“The Taming of the Fiscal Shrew”

photo: Images_of_Money

On March 2, EU-25 leaders signed the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, commonly called the Fiscal Compact. The Treaty was not signed by the Czech Republic and Great Britain. Lithuania joined the treaty, but it still needs to be ratified by the Lithuanian Parliament (Seimas). Not being a member of the eurozone, Lithuania would be able to choose, which particular provisions of the treaty to commit to. However, after adopting the euro, the entire treaty will become mandatory.

Which rule is golden?

The foundation stone of the treaty is the so called Golden Rule, which establishes that the budgets of the countries who have signed the treaty must be in balance or in surplus. The requirement will be achieved if the lower limit of the structural deficit will be 0.5% of GDP. The lower limit of 1% of GDP will be allowed for countries with government debt significantly below 60% of GDP.

It is not the first time that the EU emphasises the need for national governments to cut their coats according to their cloths. The Stability and Growth Pact also establishes requirements for government finances. Unfortunately, EU members have chronically failed to follow them. Between 1999 and 2011, Germany and France have fulfilled the fiscal deficit requirement for 6 years, failing to do so for 7 years. In the same period, Italy has observed the requirement for just 4 years, ignoring it for 9 years. Great Britain, while not being a member of the eurozone, has satisfied the requirement for 5 years and ignored it for 8.

It looks like the EU no longer knows which measures it should undertake in order to manage the deficit. The treaty is yet another attempt to establish fiscal stability and to achieve this via requiring the introduction of the treaty’s provisions to the national legal systems. It seems that this particular requirement is the essential element – the Golden Rule of the treaty, because fiscal stability is also required by both the Stability and Growth Pact and the “Six pack“, established on December 13. The regulations do not need to be incorporated into the national legal systems, these documents are directly applicable and the pack is valid in all members of EU-27. A “Two pack” is underway, which comprises two regulations that will be solely applied to the eurozone members. These documents will establish the rules of budget formation and will be ratified in summer.

The Fiscal Stability Treaty, however, additionally states that the rules determining fiscal stability have to be incorporated into national legal systems, preferably at constitutional level. That is the main point of the treaty – its golden rule.

Whips in helpless hands

Why the initiators of the treaty expect that the countries will follow the provisions of constitutional laws better than treaty obligations, is unknown. Lithuania‘s example could not support such expectations. In Lithuania the Law on Fiscal Discipline has already set forth the maximum deficit limit of 0,5% of GDP. However this requirement was not fulfilled and when the deficit was tragically sticking out like a sore thumb, it was not the deficit that was trimmed. Instead, the law was changed to reflect the current state of affairs.

So the main task has been and remains the same – to ensure that member states comply with the fiscal stability requirements. The treaty lays down sanctions. The Court of Justice can issue a one-time or a periodic fine which would not exceed 0.1% of the country‘s GDP. In the case of Lithuania, the maximum amount would be equivalent to 100 million Litas (nearly 29 million Euros). If the country has euro, the fine would be channelled to the fund of the European Stability Mechanism, whereas fines from other countries would add to the general EU budget. However, the grounds of the expectations that such “whip policy” will serve the purpose are still unknown. Because another whip of the EU – the Excessive Deficit Procedure – has only been enforced in the most lenient manner.  Usually it limits itself to a warning and an agreement to the deficit reduction procedure, which the country undertakes. It is only now that we’ve heard about perhaps the strictest sanction to be imposed on Hungary – the withholding of EU funding.

The EU is overwhelmed by complete helplessness: it has already set out fiscal stability requirements which are not being complied with, there are sanctions for that, but they are not being imposed either. Therefore, a new treaty is proposed for the countries, which establishes even stricter requirements and heavier punishments. It is naively expected that their incorporation into national legal systems would change the countries’ previous behaviour.

Economic reforms to be approved by EU institutions?

Even though it is quite clear that fiscal stability is something to be sought after, another clause of the treaty might raise even more questions. The cat in the sack is the clause that requires all major economic policy reforms planned by the countries signed to be discussed in advance and coordinated, where appropriate. This process is not described in detail, it is not mentioned that informing about the reforms is sufficient and that it is about those reforms, which would increase the country‘s obligations and its budget deficit. In theory, an industrious country should coordinate its every economic reform in EU institutions. Such clause, its essence and every single word poses a lot of questions. Why should the country coordinate its reforms with EU bureaucrats? Is a simple informing process not enough to “benchmark best practices”? What is the “more closely coordinated economic policy”, sought by the treaty?

We have already experienced in Lithuania how a concise entry in some law can turn into a detailed secondary act. That is how such treaty clause can also become massive – at least this would mean additional bureaucracy in Brussels and the countries, a slow reform process or its absence. In the end, it’s not only a matter of procedures, but also of principle. Such requirement might be understood as the transfer of all important decision making to EU institutions, and that’s a far reaching and an unexpected turn.  Even though the next treaty clause emphatically states that this treaty does not infringe on the competence of the Union, it is, unfortunately, not so obvious.

More than strange governance of the euro zone

An entire part of the treaty is devoted to the questions of the governance of the euro zone. Such a grand title and an important place – in the treaty which has to be ratified by national parliaments – makes you anticipate something very important and significant. To a great surprise, the governance of the euro zone limits itself to an absolute detail in the context of all problems. It states that the contracting euro zone countries shall informally meet in Euro Summit meetings. Such meetings have been taking place since 2008. The treaty defines various procedures, i.e. that the President of the ECB shall be invited to take part in such meetings, that the President of the Euro Group might be invited, that the President of the EP may be invited, that the meetings shall take place at least twice a year, that the President of the Euro Summit shall be appointed, and who would present a report to the EP after each meeting.

photo: Images_of_Money

However, the competence and the role in the decision making of such meeting remain unclear. It is stated that the meeting would discuss the questions relating to the specific shared responsibilities and other issues concerning the governance of the euro zone and the rules that apply to it, the competitiveness of the countries, etc. An informal meeting format is established, the competence of which is unclear, as well as the role in the law-making and decision making processes. So far at least, it looks like a red carpet event for the institutionalised upper class, the results of which would be passed on to the countries who haven’t launched the euro and yet have ratified the treaty.

The treaty in Lithuania

Lithuania has signed the treaty, without any analysis or critical approach – just like the bulk of other initiatives coming from the EU which are greeted with open arms. It still needs to be ratified by the Lithuanian Seimas. The options are limited – since the content of the treaty cannot be changed anymore, it is a question of either to accept it or to reject it.

In making this decision, it is necessary to ask, what we are seeking after all. Fiscal stability in Lithuania? With political will in place, it would be possible to tighten and follow the tightened Law on Fiscal Discipline. Perhaps the treaty will discipline potentially unstable politicians? Maybe, but not necessarily. It’s not discussed either, which provisions of the treaty Lithuania will decide to comply with. Just like many times before, we’ve jumped into a train, but we have no idea how fast and where we are going. Or perhaps we are standing in place?