The Fiscal Compact (formally, the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union; also referred to as TSCG or more plainly the Fiscal Stability Treaty, is an intergovernmental treaty that was signed on 2 March 2012, by all member states of the European Union (EU), except the Czech Republic and the United Kingdom. The treaty will enter into force for all ratifiers, on the first day of the month following its ratification by the twelfth eurozone member; or provided that the twelfth eurozone member only complete its ratification after 1 January 2013, it will on that time retrospectively enter into force by 1 January 2013.
Once in force the Fiscal Compact would require ratifying member states to enact laws requiring national budgets to be in balance or in surplus within the treaty’s definition. These laws must provide for a self-correcting mechanism to prevent their breach. The treaty defines a balanced budget as one which has a general budget deficit less than 3% of GDP and a structural deficit of less than either 0.5% or 1%, depending on a countries debt-to-GDP ratio. If the structural deficit for the annual account or budget is found to exceed those limits, the country will have to correct the issue within the timeline, nature and targeted size deemed necessary by the European Commission.
The treaty also places compliance with its budgetary and other requirements under the jurisdiction of the European Court of Justice. This contrasts with the EU treaties which specifically exclude this jurisdiction. If ratified, any ratifying state may bring enforcement proceedings against any other ratifying state before the Court of Justice, if they fail to fulfil their obligations under the Fiscal Compact. A state found in breach of its obligations can ultimately be fined up to 0.1% of its GDP
The fiscal pact contains the following rules:
General government budgets shall be balanced or in surplus. The annual structural deficit must not exceed 0.5 percent of GDP. Countries with government debt levels significantly below 60 percent and where risks in terms of long-term sustainability of public finances are low, can reach a structural deficit of at most 1 percent of GDP.
Such a rule will also be introduced in Member States’ national legal systems at statutory level or higher. The rule will contain an automatic correction mechanism that shall be triggered in the event of deviation. It will be defined by each Member State on the basis of principles proposed by the European Commission. All signing parties recognise the jurisdiction of the Court of Justice to verify the transposition of this rule at national level.
The EU’s highest court will be able to fine a country that does not adopt a standardised balanced budget rule – with a penalty equivalent to up to 0.1% of GDP. The money goes either to the ESM (if a Euro country is fined) or to the general EU budget (in case of fines imposed on non-eurozone signatories).
Member States shall converge towards their specific reference level, according to a calendar proposed by the European Commission.
Member States whose government debt exceeds the 60% reference level shall reduce it at an average rate of one twentieth (5%) per year as a benchmark.
Member States in Excessive Deficit Procedure shall submit to the Commission and the Council for endorsement, an economic partnership programme detailing the necessary structural reforms to ensure an effectively durable correction of excessive deficits. The implementation of the programme, and the yearly budgetary plans consistent with it, will be monitored by the Commission and the Council.
A mechanism will be put in place for the ex ante reporting by Member States of their national debt issuance plans.
Acceleration of the ESM treaty ratification and entry into force, as well as amendments to it.
Member States agree to take the necessary actions and measures, “which are essential to the good functioning of the euro area in pursuit of the objectives of fostering competitiveness, promoting employment, contributing further to the sustainability of public finances and reinforcing financial stability.” They also ensure that all major economic policy reforms that they plan to undertake will be discussed ex-ante and, where appropriate, coordinated among themselves and with the institutions of the European Union.
Eurozone countries shall meet at least twice a year with the European Commission president to discuss Euro matters. Non-eurozone countries may join in at least once a year.
The implementation of the programme, and the yearly budgetary plans consistent with it, will be monitored by the European Commission and by the Council. As soon as a Member State is recognised to be in breach of the 3% ceiling, the Commission submits a proposal of counter-measures, concerning in particular the nature, the size and the time-frame of the corrective action to be undertaken, while taking into consideration country-specific sustainability risks. Progress towards and respect of the medium-term objective shall be evaluated on the basis of an overall assessment with the structural balance as a reference, including an analysis of expenditure net of discretionary revenue measures. A qualified majority of Member States may reject these proposals.
2012, the Irish electorate voted in favour by a margin of 60.3% to 39.7% on a turnout of 50%, to empower the Irish Parliament to ratify the Fiscal Compact. Ireland is the only EU member state to have had a referendum on the treaty. As of 27 September 2012, the Fiscal Compact had been completely ratified by 8 out of 17 eurozone countries and by 3 out of the 8 other committed EU member states
France: On 9 August the constitutional court ruled that the French parliament can ratify the treaty by simple majority. A bill (no.197) for the ratification of the fiscal compact was submitted to the National Assembly on 19 September, together with a written governmental recommendation for the parliament to pass the ratification bill. A detailed analysis report written by the Foreign Affairs Committee on 26 September, also recommended the parliament to pass the bill. The National Assembly concluded the first reading of the bill on 3 October, and voted to pass the bill on 9 October. It was subsequently also passed by the Senate on 11 October 2012. As the Senate passed the bill without new/different amendments compared to the transmitted text by the National Assembly, it has now been adopted as final law and will be submitted for a presidential assent to conclude the process.
The Next Crisis Victory
(Own report) – The French parliament’s passage of the EU’s Fiscal Pact has sealed the defeat of French President François Hollande in Paris’ power struggle with Berlin. Hollande won last May’s elections also due to his announcement that he would oppose the German austerity dictate, which his predecessor, Nicolas Sarkozy had proven unable to prevent. With the anticipated parliamentary decision in favor of the Fiscal Pact, he will have been defeated once and for all. Berlin’s proposed symbolic concessions, to assuage France’s continued resistance to the German austerity dictate, are just as unsuccessful. The beginning of mass protests and serious frictions are weakening the French coalition government. To eventually catch up again to Germany’s clout, in the aftermath of the defeat in the struggle against Berlin’s austerity dictate, Paris is embarking on France’s “reindustrialization.” In Berlin, one hears that there “is nothing left” of a German-French balance of power.
The Fiscal Pact
The France’s National Assembly has passed the EU Fiscal Pact, obligating signatory states to a strict austerity policy à la the German model, and thereby restricting their fiscal sovereignty. France has therefore complied with the German demand to implement the Pact.
The approval of the Fiscal Pact at EU Summits in December 2011 and March 2012 had already sealed President Sarkozy’s defeat in the struggle over the EU’s crisis policy. For a long time, Sarkozy had strongly opposed the German austerity dictate – to no avail.
Berlin had been able to impose its austerity policy practically unrestricted. The conservatives in the French establishment finally felt obliged to initiate their own austerity measures along the lines of the German model (“Hartz IV”) to strengthen their country’s economy vis à vis the overpowering German industry.
Sarkozy’s UMP party’s program for the presidential elections 2012 was formulated under the guidance of the Konrad-Adenauer Foundation (CDU) and the “German Model” was openly discussed. (German-foreign-policy.com reported.)
Submission to Berlin’s austerity policy had contributed to Sarkozy’s defeat by the current President Hollande, who distinguished himself, in the election campaign, as a staunch opponent of the German austerity dictate, he is now forced to accept.
Placebos for the People
German experts had not expected Hollande’s conspicuous opposition toward Berlin’s policy to be successful. “Hollande will not carry out any of his electoral promises,” the German economist Rudolf Hickel remarked shortly after Hollande’s election.
However, his image should not be too flagrantly tarnished, according to voices in the German capital. The French are very “sensitive” to “German dominance.” Boasting openly, could drive the French left to the barricades. One should rather concede the EU “Stability and Growth Pact” to the French president, to salvage “his credibility in France.”
The “Stability and Growth Pact,” in fact, has been passed. It contains already existing projects and redeployed financial means from other EU budgets, but, in the current conflict over the Fiscal Pact, Hollande is praising it to be a victory in the power struggle against Berlin. The German Council on Foreign Relations (DGAP) considers the “Stability and Growth Pact,” along with other, “primarily symbolic” measures – such as increasing the minimum wage and the partial reintroduction of retirement at 60 – to be “populist concessions to the electorate.” “They should (…) regain their confidence in politics.” In France, “where pompous appearances (…) are often the norm, the significance of such gestures should not be underestimated.”
In the Palais Beauharnais
Efforts to assuage persisting French resistance with symbolic concessions, such as the “Stability and Growth Pact” are doomed to failure, due to the parliament’s passage of the Fiscal Pact, which seals Hollande’s defeat in Paris’ power struggle with Berlin. Approx.
80,000 came out in Paris, September 30, in the first mass protest demonstrations against the German austerity dictate. Numerous parliamentarians of the government coalition parties want to refuse to vote in favor of the Fiscal Pact today. It has been noted that President Hollande’s “popularity ratings” has “severely declined” and that he has, “with surprising speed, also lost his status as the left’s indisputable leader.”
The French left is disintegrating “into irreconcilable blocks,” with one resolutely persisting in its refusal of the austerity dictate. A few days ago, the German press had related that, in spite of the bitter conflict around the Fiscal Pact in parliament, Prime Minister Jean-Marc Ayrault could “at least find empathy in the Palais Beauharnais, the residence of the German Ambassador in Paris.”
He was consoled “for the tensions in his own camp, at the reception commemorating German Unification with a mountain of praise for the German-French friendship.” France’s parliamentarians, on the other hand, are still finding the treaty “hard to accept.”
To catch up and again match Germany’s political clout, Paris is now embarking on a “reindustrialization” of the country. Already last year, experts were pointing out that Germany’s predominating position in the EU was due to its industrial strength. The Federal Republic of Germany disposes of more than three times as many export companies as France and, for example, exports six times more to China, thanks to the passage of the “Hartz IV” reforms enacted under Chancellor Gerhard Schröder (SPD). Correspondingly, France’s share of global commerce has dropped from six percent in 1998 to four percent. Whereas only eleven to twelve percent of France’s employees are working in industry, in Germany it is 20 percent. France must “reindustrialize,” announced Patrick Artus, research director of the Natixis Investment Bank, back in November 2011. Hollandes government has completely adopted this demand for “reindustrialization” as its own. This is one of Industry Minister, Arnaud Montebourg’s key tasks.
On the eve of the passage of the Fiscal Pact by the French Parliament, there can be no doubt about the balance of power within the EU, it is alleged in Berlin.
Germany is “seen throughout the world as the EU’s leading economic and political power,” writes “Internationale Politik,” Germany’s leading foreign policy journal, published by the DGAP. Today, no one is talking about “a balance of powers, even with France” as “the EU’s second strongest economy.”