European Fiscal Compact
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 introduced as a new stricter version of the Stability and Growth Pact, signed on 2 March 2012 by all member states of the European Union, except the Czech Republic and the United Kingdom. The treaty entered into force on 1 January 2013 for the 16 states which completed ratification prior to this date. As of 3 April 2019, it had been ratified and entered into force for all 25 signatories plus Croatia, which acceded to the EU in July 2013, and the Czech Republic.
The Fiscal Compact is the fiscal chapter of the Treaty. It binds 23 member states: the 21 member states of the eurozone, plus Denmark and Romania, who have chosen to opt in. It is accompanied by a set of common principles.
Member states bound by the Fiscal Compact have to transpose into their national legal order the provisions of the Fiscal Compact. In particular, the national budget has to be in balance or surplus, under the treaty's definition. An automatic correction mechanism has to be established to correct potential significant deviations. A national independent monitoring institution is required to provide fiscal surveillance. The treaty defines a balanced budget as a general budget deficit not exceeding 3.0% of the gross domestic product, and a structural deficit not exceeding a country-specific Medium-Term budgetary Objective which at most can be set to 0.5% of GDP for states with a debt‑to‑GDP ratio exceeding 60% – or at most 1.0% of GDP for states with debt levels within the 60%-limit. The country-specific MTOs are recalculated every third year, and might be set at levels stricter than the greatest latitude permitted by the treaty. The treaty also contains a direct copy of the "debt brake" criteria outlined in the Stability and Growth Pact, which defines the rate at which debt levels above the limit of 60% of GDP shall decrease.
If the budget or estimated fiscal account for any ratifying state is found to be noncompliant with the deficit or debt criteria, the state is obliged to rectify the issue. If a state is in breach at the time of the treaty's entry into force, the correction will be deemed to be sufficient if it delivers sufficiently large annual improvements to remain on a country specific predefined "adjustment path" towards the limits at a midterm horizon. Should a state suffer a significant recession, it will be exempted from the requirement to deliver a fiscal correction for as long as it lasts.
Despite being an international treaty outside the EU legal framework, all treaty provisions function as an extension to existing EU regulations, utilising the same reporting instruments and organisational structures already created within the EU in the three areas: Budget discipline enforced by the Stability and Growth Pact, Coordination of economic policies, and Governance within the EMU. The treaty states that the signatories shall attempt to incorporate the Fiscal Compact into the EU's legal framework, on the basis of an assessment of the experience with its implementation, by 1 January 2018 at the latest. By 2017 it was determined that only Title 3 could be easily incorporated since otherwise treaty change would be required. Title 3 of the Fiscal Compact was subsequently incorporated into EU law as part of the economic governance framework reforms 2024/1263, Council Directive 2024/1265 and Council Regulation as of 4 April 2024.
History
Background
in the eurozone is determined by the European Central Bank. Thus, the setting of central bank interest rates and monetary easing is in the sole domain of the ECB, while taxation and government expenditure remain mostly under the control of national governments, within the balanced budget limits imposed by the Stability and Growth Pact. The EU has a monetary union but not a fiscal union.In October 2007, then ECB president, Jean-Claude Trichet, emphasised the need for the European Union to pursue further economic and financial integration within certain areas. If these fiscal policies were adhered to by all member states, the ECB believed that this would increase their competitiveness. In June 2009, recommendations were published by The Economist magazine which suggested that Europe establish a fiscal union comprising a: "Bailout fund, banking union, mechanism to ensure the same prudent fiscal and economic policies were pursued equally by all states, and common issuance of eurobonds". Angel Ubide from the Peterson Institute for International Economics joined this view, suggesting that long-term stability in the eurozone required a common fiscal policy rather than controls on portfolio investment.
Response to the euro area crisis
Starting from early 2010, the proposal to create a much greater fiscal union, at least in the eurozone, was considered by many to be either the natural next step in European integration, or a necessary solution to the euro area crisis. Combined with the EMU, a fiscal union would, according to the authors of the Blueprint report, lead to much greater economic integration. However, the process of building a fiscal union was envisaged by them to be a long-term project. The presidents of the ECB, Commission, Council and Eurogroup published a blueprint for a deep and genuine EMU in November 2012, outlining the elements of a fiscal union which could be achieved in the short, medium and long-term. For the short term, only proposals within the existing competences of the EU treaties were considered, while more wide-reaching proposals requiring treaty amendments were only considered for longer time frames.The blueprint report mentioned that the potential introduction of a common issuance of eurobills with 1-year maturity could be implemented in the medium term, while eurobonds with 10-year maturity could be implemented as the final step in the long term. According to the authors of the Blueprint report, each step the EU takes towards the sharing of common debt, the first of which is envisaged to include joint guarantees for debt repayment in conjunction with either a "debt redemption fund for excessive debt" or "issuance of some short-term eurobills", will need to be accompanied by increased coordination and harmonization of fiscal and economic policies in the eurozone. As such, the two reforms of the Stability and Growth Pact known as the sixpack and twopack, and the European Fiscal Compact, represent, according to the authors of the Blueprint report, the first step towards the increased sharing and adherence to the same fiscal rules and economic policies, which they argue potentially paves the way for ratification in the medium term of a new EU treaty allowing for the common issuance of eurobills.
Proposal development: Sixpack, Twopack and Fiscal Compact
In March 2010, Germany presented a series of proposals to address the euro area crisis. They emphasised that the intention was not to establish a fiscal union in the short term, but to make the monetary union more resilient to crises. They argued that the previous Stability and Growth Pact needed to be reformed to become more strict and efficient, and in return a European emergency bailout fund should be founded to assist states in financial difficulties, with bailout payments available under strict corrective fiscal action agreements – subject to approval by the ECB and Eurogroup. In case a non-collaborating state with an Excessive Deficit Procedure breached the called for adjustment path towards compliance, it should risk being fined or lose its payment of EU cohesion funds and/or lose its political voting rights in the Eurogroup. A call was also made to enforce the Coordination of economic policies between eurozone members, so that all states take an active part in each other's policymaking. Throughout the following three years, these German proposals materialised into new European agreements or regulations after negotiations with the other EU member states.The envisaged emergency bailout fund, the European Financial Stability Facility, was the first proposal to be agreed to by the EU member states on 9 May 2010, with the facility being fully operational on 4 August 2010.
As a part of the proposed reform of the Stability and Growth Pact, Germany also presented a proposal in May 2010 that all Eurozone states should be obliged to adopt a balanced budget framework law into its national legislation, preferably at the constitutional level, with the purpose of guaranteeing future compliance with the Pact's promise of ensuring a clear cap for Member States on new debt, strict budgetary discipline and balanced budgets. Implementation of the proposed debt brake was by itself envisaged to imply much tighter fiscal discipline compared to the existing EU rules requiring deficits not to exceed 3% of GDP. This proposal was later adopted as part of both the Fiscal Compact and Twopack regulations.
In late 2010, proposals were made to reform some rules of the Stability and Growth Pact to strengthen fiscal policy co-ordination. In February 2011, France and Germany had proposed the 'Competitiveness Pact' to strengthen economic co-ordination in the eurozone. Spain also endorsed the proposed pact. German Chancellor Angela Merkel also verbally championed the idea of a fiscal union, as did various incumbent European Finance ministers and the head of the European Central Bank.
In March 2011, a new reform of the Stability and Growth Pact was initiated, aiming at strengthening the rules by adopting an automatic procedure for imposing penalties in case of breaches of either the deficit or the debt rules.
By the end of 2011, Germany, France and other EU Member States went a step further and vowed to create a fiscal union across the eurozone with strict and enforceable fiscal rules and automatic penalties embedded in the EU treaties. German chancellor Angela Merkel also insisted that the European Commission and the Court of Justice of the European Union must play an "important role" in ensuring that countries meet their obligations.
In that perspective, they called for strong European Commission "oversight in the fields of taxation and budgetary policy and the enforcement mechanisms that go with it could further infringe upon the sovereignty of eurozone member states". Think-tanks such as the have argued that a profound revision of the Lisbon Treaty would be unavoidable if Germany were to succeed in imposing its economic views, as stringent orthodoxy across the budgetary, fiscal and regulatory fronts would necessarily go beyond the treaty in its current form, thus further reducing the individual prerogatives of national governments.