European Economic and Monetary Union Sander Winckel Adviser EIF Ministry of Finance SR Sofia, October 20-21, 2006

Content Economic theory Economic theory History of Economic and Monetary Union History of Economic and Monetary Union EU new Member States EU new Member States

Models of Economic Integration Preferential trade agreements ( Lome) Preferential trade agreements ( Lome) Free Trade Area (EFTA) Free Trade Area (EFTA) Harmonisation of external tariffs plus free trade area (EEC) Harmonisation of external tariffs plus free trade area (EEC) Common Market: market integration plus factor mobility (capital and labor). This stage may include monetary union to ensure complete factor mobility (EU) Common Market: market integration plus factor mobility (capital and labor). This stage may include monetary union to ensure complete factor mobility (EU)

Monetary union - definition In economics, a monetary union is a situation where several countries have agreed to share a single currency among them. In economics, a monetary union is a situation where several countries have agreed to share a single currency among them.monetary unionmonetary union The European Economic and Monetary Union (EMU) exists between 12 of the 25 member states of the European Union which have adopted the euro as their single currency and who co-ordinate their economic policies. The European Economic and Monetary Union (EMU) exists between 12 of the 25 member states of the European Union which have adopted the euro as their single currency and who co-ordinate their economic policies.European UnioneuroEuropean Unioneuro

Theory of Optimal Currency Areas (OCA) Robert Mundell – 1961 (Nobel Prize 1999): Size of OCA dependent on degree of integration of economy (highly integrated economy less susceptible to asymmetric shocks), preferences regarding inflation and unemployment, different labor market institutions, growth rates, balances of trade, fiscal systems etc. (economic policy coordination) Size of OCA dependent on degree of integration of economy (highly integrated economy less susceptible to asymmetric shocks), preferences regarding inflation and unemployment, different labor market institutions, growth rates, balances of trade, fiscal systems etc. (economic policy coordination) Asymmetric shock: recession which only affects some members of a group of trading countries Asymmetric shock: recession which only affects some members of a group of trading countries Country needs separate currency if the economic costs of an asymmetric shock, through changes in wages and prices, factor mobility or government budget, would be higher than those of altering the exchange rate Country needs separate currency if the economic costs of an asymmetric shock, through changes in wages and prices, factor mobility or government budget, would be higher than those of altering the exchange rate

Optimal Currency Areas (cont.) Therefore, an independent monetary policy with exchange rate flexibility is the most efficient way to deal with asymmetric shocks Therefore, an independent monetary policy with exchange rate flexibility is the most efficient way to deal with asymmetric shocks But …. asymmetric shocks sometimes occur only in one region or in a specific sector in one or more countries But …. asymmetric shocks sometimes occur only in one region or in a specific sector in one or more countries Flexible exchange rate regime less efficient in open and/or small economies Flexible exchange rate regime less efficient in open and/or small economies And …. theory is static (e.g. exchange rate changes can be effected in short term, other changes take much longer) And …. theory is static (e.g. exchange rate changes can be effected in short term, other changes take much longer) Thus … more dynamic (and contrarian) theory in follow-up paper: Thus … more dynamic (and contrarian) theory in follow-up paper:

‘Uncommon Arguments for Common Currencies’ and ‘A plan for a European Currency’ (Mundell, 1970) Common currency can reduce impact of asymmetric shocks by better reserve pooling and portfolio diversification: Common currency can reduce impact of asymmetric shocks by better reserve pooling and portfolio diversification: Negative effects on currency are shared with currency partners Negative effects on currency are shared with currency partners Impact on economy of whole currency area will be less, therefore less risk premium needed on capital market instruments denominated in that currency Impact on economy of whole currency area will be less, therefore less risk premium needed on capital market instruments denominated in that currency Macro-economic shocks weakened by capital movements Macro-economic shocks weakened by capital movements Single currency reduces speculation (as in 1960s) Single currency reduces speculation (as in 1960s) EU economies are highly integrated (e.g. intra-EU trade >90% of all members’ trade) EU economies are highly integrated (e.g. intra-EU trade >90% of all members’ trade)

Costs and benefits of Monetary Union Costs: Increasing loss of national sovereignty Increasing loss of national sovereignty Loss of control over monetary policy (instruments: interest rate, exchange rate, open market ops, discount window, reserve requirements) Loss of control over monetary policy (instruments: interest rate, exchange rate, open market ops, discount window, reserve requirements) Benefits: Lower transaction costs between member states Lower transaction costs between member states More efficient market – less price inequality More efficient market – less price inequality Greater economic certainty Greater economic certainty Lower interest rates Lower interest rates Seignorage Seignorage Less speculation and currency risk Less speculation and currency risk Sharing of macro-economic shocks Sharing of macro-economic shocks

Exchange rate system after WW II Bretton Woods fixed exchange rates – since 1945 Bretton Woods fixed exchange rates – since 1945 Currencies pegged to fixed USD/gold rate Currencies pegged to fixed USD/gold rate Currency had to remain within upper and lower bands Currency had to remain within upper and lower bands At shock reserves had to be sold At shock reserves had to be sold US expansionary fiscal policy from 1965 (Vietnam) caused inflation and stress to the system US expansionary fiscal policy from 1965 (Vietnam) caused inflation and stress to the system

Exchange rate system after WW II – cont. 1967: devaluation UK pound 1967: devaluation UK pound Increased speculative activities in money markets Increased speculative activities in money markets 1971: first US dollar devaluation 1971: first US dollar devaluation 1973: second US dollar devaluation 1973: second US dollar devaluation 1973: Bretton Woods system abolished 1973: Bretton Woods system abolished

Economic and monetary integration in Europe 1950: European Payments Union 1950: European Payments Union 1951: European Coal and Steel Community (ECSC) 1951: European Coal and Steel Community (ECSC) 1957: Treaty of Rome – European Economic Community: 6 members 1957: Treaty of Rome – European Economic Community: 6 members 1958: European Monetary Agreement 1958: European Monetary Agreement 1970: Werner Report 1970: Werner Report

Werner Report 1969: Following Bretton Woods System instability and impact of Optimal Currency Areas theory of Prof. Mundell, a High Level group, chaired by Prime Minister Werner of Luxembourg, was set up during the The Hague summit 1969: Following Bretton Woods System instability and impact of Optimal Currency Areas theory of Prof. Mundell, a High Level group, chaired by Prime Minister Werner of Luxembourg, was set up during the The Hague summit Werner Report proposed a three-stage plan to create an economic and monetary union (EMU) within 10 years Werner Report proposed a three-stage plan to create an economic and monetary union (EMU) within 10 years

Werner Report – cont. 1) Reduction of fluctuation margins between Member states currencies, broad guidelines for economic policy, coordination of budgetary policy, preparation of Treaty changes to facilitate later stages of EMU 2) Integration of financial markets and banking systems to create free movement of capital, gradual elimination of exchange rate fluctuations, closer coordination of short term economic policies and budgetary and fiscal measures

Werner Report – cont. 3) Irrevocable fixing of exchange rates between participating national currencies, convergence of economic policies, establishment of a Community system of central banks 1971: collapse Bretton Woods system – temporary abandonment of EMU project 1971: collapse Bretton Woods system – temporary abandonment of EMU project

European economic and monetary integration after Bretton Woods : Snake in the tunnel: fluctuations between member currencies were narrowed (“snake”) in relation to fluctuations towards the US dollar (“tunnel”) 1972: Snake in the tunnel: fluctuations between member currencies were narrowed (“snake”) in relation to fluctuations towards the US dollar (“tunnel”) 1970s oil crisis put system under heavy pressure; sharp fluctuations, some leaving system; 1977: only 5 Members remained in a zone based around the German mark. 1970s oil crisis put system under heavy pressure; sharp fluctuations, some leaving system; 1977: only 5 Members remained in a zone based around the German mark.

European economic and monetary integration after Bretton Woods : new Member States: UK, Ireland, Denmark 1973: new Member States: UK, Ireland, Denmark 1979: European Monetary System, consisting of: 1979: European Monetary System, consisting of: 1) currency basket (ECU) 2) monetary stabilisation mechanism (Exchange Rate Mechanism ERM) 3) mechanism for financing monetary interventions (European Monetary Cooperation Fund)

European economic and monetary integration in the 1980s 1981: Greece joins EEC 1981: Greece joins EEC 1986: Spain and Portugal join EEC 1986: Spain and Portugal join EEC 1986: Single European Act (Delors Commission): creation of single market; free movement of goods, services, persons, capital (‘four freedoms’) 1986: Single European Act (Delors Commission): creation of single market; free movement of goods, services, persons, capital (‘four freedoms’) 1989: Study on EMU (Delors Report) – completing the single market: introduction of EMU in three stages; using existing institutional framework (unlike Werner Plan) and creating European system of Central Banks 1989: Study on EMU (Delors Report) – completing the single market: introduction of EMU in three stages; using existing institutional framework (unlike Werner Plan) and creating European system of Central Banks

European economic and monetary integration – Delors report Stage 1: increased cooperation between central banks in the field of monetary policy, removal of obstacles to financial integration, monitoring of national economic policies, coordination of budgetary policy Stage 1: increased cooperation between central banks in the field of monetary policy, removal of obstacles to financial integration, monitoring of national economic policies, coordination of budgetary policy Stage 2: Preparations for final EMU phase, establishment of ESCB, gradual transfer of monetary policy to European institutions, narrowing of margins of fluctuation within exchange rate mechanism Stage 2: Preparations for final EMU phase, establishment of ESCB, gradual transfer of monetary policy to European institutions, narrowing of margins of fluctuation within exchange rate mechanism Stage 3: fixing exchange rates between currencies and replacement by single European currency, transfer of responsibility for monetary policy to ESCB Stage 3: fixing exchange rates between currencies and replacement by single European currency, transfer of responsibility for monetary policy to ESCB

European economic and monetary integration – 1990s 1992: ERM under pressure: speculative attacks on GBP and ITL; ESP and PTE devaluation 1992: ERM under pressure: speculative attacks on GBP and ITL; ESP and PTE devaluation 1992: Maastricht Intergovernmental Conference establishing new Treaty on European Union, including the acceptance of the Economic and Monetary Union (EMU) 1992: Maastricht Intergovernmental Conference establishing new Treaty on European Union, including the acceptance of the Economic and Monetary Union (EMU) Economic convergence criteria concerning inflation rate, public finances (relating to deficits and debt), exchange rate stability and long-term interest rates (“Maastricht criteria”) Economic convergence criteria concerning inflation rate, public finances (relating to deficits and debt), exchange rate stability and long-term interest rates (“Maastricht criteria”)

Economic and Monetary Union Stage 1: elimination of exchanges controls and most restrictions on capital movements, better coordination of economic policies and intensification of central bank coordination among Member States; setting of criteria for entry into stage Stage 1: elimination of exchanges controls and most restrictions on capital movements, better coordination of economic policies and intensification of central bank coordination among Member States; setting of criteria for entry into stage Stage 2: closer policy coordination, devising multi-annual programs to reduce inflation and budget deficits, creation of European Monetary Institute Stage 2: closer policy coordination, devising multi-annual programs to reduce inflation and budget deficits, creation of European Monetary Institute 1998 – Stage 3: fixing of exchange rates, establishment of European Central Bank 1998 – Stage 3: fixing of exchange rates, establishment of European Central Bank

Maastricht Criteria Inflation rate: average inflation rate not more than 1.5 % from average of best three EU member states Inflation rate: average inflation rate not more than 1.5 % from average of best three EU member states Budget deficit: at or below 3 % of GDP, with tendency to 0 % or surplus in the medium term Budget deficit: at or below 3 % of GDP, with tendency to 0 % or surplus in the medium term Public debt: not exceeding 60 % of GDP Public debt: not exceeding 60 % of GDP Currency stability: respect for normal fluctuation margins of ERM without severe tensions for at least two years without devaluation Currency stability: respect for normal fluctuation margins of ERM without severe tensions for at least two years without devaluation Interest rate convergence: average nominal long-term interest rate not more than 2 % above that of best three EU member states Interest rate convergence: average nominal long-term interest rate not more than 2 % above that of best three EU member states

European economic and monetary integration – 1990s – cont. 1993: ERM fluctuation bands widened to +/- 15% after UK pound and Italian lira had left the mechanism and Spanish peseta, Portuguese escudo, Irish punt and French franc came under speculative attack 1993: ERM fluctuation bands widened to +/- 15% after UK pound and Italian lira had left the mechanism and Spanish peseta, Portuguese escudo, Irish punt and French franc came under speculative attack 1994: launch of European Monetary Institute, forerunner of ECB 1994: launch of European Monetary Institute, forerunner of ECB 1995: Austria, Finland and Sweden become members of EU 1995: Austria, Finland and Sweden become members of EU 1997: Stability and Growth Pact (SGP) adopted and ERM II set up to provide stability between euro and non-euro EU currencies 1997: Stability and Growth Pact (SGP) adopted and ERM II set up to provide stability between euro and non-euro EU currencies 1998: decision on Euro members – 11 fulfilling convergence criteria. Greece and Sweden not fulfilling criteria; opt-outs: UK and Denmark 1998: decision on Euro members – 11 fulfilling convergence criteria. Greece and Sweden not fulfilling criteria; opt-outs: UK and Denmark

Stability and Growth Pact (1997) To keep budgetary discipline in EMU: Political commitment to implement budget surveillance process (peer pressure) Political commitment to implement budget surveillance process (peer pressure) Elements to prevent budget deficits> 3%: preparation according to specific format and submission of stability and convergence programs to Council; early warning mechanism Elements to prevent budget deficits> 3%: preparation according to specific format and submission of stability and convergence programs to Council; early warning mechanism Dissuasive elements requiring Member States to take corrective actions if 3% value is breached, including sanctions (excessive deficit procedure) Dissuasive elements requiring Member States to take corrective actions if 3% value is breached, including sanctions (excessive deficit procedure)

Exchange Rate Mechanism II Participating currencies have 15% fluctuation bands around the central Euro rate Participating currencies have 15% fluctuation bands around the central Euro rate Denmark (participant since beginning of the system in 1999) has narrower fluctuation band of 2.25% Denmark (participant since beginning of the system in 1999) has narrower fluctuation band of 2.25% Formal requirement of two year participation before country can request to join Euro Formal requirement of two year participation before country can request to join Euro Intended to orient policies towards stability, foster convergence and thereby helps them to prepare for Euro adoption Intended to orient policies towards stability, foster convergence and thereby helps them to prepare for Euro adoption

The institutions of the Economic and Monetary Union European Central Bank and European System of Central Banks: The primary independent economic institutions of the EMU. Their goal is maintenance of price stability European Central Bank and European System of Central Banks: The primary independent economic institutions of the EMU. Their goal is maintenance of price stability The Council of Economic and Finance ministers (Ecofin, Council): consists of all the Economic and Finance ministers of the EU Member States The Council of Economic and Finance ministers (Ecofin, Council): consists of all the Economic and Finance ministers of the EU Member States Euro-12 committee: meeting of the Ministers of Economy and Finance of the Euro-zone countries only Euro-12 committee: meeting of the Ministers of Economy and Finance of the Euro-zone countries only

European economic and monetary integration – from 1998 until now 1998: creation of European Central Bank (ECB) 1998: creation of European Central Bank (ECB) 1998: conversion rates fixed 1998: conversion rates fixed 1999: birth of Euro – with 3 year transition period between creation of the Euro and introduction of notes and coins 1999: birth of Euro – with 3 year transition period between creation of the Euro and introduction of notes and coins 2000: Greece allowed to join Euro 2000: Greece allowed to join Euro 2002: Euro becomes official currency in 12 member states 2002: Euro becomes official currency in 12 member states 2004: 10 new states enter EU, including obligation to join EMU (no opt-out possibility) 2004: 10 new states enter EU, including obligation to join EMU (no opt-out possibility) 2005: Stability and Growth Pact adjusted 2005: Stability and Growth Pact adjusted

Stability and Growth Pact – adjustments 2005 Medium-term budgetary objective of close to balance or in surplus: more room for new CE Member States with low debt and high growth potential Medium-term budgetary objective of close to balance or in surplus: more room for new CE Member States with low debt and high growth potential Member states to cut deficit and debt in good times Member states to cut deficit and debt in good times EC: warnings to countries failing to consolidate in upswings EC: warnings to countries failing to consolidate in upswings Debt must fall at sustainable pace towards 60% of GDP Debt must fall at sustainable pace towards 60% of GDP Assisting rather than punishing countries that break 3% limit, but sanctions remain as last resort Assisting rather than punishing countries that break 3% limit, but sanctions remain as last resort

Stability and Growth Pact – adjustments 2005 – cont. But …. new ‘get-out’ clauses if budget deficit > 3%: Severe economic downturn – negative economic growth (old: -2%) Severe economic downturn – negative economic growth (old: -2%) Small and temporary breaches because of relevant factors, such as: development aid, EU policy goals (e.g. R&D), cost of European (i.e. German) unification Small and temporary breaches because of relevant factors, such as: development aid, EU policy goals (e.g. R&D), cost of European (i.e. German) unification Countries carrying out pension reforms: small breaches allowed Countries carrying out pension reforms: small breaches allowed Time between deficit surpassing 3% and start of sanctions now minimum 5 years or even longer in times of low growth Time between deficit surpassing 3% and start of sanctions now minimum 5 years or even longer in times of low growth

Fiscal surveillance: Broad Economic Policy Guidelines Guidance on macro- and microeconomic policies in Member States Guidance on macro- and microeconomic policies in Member States : Integrated Guidelines – combination with Employment Guidelines; links with Lisbon Strategy : Integrated Guidelines – combination with Employment Guidelines; links with Lisbon Strategy Macro guidelines include: economic stability, efficient allocation of resources, coherence between macro- and structural policies and contribution to dynamic and well-functioning EMU Macro guidelines include: economic stability, efficient allocation of resources, coherence between macro- and structural policies and contribution to dynamic and well-functioning EMU Micro guidelines include: deepening internal market, create more attractive business environment, in particular for SMEs, stimulate R&D, ICT, industrial base (Lisbon Strategy – criticism: Europe should not concentrate on peer mechanism to reduce productivity gap but increase working hours) Micro guidelines include: deepening internal market, create more attractive business environment, in particular for SMEs, stimulate R&D, ICT, industrial base (Lisbon Strategy – criticism: Europe should not concentrate on peer mechanism to reduce productivity gap but increase working hours)

Criteria for Euro membership High degree price stability High degree price stability Sustainability of public finances Sustainability of public finances Normal fluctuation margins in ERM for minimum 2 years Normal fluctuation margins in ERM for minimum 2 years Durability of convergence as reflected in long term interest rate levels Durability of convergence as reflected in long term interest rate levels ……translated in ‘Maastricht’- criteria: ……translated in ‘Maastricht’- criteria:

Maastricht Criteria Inflation rate: average inflation rate not more than 1.5 % from average of best three EU member states (over a period of one year before the examination) (Lithuania–2006) Inflation rate: average inflation rate not more than 1.5 % from average of best three EU member states (over a period of one year before the examination) (Lithuania–2006) Budget deficit: at or below 3 % of GDP, with tendency to 0 % or surplus in the medium term (there should be no excessive deficit) Budget deficit: at or below 3 % of GDP, with tendency to 0 % or surplus in the medium term (there should be no excessive deficit) Public debt: not exceeding 60 % of GDP Public debt: not exceeding 60 % of GDP Currency stability: respect for normal fluctuation margins of ERM without severe tensions for at least two years without devaluation (in particular the Member State shall not have devalued on its own initiative) Currency stability: respect for normal fluctuation margins of ERM without severe tensions for at least two years without devaluation (in particular the Member State shall not have devalued on its own initiative) Interest rate convergence: average nominal long-term interest rate not more than 2 % above that of best three EU member states in terms of price stability (on the basis of long term government bonds or comparable securities) Interest rate convergence: average nominal long-term interest rate not more than 2 % above that of best three EU member states in terms of price stability (on the basis of long term government bonds or comparable securities)

Progress towards Maastricht criteria in 2006 Country Interest rate (average) Inflation rate (average) Government budget balance Government debt Reference value 5.53 (July ’06) 2.8 <-3<60 Cyprus Czech Republic Estonia Hungary Latvia Lithuania Malta Poland Slovakia Slovenia

Pros and cons of early joining Euro - examples Pro: Stimulus for trade and foreign investment (greater certainty) Stimulus for trade and foreign investment (greater certainty) Stimulus for reigning in public spending Stimulus for reigning in public spending Volatile capital flows can heavily influence exchange rate (e.g. Hungary, Czech Republic, Poland, Slovakia) Volatile capital flows can heavily influence exchange rate (e.g. Hungary, Czech Republic, Poland, Slovakia)Con: Transitional restructuring unfinished (e.g. high government deficit in Hungary) Transitional restructuring unfinished (e.g. high government deficit in Hungary) Rapid productivity growth (e.g. Baltics) and high inward investment are offset via appreciation or inflation; fixing of exchange rates will close off former route Rapid productivity growth (e.g. Baltics) and high inward investment are offset via appreciation or inflation; fixing of exchange rates will close off former route Exogenously induced inflation limits room for endogenous inflation (Slovakia) Exogenously induced inflation limits room for endogenous inflation (Slovakia)

Euro entry preparations–current situation Denmark participates since start of ERM-II (1.1.99) Denmark participates since start of ERM-II (1.1.99) Estonia, Lithuania joined ERM-II on June 27, 2004, but high inflation makes some obstacles to adopt Euro before Slovenia has already fulfilled all Maastricht criteria and EMU entry is approved from January 2007 by relevant European institutions Estonia, Lithuania joined ERM-II on June 27, 2004, but high inflation makes some obstacles to adopt Euro before Slovenia has already fulfilled all Maastricht criteria and EMU entry is approved from January 2007 by relevant European institutions Cyprus, Latvia and Malta joined ERM-II on May 2, 2005, Cyprus and Malta plan to join the Eurozone in 2008 (and to start using Euro notes and coins as from January 1, 2009), while Latvia will have to wait until 2010 because of high inflation. Cyprus, Latvia and Malta joined ERM-II on May 2, 2005, Cyprus and Malta plan to join the Eurozone in 2008 (and to start using Euro notes and coins as from January 1, 2009), while Latvia will have to wait until 2010 because of high inflation. Slovakia joined ERM-II on November 28, 2005, plans to join the Eurozone in 2008 and to start using Euro notes and coins as from January 1, Slovakia joined ERM-II on November 28, 2005, plans to join the Eurozone in 2008 and to start using Euro notes and coins as from January 1, The Czech Republic envisaged to adopt the Euro in 2010, but delay has already been admitted by the prime minister and CNB governor, so ERM-II participation is only foreseen as from 2008 The Czech Republic envisaged to adopt the Euro in 2010, but delay has already been admitted by the prime minister and CNB governor, so ERM-II participation is only foreseen as from 2008 Hungary could realistically join ERM II between 2007 and 2009 aiming to adopt Euro between 2011 and Hungary could realistically join ERM II between 2007 and 2009 aiming to adopt Euro between 2011 and Poland could be prepared for EMU entry in 3 years, but in line with market expectation based also on reactions of rating agencies it is not very probable before Poland could be prepared for EMU entry in 3 years, but in line with market expectation based also on reactions of rating agencies it is not very probable before 2012.

Adopting Euro – economic requirements Ability to deal with asymmetric shocks: Ability to deal with asymmetric shocks: Synchronisation of business cycles with Euro area Synchronisation of business cycles with Euro area Stabilising role of fiscal policy (budgetary room in case of unforeseen shocks) Stabilising role of fiscal policy (budgetary room in case of unforeseen shocks) Wage and price flexibility (in the absence of the former, competition in product markets) Wage and price flexibility (in the absence of the former, competition in product markets) Appropriate level of competitiveness (wage growth consistent with productivity) Appropriate level of competitiveness (wage growth consistent with productivity)

Convergence Program Slovakia (Nov 2005) Inflation Government budget (excl. - costs of 2nd pillar - incl.) Government debt

Latest estimates Slovakia Inflation (June 2006) Government budget (excl. - costs of 2nd pillar - incl.) Government debt 20052, , , , ,

Comparison Convergence Program (Nov 2005) with Draft Budget (August 2006) Draft Budget Convergence Program Government budget (excl-costs 2nd pillar-incl.) Government debt Government budget (excl.-costs 2nd pillar- incl.) Government debt

Slovakia: convergence – cont. Interest rates safely settled below threshold value (3.9% in SR vs reference 5.3% on average in July 2006) Interest rates safely settled below threshold value (3.9% in SR vs reference 5.3% on average in July 2006) Pension reform, health reform, public administration/ finance reform - necessary to achieve long-term stability Pension reform, health reform, public administration/ finance reform - necessary to achieve long-term stability Thanks to higher economic growth (6.0% SR vs 1.4% EU15 in 2005), real convergence also under way: GDP per capita (PPP; 2005) 50.0%; labour productivity per capita (2005) 57.7%, relative price level (2004) 52.8% - necessary to achieve long-term stability Thanks to higher economic growth (6.0% SR vs 1.4% EU15 in 2005), real convergence also under way: GDP per capita (PPP; 2005) 50.0%; labour productivity per capita (2005) 57.7%, relative price level (2004) 52.8% - necessary to achieve long-term stability But unemployment still problem: 15.5% in 2007; 14.7% in (ESA95) But unemployment still problem: 15.5% in 2007; 14.7% in (ESA95) And inflation rising in 2006 due to higher energy prices And inflation rising in 2006 due to higher energy prices

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