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18th Oct 2021

Twenty five EU leaders sign German-model fiscal treaty

  • Merkel and Van Rompuy - the treaty was drafted under heavy influence from Berlin (Photo: consilium.europa.eu)

Germany's vision of an EU of fiscally prudent states held in check by tight budgetary laws and the threat of legal action came a step closer on Friday (2 March) when 25 leaders signed a new treaty on fiscal discipline.

In a low-key signing ceremony, all countries except the UK and the Czech Republic, became signatories to the 16-article pact, which, after going under a variety of monikers, has now been lumbered with the title "Treaty on stability, co-ordination and governance in the economic and monetary union."

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"Its effects will be deep and long-lasting." said EU council president Herman Van Rompuy ahead of the signing, adding that it will help prevent a "repetition of the debt crisis."

In line with Berlin's wishes, the text includes an article obliging those that ratify it to enshrine a balanced budget into national law, while a country breaching the budget deficit rules will be subject to intense surveillance, with curbed discretionary spending powers, and obliged to carry out an agreed list of structural reforms.

Ahead of the signing, German Chancellor Angela Merkel said the treaty represented a "strong signal" on how the EU is dealing with the eurozone crisis and spoke of a "politically unified Europe" of the future.

The treaty was drawn up in a record two months but it is an only intergovernmental agreement, after the UK in December vetoed a full-blown EU treaty change.

The awkward status - outside the EU's normal architecture - has had lawyers scratching their heads over how to get EU institutions to implement it. It has also weakened the treaty's bite as countries breaching the implementation of the balanced budget rules can only be brought to court by another member state - a politically difficult option.

The treaty will go into force once 12 of the 17 euro countries have ratified it, and only those that have done so will have access to the eurozone's permanent bail-out fund, the ESM - a provision pushed by Berlin.

The agreement foresees that eurozone country leaders will hold summits twice a year, an arrangement that some non-euro countries fear will fortify divisions between the 'ins' and 'outs.'

Designed to ease German political and public opposition to further bail-outs, critics say the treaty, with its belt-tightening focus, risks worsening Europe's struggling economy.

The biggest debate on the treaty is likely to be in Ireland where it will be put to a referendum - the debate has already started about what concessions Ireland should seek to sweeten the vote for a population looking to vent its anger at having to foot the bill for bad behaviour by banks.

Another wrinkle in German Chancellor Angela Merkel's plan is the possible election of Francois Hollande as French President later this spring.

Hollande - while backpedalling on previous, much stronger comments - has said he wants the treaty to have more emphasis on growth and questioned the exact role of the European court.

Ireland to hold referendum on fiscal compact

The Irish government will hold a referendum on the EU's new fiscal treaty. The pact can still enter into force in other euro-countries if it says No, but Dublin would not be eligible for future bail-outs.

Legal challenges may delay eurozone bail-out fund

Legal challenges in Germany, Ireland and Estonia, as well as political uncertainty in the Netherlands, may delay the setting up of a permanent eurozone bail-out fund at a time when Spain's economic woes require a strong firewall.

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