Merkel Champions Eurozone Fiscal Pact

by Ulrika Lomas, Tax-News.com, Brussels

26 January 2012

German Chancellor Angela Merkel has recently held talks in Berlin with Belgian Prime Minister Elio Di Rupo, with the talks focussing on the European agenda, and with both leaders underlining their commitment to further developing the planned fiscal pact.

Following the bilateral discussions, Merkel explained that the forthcoming European Union (EU) Council summit meeting in Brussels on January 30 should serve to send out a positive signal for growth and employment as well as for budgetary discipline.

In order to regain confidence in the eurozone, it is vital to adhere to the agreed commitments, the Chancellor emphasized, underscoring that in addition to the fiscal pact, the European Stability Mechanism (ESM) must swiftly be implemented as a matter of priority, and operational as agreed from the summer of 2012. Faster payments into the ESM capital stock will be required, Merkel added.

Merkel also stressed the need for the European Financial Stability Facility (EFSF) to be flexible to ensure that it can “really act” when needed.

It is expected that an agreement on the planned fiscal pact will be reached by the eurozone and other EU member states, with the exception of the UK, at the forthcoming Brussels summit, in order for the pact to be formally ratified at a second summit meeting in March.

Plans to conclude a new treaty on fiscal union were agreed by the 17 eurozone states and by the other members of the European Union, with the exception of the UK, during an EU summit meeting in Brussels in December.

It was agreed that all countries will introduce a statutory debt brake rule in their constitutions, designed to ensure a balanced budget. A budget is considered balanced when the deficit does not exceed more than 0.5% of gross domestic product.

Automatic sanctions will be imposed in future on countries with a large deficit, unless prevented by a qualified majority of member states. Countries with excessive debt will be required to conclude detailed reform agreements with the European Commission, and any country failing to adhere to the new requirements may be taken to the European Court of Justice.

Under the key terms of the agreement, the future permanent euro rescue mechanism, the European Stability Mechanism (ESM), is to be operational from the summer of 2012, instead of 2013 as initially planned, and, independent of the European Financial Stability Facility (EFSF) conditions, is to have a maximum lending volume of EUR500bn (USD663bn).

Given the ongoing challenges facing the eurozone, the heads of state and government also aim to meet on a monthly basis.

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