Non-euro area member states of the European Union (EU) have achieved limited progress toward economic convergence with the eurozone since 2022, according to the just-released European Central Bank’s (ECB) 2024 Convergence Report, which has just been released.

The limited convergence is primarily due to the severe economic conditions. Over the last two years, the countries under review have been hammered by the fallout from Russia’s invasion of Ukraine, which has resulted in a severe slowing of economic activity and rising prices. 

The report indicates that countries with a history of higher energy dependence and closer trade ties with Russia were the most affected. 

Economic activity predicted to improve 

Looking ahead, economic activity is predicted to improve in all of the countries under consideration, but geopolitical tensions and dangers are clouding economic prospects.

Regarding the price stability criterion, five of the nations under consideration – Bulgaria, the Czech Republic, Hungary, Poland, and Romania – had average inflation rates that were much higher than the reference value of 3.3 per cent, while inflation was somewhat higher in Sweden. 

The reference number is based on the three best-performing member states over the past 12 months: Denmark (1.1 per cent), Belgium (1.9 per cent), and the Netherlands (2.5 per cent), taking their average inflation rates for the past 12 months and adding 1.5 percentage points. Finland, an anomaly, was eliminated from the equation.

Four of the nations included in this analysis saw their budget deficits improve in 2023 compared to 2021 levels, owing to the post-pandemic economic recovery and the phase-out of fiscal support measures. 

Economic consequences of Russian invasion of Ukraine 

However, this development was hampered in part by the economic consequences of Russia’s war in Ukraine, such as lower economic activity and fiscal policy measures implemented in reaction to rising energy prices. 

In 2023, the Czech Republic, Hungary, Poland, and Romania all exceeded the three per cent GDP deficit reference mark. Except for Hungary, all of the countries under study had a government debt-to-GDP ratio of less than 60 per cent in 2023. In 2024 and 2025, the budget balance is predicted to continue to exceed the reference figure in Hungary, Poland and Romania.

Romania remains subject to an excessive deficit procedure, which was opened in 2020. On June 19, the European Commission determined that Romania had not taken appropriate steps to eliminate its high deficit. 

In addition, the commission recently found that Hungary and Poland did not meet the Stability and Growth Pact’s government deficit threshold. The commission will suggest that the EU Council initiate excessive deficit procedures for these countries. 

In terms of the exchange rate criterion, only the Bulgarian lev participates in the ERM II system. Bulgaria joined ERM II in July 2020, retaining its existing currency board as a unilateral commitment. This agreement to participate in ERM II was based on several policy pledges made by Bulgarian authorities. 

Bulgaria is presently working to meet these policy commitments, including enhancing its anti-money laundering system.