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Thursday, January 19, 2012

The Draft Euro Fiscal Pact - Episode IV

We have just got our hands on the fourth draft of the European 'fiscal pact' (this time, the Telegraph's Bruno Waterfield - who is always quick off the blocks - beat us to it), which is being circulated among national delegations tonight. At a first glance, a very limited number of Articles have changed from the previous version - but all the changes look pretty significant:
  • At the request of Germany, the preamble of the agreement makes now clear that, as of 1 March 2013, struggling eurozone countries will be allowed to apply for a bailout under the eurozone's permanent bailout fund, the ESM, only if they have ratified the 'fiscal pact'. The previous version only required that countries incorporate the balanced budget rule.

The new draft gives the European Commission a greater role, compared with the previous version. In fact,

  • The Commission will set out "common principles" on the establishment of the national corrective mechanisms which, under the agreement, should be triggered automatically every time governments fail to comply with their deficit targets;
  • Furthermore, the Commission is now allowed to issue a report on whether governments have correctly transposed the balanced budget rule into national law on its own initiative (under the previous draft, it needed to be "invited" to do so by a member state);
  • More importantly, if the Commission's report concludes that a country has failed to transpose the balanced budget rule properly, "the matter will be brought to the ECJ by one or more of the Contracting Parties." In other words, a government can only be taken to the ECJ by its peers, at least formally. However, what the Commission says in its report plays a key role in the process.

In regards to the ECJ, its jurisdiction remains limited to Article 3(2), i.e. how national governments implement the balanced budget rule. But some very relevant changes have been made in Article 8, in particular:

  • If a member state fails to comply with the first ECJ ruling (see above), it can be taken to the ECJ again. If the ECJ confirms that the government concerned has actually ignored its previous ruling, it can now impose a fine (no more than 0.1% of the country's GDP);
  • Interestingly, under the latest draft, the fines "shall be payable" to the eurozone's permanent rescue fund, the ESM;
  • In addition, a new paragraph has been added, which makes clear that Article 8 "constitutes a special agreement between the Contracting Parties within the meaning of Article 273 of the Treaty on the Functioning of the European Union".

What does that mean in practice?

This new paragraph really reads like an insurance against any possible objections from the UK regarding the use of the ECJ outside the EU Treaties. For those who, unlike us, do not remember the Lisbon Treaty by heart, this is what Article 273 says,

"The Court of Justice shall have jurisdiction in any dispute between Member States which relates to the subject matter of the Treaties if the dispute is submitted to it under a special agreement between the parties."

Therefore, this small paragraph makes the use of the ECJ (albeit still limited to a legislative rather than enforcement role) 100% legal under the EU Treaties.

One last thing is worth noting. Following suggestions from the Polish government that Poland might decide to stay out of the agreement in the end, unless non-euro countries are allowed to be present at future meetings of euro leaders, the latest draft establishes that:

  • Non-euro countries that decide to sign up to the agreement must be kept "closely informed of the preparation and outcome" of eurozone summits;
  • The leaders of non-euro countries must be invited to eurozone summits at least once a year. However, the invites would be restricted to non-euro countries that not only signed and ratified the agreement, but also "declared their intention to be bound by some of its provisions."

Sounds like a tricky trade-off: the Poles are unlikely to take too kindly to having to institute the eurozone fiscal rules before they've joined the euro...


Steve Peers said...

A few points of clarification.

1) I don't think the first point you raise is really a change, except that there is now in effect a deadline to ratify this treaty if a State wants ESM support. The prior draft required States to comply with Article 3(2) in order to obtain ESM support, which necessarily implied that they had ratified the treaty. The fourth draft just makes this explicit.

2) As for the Commission, the first and third points you raise were in the previous draft. The second point is indeed new, although not really that exciting since the Commission anyway will be issuing reports under the Stability and Growth Pact on whether Member States are meeting similar requirements - if one of its proposals from November 2011 is adopted.

3) As for the ECJ, the third point was always mentioned in the preamble of each draft of this treaty; mentioning it in the main text simply makes the Article 273 point more visible for readers who had overlooked this point. The first and second points are new and important, but it should be noted that the revised Stability and Growth Pact anyway provides that any fines imposed by the Council in that procedure are paid to the ESM.

4) As to the position of non-eurozone States, your first point is not new, it appeared in prior drafts also (and in fact it applies to all MS, not just to those which have ratified this treaty). The second point is new and important, but it does not necessarily mean what you say it does - it would be possible for a State like Poland to comply only with a less significant provision of the treaty, such as Art. 6, 9, 10 or 11, in order to qualify for the right to be invited to meetings.

5) I also found some amendments to Arts. 1(1), 2(1), 9, 12(3) and 13.

Open Europe blog team said...

Thanks for your interesting thoughts, Steve. In this blog post, the comparison we make is limited to the fourth and the third draft of the fiscal treaty. A couple of observations on the points you raise,

1) We don’t think it is necessarily true that complying with Article 3(2) implicitly means that a country must ratify the treaty anyway. A country can decide to introduce the balanced budget rule into national law and not ratify the treaty at the same time – under the previous draft, this would have been enough to qualify for ESM bail-outs;

2) As regards the role of the Commission, the third point was actually in the previous draft. However, we think that the fact that the European Commission can now issue reports on its own initiative indirectly gives the Commission the de facto power to take member states to the ECJ. On the first point, the previous draft used the wording “on the basis of principles agreed on a proposal from the European Commission”, while the latest one has replaced it with “on the basis of common principles to be proposed by the European Commission”. The new wording clarifies that we are talking about the same principles for all Contracting Parties – in this sense, it is new;

3) We see your point on the reference to Article 273, but the fact that a new paragraph has been introduced in the body of the agreement, which explicitly uses the wording “special agreement”, is still legally and politically very relevant – not least because it reads like a way to refute any possible objections from the UK on this issue;

4) This really depends on the number of Articles that will be deemed “sufficient” in order for a non-euro country to sit at the table during eurozone summits. Agreeing to be bound by only one Article might not be enough, but the treaty as it stands doesn’t offer further details in this regard.

Thanks again and keep following us!

Christina Speight said...

Surely, The IMF is in breach of its whole raison d’etre. It exists to help sovereign countries unable to meet their obligations. None of the subordinate states belonging to the eurozone are sovereign because they can’t take sovereign action as required normally by the IMF. Therefore the IMF is in breach of its own rules by coming between the EU and the suffering states. For this reason Britain should surely refuse another penny of IMF contributions.

This is a result of letting the IMF fall into the hands of a lady who immerdiately prior to her appointment as its Head was Finance Minister of a eurozone state.

Denis Cooper said...

"RECALLING that Article 260 of the Treaty on the Functioning of the European Union empowers the Court of Justice of the European Union to impose the payment of a lump sum or penalty on a Member State of the European Union having failed to comply with one of its judgments."

It does, but only judgments which relate to breaches of the EU treaties.

"If the Court of Justice of the European Union finds that a Member State has failed to fulfil an obligation under the Treaties, the State shall be required to take the necessary measures to comply with the judgment of the Court ... If the Court finds that the Member State concerned has not complied with its judgment it may impose a lump sum or penalty payment on it."

There is no obligation under the EU treaties for a member state to adopt a balanced budget rule, and a group of member states cannot create such an obligation under the EU treaties through an external agreement among themselves.

It's already stretching the meaning of Article 273 TFEU:

"The Court of Justice shall have jurisdiction in any dispute between Member States which relates to the subject matter of the Treaties if the dispute is submitted to it under a special agreement between the parties."

to ask the ECJ to adjudicate on a dispute over the incorporation of a balanced budget rule into national law, but at least it could be argued that the question "relates to the subject matter of the Treaties" in a very general way.

In contrast a judgment against a member state on that question would self-evidently not mean that the member state had "failed to fulfil an obligation under the Treaties", because there is no such "obligation under the Treaties", and it must follow that the ECJ has been given no power to enforce any such judgment and it would be exceeding its legal competence if it attempted to do so.

Therefore this would not be "100% legal under the EU Treaties", it would itself be a clear breach of the treaty articles on "conferral", and in particular Article 13(2) TEU:

"Each institution shall act within the limits of the powers conferred on it in the Treaties ... "

François Heisbourg said...

Dear Friends,

does article 4 of the draft treaty mean what it appears to say, i.e. a 5% reduction of sovereign debt every year starting in 2013? If so, this would require in the case of France, a budget surplus of close to +4.4% of GDP (one-twentieth of a close-to-90% of GDP sovereign debt) next year and during the following years. If so, it is not difficult to foresee both the economic effects (violently pro-cyclical leading to a deep and lasting Greek-style depression) and the political consequences (Marine LePen present in 2nd round of the presidential election if the treaty is signed in its current form). Or maybe article 4 is just for the gallery; but then, why include it?

Thank you for your comments,

François Heisbourg

Staffan Dahllöf said...

Article 4 says:
”(...) the Contracting Parties shall reduce it (the ratio of their general government debt to gross domestic product) at an average rate of one twentieth pr year (...)”
the regulation it refers to (1177/2011) says:
”(...) if the differential with respect to the reference value has decreased over the previous three years at an average rate of one twentieth per year as a benchmark (...)”
I would say it makes a difference if you have to reduce the total debt with 5 percent , or 5 percent of the sum between actual debt and the reference value. Or have I missed something here?

François Heisbourg said...

Dear Staffan Dahllöf,

Thank you for your important comment. At the very least, if this interpretation is correct ( i.e.5% annual reduction of the differential between the reference value of 60% and the actual debt), this should be reflected in the text of the article. As things stand, there is a contradiction between article 4 proper and the regulation it refers to.

Assuming that this interpretation is correct, France would have to move to a budget surplus of +1.4% (one-twentieth of the differential between the reference value and the actual debt)on average for the period 2013-15: still violently pro-cyclical and politically explosive in the current electoral context. According to the latest government forecast, France's budget deficit for 2011 will have been of -5.5% of GDP.

Best wishes,


Open Europe blog team said...

Cher François,

The last sentence of Article 4 is key to answer your question,

“The Contracting Parties shall reduce [public debt in excess of 60% of GDP] at an average rate of one twentieth per year as a benchmark as provided for in Article 2 of Council Regulation (EC) No. 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure, as amended by Council Regulation (EU) No. 1177/2011 of 8 November 2011.”

The reference they make here is to a Regulation from the Six-Pack on economic governance (see here, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:306:0033:0040:EN:PDF). Basically, this Regulation establishes that a series of “mitigating factors” (level of private debt, currency denomination of the debt, maturity structure and so forth) must be taken into account by the Council and the Commission when it comes to deciding whether/to what extent a country is violating the EU’s debt rules. The impact of the economic cycle on the pace of debt reduction must also be accounted for. This clearly makes the 1/20 benchmark less clear-cut. Italy has been pushing hard to include this reference in the ‘fiscal treaty’, for quite obvious reasons, but it is not the only country that would benefit from it (as you correctly note, for instance, France is also well above the 60% of GDP threshold).

Thanks for your thoughts and keep following us!

Staffan Dahllöf said...

Dear blog team and Francois,
I guess I'm convinced, and yes I had seen the reference you make. Suppose the reason for not stating things clearly is due to the ongoing political process.
And again it wasn't meant to be easy in the first place. But thanks for keeping the heat on.


Toby Young said...

Has Article 15 been changed? As it stands, it sounds like all signatories of the Treaty, including non-Eurozone member state of the EU, would be expressing their intention to be bound by all of its provisions in due course. Or have I misunderstood Article 15?