EU leaders embrace 'fiscal compact' demanded by central bank

Last week, speaking before the European Parliament, ECB chief Mario Draghi had hinted that the central bank could begin to intervene more robustly in the market if a “fiscal compact” was reached at the EU summit.

All EU leaders, including from states that do not employ the single currency such as the UK and Denmark, said that they have endorsed the decisions taken by the euro area.

But employing language stressing the unity of the bloc as a whole, they said: “The European Council is determined to preserve the integrity of the EU and the coherence between the euro area and the EU as a whole.”

States outside not using the single currency have been worried that as deeper integration proceeds apace in the eurozone, decisions affecting all 27 countries will be agreed by the smaller grouping and delivered as faits accomplis to the wider EU.

Key to a "new legal framework" governing the compact will be a 'golden rule' enforcing balanced budgets that must be inscribed in domestic constitutions or at an “equivalent level”.

Governments will be deemed to have achieved balanced budgets so long as deficits do not exceed 0.5 percent of GDP and the rules will have to include automatic correction mechanisms.

The European Court of Justice would be tasked with ensuring that this golden rule is transposed into national law, a watering down of previous proposals by Berlin.

For those countries that breach existing EU rules forbidding deficits exceeding three percent of GDP, there would now be “automatic consequences” unless a qualified majority of states decided otherwise.

The eurozone leaders also endorsed new rules proposed by the European Commission on 23 November that give the EU executive far-reaching new powers over domestic fiscal policy decision-making.

Under the proposals, almost all fiscal policy-making would be taken out of the hands of national assemblies and delivered up to European civil servants.

Governments in member states that use the single currency would be obliged to submit their budgets to both the commission and the eurogroup of states for vetting - before they are submitted to their own national parliaments.

If the commission does not like what it sees, it can demand changes to the budget, as well as other mid-term plans a government may have for its economy.

Those countries that have exceeded EU rules on the size of their debt and deficit would also be subject to tighter monitoring by Brussels and would have to submit regular reports on how they are progressing in trying to correct the situation.

The commission would be able to issue recommendations for how this should be done.

All eurozone states would also be forced to create independent fiscal councils - bodies of 'experts' unaccountable to parliaments - who would issue budgetary and economic forecasts. A country's budget would in turn have to be based on the reports of these fiscal councils.

For countries in deeper troubles and facing serious financial difficulties, Brussels could send teams of inspectors - akin to the 'Troika' monitors sent to member states that have received bail-outs.

The overseers could be sent to any state that the commission decides, even if the county has not requested any international assistance.

The commission would also be given the power to recommend to the Council of Ministers, representing the member states, that a country should take a bail-out.

“For the longer term, we will continue to work on how to further deepen fiscal integration,” the eurozone leaders say in the draft statement.

“This will imply more intrusive control of the national budgetary stance by the EU,” they continue.

Additionally, the draft statement mentions “the possibility of moving towards common debt issuance in the longer term and in a staged and criteria-based process,” a reference to the establishment of so-called eurobonds, long opposed by Berlin.

EU Council President Herman Van Rompuy is to produce a report on such further moves in March next year, a document that is also to tackle the thorny question of relations between the euro-area and the broader EU.