News Column

European Fiscal Treaty - Where Things Stand

October 10, 2012

France inched closer to ratifying the European fiscal compact Tuesday after the lower house of parliament backed a bill incorporating the treaty into national law.

If the French Senate also backs the bill, France will be the 14th country (and 10th eurozone member) to adopt the treaty, which was signed by 25 out of 27 EU leaders in March.

The countries who have already ratified the treaty are: Austria, Cyprus, Denmark, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Portugal, Romania, Slovenia and Spain.

The treaty will enter into force on January 1, 2013, if at least 12 eurozone countries have ratified it.

Its main elements, which are legally binding only for eurozone members, are:

Countries must incorporate a "golden rule" on balanced budgets into their legal systems, at constitutional level or equivalent, including automatic correction mechanisms - such as spending cuts or tax hikes - when the target is not met.

Structural deficits - that is, budget shortfalls not linked to the temporary effects of economic recessions - must be kept below 0.5 per cent of gross domestic product (GDP). Derogations apply "only in exceptional circumstances."

Countries whose public debt breaches the EU limit of 60 per cent of GDP must reduce it by 5 per cent per year. Conversely, countries respecting the limit can run higher structural deficits, up to 1 per cent of GDP.

Countries with deficits above 3 per cent of GDP are to face sanctions unless a qualified majority of eurozone member states blocks the move.

The European Court of Justice will police whether nations implement the budget rule properly and can fine them up to 0.1 per cent of gross domestic product if they fail to do so.

Only countries that have ratified the treaty will be eligible to apply for funds from the European Stability Mechanism, the eurozone's new permanent bailout fund.

Source: Copyright 2012 dpa Deutsche Presse-Agentur GmbH

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