European fiscal compact enters into force on 1 January 2013
The fiscal compact, which is the contractual basis for further enhanced coordination in fiscal and economic policy, enters into force on 1 January 2013. With the entry into force of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, stricter budget rules come into play for participating EU states. Governments undertake in particular to introduce national debt brakes following the German model.
The fiscal compact will help stabilize the euro
© picture alliance / Klaus Ohlenschläger
The fiscal compact is the result of a Franco-German proposal dating from December 2011. The Heads of State and Government of all euro states and the other EU member states except the United Kingdom and the Czech Republic signed the treaty on 2 March 2012. Finland deposited its instrument of ratification on 21 December 2012, the twelfth euro state to do so, thus fulfilling the conditions for the fiscal compact’s entry into force on 1 January 2013.
In Germany, both the Bundestag and the Bundesrat gave the fiscal compact their approval in June. Concerns that the fiscal compact was not compatible with the Basic Law were swept away by the Federal Constitutional Court in September 2012. Once these constitutional complaints had been rejected, Germany was able to ratify the treaty and deposit its instrument of ratification in Brussels. Within the Federal Government, the Federal Foreign Office and the Federal Ministry of Finance are jointly responsible.
Debt brake - balanced budget - automatic deficit procedure
The fiscal compact demands greater budget discipline from the signatory states
© picture alliance / ZB
First and foremost, the fiscal compact contains regulations on the introduction of national debt brakes, an obligation on participating EU states to run a balanced budget and a quasi automatic deficit procedure:
- National debt brakes: under the fiscal compact, the EU states undertake to anchor a national debt brake into their national legislation, at constitutional level if possible, by 1 January 2014. Germany took this step back in 2009, anchoring the debt brake in the Basic Law. This debt brake is the model for Europe to follow. The European Court of Justice (ECJ) will monitor the introduction of the national debt brakes. If it finds that the rules are not being complied with, sanctions can be imposed.
- Balanced budgets: the annual structural deficit may not exceed 0.5 percent of nominal GDP.
- Quasi automatic deficit procedure: if a state fails to comply with the stability criteria, a deficit procedure will be launched quasi automatically. In future this can only be prevented if a qualified majority of states vote against (reverse qualified majority).
In addition, the fiscal compact provides for closer cooperation on economic policy and strengthens the involvement of national parliaments. As of March 2013, ESM (European Stability Mechanism) support will only be given to states which have ratified the fiscal compact.
Last updated 02.01.2013