The Commission’s report on the Fiscal Compact and its expected (cautious) assessment

Last February, the European Commission issued its report on the Member States’ compliance with their implementation duties under the Fiscal Compact. Following a rather generous and prudent assessment, the Commission considers that all States have fulfilled their obligations.

The “Fiscal Compact – Taking Stock” Report – Better Late than Never

On 22 February 2017, the European Commission eventually published the report it had to prepare on the introduction by the Member States of the famous budgetary “golden rule” contained in Title III (Fiscal Compact) of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG). Article 8(1) TSCG indeed states that ‘The European Commission is invited to present in due time to the Contracting Parties a report on the provisions adopted by each of them in compliance with Article 3(2)’. Article 3(2) requires Member States to anchor the balanced budget rule (BBR) and an automatic correction mechanism (ACM) in ‘provisions of binding force and permanent character, preferably constitutional, or otherwise guaranteed to be fully respected and adhered to throughout the national budgetary processes’.

Furthermore, Member States should also set up national independent institutions in charge of monitoring the compliance with these provisions. Note that no obligation rested on the Commission as to the moment in which it had to present its report, this only being necessary ‘on due time’. Yet, given that Article 8 TSCG provides for quasi-automatic judicial review should the Commission find that a Member State has not respected its obligations, some had been eagerly awaiting this report, finally published in the most discreet manner one month ago.

The Commission opted for presenting a general report (in which it assesses compliance with the three obligations mentioned above) and individual reports for each of the Member States bound by Article 3(2), i.e. all Euro area Member States and Bulgaria, Denmark and Romania since Hungary, Poland and Sweden are signatories to the TSCG but not to the Fiscal Compact. Here the focus is set on the general report.

BBR’s and ACM’s – No Risk Taken Here

This report first focuses on the national provisions internalizing the BBR and the ACM consecrated by Article 3(1) of the TSCG. It starts by inquiring the legal status of those provisions, seeking to determine if they are, as required by Article 3(2), of a binding and permanent character, in such a way that they will effectively limit the freedom of the budget authority through the budgetary process. The Commission observes a high level of heterogeneity as to the type of legal instruments favored by the Contracting parties, and their position within their respective legal orders. This should not be surprising considering the inherent flexibility (one might say, ambiguity) of Article 3(2)’s wording, from which some States were quick to take advantage of. On this very point of legal status, the Commission found that all national implementing instruments in compliance with Article 3(2).

If this conclusion seems rather straightforward for States which favored the hard way of constitutional revision (such as Germany or Spain) or supra-legislative reform (such as Italy), or concluded a comprehensive federal agreement (such as Belgium or Austria), it is less obvious for those, like France or the Netherlands, which internalized the core substance of the Compact in ordinary laws, thus flirting with the limits of the spirit and the letter of Article 3(2). Those States however gave formal commitment that full adherence of their legal frameworks to the requirements of the Compact would be guaranteed. This apparently sufficed to offset the evident weakness of those frameworks (but does it really?), and ultimately satisfied the Commission.

The report then turns to the substance of the BBR’s and ACM’s that Contracting parties incorporated into their national legal order, to assess their compatibility with the Fiscal Compact and, with regard to the ACM’s, to the common principles established by the Commission. Here too, the Commission observes a high degree of variation, which it explains by the very nature of the TSCG as a compromise, its broadness and principles-based character, and the subsequent exploitation by the Contracting parties of the scope and leeway it offers. Such heterogeneity is for example very visible in the way the budgetary balance is set out in national legal frameworks (direct integration of the notion of medium-term budgetary objective, reference to the Stability and Growth Pact,…). Strong variation also prevails with regard to the escape clauses, and the determination of the ‘exceptional circumstances’ under which States can temporarily deviate from their budgetary objectives, some states directly referring to the definition of Article 3(3) TSCG, while others add further specifications (simultaneously guaranteeing the Commission that those will be interpreted consistently with the TSCG), or build on the structural reforms clause of Article 5(1) of Regulation 1466/97.

A great deal of diversity can also be observed for the ACM’s. Despite the assurances given to the Commission in that regard, a panoramic assessment shows that all States do not share the same understanding of what automaticity entails. The same goes for the structuring of the corrective action, its substance and its timeline. Despite this high degree of variation for both the BBR’s and ACM’s, which the Commission deems a natural consequence of the very rationale of the TSCG, i.e. increasing national ownership over EU-induced budgetary discipline, its conclusion is one of overall compliance with the TSCG.

Independent Monitoring Institutions – A (Still) Contrasted Picture

Following this analysis, the report examines the independent monitoring institutions. It should first be underlined that in this regard, the Commission’s report provides much-needed clarity. Up until now, it had been difficult to truly know which of the national institutions would be deemed to represent these institutions under EU law since their identity varied depending on the body making the assessment. The list provided in the report’s annex V is more limited than could have perhaps been expected.

Unsurprisingly though, the Commission has also been generous in its assessment of Member States’ compliance with their obligations and it has deemed them all to respect their obligations, although with certain reservations for some of them.

The Commission assesses a series of elements: the institutions’ statutory regime, their set up, their mandate, the guarantee of the ‘comply-or-explain’ principle’, the freedom of interference and the institutions’ capacity to communicate. It also analyses the nomination procedures of their members, their resources and their access to information. It is impossible to elaborate here on all of these aspects but it suffices to say that here too the Commission has been generally open to accepting Member States authorities’ formal commitment where the legal framework in place appeared not to be sufficient.

It is also noteworthy that the Commission’s assessment has been particularly cautious in assessing the question of these institutions’ resources: whereas it recalls the need for them to be ‘properly resourced’ it simply observes in which norms the rules concerning these resources are contained without addressing the question of the sufficient quantity of said resources. This could come as a disappointment to these institutions which, for some of them at least, have already faced difficulties in this regard (e.g. Spain). The same is true of their independence and of their access to information – although Spain is a notable exception in this regard since the Commission specifically underlines the existing deficiencies (more on the Spanish situation here).

In Sum – Finally Turning the Page of Article 8?

In sum, even if the Commission’s report is cautious in its assessment as illustrated here, its publication should be praised: eventually, the threat of potential judicial review under Article 8 has officially vanished or, at least it is now only reduced to the possibility of judicial review based on one Member State’s own assessment that another State does not comply with its obligations. Such a possibility appears to be particularly remote however.

The question remains as to whether there was ever a real threat though, in other words whether the Commission would have ever issued a negative report, given that the procedure before the Court of Justice appears to have been introduced mostly to reassure financial markets at the peak of the economic and financial crisis and was hence more of a ‘nuclear option’ than of a realistic one.

By Diane Fromage and Paul Dermine, Faculty of Law, Maastricht University

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