Fiscal Compact - The EU's new budgetary 'golden rules'

29 May 2012
by eub2 -- last modified 29 May 2012

The EU fiscal pact -- a German demand as the price of financial solidarity with debt-laden, recession-hit eurozone partners -- introduces "golden rules" making balanced budgets mandatory. Here are the main points:

-- The 'golden rule'

Countries that ratify commit to balanced budgets, ideally in surplus over the course of economic cycles. The 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. 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," brakes, are triggered when this goal is missed by too great a margin, and are obliged to take action within a certain timeframe.

-- Rule enshrined, if possible, in constitutions

The treaty asks states to insert the new rules "preferably" into their constitution. Germany backed down on initial constitutional inistence when it became apparent that a series of referendums could torpedo the agreement. Instead, the debt brake takes effect "at the latest one year after the entry into force of this Treaty through provisions of binding force and permanent character," it says.

-- Court supervision

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 peers and, in the ultimate sanction, face an EU fine amounting to 0.1 percent of GDP.

Germany wanted to go further in giving the court powers to penalise broken budget commitments. France would not give up its sovereignty here, even before this month's election as president of Francois Hollande -- who said during campaigning he wanted to re-negotiate the pact as signed by Nicolas Sarkozy, but has since settled for adding a related agreement on growth to be negotiated at an end-June summit.

-- Near-automatic sanctions for excessive deficits

The annual public deficit limit will remain 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 risk of financial penalties. Imposition of these sanctions will be harder to wriggle out of than at present with a qualified majority of states needed to stop the fine. Such a vote is difficult to obtain.

Germany, the Netherlands and the Commission would like to go further by applying this principle to public debt as well. Italy, which has high national debts, rejected this push.

-- 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.

-- The treaty's entry into force

The inter-governmental treaty will enter into force once 12 states have ratified it.

Eurozone countries need to have ratified the treaty by March 1, 2013, in order to be eligible for assistance from the European Stability Mechanism (ESM), an emergency fund of 500 billion euros.

Treaty on stability, coordination and governance in the economic and monetary union

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