PDF to HTML - Convert PDF files to HTML files

Europaudvalget 2005-06
EUU Alm.del Bilag 260
Offentligt

20060420

MEMO

Operational Definition of Maastricht Price Stability Criterion

The Treaty requires a high achievement of price stability criterion to enter a third stage of

Economic and Monetary Union. According to the Article 121(1) of the Treaty each

Member State should refer to the achievement of a high degree of price stability, which

should be apparent from a rate of inflation which is close to that of, at most, three best

performing Member States in terms of price stability.

According to the Article 1 of the Protocol No 21 the criterion of price stability 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 1.5 percentage points that of, at most, the three best performing Member

States in terms of price stability.

The first operational definition on price stability was made by the Commission in the

Convergence Report of 1993

. In measuring the performance of member states, the

Commission has set up an

inflation reference range

by assuming that the first and the

third best performing country determine the reference range.

In 1996 Convergence Report

the Commission has used

six alternative methods for

calculating inflation reference values

by concluding that they produced similar results

within a range of 0.5 percent. The Commission was including into formula one to three

best performers and using weighted and unweighted averages. It was considered that the

reference value measured against one country is the strictest possible way in which the

reference value could be defined. Since 1998 the Commission has been calculating the

operational reference value as the arithmetic average of the inflation rates of the three

Member States as it argued that the range of 0.5 produced marginal effects.

Commission in its report of May 2000 has raised another question of whether countries

not participating in the euro should be considered for the inflation and interest rates

reference values.

Commission has referred to changing circumstances in pursuing price stability by means

of monetary policy which have changed with the introduction of euro in those countries.

It was also argued that countries aiming to join euro should orient their convergence

efforts to economically relevant benchmarks of the euro area economies. A number of

euro members which are above the value for inflation was also indicated in the report for

information purposes as a reference.

SEC(1993)/1755 final

COM(1996)/0560 final

PDF to HTML - Convert PDF files to HTML files

It should be also considered, whether in the operational definition of the inflation

criterion “the best performing member states” should be selected as those having “the

lowest average inflation”. It follows from the use of that definition that a very low

inflation, e.g. substantially below the average rate of the euro area or the EU, could be

treated as a non-representative performance. To avoid an analysis towards that direction

it might be also appropriate to set an upper limit of the reference value.

The Commission in report of May 2000 has concluded that these considerations may be

relevant in future applications of the convergence criterion, however since than the

procedure has not been followed as provided in the Protocol No 21 of the Treaty

. In

2002 the Commission has further used a definition which excluded non euro Member

States from the group of the reference countries.

European Central Bank on its behalf has introduced an inflation definition for the best

performers in terms of price stability, which in 2003 was fine-tuned to “inflation being

less but close to 2%”. It helps to benchmark the criterion for stability of prices in a more

transparent and objective manner and takes into account gravity affect of euro area to

convergence.

In 2004 Convergence Report the reference value was calculated as a simple and non

weighted arithmetical average of best performers with lowest average inflation. Although

the average inflation in Lithuania at that time was lower, this country has been excluded

from the calculation of the reference value as it was further concluded that countries with

negative inflation rates do not represent best performers in terms of price stability.

To conclude, the analysis of price stability still requires a broad assessment and a use of

the range of reference setting methods. Operational definition of the price stability

criterion should take into account a definition of price stability criterion provided by

European Central Bank, as well as a range of estimates pertaining to deviations to the

averages of inflation in a selected group of EU/euro zone member states.

Further in the annex a list of emerging results for inflation reference value is provided

after using different methods of calculation.

According to the Article 6 of the same Protocol the Council shall, acting unanimously on a proposal from

the Commission and after consulting the European Parliament, the European Central Bank, and the

Economic and Financial Committee adopt appropriate provisions to lay down the details of the

convergence criteria, including criterion of price stability, which shall replace this protocol.

PDF to HTML - Convert PDF files to HTML files

ANNEX

Emerging results after operating with methodology for inflation reference value

Inflation

March 2006*

7,0

4,1

3,9

3,6

3,4

3,2

2,7

2,6

2,3

2,0

1,9

1,5

1,0

0,9

*Eurostat, April 2006

EU12 (euro)

(3.0)

Reference

range – EU25

(2.4-3.0)

EU25

(2.7)

EU, euro average

(2.2)

ECB upper limit

(2.0)