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25 EU Leaders Agree on Fiscal Compact Treaty. What’s that?

 Twenty five European Union leaders agreed at the EU summit on a new fiscal treaty designed to strengthen budget deficit and debt rules in all EU members. UK and the Czech Republic have decided not to enter into it. The new Treaty, now a Treaty of 25 countries, will impose German style budget discipline on all EU member states. It’s understood The Czech Republic has objected to the EU Fiscal Pact on constitutional grounds. The so-called “fiscal compact” limits the primary deficits of EU member states to a maximum of 0.5 per cent of their output over the course of an economic cycle and foresees automatic sanctions for states with a deficit above 3 per cent of their gross domestic product.

The Treaty will come into force on Jan 1, 2013 provided that the countries have ratified it by then.

(Sources: also  

Fiscal Compact Treaty – What’s that?

Under fiscal union, decisions about the collection and expenditure of taxes are taken by common institutions, shared by the participating governments. One definition of the proposed EU fiscal union is fiscal discipline, where countries in violation of their Stability and Growth Pact obligations will have to concede some of their fiscal sovereignty. The other definition focuses more on the notion of convergence in terms of tax policies, welfare systems and labour market regulations.On 9 December 2011, all EU members except the United Kingdom agreed on strict caps on government spending and borrowing (although some others’ agreements are subject to parliamentary votes or referenda), including automatic sanctions for countries breaking the rules (wikipedia)

We don’t actually need it….

The proposed fiscal compact treaty is redundant as it presents little improvement over the existing EU rules and does not address the financial markets’ actual concerns over short and medium-term growth, argues Massimiliano Marcellino,  economics professor at the European University Institute in Florence.

“This is surely not the right moment to spend so much time in drafting a new treaty that does little to address the most pressing short term problems of the euro area. But let’s assume for a moment that the Treaty is approved, and without major modifications. Will the Treaty manage to achieve its own set goals?

The first goal in the treaty is to ‘foster budgetary discipline’ and Title III of the draft treaty introduces measures aimed at achieving this target. The key economic indicators used in Title III are the structural balance of the general government, which is required to be balanced or in surplus, and the ratio of the general government debt to gross domestic product (GDP), which in the long run should not exceed 60%, and if it does it should be reduced by an average rate of one twentieth per year….” (Further reading in EurActiv.com)

PS Main thing is the EU leaders agreed on something today… As I write this post , there is a mini Greece-Summit in Brussels after the EU leaders successfully concluded their normal EU-Summit. I will report about the outcome as soon as news arrive.

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