Treaty on Stability, Coordination and Governance

Treaty on Stability, Coordination and Governance. The Treaty on Stability, Coordination and Governance, often referred to as the Fiscal Compact, is an intergovernmental agreement intended to strengthen fiscal discipline within the Eurozone through the introduction of stricter budgetary rules. It was negotiated in the aftermath of the European debt crisis and signed in 2012 by all member states of the European Union except the Czech Republic and the United Kingdom. The treaty aimed to complement existing EU law, particularly the Stability and Growth Pact, by enshrining balanced budget rules into national legal systems.

Background and context

The treaty emerged directly from the severe financial turmoil that engulfed the Eurozone following the 2007–2008 financial crisis and the subsequent European debt crisis. Key events like the Greek government-debt crisis and concerns over the stability of countries such as Ireland, Portugal, Spain, and Italy exposed weaknesses in the Economic and Monetary Union of the European Union. At a summit in Brussels in December 2011, led by then-President of France Nicolas Sarkozy and Chancellor of Germany Angela Merkel, EU leaders failed to secure a unanimous amendment to the Treaty on the Functioning of the European Union. This impasse led to the decision to proceed with an intergovernmental treaty outside the formal EU legal framework, a process championed by the European Council under its then-President Herman Van Rompuy.

Main provisions

The core of the treaty is the "Fiscal Compact," which requires contracting parties to implement a national "balanced budget rule." This rule, ideally of constitutional or equivalent strength, must ensure that the annual structural government budget deficit does not exceed 0.5% of nominal Gross domestic product. The treaty mandates that adherence to this rule is overseen by independent national monitoring bodies, such as fiscal councils. Furthermore, it strengthens the corrective arm of the Stability and Growth Pact, requiring Eurozone countries in an Excessive Deficit Procedure to submit detailed economic partnership programs to the European Commission and the Council of the European Union. Additional provisions call for enhanced economic policy coordination and regular Euro Summits, to be chaired by the President of the Eurogroup.

Ratification and entry into force

The treaty was signed on 2 March 2012 in Brussels by 25 of the then 27 EU member states. It entered into force on 1 January 2013, after being ratified by 12 Eurozone member states, as stipulated in its provisions. All Eurozone countries were required to ratify it, while other signatories like Poland, Denmark, and the Baltic states could choose to participate in the treaty's fiscal provisions. The Czech Republic, under President Václav Klaus, declined to sign, and the United Kingdom, led by Prime Minister David Cameron, opted out. The ratification process saw public debates and referendums in several countries, most notably in Ireland, where a referendum was constitutionally required and passed in May 2012.

Legal and political implications

As an intergovernmental treaty, it operates in parallel to, but outside, the primary law of the European Union, though it obliges signatories to support the integration of its substance into EU law within five years. This created a complex two-tier legal structure within the EU. Politically, it represented a major step towards fiscal union and a victory for the austerity-focused policies advocated by Germany and its allies. The treaty significantly increased the surveillance and enforcement powers of the European Commission over national budgets, particularly through the European Semester process. It also reinforced the role of the Court of Justice of the European Union, which was granted jurisdiction to impose financial penalties on non-compliant Eurozone countries.

Criticism and debate

The treaty faced substantial criticism from various quarters. Many economists, such as those associated with Keynesian economics, argued that the strict deficit ceilings were pro-cyclical and would hamper economic recovery and growth, particularly in crisis-hit states like Greece and Portugal. Political opposition was strong in several countries; in the United Kingdom, the treaty fueled debates that preceded the Brexit referendum. Figures like Jean-Claude Juncker and François Hollande expressed concerns about its democratic legitimacy and social impact. Critics also argued it undermined national parliamentary sovereignty and led to increased support for Eurosceptic parties such as Syriza in Greece and the Five Star Movement in Italy.