The Fiscal Stability Treaty: what happens next?

Tuesday 31 January 2012 11.00

Tony Connelly, Europe Editor, in Brussels

What happens now that EU leaders have signed off on the fiscal compact treaty in Brussels?

The first step is that the text will be translated into all 23 official EU languages (including Irish) and lawyers in each member state (26 since the UK is not participating) will check the text for legal compatibility in the relevant language.  That process should take a month, then it will be signed at the next EU summit at the beginning of March.

From then the contracting parties – ie up to 26 member states – have until January 1, 2013 to ratify the treaty.  On this occasion only 12 countries need to ratify it for the treaty to come into effect.  Since it’s not an EU treaty unanimity is not required – 12 countries was seen by negotiators as giving the new Treaty on Stability, Coordination and Governance in the Economic and Monetary Union the right balance and credibility to come into effect.

Once a country has ratified the Treaty it then has one year – the beginning of January 2014 – to ensure that the new debt brake has been transposed into their constitutions, or their national legislatures.

There is another key date, though.  Member states have until March 1, 2013 to sign up to their obligations under the new treaty (ie, ratified it) in order to qualify for any new funding which might be required under the EU’s permanent bailout mechanism, the European Stability Mechanism (ESM) which comes into effect in July.

In other words, if you don’t ratify the treaty, then you’re not eligible for any fresh funding after March 2013.  Programs in countries in receipt of existing bailout funds, like Ireland, will be unaffected by the new treaty, but should Ireland need a second bailout in two years’ time and hasn’t ratified by then could be in trouble.

What are the key elements of the treaty?

In fact, much of what is enshrined in the treaty already exists in what’s known as secondary legislation, ie EU rules already agreed by all member states.

The key chunk of legislation is known as the Six-Pack, a set of proposals launched by the European Commission and agreed by 27 governments and which was designed to prevent a repeat of the Greek debt crisis.

The Six Pack provides for much more intrusive monitoring of countries’ budgetary processes if they are in breach of the EU’s 3pc budget deficit rules.  It also allows for the European Commission to trigger sanctions if a country is repeatedly in breach of the rules.

Where the new Treaty differs is essentially in two areas.  The first key difference is the debt brake.  That is a binding commitment by member states to stick to the rule of keeping their budget deficit below 3pc.  There is some discretion when a country is facing “exceptional circumstances”, although those are not clearly defined.  The second innovation is that the European Court of Justice, under the new treaty, will have the competence to impose sanctions on a country if it is believed that that member state hasn’t properly transposed the new debt law in their constitution or national legislation.

The fines won’t be entirely automatic since each country will have due process in replying to requests and setting out their reasons.

Already under the Six Pack the European Commission can trigger financial sanctions if a country is repeatedly in breach of the rules.  Only if a qualified majority of member states declare that a country shouldn’t be sanctioned will penalties be stopped.

From Ireland’s point of view the big question is:  will ratification of the treaty require a referendum.

The government has insisted all along that only if the Attorney General decides the treaty breaches the Constitution will a referendum be required.  Since most of the treaty is governed by existing EU law there is an argument that this will obviate the need for a referendum.

However, a legal challenge is very likely.

If there is no referendum needed the government will pass necessary legislation through the Dail by way of the Fiscal Responsibility Bill.  That piece of legislation was in the pipeline anyway, and it would be the vehicle for enshrining the new debt brake in national law.

A key question for the government is, to what extent will the new Fiscal Responsibility Bill have the kind of rigidity and permanence that will satisfy Berlin in particular that Ireland is committed to maintaining the 3pc budget deficit rule in perpetuity.

 

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