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The Fiscal Pact and Bulgaria: Close Encounters of the Third Kind

Published on , , Sofia

The absence, and lately the availability, of Bulgarian positions on key for the European Union issues, does not evoke almost any interest in Bulgaria's society and among the very few people that manifest curiosity on the issue in Bulgaria they evoke mainly perplexity. Such is the case with the fiscal pact, agreed by the EU leaders at their summit on 8-9 December 2011 in Brussels, at which PM Boyko Borissov agreed to accede the country without understanding what it was all about. Before the Bulgarian journalists he said that in fact the EU had finally matured for an idea, which the Bulgarian government launched a long while - namely about a debt brake, which the cabinet indeed proposed to be directly bound with the Constitution in order to avoid "populist" governments to pile debt.

Up to the moment when the prime minister gave his consent in principle for Bulgaria's participation, there was still no clarity what would the document look like. This is what the then brief but vehement reaction in the society was odd. It was talked about how the country would have to pay a lot of money, that it would hand over its most precious - the independent tax policy, etc. The work on the text of the treaty started literally days before the Christmas holidays and is going on with full steam, as there is already a third version of the text, moreover very much different from the previous ones.

As euinside wrote, the third version, although making a few steps back, is making a very significant one forward and it is that it is now almost entirely focused on the eurozone countries. Furthermore, it is envisaged all countries that at a later stage decide to join to be able to do that after an application procedure.

Excluding the sudden ebb of transparency with the Ministry of Finance, which after announcing a "media pause" on the issue, at the end decided to publish [in Bulgarian] on its official web page the first version of the document, in general in Bulgaria there is no detailed discussion of the treaty, which in the meantime, as I already mentioned, went through several significant editions. Though the third version concerns predominantly the euro area, Bulgaria is obliged with its accession treaty to join the monetary union, so sooner or later these rules will apply for the country too, which is why it is important that they are being discussed. Besides, the treaty provides a possibility for non-euro countries to request to apply its provisions before actually having joined the monetary union, but at this stage we don't know whether the Bulgarian government intends to ask to do that.

The only official Bulgarian position on the drafted treaty came from the minister of foreign affairs, who explained on the occasion of the 5th anniversary of Bulgaria's accession to the EU, that the conclusion of the negotiations for a new "fiscal union" of the EU was a priority task for the member states and that Bulgaria would not make any financial commitments, requiring additional instalments to the IMF or other financial institutions. "We say 'Yes' to fiscal discipline and 'No' to interference in our right to follow independent tax policy", Mr Mladenov said, quoted by the foreign ministry's web page. He recalls the decision, please note, of the government as of December 30 Bulgaria to participate actively in the negotiations on the international agreement, because "for Bulgaria it is of utmost significance to take part in further processes of integration of the European Union, given the Bulgarian national interests are defended".

And the Bulgarian interests, as being articulated in the cabinet's decision and quoted by the Ministry of Foreign Affairs, are as follows:

1. With the proposed draft of an international agreement are being confirmed the principles, followed by Bulgaria, to maintain strict budgetary policy and macro financial stability.

2. In the course of the negotiations on the international agreement Bulgaria would not support proposals that would infringe our right to follow independent tax policy.

3. Enhanced cooperation in the area of economic and fiscal policy should not threaten the effective functioning of the EU Internal market.

4. Bulgaria renders a priority significance to the fast inclusion of the provisions of the International agreement for enhanced economic union in the EU Treaties.

5. It is a principled position of the country that it is necessary to ensure full conformity of the provisions of this agreement with the Treaties of the EU and EU legislation, as well as that the EU law would have a superiority over the provisions of the agreement. The role of the existing European institutions should be protected.

On point one the Bulgarian government has stated, with the proposed Pact for Financial Stability, adherence to the following fiscal rules, which however are not incorporated in the Constitution because of a lack of consent in the National Assembly, but in the State Budget Act: a budget deficit ceiling on a consolidated basis of 2% of GDP, restricting the redistribution role of the state up to 40% of gross domestic product. In the Ministry of Finance's proposal for a debt brake it is also envisaged a restriction indebtedness not to exceed 40%. The rule under the Stability and Growth Pact (SGP) of the EU is for 60% indebtedness, but in the third version of the proposed international agreement the rules in SGP are gaining a leading role.

Although the ideas in the Bulgarian fiscal pact to be akin to the proposed in the European one, there are several differences. For example, in the latest version of the document it is proposed the deficit not to exceed 0.5% of gross domestic product at market prices. Besides, the parameters of the agreement are bound to the mid-term objectives too of the participant countries. For nations as Bulgaria (with low indebtedness) in previous versions it was envisaged the structural deficit ceiling to be increased from 0.5% to 1.0 percent of GDP. With the latest version, however, it is explicitly pointed out that this can happen only if the risks for the long term stability of public finances are low.

On the second articulated by the government national interest, which is to protect the right for an independent tax policy, at this stage of drafting nothing is mentioned of deprivation of independence in this aspect. As euinside already wrote such a discussion is being held on EU level but it is not in any way reflected in the draft of the international agreement. However, it makes a direct link to the Euro Plus Pact, where "tax coordination" is being proposed and to which Bulgaria committed itself.

On the occasion of the third stated interest - "Enhanced cooperation in the area of economic and fiscal policy should not threaten the effective functioning of the EU Internal market" - in Article 10 of the third version it is explicitly said that the aim of the enhanced cooperation is not to harm the internal market.

And regarding Bulgaria's rendering "a priority significance to the fast inclusion of the provisions of the International agreement for enhanced economic union in the EU Treaties", this is explicitly written, as well as the last point for the full conformity of the treaty with the EU Treaties and law.

But the bigger problem here is different and it is that unlike many other EU member states, in Bulgaria the issue about the European fiscal compact and the benefit from it is not being discussed on national level.

It is interesting to see how the discussion is unfolding in the Czech Republic, considered to be a "gnarled" EU member. Even there the eurosceptic president, Vaclav Klaus, announced he was against the initiative of the senior coalition partner, Civic Democrats, to hold a referendum on the treaty for budgetary responsibility. For the Czech news agency, quoted by the Ceske Noviny daily, Vaclav Klaus said that a referendum in the Czech Republic was not necessary. "I would wish very much that politicians took responsibility in their hands and decided about this matter on their own", Klaus was quoted saying, adding that in general he was against the proposed treaty because it meant "a radical liquidation of the European countries' sovereignty. This cannot be accepted!"

On the opposite position is Foreign Minister Karel Schwarzenberg, according to whom the Czech Republic has to join the new budgetary and economic union. Moreover, he even threatened that he would not be part of a government that would leave the Czech Republic aside from the main stream of European integration. In special debates on the Czech national TV, Czech state secretary for European affairs Vojtech Belling said that the prepared treaty would transfer Czech national powers to a supranational level. Mr Belling is one of the three negotiators on the treaty and also supports the idea the document to be subjected to a referendum.

As is visible from the actions of the credit rating agencies, which either downgrade or confirm the credit ratings of the biggest and strategically important for the eurozone and the EU member states, it is of great significance for the investors and the long term stability of the countries to know what kind of policy to be followed. This is why it is very important that there are proper debates on the issue in society. Therefore euinside is inviting you to join with an opinion. Bulgaria is a member of the EU for five years now, our national currency is pegged to the euro and our trade with the EU and the eurozone has a significant share in our economic activities, so let us not consider another discussion of a strategic European document as something that does not concern us - not now, not ever.

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