The Fiscal Compact Bypasses Democracy and the Rule of Law

New Treaty Next Step in Neoliberal Crisis Management
08 မတ်လ 2012

The adoption of the “fiscal compact” through a treaty under international law bypasses the already feeble democratic and constitutional requirements of European law.


Signed by 25 of 27 member states at the previous EU Summit, the “Fiscal Compact” falls into a similar pattern as the “Six Pack” on economic governance: the rule of law and the European Constitution, which at least formally grants democratic forms of participation, are shoved aside if necessary to impose European austerity politics.

The falling apart of the consensus for a neoliberal integration of the European Union and its enforcement through post-democratic mechanisms, can also be observed when considering the cramped time schedule of the adoption of the treaty.  The agreement on the preparation of a fiscal pact was made on 9 December 2011 and the first draft was presented a week later. The heads of state and government coordinated the final version of the treaty on 31 January and signed it on the 2nd of March.

The material substance of the Fiscal Pact

The material essence of the “Treaty on Stability, Coordination and Governance in the Economic and Monetary Union”, the official label of the Fiscal Pact (FP), is composed of the adoption of a European debt brake and an automatic budget austerity mechanism.

A “European Debt Brake” essentially means that contracting parties commit to a balanced budget or a budgetary position in surplus. To respect this rule, the budgetary balance cannot fall short of the medium-term objective as defined in the Stability and Growth Pact, which was revised and tightened by the “Six-Pack” on economic governance.  However, the Fiscal Pact sets out an even tighter goal: while the medium-term objective following the strict parameters of the “Six-Pack” can reach the limit of -1%, of the GDP[1], in cyclical adjusted terms, the Fiscal Pact only allows a “lower limit of a structural deficit of 0,5% of the GDP” (Art. 3 para. 1 lit. b. FP).

Furthermore, the fiscal pact does not only comprise rules for “new debt”, but also a strict regime for the reduction of existing debt. A debt rule is set down in Art. 4 of the Fiscal Pact: It states that the contracting parties whose deficit exceeds 60% of the GDP are obliged to reduce their debt by a rate of one-twentieth a year until they have fallen below the value of the 60% benchmark. This is again a much more stringent provision than the “Six-Pack” rules: Art. 2 para. 1 of the relevant regulation[2] on the “Six Pack” asserts that the annual reduction of one-twentieth “only” refers to the difference to the benchmark of 60% and not to the overall debt. 

In the event of deviations from the medium-term objective, a “correction mechanism” shall be triggered automatically (Art. 3 para. 1 lit. e FP). The exact form and substance of this austerity mechanism is not defined throughout the fiscal pact and remains entirely unclear. Yet, even though the contracting parties have not defined the general conditions or the substance of the austerity mechanism ,,they appoint solely the European Commission to concretize it. The Fiscal Pact provides that the executive organ of the European Union should develop “the nature, the size and the time-frame of the corrective action to be undertaken.” The Fiscal Pact even authorizes the Commission to define, “the role and independence of the institutions responsible at national level for monitoring the observance of the rules” (Art. 3 para. 2 FP).

Through the Fiscal Pact, the implementation of the European debt brake and the austerity mechanism is subjected to a rigorous judicial control. Modeled after the infringement proceeding of European law, the Fiscal Pact grants the Commission the duty of surveying the contracting parties in their attempts to implement the debt brake and the austerity mechanism accordingly into their national law (Art. 8, para. 1 FP). If the European Commission concludes that there has been a violation of these obligations “the matter will be brought to the Court of Justice of the European Union by one or more of the Contracting Parties”. Contracting parties are able to bring the matter to the Court of Justice independently, if they feel a violation has occurred. The contracting party concerned is obliged to take the necessary measures to comply with the judgment within a period decided by the Court.

If the concerned contracting party has not taken the necessary measures to comply with the judgment of the Court, the Court may even impose a penalty payment of up to 0,1% of the GDP (Art. 8 para. 2).

A treaty outside of European Law

These austerity measures are not only established on an international level - national legal systems are required to implement these rules “through provisions of binding force and permanent character, preferably constitutional” (Art. 3 para. 2 FP). Yet, a wide range of measures which are contained in the Fiscal Pact, especially the imposition of the debt brake and the austerity mechanism into national law and the assignment of the European Commission to act as an executive organ of the pact, possess no legal basis in the Treaties of the EU. The introduction of these measures would have required an ordinary revision procedure for the amendment of the European Treaties according to Art. 48 Treaty on European Union (TEU). This procedure ensures through formal guarantees, amongst other, the participation and endorsement of the national parliaments as well as the European Parliament.

Since the Fiscal Pact is set up as a treaty under international law, it bypasses this procedure and with it the parliamentary arena. But not only: with the retreat away from European law, the head of states or governments bypass the already feeble guarantees of democratic and judicial control within the European Union. This means that the new instruments of austerity, which cut deep into social and democratic rights, are established outside of the European Constitution which at least secures parliamentary control, independent judicial scrutiny, the separation of powers, the respect for fundamental rights and the compliance with legal procedures.

Given these legal maneuvers, it can only be surmised that the contracting parties, which are all Member States of the EU, infringe European law by signing and ratifying the Fiscal Pact. The European Union not only commits itself and the Member States to respect democratic and constitutional principles (Art. 2 TEU ), it moreover demands that the Member States “refrain from any measure which could jeopardise the attainment of the Union’s objectives” (duty of loyalty following Art. 4 para. 2 TEU).

The avoidance of the revision of the European Treaties for the passing of the instruments of the Fiscal Pact and their enactment without the corresponding constitutional foundations, suggests that the current neoliberal crisis management can only be accomplished by cutting off formal democracy.  This is especially apparent when comparing the procedure to ratify a revision to the European Treaties to the same procedure for an International Treaty. Art. 48 TEU and Art. 14 of the Fiscal Pact clearly state that the Treaty shall enter into force provided that the contracting parties, respectively the Member States, ratify it “in accordance with their respective constitutional requirements”. However the requirements of the Member States differ for European and International Treaties. For example, the Irish Supreme Court[3] has decided that “amendments to European Treaties” are authorized only by means of Constitutional Law, which implies a mandatory referendum. But the wording of the judgment does not automatically specify its application to International Treaties. The constitutional provisions of other Member States are configured similarly, considering that International Treaties other than the modification of European Treaties, only sporadically assigns sovereign rights to international bodies.

It is therefore not surprising that, only a day after the first draft for the Fiscal Pact was published, representatives of the Irish conservative ruling party Fine Gael were able to claim that a referendum was not necessary to ratify the Fiscal Pact. Jurists later questioned this argument, and the Attorney-General himself came out with a legal advice in favor of a referendum.[4]. Similar legal wrangling is to be expected prior to the ratification of the Fiscal Pact in other countries.

Divide and rule!

That said, a transnational debate on the necessity of the Fiscal Pact is not to be expected during the ratification period given the fact that the Fiscal Pact follows a strategy based on “divide and rule”. Contrary to the provision concerning the revision of European Treaties, the ratification of only twelve contracting parties (Art. 14 para. 2 FP), not of all the Member States (Art. 48 para. 4 TEU), is sufficient for the Fiscal Pact to enter into force. Reports[5] that a change of power in France may lead to an “automatic” blockade of the ratification process given Hollande’s (the French social democratic candidate for the presidency) opposition, are therefore an overstatement.

In addition, a potent incentive exists in the Fiscal Pact which makes ratification against a democratic majority even more likely: the ratification of the Fiscal Pact, the implementation of and abidanceto the new austerity instruments are pre-conditions for receiving aid from the European Stability Mechanism. (Recital 25 FP).

The European Commission and the Fiscal Pact

The clause concerning the austerity mechanism can prove to be another Trojan horse for the legal trenches of democracy. Due to the fact that the “corrective mechanism” within the Fiscal Pact remains undefined, a variety of instruments becomes possible. The terminology “automatically triggered corrective mechanism” (Art. 3 para. 1 lit. e FP) suggests harsh instruments, which could range from an automatic reduction of public expenses, to a correspondent increase in indirect taxation , or the establishment of a preferred special account similar to the Greek example[6]. At any rate, the parliaments lose their democratic control over the concrete composition of the austerity mechanism as soon as the Fiscal Pact is ratified. The Commission is de jure alone responsible to define the concrete composition of the austerity mechanism.

Even more problematic is that several provisions of the Fiscal pact assign the European Commission with sovereign rights. This is foremost problematic from a European law perspective. While European law provides that the Court of Justice of the EU can be assigned with the settlement of disputes among Members (Art. 273 TFEU), the Treaties do not provide for an equivalent entrustment of the European Commission outside of European Law. Once more, this would require the revision of the Treaties. Likewise, the same argument applies to the European Court of Justice’s acquired competence through the Fiscal Pact to impose financial fines of 0,1 percent of the GDP, given that the respective Article of European Law (Art. 273) does not provide a legal basis for these penalty payments, which imitate the infringement procedures of the Treaties (Art. 260 AEUV). The mentioned article merely allows for the Court of Justice to act as a court of arbitration for the Member States, but it does not entitle the Court to impose coercive fines[7]

The objections coming from a democratic perspective are even more profound.  Since in the context of the Fiscal Pact the Commission is not subjected to the framework of the European Law, it is nothing more than a powerful executive without any democratic and judicial control. The heads of states or government have created de jure an uncontrolled, autonomous administration, to determine the austerity mechanism and to watch over the implementation of the debt brake.

Of binding and eternal validity

The Fiscal Pact does not contain any provisions for its cancellation, where normally International Treaties provide concrete clauses concerning their termination[8]. In considering the prospects for its termination therefore, one has to revert to the Vienna Convention of the Law of Treaties (VCLT). Art. 56, para. 1 states that “a Treaty which contains no provision regarding its termination and which does not provide for denunciation or withdrawal is not subject to denunciation”. Unilateral termination will therefore trigger the responsibility of states for international wrongful acts following customary international law, hence the obligation to fulfill the contract persists (Art. 29 UN Draft Articles on State Responsibility of States for International Wrongful Acts). Moreover, the contracting parties are entitled to demand compensation (Art. 31) and are able to take reprisals to force the party to conclude its obligations (Art. 49).

However, it may be argued that a right of denunciation “may be implied by the nature of the treaty” (Art. 56 para. 1 lit. b VCLT). But this particular wording is imprecise and regularly gives occasion for disputes among the contracting parties, especially since its interpretation is also contested amidst scholars of international law[9]. Consequently, it is likely that a denunciation of the Fiscal Pact may lead to a long-lasting legal dispute on an international level.

As a result, the initially provocative undertone of the notion “austerity forever” renders true. This is captured succinctly by no less than the leading figure of the neoliberal ensemble of European state apparatuses, the German chancellor Angela Merkel, when she commented: “The Fiscal Pact is about inserting debt brakes permanently in the national legal systems. They shall possess a binding and eternal validity!”[10]


Lukas Oberndorfer is a legal scholar in Vienna; scientific staff member of the Austrian Chamber of Labour and the legal journal juridikum (zeitschrift für kritik|recht|gesellschaft). He is also active in the Study Group on Critical European Studies (Assoziation für kritische Gesellschaftsforschung). His main field of research is critical theory and the empirical study of European integration, European law and transnational industrial relations;

[1] Art. 2 a para. 2 Reg. 1175/2011.

[2] Reg. 1177/2011.

[3] Supreme Court of Ireland, Crotty v. An Taoiseach, 9.4.1987, IESC 4; IR 713.

[4] Collins, Noonan spells out stark reality if referendum is needed, The Irish Times (17.12.2012); Kenny denies fiscal compact will bring further austerity, (5.2.2012).

[5] Mayer, Präsidentenwahl in Frankreich könnte den Fiskalpakt kippen, der Standard (31.1.2012).

[6] Greece has agreed to install a special account following Germany’s demand. In the future, it will be composed of public revenues up until the interest rates and the repayments are covered. Only the remaining sum can be used for public expenses. For further information see Böhm, Einbruch in Griechenlands Souveränität, Die Presse (23.2.2012).

[7] Similarly Pernice, International Agreement on a Reinforced Economic Union – Legal Opinion (2011) P. 13.

[8] Ipsen, Völkerrecht5 (2004) P. 173.

[9] Neuhold/Hummer/Schreuer (Eds.) Österreichisches Handbuch des Völkerrechts4 – Band 1 (2004).

[10] Ö1-Morgenjournal (31.1.2012).