EU Fiscal Treaty Aims At Preventing New Eurozone Crises

By Svetla Dimitrova

Bulgaria and Romania joined 23 other EU countries, including the 17 eurozone nations, in agreeing to a new pact intended to strengthen budget discipline as a safeguard against new crises in the euro area. The Czech Republic and the UK were the only members of the Union that refused to sign the treaty.

The fiscal compact, which was approved on January 30th during an informal EU summit in Brussels, will be signed at the bloc’s next high-level meeting at the beginning March. It will enter into force once it has been ratified by at least 12 eurozone nations. The participating countries will then have one year to incorporate the new tight budget rules into their national legislation.

Aimed at achieving stability, co-ordination and governance in the Economic and Monetary Union (EMU), the treaty provides that the national budgets must be balanced or in surplus and that the governments’ structural deficits should not exceed 0.5% of GDP.

For countries like Bulgaria, whose public debt is well below the 60% of GDP mark set out in the Maastricht criteria, the structural deficit could be slightly higher, but should not exceed 1% of GDP.

The EU Court of Justice will verify countries’ compliance with the obligation to transpose the “balanced budget rule” into their national legal systems and will have the power to impose a penalty of up to 0.1% of GDP on violators.

Furthermore, the treaty also stipulates that countries whose general government debt exceeds 60% of GDP “shall reduce it at an average rate of 1/20th per year as a benchmark”.

Bulgaria, the country with the lowest tax rates in the EU, said its condition for joining the pact was that it forces tax policy harmonisation.

“Taxation policy must be reserved for each individual state,” Bulgarian Prime Minister Boyko Borisov told reporters ahead of the talks.

“As concerns the fiscal part, there will be no direct consequences for Bulgaria, because it meets the requirements anyhow,” Gorgy Ganev, programme director for economic research at the Sofia-based Centre for Liberal Strategies (CLS) think-tank, told SETimes.

The treaty could have some indirect effects on Bulgaria, depending on how markets and investors react to it.

“If it is perceived as a reliable step towards resolving the public debt crisis in Europe in the longer term, then it would give a boost to the production sector, which would then have an immediate [positive] effect on Bulgarian exports,” Ganev said.

What needs to be seen now, the analyst noted, is how much money the banks will draw from the ECB.

“That will send a signal about their crediting plans, or at least their will to buy government bonds,” he said.

According to former Romanian Finance Minister Daniel Daianu, the “rigid” fiscal pact does not address the fundamental reasons for the euro crisis.

“This treaty is a one-sided reading of the causes of the eurozone crisis … The basic cause of this crisis is rooted in the sub-optimality of the Monetary Union and in inadequate institutional and policy arrangements,” he told SETimes.

“I hardly see how the eurozone can survive in its current configuration without a modification of its rules, which need to go much beyond enforcement of budget discipline. There is need for a lender of last resort, for a budget, which should operate according to the reality of very diverse conditions among the countries.”

European Central Bank (ECB) President Mario Draghi was more enthusiastic in his endorsement.

“It is the first step towards a fiscal union. It certainly will strengthen confidence in the euro area,” he said.