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European Union: Treaty on Fiscal Compact

(Feb. 3, 2012) On January 30, 2012, in the midst of Greece's desperate attempts to avert fiscal default, the European Union (EU) Members – except the United Kingdom and the Czech Republic – agreed on a new Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, otherwise known as the fiscal compact. The objectives of the draft Treaty, as laid down in article 1, include the strengthening of budgetary discipline, coordinating economic policies, and improving the governance of the euro zone. (Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, EUROPA (Jan. 31, 2012).)

Under the fiscal compact, a key obligation undertaken by the contracting members is the “balanced budget rule.” Such a rule will be deemed as having been met “if the annual structural balance of the general government is at its country-specific medium-term objective as defined in the revised Stability and Growth Pact with a lower limit of a structural deficit of 0.5 % of the gross domestic product at market prices.” (Id.)

Other obligations agreed upon by the contracting states include:

    • non-deviation from the balanced budget rule, except in exceptional circumstances, such as a major event beyond the control of the government;
    • incorporation of the balanced-budget-related rules into national constitutions or into laws of equivalent rank;
    • adoption and implementation of structural reforms in the case of an excessive deficit, with the European Commission and the Council monitoring their implementation.
    • endorsement of any proposals recommended by the Commission to euro zone members that undergo a deficit reduction procedure; and
    • introduction of a correction mechanism that will be triggered automatically in the case of large deviations from medium-term fiscal objectives. (Id).

The European Commission, as the executive arm of the EU and within its powers granted by the EU treaties, will monitor implementation of the budgetary commitments assumed by parties to the Treaty. In the event of non-conformity with the Treaty rules, the Commission has the power to refer a recalcitrant EU Member State to the European Court of Justice. The Court of Justice may impose a penalty of up to 0.1% of the Member State's GDP. The penalty will be payable to the European Stability Mechanism (ESM) if the EU Member concerned is a euro zone member; otherwise it will go into the general EU budget. The ESM was established in 2010 by Council Regulation 407/2010 to financially assist euro zone members that experience serious financial problems beyond their control. (Id.)

With regard to the coordination of economic policy, the contracting members of the Treaty must take all necessary measures to cooperate on an economic policy that ensures the functioning of the Economic and Monetary Union. The EU Members undertake the obligation to consult with other EU Members and with the institutions of the EU prior to adopting major economic reform plans. (Id. art. 9.)

In regard to the governance of the euro zone, the contracting euro zone members are required to meet informally at least twice a year in euro zone summit meetings with the President of the European Commission and the President of the European Central Bank. Those non-euro zone states that ratify the treaty must be invited to participate in discussions affecting competitiveness and the future of the euro. (Id. art. 12.)

The Treaty will apply fully to the 17 euro zone Members and will enter into force on January 1, 2013, provided that 12 euro zone Members have deposited the instruments of ratification with the General Secretariat of the Council of the European Union. The rules on the fiscal compact have to be transposed into national rules at the latest one year after the entry into force of the Treaty. All the contracting members must ratify the treaty according to their constitutional requirements. The Treaty will be incorporated within the EU body of law after being assessed during the implementation phase and within five years after its entry into force. (Id. art. 14.)