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 Luxembourg 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.
No difficulties in the negotiation known.
How has the Fiscal Compact been ratified in Luxembourg and on what legal basis/argumentation?
The ratification is based on Loi portant approbation du traité sur la stabilité, la coordination et la gouvernance au sein de l’Union économique et monétaire, signé à Bruxelles, le 2 mars 2012. Since the Treaty includes the transfer of sovereign competences to an international institution, it is based on Article 49bis Luxembourg Constitution which lays down that the competences reserved to the legislative, executive and judicial powers by the constitution can be transferred to an international institution by a treaty (see for the constitutional background question V.2; for the discussion about the necessity of a qualified majority in this case see question IX.3). The Luxembourg Fiscal Compact ratification law (Loi portant approbation du traité sur la stabilité, la coordination et la gouvernance au sein de l’Union économique et monétaire, signé à Bruxelles, le 2 mars 2012) passed the Chambre des Députés on 27 February 2013. 46 members of parliament voted in favour, among them the members of the government coalition from the CSV (Christian Democrats) and the LSAP (Social Democrats) as well as MPs from parties being in opposition (DP (Conservative Liberals) and M. Jacques-Yves Henckes (Indépendant)). 10 MPs voted against the law (déi gréng (the Greens), ADR (National Conservatives), déi Lénk (Democratic Socialists) and M. Jean Colombera (Indépendant)). Both Indépendants Jacques-Yves Henckes and Jean Colombera were members of the ADR, but left the party at the end of the year 2012 because of inner-party conflicts, which were not directly related to the adoption of the Fiscal Compact, but on domestic political questions as well as the general point of view towards the EU. Henckes left the party on 18 December 2012 , Colombera on 21 December 2012. The law entered into force on 4 April 2013, entitled “Loi du 29 mars 2013 portant approbation du traité sur la stabilité, la coordination et la gouvernance au sein de l’Union économique et monétaire, signé à Bruxelles, le 2 mars 2012“.
What political/legal difficulties did Luxembourg encounter during the ratification of the Fiscal Compact?
In the framework of the legislative procedure, stakeholder groups are always invited to present their opinion on the legislative proposal. The social dimension of the Fiscal Compact was emphasised by the representatives of the employees (Chambre des Salariés). They denied their approval and called on the national and European decision-makers not to forget the social dimension of fiscal policy. Therefore, they reminded them to strengthen economic growth and fight against unemployment. They were of the opinion that the Fiscal Compact will destroy the European social model. The measures laid down in this Treaty will – in their point of view – aggravate the crisis. The strict framework of the Fiscal Compact does not help to fight the crisis, but makes it even worse. In addition, they criticized the democratic deficit of the institutional structure, in particular the restriction of the parliamentary right to decide about the public budget.
The Conseil d’Etat generally conducts the constitutional analysis of the legislative proposal and in its opinion on the Luxembourg Fiscal Compact-law it emphasised that this Treaty is of a legally unknown nature (“nature juridique inédite”). Formally, it is an intergovernmental treaty, in substance it refers to EU law. The Conseil d’Etat did not have any objections against titles I, II, IV, V and VI, but against title III (articles 3 to 8) of the Fiscal Compact.
The Conseil d’Etat examined the approval to the Fiscal Compact by analysing whether the approval to the Fiscal Compact infringes any constitutional provision. Therefore, the Conseil d’Etat mentioned that the right to pass the budgetary law yearly is one of the core competences of the parliament and its most effective mechanism of control of the government.
Since the obligation of Article 3 (1) TSCG (keeping the budgetary position balanced or in surplus) is not new in the framework of the Economic and Monetary Union (EMU), Luxembourg did not have to amend its constitution. All necessary amendments had already been made on the occasion of earlier obligations of the EMU. The TSCG was also not contrary to Article 104 of the Luxembourg Constitution, which obliges the Parliament to vote every year on the budget because even though the Fiscal Compact has a perennial programme, the Chambre des Députés can vote on a yearly basis on the budget. The changes demanded from the TSCG concerning the ‘golden rule’ did not require changing the Constitution, because the Fiscal Compact put an international obligation on Luxembourg, which does not have a different legal value, if it is written into the Constitution. However, the Constitution did not prohibit writing the golden rule into it, so that the parliament was free to decide to do so. The automatic correction mechanism including the establishment of an independent supervisory institution did not per se require changes to the Constitution, except the Government decides to implement both measures on the constitutional level, which is not required by the Fiscal Compact.
Concerning the transfer of sovereign competences onto international organisations in the sense of Article 49bis of the Luxembourg Constitution the Conseil d’État did not determine an additional transfer of competences in Article 3 (1) Fiscal Compact, which was not already laid down in the Treaty of Maastricht. However, Article 3 (2) Fiscal Compact, which must be read along with Article 8, seemed to be more problematic, also because its formulation was not very clear. The Conseil d’Etat emphasised that it is extremely difficult to determine whether this obligation infringes the Constitution because the wording is so vague. Without any legislative proposal implementing this international obligation Conseil d’Etat could not determine which provisions of the Constitution might be in conflict with this obligation. However, the combination of Article 3 (2) with Article 8 TSCG (control of budgetary discipline which can be supervised by the European Commission and sanctioned by the ECJ) leads to a transfer of competences, which are not part of present EU law. The competences of the Commission and the European Court of Justice in the case of an infringement of the golden rule are of procedural nature, but they have an important impact on the decision-making procedure. This made it necessary to adopt the law with a two-third majority as laid down in Article 114 of the Luxembourg Constitution. The government did not agree on this latter interpretation.
Taking into consideration the opinion of the Conseil d’Etat the parliamentary Committee for Finances and the Public Budget (Commission des Finances et du Budget) decided – for reasons of legal certainty – to vote with a two-third majority.
The legislative proposal was discussed in a plenary session of the Luxembourg parliament on 27 February 2013. Claude Meisch from the DP (Conservative Liberals) criticised that the government proposes to ratify the Treaty, but does not say how the goals of the Treaty can be achieved by Luxembourg, in particular the structural deficit of 0.5%. Alex Bodry from the then governmental party LSAP (Social Democrats) emphasised that the ‘golden rule’ does not have to be written into the Luxembourg constitution, but that it is sufficient to include this law in the ordinary legislation. In addition, he explained that the European Court of Justice will not have the competence to control whether the Member States have respected the balanced budget rule, but only whether the Member States have implemented the TSCG-rules into its legal system. Serge Urbany from déi lénk (Democratic Socialists) asked where the conditions of the structural deficit are laid down and Alex Bodry confirmed that this is a weak point in the construction of this requirement. Bodry also commented on certain aspects of the implementation of the Fiscal Compact. He and his party (the Social Democrats) think that the Court of Auditors should be equipped with the surveillance competences. However, the present legislative proposal for the implementation made by the new government consisting of DP (Conservative Liberals), LSAP (Social Democrats) and déi gréng (the Greens) lays down that this task ought to be fulfilled by a newly created ‘National Council on Public Finances’ (for more information see question VII.5). Furthermore, he demanded a European-wide Social Pact and a strategy for economic growth. The Social Democrats approve the Luxembourg TSCG-law, not because they are convinced that this Treaty is a perfect one, but at least it points into the correct direction and accepts the reality of a common Eurozone. Francois Bausch from the Greens mentioned several points why his party could not approve the law. Firstly, the golden rule creates with its automatic deficit procedure a too rigid tool for economic policy, which has to react on cyclical economic developments. Secondly, the Fiscal Compact creates a non-democratic and non-European institution because it is mainly governed by the two big Member States France and Germany. Thirdly, the Fiscal Compact is no solution for the Euro-crisis because it does not regulate the financial market, which – in the view of Bausch – had caused the crisis. The ADR (Conservative Nationals), represented by Gast Gibéryen, regretted that Luxembourg loses sovereign rights with this ratification. Decisions, which were formerly made by the Luxembourg parliament will from now on be decided by technocratic institutions and the European Court of Justice said Gibéryen. Serge Urbany from the Democratic Socialists (déi lénk) emphasised that the Fiscal Compact is an undemocratic instrument, which follows the logics of the austerity policy and will lead to the reduction of social guarantees. The Minister for Finance Luc Frieden from the CSV (Christian Democrats) refused that the Treaty is antidemocratic because it was negotiated from the elected representatives of all Member States.
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 Luxembourg? 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.
The golden rule has not yet been implemented into Luxembourg law. The Constitution does not contain such a rule and the former Prime Minister Jean-Claude Juncker, leader of a coalition of Christian Democrats (CSV) and Social Democrats (LSAP), was of the opinion that the Luxembourg Constitution is not the appropriate legal text for such a political rule (see question III.8). A legislative proposal, introduced into parliament on 2 July 2013, provides in its Article 4 the Balanced Budget Rule by referring to Article 3 of the Fiscal Compact. This proposal is still under discussion in the framework of the Luxembourg legislative procedure and would, in the case of a successful approval by the parliament, be part of the ordinary legislation and not modify the Constitution (for more information on this see questions VII.2 and VII.3).
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.
Luxembourg plans to implement the obligation of the golden rule in a new law. During a meeting on 8 January 2013, the parliamentary Commission of Financial and Budgetary Affairs (Commission des Finances et du Budget) did not see any problem in writing this rule into the Constitution. However, the then Prime Minister Juncker from the Christian Democrats (CSV) did not want to write the rule into the Constitution because he classified this rule as a political understanding which should not form part of the guiding principles of the country set out in the Constitution (see question III.8).
Concerning the obligation to equip an independent institution with the supervision of the budgetary process, the government at this time wanted to avoid the creation of a new institution, but preferred to grant this competence to an already existing institution. The rapporteur du projet de loi 6449 preferred to equip the Central Bank with this competence, because it is politically more independent than the Court of Auditors.
At the moment, a legislative proposal called projet de loi relatif à la coordination et à la gouvernance des finances publiques which was brought into the parliamentary process by the then Finance Minister Luc Frieden from the CSV (Christian Democrats) on 22 July 2013, is discussed in parliament. The law is not passed until now, but the first draft of the legislative proposal provides that the Luxembourg Central Bank will be empowered to exercise the supervision role. A second, recently published draft of this law contains the establishment of a new ‘National Council on Public Finances’. In case of the adoption of this new legislative proposal the Luxembourg Central Bank will not have these supervisory competences.
In the framework of the legislative procedure certain stakeholder groups can bring in their opinion on the legislative proposal. The representatives of the public servants (Chambre des Fonctionnaires et Employés Publics (CFEP)) emphasised that the Fiscal Compact does not contain sufficient guarantees of democratic legitimacy. Furthermore, the CFEP clearly objected against the transfer of budgetary competences to international institutions and welcomed that the government had rejected any proposal to write fiscal rules into the Constitution. In addition, the CFEP was of the opinion that it is important that the proposal respects the prerogatives of the parliament. Concerning the independent surveillance institution, the CFEP noted severe doubts that the Central Bank of Luxembourg is independent and impartial.
The representatives of the artisanry and of the small and medium enterprises (Chambre des Métiers (CM)) welcomed the legislative proposal all in all but criticised that the proposal does not go far enough because the CM was convinced that the necessity to reform the public budget law is a good opportunity to implement further reforms. Moreover, the CM expressed its concerns about the fact that Article 2 of the legislative proposal only refers to Article 3 (1) of the Fiscal Compact but does not use the wording of this article. The CM also supported the proposal to transfer surveillance competences for fiscal rules to the Central Bank of Luxembourg.
The representatives of the employees (Chambre des Salariés (CS)) published the most distinct critique concerning the legislative proposal. One of the main points concerned the golden rule itself. In the point of view of the CS, the golden rule is a tool – at least in its present setting – to follow a neoliberal and austerity policy, which does not take into account the social dimension of the public budget. The golden rule does not leave enough room for manoeuvre for the Member States, if there are severe economic drops. The concept of an anti-cyclical economic policy would no longer be possible. Moreover, the method to determine a structural deficit contains many indeterminate factors, which questions the whole procedure. The CS was also not convinced that the Luxembourg Central Bank is the adequate institution for the surveillance of the compliance of the public budget with the golden rule because of constitutional norms. In their point of view, Article 32 of the Luxembourg constitution, which lays down that the sovereign power resides in the (Luxembourg) nation, is infringed because the Luxembourg Central Bank does not have sufficient guarantees of democratic legitimacy. Moreover, the legislative proposal infringes the competence of the parliament to decide about the public budget (Article 104 Luxembourg Constitution) and the competence of the Court of Auditors to control the expenses (Article 105 Luxembourg Constitution). The CS proposed to open the procedure, which determines a violation of the golden rule, by allowing more stakeholder groups to participate, which would increase the democratic legitimacy of the whole procedure.
The Chambre de Commerce (CC), representing a main part of the economic sector, criticised that the golden rule is neither written into the Constitution nor part of a law, which can only be amended by a qualified majority. The fact that – following this legislative proposal – the golden rule could be overruled by another law passed by a simple majority would not fulfil the obligations laid down in the Fiscal Compact and would not create guarantees for a permanent budgetary policy in Luxembourg but rather depend on short-term political considerations. In the view of the CC, the golden rule is also a good step in the direction of a more stable public budget. However, they proposed to add a further rule only applicable for the central administration because its negative budget in the last years has been significantly higher than those of the municipalities and the social security administration. The CC was convinced that the Luxembourg Central Bank is the adequate institution for the surveillance of the fiscal rules, but it recommended establishing a consultative procedure before the publication of the opinion of the Central Bank in order to incorporate the point of view of all stakeholder groups. In addition, the CC demanded from the government to use this legislative proposal to make more extensive reforms in the budgetary architecture of Luxembourg.
The State Council (Conseil d’Etat) commented in depth on the different levels of the public administration (central, social security and municipality). In its opinion the Conseil d’Etat recommended including very detailed rules on how to make sure that the social security administration respects the balanced budget rule and not only, as laid down in the present legislative proposal, to base this obligation on a norm which generally obliges the social security administration to respect the golden rule. Concerning the implementation of the automatic correction mechanism the Conseil d’Etat wanted to wait for the position taken by the European Commission because a similar implementation exists in France. (More information about the opinion of the Conseil d’Etat can be found in question VII.3).
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)?
No position known.
Is there a (constitutional) court judgment on the Fiscal Compact/implementation of the Balanced Budget Rule?
No. The opinions of the Conseil d’Etat cannot be considered as constitutional court judgments (see question II.2)
Non-Eurozone and binding force
Has Luxembourg 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?
Not applicable, since Luxembourg is a Euro area member state.
What other information is relevant with regard to Luxembourg and the Fiscal Compact?
Yes. The legislative proposal for a reformed governance of public finances contains a provision which implements the automatic correction mechanism mentioned in Article 3 of the Fiscal Compact. This provision obliges the government to lay down in the budgetary law for the next year which measures will be made to achieve the Medium Term Objective, if there is a higher structural deficit than 0.5%. This procedure inspired by the French legislation is justified by a reference to the last sentence of Article 3 (2) Fiscal Compact which says that ‘Such
correction mechanism shall fully respect the prerogatives of national Parliaments’. This interpretation makes it possible to state a structural deficit in year 1, write down the measures to correct the structural deficit in the budgetary law in year 2 (usually in October) and to undertake these measures in year 3.