Bulgaria joins the euro area
The euro area has expanded: on 1 January Bulgaria too replaced its national currency, the lev, with the single currency of the European Union (EU), just as Italy did back in 2002. This accession marks an important step in the process of European integration. Of the EU's 27 Member States, 21 have now adopted the euro as their official currency.
The euro area, or eurozone, is made up of the EU countries that have adopted the euro as their official currency and their overseas territories (such as the Azores, the Canary Islands and French Guiana). Andorra, the Principality of Monaco, San Marino and the Vatican City State have also adopted the euro as their national currency, on the basis of a formal agreement with the European Union. Montenegro and Kosovo use the euro de facto, without an agreement with the EU.
The requirements for adopting the euro
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An EU country can adopt the euro as its national currency only if it meets a number of conditions. First and foremost, it must comply with four economic requirements known as the convergence criteria, laid down in the Treaty on European Union. These criteria ensure that the country’s economic conditions are not significantly different from those of the countries that already use the euro and that its public finances are sound:
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price developments. Inflation – that is, the general increase in prices – must be kept under control. Specifically, the average inflation rate in the year preceding the assessment for entry must not exceed by more than 1.5 percentage points that of the Member States with the best performance in terms of price stability;
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public finances. The state must have its public finances in order and be in a sustainable fiscal position. In technical terms, the budget balance (the gap between spending and revenue) and public debt must remain within certain thresholds (see box below);
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the exchange rate between the national currency and the euro. The country must have participated in the European Exchange Rate Mechanism (ERM II) for at least two years, and during that period the exchange rate between its national currency and the euro must have remained relatively stable around a reference value;
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long-term interest rates. The interest rates paid by the state when it borrows must not exceed by more than 2 percentage points those of the Member States with the best results in terms of inflation. The assessment looks at yields on long-term government bonds or comparable securities.
The budget balance is the difference between a state's revenue (for example, taxes) and expenditure (such as pensions, healthcare spending and so on) over a given period, for instance a year. If expenditure exceeds revenue - in other words, if the state spends more than it collects - there is a budget deficit. Public debt accumulates over time as a result of deficits and decreases when the budget is in surplus.
Under the convergence criteria, the deficit must not exceed 3 per cent of GDP (gross domestic product, the value of goods and services sold in a country over a given period), with some exceptions where it is only slightly above that threshold. The ratio of public debt to GDP must not exceed 60 per cent, again with some exceptions where the ratio is being reduced sufficiently and at an adequate pace towards 60 per cent.
In addition to the convergence criteria, a country must also meet other requirements in order to officially adopt the euro. For example, its institutions must be sound and its legislation must be compatible with the Treaties of the European Union.
Who decides whether a country can adopt the euro?
The European Commission and the European Central Bank (ECB) assess whether a Member State meets the requirements, and each publishes its conclusions in a report. On the basis of these two reports, and after consulting the European Parliament, the Council of the EU (Ecofin) authorises the adoption of the euro by the Member State.
In the near future, Italy and the other euro area countries may also adopt a digital version of the euro. To find out more, read our article on the digital euro in the 'Made Easy' section.
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