European Fiscal Compact

European Fiscal Compact
Name	European Fiscal Compact
Long name	Treaty on Stability, Coordination and Governance in the Economic and Monetary Union
Type	Intergovernmental treaty
Date signed	2 March 2012
Location signed	Brussels
Date effective	1 January 2013
Condition effective	Ratification by 12 Eurozone states
Signatories	25 European Union member states
Parties	All European Union member states except Czech Republic and United Kingdom
Depositor	Government of Italy
Languages	All 24 official languages of the European Union

European Fiscal Compact. The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, commonly known as the European Fiscal Compact, is an intergovernmental agreement intended to strengthen fiscal discipline within the Eurozone. It was negotiated in response to the European debt crisis and established stricter rules for national budgets, including a requirement for balanced budgets to be enshrined in national law. The treaty aimed to complement existing European Union economic governance frameworks, such as the Stability and Growth Pact, by introducing automatic correction mechanisms for deficits.

Background and origins

The compact emerged directly from the severe financial turmoil of the European debt crisis, which exposed critical weaknesses in the Economic and Monetary Union of the European Union. Key events like the Greek government-debt crisis and market pressures on countries like Italy and Spain highlighted the need for stronger fiscal rules. The initial response, the Six-Pack regulations, was deemed insufficient by several leaders, notably Angela Merkel of Germany and Nicolas Sarkozy of France. Following a pivotal summit in Brussels in December 2011, the European Council agreed to pursue a new intergovernmental treaty outside the formal Treaties of the European Union, leading to negotiations finalized in early 2012.

Key provisions

The treaty's central pillar is the "balanced budget rule," requiring contracting parties to maintain a structural deficit of no more than 0.5% of GDP. This rule must be transposed into national legal systems, preferably at constitutional level, through provisions of "binding force and permanent character." An automatic correction mechanism is triggered in the event of significant deviations from this objective or from the country-specific medium-term budgetary objective. The compact also reinforces the Excessive Deficit Procedure of the Stability and Growth Pact and includes commitments to coordinate major economic policy reforms and to hold regular Euro Summits involving the President of the European Council and the President of the European Commission.

Ratification and implementation

The treaty was signed on 2 March 2012 in Brussels by 25 of the then-27 European Union member states; only the United Kingdom and the Czech Republic declined. It entered into force on 1 January 2013 after ratification by twelve Eurozone members, as required. Ratification processes varied, with some states like Germany requiring parliamentary approval and others like Ireland holding a constitutional referendum. Implementation involved member states passing national legislation, such as Germany's *Schuldenbremse* (debt brake) and Spain's Organic Law on Budgetary Stability, to codify the balanced budget rule into domestic law.

Legal status and relationship to EU law

The compact is an intergovernmental treaty under public international law, deliberately created outside the formal European Union legal framework to circumvent objections from certain members. However, its substance is designed to be closely aligned with and reinforce European Union law, particularly the Stability and Growth Pact. Key provisions are intended to be incorporated into the Treaties of the European Union within five years, as stipulated in the treaty's Article 16. The Court of Justice of the European Union is granted jurisdiction to impose financial sanctions on non-compliant Eurozone countries, creating a unique bridge between the intergovernmental pact and the European Union's judicial system.

Criticism and debate

The compact faced significant criticism from various quarters. Economists, including Paul Krugman and Joseph Stiglitz, argued it enforced pro-cyclical austerity during a recession, potentially stifling growth and employment. Political opposition arose in countries like Ireland and Portugal, where it was seen as an imposition undermining national sovereignty. The European Central Bank president, Mario Draghi, later emphasized the need for a "growth compact" alongside fiscal discipline. Legal scholars debated its complex relationship with existing European Union institutions and the democratic legitimacy of its stringent, automatic rules limiting fiscal policy discretion for elected governments.

Impact and effectiveness

The compact's primary impact was a significant and rapid reduction of budget deficits across the Eurozone in the years following its adoption, contributing to a stabilization of sovereign debt markets. However, its effectiveness in promoting sustainable growth and preventing future crises remains debated. Critics note that while deficits fell, public debt-to-GDP ratios in many countries, including France and Italy, remained high or increased. The treaty's rules were temporarily suspended in 2020 to allow for massive fiscal stimulus in response to the COVID-19 pandemic, highlighting their rigidity. Its long-term legacy is its role in shaping the architecture of the European Union's economic governance, influencing subsequent initiatives like the European Stability Mechanism and debates on a full European Banking Union.

Category:2012 in the European Union Category:European Union treaties Category:Economics of the European Union