Academic journal article Economics, Management and Financial Markets

Requirements and Difficulties of Eu Tax Treaty Application

Academic journal article Economics, Management and Financial Markets

Requirements and Difficulties of Eu Tax Treaty Application

Article excerpt

1. Introduction

On 02.03.2012, the leaders of 25 European countries signed the Treaty of Stability, Cooperation and European Governance, known as the Tax Treaty or Pact. According to this treaty, the signatory States undertake to fall into a deficit of maximum 0.5% (so-called "Golden Rule") and maximum cyclical deficit should not exceed 3% of GDP. If states have a gearing ratio below 60% of GDP structural deficit will be negotiated down to 1%. If these numbers are exceeded, the Treaty provides a mechanism triggering automatic penalty which may extend to fines of 0.1% of GDP.

Only countries that signed the Treaty will help benefit the European Stability Mechanism - the so-called financial facility. States signatory to the Treaty undertakes to ratify domestic legislative and find ways to impose "golden rule." In some cases it may be about amending the Constitution states, others might call the parliamentary ways. European budgetary pact or tax treaty signed by Romania entered into force on January 1, 2013, after being ratified by Finland. The main purpose of the treaty is to ensure better fiscal discipline in the euro zone, with the "golden rule." Finland was the 12th state to ratify the Eurozone treaty, thus fulfills the prerequisite for entry into force.

2. Application of the Treaty in EU states

Romanian Senate, approved on 21.05.2012, with 89 votes to ratify the Treaty on stability, coordination and governance in the Economic and Monetary Union. Treaty is based on a strengthening fiscal discipline, having as main element the budgetary position, which must be balanced or in surplus. The budget rule of the Treaty is inserted through national provisions, having a binding and permanent legal character, preferably at constitutional level.

The adoption in Romania of the Tax Treaty could generate several risks that may affect the economic development. The restriction of the structural deficit to 0.5%, as a uniform rule for all countries of the Covenant, although their public debt differs significantly from 6% (Latvia) to 160% (Greece) - in Romania is around the 40% threshold - could make fine adjustments required by economic optimization.

In the future, our country could request a rise of the restriction to expand to 0.7% or even to 1% the level structural deficit. By obtaining this concession, economic growth would be affected and artificial growth potential would remain underutilized. The 0.5% level would rather preserve gaps than to allow the recovery. In case of favorable economic developments, it will be very difficult to explain why people cannot be granted immediate rewards and to be accepted before distributing the results of the long-term advantages. The issue of national sovereignty is limited by this European agreement.

The calculation difficulties and uneven application could lead to major controversy relating to the observance of 0.5% structural deficit. We can expect adverse effects on European cohesion and destabilizing reactions at the institutional level. Specifically, Hungary was subject to some sanctions imposed by the European Commission when it has overcome the deficit. Greece accepted hardly these conditions and only in time. There are many calculations who contest the calendar of restructuring the budget and feasibility of repayment of medium and long term public debt.

As economic advantages, the Treaty could prevent economic skidding and his long-term effects through structural deficit. One of the provisions of the Treaty is the implied obligation of the legal originator of providing benefits for sustainability while demonstrating the benefits granted. Economic practice has shown that, once granted, the benefits cannot be withdrawn, even if policymakers take responsibility in this regard.

Macroeconomic stability allows faster development, better use of available resources, can generate a favorable effect on investment and not for consumption later. Everything is fine as 0. …

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