How to Bring It Home – The EU’s Options for Incorporating the Fiscal Compact into EU Law

By Johannes Graf von Luckner

From North to South, from national governments to the Commission: EU Institutions and Member States are in agreement that a reform of the Economic and Monetary Union (EMU) is high on the political agenda. One aspect of such a reform is the integration of the Fiscal Compact into the EU legal framework, which the Member States committed to in the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG). With a French Government that is pushing for reforms, a German government that is finally in place, and a proposal for a directive drafted by the EU Commission on the table, it is likely that the topic will gain importance.

In three somewhat distinct steps, this post aims to explain the obligation to incorporate the Fiscal Compact into EU law (1.), explore one viable option to do so, which some of the treaty-drafters might have had in mind, namely the Enhanced Cooperation mechanism (2.), and analyse the (rather surprising) Commission proposal on the topic (3.).

  1. The Obligation to Reincorporate the Fiscal Compact

In the wake of the European debt crisis, most Member States agreed on the need for a new fiscal treaty for the Eurozone. The firm resistance of the UK eventually led them to adopting the TSCG, and its key ingredient the Fiscal Compact, outside the treaty framework as an intergovernmental treaty. Nevertheless, the treaty upheld close ties to EU law and the EU institutions: several tasks are foreseen for the Court of Justice, the Commission and, to some extent, even the Parliament (Article 13 TSCG), and the Member States are prompted to make “active use” (Article 10 TSCG) of EU legal instruments. Further intertwinement between the EU legal order and the TSCG is provided by Article 16:

 “Within five years, at most, of the date of entry into force of this Treaty,[…] the necessary steps shall be taken […] with the aim of incorporating the substance of this Treaty into the legal framework of the European Union.”

This five-year deadline ended on January 1st, 2018.

It can be debated to what extent Article 16 TSCG can be considered a binding obligation: The CJEU has jurisdiction over some parts of the TSCG (Article 8 (1) TSCG). Article 16, however, is not one of them. Also, it only addresses the States that are parties to the treaty, and cannot compel the non-participating Member States or the Institutions, which would be necessary to guarantee an incorporation into EU law.

Nevertheless, Article 16 TSCG is binding upon the participating Member States under international law. Moreover, the TSCG was, to a large degree, created to calm the financial markets – for future reference, creating a precedent for ignoring the obligations of ad hoc international treaties could go against the interests of Member States and the institutions.

Therefore, it does not come as a surprise that Member States and Institutions alike are interested in ‘repatriating’ the TSCG into EU law.

On the practical side, when it comes to the method of incorporating the treaty into EU law, there are two main viable options: it could be incorporated into secondary law (the Commission regards Article 126 (14) TFEU, which calls for a special legislative procedure, as the only possible legal basis, see below), or into EU primary law through a treaty amendment.

However, both of these options would likely face difficulties: Until today, not all Member States have ratified the TSCG (25 of the 28), and some of the signatory states have not signed it in its entirety. Both, a treaty amendment and a special legislative procedure require unanimity among the Member States. Unanimity, though, will not easily be reached:  Especially the United Kingdom and the Czech Republic were actively against adopting the TSCG. Even with the UK leaving the EU, in many of the contracting Member States it might not be met with particular endorsement to reaffirm a legal instrument largely implementing austerity tools.

Therefore, if the EU is aiming at the incorporation of the treaty into EU law, it is advisable to look for alternative options.

  1. Incorporation through Enhanced Cooperation

One option worth looking at for the repatriation despite the disunity between Member States is named in the treaty itself: the Enhanced Cooperation procedure (Article 20 TEU and Article 326-334 TFEU).

Article 10 TSCG

“In accordance with the requirements of the Treaties on which the European Union is founded, the Contracting Parties stand ready to make active use, whenever appropriate and necessary, of […] enhanced cooperation”

Enhanced Cooperation is the EU’s standard tool to create differentiated secondary law. It allows groups of Member States to pass European legislation despite the unwillingness (and even the vetoes) of other Member States. Unlike with normal legislation, the resulting acts bind only participating States. In the case of the TSCG, interested states could declare their willingness to incorporate it into EU law and pass a directive to this end, while the Czech Republic and the UK (and every other uninterested State) would remain unaffected.

For the interested Member States to be able to resort to Enhanced Cooperation, there are nine conditions laid out in Article 20 TEU and Articles 326-334 TFEU. In the following, I will briefly analyse these to delineate whether the TSCG could in fact be repatriated using the Enhanced Cooperation mechanism.

An Enhanced Cooperation

  1. shall aim to further the objectives of the Union, protect its interests and reinforce its integration process, Article 20 par 1 TFEU

The preamble of the TSCG declares the goal to create an “ever closer coordination of economic policies within the Euro-area”. Moreover, Article 1 of the Treaty declares the objective of “strengthen[ing] the economic pillar of the economic and monetary union by adopting a set of rules intended to foster budgetary discipline […] and to improve the governance of the euro area thereby supporting the achievement of the European Union’s objectives for sustainable growth, employment, competitiveness and social cohesion”. Regardless of the question whether the Fiscal Compact is successful in furthering the objectives of the Union, the preamble indicates that it at least aims to do so.

  1. shall be open at any time to all Member States, Article 20 (1) TFEU, Article 328 (1) TFEU

The Fiscal Compact mainly imposes duties on Member States to fulfil certain fiscal goals. These duties can subsequently be complied with at any later time by states that chose not to participate from the beginning. This is true even for States that are not part of the Eurozone, which is shown by examples such as Denmark, which is member to the treaty despite having opted out of the EMU, and as can be seen in Article 14 (5) TSCG.  Thus, the Treaty is at any time open for new Member States to join.

  1. shall be adopted as a last resort, Article 20 (2) TFEU

In its first judgement on enhanced cooperation (concerning the Unitary patent), the Court of Justice stated that it is mostly for the Council to decide whether there is hope for a political agreement among all Member States, and that it has a wide margin of appreciation in doing so. However, it seems fair to say that some discussions on the political level in the Council would be necessary in order to explore possibilities of an incorporation binding all Member States. Given the resistance against the TSCG of some Member States in the past, it is likely that unanimity could not be reached, and consequently the last resort criterion would be fulfilled. If it is in the interest of all Member States, this process might be abbreviated if parties who are not interested in joining an Enhanced Cooperation explicitly declared this in the council.

  1. can only be established within the framework of the Union’s non-exclusive competences, Article 20 (1) TFEU

The commission considers Article 126 (14) TFEU to be the legal basis for incorporating the Fiscal Compact. This provision allows the Council to (unanimously) adopt provisions to replace the Protocol (No. 12) on the Excessive Deficit Procedure, which contains the key figures of the Stability and Growth Pact. This might be criticised as a rather flexible interpretation of said provision, since nobody intends to replace this protocol. However, there is no indication for this competence to interfere with any of the exclusive competences named in Article 3 TFEU. In fact, fiscal policy is the counterpart to monetary policy, which is enumerated in the list of exclusive competences in Article 3 (1)) TFEU – the fact that competence for monetary policy does not entail fiscal policy is the reason for the existence of the Fiscal Compact in the first place.

  1. shall comply with the Treaties and Union law, Article 326 TFEU

If the Fiscal Compact is supposed to be incorporated in EU law, it must comply with it in any case.

  1. shall not undermine the internal market or economic, social and territorial cohesion, Article 326 TFEU.

As stated above, Article 1 of the Fiscal Compact declares for the treaty to aim at “improv[ing] the governance of the euro area thereby supporting the achievement of the European Union’s objectives for sustainable growth, employment, competitiveness and social cohesion”. It may be questionable which effect austerity measures imposed on crisis-hit states can have on social cohesion and sustainable growth. However, this seems to be a political rather than a legal issue.

  1. shall not constitute a barrier to or discrimination in trade between Member States
  2. shall not distort competition between them, Article 326 TFEU

There is no apparent reason why the Fiscal Compact could lead to trade barriers, cause discriminations or distort competition between Member States, especially since integration in the field of EMU is already fragmented.

  1. shall respect the competences, rights and obligations of those Member States which do not participate in it, Article 327 TFEU

In fighting the sovereign debt crisis and preventing further crises, the aim of the Fiscal Compact is not only respecting, but even furthering the interests of the non-participating Member States, which through to the interconnection of financial markets are heavily influenced by crises as well.

This overview indicates that all conditions that enhanced cooperation is subject to could be met, making the mechanism a possible option if the TSCG was to be repatriated in its entirety.

That is not to say that Enhanced Cooperation would necessarily be the best, let alone the only choice, and a differentiated incorporation would face problems of its own: Given that not all contracting states signed the entirety of the TSCG, one problem arising could be the extent to which it would be transferred into EU law. A differentiation with the differentiation seems hardly feasible. Moreover, differentiated integration is frequently met with scepticism.

However, the possibility of incorporating the TSCG through Enhanced Cooperation can be seen as one viable option and should therefore play a role in the debate.

  1. “Fake Repatriation”?

Besides an unlikely treaty change, similarly difficult legislation for the Union as a whole, carving the Fiscal Compact measures in EU law stone, and an enhanced cooperation, it seems like the European Commission may explore a fourth, alternative option – an option that Bruno De Witte in the ADEMU workshop “The Future of Economic & Monetary Union – Law and policy issues of EMU reform” entitled a “Fake Repatriation”.

As I stated before, the Article 16 TSCG obligation to incorporate the treaty into EU law binds only the contracting states and not the EU institutions. Nonetheless, it is the Commission that is showing particular interest in the repatriation.

On December 6th, the Commission published a proposal for a Council directive incorporating the Fiscal Compact. This proposal aims to pass a directive with all Member States jointly. However, its scope of application (Article 1(2) and 4 Draft Directive) would be limited to Eurozone States, with the possibility for other Member States to join on a voluntary basis.

The draft directive, according the Commission, would “integrate[…] the essence of Article 3 of the Treaty on Stability, Coordination and Governance, which forms part of the so-called Fiscal Compact.” However, when looking through the provisions of the draft directive, one will notice substantial divergences from the TSCG.

The Fiscal Compact (i.e. Article 3 TSCG) introduced strict obligations, particularly the duty to have a balanced budget, allowing only a structural deficit limit of 0,5% of the GDP. Article 3 (1)(a) Draft Directive, on the other hand, merely obliges Member States to fulfil the limits set in the Stability and Growth Pact, with the much less restrictive limit of 3% of GDP, “or approach[…] it at a satisfactory pace”.

Of course, the TSCG contains more than the budgetary constraints of Article 3(2), such as the governance and convergence provisions in Article 9 TSCG. These are soft legal obligations though, whereas the novelty of TSCG was a hard law, justiciable obligation to fulfil fiscal duties, named in Article 3 TSCG.

What the draft directive does take over from the TSCG (although in less detail) is the obligation for the Member States to introduce domestic laws to enforcing the budgetary restraints (Article 3 Draft directive). This was a novelty of the TSCG – however, the Commission’s report on the compliance with Article 3 (2) TSCG under Article 8 TSCG concluded already one year ago that all Member States who are part to the TSCG already have such rules, introduced in compliance with the TSCG.

In conclusion, it can be said the proposed directive would be a surprisingly clear turn away from the Fiscal Compact’s austerity measures, while still taking the formal stand that the intergovernmental Fiscal Compact was, in compliance with Article 16 TSCG, repatriated into the Treaties. While being of a mostly symbolic nature, passing the Commission’s draft directive would avoid creating a critical precedent. At the same time, it would mean a step away from legal fragmentation through intergovernmentalism, back to uniform solutions under the Treaty framework, especially if TSCG was consequently abolished in the aftermath (something that the proposal does not comment on).

What remains is the political question of why there was practically no reaction to this type of repatriation. One explanation could be this: Only five days before the publication of the Commission’s draft proposal, media reports outlined that the Commission was aiming to change the debt rules established by the Stability and Growth Pact, and turn them into a common obligation to all Member States which must be fulfilled by them in their entirety, but not individually. The echo in the media and politics was accordingly critical. When the actual proposal was published five days later, it contained no such plan – critical voices showed clear relief. The fact that the draft proposal meant a virtual abolishment of the Fiscal Compact seemingly went largely unnoticed under these circumstances. It is not without irony that the a research paper issued by Deutsche Bank concludes that the Commission’s Saint Nicholas Proposals contain “no real surprises” – without commenting upon the missing Article 3 obligations in the proposal – while showing relief that the Stability and Growth Pact remains untouched.

Was all of this a Commission hand trick? We will never know. From the point of view of fiscal policy and particularly of unity in EU integration, adopting the draft proposal would in any case be an astonishing development.

  1. Conclusion

In conclusion, the TSCG is due to be ‘repatriated’ into EU law, if the international law obligation in its Article 16 is to be respected. One possibility to go about this would lead to more differentiation within EU law: an incorporation through the Enhanced Cooperation mechanism. The Commission, in its recent proposal for a Council directive, proposes an opposite approach: an adoption by all Member States – even if the changes necessary to accomplish this would make it somewhat of a “fake repatriation”.