Another potential fiscal catastrophe in the European Union was averted earlier this month when Greece met its deadline to agree to roll over €14 billion of private sector loans due to be refinanced this week. Around 85.5% of private investors agreed to support the restructuring of Greek national debt that would see €110 billion cut from the €206 billion value of privately-held Greek bonds to place national debt on a more “sustainable” footing by 2020.
In return, the Greeks will now receive a second €130 billion joint bailout package from the EU and International Monetary Fund. While this European crisis de jour may have been averted, there still remain the formalities involved in ratifying the European Fiscal Compact. Back in January, the Czech Republic joined the United Kingdom in being the only two member states to veto the new treaty. While the UK’s answer was an outright no, the Czechs wanted more time to examine the treaty before agreeing to sign it.
The new fiscal compact requires eurozone countries to introduce balanced budget rules into their constitutions that will cap annual structural deficits at 0.% of gross domestic product. If this limit is broken, an automatic correction mechanism will be triggered and this will ensure that the deficit is brought back into line.
If a member’s “debt break” is considered too soft, it can be taken to Europe’s central court and receive a fine of up to 0.1% of GDP against the country. The fine will be paid into the eurozone’s new bailout fund, the European Stability Mechanism or ESM. There will be an agreement amongst states to inform each other of significant economic reforms in advance.
The fiscal compact will only come into effect once it has been passed by the domestic parliaments of at least 12 members of the eurozone. States can only receive help from the ESM if they ratify the treaty. This means that troublesome eurozone members such as Ireland and Greece can continue to receive funding under current bailout agreements, but should they require further funding in two years’ time they would have to ratify the treaty.
The events of the past 12 months appear to validate arguments that closer fiscal integration within the EU was both needed and inevitable. Eurosceptics, on the other hand, may find this yet another attempt by Brussels to use financial aid as a means of holding member states to ransom. They may also find the fact that this new treaty contains a further transfer of power over fiscal policy and discipline to Brussels unpalatable, but a lot of what is enshrined in the new treaty is adapted from existing EU legislation.
This legislation is known as the “Six Pack” and is six pieces of legislation that was launched by the EU earlier last year and was later agreed to by the 27 member states to prevent a repeat of the Greek debt crisis.
Now what is left is for the 25 remaining member states to ratify the treaty by January 1, 2013. Unlike previous treaties, it does not require unanimity; only 12 states need to ratify the treaty for it to come into effect. Once a country has ratified a treaty it then has until the beginning of January 2014 to ensure the new break debt has been transposed into national legislatures.
For some member states, ratifying the treaty is as simple as a parliamentary vote or consensus amongst political and judicial circles. For others, such as the Republic of Ireland, a referendum will be required. Putting the decision in the hands of voters has previously delayed the implementation of treaties. For example, Nice and Lisbon were held up by the Irish after they vetoed both treaties in an initial referendum.
But this time around unanimity is not required and anyone who is unable to ratify the treaty by the deadline will be left behind and those who are in need of a further financial helpline will be unable to seek it unless they ratify the treaty.