A treaty, aiming to strengthen fiscal discipline in the euro area, entered into force on the 1st of January 2013.
The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, known as "fiscal compact", aims to strengthen fiscal discipline in the euro area through the balanced budget rule and the automatic correction mechanism.
The treaty will be legally binding as an international agreement and will be open to EU countries which did not sign it at the outset.
It requires the national budgets of participating member states to be in balance or in surplus. This goal will be deemed to have been met if their annual structural government deficit does not exceed 0.5% of nominal GDP.
In addition, the deficit must also be in line with the country-specific minimum benchmark figure for long-term sustainability. This figure is set by the preventive arm of the Stability and Growth Pact. The adjustment path towards this goal is assessed every year in the context of the European Semester.
Temporary deviation from this "balanced budget rule" is allowed only in exceptional economic circumstances, for example during severe downturns in economy. If government debt is significantly below the reference value of 60% of GDP, the limit for the deficit can be set at 1% of GDP.
If a member state deviates from the balanced budget rule, an automatic correction mechanism will be triggered. The member state will have to correct the deviations over a defined period of time.
The mechanism will fully respect the prerogatives of national parliaments.
The member states will have to incorporate the requirement for budgetary discipline and the automatic correction mechanism into their national legal systems, preferably at constitutional level.
The deadline for doing so is one year (by 1 January 2014) at the latest after the entry into force of the treaty.
Should a member state fail to transpose the "balanced budget rule" rule and the correction mechanism on time, the EU Court of Justice will have jurisdiction to take a decision on the matter.
The Court`s judgment will be binding, and, if not complied with, can be followed by a penalty of up to 0.1% of GDP.
This amount will be payable to the European Stability Mechanism if the country`s currency is the euro; otherwise, payment will be made to the general budget of the EU.
