Fiscal Compact

Fiscal Compact
Name	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 EU member states (all except Czech Republic and United Kingdom)
Parties	All signatories except Czech Republic
Depositor	General Secretariat of the Council of the European Union
Languages	All 24 official EU languages

Fiscal Compact. The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, commonly known as the Fiscal Compact, is an intergovernmental agreement intended to strengthen fiscal discipline within the Eurozone. It was signed in 2012 by 25 member states of the European Union as a direct response to the European debt crisis. The treaty mandates stricter budgetary rules, including a requirement for national budgets to be in balance or surplus, enforced through automatic correction mechanisms and potential legal challenges at the Court of Justice of the European Union.

Background and origins

The impetus for the Fiscal Compact emerged from the severe financial instability triggered by 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 such as Ireland, Portugal, Spain, and Italy highlighted the need for stronger economic governance. Initial responses, including the European Financial Stability Facility and the Six-Pack regulations, were deemed insufficient by several leaders. At a pivotal summit in Brussels in December 2011, led by then-President of the European Council Herman Van Rompuy and strongly advocated by Chancellor of Germany Angela Merkel and President of France Nicolas Sarkozy, political agreement was reached to draft a new treaty outside the Treaty on the Functioning of the European Union framework to enforce stricter rules.

Main provisions

The core of the treaty is the "balanced budget rule," which requires contracting parties to enshrine in national law a structural deficit limit of 0.5% of GDP. This rule must be implemented through provisions of "binding force and permanent character," preferably constitutional. An automatic correction mechanism must be triggered if significant deviations from this objective or the adjustment path are observed. The treaty also strengthens the European Semester for economic policy coordination and requires Eurozone members to priorly discuss major economic reforms. Compliance with the deficit rule can be referred to the Court of Justice of the European Union by another contracting party, with the possibility of financial sanctions for Eurozone members.

Ratification and implementation

The treaty was signed on 2 March 2012 in Brussels by all European Union member states except the Czech Republic and the United Kingdom. It entered into force on 1 January 2013 after ratification by twelve Eurozone member states. National implementation varied, with countries like Germany integrating the rules via a constitutional "debt brake" law, while others, such as Ireland, held a referendum to approve the necessary constitutional amendment. The European Commission was tasked with monitoring the adoption of the national rules, issuing reports on compliance to the European Council and the Euro Group.

Legal status and relationship with EU law

The Fiscal Compact is an intergovernmental treaty under public international law, deliberately created outside the formal European Union legal framework to expedite its adoption and avoid vetoes. However, its substance is designed to be closely aligned with and reinforce European Union law, particularly the Stability and Growth Pact. Key articles of the treaty are to be incorporated into the Treaty on the Functioning of the European Union within five years of its entry into force, as per a specific clause. The Court of Justice of the European Union was granted jurisdiction to review the transposition of the balanced budget rule into national law, creating a unique bridge between the intergovernmental and EU legal orders.

Criticism and debate

The treaty faced significant criticism from various quarters. Economists, including Paul Krugman and Joseph Stiglitz, argued it imposed excessive austerity, potentially stifling growth and recovery in crisis-hit nations. Political opposition was strong in countries like Ireland during its referendum campaign and from left-wing parties across Europe, such as Syriza in Greece and Die Linke in Germany, who saw it as a surrender of national sovereignty. Legal scholars debated its democratic legitimacy and complex relationship with the European Union's institutional framework. The decision by the Czech Republic under President Václav Klaus not to sign, and the United Kingdom's opt-out, highlighted political divisions within the European Union.

Impact and effectiveness

The treaty's primary impact was to institutionalize stricter fiscal surveillance and anchor expectations for budgetary discipline within the Eurozone. It contributed to a significant reduction in structural deficits across member states in the years following its adoption. However, its effectiveness in preventing future crises remains debated, as critics point to the persistent high public debt levels in countries like Italy and the economic challenges exacerbated by the COVID-19 pandemic. The treaty's rules were subsequently suspended in 2020 to allow for massive fiscal stimulus during the pandemic, and ongoing reforms to the Stability and Growth Pact seek to integrate its principles with more flexibility. The Fiscal Compact is widely seen as a foundational element of the evolving architecture of the Economic and Monetary Union of the European Union.

Category:European Union treaties Category:2012 in the European Union Category:Economics and finance in the European Union