Eurozone Unites On New 'Fiscal Compact'

by Ulrika Lomas, Tax-News.com, Brussels

12 December 2011

Following the first working session of the European Council at the key summit in Brussels, President of the European Council Herman Van Rompuy outlined the main outcome of the talks, announcing that in the short term immediate action to overcome the eurozone crisis was agreed, and that in the longer term the overwhelming majority of member states united on plans for a new ‘fiscal compact’ for the eurozone.

Somewhat isolated, Britain and Hungary declared that they would not join the fiscal compact, while the Czech Republic and Sweden still require a mandate to participate.

Alluding to plans for immediate action in the short term, Van Rompuy revealed that eurozone and other member states agreed to increase financial resources to address the crisis, by making available additional contributions of up to EUR200bn (USD267bn) to the International Monetary Fund (IMF).

It was also agreed that the European Financial Stability Facility (EFSF) leverage will be rapidly deployed and that entry into force of the European Stability Mechanism (ESM) rescue fund would be accelerated and enter into force in July 2012.

Regarding private sector involvement, Van Rompuy stressed that members had agreed to strictly adhere to IMF principles and practices in future, conceding that the approach taken in the case of Greece, in which a debt writedown from the private sector was negotiated, had had a very negative effect on the debt markets and would not therefore be repeated.

Underscoring the need to address the medium and longer term future of the eurozone, Van Rompuy explained that member states had agreed on a new fiscal compact, requiring a commitment to a strong European fiscal rule to enforce greater budgetary discipline, to be transposed in member states' constitutions or equivalent.

The fiscal compact would, he continued, also mean “reinforcing our rules on excessive deficit procedure by making them more automatic” and that member states will be required “to submit their draft budgetary plans to the Commission”.

In his statement, the European Council President explained that during the discussions there was “a broad agreement on the substance” of fiscal union, and that “everybody wants to make this new commitment solemnly binding”.

Van Rompuy stated that as regards the legal means to achieve the agreed goals, it was concluded that the 17 eurozone members and six other member states would conclude an inter-governmental treaty.

Alluding to additional plans to strengthen economic convergence of the eurozone and deepening the economic union, Van Rompuy revealed plans to prepare a follow-up report in June, aimed at deepening fiscal integration.

In their joint letter to Van Rompuy, ahead of the summit, German Chancellor Angela Merkel and French President Nicolas Sarkozy set out their plans for economic convergence.

The leaders underlined the need to strengthen growth by increasing competitiveness and by converging economic policies, at the very least among eurozone member states.

Here, Merkel and Sarkozy alluded to the need for a new legislative framework, intended to make “faster progress” in concrete areas such as financial market regulation, the labour market, convergence and harmonization of the corporate tax base, as well as the creation of a financial transactions tax.

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