New EU Fiscal Treaty Allows for Deficits in Extreme Circumstances

The latest draft of a new EU fiscal treaty will only allow euro zone countries to incur budget deficits during severe economic downturns or other exceptional events.

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The treaty, which seeks to tighten fiscal controls within the 17-nation single-currency bloc, was insisted upon Germany as of means of keeping the sort of spending that led to the debt crisis in check. In the latest draft, it is more clearly spelled out when the euro zone would tolerate a deviation from the medium-term objective, that is, a budget in balance or in surplus.

“Temporary deviation from the medium-term objective will only be allowed in cases of [an] unusual event outside the control of the contracting party with a major impact on the financial position of the general government or in periods of severe economic downturn for the euro area, the EU or the concerned contracting party,” reads the document, which was obtained by Reuters on Wednesday.

Central to the new treaty is a rule that demands governments balance their budgets over the economic cycle. Brussels will be given the power to take states to court if they violate strict budget rules.

The latest draft of the treaty includes a provisional timeline for the entry into force of the new regime by the start of next year. It also removes a controversial reference to deeper integration in the single market for those countries signing the compact, as it would leave Britain, which has opted out of the new agreement, on the sidelines as a large group of EU countries deepen their ties. As many as 26 of the European Union’s 27 member states are expected to back the agreement.

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