The Zero Impact Treaty?
Some Observations About the Debt and Deficit Rules in the Fiscal Treaty
Some readers will have come across an article I wrote which was published in the Irish Times on Friday 4th May. If not they will locate it here. This is just a short expansion on some of the ideas about the law expressed in that article. In essence, the point being made here is that the impact of this Treaty seems to be in the enhanced guarantee of adherence to its debt and deficit rules provided by (a) their ‘elevation’ to Treaty status (b) their domestication into national legal systems and (c) the Treaty’s extra enforcement provisions. Very far from costing us billions of extra euro or ushering in twenty years of austerity, the rules themselves however do not appear to involve any change at all from the standards we are already complying with – a point which is frequently missed by expert analyses. It is proposed to turn to each rule in question
1) Debt Brake
As I note in my Irish Times article, whatever the economic impact of such a debt brake – and this is something which has (quite reasonably) formed the subject of discussions on IrishEconomy.ie – this rule involves nothing new, since precisely such a debt brake is already found in Article 2(1a) of Council Regulation (EC) No. 1467/97 as amended by Article 1 of ‘Six Pack’ Council Regulation (EU) No. 1177/2011. Readers will find that here (see p. 3 thereof).
Its impact will not therefore be felt by anyone in the form of increased austerity.
2) Deficit Target
Here unfortunately, in order to understand the legal position, it is necessary to quote the deficit target rule at length. Under Article 3 of the Fiscal Treaty,
“(a) the budgetary position of the general government shall be balanced or in surplus.
(b) the rule under point (a) shall be deemed to be respected if the annual structural balance of the general government is at its country-specific medium-term objective as defined in the revised Stability and Growth Pact with a lower limit of a structural deficit of 0.5 % of the gross domestic product at market prices. The Contracting Parties shall ensure rapid convergence towards their respective medium-term objective. The time frame for such convergence will be proposed by the Commission taking into consideration country-specific sustainability risks. Progress towards and respect of the medium-term objective shall be evaluated on the basis of an overall assessment with the structural balance as a reference, including an analysis of expenditure net of discretionary revenue measures, in line with the provisions of the revised Stability and Growth Pact.
(c) The Contracting Parties may temporarily deviate from their medium-term objective or the adjustment path towards it only in exceptional circumstances as defined in paragraph 3.”
Article 3(3) provides some definitions which are necessary for the purposes of understanding the foregoing rule:
“…”annual structural balance of the general government” refers to the annual cyclically-adjusted balance net of one-off and temporary measures. “Exceptional circumstances” refer to the case of an unusual event outside the control of the Contracting Party concerned which has a major impact on the financial position of the general government or to periods of severe economic downturn as defined in the revised Stability and Growth Pact, provided that the temporary deviation of the Contracting Party concerned does not endanger fiscal sustainability in the medium term.”
What can be said about this new deficit rule? The first observation is that there is already a rule in place – Article 2a of Council Regulation (EC) No. 1467/97 as inserted by Article 1(5) of Regulation 1175/2011 – which stipulates that
“the country-specific medium-term budgetary objectives shall be specified within a defined range between -1 % of GDP and balance or surplus, in cyclically adjusted terms, net of one-off and temporary measures.”
Readers will find that here (see p. 5 thereof). So even if the Fiscal Treaty involved a straightforward obligation to hit a 0.5% structural deficit target, the most we could ever have been talking about would have been a shift in targets from a -1% cyclically adjusted deficit, to a -0.5% cyclically adjusted deficit.
The Fiscal Treaty does not however involve a straightforward obligation to hit a 0.5% structural deficit target. Instead, the Article 3 Fiscal Treaty requirement involves an obligation to hit a tailor-made target for each country – and even that is shot through with exceptions and ‘wiggle room’ for those charged with enforcing it either at Irish or European levels:
(i) the real requirement is merely that the annual structural balance of the general government be at its country-specific medium-term objective as defined in the revised Stability and Growth Pact (with a lower limit of a structural deficit of 0.5 % of the gross domestic product at market prices);
(ii) even that is putting things too strongly, since Article 3(1) immediately stipulates that “the Contracting Parties shall ensure rapid convergence towards their respective medium-term objective.” – implying in reality that they do not actually have to hit their medium term objective, merely converge rapidly with it;
(iii) even ‘rapidly’ is a relative term: according to Article 3(1), the “time frame for such convergence will be proposed by the Commission taking into consideration country-specific sustainability risks”;
(iv) moreover “progress towards and respect of the medium-term objective shall be evaluated on the basis of an overall assessment with the structural balance as a reference, including an analysis of expenditure net of discretionary revenue measures, in line with the provisions of the revised Stability and Growth Pact”;
(v) it should not be forgotten also that under Article 3(1)(c), the Contracting Parties may temporarily deviate from their medium-term objective or the adjustment path towards it in the exceptional circumstances as defined in paragraph 3 – which are broadly enough defined to include, within certain limits, ‘an unusual event outside the control of the Contracting Party concerned which has a major impact on the financial position of the general government’ and ‘periods of severe economic downturn’;
That is not all. All of the foregoing are merely the general rules: more specific ‘soft law’ rules apply to Ireland. According to Ireland – Stability Programme Update (April 2012) at p. 31
“… Ireland’s ‘medium-term budgetary objective’ (MTO) currently stands at -0.5% of GDP. This objective was set well in advance of the Inter-Governmental Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (the ‘Stability Treaty’)…”
In other words, as with the debt brake, the Fiscal Treaty involves the introduction of a structural deficit target which we are already aiming for. As with the Treaty’s debt rule therefore, regardless of the economic impact of aiming for such a target – and again, this has formed a very legitimate source of discussion on IrishEconomy.ie, the fact that the target is the same before and after the coming into force of the Fiscal Treaty should mean that the economic impact of the introduction of the Fiscal Treaty’s new deficit target should be precisely zero.
A few final rather random but still significant observations may be made on the debt and deficit rules
As regards the debt rule:
· even the veritable non-event of the new rule’s coming into force is postponed for several years – Article 2(1a) plus Clause 13 of the Preamble to the 2011 Regulation provides for a transitional period before the debt reduction rule applies with full force, a rule which does not appear to be interfered with by the Fiscal Treaty (see Clause 20 of its Preamble));
· some degree of confusion has arisen because of the somewhat ambiguous wording of Article 4 as to whether the ‘one twentieth per year’ benchmark reduction it refers to relates to one twentieth of the entire debt-to-GDP ration or merely to (a less onerous) one twentieth of the excess over 60% reference value. The words ‘as provided for in Article 2 of Council Regulation (EC) No. 1467/97 of 7 July 1997’, however indicate that what was intended was the lesser amount i.e., one twentieth of the excess over 60% reference value. There appears to be no change there from the existing legal position.
As regards the deficit rule:
· despite the misleading wording of Article 3(1)(a)of the Fiscal Treaty, the Treaty does not really oblige the budgetary position of a Contracting State’s general government to be ‘balanced or in surplus’ (since moments later Article 3(1)(b) refers to a lower limit of a structural deficit of 0.5 % of the gross domestic product at market prices) – a lower limit which could not exist were there really an obligation to have a budgetary position balanced;
· structural deficits are easier targets to be aiming at for an economy in a downturn than ordinary deficits;
· as regards the meaning of ‘rapid convergence’, in Ireland’s case, the Commission has already set us an ‘excessive deficit procedure’ general government balance target of 2.9% by 2013. It seems unlikely to adopt a different approach in the context of structural deficits. (see p. 45 of Ireland – Stability Programme Update (April 2012)).
There is of course far more to be said about the law and the Fiscal Treaty, but not in a blog of this size. The IIEA were kind enough to invite me to contribute a few thoughts to their website on e.g., the implications of putting this material in the Constitution. Interested readers may want to visit that site which they will find linked here.