A concise summary of the Fiscal Compact

Lockstep · 10-05-2012 9:07am #1

Seeing as many people are saying you don’t understand the treaty, I’ve summarised it as best I can.
I kept this as neutral as possible and everything here is included in the treaty, anything that isn’t is bracketed and in italics.

Quick glossary at the beginning for those who aren’t familiar with the EU.

Glossary

Contracting Parties: EU countries that agree to the Fiscal Treaty.

Council of Ministers: Made up of the governments of each EU country. They share legislative power with the European Parliament, sort of like the way the American Senate shares legislative power with the House of Representatives.

European Commission: Made up of one Commissioner from each country. They act in the EU’s interest as a whole rather than the interests of any one nation. They have executive powers (they are in charge of implementing EU policy).
Think of it as the officer board of the EU.

European Parliament: made up of MEPs who are elected from each EU country. They share legislative power with the Council of Ministers and are directly elected by European citizens.

Qualified Majority: Each EU country has a voting weight based on population in the Council of Ministers. When something needs qualified majority to pass, it must have 15 member states (55% of the total EU countries) supporting it who represent 65% of the EU’s citizens. This is to prevent both small countries banding together to force decisions on larger ones as well as to stop large countries using their population size to force decisions on smaller ones.

Preamble
Basically sets out why the Fiscal Treaty is being done up: to promote economic growth, the importance of running sustainable budgets etc.
It also notes that any further funding of EU countries by the European Stability Mechanism is reliant on their accepting the Fiscal Treaty as well as abiding by it.

Article 1: States that the aim of this treaty is to improve economic discipline to promote Economic and Monetary Union.

Article 2: The Fiscal Treaty must comply with existing European treaties, European law and cannot encroach upon the EU’s existing powers on economic union.

Article 3: Contracting Parties must run balanced budgets; they must not spend more than 0.5% more than what they take in taxes with the European Commission setting out what the timeframe must be to achieve this It can run a 1% deficit if it’s national debt isn’t too heavy. The rules here come into force one year after the Fiscal Treaty is agreed. Governments can deviate from the balanced budget in exceptional circumstances such as an unexpected occurrence outside of its control or due to a severe economic downturn.

Article 4: Contracting Parties must keep their national debt below 60% of Gross Domestic Product. Where it is above this, Contracting Parties must reduce this by 5% each year, although this is already part of European law.

Article 5: Contracting Parties which are in breach of this must bring in a system to bring their public finances into line. (However, it is up to states how this can be done and can be done through spending cuts or tax raises for example)

Article 6: Contracting Parties must report to the EU’s Council of Ministers and the Commission on when they plan to issue debt (selling government bonds to make money)

Article 7: Contracting Parties using the Euro must support relevant proposals by the Commission where it considers they are running up excessive deficits. However, this cannot be applied where a qualified majority opposes the Commission’s decision.

Article 8: Where a Contracting Party has breached article 3 and has been given a chance to explain themselves, other Contracting Parties can bring the naughty country to the European Court of Justice. If the European Court finds that the naughty Contracting Party has not complied with the Court’s decision, they can be fined up to 0.1% of their Gross Domestic Product. If they naughty Contracting Party uses the euro, the fine is to be paid into the European Stability Mechanism.
If they do not use the euro, the fine is made to the EU’s general budget.

Article 9: Those who accept the Fiscal Compact agree to work towards Economic and Monetary Union as well as economic growth. They must therefore promote employment, sustainable public finances, competitiveness and financial stability in their own countries.

Article 10: When necessary, Contracting Parties will use existing European Treaty measures for Eurozone countries to ensure the Eurozone’s smooth functioning.

Article 11: In order to ensure best practices, Contracting Parties will share their economic reform plans with each other (although they are not obliged to implement them)

Article 12: The heads of state/government of Contracting Parties that use the Euro will meet up at Euro Summits. These will be held twice a year to discuss the Euro.
Where a Contracting Parties doesn’t use the Euro can also take part in these Euro Summits when it is relevant to them.

Article 13: The European Parliament and Contracting Parties parliaments will have a conference composed of relevant committee members from both the European Parliament and Contracting Parties parliaments to discuss budgetary problems.

Article 14: Each Contracting Party will ratify this in accordance with their own Constitutional requirements (a referendum in Ireland’s case)
It begins on the 1st January 2013 if 12 Eurozone countries have agreed to it, or on the 1st day of the month following 12 Eurozone countries agreement.

Article 15: Countries that are not Contracting Parties can join in the future if they want to.

Article 16: Within 5 years of this treaty coming into force, an attempt will be made to bring this Treaty into being with the legal framework of the EU.

Scofflaw · 10-05-2012 3:45pm

I'm going to add in a number of ancillary clarifications here:

Fiscal Treaty ratification - the Fiscal Treaty comes into force once any 12 members have ratified it. Ireland has no veto on this.

ESM ratification - ESM comes into force once members providing 90% of the capital have ratified it. Ireland has no veto on this, since we are agreeing only to provide 1.5922% of the capital.

Article 136 amendment - it is proposed to amend article 136 of the TFEU to provide a clearer legal basis for ESM, but the amendment may not be required to allow ESM to go ahead. Ireland does have a veto here, but the government has already decided not to use it.

ESM initial capital - if Ireland ratifies ESM, it is to provide its share of the initial paid-in capital, which is 1.5922% of €80bn, or €1.27 billion.

ESM capital - additional capital is required if and when the fund makes losses on bailout facilities provided to a country thatthen defaults or there is a danger of the fund being unable to meet repayments to lenders. The maximum Ireland can be called on for is the balance of its shareholding of €11.145bn, and the capital of the ESM can only be increased by unanimity.

ESM access - access to the ESM bailout fund is legally dependent on ratifying the Fiscal Treaty. While it might be possible to find some way around the legal requirement to allow Ireland continued programme funding, it would be subject to legal challenges and political uncertainty.

ESM rates - these are currently unknown, because the money will be raised as needed, and will be subject to market conditions at that time. The current rates for European funding are 2.97% for EFSM funding, and 3.06% for EFSF funding, and it is not unreasonable to expect ESM rates to be in line with these. For comparison, IMF funding rates are 4.79%, while UK bilateral rates are 4.83%.

Troika funding - Ireland is currently funded until the end of 2013. If Ireland is unable to return to the markets to fund both the expected €10bn 2014 deficit and the €8bn in government debt falling due on the 15th January 2014, we will require further funding.

European alternatives to ESM funding - there is a commitment by our European partners to continue funding Ireland in the existing programme for as long as Ireland does not have market access. However, no details of such funding have been negotiated, and no legal basis established for it.

IMF funding - Ireland has already borrowed 1350% of its IMF quota, which will have risen to 1550% by the end of the programme. Normal IMF lending limits are 600% of quota, and the IMF is committed to supporting EU countries only in conjunction with European partners.

Excessive deficit procedure - we are currently in an excessive deficit procedure, and will be until 2015, when we are expect to have reduced our general government deficit below 3% of GDP. This is based on the debt and deficit limits in the Stability & Growth Pact, which the Fiscal Treaty updates.

Fiscal Treaty grace period - there is a three year grace period after the end of an excessive deficit procedure before the fiscal rules begin to apply again. In Ireland's case, this means the fiscal rules do not apply to us until 2018.

Applicability of Fiscal Treaty rules - the rules in the fiscal compact will apply to Ireland after 2018 whether Ireland ratifies the Fiscal Treaty or not, because these rules are already part of Ireland's international agreements in the Stability & Growth Pact. The 3% deficit rule and the 60% debt rule have been in force for Ireland since 1992, the structural balance rule since 2005. There are no new fiscal rules in the Treaty

Debt reduction - the fiscal treaty rules require countries to reduce their excess debt ratio (over the 60% benchmark) by one-twentieth of the excess debt per year - only the excess of debt ratio over 60% of GDP is considered, not the whole debt
the one-twentieth rule means 1/20th of the remaining excess debt, which means that the reduction required gets smaller each year

the debt ratio is calculated against nominal GDP, which means that inflation, by increasing nominal GDP, reduces the debt/GDP ratio even in conditions of zero real GDP growth

Debt repayment - the fiscal rules do not require any repayment of the debt capital. If there is sufficient growth in the economy (about 1.5% growth)and sufficient inflation (about 2%) then no repayments are required to reduce Ireland's debt ratio at the required rate.

Exceptional circumstances - the fiscal rules recognise that debt ratio reduction will not be possible in periods of low or negative growth, or where an unusual event has had a major negative impact on the economy. Under those circumstances no excessive deficit proceeding would be started for breaches of the fiscal rules.

Breaches of fiscal rules - the Treaty does not provide for countries to take each other to court over breaches of the fiscal rules, nor require them to do so to enforce the rules. It provides only for the CJEU to determine whether a country has adequately transposed the required fiscal rules and correction mechanism into domestic law.

Fiscal rules & the Constitution - the fiscal rules in the Treaty are not being put into the Constitution. All that is being entered into the Constitution is permission for the government to ratify the Treaty, and the standard clauses to allow the State to comply with its Treaty obligations.

Fiscal rules & Irish law - the fiscal rules in the Treaty are, however, being transposed into Irish legislation. While this will be binding on future governments, it can, in an emergency, be overturned without the government acting unconstitutionally (and thus illegally), as would be the case if the rules were put into the Constitution.

"bodies competent" - the "bodies competent under the Treaty" referred to in the Constitutional Amendment are those bodies or institutions which are given a specified task to perform in the Treaty. These are the Commission, the Council, and the Court of Justice.

"acts necessitated" - the protection against constitutional challenge provided for in the Amendment is not a blank cheque, but has been tested, and is interpreted very narrowly by Irish courts. If the government wishes to claim that an act or legislation related to the Treaty is necessitated by the Treaty, they first have to show that the Treaty requires it, and then, in addition, that the requirements of the Treaty could not have been satisfied in another way that was more compliant with the Constitution. Otherwise, the act can be struck down as unconstitutional despite this apparent protection.

legal immunities - the immunities granted in the ESM treaty to ESM staff are not unusual for international bodies, and contain only standard provisions of such immunities. As such, they will be governed by the established body of law relating to such job-related immunity. They are not the equivalent of 'diplomatic immunity, and do not provide cover for individuals committing crimes or even committing private acts in their official capacity, such as fraud, corruption, or special favours.

cordially,
Scofflaw

A concise summary of the Fiscal Compact

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