In Europe: EU treaty draft spells out escape clause

11 January 2012

In these troubled times, the EU outlines discipline required by member countries. Speaks to ‘exception to the rule’ with regard to fiscal objectives.

A new EU fiscal treaty will only allow euro zone countries to incur budget deficits during severe economic downturns in the euro zone or other exceptional events, according to a draft of the document obtained by Reuters on Wednesday.

The document is the latest draft of a treaty to tighten fiscal controls in the euro zone, a move Germany has insisted upon in order to prevent a repeat of the runaway spending that led to a debt crisis in the 17-country euro zone.

In the latest draft, officials spell out more clearly when the euro zone would tolerate a deviation from a budget in balance or in surplus — called the medium-term objective:

“Temporary deviation from the medium-term objective will only be allowed in cases of (an) unusual event outside the control of the contracting party with a major impact on the financial position of the general government or in periods of severe economic downturn for the euro area, the EU or the concerned contracting party.”

The balanced-budget rule, which demands governments balance their budgets over the economic cycle, is central to the new treaty.

The draft sets a provisional timeline for the entry into force of the new regime by the start of next year.

The draft also removes a controversial reference to deeper integration in the single market among those who sign up to the pact.

This was problematic for Britain, which has opted out of the new agreement, and will not want to be left on the sidelines as a large group of EU countries deepen their ties. Up to 26 EU countries are expected to back the agreement.


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