Summary of the Fiscal Stability Treaty

The details of the Treaty

Preamble

The Treaty contains a lengthy preamble which sets out why it has been agreed by the countries concerned and what its main contents are. The countries which have signed the Treaty are known as the “contracting parties” to the treaty.

The main stated reasons for agreeing the Treaty are that the parties to the Treaty:

• Are obliged to regard their economic policies as a matter of common concern;
• Want to promote conditions for stronger economic growth in the EU and, in order to achieve that, want to develop closer coordination of economic policies in the euro area;
• Recognise the need for governments to maintain sound and sustainable public finances and to prevent a government deficit becoming excessive; this requires the introduction of specific rules on a balanced budget and on an automatic mechanism to take corrective action.

Aims of the Fiscal Treaty

The aims of the Treaty are

• to strengthen Economic and Monetary Union by agreeing a set of rules on budgetary discipline; (this set of rules is sometimes called the “fiscal compact”);
• to strengthen the co-ordination of economic policies within the EU; and
• to improve the governance of the euro area.

To whom it applies

The Treaty applies in full to the contracting parties (the countries who agree to the treaty) whose currency is the euro. If ratified, it will apply in full to Ireland. There are different rules for the non-euro countries.

Effect on financial assistance/bail-out mechanisms

The preamble explicitly states that the provisions of this Treaty do not change the conditions under which financial assistance has been granted to a country in a stabilisation programme – in effect, this Treaty does not change the conditions under which Ireland is getting a “bail-out” from the Troika. It also states that, from 1 March 2013, any future such bail-outs, involving the use of funds from the European Stability Mechanism, will be granted only to those countries which have ratified and implemented this Treaty. The ESM treaty also includes a similar condition.

The fiscal compact

The essential features of the fiscal compact are that

• the governments agree to be bound by rules on the level of government deficits and government debt
• these rules must be implemented in national legislation
• the European Court of Justice may impose penalties for failure to abide by these rules.

Balanced budget/the deficit brake

The Treaty requires that the general government budget must be balanced or in surplus. This means that, in general, the government’s “structural deficit” must not be more than 0.5% of gross domestic product. If it is more than this, 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 time table set by the EU. The country may deviate from the time table 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 or
• periods of severe economic downturn.

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

Each country must put a “correction mechanism” in place. This mechanism will be based on common principles to be set out by the European Commission. These will deal with, among other things,

• the nature, size and time-frame of the corrective action to be undertaken;
• the role and independence of the institutions which will have responsibility at national level for monitoring how the rules are put into effect

Level of government debt/the debt brake

Under the current 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

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. This is called a “budgetary and economic partnership programme”. The content and format of these programmes will be set out in EU law. They will be monitored by the European Commission and the Council in the same way as the Stability and Growth Pact is monitored at present. Among other things, countries will be 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. This decision making process is sometimes called “reverse QMV”.

If Commission concludes that a country has failed to comply with the requirements to put these rules fully into law or another country reaches this conclusion, the issue may be referred to the European Court of Justice (ECJ). The Court’s ruling will be binding on all parties. If the country then fails to abide by the ECJ 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 ESM.

The ECJ already has a general power to impose fines on countries which fail to abide by its judgments (Article 260 of the Treaty on the Functioning of the European Union (pdf)). The Commission has established criteria for deciding what penalty should be imposed.

Co-ordination of economic policies

The treaties governing the EU already provide for various economic co-ordination procedures and mechanisms including some which are specific to euro area countries (for example, Article 136 of the Treaty on the Functioning of the EU (pdf)). The countries which ratify the Fiscal 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.

Governing the euro area

The Treaty formalises the present 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.

A President of the Euro Summit will be appointed by the Heads of State or Government of the countries which have ratified the Treaty, 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 this Treaty.