The Treaty on Stability, Coordination and Governance builds on already existing EU legislation, therefore it is worth considering which aspects of the Treaty’s Fiscal Compact are new. This article examines the provisions contained in the Fiscal Compact. The first half of this article considers the four fiscal rules and shows that none are new. The second half considers the enforcement mechanisms in the Treaty and finds that some new and some are not new. A summary of what’s new and what’s not is detailed in Table 1 below.
|The rule that Debt-to-GDP ratio should be 60% or less||Expanded use of reverse qualified majority voting|
|The rule that Government deficits should be 3% or less||The requirement for the introduction of automatic correction mechanisms on a national level|
|The rule that Government structural deficits should be 0.5% or less||The requirement to transpose the fiscal rules into national law|
|The rule that if the debt-to-GDP is “significantly below 60% and where risks in terms of long-term sustainability of public finances are low” the structural deficit can be up to 1.0%||The role of the Court of Justice of the European Union in ensuring that these rules are transposed into national law|
|The allowance for temporary deviations from a country’s medium term objectives in ‘exceptional circumstances’||The provisions to ex-ante report on public debt issuance|
|The requirement for a 1/20 reduction in debt per year if a country has a debt to GDP ratio over 60%||The creation of budgetary and economic partnership programmes|
|Reverse qualified majority voting on sanctions|
Table 1: What’s new and what’s not in the Fiscal Compact?
Most of the provisions contained in the Treaty on Stability, Coordination and Governance concern fiscal policy. These provisions are contained in Title III of the Treaty, which is entitled the ‘Fiscal Compact’ and are probably the most widely discussed aspect of the Treaty.
It is worth noting that the Treaty’s rules on fiscal policy do not say anything about what governments can or should spend on, nor about how much a government can or should spend. The rules only relate to the size of the government deficit and the size of the country’s debt burden.
Although the provisions on fiscal policy are so important that some have referred to the Treaty as the Fiscal Compact, attention should also be paid to Title IV and Title V of the Treaty. Title IV comprises provisions for increased economic policy coordination and convergence and Title V sets out new rules for the governance of the Eurozone. This article will only address Title III, the Fiscal Compact.
The purpose of this article is to give some background to the provisions contained in the Fiscal Compact, as many of them are not new. It demonstrates that even those measures that are new are, by-and-large, relatively minor changes to existing law.
I: The Four Fiscal Rules
The Fiscal Compact contains both a number of restrictions on budgetary policy and details of how these restrictions are to be enforced. The four main restrictions are
1. Debt-to-GDP ratio should be 60% or less;
2. Government deficits should be 3% or less;
3. Government structural deficits should be 0.5% or less
4. If the debt-to-GDP is “significantly below 60% and where risks in terms of long-term sustainability of public finances are low” the structural deficit can be up to 1.0%
None of these restrictions are new.
The 60% debt rule and the 3% deficit rule
The 60% debt rule and the 3% deficit rule are long established. They constitute one of the four ‘Convergence Criteria’ contained in the Maastricht Treaty, which came into effect on 1 November 1993. The Convergence criteria are criteria that European Union Member States have to fulfill in order to adopt the euro as their currency.
Article 104c of the Maastricht Treaty also states “Member States shall avoid excessive government deficits”. The Maastricht Treaty also requires that Member States exercise “compliance with budgetary discipline on the basis of the following two criteria: (a) whether the ratio of the planned or actual government deficit to gross domestic product exceeds a reference value… (b) whether the ratio of government debt to gross domestic product exceeds a reference value… The reference values are specified in the Protocol on the excessive deficit procedure annexed to this Treaty.” The reference values are the 60% debt rule and the 3% deficit rule.[i]
These rules were further advanced four years latter in the Stability and Growth Pact (SGP). The SGP was a set of agreements made in 1997 between the Member States of the EU. It has since been developed substantially. The aim of the SGP was to ensure that the economies of the EU remained in healthy fiscal positions. It was believed that this was necessary for the stability of the Euro, which was to be introduced two years later. The two main provisions of the SGP were, once again, that countries should have a budget deficit no higher than 3% of GDP and a debt to GDP ratio no higher than 60% of GDP.
The SGP was set out in a European Council resolution in June 1997 and in two major pieces of legislation: regulations[ii] 1466/1997 and 1467/1997[iii]. Regulation 1466/1997 is known as the Stability and Growth Pact’s ‘preventative arm’ because it sets out a multilateral surveillance system through which country’s budgetary positions are observed in order to prevent countries from developing deficits greater than 3% of GDP or debt to GDP ratios greater than 60%. A significant part of this is that it requires each country to specify a medium term budgetary objective.
Regulation 1467/1997 is known as the Stability and Growth Pact’s ‘corrective arm’ because it sets out how a country should correct their fiscal position if they have deficits greater than 3% of GDP or debt to GDP ratios greater than 60%. It provides for an ‘excessive deficit procedure’ that should be implemented if countries are not achieving the aims of the SGP.
Revisions to the Stability and Growth Pact
The Stability and Growth Pact has been developed significantly since 1997. The pact was heavily amended in 2005 to allow for deviations from a country’s medium term objectives. The post-2005 SGP is often referred to as ‘the Revised Stability and Growth Pact’.
Over the last year a further series of reforms to develop the SGP has been going through the EU institutions. Firstly there was the six pack. The six pack contains five regulations and one directive. The six pack came into effect on 13 December 2011.
Secondly there is the Treaty on Stability, Coordination and Governance. This is currently in the process of ratification and uniquely the Irish people are being asked to vote on it on 31 May.
Finally there is the two pack. The two pack contains two regulations proposed by the European Commission on 23 November 2011. However, they are awaiting adoption by the Council and it is expected that they will be adopted following any amendments that the European Parliament may put forward. The two pack provides for stronger surveillance of Eurozone countries’ national budgets and more oversight of the economic policy plans of those in financial difficulties.
It is worth emphasising that the six pack, unlike the Treaty on Stability, Coordination and Governance and the two pack, is not currently being debated. It is already law and has been in force since December 13 2011.
The 0.5% and 1% Structural Deficit Rules
The 0.5% and 1% structural deficit rules are contained in both the Treaty on Stability, Coordination and Governance and in the six pack.
The Treaty on Stability, Coordination and Governance commits those who ratify the Treaty to a ‘balanced or in surplus government’ budget. The Treaty says this commitment is respected “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.” Furthermore, it states that this medium term objective can be no higher than 0.5% of GDP. Importantly this provision is not new. It is contained in Regulation 1175/2011, one of ‘the six pack’ that were agreed in Winter 2011. Regulation 1175/2011 amends Regulation 1466/97; the ‘preventative arm’ of the SGP mentioned above. Just as the 0.5% deficit rule is not new, the 1% structural deficit rule is not new. The 1% deficit rule is contained in the Treaty on Stability, Coordination and Governance where it states that if a country’s debt to GDP is “significantly below 60 % and where risks in terms of long-term sustainability of public finances are low” the structural deficit can be up to 1.0%.
Both the 0.5% and 1% structural deficit rules, are contained in Regulation 1175/2011, where it amends articles 2(a) and 5 of Regulation 1466/97, the ‘preventive arm’ of the SGP. As emphasized above, this regulation is already law.
What’s new in the four main restrictions?
Given the European legislation already in place, it is worth considering what aspects of the Treaty on Stability, Coordination and Governance’s four restrictions on fiscal policy are new. The answer is none. The 60% debt rule and the 3% deficit rule have a part of EU Treaty law since the Maastricht Treaty came into force in November 1993 and the 0.5% and 1% structural deficit rules have been in force since December 2011.
Of course this does not mean that nothing in the Treaty is new. However, the novelties in the Fiscal Compact relate to how the fiscal rules are enforced, not to their content.
II: Enforcement of the Four Fiscal Rules
Transposition of the Budget Rule into National Law and the Court of Justice
Probably the most significant original piece of law in the Fiscal Compact part of the Treaty, and perhaps in the entire Treaty, is the requirement for national governments to transpose the fiscal rules into their national law. The Treaty establishes an “obligation to transpose the "balanced budget rule" into their national legal systems, through binding, permanent and preferably constitutional provisions”. The Treaty also provides for an independent body at national level to be established to monitor their implementation.
Also new is the role of the Court of Justice of the European Union (CJEU) in this process. There is much confusion on this topic but the issue is relatively simple. The Treaty states that if a country fails to transpose the balanced budget rule into national law they can be brought before the CJEU and directed to do so. If the country fails to comply with the court’s directions, as a last resort, the country can be fined up to a maximum of 0.1% of GDP. (Note that the CJEU is not given a remit in the Treaty to decide if a country has breached the fiscal rules.)
In the Event of Deviations from the Medium Term Objective
The Treaty on Stability, Coordination and Governance follows on from previously existing law, specifically Article 5 of the preventative arm of the SGP, Regulation 1466/97, in allowing for temporary deviations from the medium term objective. These temporary deviation are only allowed in the “exceptional circumstances” of “an unusual event outside the control of the Contracting Party concerned which has a major impact on the financial position of the general government or to periods of severe economic downturn as set out in the revised Stability and Growth Pact, provided that the temporary deviation of the Contracting Party concerned does not endanger fiscal sustainability in the medium-term.”
Outside of these “exceptional circumstance” in the event of a ‘significant observed deviation’ from medium term objectives, an automatic ‘correction mechanism’ will be triggered. This provision is new. It states that the correction mechanism will work on a national level “on the basis of principles to be proposed by the European Commission”. The European Commission has yet to propose these principles.
In addition to the above correction mechanism the Treaty has a provision for a 1/20 reduction in debt per year if a country has a debt to GDP ratio over 60%. This provision is not new. It is the exact same as that provided for by Regulation 1467/97 as amended by Regulation 1177/2011.
Excessive Deficit Procedure
There are also a number of new provisions on the operation of the excessive deficit procedure in Treaty on Stability, Coordination and Governance.
Reverse Qualified Majority Voting
One issue that has received some commentary is the introduction of reverse qualified majority voting in the Treaty. Reverse qualified majority means a qualified majority needs to vote against something to stop it from happening as opposed to a qualified majority voting for something to make it happen. Some have expressed concern about the legality of the reverse qualified majority voting provisions, with Peadar O’Broin stating, “The use of reverse majority is not provided for in the EU Treaties. This alteration directly by-passes the Treaty change procedures contained in Article 48 TEU, and may therefore be held inconsistent with the EU Treaties in case of a legal dispute.”
However, reverse qualified majority voting is not new. It has been introduced for a number of issues under the six pack, but the Treaty on Stability, Coordination and Governance makes its use slightly more general. The provision regarding reverse qualified majority voting is in Article 7 of the Treaty on Stability, Coordination and Governance. It involves a commitment of Eurozone countries “to supporting the proposals or recommendations submitted by the European Commission where it considers that a Member State of the European Union whose currency is the euro is in breach of the deficit criterion in the framework of an excessive deficit procedure”. However, this obligation does not apply if a qualified majority votes against the proposals or recommendations. Exactly what the ‘proposals or recommendations’ in the article could be is left open. One obvious example would be a proposal to impose sanctions.
The six pack provides for the use of reverse qualified majority voting for the imposition of sanctions. Regulation 1173/2011 on the effective enforcement of budgetary surveillance in the euro area, states “When taking decisions on sanctions, the role of the Council should be limited, and reversed qualified majority voting should be used.” On this basis the regulation details a number of sanctions that where reverse qualified majority will apply. These include, in order of severity and imposition, lodging “with the Commission an interest-bearing deposit amounting to 0,2 % of its GDP in the preceding year”, lodging an non interest-bearing deposit in the same manner and of the same amount and having a fine imposed of the same amount,
Similar rules regarding sanctions and reverse qualified majority voting apply in Regulation 1174/2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area. This regulation “lays down a system of sanctions for the effective correction of excessive macroeconomic imbalances in the euro area” and only applies to countries in the Eurozone. It enables the council to impose sanctions of an interest-bearing deposit and an annual fine by reverse qualified majority voting.
A further example of reverse qualified majority voting exists in Regulation 1176/2011 on on the prevention and correction of macroeconomic imbalances. The Commission can make recommendations on establishing that a country has not complied its recommended actions to correct its macroeconomic imbalances. These reccomendations are “deemed to have been adopted by the Council, unless it decides, by qualified majority, to reject the recommendation within 10 days of its adoption by the Commission.”
Provisions related to the Two Pack
Finally, there are two provisions that relate to provisions in the two pack. The first is a commitment that “Contracting Parties shall report ex-ante on their public debt issuance plans to the Council of the European Union and to the European Commission” with a view to better coordinating the planning of their national debt issuance. This relates to the proposal for a regulation on ‘common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area’. This proposed regulation is one of the two pack and lays out detailed plans for increased coordination of the budgets of Member States in the Eurozone.
The second provision is the creation of ‘Budgetary and Economic Partnership Programmes’ which, the Treaty says a country in excessive deficit procedure will put in place. This is a new provision. The Treaty states, “The content and format of such programmes shall be defined in European Union law”. The legislation that will define the ‘content and format of such programmes’ has not yet been brought into effect. It is likely that the Budgetary and Economic Partnership Programmes in the Treaty on Stability, Coordination and Governance will relate to the ‘Macroeconomic Adjustment Programmes’ provided for in the proposal for regulation on ‘common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area’. This proposed regulation is one of the two pack and lays out plans on operation of ‘enhanced surveillance’ and the operation and surveillance of countries in ‘Macroeconomic Adjustment Programmes’.
What’s new and what’s not
So in conclusion: What’s new and what’s not?
The 60% debt rule, the 3% deficit rule, the 0.5% and 1% structural deficit rules are not new. The allowance for temporary deviations from a country’s medium term objectives in ‘exceptional circumstances’ is not new. The 1/20 rule is not new. Reverse qualified majority voting is not new but its use is expanded slightly under the Treaty. The requirement for the introduction of automatic correction mechanisms on a national level is new but the principles that will form the basis of these mechanisms have not yet been proposed. The requirement to transpose the fiscal rules into national law is new, as is the role of the Court of Justice of the European Union in ensuring that these rules are transposed into national law. And finally the provisions to ex-ante report on public debt issuance and the creation of budgetary and economic partnership programmes are both new but are related to the two pack proposals.
Many of the provisions contained in the Fiscal Compact are not new. None of the four restrictions on fiscal policy are new. And, by-and-large, those measures that are new are relatively minor changes to existing law.
[i] This protocol still exists as Protocol (No 12) on the Excessive Deficit Procedure. It is annexed to the founding treaties of the EU. The founding treaties are the Treaty of European Union and the Treaty on the Functioning of the European Union. They form the core of EU primary law.
[ii] Regulations are one of the main forms of secondary EU law.
[iii] The Regulations linked to here are not the original regulations. They are the regulations as amended by the ‘Revised Stability and Growth Pact’ in 2005 and the ‘six pack’ in 2011.