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 Slovakia 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.
Negotiating position of Slovakia within the Eurozone was considerably shaken after its stand over the first Greek aid package, EFSF increase of guarantees, and push for re-negotiation of the key for Slovak contribution to the ESM. The Fiscal Compact negotiations represented an opportunity to regain credibility. Moreover, the plan fit the arguments circulated in previous external and internal debates – prudent fiscal policy of Slovakia lead the country to more or less stable fiscal situation and moderate economic growth, however at the cost of living standard in the country. To bind other countries to these rules and accompanying austerity measures seemed uncontroversial and something Slovakia should support. At the EU summit of Dec. 2011, Slovakia, then still represented by the Radičová cabinet in demise, “was in favour of measures aimed at the immediate introduction of fiscal discipline as well as automatic sanctioning mechanisms and monitoring. Slovakia supports a strong and independent position of the European Central Bank… With regard to the countries with excessive deficits, Slovakia’s preference is to put them under surveillance by the European Commission.” A coalition party SaS was in favour of strengthening fiscal discipline and surveillance over the deviating countries, however, it opposed “fiscal centralization in the EU.” After the general elections in March 2012, new PM Fico explicitly said: “We no longer want to be the troublemakers … [w]ithin our means, we will contribute to all measures and support all decisions aimed at protecting the euro… [t]he euro region can’t function with a common currency and different economic and fiscal policies… [w]hat is wrong with consulting budgets with the European Commission?” PM Fico due to his stands during 2006-2010 premiership and comfort majority his cabinet enjoys in the current Parliament was considered more reliable partner than the difficult coalition of previous PM Radičová, who was not able to ensure that her positions at the Eurozone level would be backed by the Parliament.
How has the Fiscal Compact been ratified in Slovakia and on what legal basis/argumentation?
The Fiscal Compact was designated a presidential treaty under Art. 7/4 of the Constitution that requires implementation by a statute. That means the Treaty does not enjoy primacy over statutes (Art. 7/5 of the Constitution). The Treaty did not fall under the category of a treaty that transfers competences to the EU (Art. 7/2 of the Constitution) and therefore an absolute majority (instead of the constitutional three-fifths majority) was required for its approval.
The position of international treaties within the Slovak legal system needs a short explanation. A dichotomy of monist-dualist systems is not anymore a viable concept to describe effects of international treaties and decisions of international institutions within many states, especially EU Member States. Slovakia, as other Member States, differentiates between an effect of treaties that transfer powers to an international organization and treaties that do not transfer sovereign powers. Also, it differs between treaties that create rights and obligations to individuals and treaties that do not. Internal effect of these treaties differs. According to the Slovak Constitution, international treaties on human rights and fundamental freedoms and international treaties for whose exercise a law is not necessary, and international treaties which directly confer rights or impose duties on natural persons or legal persons and which were ratified and promulgated in the way laid down by a law have precedence over laws. The Fiscal Compact was interpreted as an international treaty that needs an implementation by a law and so it is not directly applicable. The Fiscal Compact is implemented in § 30a of Law No. 523/2004 Coll., on budgetary rules for general government (MTO and correction mechanism). FCRA provides a constitutional basis for this implementing act, to which the budgetary rules refers as well as they referred to the Fiscal Compact directly. Thus § 30a of Law No. 523/2004 Coll. states that “[a] balanced budget or a surplus budget of the general government, including the adjustment path towards the medium-term objective, shall be ensured in compliance with the international treaty binding for the Slovak Republic and pursuant to separate regulations.” These separate regulations are the Fiscal Compact, Reg. 1466/97 and Reg. 1467/97. What the consequences of this construction are will have to be interpreted by courts. In my understanding, the Fiscal Compact is not directly applicable and does not enjoy primacy over statutes. It cannot be invoked by individuals. § 30a of Law No. 523/2004 Coll. obliges state organs to interpret this provision in compliance with the Fiscal Compact, which will also fill gaps of § 30a.
The Parliament approved the Fiscal Compact almost unanimously – 138 MPs were in favour, nobody voted against (2 MPs abstained from the vote, 1 not voting, and 9 missing). This vote signifies that neither of the Slovak political parties has a problem with strengthening of the economic governance, especially with tightening the rules, but rather with mutualizing debts and Slovakia guarantees thereof. Even all MPs from SaS were in favour. After the Parliament gave consent to the Treaty, the President signed the ratification documents on Jan. 11, 2013. The ratification documents were deposited on Jan. 17, 2013.
What political/legal difficulties did Slovakia encounter during the ratification of the Fiscal Compact?
The Report on the submission of the Treaty to the Parliament for consent emphasized that a role of the Commission is in no way supervisory, but only advisory, and that the obligations arising from the Treaty will be enforced by the CJEU. The report’s extensive focus on the role of these two institutions suggests that the intent of the Government was to highlight that, unlike the experiences with the SGP before it was amended, the Fiscal Compact will ensure that the rules are obeyed (and hence the ESM will be used less). Although SaS voted in favour of the ratification, it was the main critic of the Treaty and reasons were exactly of the kind the Government tried to prevent. SaS claimed that although the Fiscal Compact aimed to replace the toothless Maastricht criteria, it would end up the same way, because it finally did not enact automatic sanctions and accepted too many exemptions, for which the big countries like Italy or France pushed. Moreover it was becoming clear that countries like Spain and Italy, and probably France, would observe the deficit limits in neither 2012 nor 2013. In sum, SaS claimed that while big countries would be given ad hoc exemptions if in troubles, the small countries, like Slovakia, would have to strictly obey the rules of the Fiscal Compact, which would mean, at least for Slovakia, increase of taxes. According to SaS, PM Fico has been in fact using the arguments that for the implementation and observation of the new fiscal rules taxes must be increased in order to advance his own political program, which builds on increasing the revenue side of the budget.
It shall be noted that a year before the ratification of the Treaty, the Parliament passed a constitutional law on fiscal responsibility (Fiscal Responsibility Constitutional Act) (see the answer to question IX.4), implementing mainly the numerical rules concerning debt level. Some competence issues were implemented by Law No. 36/2013 Coll., on the competences of the organs of the Slovak Republic in ensuring fiscal responsibility in the European Union, which became effective on Feb. 27, 2013, and specific provisions on balanced budget rule and deficit level were implemented through an amendment to Law No. 523/2004 Coll., on budgetary rules for general government and an amendment to Law No. 583/2004 Coll., on budgetary rules for territorial self-government.
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 Slovakia? 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.
Balanced budget rule was implemented by an amendment to Law No. 523/2004 Coll., on budgetary rules for general government, in force as of January 1, 2014. § 30a/1 of this law is titled Specific Provisions on the Balanced Budget of the General Government. It reads: “The general government budget shall be balanced or in surplus. The general government budget shall be deemed balanced also in a situation where the general government deficit, adjusted for the impact of the economic cycle and one-off impacts (hereinafter referred to as the “structural deficit”) is equal to or below 0.5% of gross domestic product [Fiscal Compact]; the one-off impact is a revenue or expenditure which is not of a permanent or recurring nature and the impact of which on the general government balance is limited in time. If the ratio of the general government debt [Art. 5/2 FCRA] is significantly below 60% of gross domestic product and the risks in terms of long-term sustainability [Art. 2 FCRA] are minimal, the structural deficit may be equal to or lower than 1% of gross domestic product. A balanced budget or a surplus budget of the general government, including the adjustment path towards the medium-term objective, shall be ensured in compliance with the international treaty binding for the Slovak Republic and pursuant to separate regulations [Fiscal Compact].”
According to the explanatory report accompanying the law, the amendment to the budgetary rules (ordinary law) is the implementation of the Fiscal Compact. The report, inaccurately, states that the deficit rule, according to the Treaty “should be binding and permanent”, which sounds rather as a recommendation than an obligation, whereas the Fiscal Compact obliges the MS implement the rules through provisions of binding force and permanent character, guaranteed to be fully respected, etc. Only the notion of “constitutional character” may be understood as recommendation (there is no deviation of the Slovak version of the Fiscal Compact from the English version in this regard). Thus although the balanced budget rule is enacted in the form of ordinary statute on budgetary rules and an annual budget is also enacted on the form of ordinary statute, the budgetary rules are specifically directed to constrain preparation of annual budget. In sum, budgetary rules shall be considered permanent and binding enough for the preparation and adoption of annual budgets, fulfilling the requirement of Art. 3/2 of the Fiscal Compact.
Such interpretation is also in line with fundamental reform of public finances. A special constitutional law, No. 493/2011 Coll., on Fiscal Responsibility (Fiscal Responsibility Constitutional Act), to which the above described provision of § 30a/1 of Law No. 523/2004 Coll. refers, created a constitutional framework for fiscal responsibility, making fiscal responsibility a constitutional value. It does not contain, however, a general balanced budget rule. Its considers a balanced budget requirement a remedy that must be taken when certain level of debt-GDP ratio is surpassed (more specifically when the debt surpasses 57% of GDP temporarily until the end of 2017, then it will be lowered by 1% a year, and so from 2028 this particular debt brake will be 47% of GDP; see below).
The implementation of the Fiscal Compact therefore must be seen as part of more complex legal reform that has on its apex the Fiscal Responsibility Constitutional Act (FRCA) implemented on a statutory level mainly by amendments to budgetary rules. While FRCA contains a debt rule, § 30a of Law No. 523/2004 Coll., on budgetary rules for general government contains balanced budget rule and deficit rule.
The Parliament passed the Fiscal Responsibility Constitutional Act in a shortened procedure, which was concluded within a month since the bill was submitted to the Parliament as an initiative of a group of MPs led by then opposition MP Peter Kažimír, who became later, after the March 2012 elections, the Finance Minister, and consisting of MPs from all Parliamentary parties. The Act, requiring a three-fifths constitutional majority, passed in a unanimous vote of 146 MPs in favour (1 abstention, 3 missing). As explained in detail in the answer to the following question, FRCA had been negotiated on cross-partisan basis for nearly two years before it was submitted to the Parliament. A broad consensus that had been reached in these negotiations allowed the FRCA to pass rather quickly once it reached the Parliament, as the unanimous voting clearly indicates.
Given the central position of the FRCA in the new fiscal regulatory scheme, I shall summarize its major provisions. The Fiscal Responsibility Constitutional Act creates a fiscal council and sets rules for fiscal transparency (see the answers to questions on the six-pack). As main instruments for fiscal responsibility it uses an indicator of long-term sustainability, public expenditure ceiling, and debt brakes:
“General government gross debt-to-GDP limits and sanction mechanisms in 2012-2017
– Debt amounting to 50–53% of GDP – the Ministry of Finance sends to the Parliament a written explanation of the amount of debt, including the proposed measures for its reduction
– Debt amounting to 53–55% of GDP – the Government will submit to the Parliament a proposal of measures aimed at reducing the debt; the salaries of Cabinet members will be reduced to the level applicable in the previous fiscal year
– Debt amounting to 55–57% of GDP – The Ministry of Finance will set aside 3% of the total state budget expenditures (other than those on the government debt service, EU funds, contributions paid to the EU, transfers to the Social Insurance Company); at the same time, the Government may not propose to the Parliament a draft state budget featuring any nominal year-on-year increase in general government expenditures and the local governments are required to approve budgets with expenditures not exceeding those in the previous year’s budgets.
– Debt amounting to 57–60% of GDP – the Government may not submit to the Parliament a proposal for a deficit-based budget of the general government, while the local governments are required to approve a balanced or surplus budget for the next fiscal year.
– Debt exceeding 60% of GDP – in addition to the steps described above, the Government will ask the Parliament for a vote of confidence.
As from 2018, the brackets for the application of the sanction mechanism, as well as the general government debt ceiling, will be reduced annually by 1 p.p. until the upper ceiling drops to 50% of GDP (in 2027).” The upper ceiling on public expenditures was introduced by the above mentioned amendment to Law No. 523/2004 Coll, on Budgetary Rules for General and “represents an instrument to actively manage the general government balance with a view to ensure its long-term sustainability. Unlike the debt rule, the mechanisms of which are triggered only if a significant deviation from the fiscal position occurs, the expenditure ceilings constitute operational instruments linked to the consolidation targets and the plan for improving the indicator of long-term sustainability of public finances.”
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 position of the government and main political parties in Parliament on the Fiscal Compact and balanced budget rues were presented in the answer to question IX.1. The approach of Slovak elites to the Fiscal Compact and the BBR must be seen in the context of a deeper reform of public finances management that had started with the rules on fiscal discipline enacted on the constitutional level by the Fiscal Responsibility Constitutional Act a year before the ratification of the Fiscal Compact. The draft of the Act was submitted to the Parliament on Nov. 8, 2011, that is one month before the December EU Council meeting that agreed on the outline of the Fiscal Compact. A draft constitutional bill was prepared by an expert group composed of representatives of all parliamentary parties and published in early Oct. 2011, and was a result of talks among political parties that had begun in Dec. 2009. The works on the constitutional bill started with mapping out the fiscal rules in EU countries, but also other successful models such as one of New Zealand. MP Jozef Kollár (SaS), one of the participants in the expert group, stated that the construction of debt breaks in what became FRCA was stricter than in the case of the German or the Polish legislation on the issue. The Slovak approach was based on the Net National Welfare as the main indicator from which the reference values are calculated. The NNW provided, in the view of the authors of the Act, the most realistic picture of the nation’s debt. It precluded the Government to hide any structural problems with the debt behind one-off operations. It took into account implicit and conditional obligations. In the debates, it was also appreciated that the corrective measures were bound to the public debt, not deficit, which was calculated as structural deficit cleared off temporal and cyclical measures and servicing of the debt.
Given that the Act was prepared in an agreement of all political parties and passed unanimously in the Parliament, at the time the Fiscal Compact came to the Parliament for ratification, there was almost no discontent about it. Slovakia was in advantageous position, it was argued, to have the fiscal rules already in force and its implementation would require “only cosmetic adjustments of the law on debt brake.” Only concerns were expressed by SaS – MP Jozef Kollár warned that given the experience with the SGP for the previous fifteen years, nothing in the Compact ensures that similar ignorance of the rules will not continue.
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)?
The provisions on BBR of the Fiscal Compact and on the correction mechanism in the case of significant deviation from the MTO have been implemented by § 30a of Law No. 523/2004 Coll., on budgetary rules for general government, where first paragraph deals with BBR and structural deficit level, and the second paragraph with the MTO correction mechanism. This solution suggests legislator clearly links the two issues together. No specific political debate on the relationship between BBR and MTO has been noticed.
Is there a (constitutional) court judgment on the Fiscal Compact/implementation of the Balanced Budget Rule?
Non-Eurozone and binding force
Has Slovakia 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?
What other information is relevant with regard to Slovakia and the Fiscal Compact?
There has been so far no evidence on a public debate on the Commission material “Towards a Deep and Genuine Economic and Monetary Union Ex ante coordination of plans for major economic policy reforms.”
During the legislative process, the Council for Budget Responsibility published its comments on the amendment on budgetary rules for general government implementing the Fiscal Compact. It stated that the amendment did not follow fully the Commission Communication on Common principles on national fiscal correction mechanisms (COM(2012)342 final) envisaged in the Fiscal Compact (Art. 3/2). In particular, the Council for Budget Responsibility urged the following changes:
– To oblige the Government to respond publicly to a Council for Budget Responsibility’s negative evaluation of a Government’s decision on a correction mechanism (principle “comply or explain”). In response, § 30a/4 of Law No. 523/2004 Coll., on budgetary rules for general government requires the Ministry of Finance shall publish its opinions on the Council for Budget Responsibility’s assessments.
– To provide a procedure and definition of correction mechanism, which the bill leaves to a Government’s decision, which contradicts to the requirement for automatic triggering of the correction mechanism (that is without Government’s discretion). The final version of the amendment does not rely on the automatic triggering of correction mechanism. If the Government chooses not to apply the correction mechanism, it shall deliver to the Parliament a written justification of the decision not to apply correction mechanism. The Council for Budget Responsibility criticized the legislative framework on public expenditures once again in November 2013. It states that expenditure ceiling is the main instrument for operative budget management and that it must be of permanent character, not only a correction mechanism (see § 30a/2 of Law No. 523/2004 Coll., on budgetary rules for general government). According to the Council, the Ministry of Finance plans to discuss a legislative change on the regime of expenditure ceiling in 2014.
– To bound the process of detection of a significant deviation to a Council’s decision in line with Art. 6 of Reg. 1466/97 instead of giving this competence to the Ministry of Finance, which would anyway have to base its evaluation on a Council’s decision. The final version of the amendment specifies that the Ministry of Finance shall, pursuant to Articles 5 and 6 of Regulation (EC) No 1466/97, publish a notice on whether a significant deviation has occurred, which seems to link the Ministry’s judgment to the Council’s decision.
Slovakia also adopted a specific Law No. 36/2013 Coll., on competences of the organs of the Slovak Republic in ensuring fiscal responsibility in the European Union.
In § 1, the law states that the Prime Minister represents Slovakia on the Eurozone summits, when fundamental rules and future cooperation in the areas specified by the Fiscal Compact are discussed.
§ 3 obliges the Ministry of Finance to submit in compliance with the Fiscal Compact to the Council and to the European Commission programs of budgetary and economic cooperation for the purposes of their approval and monitoring and realize these programs; and to report on plans to issue state bonds.
The most interesting is § 4, which sets up an internal system for enforcing the Fiscal Compact against another contracting party by the CJEU (Art. 8 of the Fiscal Compact). The Ministry of Justice based on a suggestion from the Ministry of Finance and after an approval by the Government asks the CJEU to commence a proceeding against a contracting party that, according to the Commission report, has failed to comply with an obligation to introduce the fiscal rules and correction mechanism.
– The Ministry of Finance is obliged to suggest such action if the following conditions are cumulatively given: Slovakia is one of the MSs in the group of three MSs that hold or assist with the Council Presidency (Dec. 2009/908/EU); Slovakia is not considered a MS that has not fulfilled its obligations to introduce the fiscal rules and correction mechanism; there is no proceeding against Slovakia in front of the CJEU under the Fiscal Compact; and Slovakia is not prevented from such action for other reasons in compliance with general principles of international law.
– The Ministry of Finance may suggest to the Ministry of Justice to bring a contracting party to the CJEU if, disregarding the Commission report, concludes that another contracting party breached the obligation under the Fiscal Compact to introduce the fiscal rules and correction mechanism; or if, based on its own evaluation, concludes that another contracting party has not adopted measures necessary to comply with a CJEU decision on an action under the Fiscal Compact and may also suggest a fine.
In both cases, the Slovak Government adopts the final decision. A Government’s approval is also needed for the support to proposals or recommendations of the Commission where it considers that a MS is in breach of the deficit criterion in the framework of an EDP (Art. 7 of the Fiscal Compact).