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[3][4][5] 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 (EU), except the Czech Republic and the United Kingdom.[1] The treaty entered into force on 1 January 2013 for the 16 states which completed ratification prior to this date.[6] 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.
Treaty on Stability, Coordination and Governance in the Economic and Monetary Union
30 January 2012 (treaty finalised)
2 March 2012[1]
Brussels, Belgium
1 January 2013
Ratified by twelve eurozone states
25 EU member states (all except Croatia and Czech Republic) including all eurozone states[1]
27 states (all EU member states) [2]
22 (All EU languages except Croatian & Czech)
The Fiscal Compact is the fiscal chapter of the Treaty (Title III). It binds 23 member states: the 20 member states of the eurozone, plus Bulgaria, 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 national legal order the provisions of the Fiscal Compact. In particular, 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 (GDP), and a structural deficit not exceeding a country-specific Medium-Term budgetary Objective (MTO) 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.[7][8] 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.[9]
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.[10][11]
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 Stability and Growth Pact (extended by Title III), Coordination of economic policies (extended by Title IV), and Governance within the EMU (extended by Title V).[9] 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.[10] By 2017 it was determined that only Title 3 could be easily incorporated since otherwise treaty change would be required.[12] Title 3 of the Fiscal Compact was subsequently incorporated into EU law as part of the economic governance framework reforms (Regulation (EU) 2024/1263, Council Directive (EU) 2024/1265 and Council Regulation (EU) 2024/1264) as of 4 April 2024.[13]
History[edit]
Background[edit]
Monetary policy in the eurozone (the EU countries which have adopted the Euro) is determined by the European Central Bank (ECB). 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 (EU) to pursue further economic and financial integration within certain areas (among others, labour mobility and flexibility and reaching retail banking convergence). If these fiscal policies were adhered to by all member states, the ECB believed that this would increase their competitiveness.[14] 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".[15] 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.[16]