Integration of the Fiscal Compact into secondary EU law

In “An Economy that Works for People”

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Signed in March 2012 by 25 EU Member States and entered into force on 1 January 2013, the Treaty on Stability, Coordination and Growth (TSCG), commonly referred to as the 'Fiscal Compact', aims to strengthen the economic pillar of EMU by introducing stricter fiscal discipline, enhancing economic policy coordination and convergence, and improving the governance of the euro area. At the time of signing, only the UK and the Czech Republic decided not to join the TSCG. This intergovernmental Treaty complements the measures introduced by the 'Six Pack' and the 'Two Pack'.

The Fiscal Compact's core principle is that national budgets must be in balance or in surplus. This reiterates the aim and central requirement of the Stability and Growth Pact agreed in 1997. It also compels Member States to transpose into national law (preferably at constitutional level) a balanced-budget rule. It requests the introduction of a binding correction mechanism in the event of significant observed deviations from their budgetary medium-term objective. If the abovementioned provisions are not complied with by a Member State, the Commission or any other country that adhered to the Compact may take a case to the Court of Justice of the EU. A financial sanction of up to 0.1% of GDP could then be levied if the Member State did not comply with the Court's judgment.

Countries subject to an excessive deficit procedure shall put in place a budgetary and economic partnership programme which includes structural reforms. Public debt issuance plans shall be reported by the Member States. The contracting parties from the euro area commit to support recommendations by the Commission when the latter considers that a euro area Member State is in breach of the deficit criterion within the excessive deficit procedure, except when a qualified majority opposes the Commission recommendation (thus partially departing from the required majority enshrined in Article 126 TFEU). Other measures include common sittings (so-called ‘Article 13 conferences’) of the relevant committees of the European Parliament and the national parliaments.

Article 16 of the TSCG stipulates that, within five years at most of the date of entry into force, 'the necessary steps' would be taken to incorporate the substance of the Treaty into the EU legal framework.

As long as the TSCG is of intergovernmental nature, the European Parliament cannot exercise scrutiny rights in relation with that treaty. In a resolution of 24 June 2015 on the review of the economic governance framework: stocktaking and challenges, the EP called for the full integration of the 'Fiscal Compact' into the Community framework and consequently made formally accountable to the Parliament.

The Five Presidents' Report recommends that the TSCG should be fully integrated into the EU legal framework.

On 6 December 2017 the Commission made a proposal for a Council Directive laying down provisions for strengthening fiscal responsibility in the Member States by integrating the TSCG in the Union legal framework. A framework of numerical fiscal rules are put forward which are specifically meant to complement the Stability and Growth Pact (SGP), with each Member State setting up a framework of binding and permanent numerical fiscal rules, aimed at strengthening its responsible conduct of fiscal policy. The intention is to avoid excessive deficits and debt. For government budgets a medium-term objective in terms of structural balance shall be set, and a correction mechanism shall be automatically activated in case of significant observed deviations. A temporary deviation is allowed only in cases of exceptional circumstances. It is to be reminded that the SGP, as well as the TSCG, stipulates that the medium-term budgetary position of the general government shall be in balance or in surplus, which means that the SGP goes much further than just considering the limits of 3 % of GDP for deficit as well as 60 % for debt.

Some of the TSCG provisions go further than what is foreseen in the EU Treaties. This is especially the case for the agreement on voting modalities in relation with the excessive deficit procedure, where through the Fiscal Compact (Article 7 TSCG) the Member States agreed to apply Article 126 TFEU in a stricter way than requested by the EU Treaties. A one-to-one transposition of the TSCG into Community law should therefore also require to amend the Treaty. This is why some provisions, especially the Article 7, will not be formally integrated in EU law, but leave the commitments between the contracting parties unaffected.

On 11 May 2018 the ECB published an opinion, where it generally welcomes the proposals, but advocates several amendments. Amongst others, an explicit reference to the obligation to have a budgetary position of general government that is in balance or in surplus should be included.

The Ecofin Council of 23 January 2018 concluded that the proposal to integrate the Fiscal Compact into the EU legal framework is not yet at a stage where it can be taken up in Council.

The lead committee in the European Parliament is the Economic and Monetary Affairs Committee (ECON). In her draft report presented in committee on 9 October 2018, the rapporteur Danuta Hübner (EPP, Poland) broadly welcomed the proposal. However, a number of very divergent amendments to the Commission proposal were tabled in committee, and no majority could be found at the committee vote on 27 November 2018. Despite the lack of a committee report, the dossier needs to go to plenary for a formal closure of the procedure in the EP. The consultation procedure foresees to put a report to the vote in plenary that stipulates that Parliament rejects the Commission proposal and further asks the Commission to withdraw its proposal. 

This is not a codecision procedure. The EP is only consulted (as is the ECB), while all the legislative power lays with Council, where no visible progress is made on this file.

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Author: Angelos Delivorias, Members' Research Service, legislative-train@europarl.europa.eu

As of 20/11/2022.