Fiscal Stability Treaty

Introduction

The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG) was signed in March 2012 by the leaders of all euro area members and 8 other EU member states. It entered into force on 1 January 2013 and aims to strengthen fiscal discipline in the euro area through a balanced budget rule and an automatic correction mechanism. The Treaty is frequently described as the “Fiscal Compact Treaty” or the “Fiscal Stability Treaty”.

The Treaty applies in full to the countries who have ratified it and whose currency is the euro. There are different rules for the non-euro countries.

The Treaty is an inter-governmental treaty and not an EU treaty, but its implementation involves using the EU institutions. It does not amend the existing EU treaties. Although it is not itself part of the treaties which govern the EU, it is applied and interpreted in conformity with the EU treaties and with EU law.

It is the intention of the parties to the Treaty to incorporate its substance into the EU treaties as soon as possible and within 5 years of it coming into force at the latest.

The Fiscal Stability Treaty

The Treaty deals with 3 main issues:

  • Fiscal stability, that is, the rules on the levels of government deficit and government debt (the fiscal rules in the Treaty are sometimes described as the “Fiscal Compact”)
  • Economic co-ordination in the EU
  • How the euro area is governed

There are already detailed EU rules in existence about these issues, particularly about fiscal stability. The Treaty repeats some of these rules, reinforces some and introduces some new rules.

Fiscal stability

The Treaty requires that the rules on government deficits and debts be put into national law by the end of 2013 and that there be a national body with responsibility for monitoring their implementation.

Balanced budget/the deficit brake

The Treaty requires that the general government budget must be balanced or in surplus. This means that, in general, a government’s structural deficit must not be more than 0.5% of gross domestic product (GDP). The structural deficit is the general government deficit adjusted for the economic cycle and for one-off or temporary measures. It must be estimated. However, it is difficult to estimate it accurately and precision is not possible.

If the structural deficit is more than 0.5% of GDP, the government is obliged to work towards reducing it. This must be done within time limits set by the EU.

If the government debt is significantly below 60% of GDP and the public finances are sustainable in the long term, the structural deficit may be up to 1% of GDP.

The structural deficit is the general government deficit adjusted for the economic cycle and for one-off or temporary measures. It must be estimated. It is difficult to estimate it accurately and precision is not possible.

The Treaty provides that the rules on the structural deficit are met if the deficit is at its country specific medium-term objective. This means that a separate objective is set for each country – the specific circumstances of each country are taken into account when setting this objective. The objective is revised from time to time to take account of economic changes. Each country is obliged to work towards achieving the objective which has been set for it within a timetable set by the EU. The country may deviate from the timetable only in exceptional circumstances. Exceptional circumstances are:

  • Unusual events outside the control of the country concerned which have a major impact on the financial position of the general government
  • Periods of severe economic downturn.

If there are significant deviations from the medium-term objective or the timetable set to achieve it, a correction mechanism is triggered. This will oblige the country to correct the deviation over a defined period.

Level of government debt/the debt brake

Under the existing rules, all countries are required to maintain their general government debt below 60% of GDP. The Treaty repeats that requirement. Where the debt is greater than 60%, it must be reduced by one twentieth a year on average until the target is met.

Implementation and enforcement

If the Commission concludes that a country has failed to comply with the requirements to put the rules on government deficits and debts fully into law, or another country reaches this conclusion, the issue may be referred to the European Court of Justice. The Court’s ruling is binding on all parties. If the country fails to abide by the ruling, the Court may impose financial sanctions on that country. The sanction may be a lump sum or penalty payment of not more than 0.1% of the country’s GDP. In the case of euro area countries, any such penalty will be payable to the European Stability Mechanism (ESM).

Countries which have excessive deficits (technically, the countries which are in the excessive deficit procedure) are required to put in place a detailed programme of structural reforms which are designed to reduce the deficit. The content and format of these programmes are set out in EU law. They are monitored by the European Commission and the Council in the same way as the current EU rules on government debt and deficits, known as the Stability and Growth Pact, is monitored at present. Among other things, countries are required to report their plans for issuing public debt to the Commission and the Council.

The monitoring of the Stability and Growth Pact includes the European Commission making recommendations for the correction of excessive deficits. This Treaty provides that, in general, the countries that have ratified it must support the Commission’s proposals. This obligation will not apply where a qualified majority of the euro area countries opposes the proposed recommendation or decision.

Economic co-ordination

The treaties governing the EU already provide for various economic co-ordination procedures and mechanisms including some which are specific to euro area countries. The countries which have ratified the Treaty restate their general commitment to take the measures necessary for the good functioning of the euro area in pursuit of the objectives of fostering competitiveness, promoting employment, contributing further to the sustainability of public finances and reinforcing financial stability. The ratifying countries also agree to discuss planned economic policy reforms among themselves before they are implemented and, where appropriate, co-ordinate such reforms.

Governance of the euro area

The Treaty formalises the practice whereby the leaders of the euro area countries hold informal meetings. It requires that the heads of state or government of the euro area countries that ratify the Treaty must meet informally in Euro Summit meetings. The meetings must be held with the President of the European Commission. The President of the European Central Bank must be invited to take part and the President of the European Parliament may be invited.

The President of the Euro Summit is appointed by the heads of state or government of the euro area countries, by a simple majority, at the same time the European Council elects its President and for the same term of office. Euro Summit meetings must take place at least twice a year.

Other issues

The Treaty provides for a conference of representatives of the European Parliament and national parliaments in order to discuss budgetary policies and other issues covered by the Treaty.

Further information

The full text of the Treaty (pdf) is available on the European Council website.

Page edited: 5 November 2013