ECB: Inflation and Geopolitical Uncertainty Challenge Future Euro Adopters

26 June 2024

By Isabel Teles – FRANKFURT (Econostream) - Bulgaria, the Czech Republic, Hungary, Poland, Romania and Sweden recorded average inflation rates above the reference value of 3.3%, according to the 2024 Convergence Report published Wednesday by the European Central Bank.

‘Over the past two years, the countries under review have been hit by the fallout from Russia’s invasion of Ukraine, which led to a significant weakening of economic activity and soaring inflation’, the ECB said in a press release accompanying the publication of the Convergence Report.

The report examined the progress in ‘fulfilling their obligations regarding the achievement of economic and monetary union’ in six of the seven EU member states that have yet to adopt the euro; Denmark was not covered because it did not submit a formal request, according to the ECB.

‘Limited progress has been made by non-euro area member states of the European Union on economic convergence with the euro area since 2022', the ECB said.

The economic impact of Russia’s war against Ukraine was stronger in the central and eastern European countries, the ECB said.

Even with uncertainty about economic prospects due to the geopolitical tensions, activity was expected to strengthen in all countries under review, according to the report.

‘A key source of uncertainty is geopolitical tensions, which might exacerbate fragmentation trends, potentially further disrupting trade and investment flows and increasing risk perceptions’, the ECB said. ‘The economic outlook is also clouded by losses in price competitiveness over recent years in most of the countries under review and uncertainty surrounding the path of inflation.'

According to the report, the strength and quality of institutions, defined as ‘an important factor in the sustainability of convergence over time’, remained weaker in the countries under review, except for Sweden,  than elsewhere in the EU.

Of the six countries under review, only Bulgaria was considered to have a national legislation fully compatible with the adoption of the euro, the ECB said.

‘With regard to Bulgaria’s legislation, the report concludes that its national legislation is consistent with the Treaty and the Statute, subject to conditions and interpretations set out in the relevant country assessment’, the ECB said.