ANALYSIS:Europe's new pact, strongly backed by the German chancellor, is designed to toughen up enforcement of EU rules
EUROPE’S LEADERS aim to enact Europe’s new fiscal treaty next January after a deal on Monday night to finalise the terms of the pact.
In order to prevent any country or small group of countries from exercising a veto, they have resolved that the pact will take effect once it is ratified by 12 of the 17 euro zone countries.
In reality, however, governments with frail public finances will be under pressure to enact the treaty by March 1st, 2013. This is because the granting of rescue aid from the new European Stability Mechanism permanent bailout fund will be conditional on ratification of the fiscal treaty by that date.
The treaty, championed by German chancellor Angela Merkel, is designed to toughen up the enforcement of EU rules.
These oblige member states to keep their budget deficit below 3 per cent of gross domestic product (GDP) and ensure their public debt does not exceed or is sufficiently declining towards 60 per cent of GDP.
Britain’s veto over a European treaty led EU leaders to pursue an international agreement, operating outside EU law.
Most of the treaty falls within the sweep of newly-enacted European legislation harden the stability and growth pact. However, it contains two elements which fall beyond the ambit of existing law.
The first is the obligation on participating governments to adopt a permanent golden rule to limit public debt and budget deficits.
The second is the obligation to introduce an automatic corrective mechanism to reverse any deviation from an EU-approved recovery plan if a government’s debt or deficit breaches the limits.
Germany pushed for weeks for these limits to be enshrined in constitutional law but relented to accept a reference to “preferably constitutional” measures.
“The rules ... shall take effect in the national law of the contracting parties at the latest one year after the entry into force of this treaty through provisions of binding force and permanent character, preferably constitutional, or otherwise guaranteed to be fully respected and adhered to throughout the budgetary process,” the treaty says.
The European Commission will monitor compliance with this provision. Legal action can be taken in the European Court of Justice against governments which breach it.
Any member state which believes another has not complied with the Court’s ruling can ask it to impose financial sanctions on that government.
The Court may impose a penalty “appropriate in the circumstances” and which does not exceed 0.1 per cent of the country’s GDP.
In Ireland the debt-brake is set to be enshrined in the Government’s Fiscal Responsibility Bill, which will include a proviso that its terms cannot be unwound in the annual Finance Act.
The Government’s obligations under the EU-IMF bailout will supersede those set out in the treaty.
When the bailout is finished, however, the treaty will compel the State to run a “balanced” or “surplus” general government budgetary position.
The pact lays heavy emphasis on the achievement of medium-term objectives proposed by the European Commission to bring a country’s structural deficit to 0.5 per cent of GDP at market prices. This is a reference to the budget deficit net of one-off and temporary measures.
“Progress towards and respect of the medium-term objective shall be evaluated on the basis on an overall assessment with the structural balance as a reference, including an analysis of expenditure net of discretionary revenue measures, in line with the provisions of the revised stability and growth pact,” the treaty says.
Any euro zone country which breaches its deficit criterion under the stability pact faces penalties proposed by the commission. Only a qualified majority of other euro zone countries can block the commission’s recommendation.
Treaty participants may temporarily deviate from their country-specific objectives “only in exceptional circumstances” and provided the deviation does not endanger medium-term fiscal sustainability.
Such circumstances are defined as “unusual event” outside a government’s control which has a big impact on its finances or a severe economic downturn.
“In the event of significant deviations from the medium-term objective or the adjustment path towards it, a correction mechanism shall be triggered automatically,” the treaty says.
“The mechanism shall include the obligation of the contracting party concerned to implement measures to correct the deviations over a defined period of time.” As per existing legislation, a country whose national debt exceeds the EU limit of 60 per cent of GDP is obliged under the treaty to reduce it at an average rate of one-twentieth per year.
Poland pressed until the final negotiation for the right to attend all summits of euro zone leaders, but was blocked by euro countries. The eventual compromise gives the leaders of non-euro countries the right to attend euro summits concerning competitiveness, any modification of the architecture of the euro area and its fundamental rules.
At least once a year the non-euro countries can attend a summit to discuss the treaty’s implementation.
For the full text of the treaty see irishtimes.com/indepth/
