The Fiscal Compact - a quick explainer
At the European Parliament in Strasbourg last week, MEPs debated the European Commission’s plans to fully incorporate the so-called ‘Fiscal Compact’ into EU law – binding all signatory states to common budgetary rules as well as imposing penalties on those which fail to meet the threshold.
Rules that say EU countries must keep public debt and deficits tightly limited have their origins in something called the “Stability and Growth Pact”, adopted in 1997. This pact states that government debt cannot be higher than 60% of GDP (the total value of goods and services the economy produces), and government deficit may not exceed 3% of GDP. If a country does not manage to keep its finances within these limits, it risks fines and being forced into neoliberal economic measures that mean constant pressure on public expenditure, and a general transfer of economic power from the public to the private sector. The pact was applied more strictly in smaller countries than big ones and became deservedly known as the “Stupidity Pact”.
What is the Fiscal Compact?
Despite the problems associated with the Stability and Growth Pact, in 2012, the intergovernmental Treaty on Stability, Coordination and Governance in the Economic and Monetary Union or “Fiscal Compact” was signed. It complements the Stability and Growth Pact, adds the so-called the “Six-Pack” and “Two-Pack” regulations which introduce greater surveillance and reinforce budgetary controls. In short, this makes the demands of austerity even harsher by making member states stick to tougher rules to drive expenditure down.
Cuts to government spending have a contractionary effect and cause the economy to shrink; when the national income shrinks spending on unemployment benefits have to rise, the situation thus gets worse. Despite the fact that unregulated financial markets were one of the key causes of the crisis, it is citizens that have paid the cost.
Why does it matter now?
At the end of this year the Council has to decide whether to enshrine the Fiscal Compact (now an inter-governmental treaty) into EU law. This straitjacket of austerity should instead be scrapped. Enshrining it in the Treaty will commit all EU countries to permanent austerity. Meanwhile, after a decade of stagnation, even the IMF and the European Commission have been puzzling over whether austerity does more harm than good. Austerity is a failed ideology with evidence piling up showing that economic crises are triggered and prolonged by austerity programmes.
Article 16 of the Fiscal Compact foresees the need for it to be evaluated by the end of 2017 with substantial partsintegrated into the legal framework of the European Union in line with the Treaties. Most likely the Commission will publish concrete proposals in early December.
“The EU's Fiscal Compact, with rules such as deficit limits, restrict member states' ability to respond to the economic cycle through fiscal policy. It shows that the EU has learnt nothing from its history. Integrating this Compact into EU law will be a tragedy. I appeal to all groups that stand for the welfare state, the protection of workers and a Social Europe to reject this. I do not know if we are still on time to save the Union, but in order to do so we have to take this step.” – Marisa Matias MEP, Portugal
“It is just astounding to me that so many members of this Parliament and member states want to permanently impose an austerity straitjacket on the entire EU by inserting the Fiscal Compact into the Treaty. The evidence is stark – the Fiscal Compact has prolonged the downturn, stifled growth and ensured that stagnation is the 'new normal'. The failed austerity model has directly caused the rise of the far-right in Europe, and a crisis of legitimacy for the EU institutions. We have the opportunity to shake off the straitjacket. If we don’t, the EU’s political and economic crisis will become a political and economic catastrophe.” – Matt Carthy MEP, Ireland.
“The Fiscal Compact is a denial of democracy. People of Europe have to break with such policies and structures in order to achieve social justice and prosperity.” – Nikolaos Chountis MEP, Greece.
“As the example of Portugal has shown, austerity is not inevitable. Despite the European Commission’s blackmail and threats of sanctions, as well as cuts to the European Structural Funds, we saw a reversal of the measures that had been imposed by the Troika. As a result, salaries and pensions have increased, taxes on labour decreased and privatisations have been reversed.” – Miguel Viegas MEP, Portugal.
“The Commission has announced that it wants to use Brexit to integrate the Fiscal Pact into EU law. They should forget it now! The Fiscal Compact does not lead to greater cohesion but instead creates tensions that could lead to the disintegration of the European project.” – Miguel Urbán MEP, Spain.