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"Fiscal compact" entered into force on 1 January 2013

The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (popularly known as the "fiscal compact") entered into force on 1 January 2013 following its ratification by Finland. The treaty aims to strengthen fiscal discipline in the euro area through the "balanced budget rule" and the automatic correction mechanism.

© European Union

For the treaty to enter into force, it had to be ratified by 12 euro area member states. This condition was met when Finland, the twelfth euro area member state to ratify the treaty, deposited its instrument of ratification on 21 December 2012.

The treaty is legally binding as an international agreement and is open to EU countries which did not sign it at the outset.

The treaty was conceived following the decision by euro area leaders in December 2011 that stronger measures were needed to reinforce stability in the euro area. It was signed on 2 March 2012 by 25 EU countries.

The idea is to incorporate it as soon as possible into the existing EU treaties. The necessary steps for doing so should be taken within next five years.

Limiting deficits - the balanced budget rule

The new treaty requires the national budgets of participating member states to be in balance or in surplus. This goal will be deemed to have been met if their annual structural government deficit does not exceed 0.5% of nominal GDP.

In addition, the deficit must also be in line with the country-specific minimum benchmark figure for long-term sustainability. This figure is set by the preventive arm of the Stability and Growth Pact. The adjustment path towards this goal is assessed every year in the context of the European Semester.

Temporary deviation from this "balanced budget rule" is allowed only in exceptional economic circumstances, for example during severe downturns in the economy. If government debt is significantly below the reference value of 60% of GDP, the limit for the deficit can be set at 1% of GDP.

Automatic correction mechanism

If a member state deviates from the balanced budget rule, an automatic correction mechanism will be triggered. The member state will have to correct the deviations over a defined period of time.

The mechanism will fully respect the prerogatives of national parliaments.

Transposing the rules into national legislation

The member states will have to incorporate the requirement for budgetary discipline and the automatic correction mechanism into their national legal systems, preferably at constitutional level.

The deadline for doing so is one year at the latest after the entry into force of the treaty (i.e. by 1 January 2014).

European Court of Justice

Should a member state fail to transpose the "balanced budget rule" rule and the correction mechanism on time, the EU Court of Justice will have jurisdiction to take a decision on the matter.

The Court's judgment will be binding, and, if not complied with, can be followed by a penalty of up to 0.1% of GDP.

This amount will be payable to the European Stability Mechanism if the country's currency is the euro; otherwise, payment will be made to the general budget of the EU.

Amendment to the excessive deficit procedure

Decision-making in the context of the excessive deficit procedure will be more automatic than before: the euro area member states agree to support the Commission's recommendations and proposals for Council acts except where a qualified majority of them are opposed.

In addition, a member state that is subject to an excessive deficit procedure will have to put in place a " budgetary and economic partnership programme".

The programme will include a detailed description of the structural reforms which the member state will have to implement in order to ensure an effective and durable correction of its deficit. 

Such programmes will be submitted to the Council and to the Commission for endorsement. Their implementation will be monitored according to the rules of the Stability and Growth Pact.

Further coordination

The member states that are parties to the treaty will report their public debt issuance plans to the European Commission and to the Council. In addition, they will discuss and, if appropriate, coordinate among themselves and with the EU institutions in advance all the major economic reforms that they plan to undertake.

Governance in the euro area

Heads of state or government of the euro area member states meet at least twice a year in "Euro Summit" meetings, together with the European Commission.

They elect the president of the Euro Summit by a simple majority of votes. The President of the European Central Bank takes part in the Euro Summit meetings. The President of the European Parliament may be invited to be heard.

When appropriate and at least once a year, leaders of non-euro area member states that have ratified the treaty participate in these meetings as well.

Cooperation between the parliaments

The European Parliament and the national parliaments of participating member states will cooperate on questions relating to budgetary policies and other issues covered by the treaty.

For this purpose, they will set up a body made up of representatives from the relevant committees in the European Parliament and the national parliaments. The body will itself decide on its organisation. 


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