Academic journal article The Polish Quarterly of International Affairs

The Fiscal Compact and European Union Economic Governance: An Institutional and Legal Assessment

Academic journal article The Polish Quarterly of International Affairs

The Fiscal Compact and European Union Economic Governance: An Institutional and Legal Assessment

Article excerpt

Introductory Remarks

The Greek sovereign debt crisis has questioned the foundations of the Economic and Monetary Union (EMU) and confronted the Member States with the question of whether a eurozone member should be allowed to fail.1 The potential risks and costs of further eurozone destabilisation or a break-up has influenced wide European Union actions that aim to maintain the financial stability of the eurozone. The vision of a crisis contaminating other EU economies has affected work on strengthening the economic arm of the EMU, including surveillance of Member States' fiscal policies in order to avoid similar dilemmas in the future.2

The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union ("fiscal compact") constitutes one of the latest EU efforts to introduce stricter fiscal discipline in the eurozone.3 It was agreed on 30 January 2012, and signed on 2 March 2012, by 25 Member States, except for the United Kingdom and Czech Republic.4 This article will mainly focus on the legal and institutional aspects of the fiscal compact and its relationship with EU law. However, it seems essential to present the current economic architecture in order to point out the interdependence of the specific measures established and implemented since the Greek sovereign debt crisis erupted. This will show what role, if any, the fiscal compact plays in the architecture of EU economic governance. While it is impossible to describe the whole package of reforms introduced since May 2010, it is vital to mention the six legislative measures aimed at strengthening EU economic governance ("six pack")5 and the permanent European Stability Mechanism (ESM),6 which is meant to replace temporary rescue mechanisms such as the European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM).7 The provisions of the fiscal compact are directly linked to those mechanisms. The fiscal compact introduces among its contracting parties stricter surveillance that, to a large extent, has already been covered by "six pack" legislation. It is also worth noting that the financial support from the ESM that is supposed to start operating from July 2012 might be granted only if the potential recipient has ratified the fiscal compact and transposed the balanced budget rule into its national legal order.

An Asymmetrical Structure

The world financial crisis, followed by a sovereign debt crisis in some of the eurozone Member States, has fully exposed the weak construction of the EMU. The Lisbon Treaty, which entered into force on 1 December 2009, has not introduced any far-reaching changes regarding its functioning, either.8 It maintained the EMU's asymmetrical shape as established by the Maastricht Treaty. While monetary policy in relation to Member States whose currency is euro belongs to the EU's exclusive competences, decisions about economic policy are still taken at the Member State level and only coordinated by the EU. Additionally, EU Member States evaded the rules envisaged by the Stability and Growth Pact adopted in 1997, which supplements treaty rules about the excessive deficit procedure, and eventually diluted them in 2005.9

EMU also did not provide any solidarity mechanism that would be at hand for the EU to activate financial support for a eurozone member in need.10 On the contrary, the Lisbon Treaty maintained the "no- bailout clause" in Art. 125 of the Treaty on the Functioning of the European Union (TFEU), stating that both the EU and its Member States should not be liable or assume the commitments of any other Member State.11

Greek Sovereign Debt Crisis: Impetus for Strengthening EU Economic Governance

Awareness of the potential consequences of the Greek debt crisis being ladled out to other euro area members influenced the activities of EU political leaders in 2010. Establishing a proper firewall by using available EU treaty tools became the main challenge for EU decision makers. …

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