10 things you need to know about the Austerity Treaty

Posted: March 5, 2012 in Austerity, Austerity Treaty Referendum, European Union

On 2 March 2012, the Fine Gael-Labour Government signed up to the Eurozone austerity treaty. Here are 10 things you need to know about the new agreement.

1. The reason we have this treaty is because ‘core’ EU member states (like Germany and France) want to impose stricter fiscal discipline on ‘peripheral’ EU economies like Ireland, Portugal and Greece. The aim of the treaty is to strengthen the enforcement of existing rules and impose some new rules on government deficits, debt and budgetary policy.

2. The Eurozone austerity treaty is not a European Union treaty. The British Government refused to allow the treaty to become EU law. It now takes the form of a separate non-EU inter-governmental treaty. This means that it sits outside the scope of EU law though, controversially, it alters the way in which EU policy and institutions operate.

3. Article 3 of the treaty is the most important. It states that governments’ budgets must be balanced or in surplus. The article makes significant changes to the existing EU treaty rules on fiscal policy known as the Stability and Growth Pact. Some of these changes were included in an EU legislative proposal agreed in November 2011 known as the “six-pack”. However, by placing them in an intergovernmental treaty they are more binding and permanent. This means that, if ratified, future governments will have to implement pro-austerity, anti-stimulus budgets in perpetuity. This significantly limits the freedom of decision-making of governments in the future, irrespective of the mandate they receive from the electorate.

4. The key provisions of Article 3 include a new structural deficit target of 0.5%; a restatement of the existing Stability and Growth Pact deficit target of 3% and debt target of 60% of GDP; a requirement for states who breach these targets to return to them rapidly; and an option for breaching these targets in “exceptional circumstances”. This means that the ability of any future government to borrow or run deficits at times of recession will be severely limited if not removed outright. It also means that the current government will have to implement austerity budgets beyond 2015.

5. Article 4 strengthens the existing Stability and Growth Pact requirement for states to maintain a debt-to-GDP ratio of 60%. Under this rule a state in breach of the 60% limit will have to reduce the excess portion of their debt ratio by 1/20th a year. In Ireland’s case this will apply from 2018.

6. The preamble to the treaty reminds us of the existing mechanism for enforcing the Stability and Growth Pact targets, known as the “excessive deficit procedure”. Article 5 of the treaty goes further and introduces new measures aimed at compelling member states in breach of the targets to take action deemed necessary by the Commission and Council. There is a new obligation to enter a “budgetary and economic partnership programme” involving detailed structural reforms aimed at reducing debt and deficit levels. This is essentially a Eurozone version of the Troika austerity programmes that member states will be legally obliged to accept when they breach the debt and deficit targets.

7. Articles 7 and 8 make three more changes. The first is that the excessive deficit procedure becomes automatic, requiring a majority of the European Council to block it. The second is that member states can now take each other to the European Court of Justice if they believe that the debt and deficit rules are not being respected. The third is that the European Court of Justice can fine an errant member state for not complying with the rules, a fine being up to but not exceeding 0.1% of a member state’s GDP, which in Ireland’s case would be approximately €155million based on 2011 GDP figures.

8. Article 12 creates a new parallel governance structure for the Eurozone, based on the existing Eurozone summit meetings but outside the framework of the existing euro governance framework. This will apply to all Eurozone countries irrespective of whether they ratify the treaty or not.

9. Article 16 states that the content of the austerity treaty will be incorporated into EU treaty law within five years of coming into force.

10. Finally, the preamble of the treaty makes ratification a condition for accessing future EU bail-out funds from the European Stability Mechanism. The treaty governing the ESM funds has also been amended. This means that if we say no to this treaty we could be excluded from applying for ESM funds in the future – however, it is unlikely that the European Council will enforce this rule as it would have serious implications for the member state concerned and the Eurozone as a whole.

There are two key arguments against this treaty.

The first is that it will impose greater levels of austerity on citizens for an indefinite period of time. One economist has estimated that it will require, at a minimum, a further €6billion of cuts and tax hikes post-2015.

The second is that it significantly undermines the choices available to future governments to manage the state’s economic affairs and in doing so undermines our sovereignty.

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