A new pact to spread budgetary 'golden rules'

(BRUSSELS) - European leaders are set to adopt Monday a new treaty to reinforce budgetary discipline among governments in the wake of the debt crisis. A German demand as the price of financial solidarity, it will introduce "golden rules" making balanced budgets mandatory.

-- The 'golden rule'

Countries that sign up commit to balanced budgets, ideally in surplus over the course of economic cycles. The so-called "structural deficit," which strips out one-off effects such as debt repayments and the economic cycle, should be capped at 0.5 percent of gross domestic product (GDP). Countries with debts comfortably below the 60-percent-of-GDP EU threshold will get more leeway, up to 1.0 percent of GDP for the structural deficit.

-- Automatic correction

Each state must ensure that "automatic consequences," or brakes, are triggered where this goal is missed by too great a margin, and are obliged to take action within a certain timeframe.

-- Inscription if possible in constitutions

The treaty asks states to insert the new rule "preferably" into their constitution. This is not an obligation; other legal guarantees that the rules will be respected will also be accepted. Germany had to give ground on this because numerous countries refused to take the constitutional route which they said may require endorsement in referendums which many feared would not pass public muster.

-- European Court of Justice sanctions

The European Court of Justice will verify that countries adopting the treaty have delivered on their legal commitments at national level and under set criteria. Where this is not the case, a state could be taken to the court by one or more fellow states and, in the ultimate sanction, face a fine amounting to 0.1 percent of the guilty country's GDP. This money will be paid into the permanent rescue fund, or financial firewall, being set up in a parallel treaty and to become operational from July this year.

Germany wanted to go further in giving the court powers to penalise broken deficit and debt commitments. France would not give up its sovereignty here, so Germany backed down, for now. If signficantly enhanced eurozone economic governance rules become integrated, the court could monitor national budget planning and other policies, Chancellor Angela Merkel has said in an interview.

-- Quasi-automatic sanctions for excessive deficits

The limit of tolerance over annual public deficits will remain as is at 3.0-percent of GDP, as enshrined in a longstanding European Union Stability and Growth Pact (SGP). If the executive European Commission deems a state to have violated this ceiling, there is a semi-automatic risk of financial penalties. Imposition of these sanctions will be harder to wriggle out of than at present with a majority of weighted votes among states required to prevent the fine being applied. Such a vote is difficult to obtain.

Again, some countries -- Germany, the Netherlands and also the Commission -- would like to go further by applying this principle to public debt as well as deficits. Italy, which has high national debts, rejected this push. The subject remains to be debated during Monday's Brussels summit.

-- Eurozone summits

At least two summits per year are envisaged purely for eurozone states, with non-euro pact signatories invited "at least" once per year. Poland, which retains a target date for entry of around 2015, says this is not enough. Poland wants guarantees it can participate in all meetings where decisions may be taken that could affect it. France refuses to open all of these summits to non-euro states. This dispute also remains to be resolved on Monday.

-- The treaty's entry into force

This is an inter-governmental treaty, distinct from a cohesive EU treaty rewrite. It is to be signed by 26 of the 27 existing EU states, the 17 from the eurozone and nine others. Britain refused to take part. It will enter into force once 12 signatory-states have ratified the treaty.