UPDATE: the approved text of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union is available here.
The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union is expected to be discussed at the European Council meeting on 30 January 2012. I will use the last leaked draft to present a short summary of the treaty, and then analyze its content.
1. Summary of the Fiscal Stability Treaty
The treaty covers a number of topics as follows:
Scope and Objectives
The contracting parties aim to strengthen the economic pillar of the Economic and Monetary Union by adopting a set of rules intended to foster budgetary discipline through a fiscal compact, strengthen the coordination of economic policies, and improve the governance of the euro area.
The overall principle is that the government budget must be balanced or in surplus. The annual structural deficit must not exceed 0.5% of GDP. In the event of significant observed deviations from this principle, a correction mechanism will be triggered automatically. The mechanism will include the obligation of the EU Member State to correct the deviations over a defined period of time.
These rules must be transposed in the national law of the participating EU Member States within one year of the entry into force of the fiscal stability treaty through provisions of “binding force and permanent character, preferably constitutional”.
When the ratio of the general government debt to GDP exceeds the 60%, the must reduce it at an average rate of 1/20 per year as a benchmark.
The participating eurozone Member States commit to support the proposals or recommendations submitted by the European Commission where it considers that a Member State is in breach of the deficit criterion in the framework of an excessive deficit procedure.
If the European Commission concludes in its report that a participating EU Member State has failed to comply with the relevant rules in national law, the matter will be brought to the ECJ by one or more of the participating Member States. T he judgment of the ECJ will be binding on the parties in the procedure, which will have to take the necessary measures to comply with the judgment within a set period. If ECJ finds that the Contracting Party concerned has not complied with its judgment, it may impose on it a lump sum or a penalty payment appropriate in the circumstances that does not exceed 0.1% of GDP. The amounts imposed will be payable to the European Stability Mechanism.
Economic Policy, Coordination and Convergence
The participating Member States agree to take the necessary actions and measures in all the domains 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. This will be done through the adoption of special provisions for the eurozone (art. 136 TFEU) and the enhanced cooperation procedure (art. 20 TEU).
Governance of the Euro Area
The Heads of State or Government of the eurozone Member States will meet informally in Euro Summit meetings, together with the President of the European Commission.
Euro Summit meetings will take place at least twice a year, to discuss the responsibilities of eurozone Member States, other issues concerning the governance of the euro area and the rules that apply to it, including strategic orientations for the conduct of economic policies and for improved competitiveness and increased convergence in the euro area. Non-eurozone Member states that participate in the fiscal stability treaty will be invited to participate at least once a year in the Euro Summit.
General and Final Provisions
The fiscal stability treaty will enter into force on 1 January 2013, provided that twelve participating eurozone Member States have deposited their instrument of ratification, or on the first day of the month following the deposit of the twelfth instrument of ratification, whichever is the earlier.
Within five years of the entry into force of the treaty, participating Member States will take the necessary steps in compliance with the provisions of TEU and TFEU, to incorporate the substance of the treaty into the legal framework of the European Union.
2. Analysis of the provisions of the Fiscal Stability Treaty
One point must be made at the start: the fiscal stability treaty in its present form is not part of EU law. It is an instrument that is coordinated with and to large extent depending on primary EU law. This is also the main problem of the treaty.
The provisions are intentionally vague in order to avoid any conflict with the enhanced powers of the EU post-Lisbon. The only meaningful instrument is the sui generis infringement procedure in case a participating Member State has failed to apply the automated deficit correction mechanism. However, this procedure is substantially weakened by the fact that Member States, and not the European Commission, must petition the ECJ. This will happen only in extraordinary circumstances and with great unease.
In addition the provisions on economic coordination are totally bland. I fail to understand how these texts may enhance economic policy coordination – they are restating existing opportunities in EU law.
Another concern is whether the fiscal stability treaty will produce the intended effect. In a time when many are openly considering eurozone breakup we need much more substance and detail to stem the crisis. Yes, the UK government did its part in complicating the mitigation efforts, but we really need to respond to market expectations and to political realities today. Too many Europeans are already suffering from the effects of the continuing uncertainty and economic contraction.