EURO ZONE leaders have pledged to enact legislation or constitutional change binding their governments to run balanced or surplus budgets and to have the European Court of Justice verify such measures.
The adoption of the “golden rule” is one of the core pillars of a new fiscal compact in which the members of the single currency moved to strengthen Europe’s oversight of their economic policy.
A communiqué the leaders issued early yesterday morning said they decided to adopt the proposal “through an international agreement to be signed in March or at an earlier date” due to the absence of unanimity among EU member states on treaty change.
Although German chancellor Angela Merkel had pursued full-blown amendments to the Lisbon Treaty, the effort was derailed by the refusal of British prime minister David Cameron to accept treaty change without any quid pro quo.
At the same time, the leaders agreed to accelerate the introduction of the European Stability Mechanism permanent rescue fund next year and to drop the requirement that any bailout it supports should include a contribution from private sector investors.
Furthermore, they will waive the requirement for unanimous member state support for ESM interventions in an emergency to ensure the fund can take the necessary decisions “in all situations”. In light of German concerns, however, the leaders made no reference to the granting of a banking licence to the ESM or to its simultaneous operation alongside the EFSF temporary bailout fund.
The communiqué said that the ongoing effort to buttress economic and monetary union would require a “new deal” between their governments. Ireland’s obligations under its EU–IMF bailout supersede the new golden rule so the Government will not be obliged to a run a balanced budget immediately. In principle, however, the new compact means Dublin’s ability to borrow to fund public expenditure will in the future be greatly limited.
The Government plans to enshrine the golden rule in legislation and it will be obliged to ensure that the rule contains an “automatic correction mechanism” that will be triggered in the event of a deviation.
“General government budgets shall be balanced or in surplus; this principle shall be deemed respected if, as a rule, the annual structural deficit does not exceed 0.5 per cent of gross domestic product,” the leaders said.
Furthermore, countries whose deficit is greater than the EU limit of 3 per cent of GDP will have to seek each other’s endorsement and that of the European Commission for an “economic partnership programme” setting out reforms to ensure a durable correction of excessive deficits.
The implementation of the programme and annual budget plans consistent with it will be monitored by the Commission and the European Council, which represents EU governments.
The new agreement includes provisions for “automatic consequences” to be imposed on countries once they breach the 3 per cent limit unless a qualified majority of member states is opposed.
They also called on finance ministers and the European Parliament to “rapidly examine” legislative proposals from the European Commission to escalate the surveillance of budget policies.
According to the leaders, this legislation should be enacted in time for the 2013 budgetary cycle.
The draft legislation, which can be introduced without any treaty amendments, would give the EU authorities the power to continue intrusive policy oversight of bailout recipients long after their formal rescue programmes finish.
It would also compel European governments to produce draft budgets to the Commission by mid-October each year. The Commission would have the power to seek changes to governments’ plans.
