The Fiscal Compact (Treaty on Stability, Coordination and Governance in the Economic and Monetary Union) was signed on March 2, 2012. Negotiations on this Treaty began between 26 member states of the EU (all but the UK) after the 8/9 December 2011 European Council. 25 contracting parties eventually decided to sign the Treaty (not the Czech Republic).
After ratification by the twelfth Eurozone member state (Finland) in December 2012, the Fiscal Compact entered into force on 1 January 2013. For several contracting parties the ratification is still on-going.
What political/legal difficulties did Latvia encounter in the negotiation of the Fiscal Compact, in particular in relation to the implications of the treaty for (budgetary) sovereignty, constitutional law and the budgetary process.
The Parliamentary Committee of European Affairs (PCEA) repeatedly discussed the Fiscal Compact before it was signed, and its members participated in various conferences dedicated to the Fiscal Compact. The Government decision to accede to this Treaty was supported by the Parliamentary Committee of European Affairs.
In the meeting of the PCEA on 13 January 2012, it decided on the national position concerning the Fiscal Compact, which previously had been approved by the Government.
During this meeting, the Minister of Foreign Affairs (E. Rinkēvičs) informed that the position provides that Latvia supports closer coordination of fiscal discipline and the economy among the Member States with an aim to avoid excessive budgetary deficits which create instability of financial markets in Europe. He continued that a stable environment of economic and financial markets is a precondition for ensuring sustainable and stable economic development in Europe. The position favourably appreciated the initiative to involve EU institutions in the implementation of Fiscal Compact provisions, ensuring the supremacy of EU law and the determination to incorporate the provisions of this Treaty in EU primary law when possible.
At the same time the position insisted that the involvement of EU institutions is appropriate only insofar as the founding Treaties allow this and the Fiscal Compact cannot serve as a legal basis for adoption of EU legislation. It was emphasized that it is important to clearly define in what way the Court of Justice of the European Union (CJEU) competence under this Treaty is compatible with the TFEU, especially Article 126(10) TFEU. The position did not support an extension of CJEU competences more than necessary for achieving the aims of the Fiscal Compact; for example, the position did not support the CJEU’s control over national constitutions. According to the position, the tasks for national courts and their interaction with the CJEU should be clearly formulated. The CJEU could have supervisory powers only concerning clearly legally defined obligations of the contracting parties and the scope of CJEU competences has to be in compliance with the EU competences. The position stressed the importance of information exchange and transparency and the need to ensure that non-euro countries can participate in Euro summits in observer status. As well it has to be clear that the Maastricht criteria are not changed by the Fiscal Compact.
A. Lejiņš (MP, Fellow of the PCEA chairman, coalition, Vienotība) stated that the issue of the Maastricht criteria is not sufficiently clear. To this the Finance Minister answered that they remain in force but that the goal is to strive for a structural deficit of 0.5% of GDP. Another MP (S. Dolgopolovs, opposition, SC) objected that when the importance of this Treaty is considered, then there is a need to work with each Article separately and not only with the text as a whole. As well a concern that the Fiscal Compact significantly changes the CJEU competences and could potentially breach the founding Treaties was expressed by MP B. Cilevičs (opposition, SC). In reaction to this last comment the Foreign Affairs Ministry representatives stressed that the position is exactly that this new Treaty cannot breach the founding Treaties.
There was as well a suggestion to put this position for vote in the Parliament (instead of it remaining in the hands of the PCEA). The votes in the Committee were much divided on this (8 in favour and 9 – against); the suggestion was rejected. In reaction to this the MPs belonging to Harmony Centre (SC) (opposition) left the meeting. Followingly, the position proposed by the Government concerning the Fiscal Compact was approved (10 in favour, none against).
After the signing of the Fiscal Compact the Prime Minister indicated that this event has sent a clear signal to the international markets concerning the determination of Member States to foster growth and avoid crisis in the future. The ratification was now in the hands of the Parliament and he stressed there will be no hesitation from the Government to move forward with the ratification.
How has the Fiscal Compact been ratified in Latvia and on what legal basis/argumentation?
Latvia ratified the Fiscal Compact by adopting the Law on Treaty on Stability, Coordination and Governance in the Economic and Monetary Union on 31 May 2012. Since it was considered that the treaty delegates a part of the national competences to international institutions, a vote of constitutional majority was necessary.
This procedure in accordance with Article 68 of the Constitution (Satversme) provides that in cases where international treaties which delegate part of the state competences to international institutions are ratified a qualified majority is needed – two-thirds of the votes of the present MPs with at least two-thirds of all the MPs being present at the sitting. Otherwise the usual rules apply. The law was adopted in two readings (in the second and final reading 67 MPs out of 96 MPs who were prsent voted in favour of ratification, 29 – against, no one abstained).
Since Latvia does not yet belong to the Eurozone (it plans to accede in 2014) Article 4 of the ratifying law states that the treaty will be applied after the decision repealing the derogation awarded to the Republic of Latvia under Article 139(1) TFEU comes into force.
What political/legal difficulties did Latvia encounter during the ratification of the Fiscal Compact?
In accordance with Art 68(2) of the Constitution which determines the procedure for ratification of international treaties which delegate part of the state institution competence, a quorum of two-thirds of the votes was needed in a sitting when it is put on the vote with at least two-thirds of the MPs being present. The Fiscal Compat went through two readings in accordance with Art 114 of the Rules of Procedure of the Parliament.
Due to the necessity to achieve a 2/3 majority in order to ratify this Treaty, the coalition needed the support from the opposition. The ZZS originally promised that it would be ready to support the initiatives for strengthening financial discipline only, if it would get two minister positions in the coalition. The parties who are in the coalition refused such offer and the ZZS retreated from its demands. The ZZS came up with a suggestion that if it received a written promise from the PM about defending the Latvian position in the talks concerning direct payments to farmers and division of cohesion funding, ZZS would vote in favour of the fiscal discipline instruments. This was essentially an agreement achieved between the PM and the opposition force ZZS and this agreement was relevant as well inter alia for achieving the necessary support for the ratification of the Fiscal Compact.
There were some particularly heated debates in the Parliament:
Voting for submission of the proposal to the Committees
When the Parliament decided on whether or not to submit the Fiscal Compact for consideration in the committees, Igors Pimenovs from Saskaņas Centrs (SC, opposition) spoke out “against” the ratification. This opinion has to be considered important because SC was and still is the biggest force in the opposition.
He stated that the agreement concerns all Member States who have accepted the euro as the only means of payment or are planning to join the Eurozone. This means that the agreement directly concerns Latvia. He stressed its high political importance. According to I. Pimonovs, this agreement establishes fundamental restrictions in yearly budget planning, provides for an enforcement mechanism for obeying these restrictions and implements external sanctions for disobeyance. He argued that this treaty will limit the ability of Latvia to influence its own economic development and will not allow starting the necessary investments in infrastructure, creation of jobs, investments in education, science and solutions for the overwhelming demographic problems. “In the long-term Latvia will lose its competitiveness. This Treaty will endanger the future existence of this nation and because of that the SC does not support its ratification,” he continued.
I. Pimenovs further argued that the agreement was created in order to avoid further irresponsible borrowing exercised by some Eurozone countries in the international financial markets. They borrowed money by using the high authority of the euro ensured by the economies of the developed countries of the Eurozone – Germany, France, Austria and the Netherlands – but the failing economies became a huge burden for the whole EMU and the developed countries disliked this fact. “But Latvia,” he argued, “did not borrow; Latvia fully fulfilled the Maastricht criteria. The extravagance of Latvian government which is criticized here did not lead to non-fulfilment of its commitments. Latvia does not need this Treaty!”
According to Pimenovs the Fiscal Compact does not protect the Member States, including Latvia, from a new crisis because it restricts only the state expenses and does not regulate the consumption and money flows in the private sector, whereas “exactly the private capital inflows were the reason behind the credit bubble and overheating of the economy.” “This agreement,” he argued “takes away such economic development tool as fiscal stimulation; worse is that it happens in addition to the loss of autonomy of the monetary policy. Finally the treaty breaches the principle of sovereignty because it requires establishing fundamental restrictions for fiscal policy in our legislation and Constitution.” “If Brussels would assume the responsibility for our territorial development in exchange to restricting our sovereignty, then we could think about it, but at the moment,” he continued, “we fight for bigger, fairer direct payments to our farmers and at least for the same level of cohesion funding.” “Who needs this Treaty? Who can afford to join it? The Member States whose export exceeds import. Why is the Treaty beneficial for them?”  I. Pimenovs argued that the Treaty is beneficial for them because it captures the division of Member States in exports who determine the economic forces in the markets and importers who stay dependent on these forces forever. He asked the Parliament not to support submission of this draft law to the committees and to vote ‘against’ or to abstain.
In the end 57 MPs were in favour of ratification, 25 – against and one abstained. The draft law was passed to the committees (to the Committee of Foreign Affairs (responsible) and the Committee of Budget and Finances).
Debates in the first reading
In the first reading on 17 May 2012 Ojārs Kalniņš (coalition, Vienotība) in the name of the Parliamentary Committee of Foreign Affairs stated that after consideration and hearing the Minister of Foreign Affairs (Ilmārs Rinkēvičs) and the head of the Legal Unit of the Parliament (Gunārs Kusiņš) as well as after consideration of the opinion prepared by the Ministry of Foreign Affairs the Parliamentary Committee of Foreign Affairs , which argued that for ratification of this Treaty the procedure prescribed by Art 68 Constitution should be applied, agreed that this Treaty might delegate part of the competence of the state institutions to the institutions of the European Union. Therefore it was admitted that for its ratification in the Parliament a constitutional quorum is necessary.
In the debates Igors Pimenovs again spoke out against the ratification. He insisted that in spite of the fact that the issue of fiscal discipline today can be considered fashionable; each Member State still has its own interests. According to him the national interests of Latvia are to ensure fast and rapid growth of our economy. He stressed that “Latvia cannot put up with a slow and gradual (2-3%) growth every year because our country is small and many young people are leaving it to find a job elsewhere.” He said that this is a very different challenge from the ones faced by the old democracies who prepared the draft of this Treaty which was created to avoid irresponsible borrowing in the financial markets in the future. “This does not concern Latvia!” he argued “We behaved very well and accurately followed all the Maastricht criteria.” He insisted that the irresponsible behaviour of the Government lead by A. Kalvītis did not affect Latvia’s fulfilment of international commitments. The cause of the crisis was the private consumption and the Treaty does not deal with this. Signing the Fiscal Compact Treaty will mean to refuse development policy. “We cannot support this Treaty in these circumstances.”
The result in the first reading was 68 in favour, 26 – against and nobody abstained. Therefore the draft law was approved in the first reading.
The debates during the second reading
In the Second reading the following positions were taken: Finance Minister (A. Vilks): “Latvia has gone through a very deep crisis. We have actually already adopted many of the points established by the Treaty.” He gave seven arguments in favour of the ratification:
§ The Treaty will strengthen the EU by precluding excessive budgetary deficits which create the instability of European financial markets. The national parliaments of EU countries are carrying out politics that create additional expenses and reduce the tax income. The consequences of such politics are being fully felt today. The Fiscal Compact is necessary to stop such a practice.
§ The Treaty is compatible with the course towards realization of responsible fiscal policy started by Latvia and will not lead to changes in this, already undertaken, course towards balanced budget in the economic cycle.
§ The Treaty strengthens the Latvian sovereignty. He argued: “By obeying Art 3 Fiscal Compact we will avoid a situation where we have to ask for international financial assistance and which is connected with the loss of sovereignty in the budgetary processes. The loss of sovereignty associated with the Fiscal Compact is a myth provided that sovereignty is not understood as living in complete isolation. States are bound by international treaties. Latvia is bound by EU regulations. Therefore, nowadays the state sovereignty is not absolute. This Treaty is an agreement among states concerning some definite principles of fiscal policy. Latvia cannot be isolated. We are integrated in the EU, we have to respect its main guidelines.” When talking about the loss of sovereignty, Latvia has to admit that in the last years, while we were in the international assistance programme, the state budget was supervised. This treaty absolutely does not affect the way we will look at our expenditure and revenue. That, he concluded, has been left to ourselves.
§ The Treaty reduces the cost of Latvian bonds. One of the objectives of the Fiscal Compact is the creation of trust that the EU can manage its deficit. This trust is a necessity, because the interest rate a Member States will have to pay to cover their deficits depends on it.
§ How much Latvia will receive from the EU funds is not directly dependant on joining the Fiscal Compact. However, the ratification of this treaty can serve as an argument because, if the fiscal conditions in the country are in order, the risk that the funds will be used inappropriately decreases.
§ The Treaty ratification should not be delayed. Latvia does not act as an exemplary pioneer; it does act as a pragmatic European state. Since Latvia supports the principles of fiscal discipline, it makes sense that the Treaty is ratified without unnecessary delay.
§ The Treaty fosters growth. He recalled the argument of the opponents that the austerity policy limits development. To counter this argument he invoked the example of Estonia “These opponents should consider the example of Estonia and compare their development. Estonia followed austerity policy before the crisis whereas we implemented policy of completely the opposite nature. However, it did not lead to a more rapid economic growth in the long term but the negative consequences can be seen. We for our interest on depth are paying approximately 2% GDP while Estonia pays approximately 10 times less. Latvia pays around 200 million to our lenders while Estonia can afford to invest such sums in its economy. The idea that we can borrow because it will lead to benefits in the future is theoretically correct but who will take responsibility that this borrowed money will truly boost growth? The effect on growth can turn out to be minimal while the debt will have to be repaid. It will be paid by todays’ and future generations.” “Latvia is a small country and its capabilities in overcoming the crisis were huge. Latvia has overcome its own size reputation-wise both economic and territorial. Latvia has become a more serious player in the EU because of our decisive actions. It is very important to sign this Treaty for sustainable and balanced development. This Treaty will result in a better reputation, a better environment for businesses and credit ratings” he concluded.
– I. Pimenovs (opposition, SC): He spoke out against the ratification and argued that the Fiscal Compact will not allow carrying out investments in the infrastructure, science, education and will prevent solving the demographic problems. His main arguments were that the Treaty does not solve problems with the private consumption and hence the same problems which caused the crisis can arise again in the future and the fiscal discipline enforcement mechanism and the external sanctions for disobeyance of the Treaty breach the sovereignty of Latvia. According to Pimenovs, Latvia will lose the chance to put in action the main and very serious instrument for our future development – fiscal stimulation; the limit to structural deficit will not allow Latvia to solve its own problems due to the population size (just about 2 million) and emigration tendencies. He argued that this Treaty is beneficial only for the countries which used the European currency to reduce their currency risks close to zero and Latvia cannot support this Treaty at the moment and in the current circumstances.
– I. Līdaka (opposition, ZZS): expressed general satisfaction with the Treaty.
– Dz. Ābiķis (coalition, Vienotība): The ratification is a geopolitical question (concerns our geopolitical orientation). He stated that during the hard times in Europe, it is fashionable to criticize the EU. “We are on the borderline between East and West and cannot afford to be in the grey zone. In the East the GDP per person is more than ten times less than average in the EU. In spite of the fact that there is a difficult situation in Europe, we don’t have a choice. We need the EU more than the EU needs us. If we want to be an EU state, we need to support this decision.”
– A. Lejiņš (coalition, Vienotība): He argued that the Fiscal Compact is an inter-governmental Treaty but in principle does not differ from the so called EU legislation. “A year ago we approved one directive and five regulations, the so called six-pack. Essentially this Treaty is the same we have already approved. And the six-pack grew from the SGP. We are not approving anything new today.” He continued: “If we again compare Estonia and Latvia. Estonia complied with the SGP, we did not. Who ended up losing more sovereignty? Estonia gained more, we lost. It is possible that there will be a growth pact asked for by Mario Draghi. It will not be possible to support the growth agreement without a Fiscal Compact. In fact, we strengthen our sovereignty in this way because we do not live in an isolated world.”
– V. Liepiņš (coalition, ZRP): He claimed that it is necessary to talk about responsible growth. He argued that there are many examples of what responsible growth and conservative fiscal policy can do. “Germany went through the same some years ago. And which is the strongest economy in Europe? Germany? If we talk about some kind of sovereignty loss, then big countries like Spain, Portugal, Ireland, and Italy have largely lost this sovereignty. And if we want to be Greece, then, please, do not vote for this ratification. I do not want to be in Greece, I want to be in growing Latvia.”
– S. Mirskis (opposition, SC): He asked to the MPs whether the words „Latvian independence” and „sovereignty” do not mean anything to all for them anymore. He drew the comparison with the Soviet Union concerning the Fiscal Compact. “MPs voting in favour of the ratification will in fact be voting against the sovereignty of Latvia.”
– D. Reizniece-Ozola (opposition, ZZS): “The word “austerity” could be considered to be the non-word of 2010. We speak about a two-speed Europe. We speak about economic breakthrough which is as well our top priority in the National Development plan. But at the same time we enter into contradictions because only with austerity we will not be able to ensure this development. When talking about signing this Treaty we have to think not only about austerity but as well about development.” She talked about the insufficient funding for education and increases in the retirement age. Further she continued: “it is likely that we will sign this Treaty but we should not blindly follow Ms Merkel and listen to the German opinion but as well support, for example, the belief of Mario Monti that we have to think about the development as well. We always tell the population that the IMF forces us to save money. It is not the truth! The IMF recently complimented Mario Monti who not just carried out austerity but as well talked about courageous decisions for the economic development in Europe.”
– I. Latkovskis (coalition, NA): He stated that he will most likely vote in favour of the Fiscal Compact but stressed two concerns regarding this Treaty: the possible loss of sovereignty (or speculations about it) and the rush which comes alongside this Treaty. “The speculations concerning sovereignty tame the population to an illusion that we can have such a unique economy without arbitrary behaviour and that Latvia can be such a super-country which will successfully operate between different blocks. The sovereignty when we talk about national matters, national identity and “Latvian Latvia” I see only in economically very strong and united Europe. It is of course not today’s Europe. If we want arbitrary economic behaviour and enjoy limited European Union, then that is the already mentioned example of Greece. I am against the speculations concerning sovereignty and in the name of sovereignty I ask you to vote in favour today.”
– I. Zariņš (opposition, SC): “There is a lack of understanding what this Treaty will fundamentally do. There are no rational arguments in favour of a rushed ratification of this Treaty without a deeper discussion concerning its consequences. Especially in a situation where other European countries do not obey these conditions and do not even try to carry out appropriate measures of fiscal discipline.” He argued that the Treaty forces upon all the states an identical fiscal framework without taking into account the level of their economical development which, in turn, means that some states (for example Germany) will have leverage over other Member States whose potential is smaller or weakened, as is the case in Latvia. “I do not say that a state should not exercise fiscal discipline but before that comes the proportionality, understanding and sustainable vision of development.” He claimed that Latvia is approaching the problem from the wrong angle: “In this case a state which is unable to compete with mature economies by being in this level playing field puts itself in a role of victim by at the beginning feeding mature state economies with its workforce and being forced to sell its activities. This means the privatization of the capital belonging to the state, to its people.”
– A. Bērziņš (opposition, ZZS): He argued that the Fiscal Compact will add to the development of Europe and insisted that the Parliament is voting for a document which will allow Latvia to reasonably develop within the EU and to move forward.
– I. Grigule (opposition, ZZS): “We have to understand that with the ratification of this Treaty we are telling our people who have saved and lived with few means, in whose expense we have come out of this crisis that we will not be able to reasonably support them for many, many years.” “We will not be able to increase wages to the teachers, medics, policemen, and mothers, increase pensions because after signing this Treaty big budgetary means will go for co-funding for EU structural funds. Of course we can talk here about sovereignty and speculations with it. But the Czech Republic has not signed those Treaties and the Czech President has clearly stated “We will not give our sovereignty and decision-making concerning the destinies of our people to Brussels bureaucracy and Eurocrats”. France has signed but what happens there? The programme of the new president is diametrically different from Sarkozy’s. He still insists that in this form and version France will not ratify this Treaty. Maybe we should wait for the proposals of French colleagues and then take the decision? What happened in the bastion of austerity – Germany? If the elections were held today, Merkel would not be Prime Minister. Germany itself is not able to ratify the agreement at the moment. More and more countries retreat from Germany. We should wait a bit because we will not be able to breach this agreement that easily. I do not question the course of action taken by V.Dombrovskis and A.Vilks – the fiscal discipline is the right way. But is this the reason why we should rush at this moment in a moment when we even do not know whether Germany will ratify?”
– A. Elksniņš (opposition, SC): He argued that the fact that Latvia will have to pay 150 million in the stability mechanism is something the Government should explain to all those to who it has promised wage increase. “The EU dictates to us the conditions under which we receive cohesion funding and direct payments to farmers. Each of you when you started your MP duties took an oath to be loyal to Latvia and not the European Union, to strengthen the sovereignty of Latvia, not that of the EU.” “The preamble of the Fiscal Compact emphasizes that the EU economic policy has to be taken into account. If any lawyer would study more in detail what is meant there with the coordination of the economic policy, then we would not have doubts and discussions concerning the Latvian sovereignty and strengthening of independence of Latvia. The agreement requires implementing provisions to support all the Eurozone. Where is Latvia in here? Member States have to refrain from any measures endangering the economic objections of the union. In the future we will make decisions for the European Union and not for Latvia. We will support proposals which the Commission could submit. We are signing for the future, for the potential proposals and undertake to support them. I have to agree with Mr Zariņš that with the economic growth we will have problems. In addition, this agreement has been drafted as a real Criminal codex. The CJEU will impose fines, penalties and the agreement does not provide for a possibility to refuse these commitments. I ask you not to overstep your oath – you have sworn to Latvia and not to the EU.”
– Vjačeslavs Dombrovskis (coalition, ZRP): He referred to the establishment of the EU as a historic challenge and the common currency – euro – as one of the necessary steps in-between. He argued that at the moment there is a choice between two roads: “The first is to use this crisis to increase integration both in labour markets and in a fiscal sense in order for the common currency to work. And there is the place for the Fiscal Compact which is one of the preconditions for the common currency to work in the future. The second road leads either to collapse or degradation of Europe.” “The process happening now is very old – the rich countries do not want to pay for the poor anymore. What will happen if the EU collapses? You will get full sovereignty. What does it mean? First of all, Latvia is a receiving country – both cohesion funds and direct payments for farmers. If we will be completely sovereign, nothing like that will exist. Such full sovereignty historically means that it is hard to keep it. If there will not be euro, then maybe there will be rubbles. We are at the moment showing to Germany and other countries like Greece and Spain as well that there is light at the end of the tunnel and that growth after austerity is also possible. This might be a benefit for us and could help us to gain a favourable attitude from Germany and other countries in the talks concerning the multi-annual budget. And that of course is a political decision.”
– Dz. Kudums (coalition, NA): He stated that his party’s three main values are „Latvian Latvia”, economically strong Latvia and secure Latvia. He argued that the NA is for economic security and therefore he does not see any reason not to support this Treaty today.
– K. Seržants (opposition, ZZS): “When we talked with the Prime Minister recently he told us that it would be good to support the Fiscal Compact now but also that nothing bad would happen if we supported it in the fall. Earlier ratification would be a good signal. The question is for who is this a good signal? Of course for our good friends in Europe but not for our citizens and voters because, I repeat, this Treaty will be active only in euro countries and we have a long road ahead to that. If anybody has noticed, the support for the euro among citizens is around 4% at the moment. We should start thinking about convincing people to vote for the euro.”
– J. Reirs (coalition, Vienotība): “I completely disagree with colleagues who argue that Europe is dictating all this to us. Latvia began the implementation of these ideas into laws already in January last year. Therefore Latvia came to a conclusion that when a state is led in a fiscally responsible manner, growth will follow earlier than the rest of Europe. It is beneficial for us for this Treaty to be ratified in order for us to live in a secure Europe. I ask to be responsible and to think about sovereignty of Latvia. And the sovereignty of our country is only the space of Europe, not that of Eurasia.”
– J. Dombrava (coalition, NA): “We had many discussions in our faction concerning this Treaty. This Treaty is not good but in this moment – necessary. I really hope that this is the last attempt towards federal Europe.”
– I. Čepāne (coalition, Vienotība): “Today especially when we are talking about sovereignty, about independence, populism hits a new level. I am simply ashamed about these things. Please read if not the doctrines of constitutional law then at least the judgment of the Constitutional court concerning the Treaty of Lisbon. By carrying out completely irresponsible politics during 2007-2008, in 2009 in fact the very basis of the existence of this country was endangered. The country was close to insolvency. Latvia faced the most rapid decrease in GDP in Europe, the highest inflation in Europe due to this irresponsibility. Some of the MPs in this room have a memory loss because if the opposite was true, such discussions as today would not take place. I invite you not to speak about loss of sovereignty without understanding what you mean with that in the current geopolitically economic situation.”
– I. Pimenovs (opposition, SC): “We cannot compare ourselves to Poland because the Polish currency floats freely against the euro while our national bank refused to do that due to its very neoliberal approach based simply [on will] to ensure the introduction of the euro. If we would follow the federalization of the EU, then Brussels would have already taken all responsibility for the development of our territory. But at the moment we are fighting for the cohesion funding and the direct payments for our farmers. Therefore our destiny is in our hands. There are countries in front of us and behind us. But the only mechanism to use is our legislature and our sovereignty. And this means the chance to use fiscal stimulation to develop our economy. With this Treaty we refuse this stimulation for ourselves.” He concluded that ratification of the Fiscal Compact is a mistake.
– J. Urbanovičs (opposition, SC): “It is clear that to talk about sovereignty is as useless as to talk about virginity which has been lost years ago. There are more serious matters to discuss. It is clear that we will end up ratifying this Treaty. I simply want to explain why we are voting against.” He continued that the SC will vote against the demonstration of weakness and fate that there will never be a government able to predict, plan and able to carry out its plans. “The banking sector is Swedish, television – Swedish. Swedes will show, tell; Latvia will watch and listen, will go to Swedish banks and take loans. Since all the three Governments Dombrovskis has led, we have taken away one by one all the instruments which could be used to influence the economy. Since the moment when Lats was pegged to the euro, there of course is no value to have it. In this case we should really just go for the euro already.”
– A. Brigmanis (opposition, ZZS): “The spirit of this Treaty is such that we belong to the EU. Since we signed the accession treaty, it is clear that these common events, common provisions to a certain level dictate our life. A good question is when this Treaty will start to work in Latvia and whether Latvia will join the euro? I disagree with the statement that the decision for joining the euro should be left to the Parliament. It is more a question for a referendum.”
– O. Ē. Kalniņš (coalition, Vienotība): “We in the Committee of Foreign Affairs as well had such interesting discussions. Only there was one more argument which I did not hear here today. That was the reminder that on 19 April we unanimously supported the ESM. And if we consider that to be a rescue measure then this Fiscal Compact is a control mechanism. And if a control mechanism works, we will not need the rescue mechanism. If we accepted „A” in April, then it is time to do „B” today. The [PCEA] invites you to support this draft law in its second and final reading.”
In the second reading the quorum was reached (97 MPs were at the sitting). The result was 67 in favour, 29 – against and 1 abstained. The draft law ratifying the Fiscal Compact was therefore adopted.
Debates following the ratification
In general all the parties forming the coalition at the time (Vienotība, ZRP and NA) were in favour of adoption of the Fiscal Compact (even though during previous Governments the members of NA had expressed worries concerning federalization of Europe etc.). As well, due to an agreement concluded between ZZS and Valdis Dombrovskis, the members of ZZS, even though at the time it was in opposition, mainly supported the ratification of the Fiscal Compact. The only political party whose members were against the ratification was SC (opposition).
After the ratification Finance Minister Andris Vilks stressed that Latvia had to adopt this Treaty because its essence is fully clear to Latvia due to the events during the crisis. He argued that this Treaty will strengthen sovereignty because it will help to avoid budgetary problems which could lead to requesting international assistance which in turn would lead to Latvia losing sovereignty over its budget.
The Chairman of the Parliament after the ratification of the Fiscal Compact stated “By ensuring the ratification […] our country has taken an essential step in order to be part of the core in Europe in the future. This will promote the economic growth of the block and increase the global competitiveness. Already before Latvia has successfully showed that by exercising responsible fiscal policy it is possible to overcome the crisis and to return to growth. However as well in the upcoming years in order to ensure the economic breakthrough which is topical for Latvia responsible fiscal policy will be on the agenda in our country”.
The Fiscal Compact was one of the rare occasions when a “European” measure served as a basis for a lively discussion among not just practitioners but legal scholars as well. The Latvian law journal “Lawyer’s Word” (Jurista Vārds) asked various experts representing different groups whether the Fiscal Compact and the competences allocated to the EU do not breach state sovereignty and whether as a result of ratification there will be a situation where a collision between jurisdictions of the CJEU and the Constitutional Court will arise? Here are some of the opinions expressed:
– The Head of the Legal Bureau of the Parliament G. Kusiņš stated that Latvia already has given part of its competences to the EU and the Fiscal Compact does not foresee anything very new because it has to be applied only insofar as it is compatible with the founding Treaties and EU law. According to him, it establishes closer cooperation among the states. Previous case law of the CJEU and constitutional courts indicate that they can successfully divide the questions of competences among themselves.
– The Parliamentary Secretary of the Ministry of Finance K. Korna argued that already with the ratification of the Lisbon Treaty Latvia gave up definite competences, also in the field of economic policy (the control of excessive budgetary deficits). She continued that the Balanced budget rule, essentially, is an instrument for implementing the Maastricht criteria. The Fiscal Compact strengthens the power of the European Commission in the area of budgetary control but there is no reason to think that this would breach the state sovereignty. K. Korna stated that the CJEU and the competences of the Constitutional Court are separated because the Fiscal Compact will be implemented with the Law on Fiscal Discipline.
– Dr. iur. Inese Lībiņa-Egnere (Legal Committee of the Parliament and assistant professor at the University of Latvia) emphasized that Latvia already with the Lisbon Treaty gave to the EU certain competences concerning the control of excessive budgetary deficits and no exclusive competences are being transferred by the Fiscal Compact.
– Prof. Vjačeslavs Dombrovskis (assistant professor at the Riga Graduate School of Law and Chairman of the Parliamentary Committee of Economy, Environment and Regional policy) stated that Constitutional amendments are necessary in order to ensure the obeyance of the Law on Fiscal Discipline because otherwise in the hierarchical order of legal acts it will be on the same level as the annual budget law. This will create confusion. He stressed the role of the Fiscal Discipline Council.
– I. Pimenovs (MP, SC) argued that the Fiscal Compact expresses an apparent federalization tendency of the EU. According to him, this would be acceptable, if at the same time the responsibility of the ‘EU central government’ would increase concerning the development of all of its territories and for improvement of the life quality. Otherwise, Latvia’s fight for cohesion funding so far has rather resembled colonial charity.
– Dita Amoliņa (Ph.D. candidate at the University of Latvia) argued that in essence the Fiscal Compact reduces the discretion of Member States to shape their economic policies in accordance with their own views – the scope of competence in preparing the state budget has been reduced. There are doubts about whether the Fiscal Compact provides for something new or different. She argued that it, however, broadens the competences of the CJEU.
– K. Bukovskis (Deputy Director of the Institute of Foreign Policy Latvia) stated that the Fiscal Compact contains provisions which reduce sovereignty, if it is understood as keeping the last word of legitimately leading the national political elite. It allows the Commission to more closely follow the adoption of state budgets and to request amendments.
– J. Ošlejs (economist) argued that there is a need for a referendum concerning the Fiscal Compact. He stated that to regulate the budgetary process in the Constitution is an absurd thought. It is clear that the legislator has to have the right to create as big a state debt as necessary at a certain moment. To regulate the budgetary issues in the Constitution in a satisfactory manner is not possible.
The Council of International and European Law Experts (established under the wing of the Ministry of Foreign Affairs) also gave an opinion on the Fiscal Compact. In general it concluded:
– The Fiscal Compact contains provisions which cannot be found in the EU legal framework currently in force and strengthens the EU rules on economic governance by inter alia elevating the secondary EU measures to the level of primary law. The opinion states that from one side the Commission only has competences to make suggestions; but from another, it cannot be excluded that the Fiscal Compact increases its competences.
– In general, it can be argued that the agreement on CJEU jurisdiction does not touch upon the TEU and TFEU. According to the opinion, the additional jurisdiction is precise and narrow and the Fiscal Compact stresses the importance of maintaining the role of national parliaments.
– The opinion concluded that new competences cannot be transferred to the EU with the help of the Fiscal Compact; however, the agreement is meant for strengthening the budgetary control and it is foreseen to implement this in the founding Treaties, therefore the Fiscal Compact opens an opportunity for closer mutual supervision and involvement of the Commission in the adoption of balanced budgets in contracting states.
– Concerning the necessity to apply the qualified majority voting requirement for the ratification, the Opinion stated that the constitutional ratification procedure has to be applied in this case. The right ratification procedure is the one under Article 68(2) Constitution, when the significance and the development of state budgetary preparation rules and EU policy under the Fiscal Compact are taken into account.
Balanced Budget Rule
Article 3(2) Fiscal Compact prescribes that the Balanced Budget Rules shall take effect in national law through “provisions of binding force and permanent character, preferably constitutional, or otherwise guaranteed to be fully respected and adhered to throughout the national budgetary processes.” How is the Balanced Budget Rule (intended to be) implemented in Latvia? Will there be an amendment of the constitution? If not, describe the relation between the law implementing the Balanced Budget Rule and the constitution. If the constitution already contained a Balanced Budget Rule, describe the possible changes made/required, if any.
One proposal for changes in the constitution was still pending before the Parliament at the moment Latvia signed the Fiscal Compact but which touches upon the Balanced Budget Rule. The proposal was given to the Parliamentary Committees for consideration. The draft proposal foresaw to amend Art 66 Constitution which, if amended, would read as follows:
“66. The Parliament is responsible for the economic budget and the creation of savings for state development and financial stability. The Parliament every year before the beginning of the financial year decides on state revenues and expenditures in the framework of a multi-annual budgetary plan. The draft budget is submitted to Parliament by the Cabinet of Ministers, which keeps the public finances balanced.
If the Parliament makes a decision concerning unforeseen expenses, then the decision has to determine the means from which to cover these expenses.
After the end of a budgetary year the Cabinet of Ministers submits to the Parliament for approval a report for the fulfilment of the budget.”
In essence this draft proposal would establish at constitutional level the following principles connected with fiscal discipline: the principle of national development providing for the growth of the national economy, the principle of financial stability (the state debt is reduced to a sustainable amount), the principle of austerity (a reasonable and responsible use of the resources and avoidance of unnecessary expenditure), the principle of saving (creation of saving of budgetary means which is created by exercising a budget with surplus), the principle of medium-term budgetary planning (provides that the budget will be planned for several years), and the principle of balance (means that the government will have to exercise anti-cyclical fiscal policy and balance the budget within a budgetary cycle). The principles in detail are implemented in the Law on Fiscal Discipline.
These proposed amendments of the Constitution in the end were not advanced partly due to the lack of political support, to the general unwillingness to amend the Constitution and partly because constitutional law experts have expressed the opinion that the principles of fiscal discipline can be ensured by ratifying international or EU instruments, together with the adoption of the Law on Fiscal Discipline.
In general, amendments to the Constitution in Latvia are very rare and the general opinion of the politicians and as well among experts is that the very laconic Constitution of Latvia should be amended only in cases of grave necessity. The fact that the Fiscal Compact was approved using the procedures in Art 68(2) Constitution means that it after ratification became an act at the constitutional level and not merely an ordinary law, therefore the provisions implementing Fiscal Compact including those implementing the Balanced Budget Rule will have special significance/status. This weight might be enough to ensure their priority.
More precisely the Balanced Budget Rule is implemented in the Law on Fiscal Discipline.
According to Art 10 of the Law on Fiscal Discipline the framework budgetary law determines the general government structural balance for each year of the framework period not lower than -0.5% GDP. According to Art 11 the Government structural balance is adjusted in order to ensure that the factual divergences of previous years do not affect the balanced budget. Derogation from the balanced budget rule is possible in cases of force majeure when there is a need to carry out prevention measures exceeding 0.1% GDP, if the dangers mentioned in Art 62 Constitution have to be prevented or during a serious downturn of economy (Article 12(1) Law on Fiscal Discipline).
Debate Balanced Budget Rule
Describe the national debate on the implementation of the Fiscal Compact/Balanced Budget Rule, in particular in relation to the implications of the treaty for (budgetary) sovereignty, constitutional law and the budgetary process.
The Law on Fiscal Discipline was developed from June 2010 until November 2011 and was drafted in cooperation with experts from the IMF and the European Commission. It was initially not meant for the implementation of the Fiscal Compact; however, since the law was developed in close cooperation with European Commisison and the IMF during the time when potential changes at the EU level concerning EMU were considered, it ended up being drafted along the lines of discussions leading up to the Fiscal Compact. When the Law of Fiscal Discipline was already in the Parliament and before it was adopted , the Fiscal Compact was signed and it was decided to adjust the draft law along the lines of this new treaty.
The basic rule in the Law on Fiscal Discipline is the provision on balanced budget in an economic cycle. This is ensured by using a formula which depending on whether the GDP grows faster or more slowly in comparison to the speed of average growth establishes the minimal surplus which has to be created or the maximal deficit. The second basic principle provides that with the help of the medium-term budgetary framework for three following years the allowed limit for Government expenditure is fixed (by thus strengthening medium-term planning of expenditure policy).
The Fiscal Compact was signed on 2 March 2012 already after the approval of the Law on Fiscal Discipline in the first reading in the Parliament. The Government decided that it is reasonable to coordinate the Law on Fiscal Discipline with the requirement of Fiscal Compact at this stage. The Finance Minister proposed the following changes for the second reading :
– Change in the balance formula: The Fiscal Compact provides for a different methodology for ensuring a balanced budget. The proposed changes amended this methodology for it to be compatible with the Fiscal Compact.
– Limits on growth speed of expenditure: The Fiscal Compact provides that in addition to limiting structural deficit, expenditure, except for inflation, cannot grow faster than the potential GDP growth. The proposed changes would implement this.
– Automatic correction mechanism: While the original version of the draft law on fiscal discipline provides an ex-ante regime for ensuring that the general balance is obeyed, the Fiscal Compact provides for a more elastic approach by allowing that the structural balance can differ from the planned one (ex post corrective mechanism). The proposed changes would implement this.
– The differentiation between short-term and structural fiscal policy: The Fiscal Compact differentiates between one-time increase in revenues or expenditure and an increase with a permanent character. The proposals for the second reading on the Law of Fiscal Discipline are analogous.
– Allowing the structural deficit for productive investment projects: The proposed draft for the first reading foresees a strictly balanced budget. The Fiscal Compact on the other hand provides that a structural deficit of not more than 0.5% GDP is allowed. This proposal suggested to retain the general rule of 0% structural balance but as an exception provides for derogation in order to realise productive investments. The average derogation in a four year period cannot exceed 0.5% GDP.
– Convergence on the medium-term budgetary balance objective: The draft proposal for the Law on Fiscal Discipline provided that the balance formula will be used starting in 2015. Regulation No 1175/2011 contains a provision (Article 5(1)) that has to be obeyed, if the structural balance is much more negative than the medium-term objective. In this case the structural balance has to be improved with a rate of at least 0.5% GDP per year. The Fiscal Compact on the other hand provides that the speed of structural balance improvements is determined individually for each state so that in the period of the stability programme (4 years) the actual balance would reach its objective. In accordance with the Regulation and the Fiscal Compact the proposals for the second reading provide for an analogous solution. The improvements in the structural balance have to happen at the rate of at least 0.5% GDP per year or another rate, if that is established by an international Treaty. Both Regulation No 1175/2011 and the Fiscal Compact provide that during the period of improving the structural balance the expenditure has to increase more slowly than the GDP growth. Proposed changes for the second reading suggested an analogous approach.
These suggestions were taken into account and implemented in the Law on Fiscal Discipline.
Please see the relevant debates in the Parliament concerning Fiscal Compact under Question IX.3.
During the debates on the Law on Fiscal Discipline (starting with the second reading, after the Fiscal Compact was already signed) the following points were raised:
1) I. Pimenovs (opposition, SC): Expressed satisfaction with the fact that Article 11 has been amended with possible derogations from balanced budget rule (the derogation is possiblem, if national public investment project(-s) is implemented with total amount of funding is not less than 0.5% GDP). He expressed doubts about using structural balance as basis for grounding austerity policy in accordance with the Fiscal Compact.
2) J. Reirs (coalition, Vienotība). He responded to the comment concerningratification of the Fiscal Compact. He stated: „Latvia already during the last Parliament decided to draft a Law on Fiscal Discipline […]. And it is not our fault that Europe has come to these conclusions a year later than we did and that we already started working on this draft law. There cannot be claims about „obedient” approval of inter-governmental fiscal treaty because we, practically, adopted a thing what we had started to solve already. Thank you for the media which today reminded me that Latvia started work with these documents earlier than Europe.”
3) Z. Kalniņa-Lukaševica (RP, coalition) favourably greeted establishment of a Fiscal Discipline Council.
Relationship BBR and MTO
What positions, if any, are taken in the national debate about the relationship between the Balanced Budget Rule of article 3(1)(b) Fiscal Compact and the Medium-term Budgetary Objective (MTO) rule in the Six-Pack (section 1A, article 2a Regulation 1466/97, on which see above question VII.10)?
There is no information concerning such debates.
Is there a (constitutional) court judgment on the Fiscal Compact/implementation of the Balanced Budget Rule?
No, there is no such judgment.
Non-Eurozone and binding force
Has Latvia decided to be bound by parts of the Fiscal Compact on the basis of article 14(5) Fiscal Compact already before joining the Euro area, or has this option been debated?
No, Latvia has not submitted such declaration and this option has not been discussed, since Latvia planed to join the Eurozone already on 1 January 2014 and has done so.
What other information is relevant with regard to Latvia and the Fiscal Compact?
According to a report prepared by the Ministry of Finance on the Commission’s plans regarding Art 11 Fiscal Compact, the coordination of the economic policy has to be carried out only where there are clear reasons for this stemming from the interests of the EMU. Latvian opinion was that reforms should be coordinated where there is a risk that EMU stability can be negatively influenced. The Report provides that possibly the economic coordination could be carried out concerning those policies which, even if they do not influence the stability of the EMU in general, have an impact on neighbouring countries. Latvia maintained an open position concerning this. In addition the Report stated that Latvia is open to discussions concerning the question which areas should be coordinated. In general tax policy is important for attracting investments; therefore Latvia wants to maintain national competence regarding this matter. Latvia agreed that there could be cases when the implementation of reforms has to be funded jointly and that would be in the interests of the whole EMU. It was stressed that it is essential to ensure that the EU has sufficient means and mechanisms to prevent mistakes of fiscal and economic policy in the Member States which otherwise would have to be corrected with the help of the solidarity mechanism.