the country under examination has benefited from central bank liquidity assistance or balance of payments support, either bilaterally or multilaterally with the involvement of the IMF and/or the EU. Both actual and precautionary assistance are considered, including access to precautionary financing in the form of, for instance, the IMF’s Flexible Credit Line. With regard to long-term interest rate developments, the legal provisions and their application by the ECB are outlined in Box 4. Box 4 LONG-TERM INTEREST RATE DEVELOPMENTS 1 Treaty provisions Article 140(1), fourth indent, of the Treaty requires the Convergence Report to examine the achievement of a high degree of sustainable convergence by reference to the fulfilment by each Member State of the following criterion: “the durability of convergence achieved by the Member State with a derogation and of its participation in the exchange-rate mechanism being reflected in the long-term interest-rate levels”. Article 4 of Protocol (No 13) on the convergence criteria referred to in Article 140 of the Treaty stipulates that: “The criterion on the convergence of interest rates referred to in the fourth indent of Article 140(1) of the said Treaty shall mean that, observed over a period of one year before the examination, a Member State has had an average nominal long-term interest rate that does not exceed by more than two percentage points that of, at most, the three best performing Member States in terms of price stability. Interest rates shall be measured on the basis of long-term government bonds or comparable securities, taking into account differences in national definitions”. 2 Application of Treaty provisions In the context of this report, the ECB applies the Treaty provisions as outlined below. First, with regard to “an average nominal long-term interest rate” observed over “a period of one year before the examination”, the long-term interest rate has been calculated as an arithmetic 16 ECB Convergence Report June 2014 As mentioned above, the Treaty makes explicit reference to the “durability of convergence” being reflected in the level of long-term interest rates. Therefore, developments over the reference period from May 2013 to April 2014 are reviewed against the background of the path of long-term interest rates over the past ten years (or otherwise the period for which data are available) and the main factors underlying differentials vis-à-vis the average long-term interest rate prevailing in the euro area. During the reference period, the average euro area long-term interest rate partly reflected the high country-specific risk premia of several euro area countries. Therefore, the euro area AAA long-term government bond yield (i.e. the long-term yield of the euro area AAA yield curve, which includes the euro area countries with an AAA rating) is also used for comparison purposes. As background to this analysis, this report also provides information about the size and development of the financial market. This is based on three indicators (the outstanding amount of debt securities issued by corporations, stock market capitalisation and domestic bank credit to the private sector), which, together, measure the size of financial markets. Finally, Article 140(1) of the Treaty requires this report to take account of several other relevant factors (see Box 5). In this respect, an enhanced economic governance framework in accordance with Article 121(6) of the Treaty entered into force on 13 December 2011 with the aim of ensuring a closer coordination of economic policies and the sustained convergence of EU Member States’ economic performances. Box 5 below briefly recalls these legislative provisions and the way in which the above-mentioned additional factors are addressed in the assessment of convergence conducted by the ECB. average over the latest 12 months for which HICP data were available. The reference period considered in this report is from May 2013 to April 2014. Second, the notion of “at most, the three best performing Member States in terms of price stability”, which is used for the definition of the reference value, has been applied by using the unweighted arithmetic average of the long-term interest rates of the same three Member States entering the calculation of the reference value for the criterion on price stability (see Box 1). Over the reference period considered in this report, the long-term interest rates of the three best performing countries in terms of price stability were 3.3% (Latvia), 3.5% (Ireland) and 5.8% (Portugal). As a result, the average rate is 4.2% and, adding 2 percentage points, the reference value is 6.2%. Interest rates have been measured on the basis of available harmonised long-term interest rates, which were developed for the purpose of examining convergence (see Section 9 of Chapter 5). Box 5 OTHER RELEVANT FACTORS 1 Treaty and other legal provisions Article 140(1) of the Treaty requires that: “The reports of the Commission and the European Central Bank shall also take account of the results of the integration of markets, the situation and development of the balances of payments on current account and an examination of the development of unit labour costs and other price indices”. 17 ECB Convergence Report June 2014 2 FRAMEWORK FOR ANALYSIS In this respect, the ECB takes into account the legislative package on EU economic governance which entered into force on 13 December 2011. Building on the Treaty provisions under Article 121(6), the European Parliament and the EU Council adopted detailed rules for the multilateral surveillance procedure referred to in Articles 121(3) and 121(4) of the Treaty. These rules were adopted “in order to ensure closer coordination of economic policies and sustained convergence of the economic performances of the Member States” (Article 121(3)), following the “need to draw lessons from the first decade of functioning of the economic and monetary union and, in particular, for improved economic governance in the Union built on stronger national ownership”.1 The new legislative package includes an enhanced surveillance framework (the macroeconomic imbalance procedure or MIP) aimed at preventing excessive macroeconomic imbalances and helping diverging EU Member States to establish corrective plans before divergence becomes entrenched. The MIP, with both preventive and corrective arms, applies to all EU Member States, except those which, being under an international financial assistance programme, are already subject to closer scrutiny coupled with conditionality. The MIP includes an alert mechanism for the early detection of imbalances, based on a transparent scoreboard of indicators with alert thresholds for all EU Member States, combined with economic judgement. This judgement should take into account, inter alia, nominal and real convergence inside and outside the euro area.2 When assessing macroeconomic imbalances, this procedure should take due account of their severity and their potential negative economic and financial spillover effects, which aggravate the vulnerability of the EU economy and threaten the smooth functioning of EMU.3 2 Application of Treaty provisions In line with past practices, the additional factors referred to in Article 140(1) of the Treaty are reviewed in Chapter 5 under the headings of the individual criteria described in Boxes 1 to 4. Regarding the elements of the MIP, most of the macroeconomic indicators have been referred to in this report in the past (some with different statistical definitions), as part of the wide range of additional backward and forward-looking economic indicators that are considered to be useful for examining the sustainability of convergence in greater detail, as required by Article 140 of the Treaty. For completeness, in Chapter 3 the scoreboard indicators (including in relation to the alert thresholds) are presented for the countries covered in this report, thereby ensuring the provision of all available information relevant to the detection of macroeconomic imbalances that may be hampering the achievement of a high degree of sustainable convergence as stipulated by Article 140(1) of the Treaty. Notably, EU Member States with a derogation that are subject to an excessive imbalance procedure can hardly be considered as having achieved a high degree of sustainable convergence as stipulated by Article 140(1) of the Treaty. 1 See Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances, recital 2. 2 See Regulation (EU) No 1176/2011, Article 4(4). 3 See Regulation (EU) No 1176/2011, recital 17. 18 ECB Convergence Report June 2014 2.2 COMPATIBILITY OF NATIONAL LEGISLATION WITH THE TREATIES 2.2.1 INTRODUCTION Article 140(1) of the Treaty requires the ECB (and the European Commission) to report, at least once every two years or at the request of a Member State with a derogation, to the Council on the progress made by the Member States with a derogation in fulfilling their obligations regarding the achievement of economic and monetary union. These reports must include an examination of the compatibility between the national legislation of each Member State with a derogation, including the statutes of its NCB, and Articles 130 and 131 of the Treaty and the relevant Articles of the Statute. This Treaty obligation of Member States with a derogation is also referred to as ‘legal convergence’. When assessing legal convergence, the ECB is not limited to making a formal assessment of the letter of national legislation, but may also consider whether the implementation of the relevant provisions complies with the spirit of the Treaties and the Statute. The ECB is particularly concerned about any signs of pressure being put on the decision-making bodies of any Member State’s NCB which would be inconsistent with the spirit of the Treaty as regards central bank independence. The ECB also sees the need for the smooth and continuous functioning of the NCBs’ decision-making bodies. In this respect, the relevant authorities of a Member State have, in particular, the duty to take the necessary measures to ensure the timely appointment of a successor if the position of a member of an NCB’s decision-making body becomes vacant.1 The ECB will closely monitor any developments prior to making a positive final assessment concluding that a Member State’s national legislation is compatible with the Treaty and the Statute. MEMBER STATES WITH A DEROGATION AND LEGAL CONVERGENCE Bulgaria, the Czech Republic, Croatia, Lithuania, Hungary, Poland, Romania and Sweden, whose national legislation is examined in this report, each have the status of a Member State with a derogation, i.e. they have not yet adopted the euro. Sweden was given the status of a Member State with a derogation by a decision of the Council in May 1998.2 As far as the other Member States are concerned, Articles 43 and 54 of the Acts concerning the conditions of accession provide that each of these Member States shall participate in Economic and Monetary Union from the date of accession as a Member State with a derogation within the meaning of Article 139 of the Treaty. This report does not cover Denmark or the United Kingdom, which are Member States with a special status and which have not yet adopted the euro. Protocol (No 16) on certain provisions relating to Denmark, annexed to the Treaties, provides that, in view of the notice given to the Council by the Danish Government on 3 November 1993, Denmark has an exemption and that the procedure for the abrogation of the derogation will only be initiated at the request of Denmark. As Article 130 of the Treaty applies to Denmark, Danmarks Nationalbank has to fulfil the requirements of central bank independence. The EMI’s Convergence 1 Opinions CON/2010/37 and CON/2010/91. 2 Council Decision 98/317/EC of 3 May 1998 in accordance with Article 109j(4) of the Treaty (OJ L 139, 11.5.1998, p. 30). Note: The title of Decision 98/317/EC refers to the Treaty establishing the European Community (prior to the renumbering of the Articles of this Treaty in accordance with Article 12 of the Treaty of Amsterdam); this provision has been repealed by the Treaty of Lisbon. 3 Act concerning the conditions of accession of the Czech Republic, the Republic of Estonia, the Republic of Cyprus, the Republic of Latvia, the Republic of Lithuania, the Republic of Hungary, the Republic of Malta, the Republic of Poland, the Republic of Slovenia and the Slovak Republic and the adjustments to the Treaties on which the European Union is founded (OJ L 236, 23.9.2003, p. 33). 4 For Bulgaria and Romania, see Article 5 of the Act concerning the conditions of accession of the Republic of Bulgaria and Romania and the adjustments to the treaties on which the European Union is founded (OJ L 157, 21.6.2005, p. 203). For Croatia, see Article 5 of the Act concerning the conditions of accession of the Republic of Croatia and the adjustments to the Treaty on European Union, the Treaty on the Functioning of the European Union and the Treaty establishing the European Atomic Energy Community (OJ L 112, 24.4.2012, p. 21). 19 ECB Convergence Report June 2014 2 FRAMEWORK FOR Report of 1998 concluded that this requirement had been fulfilled. There has been no assessment ANALYSIS of Danish convergence since 1998 due to Denmark’s special status. Until such time as Denmark notifies the Council that it intends to adopt the euro, Danmarks Nationalbank does not need to be legally integrated into the Eurosystem and no Danish legislation needs to be adapted. According to Protocol (No 15) on certain provisions relating to the United Kingdom of Great Britain and Northern Ireland, annexed to the Treaties, the United Kingdom is under no obligation to adopt the euro unless it notifies the Council that it intends to do so. On 30 October 1997 the United Kingdom notified the Council that it did not intend to adopt the euro on 1 January 1999 and this situation has not changed. Pursuant to this notification, certain provisions of the Treaty (including Articles 130 and 131) and of the Statute do not apply to the United Kingdom. Accordingly, there is no current legal requirement to ensure that national legislation (including the Bank of England’s statutes) is compatible with the Treaty and the Statute. The aim of assessing legal convergence is to facilitate the Council’s decisions as to which Member States fulfil ‘their obligations regarding the achievement of economic and monetary union’ (Article 140(1) of the Treaty). In the legal domain, such conditions refer in particular to central bank independence and to the NCBs’ legal integration into the Eurosystem. STRUCTURE OF THE LEGAL ASSESSMENT The legal assessment broadly follows the framework of the previous reports of the ECB and the EMI on legal convergence.5 The compatibility of national legislation is considered in the light of legislation enacted before 20 March 2014. 2.2.2 SCOPE OF ADAPTATION 2.2.2.1 AREAS OF ADAPTATION For the purpose of identifying those areas where national legislation needs to be adapted, the following issues are examined: – compatibility with provisions on the independence of NCBs in the Treaty (Article 130) and the Statute (Articles 7 and 14.2) and with provisions on confidentiality (Article 37 of the Statute); – compatibility with the prohibitions on monetary financing (Article 123 of the Treaty) and privileged access (Article 124 of the Treaty) and compatibility with the single spelling of the euro required by EU law; and – legal integration of the NCBs into the Eurosystem (in particular as regards Articles 12.1 and 14.3 of the Statute). 5 In particular the ECB’s Convergence Reports of June 2013 (on Latvia), May 2012 (on Bulgaria, the Czech Republic, Latvia, Lithuania, Hungary, Poland, Romania and Sweden), May 2010 (on Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Romania and Sweden), May 2008 (on Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Romania, Slovakia and Sweden), May 2007 (on Cyprus and Malta), December 2006 (on the Czech Republic, Estonia, Cyprus, Latvia, Hungary, Malta, Poland, Slovakia and Sweden), May 2006 (on Lithuania and Slovenia), October 2004 (on the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia, Slovakia and Sweden), May 2002 (on Sweden) and April 2000 (on Greece and Sweden), and the EMI’s Convergence Report of March 1998. 20 ECB Convergence Report June 2014 2.2.2.2 ‘COMPATIBILITY’ VERSUS ‘HARMONISATION’ Article 131 of the Treaty requires national legislation to be ‘compatible’ with the Treaties and the Statute; any incompatibility must therefore be removed. Neither the supremacy of the Treaties and the Statute over national legislation nor the nature of the incompatibility affects the need to comply with this obligation. The requirement for national legislation to be ‘compatible’ does not mean that the Treaty requires ‘harmonisation’ of the NCBs’ statutes, either with each other or with the Statute. National particularities may continue to exist to the extent that they do not infringe the EU’s exclusive competence in monetary matters. Indeed, Article 14.4 of the Statute permits NCBs to perform functions other than those specified in the Statute, to the extent that they do not interfere with the ESCB’s objectives and tasks. Provisions authorising such additional functions in NCBs’ statutes are a clear example of circumstances in which differences may remain. Rather, the term ‘compatible’ indicates that national legislation and the NCBs’ statutes need to be adjusted to eliminate inconsistencies with the Treaties and the Statute and to ensure the necessary degree of integration of the NCBs into the ESCB. In particular, any provisions that infringe an NCB’s independence, as defined in the Treaty, and its role as an integral part of the ESCB, should be adjusted. It is therefore insufficient to rely solely on the primacy of EU law over national legislation to achieve this. The obligation in Article 131 of the Treaty only covers incompatibility with the Treaties and the Statute. However, national legislation that is incompatible with secondary EU legislation should be brought into line with such secondary legislation. The primacy of EU law does not affect the obligation to adapt national legislation. This general requirement derives not only from Article 131 of the Treaty but also from the case law of the Court of Justice of the European Union.6 The Treaties and the Statute do not prescribe the manner in which national legislation should be adapted. This may be achieved by referring to the Treaties and the Statute, or by incorporating provisions thereof and referring to their provenance, or by deleting any incompatibility, or by a combination of these methods. Furthermore, among other things as a tool for achieving and maintaining the compatibility of national legislation with the Treaties and the Statute, the ECB must be consulted by the EU institutions and by the Member States on draft legislative provisions in its fields of competence, pursuant to Articles 127(4) and 282(5) of the Treaty and Article 4 of the Statute. Council Decision 98/415/EC of 29 June 1998 on the consultation of the European Central Bank by national authorities regarding draft legislative provisions7 expressly requires Member States to take the measures necessary to ensure compliance with this obligation. 2.2.3 INDEPENDENCE OF NCBS As far as central bank independence and confidentiality are concerned, national legislation in the Member States that joined the EU in 2004, 2007 or 2013 had to be adapted to comply with the relevant provisions of the Treaty and the Statute, and be in force on 1 May 2004, 1 January 2007 and 1 July 2013 respectively. Sweden had to bring the necessary adaptations into force by the date of establishment of the ESCB on 1 June 1998. 6 See, amongst others, Case 167/73 Commission of the European Communities v French Republic [1974] ECR 359 (‘Code du Travail Maritime’). 7 OJ L 189, 3.7.1998, p. 42. 21 ECB Convergence Report June 2014 2 FRAMEWORK FOR CENTRAL BANK INDEPENDENCE ANALYSIS In November 1995, the EMI established a list of features of central bank independence (later described in detail in its 1998 Convergence Report) which were the basis for assessing the national legislation of the Member States at that time, in particular the NCBs’ statutes. The concept of central bank independence includes various types of independence that must be assessed separately, namely: functional, institutional, personal and financial independence. Over the past few years there has been further refinement of the analysis of these aspects of central bank independence in the opinions adopted by the ECB. These aspects are the basis for assessing the level of convergence between the national legislation of the Member States with a derogation and the Treaties and the Statute. FUNCTIONAL INDEPENDENCE Central bank independence is not an end in itself, but is instrumental in achieving an objective that should be clearly defined and should prevail over any other objective. Functional independence requires each NCB’s primary objective to be stated in a clear and legally certain way and to be fully in line with the primary objective of price stability established by the Treaty. It is served by providing the NCBs with the necessary means and instruments for achieving this objective independently of any other authority. The Treaty’s requirement of central bank independence reflects the generally held view that the primary objective of price stability is best served by a fully independent institution with a precise definition of its mandate. Central bank independence is fully compatible with holding NCBs accountable for their decisions, which is an important aspect of enhancing confidence in their independent status. This entails transparency and dialogue with third parties. As regards timing, the Treaty is not clear about when the NCBs of Member States with a derogation must comply with the primary objective of price stability set out in Articles 127(1) and 282(2) of the Treaty and Article 2 of the Statute. For those Member States that joined the EU after the date of the introduction of the euro in the EU, it is not clear whether this obligation should run from the date of accession or from the date of their adoption of the euro. While Article 127(1) of the Treaty does not apply to Member States with a derogation (see Article 139(2)(c) of the Treaty), Article 2 of the Statute does apply to such Member States (see Article 42.1 of the Statute). The ECB takes the view that the obligation of the NCBs to have price stability as their primary objective runs from 1 June 1998 in the case of Sweden, and from 1 May 2004, 1 January 2007 and 1 July 2013 for the Member States that joined the EU on those dates. This is based on the fact that one of the guiding principles of the EU, namely price stability (Article 119 of the Treaty), also applies to Member States with a derogation. It is also based on the Treaty objective that all Member States should strive for macroeconomic convergence, including price stability, which is the intention behind the regular reports of the ECB and the European Commission. This conclusion is also based on the underlying rationale of central bank independence, which is only justified if the overall objective of price stability has primacy. The country assessments in this report are based on these conclusions as to the timing of the obligation of the NCBs of Member States with a derogation to have price stability as their primary objective. INSTITUTIONAL INDEPENDENCE The principle of institutional independence is expressly referred to in Article 130 of the Treaty and Article 7 of the Statute. These two articles prohibit the NCBs and members of their decision-making bodies from seeking or taking instructions from EU institutions or bodies, from any government of 22 ECB Convergence Report June 2014 a Member State or from any other body. In addition, they prohibit EU institutions, bodies, offices or agencies, and the governments of the Member States from seeking to influence those members of the NCBs’ decision-making bodies whose decisions may affect the fulfilment of the NCBs’ ESCBrelated tasks. If national legislation mirrors Article 130 of the Treaty and Article 7 of the Statute, it should reflect both prohibitions and not narrow the scope of their application.8 Whether an NCB is organised as a state-owned body, a special public law body or simply a public limited company, there is a risk that influence may be exerted by the owner on its decision-making in relation to ESCB-related tasks by virtue of such ownership. Such influence, whether exercised through shareholders’ rights or otherwise, may affect an NCB’s independence and should therefore be limited by law. Prohibition on giving instructions Rights of third parties to give instructions to NCBs, their decision-making bodies or their members are incompatible with the Treaty and the Statute as far as ESCB-related tasks are concerned. Any involvement of an NCB in the application of measures to strengthen financial stability must be compatible with the Treaty, i.e. NCBs’ functions must be performed in a manner that is fully compatible with their functional, institutional, and financial independence so as to safeguard the proper performance of their tasks under the Treaty and the Statute.9 To the extent that national legislation provides for a role of an NCB that goes beyond advisory functions and requires it to assume additional tasks, it must be ensured that these tasks will not affect the NCB’s ability to carry out its ESCB-related tasks from an operational and financial point of view.10 Additionally, the inclusion of NCB representatives in collegiate decision-making supervisory bodies or other authorities would need to give due consideration to safeguards for the personal independence of the members of the NCB’s decision-making bodies.11 Prohibition on approving, suspending, annulling or deferring decisions Rights of third parties to approve, suspend, annul or defer an NCB’s decisions are incompatible with the Treaty and the Statute as far as ESCB-related tasks are concerned. Prohibition on censoring decisions on legal grounds A right for bodies other than independent courts to censor, on legal grounds, decisions relating to the performance of ESCB-related tasks is incompatible with the Treaty and the Statute, since the performance of these tasks may not be reassessed at the political level. A right of an NCB Governor to suspend the implementation of a decision adopted by the ESCB or by an NCB decision-making body on legal grounds and subsequently to submit it to a political body for a final decision would be equivalent to seeking instructions from third parties. Prohibition on participation in decision-making bodies of an NCB with a right to vote Participation by representatives of third parties in an NCB’s decision-making body with a right to vote on matters concerning the performance by the NCB of ESCB-related tasks is incompatible with the Treaty and the Statute, even if such vote is not decisive. 8 Opinion CON/2011/104. 9 Opinion CON/2010/31. 10 Opinion CON/2009/93. 11 Opinion CON/2010/94. 23 ECB Convergence Report June 2014 2 FRAMEWORK FOR Prohibition on ex ante consultation relating to an NCB’s decision ANALYSIS An express statutory obligation for an NCB to consult third parties ex ante relating to an NCB’s decision provides third parties with a formal mechanism to influence the final decision and is therefore incompatible with the Treaty and the Statute. However, dialogue between an NCB and third parties, even when based on statutory obligations to provide information and exchange views, is compatible with central bank independence provided that: – this does not result in interference with the independence of the members of the NCB’s decisionmaking bodies; – the special status of Governors in their capacity as members of the ECB’s decision-making bodies is fully respected; and – confidentiality requirements resulting from the Statute are observed. Discharge provided for the duties of members of the NCB’s decision-making bodies Statutory provisions regarding the discharge provided by third parties (e.g. governments) regarding the duties of members of the NCB’s decision-making bodies (e.g. in relation to accounts) should contain adequate safeguards, so that such a power does not impinge on the capacity of the individual NCB member independently to adopt decisions in respect of ESCB-related tasks (or implement decisions adopted at ESCB level). Inclusion of an express provision to this effect in NCB statutes is recommended. PERSONAL INDEPENDENCE The Statute’s provision on security of tenure for members of NCBs’ decision-making bodies further safeguards central bank independence. NCB Governors are members of the General Council of the ECB and will be members of the Governing Council upon adoption of the euro by their Member States. Article 14.2 of the Statute provides that NCB statutes must, in particular, provide for a minimum term of office of five years for Governors. It also protects against the arbitrary dismissal of Governors by providing that Governors may only be relieved from office if they no longer fulfil the conditions required for the performance of their duties or if they have been guilty of serious misconduct, with the possibility of recourse to the Court of Justice of the European Union. NCB statutes must comply with this provision as set out below. Article 130 of the Treaty prohibits national governments and any bodies from influencing the members of NCBs’ decision-making bodies in the performance of their tasks. In particular, Member States may not seek to influence the members of the NCB’s decision-making bodies by amending national legislation affecting their remuneration, which, as a matter of principle, should apply only for future appointments.12 Minimum term of office for Governors In accordance with Article 14.2 of the Statute, NCB statutes must provide for a minimum term of office of five years for a Governor. This does not preclude longer terms of office, while an indefinite term of office does not require adaptation of the statutes provided the grounds for the dismissal of a Governor are in line with those of Article 14.2 of the Statute. National legislation which provides for a compulsory retirement age should ensure that the retirement age does not 12 See, for example, Opinions CON/2010/56, CON/2010/80, CON/2011/104 and CON/2011/106. 24 ECB Convergence Report June 2014 interrupt the minimum term of office provided by Article 14.2 of the Statute, which prevails over any compulsory retirement age, if applicable to a Governor.13 When an NCB’s statutes are amended, the amending law should safeguard the security of tenure of the Governor and of other members of decision-making bodies who are involved in the performance of ESCB-related tasks. Grounds for dismissal of Governors NCB statutes must ensure that Governors may not be dismissed for reasons other than those mentioned in Article 14.2 of the Statute. The purpose of this requirement is to prevent the authorities involved in the appointment of Governors, particularly the government or parliament, from exercising their discretion to dismiss a Governor. NCB statutes should either refer to Article 14.2 of the Statute, or incorporate its provisions and refer to their provenance, or delete any incompatibility with the grounds for dismissal laid down in Article 14.2, or omit any mention of grounds for dismissal (since Article 14.2 is directly applicable). Once elected or appointed, Governors may not be dismissed under conditions other than those mentioned in Article 14.2 of the Statute even if the Governors have not yet taken up their duties. Security of tenure and grounds for dismissal of members of NCBs’ decision-making bodies, other than Governors, who are involved in the performance of ESCB-related tasks Personal independence would be jeopardised if the same rules for the security of tenure and grounds for dismissal of Governors were not also to apply to other members of the decision-making bodies of NCBs involved in the performance of ESCB-related tasks.14 Various Treaty and Statute provisions require comparable security of tenure. Article 14.2 of the Statute does not restrict the security of tenure of office to Governors, while Article 130 of the Treaty and Article 7 of the Statute refer to ‘members of the decision-making bodies’ of NCBs, rather than to Governors specifically. This applies in particular where a Governor is ‘first among equals’ with colleagues with equivalent voting rights or where such other members are involved in the performance of ESCB-related tasks. Right of judicial review Members of the NCBs’ decision-making bodies must have the right to submit any decision to dismiss them to an independent court of law, in order to limit the potential for political discretion in evaluating the grounds for their dismissal. Article 14.2 of the Statute stipulates that NCB Governors who have been dismissed from office may refer such a decision to the Court of Justice of the European Union. National legislation should either refer to the Statute or remain silent on the right to refer such decision to the Court of Justice of the European Union (as Article 14.2 of the Statute is directly applicable). National legislation should also provide for a right of review by the national courts of a decision to dismiss any other member of the decision-making bodies of the NCB involved in the performance of ESCB-related tasks. This right can either be a matter of general law or can take the form of a specific provision. Even though this right may be available under the general law, for reasons of legal certainty it could be advisable to provide specifically for such a right of review. Safeguards against conflicts of interest Personal independence also entails ensuring that no conflict of interest arises between the duties of members of NCB decision-making bodies involved in the performance of ESCB-related tasks in relation to their respective NCBs (and of Governors in relation to the ECB) and any other functions 13 Opinion CON/2012/89. 14 The main formative ECB opinions in this area are: CON/2004/35; CON/2005/26; CON/2006/32; CON/2006/44; and CON/2007/6. 25 ECB Convergence Report June 2014 2 FRAMEWORK FOR which such members of decision-making bodies may have and which may jeopardise their personal ANALYSIS independence. As a matter of principle, membership of a decision-making body involved in the performance of ESCB-related tasks is incompatible with the exercise of other functions that might create a conflict of interest. In particular, members of such decision-making bodies may not hold an office or have an interest that may influence their activities, whether through office in the executive or legislative branches of the state or in regional or local administrations, or through involvement in a business organisation. Particular care should be taken to prevent potential conflicts of interest on the part of non-executive members of decision-making bodies. FINANCIAL INDEPENDENCE Even if an NCB is fully independent from a functional, institutional and personal point of view (i.e. this is guaranteed by the NCB’s statutes), its overall independence would be jeopardised if it could not autonomously avail itself of sufficient financial resources to fulfil its mandate (i.e. to perform the ESCB-related tasks required of it under the Treaty and the Statute). Member States may not put their NCBs in a position where they have insufficient financial resources to carry out their ESCB or Eurosystem-related tasks, as applicable. It should be noted that Articles 28.1 and 30.4 of the Statute provide for the possibility of the ECB making further calls on the NCBs to contribute to the ECB’s capital and to make further transfers of foreign reserves.15 Moreover, Article 33.2 of the Statute provides16 that, in the event of a loss incurred by the ECB which cannot be fully offset against the general reserve fund, the ECB’s Governing Council may decide to offset the remaining loss against the monetary income of the relevant financial year in proportion to and up to the amounts allocated to the NCBs. The principle of financial independence means that compliance with these provisions requires an NCB to be able to perform its functions unimpaired. Additionally, the principle of financial independence requires an NCB to have sufficient means not only to perform its ESCB-related tasks but also its national tasks (e.g. financing its administration and own operations). For all the reasons mentioned above, financial independence also implies that an NCB should always be sufficiently capitalised. In particular, any situation should be avoided whereby for a prolonged period of time an NCB’s net equity is below the level of its statutory capital or is even negative, including where losses beyond the level of capital and the reserves are carried over. Any such situation may negatively impact on the NCB’s ability to perform its ESCB-related tasks but also its national tasks. Moreover, such a situation may affect the credibility of the Eurosystem’s monetary policy. Therefore, the event of an NCB’s net equity becoming less than its statutory capital or even negative would require that the respective Member State provides the NCB with an appropriate amount of capital at least up to the level of the statutory capital within a reasonable period of time so as to comply with the principle of financial independence. As concerns the ECB, the relevance of this issue has already been recognised by the Council by adopting Council Regulation (EC) No 1009/2000 of 8 May 2000 concerning capital increases of the European Central Bank.17 It enabled the Governing Council of the ECB to decide on an actual increase of the ECB’s capital to sustain the adequacy of the capital base to support the operations of the ECB;18 NCBs should be financially able to respond to such ECB decision. 15 Article 30.4 of the Statute only applies within the Eurosystem. 16 Article 33.2 of the Statute only applies within the Eurosystem. 17 OJ L 115, 16.5.2000, p. 1. 18 Decision ECB/2010/26 of 13 December 2010 on the increase of the ECB’s capital (OJ L 11, 15.1.2011, p. 53). 26 ECB Convergence Report June 2014 The concept of financial independence should be assessed from the perspective of whether any third party is able to exercise either direct or indirect influence not only over an NCB’s tasks but also over its ability to fulfil its mandate, both operationally in terms of manpower, and financially in terms of appropriate financial resources. The aspects of financial independence set out below are particularly relevant in this respect.19 These are the features of financial independence where NCBs are most vulnerable to outside influence. Determination of budget If a third party has the power to determine or influence an NCB’s budget, this is incompatible with financial independence unless the law provides a safeguard clause so that such a power is without prejudice to the financial means necessary for carrying out the NCB’s ESCB-related tasks. The accounting rules The accounts should be drawn up either in accordance with general accounting rules or in accordance with rules specified by an NCB’s decision-making bodies. If, instead, such rules are specified by third parties, the rules must at least take into account what has been proposed by the NCB’s decision-making bodies. The annual accounts should be adopted by the NCB’s decision-making bodies, assisted by independent accountants, and may be subject to ex post approval by third parties (e.g. the government or parliament). The NCB’s decision-making bodies should be able to decide on the calculation of the profits independently and professionally. Where an NCB’s operations are subject to the control of a state audit office or similar body charged with controlling the use of public finances, the scope of the control should be clearly defined by the legal framework, should be without prejudice to the activities of the NCB’s independent external auditors20 and further, in line with the principle of institutional independence, it should comply with the prohibition on giving instructions to an NCB and its decision-making bodies and should not interfere with the NCB’s ESCB-related tasks.21 The state audit should be done on a non-political, independent and purely professional basis. Distribution of profits, NCBs’ capital and financial provisions With regard to profit allocation, an NCB’s statutes may prescribe how its profits are to be allocated. In the absence of such provisions, decisions on the allocation of profits should be taken by the NCB’s decision-making bodies on professional grounds, and should not be subject to the discretion of third parties unless there is an express safeguard clause stating that this is without prejudice to the financial means necessary for carrying out the NCB’s ESCB-related tasks as well as national tasks. Profits may be distributed to the State budget only after any accumulated losses from previous years have been covered22 and financial provisions deemed necessary to safeguard the real value of the NCB’s capital and assets have been created. Temporary or ad hoc legislative measures amounting to instructions to the NCBs in relation to the distribution of their profits are not admissible.23 19 The main formative ECB opinions in this area are: CON/2002/16; CON/2003/22; CON/2003/27; CON/2004/1; CON/2006/38; CON/2006/47; CON/2007/8; CON/2008/13; CON/2008/68 and CON/2009/32. 20 For the activities of the independent external auditors of the NCBs see Article 27.1 of the Statute. 21 Opinions CON/2011/9 and CON/2011/53. 22 Opinion CON/2009/85. 23 Opinion CON/2009/26 and Opinion CON/2013/15. 27 ECB Convergence Report June 2014 2 FRAMEWORK FOR Similarly, a tax on an NCB’s unrealised capital gains would also impair the principle of financial ANALYSIS independence.24 A Member State may not impose reductions of capital on an NCB without the ex ante agreement of the NCB’s decision-making bodies, which must aim to ensure that it retains sufficient financial means to fulfil its mandate under Article 127(2) of the Treaty and the Statute as a member of the ESCB. For the same reason, any amendment to the profit distribution rules of an NCB should only be initiated and decided in cooperation with the NCB, which is best placed to assess its required level of reserve capital.25 As regards financial provisions or buffers, NCBs must be free to independently create financial provisions to safeguard the real value of their capital and assets. Member States may also not hamper NCBs from building up their reserve capital to a level which is necessary for a member of the ESCB to fulfil its tasks.26 Financial liability for supervisory authorities Most Member States place their financial supervisory authorities within their NCB. This is unproblematic if such authorities are subject to the NCB’s independent decision-making. However, if the law provides for separate decision-making by such supervisory authorities, it is important to ensure that decisions adopted by them do not endanger the finances of the NCB as a whole. In such cases, national legislation should enable the NCB to have ultimate control over any decision by the supervisory authorities that could affect an NCB’s independence, in particular its financial independence. Autonomy in staff matters Member States may not impair an NCB’s ability to employ and retain the qualified staff necessary for the NCB to perform independently the tasks conferred on it by the Treaty and the Statute. Also, an NCB may not be put into a position where it has limited control or no control over its staff, or where the government of a Member State can influence its policy on staff matters.27 Any amendment to the legislative provisions on the remuneration for members of an NCB’s decision-making bodies and its employees should be decided in close and effective cooperation with the NCB, taking due account of its views, to ensure the ongoing ability of the NCB to independently carry out its tasks.28 Autonomy in staff matters extends to issues relating to staff pensions. Ownership and property rights Rights of third parties to intervene or to issue instructions to an NCB in relation to the property held by an NCB are incompatible with the principle of financial independence. 2.2.4 CONFIDENTIALITY The obligation of professional secrecy for ECB and NCB staff under Article 37 of the Statute may give rise to similar provisions in NCBs’ statutes or in the Member States’ legislation. The primacy of EU law and rules adopted thereunder also means that national laws on access by third parties to documents may not lead to infringements of the ESCB’s confidentiality regime. The access of a state audit office or similar body to an NCB’s information and documents must be limited and must be without prejudice to the ESCB’s confidentiality regime to which the members of NCBs’ decision-making 24 Opinion CON/2009/63 and Opinion CON/2009/59. 25 Opinion CON/2009/83 and Opinion CON/2009/53. 26 Opinion CON/2009/26. 27 Opinion CON/2008/9, Opinion CON/2008/10 and Opinion CON/2012/89. 28 The main Opinions are CON/2010/42, CON/2010/51, CON/2010/56, CON/2010/69, CON/2010/80, CON/2011/104, CON/2011/106, CON/2012/6, CON/2012/86 and CON/2014/7. 28 ECB Convergence Report June 2014 bodies and staff are subject. NCBs should ensure that such bodies protect the confidentiality of information and documents disclosed at a level corresponding to that applied by the NCBs. 2.2.5 PROHIBITION ON MONETARY FINANCING AND PRIVILEGED ACCESS On the monetary financing prohibition and the prohibition on privileged access, the national legislation of the Member States that joined the EU in 2004, 2007 or 2013 had to be adapted to comply with the relevant provisions of the Treaty and the Statute and be in force on 1 May 2004, 1 January 2007 and 1 July 2013 respectively. Sweden had to bring the necessary adaptations into force by 1 January 1995. 2.2.5.1 PROHIBITION ON MONETARY FINANCING The monetary financing prohibition is laid down in Article 123(1) of the Treaty, which prohibits overdraft facilities or any other type of credit facility with the ECB or the NCBs of Member States in favour of EU institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States; and the purchase directly from these public sector entities by the ECB or NCBs of debt instruments. The Treaty contains one exemption from the prohibition; it does not apply to publicly-owned credit institutions which, in the context of the supply of reserves by central banks, must be given the same treatment as private credit institutions (Article 123(2) of the Treaty). Moreover, the ECB and the NCBs may act as fiscal agents for the public sector bodies referred to above (Article 21.2 of the Statute). The precise scope of application of the monetary financing prohibition is further clarified by Council Regulation (EC) No 3603/93 of 13 December 1993 specifying definitions for the application of the prohibitions referred to in Articles 104 and 104b (1) of the Treaty29 which makes it clear that the prohibition includes any financing of the public sector’s obligations vis-à-vis third parties. The monetary financing prohibition is of essential importance to ensuring that the primary objective of monetary policy (namely to maintain price stability) is not impeded. Furthermore, central bank financing of the public sector lessens the pressure for fiscal discipline. Therefore the prohibition must be interpreted extensively in order to ensure its strict application, subject only to the limited exemptions contained in Article 123(2) of the Treaty and Regulation (EC) No 3603/93. Thus, even if Article 123(1) of the Treaty refers specifically to ‘credit facilities’, i.e. with the obligation to repay the funds, the prohibition applies a fortiori to other forms of funding, i.e. without the obligation to repay. The ECB’s general stance on the compatibility of national legislation with the prohibition has primarily been developed within the framework of consultations of the ECB by Member States on draft national legislation under Articles 127(4) and 282(5) of the Treaty.30 NATIONAL LEGISLATION TRANSPOSING THE MONETARY FINANCING PROHIBITION In general, it is unnecessary to transpose Article 123 of the Treaty, supplemented by Regulation (EC) No 3603/93, into national legislation as they are both directly applicable. If, however, national legislative provisions mirror these directly applicable EU provisions, they may not narrow the scope of application of the monetary financing prohibition or extend the exemptions available under EU law. For example, national legislation providing for the financing by the NCB of a Member 29 OJ L 332, 31.12.1993, p. 1. Articles 104 and 104b(1) of the Treaty establishing the European Community are now Articles 123 and 125(1) of the Treaty. 30 See Convergence Report 2008, page 23, footnote 13, containing a list of formative EMI/ECB opinions in this area adopted between May 1995 and March 2008. Other formative ECB opinions in this area are: CON/2008/46; CON/2008/80; CON/2009/59 and CON/2010/4. 29 ECB Convergence Report June 2014 2 FRAMEWORK FOR State’s financial commitments to international financial institutions (other than the IMF in the ANALYSIS capacities foreseen in Regulation (EC) No 3603/9331) or to third countries is incompatible with the monetary financing prohibition. FINANCING OF THE PUBLIC SECTOR OR OF PUBLIC SECTOR OBLIGATIONS TO THIRD PARTIES National legislation may not require an NCB to finance either the performance of functions by other public sector bodies or the public sector’s obligations vis-à-vis third parties. For example, national laws authorising or requiring an NCB to finance judicial or quasi-judicial bodies that are independent of the NCB and operate as an extension of the state are incompatible with the monetary financing prohibition. If an NCB is to be entrusted with a new task, that is not a central banking task, it needs to be adequately remunerated.32 Moreover, in line with the prohibition on monetary financing, an NCB may not finance any resolution fund or deposit guarantee scheme.33 No bridge financing may be provided by an NCB to enable a Member State to honour its obligations in respect of State guarantees of bank liabilities.34 However, the provision of resources by an NCB to a supervisory authority does not give rise to monetary financing concerns insofar as the NCB will be financing the performance of a legitimate financial supervisory task under national law as part of its mandate, or as long as the NCB can contribute to and have influence on the decision-making of the supervisory authorities.35 Also, the distribution of central bank profits which have not been fully realised, accounted for and audited does not comply with the monetary financing prohibition. To comply with the monetary financing prohibition, the amount distributed to the State budget pursuant to the applicable profit distribution rules cannot be paid, even partially, from the NCB’s reserve capital. Therefore, profit distribution rules should leave unaffected the NCB’s reserve capital. Moreover, when NCB assets are transferred to the State, they must be remunerated at market value and the transfer should take place at the same time as the remuneration.36 Similarly, intervention in the performance of other Eurosystem tasks, such as the management of foreign reserves, by introducing taxation of theoretical and unrealised capital gains is not permitted.37 ASSUMPTION OF PUBLIC SECTOR LIABILITIES National legislation which requires an NCB to take over the liabilities of a previously independent public body, as a result of a national reorganisation of certain tasks and duties (for example, in the context of a transfer to the NCB of certain supervisory tasks previously carried out by the state or independent public authorities or bodies), without fully insulating the NCB from all financial obligations resulting from the prior activities of such a body, would be incompatible with the monetary financing prohibition.38 FINANCIAL SUPPORT FOR CREDIT AND/OR FINANCIAL INSTITUTIONS National legislation which provides for financing by an NCB, granted independently and at their full discretion, of credit institutions other than in connection with central banking tasks (such as monetary policy, payment systems or temporary liquidity support operations), in particular the 31 Opinion CON/2013/16. 32 Opinion CON/2013/29. 33 Opinions CON/2011/103 and CON/2012/22. See also section entitled ‘Financial support for deposit insurance and investor compensation schemes’ for some specific cases. 34 Opinion CON/2012/4. 35 Opinion CON/2010/4. 36 Opinions CON/2011/91 and CON/2011/99. 37 Opinion CON/2009/63. 38 Opinion CON/2013/56. 30 ECB Convergence Report June 2014 support of insolvent credit and/or other financial institutions, would be incompatible with the monetary financing prohibition. This applies, in particular, to the support of insolvent credit institutions. The rationale is that by financing an insolvent credit institution, an NCB would be assuming a State task.39 The same concerns apply to the Eurosystem financing of a credit institution which has been recapitalised to restore its solvency by way of a direct placement of state-issued debt instruments where no alternative market-based funding sources exist (hereinafter ‘recapitalisation bonds’), and where such bonds are to be used as collateral. In such case of a state recapitalisation of a credit institution by way of direct placement of recapitalisation bonds, the subsequent use of the recapitalisation bonds as collateral in central bank liquidity operations raises monetary financing concerns.40 Emergency liquidity assistance, granted by an NCB independently and at its full discretion to a solvent credit institution on the basis of collateral security in the form of a State guarantee, has to meet the following criteria: (i) it must be ensured that the credit provided by the NCB is as short term as possible; (ii) there must be systemic stability aspects at stake; (iii) there must be no doubts as to the legal validity and enforceability of the State guarantee under applicable national law; and (iv) there must be no doubts as to the economic adequacy of the State guarantee, which should cover both principal and interest on the loans.41 To this end, inserting references to Article 123 of the Treaty in national legislation should be considered. FINANCIAL SUPPORT FOR DEPOSIT INSURANCE AND INVESTOR COMPENSATION SCHEMES The Deposit Guarantee Schemes Directive42 and the Investor Compensation Schemes Directive43 provide that the costs of financing deposit guarantee schemes and investor compensation schemes must be borne, respectively, by credit institutions and investment firms themselves. National legislation which provides for the financing by an NCB of a national deposit insurance scheme for credit institutions or a national investor compensation scheme for investment firms would be compatible with the monetary financing prohibition only if it were short term, addressed urgent situations, systemic stability aspects were at stake, and decisions were at the NCB’s discretion. To this end, inserting references to Article 123 of the Treaty in national legislation should be considered. When exercising its discretion to grant a loan, the NCB must ensure that it is not de facto taking over a State task.44 In particular, central bank support for deposit guarantee schemes should not amount to a systematic pre-funding operation.45 In line with the prohibition of monetary financing, an NCB may not finance any resolution fund. Where an NCB acts as resolution authority, it should in no event assume or finance any obligation of either a bridge institution or an asset management vehicle.46 39 Opinion CON/2013/5. 40 Opinions CON/2012/50, CON/2012/64, and CON/2012/71. 41 Opinion CON/2012/4, footnote 42 referring to further relevant Opinions in this field. 42 Recital 23 of Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes (OJ L 135, 31.5.1994, p. 5). 43 Recital 23 of Directive 97/9/EC of the European Parliament and of the Council of 3 March 1997 on investor-compensation schemes (OJ L 84, 26.3.1997, p. 22). 44 Opinion CON/2011/83. 45 Opinion CON/2011/84. 46 Opinions CON/2011/103 and CON/2012/99. 31 ECB Convergence Report June 2014 2 FRAMEWORK FOR FISCAL AGENCY FUNCTION ANALYSIS Article 21.2 of the Statute establishes that the ‘ECB and the national central banks may act as fiscal agents’ for ‘Union institutions, bodies, offices or agencies, central governments, regional local or other public authorities, other bodies governed by public law, or public undertakings of Member States.’ The purpose of Article 21.2 of the Statute is, following transfer of the monetary policy competence to the Eurosystem, to enable NCBs to continue to provide the fiscal agent service traditionally provided by central banks to governments and other public entities without automatically breaching the monetary financing prohibition. Regulation (EC) No 3603/93 establishes a number of explicit and narrowly drafted exemptions from the monetary financing prohibition relating to the fiscal agency function, as follows (i) intra-day credits to the public sector are permitted provided that they remain limited to the day and that no extension is possible;47 (ii) crediting the public sector’s account with cheques issued by third parties before the drawee bank has been debited is permitted if a fixed period of time corresponding to the normal period for the collection of cheques by the NCB concerned has elapsed since receipt of the cheque, provided that any float which may arise is exceptional, is of a small amount and averages out in the short term;48 and (iii) the holding of coins issued by and credited to the public sector is permitted where the amount of such assets remains at less than 10 % of coins in circulation.49 National legislation on the fiscal agency function should be compatible with EU law in general, and with the monetary financing prohibition in particular.50 Taking into account the express recognition in Article 21.2 of the Statute of the provision of fiscal agency services as a legitimate function traditionally performed by NCBs, the provision by central banks of fiscal agency services complies with the prohibition on monetary financing, provided that such services remain within the field of the fiscal agency function and do not constitute central bank financing of public sector obligations vis-à-vis third parties or central bank crediting of the public sector outside the narrowly defined exceptions specified in Regulation (EC) No 3603/93.51 National legislation that enables an NCB to hold government deposits and to service government accounts does not raise concerns about compliance with the monetary financing prohibition as long as such provisions do not enable the extension of credit, including overnight overdrafts. However, there would be a concern about compliance with the monetary financing prohibition if, for example, national legislation were to enable the remuneration of deposits or current account balances above, rather than at or below, market rates. Remuneration that is above market rates constitutes a de facto credit, contrary to the objective of the prohibition on monetary financing, and might therefore undermine the prohibition’s objectives. It is essential for any remuneration of an account to reflect market parameters and it is particularly important to correlate the remuneration rate of the deposits with their maturity.52 Moreover, the provision without remuneration by an NCB of fiscal agent services does not raise monetary financing concerns, provided they are core fiscal agent services.53 2.2.5.2 PROHIBITION ON PRIVILEGED ACCESS Article 124 of the Treaty provides that ‘[a]ny measure, not based on prudential considerations, establishing privileged access by Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States to financial institutions, shall be prohibited.’ 47 See Article 4 of Regulation (EC) No 3603/93 and Opinion CON/2013/2. 48 See Article 5 of Regulation (EC) No 3603/93. 49 See Article 6 of Regulation (EC) No 3603/93. 50 Opinion CON/2013/3. 51 Opinions CON/2009/23, CON/2009/67 and CON/2012/9. 52 See, among others, Opinions CON/2010/54, CON/2010/55 and CON/2013/62. 53 Opinion CON/2012/9. 32 ECB Convergence Report June 2014 Under Article 1(1) of Council Regulation (EC) No 3604/93,54 privileged access is understood as any law, regulation or other binding legal instrument adopted in the exercise of public authority which: (a) obliges financial institutions to acquire or to hold liabilities of EU institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law or public undertakings of Member States (hereinafter the ‘public sector’), or (b) confers tax advantages that only benefit financial institutions or financial advantages that do not comply with the principles of a market economy, in order to encourage those institutions to acquire or hold such liabilities. As public authorities, NCBs may not take measures granting privileged access to financial institutions by the public sector if such measures are not based on prudential considerations. Furthermore, the rules on the mobilisation or pledging of debt instruments enacted by the NCBs must not be used as a means of circumventing the prohibition on privileged access.55 Member States’ legislation in this area may not establish such privileged access. Article 2 of Regulation (EC) No 3604/93 defines ‘prudential considerations’ as those which underlie national laws, regulations or administrative actions based on, or consistent with, EU law and designed to promote the soundness of financial institutions so as to strengthen the stability of the financial system as a whole and the protection of the customers of those institutions. Prudential considerations seek to ensure that banks remain solvent with regard to their depositors.56 In the area of prudential supervision, EU secondary legislation has established a number of requirements to ensure the soundness of credit institutions.57 A ‘credit institution’ has been defined as an undertaking whose business is to receive deposits or other repayable funds from the public and to grant credits for its own account.58 Additionally, credit institutions are commonly referred to as ‘banks’ and require an authorisation by a competent Member State authority to provide services.59 Although minimum reserves might be seen as a part of prudential requirements, they are usually part of an NCB’s operational framework and used as a monetary policy tool in most economies, including in the euro area.60 In this respect, Section 1.3.3. of Annex I to Guideline ECB/2011/1461 states that the Eurosystem’s minimum reserve system primarily pursues the monetary policy functions of stabilising the money market interest rates and creating or enlarging a structural liquidity shortage.62 The ECB requires credit institutions established in the euro area to hold the required minimum reserves (in the form of deposits) on account with their NCB.63 54 Council Regulation (EC) No 3604/93 of 13 December 1993 specifying definitions for the application of the prohibition of privileged access referred to in Article 104a of the Treaty [establishing the European Community] (OJ L 332, 31.12.1993, p. 4). Article 104a is now Article 124 of the Treaty. 55 See Article 3(2) of and recital 10 of Regulation (EC) No 3604/93. 56 Opinion of Advocate General Elmer in Case C-222/95 Parodi v Banque H. Albert de Bary [1997] ECR I-3899, paragraph 24. 57 See: (i) Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176, 27.06.2013, p. 1); and (ii) Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.06.2013, p. 338). 58 See point (1) of Article 4(1) of Regulation (EU) No 575/2013. 59 See Article 8 of Directive 2013/36/EU. 60 This is supported by Article 3(2) and recital 9 of Regulation (EC) No 3604/93. 61 Guideline of the European Central Bank of 20 September 2011 on monetary policy instruments and procedures of the Eurosystem (ECB/2011/14) (OJ L 331, 14.12.2011, p. 1). 62 The higher the reserve requirement is set, the less funds banks will have to loan out, leading to lower money creation. 63 See: Article 19 of the Statute; Council Regulation (EC) No 2531/98 of 23 November 1998 concerning the application of minimum reserves by the European Central Bank (OJ L 318, 27.11.1998, p. 1); Regulation (EC) No 1745/2003 of the European Central Bank of 12 September 2003 on the application of minimum reserves (ECB/2003/9) (OJ L 250, 2.10.2003, p. 10); and Regulation ECB/2008/32 of 19 December 2008 concerning the balance sheet of the monetary financial institutions sector (OJ L 15, 20.1.2009, p. 14). 33 ECB Convergence Report June 2014 2 FRAMEWORK FOR This report focuses on the compatibility both of national legislation or rules adopted by NCBs ANALYSIS and of the NCBs’ statutes with the Treaty prohibition on privileged access. However, this report is without prejudice to an assessment of whether laws, regulations, rules or administrative acts in Member States are used under the cover of prudential considerations as a means of circumventing the prohibition on privileged access. Such an assessment is beyond the scope of this report. 2.2.6 SINGLE SPELLING OF THE EURO Article 3(4) of the Treaty on European Union lays down that the ‘Union shall establish an economic and monetary union whose currency is the euro’. In the texts of the Treaties in all the authentic languages written using the Roman alphabet, the euro is consistently identified in the nominative singular case as ‘euro’. In the Greek alphabet text, the euro is spelled ‘ευρώ’ and in the Cyrillic alphabet text the euro is spelled ‘евро’.64 Consistent with this, Council Regulation (EC) No 974/98 of 3 May 1998 on the introduction of the euro65 makes it clear that the name of the single currency must be the same in all the official languages of the EU, taking into account the existence of different alphabets. The Treaties thus require a single spelling of the word ‘euro’ in the nominative singular case in all EU and national legislative provisions, taking into account the existence of different alphabets. In view of the exclusive competence of the EU to determine the name of the single currency, any deviations from this rule are incompatible with the Treaties and should be eliminated. While this principle applies to all types of national legislation, the assessment in the country chapters focuses on the NCBs’ statutes and the euro changeover laws. 2.2.7 LEGAL INTEGRATION OF NCBS INTO THE EUROSYSTEM Provisions in national legislation (in particular an NCB’s statutes, but also other legislation) which would prevent the performance of Eurosystem-related tasks or compliance with the ECB’s decisions are incompatible with the effective operation of the Eurosystem once the Member State concerned has adopted the euro. National legislation therefore has to be adapted to ensure compatibility with the Treaty and the Statute in respect of Eurosystem-related tasks. To comply with Article 131 of the Treaty, national legislation had to be adjusted to ensure its compatibility by the date of establishment of the ESCB (as regards Sweden) and by 1 May 2004, 1 January 2007 and 1 July 2013 (as regards the Member States which joined the EU on these dates). Nevertheless, statutory requirements relating to the full legal integration of an NCB into the Eurosystem need only enter into force at the moment that full integration becomes effective, i.e. the date on which the Member State with a derogation adopts the euro. The main areas examined in this report are those in which statutory provisions may hinder an NCB’s compliance with the Eurosystem’s requirements. These include provisions that could prevent the NCB from taking part in implementing the single monetary policy, as defined by the ECB’s decision-making bodies, or hinder a Governor from fulfilling their duties as a member of the ECB’s Governing Council, or which do not respect the ECB’s prerogatives. Distinctions are 64 The ‘Declaration by the Republic of Latvia, the Republic of Hungary and the Republic of Malta on the spelling of the name of the single currency in the Treaties’, annexed to the Treaties, states that; ‘Without prejudice to the unified spelling of the name of the single currency of the European Union referred to in the Treaties as displayed on banknotes and on coins, Latvia, Hungary and Malta declare that the spelling of the name of the single currency, including its derivatives as applied throughout the Latvian, Hungarian and Maltese text of the Treaties, has no effect on the existing rules of the Latvian, Hungarian or Maltese languages’. 65 OJ L 139, 11.5.1998, p. 1. 34 ECB Convergence Report June 2014 made between economic policy objectives, tasks, financial provisions, exchange rate policy and international cooperation. Finally, other areas where an NCB’s statutes may need to be adapted are mentioned. 2.2.7.1 ECONOMIC POLICY OBJECTIVES The full integration of an NCB into the Eurosystem requires its statutory objectives to be compatible with the ESCB’s objectives, as laid down in Article 2 of the Statute. Among other things, this means that statutory objectives with a ‘national flavour’ – for example, where statutory provisions refer to an obligation to conduct monetary policy within the framework of the general economic policy of the Member State concerned – need to be adapted. Furthermore, an NCB’s secondary objectives must be consistent and not interfere with its obligation to support the general economic policies in the EU with a view to contributing to the achievement of the objectives of the EU as laid down in Article 3 of the Treaty on European Union, which is itself an objective expressed to be without prejudice to maintaining price stability.66 2.2.7.2 TASKS The tasks of an NCB of a Member State whose currency is the euro are predominantly determined by the Treaty and the Statute, given that NCB’s status as an integral part of the Eurosystem. In order to comply with Article 131 of the Treaty, provisions on tasks in an NCB’s statutes therefore need to be compared with the relevant provisions of the Treaty and the Statute, and any incompatibility must be removed.67 This applies to any provision that, after adoption of the euro and integration into the Eurosystem, constitutes an impediment to carrying out ESCB-related tasks and in particular to provisions which do not respect the ESCB’s powers under Chapter IV of the Statute. Any national legislative provisions relating to monetary policy must recognise that the EU’s monetary policy is to be carried out through the Eurosystem.68 An NCB’s statutes may contain provisions on monetary policy instruments. Such provisions should be comparable to those in the Treaty and the Statute, and any incompatibility must be removed in order to comply with Article 131 of the Treaty. Monitoring fiscal developments is a task that an NCB carries out on a regular basis to assess properly the stance to be taken in monetary policy. NCBs may also present their views on relevant fiscal developments on the basis of their monitoring activity and the independence of their advice, with a view to contributing to the proper functioning of the European Monetary Union. The monitoring of fiscal developments by an NCB for monetary policy purposes should be based on the full access to all relevant public finance data. Accordingly, the NCBs should be granted unconditional, timely and automatic access to all relevant public finance statistics. However, an NCB’s role should not go beyond monitoring activities that result from or are linked – directly or indirectly – to the discharge of their monetary policy mandate.69 A formal mandate for an NCB to assess forecasts and fiscal developments implies a function for the NCB in (and a corresponding responsibility for) fiscal policymaking which may risk undermining the discharge of the Eurosystem’s monetary policy mandate and the NCB’s independence.70 66 Opinions CON/2010/30 and CON/2010/48. 67 See, in particular, Articles 127 and 128 of the Treaty and Articles 3 to 6 and 16 of the Statute. 68 First indent of Article 127(2) of the Treaty. 69 Opinion CON/2012/105. 70 For example, national legislative provisions transposing Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the Member States (OJ L 306, 23.11.2011, p. 41). See Opinions CON/2013/90 and CON/2013/91. 35 ECB Convergence Report June 2014 2 FRAMEWORK FOR In the context of the national legislative initiatives to address the turmoil in the financial markets, ANALYSIS the ECB has emphasised that any distortion in the national segments of the euro area money market should be avoided, as this may impair the implementation of the single monetary policy. In particular, this applies to the extension of State guarantees to cover interbank deposits.71 Member States must ensure that national legislative measures addressing liquidity problems of businesses or professionals, for example their debts to financial institutions, do not have a negative impact on market liquidity. In particular, such measures may not be inconsistent with the principle of an open market economy, as reflected in Article 3 of the Treaty on European Union, as this could hinder the flow of credit, materially influence the stability of financial institutions and markets and therefore affect the performance of Eurosystem tasks.72 National legislative provisions assigning the exclusive right to issue banknotes to the NCB must recognise that, once the euro is adopted, the ECB’s Governing Council has the exclusive right to authorise the issue of euro banknotes, pursuant to Article 128(1) of the Treaty and Article 16 of the Statute, while the right to issue euro banknotes belongs to the ECB and the NCBs. National legislative provisions enabling the government to influence issues such as the denominations, production, volume or withdrawal of euro banknotes must also either be repealed or recognition must be given to the ECB’s powers with regard to euro banknotes, as set out in the provisions of the Treaty and the Statute. Irrespective of the division of responsibilities in relation to coins between governments and NCBs, the relevant provisions must recognise the ECB’s power to approve the volume of issue of euro coins once the euro is adopted. A Member State may not consider currency in circulation as its NCB’s debt to the government of that Member State, as this would defeat the concept of a single currency and be incompatible with the requirements of Eurosystem legal integration.73 With regard to foreign reserve management,74 any Member State that has adopted the euro and which does not transfer its official foreign reserves75 to its NCB is in breach of the Treaty. In addition, any right of a third party – for example, the government or parliament – to influence an NCB’s decisions with regard to the management of the official foreign reserves would be inconsistent with the third indent of Article 127(2) of the Treaty. Furthermore, NCBs have to provide the ECB with foreign reserve assets in proportion to their shares in the ECB’s subscribed capital. This means that there must be no legal obstacles to NCBs transferring foreign reserve assets to the ECB. With regard to statistics, although regulations adopted under Article 34.1 of the Statute in the field of statistics do not confer any rights or impose any obligations on Member States that have not adopted the euro, Article 5 of the Statute, which concerns the collection of statistical information, applies to all Member States, regardless of whether they have adopted the euro. Accordingly, Member States whose currency is not the euro are under an obligation to design and implement, at national level, all measures they consider appropriate to collect the statistical information needed to fulfil the ECB’s statistical reporting requirements and to make timely preparations in the field of statistics in order for them to become Member States whose currency is the euro.76 71 Opinions CON/2009/99 and CON/2011/79. 72 Opinion CON/2010/8. 73 Opinion CON/2008/34. 74 Third indent of Article 127(2) of the Treaty. 75 With the exception of foreign-exchange working balances, which Member State governments may retain pursuant to Article 127(3) of the Treaty. 76 Opinion CON/2013/88. 36 ECB Convergence Report June 2014 2.2.7.3 FINANCIAL PROVISIONS The financial provisions in the Statute comprise rules on financial accounts,77 auditing,78 capital subscription,79 the transfer of foreign reserve assets80 and the allocation of monetary income.81 NCBs must be able to comply with their obligations under these provisions and therefore any incompatible national provisions must be repealed. 2.2.7.4 EXCHANGE RATE POLICY A Member State with a derogation may retain national legislation which provides that the government is responsible for the exchange rate policy of that Member State, with a consultative and/or executive role being granted to the NCB. However, by the time that a Member State adopts the euro, such legislation must reflect the fact that responsibility for the euro area’s exchange rate policy has been transferred to the EU level in accordance with Articles 138 and 219 of the Treaty. 2.2.7.5 INTERNATIONAL COOPERATION For the adoption of the euro, national legislation must be compatible with Article 6.1 of the Statute, which provides that in the field of international cooperation involving the tasks entrusted to the Eurosystem, the ECB decides how the ESCB is represented. National legislation allowing an NCB to participate in international monetary institutions must make such participation subject to the ECB’s approval (Article 6.2 of the Statute). 2.2.7.6 MISCELLANEOUS In addition to the above issues, in the case of certain Member States there are other areas where national provisions need to be adapted (for example in the area of clearing and payment systems and the exchange of information).

4.7 ROMANIA Over the reference period from May 2013 to April 2014, the 12-month average rate of HICP inflation in Romania was 2.1%, i.e. above the reference value of 1.7% for the criterion on price stability. Looking back over a longer period, the average annual rate of HICP inflation in Romania decreased from very high levels in the early 2000s up to 2007, when the downward trend was reversed. In 2009 inflation fell again and broadly stabilised thereafter at an elevated level, before declining to historically low levels of 3.4% and 3.2% in 2012 and 2013 respectively. In addition to unit labour costs, a succession of major supply-side shocks (including a VAT rate hike in 2010), adjustments in administered prices and excise duties and exchange rate developments played a major role in driving inflation developments. Inflation dynamics over the past ten years should be viewed against a background of overheating in the economy from 2004 to 2008, which was followed by a sharp contraction in economic activity in 2009 and 2010, and a moderate recovery from 2011 to 2013. During the period 2004-08 unemployment declined and wage growth significantly outpaced productivity growth, which in turn drove up unit labour cost growth to double-digit levels. As unemployment picked up again and wage growth moderated significantly, unit labour cost growth fell from 22.9% in 2008 to 2.5% in 2013. Looking at recent developments, annual HICP inflation broadly followed a downward path from its peak of 5.4% in September 2012 to 1.1% in September 2013, before picking up somewhat to 1.6% in April 2014 following an increase in excise duties on fuel. The overall marked decline is attributable to a reduction in the value added tax rate on flour and bakery products in September 2013, easing pressures from energy and food prices on the back of global price developments, a very good harvest, downward base effects, the disinflation pressures exerted by the negative output gap and falling inflation expectations. The latest available forecasts from major international institutions project average annual inflation to rise gradually from historically low levels and to range from 2.2% to 2.5% in 2014 and from 3.0% to 3.3% in 2015. While the immediate risks to the inflation outlook are broadly balanced, upside risks prevail in the medium term. They relate to a stronger than expected rise in global commodity prices and depreciation pressures on the leu resulting from renewed tensions in global financial markets. Risks from domestic sources are associated with the impact of further deregulation of energy prices and hikes in excise duties as well as persistent uncertainty regarding progress made on implementing the structural reform measures agreed in the context of the precautionary financial assistance programme. Moreover, there are risks stemming from possible fiscal slippages in the context of the presidential elections scheduled for December 2014. Weaker than expected economic activity constitutes a downside risk to the inflation outlook. Looking further ahead, the catching-up process is likely to have a bearing on inflation and/or the nominal exchange rate over the coming years, given that GDP per capita and price levels are still significantly lower in Romania than in the euro area. However, it is difficult to assess the exact magnitude of the effect resulting from this catching-up process. Romania is not currently subject to an EU Council decision on the existence of an excessive deficit. In the reference year 2013 the general government budget balance recorded a deficit of 2.3% of GDP, i.e. below the 3% reference value. The general government gross debt-to-GDP ratio was 38.4%, i.e. well below the 60% reference value. In 2014 the deficit ratio is forecast by the European Commission to decline marginally to 2.2% and the government debt ratio to increase to 39.9%. With regard to other fiscal factors, the deficit ratio did not exceed the ratio of public investment to GDP in 2013. Importantly, Romania must ensure that sufficient progress is made towards meeting its medium-term objective (a structural deficit of 1% of GDP), as well as fulfilling 64 ECB Convergence Report June 2014 the commitments agreed on in the context of the EU-IMF financial assistance programme. It also needs to address a number of fiscal challenges, as described in Chapter 5. Over the two-year reference period the Romanian leu did not participate in ERM II, but traded under a flexible exchange rate regime involving a managed floating of the currency. The exchange rate of the Romanian leu against the euro showed a relatively high degree of volatility. Following a slight appreciation of the Romanian leu up to May 2013, the currency weakened during a period of increased volatility in mid-2013. Thereafter the leu strengthened again somewhat, stabilising around its average level at the beginning of the reference period. Over the entire reference period short-term interest rate differentials against the three-month EURIBOR remained, on average, at a high level, although declining gradually amid interest rate cuts by Banca Națională a României in an environment of decreasing inflation differentials vis-à-vis the euro area. In 2009 an international financial assistance package led by the EU and the IMF was agreed for Romania, which was followed by a precautionary financial assistance programme in 2011 and a successor programme in 2013. During the reference period Romania did not draw on the resources of the precautionary arrangements. As these agreements helped to reduce financial vulnerabilities, they might also have contributed to reducing exchange rate pressures over the reference period. In a longer-term context, in April 2014 both the real effective exchange rate and the real bilateral exchange rate of the Romanian leu against the euro stood relatively close to the corresponding ten-year historical averages. As regards other external developments, Romania’s current and capital account has adjusted substantially in recent years. After reporting a progressive increase in the external deficit between 2004 and 2007, the combined current and capital account deficit adjusted in 2009, improving further to 3.0% of GDP in 2012 and turning into a surplus of 1.2% of GDP in 2013. At the same time, the country’s net international investment position deteriorated substantially from -26.4% of GDP in 2004 to -67.5% in 2012, but improved to -62.3% in 2013. Fiscal and structural policies therefore continue to be important for supporting external sustainability and the competitiveness of the economy. Long-term interest rates were 5.3% on average over the reference period from May 2013 to April 2014 and were thus below the 6.2% reference value for the interest rate convergence criterion. In previous years, long-term interest rates in Romania had tended to fluctuate around 7%, within a margin of ±0.5 percentage point, with stubborn inflation dynamics preventing a sustained downward trend in nominal interest rates. More recently, inflation has declined sharply, allowing the central bank to ease policy rates more rapidly than before. This has contributed to the narrowing of the long-term interest rate differential between Romania and the euro area average. At the end of the reference period, the long-term interest rate stood at 5.2%, 2.8 percentage points above the euro area average (and 3.5 percentage points above the AAA euro area yield). Achieving an environment that is conducive to sustainable convergence in Romania requires, among other things, the conduct of economic policies which are geared towards ensuring overall macroeconomic stability, including sustainable price stability. Regarding macroeconomic imbalances, the country is subject to surveillance under a macroeconomic adjustment programme supported by financial assistance. Romania needs to deal with a wide range of economic policy challenges that are described in more detail in Chapter 5. Romanian law does not comply with all the requirements for central bank independence, the monetary financing prohibition and legal integration into the Eurosystem. Romania is an EU Member State with a derogation and must therefore comply with all adaptation requirements under Article 131 of the Treaty.

5.7 ROMANIA 5.7.1 PRICE DEVELOPMENTS Over the reference period from May 2013 to April 2014, the 12-month average rate of HICP inflation in Romania was 2.1%, i.e. above the reference value of 1.7% for the criterion on price stability (see Table 1). On the basis of the most recent information, the 12-month average rate of HICP inflation is expected to increase in the coming months. Looking back over a longer period, the average annual rate of HICP inflation in Romania decreased from very high levels in the early 2000s up to 2007, when the downward trend was reversed. In 2009 inflation fell again and broadly stabilised at an elevated level, before declining to historically low levels in 2012 and 2013 (see Chart 1). More specifically, annual HICP inflation declined from 11.9% in 2004 to 4.9% in 2007, before picking up to 7.9% in 2008, owing to the combined effects of supply-side shocks and demand pressures. In 2009 inflation once again fell somewhat, reflecting lower commodity prices and the contraction in economic activity, which more than offset the impact of a significant depreciation of the leu. From 2009 to 2011 average annual HICP inflation ranged between 5.6% and 6.1%, mirroring closely the developments in energy and food prices, which together represented roughly 50% of Romania’s HICP basket of goods and services, as well as increases in excise duties in 2009-10 and in the value added tax (VAT) rate in 2010. In 2012 and 2013 it fell to 3.4% and 3.2% respectively owing to weak domestic demand, a good harvest in 2013 and a reduction in the VAT rate on flour and bakery products in September 2013. These inflation developments took place against the background of a number of important policy choices, most notably the orientation of monetary policy towards the achievement of price stability, as enshrined in the central bank law. In 2005 Banca Națională a României shifted to an inflationtargeting framework combined with a managed floating exchange rate regime. The annual CPI inflation target was initially set at 7.5% and was reduced gradually to stand at 3.5% in 2009 and 2010, 3.0% in 2011 and 2012, and 2.5% from 2013 onwards, with a 1 percentage point variation band around the central target. Following a certain amount of fiscal consolidation between 2002 and 2005, the fiscal deficit started to rise again as of 2006 and recorded sharp increases in 2008 and 2009. However, from 2010 the Romanian government implemented more forcefully the fiscal consolidation measures agreed in the context of the three EU-IMF financial assistance programmes. The current two-year precautionary financial assistance programme was approved at the end of September 2013. Inflation dynamics over the past ten years should be viewed against a background of overheating in the economy from 2004 to 2008, which was followed by a sharp contraction in economic activity in 2009 and 2010, and a moderate recovery from 2011 to 2013 (see Table 2). Labour market conditions reflected economic developments, although the impact of the business cycle on unemployment was more muted. During the period 2004-08 unemployment declined and wage growth significantly outpaced productivity growth, which in turn drove up unit labour cost growth to double-digit levels. Thereafter, the unemployment rate picked up again, from 5.8% in 2008 to 7.3% in 2013. Wage growth peaked at 31.9% in 2008. Following three years of wage cuts from 2009 to 2011, including a 25% cut in public sector wages in 2010, compensation per employee rose again thereafter, with average annual growth rates of 3.6% in 2012 and 6.2% in 2013. At the same time unit labour cost growth fell from 22.9% in 2008 to 2.5% in 2013. After three years of low, and in some cases negative, annual rates of change in unit labour costs from 2009 to 2011, unit labour cost growth picked up to 4.4% in 2012, owing to a 0.8% fall in labour productivity growth. 180 ECB Convergence Report June 2014 As labour productivity growth went up to 3.7% in 2013, unit labour cost growth decreased again to 2.5%. These developments are attributable, inter alia, to a reduction in public sector employment, a full restoration of public sector wages and large increases in minimum wages. In addition, there is uncertainty surrounding the quality of private sector wage data, particularly given the scale of the informal economy. House prices continued to decline from their peak in 2007, falling by a total of more than 60% up to 2013, with the dynamics of the house price declines having significantly decelerated in recent years. Overall, import prices remained rather volatile during the period under review, mainly reflecting developments in commodity prices and the volatility of the effective exchange rate (EER). Looking at recent developments, annual HICP inflation broadly followed a downward path from its peak of 5.4% in September 2012 to 1.1% in September 2013, before picking up somewhat to 1.6% in April 2014 (see Table 3a) following an increase in excise duties on fuel. The overall marked decline is attributable to a reduction in the VAT rate on flour and bakery products, easing pressures from energy and food prices on the back of global price developments, a very good harvest, downward base effects and the disinflation pressures exerted by the negative output gap and falling inflation expectations. From 2011 HICP inflation excluding unprocessed food and energy decelerated more strongly than overall inflation. This partly reflects moderate increases in administered prices, which account for 14% of Romania’s HICP basket of goods and services, following the ongoing deregulation of prices for electricity and natural gas in the context of the EU-IMF precautionary financial assistance programme. The EER of the leu depreciated from mid-2011 to the end of 2012, thus adding to import price inflation. However, from 2013 the situation reversed, with the import price deflator once more slipping into negative territory. Recent inflation developments should be viewed in the light of sluggish domestic demand, despite a clearly improved macroeconomic outlook. Supported by strong increases in exports (including to outside the EU) and a good harvest, real GDP grew by 3.5%, on average, in 2013, after a very moderate 0.6% in 2012. The sharp decline in the inflation rate – temporarily even to levels below the lower side of the targeting band – and a favourable inflation outlook enabled Banca Națională a României to cut key interest rates by a total of 175 basis points between July 2013 and February 2014 to a record low of 3.5%. The latest available forecasts from major international institutions project average annual inflation to rise gradually from historically low levels and to range from 2.2% to 2.5% in 2014 and from 3.0% to 3.3% in 2015 (see Table 3b). Inflationary pressures in Romania are expected to remain contained, given the weakness in domestic demand and the fragile international environment, which should also contribute to moderate wage increases in the private sector. Annual HICP inflation is expected to fall further in the coming months, owing to downward base effects, a persistently negative output gap and low food prices. Following an increase of excise duties on fuel, inflation is projected to pick up again as of April 2014 towards the upper side of the targeting band, as the favourable effects of measures such as the VAT cut in September 2013 are expected to wane. Thereafter, inflation is expected to stabilise within the inflation targeting band. While the immediate risks to the inflation outlook are broadly balanced, upside risks prevail in the medium term. They relate to a stronger than expected rise in global commodity prices and depreciation pressures on the leu resulting from renewed tensions in global financial markets. Risks from domestic sources are associated with the impact of further deregulation of energy prices and hikes in excise duties, as well as persistent uncertainty regarding the progress made on implementing the structural reform measures agreed in the context of the precautionary financial assistance programme. Moreover, there are risks stemming from possible fiscal slippages in the context of the presidential elections scheduled for December 2014. Weaker than expected economic activity constitutes a downside risk to the inflation outlook. Looking further ahead, the catching-up process is likely to have a bearing 181 ECB Convergence Report June 2014 ROMANIA on inflation and/or the nominal exchange rate over the coming years, given that GDP per capita and price levels are still significantly lower in Romania than in the euro area (see Table 2). However, it is difficult to assess the exact magnitude of the effect resulting from this catching-up process. Achieving an environment that is conducive to sustainable convergence in Romania requires, among other things, a stability-oriented monetary policy and persistence with structural reforms in line with Romania’s commitments under the EU-IMF financial assistance programmes. Regarding macroeconomic imbalances, the country is subject to surveillance under a macroeconomic adjustment programme supported by financial assistance. Specifically, progress in the areas below will help to achieve an environment that is conducive to sustainable price stability and promote competitiveness and employment growth. With regard to structural reforms, the government should continue with product market reforms to boost investment and competition. The deregulation of energy prices, improvements to the quality of the energy and transportation infrastructure, and the reform of state-owned enterprises should continue as planned. There is also a need for further improvements to the institutional, judicial, regulatory and business environment, including the fight against corruption, which would also help to enhance Romania’s absorption capacity of EU funds. In terms of the competitiveness of the economy, it is essential to enhance labour flexibility and to better align wage growth with productivity gains. Measures aimed at reducing youth and long-term unemployment should be implemented, and training and education improved. Financial sector policies should be geared towards continuing to safeguard financial stability, thereby ensuring a sound contribution to economic growth from the financial sector. In order to minimise the potential risks to financial stability associated with a high proportion of foreign currency loans, it is necessary for Romania to continue to fully apply the recommendation of the ESRB on lending in foreign currencies,18 with which it was considered to be fully compliant in the follow-up report published by the ESRB in November 2013. Close cooperation between home and host country supervisory authorities is important to ensure the effective implementation of these measures. Finally, financial stability could benefit from Romania’s participation in the SSM, which will take up its prudential supervisory tasks in November 2014. 5.7.2 FISCAL DEVELOPMENTS Romania is not currently subject to an EU Council decision on the existence of an excessive deficit. In the reference year 2013 the general government budget balance showed a deficit of 2.3% of GDP, i.e. below the 3% reference value. The general government gross debt-to-GDP ratio was 38.4%, i.e. well below the 60% reference value (see Table 4). The budget balance ratio improved by 0.7 percentage point compared with the previous year, while the public debt ratio increased by 0.4 percentage point. In 2014 the deficit ratio is forecast by the European Commission to decline to 2.2% and the government debt ratio to increase to 39.9%. With regard to other fiscal factors, the deficit ratio did not exceed the ratio of public investment to GDP in 2013, nor is it expected to exceed it in 2014. Looking at developments in Romania’s budgetary position over the period from 2004 to 2013, after standing at 1.2% in 2004 and 2005, the deficit-to-GDP ratio began to rise and recorded sharp increases in 2008 and 2009 (when it reached 9.0% of GDP). This upward trend has been reversed 18 See Recommendation (ESRB/2011/1) of the European Systemic Risk Board of 21 September 2011 on lending in foreign currencies. 182 ECB Convergence Report June 2014 since 2010 (see Table 5 and Chart 2a). As the deficit-to-GDP ratio rose above the 3% of GDP reference value in 2008, the ECOFIN Council decided on 7 July 2009 that an excessive deficit situation existed in Romania and initially set the deadline for correcting it for 2011. This deadline was extended to 2012 following the ECOFIN Council’s recommendation of 12 February 2010. The excessive deficit procedure for Romania was abrogated in June 2013, as the country reached a deficit of 3% of GDP in 2012. European Commission estimates indicate that in 2009 and 2010, when the financial and economic crisis heavily affected public finances, cyclical factors had a negative, albeit declining, impact on the budget balance (see Chart 2b). Non-cyclical factors contributed to an increase in the budget deficit overall from before 2009, but particularly in 2008. This trend has been reversed since 2010, when the Romanian government implemented more forcefully fiscal consolidation measures agreed under the financial assistance programme led by the EU and the IMF. Fiscal consolidation packages included sizeable increases in indirect tax rates and substantial wage cuts in the public sector, as well as in most social transfers, excluding pensions. Moreover, the pace of adjustment in public sector employment was significantly faster than expected. In the absence of any substantial temporary and one-off factors before 2010, the underlying changes in the budget deficit seem to reflect a structural deterioration in Romania’s fiscal position until 2009 and consolidation thereafter. Turning to developments in general government gross debt, the debt-to-GDP ratio increased cumulatively by 19.7 percentage points between 2004 and 2013, particularly between 2009 and 2012 (see Chart 3a and Table 6). Among the factors underlying the annual change in the debt ratio, the primary budget balance started to have a debt-increasing impact from 2006 onwards, reaching a peak in 2009 (see Chart 3b). Similarly, the growth-interest rate differential had a debt-increasing impact between 2009 and 2010, which was a result of deteriorating macroeconomic and financial conditions. In 2013 the slight increase in the general government debt-to-GDP ratio mainly reflected a persistently small primary deficit ratio. As regards Romania’s general government debt structure, the share of government debt with a short-term maturity declined from 16.2% in 2004 to 9.4% in 2006, before increasing to 24.5% in 2010 and then declining again to 6.2% in 2013 (see Table 6). Taking into account the level of the debt ratio, fiscal balances are relatively insensitive to changes in interest rates. The proportion of government debt denominated in foreign currency is high (56.6% in 2013). Given the overall debt level, fiscal balances are also relatively sensitive to changes in exchange rates. During the crisis that hit Romania in 2009, the share of debt with a short-term maturity continued to rise, pointing to an increase in debt-related vulnerabilities, before starting to decline again in 2011. The share of debt denominated in foreign currency remained relatively stable. At the same time, the Romanian government has not incurred contingent liabilities resulting from government interventions to support financial institutions and financial markets during the crisis (see Section 5.9). With regard to other fiscal indicators (see Chart 4 and Table 5), the general government total expenditure-to-GDP ratio increased from 33.6% in 2004 to 35% in 2013. After peaking at 41.1% of GDP in 2009, the expenditure ratio declined between 2010 and 2013, mainly as a result of lower compensation of employees reflecting sizeable wage and employment reductions in the public sector, as well as social benefits other than in kind. Capital spending increased as a ratio of GDP in the review period, but has been declining since 2012. Total government revenue as a share of GDP increased slightly from 32.3% of GDP in 2004 to 32.7% in 2013. After peaking at 35.3% of GDP in 2007, the total revenue-to-GDP ratio declined towards the end of 2008 and in 2009 following the financial and economic crisis. This trend was reversed in 2010, mainly as a result of significant 183 ECB Convergence Report June 2014 ROMANIA indirect tax hikes, which had a positive carry-over effect in 2011. Total government revenue then stabilised at current levels. Looking ahead, Romania’s medium-term fiscal policy strategy, as presented in the 2014 convergence programme (dated April 2014), envisages a decline in the deficit ratio to 2.2% of GDP in 2014. The deficit has to be reduced to 2.2% of GDP in 2014 in accordance with Romania’s commitments under the EU-IMF precautionary financial assistance programme. The new target exceeds the original target of 2.0% of GDP (in both cash and ESA terms) by 0.2 percentage point in order to allow for higher EU co-financing. The convergence programme foresees a gradual reduction of the deficit ratio to 1.1% by 2017. The projected fiscal consolidation for 2014 mainly anticipates measures on the revenue side – such as increases in excise taxes and the property tax – to ensure that deficit targets are reached. The budget law envisages moderate increases in public sector wages and pensions, which are partly contingent on revenue collection. However, fiscal outturns are shrouded in uncertainty in view of the presidential elections scheduled for December 2014. According to the 2014 convergence programme, Romania’s medium-term objective is a deficit of 1% of GDP in structural terms. The 2014 convergence programme projects the mediumterm objective to be reached in 2015. According to the European Commission’s projections, the structural deficit will, however, remain above the medium-term objective in 2015. On 2 March 2012 Romania signed the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG), committing, inter alia, to apply (and include in its national legislation) the fiscal rules specified under Title III, “Fiscal Compact”, as referred to in Box 2 of Chapter 2. As regards fiscal governance, Romania has implemented several reforms over the past few years as part of the EU-IMF financial assistance programmes, including the setting-up of an independent fiscal council, the amendment of the Fiscal Responsibility Law to implement the Treaty on Stability, Coordination and Governance, and a reform of the tax collection agency (ANAF). However, further efforts are necessary to ensure the new institutional fiscal framework functions properly, particularly at local level. The build-up of arrears in public companies needs continued scrutiny, as this may incur upside risk to the government deficit and debt (see Section 5.9). Full compliance with the provisions for an enhanced national governance framework under Council Directive 2011/85/ EU and with the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, as referred to in Box 2 of Chapter 2, should be ensured. Turning to factors that will have an impact on Romania’s public finances over the long term, a steep ageing of the population is expected, as highlighted in Table 8. According to the 2012 projections by the European Commission and the EU’s Economic Policy Committee, starting from a level of 17.6% of GDP in 2010, Romania is likely to experience a significant increase in strictly age-related public expenditure amounting to 6.5 percentage points of GDP in the years to 2060 – above the EU average – in spite of a comprehensive pension reform adopted in 2010.19 Under the EU-IMF financial assistance programme, preparations are being made to reform the health sector. Turning to fiscal challenges, Romania must ensure rapid convergence towards its medium-term objective and fulfil the commitments agreed in the context of the EU-IMF financial assistance programme. This requires the continuation of a prudent expenditure and revenue policy in the 19 European Commission and Economic Policy Committee, “The 2012 Ageing Report: Economic and budgetary projections for the EU-27 Member States (2010-2060)”. 184 ECB Convergence Report June 2014 medium term. Despite some recent progress, Romania should take more determined measures to reduce payment arrears (as defined in ESA 95 terms) of the general consolidated budget and prevent the accumulation of new arrears, in particular in the health sector. On the revenue side, the government should continue its efforts to further improve the absorption rate of EU funds, which could support adjustment in a growth-friendly way. Romania’s fiscal policy strategy should be supported by the rigorous implementation of its revised fiscal framework. At the same time, Romania should make every effort to fully comply with its obligations under the enhanced Stability and Growth Pact. Over the longer run, the risks to medium term fiscal sustainability warrant structural fiscal reforms that focus on avoiding pro-cyclical fiscal policies as well as improving the sustainability of the pension system, tax administration, municipalities’ fiscal responsibility and the overall quality of economic governance. 5.7.3 EXCHANGE RATE DEVELOPMENTS In the two-year reference period from 16 May 2012 to 15 May 2014, the Romanian leu did not participate in ERM II, but traded under a flexible exchange rate regime involving a managed floating of the currency (see Table 9a). Over the reference period the Romanian currency mostly traded around its May 2012 average exchange rate against the euro, which is used as a benchmark for illustrative purposes in the absence of an ERM II central rate. On 15 May 2014 the exchange rate stood at 4.4328 lei per euro, i.e. 0.2% stronger than its average level in May 2012. Over the reference period the maximum upward deviation from this benchmark was 3.1%, while the maximum downward deviation amounted to 4.6% (see Chart 5 and Table 9a). The exchange rate of the Romanian leu against the euro showed a relatively high degree of volatility, as measured by annualised standard deviations in daily percentage changes. During the first half of the reference period between May 2012 and May 2013, the Romanian leu appreciated by about 2.5% on account of improving global financial market conditions, growing investor confidence in the region and a relatively high positive interest rate differential vis-à-vis euro area assets. Thereafter the leu depreciated by about 5% during a period of increased volatility in mid-2013 against the background of investor uncertainty regarding the tapering-off of quantitative easing in the United States. After a gradual normalisation of financial market conditions, the leu strengthened somewhat amid an improving outlook for the Romanian economy and stabilised around its average level at the beginning of the reference period. At the same time short-term interest rate differentials against the three-month EURIBOR remained, on average, at a high level, although declining gradually amid interest rate cuts by Banca Națională a României in an environment of decreasing inflation differentials vis-à-vis the euro area (see Table 9b). In 2009 an international financial assistance package led by the EU and the IMF was agreed for Romania, which was followed in 2011 by a precautionary financial assistance programme by the EU and the IMF, totalling €5 billion. In late 2013 this was replaced by a further precautionary financial assistance programme by the EU and the IMF, totalling €4 billion. During the reference period Romania did not draw on the resources of the precautionary arrangements. As these agreements helped to reduce financial vulnerabilities, they might also have contributed to reducing exchange rate pressures over the reference period. In a longer-term context, in April 2014 both the real effective exchange rate and the real bilateral exchange rate of the Romanian leu against the euro stood relatively close to the corresponding ten-year historical averages (see Table 10). However, these indicators should be interpreted with 185 ECB Convergence Report June 2014 ROMANIA caution, as during this period Romania was subject to a process of economic convergence, which complicates any historical assessment of real exchange rate developments. As regards other external developments, Romania’s current and capital account has adjusted substantially in recent years. After reporting a progressive increase in the external deficit between 2004 and 2007, reaching double-digit levels in the period from 2006 to 2008, the combined current and capital account deficit declined to 3.6% of GDP in 2009, improving further to 3.0% of GDP in 2012 and turning into a surplus of 1.2% of GDP in 2013 (see Table 11). The improvement in the current and capital account balance primarily reflected the sharp decline in the goods deficit, which was mainly driven by strong export performance and moderate domestic demand. The external deficit has been financed mainly by net inflows in direct and portfolio investment. By contrast, net inflows in other investment turned negative in 2012 and 2013. Against this background, gross external debt increased substantially from 34.5% of GDP in 2004 to 77.1% in 2011 and thereafter declined to 75.3% in 2012 and 68.6% in 2013. At the same time the country’s net international investment position deteriorated substantially from -26.4% of GDP in 2004 to -67.5% in 2012, but improved to -62.3% of GDP in 2013. Fiscal and structural policies therefore continue to be important for supporting external sustainability and the competitiveness of the economy. Romania is a small open economy; the ratio of its foreign trade in goods and services to GDP increased from 35.8% in 2004 to 42.4% in 2013 for exports and decreased from 44.8% in 2004 to 42.9% in 2013 for imports. Over the same period Romania’s share in world exports increased from 0.24% to 0.35%. Concerning measures of economic integration with the euro area, in 2013 exports of goods to the euro area constituted 51.1% of total goods exports, whereas the corresponding figure for imports amounted to 53.4%. The share of euro area countries in Romania’s inward direct investment stood at 80.6% in 2013, and their share in its portfolio investment liabilities was 50.7% in 2012. The share of Romania’s assets invested in the euro area amounted to 21.2% in the case of direct investment in 2013 and 64.1% for portfolio investment in 2012 (see Table 12). 5.7.4 LONG-TERM INTEREST RATE DEVELOPMENTS Long-term interest rates in Romania were 5.3% on average over the reference period from May 2013 to April 2014 and were thus below the 6.2% reference value for the interest rate convergence criterion (see Table 13). Long-term interest rates in Romania were broadly stable in a range close to 7% between 2005 and mid-2008 (see Chart 6a).20 From August 2008 long-term interest rates increased against the backdrop of deteriorating economic activity and a pass-through of an upward trend in the monetary policy interest rate. With the onset of tensions in global financial markets, the long-term interest rate increased significantly, reflecting a rise in the country risk premium and liquidity strains in the market. Romania’s vulnerability to significant external and internal imbalances and its poorer economic outlook at the time were further reflected in the downgrade of its sovereign credit rating by some rating agencies to below investment grade level. Long-term interest rates peaked at 11.5% in July 2009. Also in this period, the joint EU-IMF multilateral adjustment programme was approved. Long-term interest rates were subsequently placed on a downward trend, supported by easing inflationary pressures and a decline in the monetary policy rate, and reached a low of 6.7% in early 2011, shortly before the expiration of the multilateral adjustment programme. Romanian 20 Data are available on the reference long-term interest rate for Romania from 2005 onwards. 186 ECB Convergence Report June 2014 authorities then signed a new programme with the EU and IMF, which was treated as precautionary. The improved outlook for the economy, including the soundness of public finances, also led one major credit rating agency to restore the rating of Romania’s sovereign long-term debt to investment grade in mid-2011. This was followed by the successful issuance of a 30-year bond at the beginning of 2014. Since mid-2011, long-term interest rates have been on a broadly declining trend, which accelerated between end-2012 and the first part of 2013 against declining risk premia and stronger investor appetite for Romanian government securities, yet stabilised during the reference period despite some upward pressure in global bond markets amid policy rate cuts implemented by Banca Națională a României in the context of the improved inflation outlook. At the end of the reference period long-term interest rates in Romania stood at 5.2%. The long-term interest rate differential between Romania and the euro area average fluctuated between 2.2 and 4.0 percentage points between 2005 and 2007 (see Chart 6b). Subsequently, it increased in parallel with changes in the inflation differential between Romania and the euro area, peaking at 7.7 percentage points in August 2009. From late 2009, the long-term interest rate differential embarked on a sharp downward trend before stabilising in a range between around 2.0 and 3.5 percentage points, where it has remained since November 2010, albeit increasing slightly since late 2013. The long-term interest rate differential with the euro area average stood at 2.8 percentage points (and 3.5 percentage points with respect to the AAA euro area yield) at the end of the reference period. As regards financial market developments, capital markets in Romania are much smaller and still underdeveloped relative to those of the euro area (see Table 14). By international standards, the corporate bond market is still at an early stage in terms of issuance volume, with the amount of outstanding debt securities issued by corporations (a measure of market-based indebtedness) reaching just 0.3% of GDP at the end of 2013. Stock market capitalisation stood at 11.6% of GDP in 2013, compared with the 17%-18% ratio which Romania typically posted during the 2005-07 period, marked by financial and credit expansion. Bank financing as measured by credit to nongovernment residents, expressed as a ratio to GDP, remains less developed than in peer countries, amounting to 34.8% of GDP at the end of 2013. Foreign-owned banks, primarily from the euro area, play a major role in the Romanian banking sector, with the majority of loans to the private sector denominated in foreign currencies. The international claims of euro area banks in the country are relatively high, at 20.1% of total domestic liabilities in 2013. 187 ECB Convergence Report June 2014 ROMANIA ROMANIA 1 PRICE DEVELOPMENTS Table 1 HICP inflation 188 Chart 1 Price developments 188 Table 2 Measures of inflation and related indicators 188 Table 3 Recent inflation trends and forecasts 189 (a) Recent trends in the HICP 189 (b) Inflation forecasts 189 2 FISCAL DEVELOPMENTS Table 4 General government fiscal position 190 Table 5 General government budgetary position 190 Chart 2 General government surplus (+)/deficit (-) 191 (a) Levels 191 (b) Annual change and underlying factors 191 Table 6 General government gross debt – structural features 191 Chart 3 General government gross debt 192 (a) Levels 192 (b) Annual change and underlying factors 192 Chart 4 General government expenditure and revenue 192 Table 7 General government deficit-debt adjustment 193 Table 8 Projections of the ageing-induced fiscal burden 193 3 EXCHANGE RATE DEVELOPMENTS Table 9 (a) Exchange rate stability 194 (b) Key indicators of exchange rate pressure for the Romanian leu 194 Chart 5 Romanian leu: nominal exchange rate development against the euro 194 (a) Exchange rate over the reference period 194 (b) Exchange rate over the last ten years 194 Table 10 Romanian leu: real exchange rate developments 195 Table 11 External developments 195 Table 12 Indicators of integration with the euro area 195 4 LONG-TERM INTEREST RATE DEVELOPMENTS Table 13 Long-term interest rates (LTIRs) 196 Chart 6 Long-term interest rate (LTIR) 196 (a) Long-term interest rate (LTIR) 196 (b) LTIR and HICP inflation differentials vis-à-vis the euro area 196 Table 14 Selected indicators of financial development and integration 196 LIST OF TABLES AND CHARTS 188 ECB Convergence Report June 2014 1 PRICE DEVELOPMENTS Chart 1 Price developments (average annual percentage changes) -10 0 10 20 30 -10 0 10 20 30 HICP unit labour costs import deflator 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: European Commission (Eurostat). Table 1 HICP inflation (annual percentage changes) 2014 May 2013 Jan. Feb. Mar. Apr. to Apr. 2014 HICP inflation 1.2 1.3 1.3 1.6 2.1 Reference value 1) 1.7 Euro area 2) 0.8 0.7 0.5 0.7 1.0 Source: European Commission (Eurostat). 1) The basis of the calculation for the period May 2013-April 2014 is the unweighted arithmetic average of the annual percentage changes in the HICP for Latvia, Portugal and Ireland plus 1.5 percentage points. 2) The euro area is included for information only. Table 2 Measures of inflation and related indicators (annual percentage changes, unless otherwise stated) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Measures of inflation HICP 11.9 9.1 6.6 4.9 7.9 5.6 6.1 5.8 3.4 3.2 HICP excluding unprocessed food and energy 12.2 6.3 5.8 5.5 7.6 6.6 6.4 5.0 3.3 2.3 HICP at constant tax rates 1) 10.8 8.3 5.4 4.2 7.1 4.0 1.8 3.8 3.2 3.0 CPI 11.9 9.0 6.6 4.8 7.9 5.6 6.1 5.8 3.3 4.0 Private consumption deflator 12.7 6.9 4.9 4.8 10.0 3.7 7.7 4.3 3.9 4.4 GDP deflator 15.5 12.2 10.6 13.5 15.3 4.2 5.7 4.0 4.7 3.5 Producer prices 2) 19.2 18.4 7.8 7.6 10.9 1.9 4.0 6.6 4.8 3.7 Related indicators Real GDP growth 8.5 4.2 7.9 6.3 7.3 -6.6 -1.1 2.3 0.6 3.5 GDP per capita in PPS 3) (euro area = 100) 31.7 32.6 35.9 39.4 45.2 45.9 46.7 47.3 49.0 . Comparative price levels (euro area = 100) 42.1 53.3 56.6 62.9 61.2 54.3 55.6 57.0 54.3 . Output gap 4) 4.1 3.4 5.7 6.3 8.6 0.2 -2.3 -1.8 -3.2 -1.6 Unemployment rate (%) 5) 8.0 7.2 7.3 6.4 5.8 6.9 7.3 7.4 7.0 7.3 Unit labour costs, whole economy 3.1 22.0 4.9 15.2 22.9 2.9 -2.4 -7.0 4.4 2.5 Compensation per employee, whole economy 13.8 29.1 12.4 22.0 31.9 -1.9 -3.3 -4.1 3.6 6.2 Labour productivity, whole economy 10.3 5.8 7.1 5.9 7.3 -4.7 -0.9 3.2 -0.8 3.7 Imports of goods and services deflator 8.9 -2.9 -0.4 -7.6 15.4 3.3 5.7 6.0 5.6 -1.5 Nominal effective exchange rate 6) -6.4 11.0 2.6 6.6 -9.0 -11.9 -1.5 -0.6 -6.2 2.0 Money supply (M3) 7) – 40.0 31.1 3.9 12.9 7.2 6.6 6.1 3.8 8.7 Lending from banks 8) – 52.2 61.4 55.3 23.8 -2.0 6.3 7.6 -0.7 -3.5 Stock prices (The Bucharest Exchange BET index) 103.8 38.0 28.5 32.6 -70.3 37.3 14.6 -15.7 6.3 20.0 Residential property prices 9) 30.7 63.8 53.2 51.5 -10.9 -27.8 -7.8 -14.2 -6.5 -0.2 Sources: European Commission (Eurostat), national data (CPI, money supply, lending from banks and residential property prices) and European Commission (output gap). 1) The difference between the “HICP” and the “HICP at constant tax rates” shows the theoretical impact of changes in indirect taxes (e.g. VAT and excise duties) on the overall rate of inflation. This impact assumes a full and instantaneous pass-through of tax rate changes on the price paid by the consumer. 2) Domestic sales, total industry excluding construction. 3) PPS stands for purchasing power standards. 4) Percentage difference of potential GDP: a positive (negative) sign indicates that actual GDP is above (below) potential GDP. 5) The definition conforms to ILO guidelines; 2004 data are provided by the Romanian national statistical institute. 6) A positive (negative) sign indicates an appreciation (depreciation). 7) The series includes repurchase agreements with central counterparties. 8) Not adjusted for the derecognition of loans from the MFI statistical balance sheet due to their sale or securitisation. 9) Data up to 2009 reflect changes in prices for Bucharest (series has been discontinued); 2010 data show changes in prices of all dwellings. 189 ECB Convergence Report June 2014 ROMANIA Table 3 Recent inflation trends and forecasts (annual percentage changes) (a) Recent trends in the HICP 2013 2014 Nov. Dec. Jan. Feb. Mar. Apr. HICP Annual percentage change 1.3 1.3 1.2 1.3 1.3 1.6 Change in the average of the latest three months from the previous three months, annualised rate, seasonally adjusted -1.1 0.3 1.5 2.8 3.1 3.2 Change in the average of the latest six months from the previous six months, annualised rate, seasonally adjusted 0.9 0.3 0.3 0.5 0.8 1.3 Sources: European Commission (Eurostat) and ECB calculations. (b) Inflation forecasts 2014 2015 HICP, European Commission (Spring 2014) 2.5 3.3 CPI, OECD (May 2014)1) – – CPI, IMF (April 2014) 2.2 3.1 CPI, Consensus Economics (April 2014) 2.2 3.0 Sources: European Commission, OECD, IMF and Consensus Economics. 1) Romania is not a member of the OECD. 190 ECB Convergence Report June 2014 2 FISCAL DEVELOPMENTS Table 4 General government fiscal position (as a percentage of GDP) 2012 2013 2014 1) General government surplus (+)/deficit (-) -3.0 -2.3 -2.2 Reference value -3.0 -3.0 -3.0 Surplus/deficit, net of government investment expenditure 2) 1.8 2.2 2.1 General government gross debt 38.0 38.4 39.9 Reference value 60.0 60.0 60.0 Sources: European Commission (Eurostat, DG ECFIN) and ECB calculations. 1) European Commission projections. 2) A positive (negative) sign indicates that the government deficit is lower (higher) than government investment expenditure. Table 5 General government budgetary position (as a percentage of GDP) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total revenue 32.3 32.4 33.3 35.3 33.6 32.1 33.3 33.9 33.7 32.7 Current revenue 31.9 32.1 33.2 34.1 32.8 31.8 32.6 33.2 32.8 32.1 Direct taxes 6.4 5.3 6.0 6.7 6.7 6.5 6.1 6.2 6.1 6.0 Indirect taxes 11.7 12.9 12.8 12.3 11.7 10.7 11.9 13.0 13.2 12.7 Social security contributions 9.7 10.3 10.3 10.5 10.1 10.2 9.5 9.1 9.0 8.8 Other current revenue 4.2 3.6 4.0 4.6 4.3 4.3 5.2 4.9 4.6 4.6 Capital revenue 0.4 0.3 0.1 1.2 0.8 0.3 0.7 0.7 0.8 0.6 Total expenditure 33.6 33.6 35.5 38.2 39.3 41.1 40.1 39.4 36.7 35.0 Current expenditure 28.5 28.7 28.9 30.5 31.6 34.8 33.5 31.5 30.9 29.6 Compensation of employees 8.1 8.7 9.3 9.7 10.5 10.9 9.7 7.9 7.8 8.1 Social benefits other than in kind 8.7 8.9 8.8 9.2 10.4 12.7 12.9 12.0 11.3 10.8 Interest payable 1.5 1.2 0.8 0.7 0.7 1.5 1.5 1.6 1.8 1.8 of which: impact of swaps and FRAs 1) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other current expenditure 10.2 9.9 10.0 10.9 10.0 9.6 9.4 10.0 9.9 8.9 Capital expenditure 5.0 4.9 6.6 7.7 7.7 6.3 6.6 7.9 5.8 5.3 Surplus (+)/deficit (-) -1.2 -1.2 -2.2 -2.9 -5.7 -9.0 -6.8 -5.5 -3.0 -2.3 Primary balance 0.3 0.1 -1.4 -2.2 -5.0 -7.5 -5.3 -3.9 -1.2 -0.5 Surplus/deficit, net of government investment expenditure 1.8 2.7 2.9 3.2 0.9 -3.1 -1.1 -0.1 1.8 2.2 Sources: ESCB and European Commission (Eurostat). Notes: Differences between totals and the sum of their components are due to rounding. Interest payable as reported under the excessive deficit procedure. The item “impact of swaps and FRAs” is equal to the difference between the interest (or deficit/surplus) as defined in the excessive deficit procedure and in the ESA 95. See Regulation (EC) No 2558/2001 of the European Parliament and of the Council of 3 December 2001 amending Council Regulation (EC) No 2223/96 as regards the reclassification of settlements under swap arrangements and under forward rate agreements (0J L 344, 28.12.2001, p. 1). 1) FRAs stands for forward rate agreements. 191 ECB Convergence Report June 2014 ROMANIA Chart 2 General government surplus (+)/deficit (-) (a) Levels (as a percentage of GDP) (b) Annual change and underlying factors (in percentage points of GDP) -10 -5 0 -10 -5 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 levels -4 -2 0 2 4 -4 -2 0 2 4 2012 2013 cyclical factors non-cyclical factors total change 2004 2005 2006 2007 2008 2009 2010 2011 Sources: European Commission (Eurostat) and ECB calculations. Note: In Chart 2b a negative (positive) value indicates a contribution to an increase (reduction) in a deficit. Table 6 General government gross debt – structural features 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total debt (as a percentage of GDP) 18.7 15.8 12.4 12.8 13.4 23.6 30.5 34.7 38.0 38.4 Composition by currency (% of total) In domestic currency 24.1 19.0 21.5 34.4 41.6 41.7 40.7 42.4 44.0 43.4 In foreign currencies 75.9 81.0 78.5 65.6 58.4 58.3 59.3 57.6 56.0 56.6 Euro 48.3 51.5 50.1 47.4 42.8 47.2 47.1 47.6 44.7 46.8 Other foreign currencies 27.6 29.5 28.4 18.2 15.5 11.1 12.2 10.1 11.3 9.8 Domestic ownership (% of total) 25.0 19.4 21.6 34.5 40.3 51.5 51.3 50.8 49.1 45.5 Average residual maturity (in years) 4.8 5.6 7.6 5.9 4.0 5.7 5.7 5.0 4.1 4.4 Composition by maturity1) (% of total) Short-term (up to and including one year) 16.2 6.4 9.4 13.1 18.5 22.7 24.5 22.9 15.2 6.2 Medium and long-term (over one year) 83.8 93.6 90.6 86.9 81.5 77.3 75.5 77.1 84.8 93.8 Sources: ESCB and European Commission (Eurostat). Notes: Year-end data. Differences between totals and the sum of their components are due to rounding. 1) Original maturity. 192 ECB Convergence Report June 2014 Chart 3 General government gross debt (a) Levels (as a percentage of GDP) (b) Annual change and underlying factors (in percentage points of GDP) 10 20 30 40 10 20 30 40 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 levels -10 0 10 20 -10 0 10 20 2012 2013 primary balance growth/interest rate differential deficit-debt adjustment change in debt-to-GDP ratio 2004 2005 2006 2007 2008 2009 2010 2011 Sources: European Commission (Eurostat) and ECB. Note: In Chart 3b a negative (postitive) value indicates a contribution of the respective factor to a decrease (increase) in the debt ratio. Chart 4 General government expenditure and revenue (as a percentage of GDP) 30 32 34 36 38 40 42 30 32 34 36 38 40 42 2012 2013 total expenditure total revenue 2004 2005 2006 2007 2008 2009 2010 2011 Source: ESCB. 193 ECB Convergence Report June 2014 ROMANIA Table 7 General government deficit-debt adjustment (as a percentage of GDP) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Change in general government debt 1) 1.6 -0.3 -0.9 2.6 3.1 9.9 7.9 6.0 5.0 3.0 General government surplus (+)/deficit (-) -1.2 -1.2 -2.2 -2.9 -5.7 -9.0 -6.8 -5.5 -3.0 -2.3 Deficit-debt adjustment 0.4 -1.4 -3.1 -0.3 -2.6 0.8 1.1 0.5 2.1 0.7 Net acquisitions (+)/net sales (-) of financial assets 1.7 0.6 -0.5 1.3 -1.4 1.4 0.1 1.8 2.3 0.5 Currency and deposits 1.8 0.4 1.7 -0.1 -1.2 1.7 -0.4 1.0 1.8 0.9 Loans and securities other than shares 0.4 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 Shares and other equity -1.2 -0.3 -2.3 0.1 -0.1 -0.2 0.1 0.2 -0.1 -0.3 Privatisations -1.2 -0.3 -2.4 -0.1 -0.1 0.0 0.0 0.0 -0.1 -0.3 Equity injections 0.0 0.0 0.1 0.1 0.0 0.0 0.1 0.1 0.0 0.0 Other 0.0 0.0 0.0 0.0 0.0 -0.2 0.0 0.1 0.0 0.0 Other financial assets 0.8 0.6 0.1 1.4 -0.1 -0.1 0.3 0.6 0.6 -0.1 Valuation changes of general government debt -0.5 -0.6 -1.3 0.2 1.1 0.3 0.2 0.2 0.4 -0.3 Foreign exchange holding gains (-)/losses (+) -0.8 -0.3 -1.3 0.1 1.0 0.5 0.3 0.1 0.6 0.3 Other valuation effects 2) 0.3 -0.3 0.0 0.0 0.1 -0.2 0.0 0.0 -0.2 -0.6 Other 3) -0.8 -1.4 -1.3 -1.8 -2.4 -0.9 0.7 -1.5 -0.7 0.5 Sources: ESCB and European Commission (Eurostat). Note: Differences between totals and the sum of their components are due to rounding. 1) Annual change in debt in period t as a percentage of GDP in period t, i.e. [debt(t) – debt(t-1)]/GDP(t). 2) Includes the difference between the nominal and market valuation of general government debt. 3) Transactions in other accounts payable (government liabilities), sector reclassifications and statistical discrepancies. This item may also cover certain cases of debt assumption and settlements under swaps and forward rate agreements. Table 8 Projections of the ageing-induced fiscal burden (percentages) 2010 2020 2030 2040 2050 2060 Elderly dependency ratio (population aged 65 and over as a proportion of the population aged 15-64) 23.4 28.4 32.7 41.3 48.5 51.9 Age-related government expenditure (in percentage points of GDP) 1) 17.6 17.0 18.5 20.5 22.5 24.1 Sources: European Commission (Eurostat) and The 2012 Ageing Report: Economic and budgetary projections for the 27 EU Member States (2010-2060), a joint report prepared by the European Commission (DG ECFIN) and the Economic Policy Committee. 1) The Ageing Working Group (AWG) risk scenario, strictly age-related item. 194 ECB Convergence Report June 2014 3 EXCHANGE RATE DEVELOPMENTS Table 9 (a) Exchange rate stability Participation in the exchange rate mechanism (ERM II) No Exchange rate level in May 2012 in RON/EUR 4.44116 Maximum upward deviation 1) 3.1 Maximum downward deviation 1) -4.6 Source: ECB. 1) Maximum percentage deviations of the bilateral exchange rate against the euro from its average level in May 2012 over the period 16 May 2012-15 May 2014, based on daily data at business frequency. An upward (downward) deviation implies that the currency was stronger (weaker) than its exchange rate level in May 2012. Table 9 (b) Key indicators of exchange rate pressure for the Romanian leu (average of three-month period ending in specified month) 2012 2013 2014 June Sep. Dec. Mar. June Sep. Dec. Mar. Exchange rate volatility 1) 2.2 6.1 3.3 4.7 5.2 5.5 3.4 4.2 Short-term interest rate differential 2) 3.9 5.0 5.4 5.3 3.9 3.6 2.3 2.4 Sources: National data and ECB calculations. 1) Annualised monthly standard deviation (as a percentage) of daily percentage changes in the exchange rate against the euro. 2) Differential (in percentage points) between three-month interbank interest rates and the three-month EURIBOR. Chart 5 Romanian leu: nominal exchange rate development against the euro (a) Exchange rate over the reference period (daily data; average of May 2012 = 100; 16 May 2012-15 May 2014) (b) Exchange rate over the last ten years (monthly data; average of May 2012 = 100; May 2004-May 2014) 130 125 120 115 110 105 100 95 90 85 80 75 70 130 125 120 115 110 105 100 95 90 85 80 75 70 2012 2013 130 120 110 100 90 80 60 130 120 110 100 90 80 60 70 70 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: ECB. Note: An upward (downward) movement of the line indicates an appreciation (depreciation) of the Romanian leu. 195 ECB Convergence Report June 2014 ROMANIA Table 10 Romanian leu: real exchange rate developments (monthly data; percentage deviation in April 2014 from the ten-year average calculated for the period May 2004-April 2014) Apr. 2014 Real bilateral exchange rate against the euro 1) 1.5 Memo items: Nominal effective exchange rate 2) -10.8 Real effective exchange rate 1), 2) 0.9 Source: ECB. Note: A positive (negative) sign indicates an appreciation (depreciation). 1) Based on HICP and CPI developments. 2) Effective exchange rate against the euro, the currencies of the non-euro area EU Member States and those of ten other major trading partners. Table 11 External developments (as a percentage of GDP, unless otherwise stated) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Balance of payments Current account and capital account balance 1) -7.5 -7.9 -10.5 -12.8 -11.1 -3.6 -4.2 -3.9 -3.0 1.2 Current account balance -8.3 -8.6 -10.4 -13.5 -11.5 -4.2 -4.4 -4.5 -4.4 -1.1 Goods balance -8.7 -9.8 -12.0 -14.3 -13.6 -5.8 -6.1 -5.6 -5.6 -2.4 Services balance -0.3 -0.4 0.0 0.3 0.5 -0.2 0.3 0.3 0.9 1.9 Income balance -4.2 -2.9 -3.3 -3.3 -2.6 -1.6 -1.5 -1.7 -2.3 -3.2 Current transfers balance 4.9 4.5 4.9 3.9 4.3 3.5 2.9 2.5 2.6 2.6 Capital account balance 0.8 0.7 0.0 0.7 0.4 0.5 0.2 0.5 1.4 2.3 Combined direct and portfolio investment balance 1) 7.7 7.5 8.7 6.0 6.2 3.4 2.5 2.6 4.4 4.5 Direct investment balance 8.4 6.6 8.9 5.7 6.7 3.0 1.8 1.4 1.7 1.9 Portfolio investment balance -0.7 1.0 -0.2 0.4 -0.4 0.4 0.7 1.2 2.7 2.7 Other investment balance 6.3 6.6 6.3 11.2 6.5 2.3 4.7 1.7 -3.0 -5.1 Reserve assets -7.9 -6.6 -5.3 -3.5 0.1 -1.0 -2.6 -0.7 1.1 -1.4 Exports of goods and services 35.8 33.0 32.3 29.2 30.3 30.6 35.4 40.0 40.6 42.4 Imports of goods and services 44.8 43.2 44.3 43.2 43.5 36.6 41.2 45.3 45.3 42.9 Net international investment position 2) -26.4 -29.5 -36.2 -47.1 -53.4 -62.2 -63.7 -65.4 -67.5 -62.3 Gross external debt 2) 34.5 39.4 40.4 50.9 56.0 68.5 75.7 77.1 75.3 68.6 Memo item: Export market shares 3) 0.24 0.25 0.27 0.29 0.31 0.32 0.31 0.33 0.30 0.35 Source: ECB. 1) Differences between totals and the sum of their components are due to rounding. 2) End-of-period outstanding amounts. 3) As a percentage of total world goods and services exports. Table 12 Indicators of integration with the euro area (as a percentage of the total, unless otherwise stated) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 External trade with the euro area Exports of goods 59.5 54.7 54.0 54.4 53.5 57.7 54.9 53.2 51.8 51.1 Imports of goods 52.3 49.3 49.9 53.9 51.3 53.0 51.3 50.9 51.5 53.4 Investment position with the euro area Inward direct investment 1) 71.0 76.3 80.9 80.8 82.7 84.2 81.5 82.9 81.8 80.6 Outward direct investment 1) – 3.3 6.0 5.2 13.5 17.8 19.5 25.9 17.7 21.2 Portfolio investment liabilities 1) 66.3 71.9 72.0 78.5 65.7 75.9 82.2 70.3 50.7 . Portfolio investment assets 1) 98.2 98.5 70.7 82.5 75.3 57.6 64.2 64.6 64.1 . Memo items: External trade with the EU Exports of goods 75.5 71.0 70.8 72.4 70.8 74.5 72.5 71.3 70.4 69.6 Imports of goods 66.1 63.2 63.5 71.4 69.8 73.2 72.6 72.9 73.6 75.7 Sources: ESCB, European Commission (Eurostat) and IMF. 1) End-of-period outstanding amounts. 196 ECB Convergence Report June 2014 4 LONG-TERM INTEREST RATE DEVELOPMENTS Table 13 Long-term interest rates (LTIRs) (percentages; average of observations through period) 2014 May 2013 Jan. Feb. Mar. Apr. to Apr. 2014 Long-term interest rate 5.2 5.4 5.3 5.2 5.3 Reference value 1) – – – – 6.2 Euro area 2) 2.8 2.6 2.5 2.4 2.9 Euro area (AAA) 3) 2.0 1.8 1.8 1.7 1.9 Sources: ECB and European Commission (Eurostat). 1) The basis of the calculation for the period May 2013-April 2014 is the unweighted arithmetic average of the interest rate levels in Ireland, Latvia and Portugal plus 2 percentage points. 2) The euro area average is included for information only. 3) The euro area AAA par yield curve for the ten-year residual maturity is included for information only. Chart 6 Long-term interest rate (LTIR) a) Long-term interest rate (LTIR) (monthly averages in percentages) b) LTIR and HICP inflation differentials vis-à-vis the euro area (monthly averages in percentage points) 4 6 8 10 12 4 6 8 10 12 2012 long-term interest rate 2005 2006 2007 2008 2009 2010 2011 2013 -2 0 2 4 6 8 10 -2 0 2 4 6 8 10 2012 2013 long-term interest rate differential HICP inflation differential 2005 2006 2007 2008 2009 2010 2011 Sources: ECB and European Commission (Eurostat). Table 14 Selected indicators of financial development and integration (as a percentage of GDP, unless otherwise stated) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Memo item: euro area 2013 Debt securities issued by corporations 1) 0.8 6.2 1.4 0.7 0.2 0.2 0.2 0.2 0.2 0.3 95.3 Stock market capitalisation 2) 12.8 17.1 18.8 18.1 8.2 10.1 10.5 8.9 8.9 11.6 58.1 MFI credit to non-government residents 3) – 20.7 26.9 35.7 38.5 39.9 40.0 40.0 38.5 34.8 125.0 Claims of euro area MFIs on resident MFIs 4) – – – 27.2 33.0 27.2 28.4 27.2 23.5 20.1 7.0 Private sector credit flow 5) 9.0 11.6 15.2 18.8 15.4 0.4 1.8 2.3 0.9 . -0.4 Private sector debt 6) 33.3 39.3 44.8 58.1 66.8 73.3 75.3 73.9 73.0 . 164.5 Financial sector liabilities 7) 62.9 46.8 35.3 35.1 11.7 14.4 4.4 4.4 5.3 . -2.5 Sources: ESCB, European Commission (Eurostat), Federation of European Securities Exchanges, OMX and national stock exchanges. 1) Outstanding amount of debt securities issued by resident non-financial corporations, MFIs and other financial corporations. 2) Outstanding amounts of quoted shares issued by residents at the end of the period at market values. 3) MFI (excluding NCB) credit to domestic non-MFI residents other than the general government. Credit includes outstanding amounts of loans and debt securities. 4) Outstanding amount of deposits and debt securities issued by domestic MFIs (excluding the NCB) held by euro area MFIs as a percentage of total liabilities of domestic MFIs (excluding the NCB). Total liabilities exclude capital and reserves and remaining liabilities. 5) Transactions in securities other than shares issued and loans taken out by institutional sectors: non-financial corporations, households and non-profit institutions serving households. 6) Outstanding amounts of securities other than shares issued and loans taken out by institutional sectors: non-financial corporations, households and non-profit institutions serving households. 7) Sum of all liabilities of the total financial sector. The indicator is expressed as a year-on-year percentage change.

6.7 ROMANIA 6.7.1 COMPATIBILITY OF NATIONAL LEGISLATION The following legislation forms the legal basis for Banca Națională a României and its operations: – Law No 312 on the Statute of Banca Națională a României (hereinafter the “Law”).73 72 For a detailed review of necessary adaptations of the Constitution, the Law and other laws, see Opinion CON/2011/9. 73 Monitorul Oficial al României, Part One, No 582, 30.6.2004. 255 ECB Convergence Report June 2014 6 EXAMINATION OF COMPATIBILITY OF NATIONAL LEGISLATION WITH THE TREATIES There have been no changes in relation to the points identified in the ECB’s Convergence Report of May 2012 concerning the Law, and therefore those comments are repeated in this year’s assessment. Government Emergency Ordinance 90/2008 on the statutory audit of the annual financial statements and consolidated annual financial statements74 has been amended in order to comply with Article 123 of the Treaty75 and therefore the comment regarding the compliance of this provision with the prohibition on monetary financing has been removed. 6.7.2 INDEPENDENCE OF THE NCB With regard to Banca Națională a României’s independence, the Law and other legislation needs to be adapted in the respects set out below. 6.7.2.1 INSTITUTIONAL INDEPENDENCE Article 3(1) of the Law provides that, when carrying out their tasks, Banca Națională a României and the members of its decision-making bodies may not seek or take instructions from public authorities or from any other institution or authority. The ECB understands that the provision encompasses both national and foreign institutions in line with Article 130 of the Treaty and Article 7 of the Statute. For legal certainty reasons, the next amendment to the Law should bring this provision fully into line with Article 130 of the Treaty and Article 7 of the Statute. Further, Article 3 of the Law does not expressly prohibit the Government from seeking to influence the members of Banca Națională a României’s decision-making bodies in situations where this may have an impact on Banca Națională a României’s fulfilment of its ESCB-related tasks. In this respect the Law needs to be adapted to be fully consistent with Article 130 of the Treaty and Article 7 of the Statute. 6.7.2.2 PERSONAL INDEPENDENCE Article 33(9) of the Law provides that an appeal may be brought to the High Court of Cassation and Justice against a decision to recall from office a member of the Board of Banca Națională a României within 15 days of its publication in Monitorul Oficial al României. The Law is silent on the jurisdiction of the Court of Justice of the European Union to hear cases with regard to the dismissal of the Governor. The ECB understands that in spite of this silence, Article 14.2 of the Statute applies. Article 33(7) of the Law provides that no member of the Board of Banca Națională a României may be recalled from office for reasons other than or following a procedure other than those provided for in Article 33(6) of the Law. Article 33(6) of the Law contains grounds for dismissal which are compatible with those laid down in Article 14.2 of the Statute. Law 161/2003 on certain measures for transparency in the exercise of public dignities, public functions and business relationships and for the prevention and sanctioning of corruption,76 and Law 176/2010 on the integrity in the exercise of public functions and dignities,77 define the conflicts of interest and incompatibilities applicable to the Governor and the other members of the Board of Banca Națională a României and require them to report on their interests and wealth. The ECB understands that the sanctions provided for in these Laws for the breach of such obligations as well as the automatic resignation mechanism in cases of 74 Monitorul Oficial al României, Part One, No 481 of 30 June 2008. 75 Banca Națională a României no longer contributes funds to the functioning of the Council for the Public Supervision of the Accounting Profession in the Public Interest. 76 Published in Monitorul Oficial al României, Part One, No 279, 21.4.2003. 77 Published in Monitorul Oficial al României, Part One, No 621, 2.9.2010. 256 ECB Convergence Report June 2014 incompatibility78 do not constitute new grounds for dismissal of the Governor or other members of the Board of Banca Națională a României in addition to those contained in Article 33 of the Law. For legal certainty reasons and in line with Article 33 of the Law, a clarification to this end in the above-mentioned Laws would be welcome. 6.7.2.3 FINANCIAL INDEPENDENCE Article 43 of the Law provides that Banca Națională a României must transfer to the State budget an 80% share of the net revenues left after deducting expenses relating to the financial year, including provisions for credit risk, and any losses relating to previous financial years that remain uncovered. As noted in Chapter 6.7.4, this arrangement may in certain circumstances amount to an intra-year credit, which in turn may undermine the financial independence of Banca Națională a României. A Member State may not put its NCB in a position where it has insufficient financial resources to carry out its ESCB or Eurosystem-related tasks, and also its own national tasks, such as financing its administration and own operations. Article 43(3) of the Law also provides that Banca Națională a României sets up provisions for credit risk in accordance with its rules, after having consulted the Ministry of Public Finance. The ECB notes that NCBs must be free to independently create financial provisions to safeguard the real value of their capital and assets. Article 43 of the Law should therefore be adapted, in addition to taking into account the issues highlighted in Chapter 6.7.4, to ensure that such arrangement does not undermine the ability of Banca Națională a României to carry out its tasks in an independent manner. Pursuant to Articles 21 and 23 of Law 94/1992 on the organisation and functioning of the Court of Auditors,79 the Court of Auditors is empowered to control the establishment, management and use of the public sector’s financial resources, including Banca Națională a României’s financial resources, and to audit management of the funds of Banca Națională a României. The scope of audit by the Court of Auditors is further defined in Article 47(2) of the Law which provides that commercial operations performed by Banca Națională a României, as shown in the revenue and expenditure budget and in the annual financial statements, shall be subject to auditing by the Court of Auditors. As the provisions of Law 94/1992 on the organisation and functioning of the Court of Auditors expressly apply to Banca Națională a României, in the interests of legal certainty it should be clarified in Romanian legislation that the scope of audit by the Court of Auditors is provided by Article 47(2) of the Law and is therefore limited to commercial operations performed by Banca Națională a României.80 6.7.3 CONFIDENTIALITY Pursuant to Article 52(2) of the Law, the Governor may release confidential information on the four grounds listed under Article 52(2) of the Law. Under Article 37 of the Statute, professional secrecy is an ESCB-wide matter. Therefore, the ECB assumes that such release is without prejudice to the confidentiality obligations towards the ECB and the ESCB. 78 According to the relevant provisions of Article 99 of Law 161/2003, if a member of the Board of Banca Națională a României or an employee occupying a leading position with Banca Națională a României does not choose within a given period of time between their function and the one which they have declared to be incompatible with their function, they are considered to have resigned from their function and the Parliament takes note of the resignation. 79 Published in Monitorul Oficial al României, Part One, No 282, 29.4.2009. 80 For the activities of the NCB’s independent external auditors see, as an example, Article 27.1 of the Statute. 257 ECB Convergence Report June 2014 6 EXAMINATION OF COMPATIBILITY OF NATIONAL LEGISLATION WITH THE TREATIES 6.7.4 MONETARY FINANCING AND PRIVILEGED ACCESS Articles 6(1) and 29(1) of the Law expressly prohibit direct purchase on the primary market by Banca Națională a României of debt instruments issued by the State, central and local public authorities, autonomous public service undertakings, national societies, national companies and other majority State-owned companies. Such prohibition has been extended by Article 6(2) to other bodies governed by public law and public undertakings in Member States. Furthermore, under Article 7(2) of the Law, Banca Națională a României is prohibited from granting overdraft facilities or any other type of credit facility to the State, central and local public authorities, autonomous public service undertakings, national societies, national companies and other majority State-owned companies. Article 7(4) extends this prohibition to other bodies governed by public law and public undertakings in Member States. The range of public sector entities referred to in these provisions needs to be extended to be consistent with and fully mirror Article 123 of the Treaty and aligned with the definitions contained in Regulation (EC) No 3603/93. Pursuant to Article 7(3) of the Law, majority State-owned credit institutions are exempted from the prohibition on granting overdraft facilities and any other type of credit facility in Article 7(2) and benefit from loans granted by Banca Națională a României in the same way as any other credit institution eligible under Banca Națională a României’s regulations. The wording of Article 7(3) of the Law should be aligned with the wording of Article 123(2) of the Treaty, which only exempts publicly owned credit institutions “in the context of the supply of reserves by central banks”. Article 26 of the Law provides that, to carry out its task of ensuring financial stability, in exceptional cases and only on a case-by-case basis, Banca Națională a României may grant to credit institutions loans which are unsecured or secured by assets other than assets eligible to collateralise the monetary or foreign exchange policy operations of Banca Națională a României. Article 26 does not contain sufficient safeguards to prevent such lending from potentially breaching the monetary financing prohibition contained in Article 123 of the Treaty, especially given the risk that such lending could result in the provision of solvency support to a credit institution experiencing financial difficulties, and should be adapted accordingly. Article 43 of the Law provides that Banca Națională a României must transfer to the State budget an 80% share of the net revenues left after deducting expenses relating to the financial year, including provisions for credit risk, and loss related to the previous financial years that remained uncovered. The 80% of the net revenues is transferred monthly before the 25th day of the following month, based on a special statement. The adjustments relating to the financial year are performed by the deadline for submission of the annual balance sheet, based on a rectifying special statement. This provision is constructed in a way which does not rule out the possibility of an intra-year anticipated profit distribution in circumstances where Banca Națională a României accumulates profits during the first half of the year but suffers consecutive losses during the second half of the year. Although the State is under an obligation to make adjustments after the closure of the financial year and would therefore have to return any excessive distributions to Banca Națională a României, this would only happen after the deadline for submission of the annual balance sheet and may therefore be viewed as amounting to an intra-year credit to the State. Article 43 should be adapted to ensure that such an intra-year credit is not possible to rule out the possibility of breaching the monetary financing prohibition in Article 123 of the Treaty. 258 ECB Convergence Report June 2014 6.7.5 LEGAL INTEGRATION OF THE NCB INTO THE EUROSYSTEM With regard to Banca Națională a României’s legal integration into the Eurosystem, the Law needs to be adapted in the respects set out below. 6.7.5.1 ECONOMIC POLICY OBJECTIVES Article 2(3) of the Law provides that, without prejudice to the primary objective of price stability, Banca Națională a României must support the State’s general economic policy. This provision is incompatible with Article 127(1) of the Treaty, as it does not reflect the secondary objective of supporting the general economic policies of the Union. 6.7.5.2 TASKS Monetary policy Article 2(2)(a), Article 5, Articles 6(3) and 7(1), Articles 8, 19 and 20 and Article 33(1)(a) of the Law, which provide for the powers of Banca Națională a României in the field of monetary policy and instruments for the implementation thereof, do not recognise the ECB’s powers in this field. Collection of statistics Article 49 of the Law, which provides for the powers of Banca Națională a României relating to the collection of statistics, does not recognise the ECB’s powers in this field. Official foreign reserve management Articles 2(2)(e) and 9(2)(c) and Articles 30 and 31 of the Law, which provide for the powers of Banca Națională a României relating to foreign reserve management, do not recognise the ECB’s powers in this field. Payment systems Article 2(2)(b), Article 22 and Article 33(1)(b) of the Law, which provide for the role of Banca Națională a României in relation to the smooth operation of payment systems, do not recognise the ECB’s powers in this field. Issue of banknotes Article 2(2)(c) and Articles 12 to 18 of the Law, which provide for Banca Națională a României’s role in issuing banknotes and coins, do not recognise the Council’s and the ECB’s powers in this field. 6.7.5.3 FINANCIAL PROVISIONS Appointment of independent auditors Article 36(1) of the Law, which provides that the annual financial statements of Banca Națională a României are audited by financial auditors that are legal entities authorised by the Financial Auditors Chamber in Romania and selected by the Board of Banca Națională a României through a tender procedure, does not recognise the ECB’s and the Council’s powers under Article 27.1 of the Statute. Financial reporting Article 37(3) of the Law, which provides that Banca Națională a României establishes the templates for the annual financial statements after having consulted the Ministry of Public Finance, and Article 40 of the Law, which provides that Banca Națională a României adopts its own regulations on organising and conducting its accounting, in compliance with the legislation in force and 259 ECB Convergence Report June 2014 6 EXAMINATION OF COMPATIBILITY OF NATIONAL LEGISLATION WITH THE TREATIES having regard to the advisory opinion of the Ministry of Public Finance, and that Banca Națională a României registers its economic and financial operations in compliance with its own chart of accounts, also having regard to the advisory opinion of the Ministry of Public Finance, do not reflect Banca Națională a României’s obligation to comply with the Eurosystem’s regime for financial reporting of NCB operations, pursuant to Article 26 of the Statute. 6.7.5.4 EXCHANGE RATE POLICY Article 2(2)(a) and (d), Article 9 and Article 33(1)(a) of the Law, which empower Banca Națională a României to conduct exchange rate policy, do not recognise the Council’s and the ECB’s powers in this field. Articles 10 and 11 of the Law, which allow Banca Națională a României to draw up regulations on monitoring and controlling foreign currency transactions in Romania and to authorise foreign currency capital operations, transactions on foreign currency markets and other specific operations, do not recognise the Council’s and the ECB’s powers in this field. 6.7.6 MISCELLANEOUS With regard to Article 3(2) of the Law, which entitles Banca Națională a României to be consulted on draft national legislation, consulting Banca Națională a României does not obviate the need to consult the ECB under Articles 127(4) and 282(5) of the Treaty. Article 57 of the Law does not recognise the ECB’s powers to impose sanctions. Article 4(5) of the Law entitles Banca Națională a României to conclude short-term credit arrangements and to perform other financial and banking operations with other entities, including central banks, and provides that such arrangements are possible only if the credit is repaid within one year. The ECB notes that such a limitation is not foreseen in Article 23 of the Statute. 6.7.7 CONCLUSIONS The Law does not comply with all the requirements for central bank independence, the monetary financing prohibition and legal integration into the Eurosystem. Romania is a Member State with a derogation and must therefore comply with all adaptation requirements under Article 131 of the Treaty.