Redesigning the relevant public credit legislation under the sovereign debt crisis

Author:Florea Oprea
Position:PhD. Academic associate ? Faculty of Law, 'Transilvania' University of Brasov

In this article, the author addresses the issue of the European Union Member States government debt in terms of Community law and national law and the relationship between the two legal orders. To this end, the budgetary convergence criteria laid down in the Maastricht Treaty, in 1992, the measures contained in the Green Paper on the feasibility of introducing Stability Bonds and the draft Treaty on Stability, Coordination and Convergence in the EU were hereby analyzed. The author concluded that the relevant European regulations must be transposed into the Member States national law by amending the national Constitutions.

In this article, the author addresses the issue of the European Union Member States
government debt in terms of Community law and national law and the relationship between the two
legal orders. To this end, the budgetary convergence criteria laid down in the Maastricht Treaty, in
1992, the measures contained in the Green Paper on the feasibility of introducing Stability Bonds
and the draft Treaty on Stability, Coordination and Convergence in the EU were hereby analyzed.
The author concluded that the relevant European regulations must be transposed into the Member
States national law by amending the national Constitutions.
Keywords: sovereign debt, public debt, Europe's fiscal treaty, euro-bonds, the Green Paper on
Stability Bonds, budget and fiscal discipline
The European sovereign debt crisis and especially that of the euro zone was initiated in early
2010, as a threat to the existence of the European currency and the economy throughout the region.
Sovereign debt crisis has developed mainly due to international economic and financial crisis, rising
government debt levels being the main effect hereof.
Certain EU member states like Greece and Italy but also Spain, Portugal and Ireland have
accumulated sovereign debt to such an extent that they are unable to comply with the
reimbursement due dates, thus leading to the "bailout" credits granted by the International Monetary
Fund and to the request for public debt refunding through foreign government intervention, mainly
from Germany, and China.
The causes triggering the sovereign debt crisis are various and we include among them, without
further analysis, the lack of budget discipline in the EU Member States, the lack of European
regulation to cut the high budget deficit, social budget spending beyond evidential justification and,
not least, the lack of European institutions action against the states that have not met the conditions
for joining the single currency.
Thus, certain issues with regard to the sovereign debt crisis are arising: a) In what way and to
what extent can the EU Member States run into debt? b) What legislative measures have been taken
at European and national level to eliminate this crisis? c) What can be done to break through the
sovereign debt crisis?
1. Sovereign debt levels in the European Union. Concept and regulation
The phrase “sovereign debt” comes from English and, unfortunately, in Romanian is translated
as such, the language being used mainly in the media. We believe that use of the term “sovereign”
in this expression leads to the interpretation of the term as meaning “supreme debt” or “absolute
debt”, which is inappropriate.
PhD. Academic associate – Faculty of Law, “Transilvania” Uni versity of Braşov. E-mail: oprea_alex747@
Sovereign debt is nothing more than state’s public debt or the government debt as defined by
Romanian law
. Public debt is the result of public
loans and includes all monetary liabilities
incurred through domestic and foreign loans on behalf of the State or guaranteed by the State. The
general theory of public credit refers to notions and concepts relating to the need, usefulness and
role of funds obtained by credit, the public debt main forms and derivatives, ordinary and
extraordinary contracting, extinguishment and issuing methods concerning the public credit
With regard to the level of public debt, according to the criteria for joining the euro zone, the
States that want to adopt, or have already adopted the euro, must meet certain budgetary
convergence criteria
- Government deficit must not exceed 3% of GDP;
- Low inflation rate, according to the European average (generally up to 3%);
- Government debt must not exceed 60% of GDP.
Before launching the Euro, many countries exceeded this figure, but Italy and Belgium stood
out as each had a debt of over 100% of GDP
. These countries have committed themselves to make
efforts to stabilize and reduce government public debt through very restrictive fiscal policies in
subsequent years.
Unfortunately, this goal was not achieved either at law or in practice. Since EU law is directly
applicable within the national law of Member States, these countries would have been practically
bound to meet the criteria for accession to the euro.
We believe that between Community law and the national law in the Member States euro zone
should be a correlation as regards the compliance with the budgetary convergence criteria, precisely
to obviate sovereign debt crises. In time, subsequent to adopting the euro and until present time, this
mismatch has led to the overgrowth of public debt of many European Union Member States.
The Greek government's debt is about 160% of gross domestic product (GDP) and the country
faces bankruptcy. Although Greece has a low economy in terms of volume and possible damage to
the euro zone could be covered, the risk of this country’s collapse takes into account the contagion
or chain reaction phenomenon.
Other countries with high levels of debt are: Italy, with a government debt of 120% of GDP,
Republic of Ireland with 112% of GDP, Portugal with 102% of GDP, Belgium with 97% of GDP,
difficult situations being found also in Spain and Hungary.
These countries main lender, Germany, is exposed to foreign government debt and may be
affected if one of the biggest debtors goes into payment default.
2. European legislative action against government debt.
The main aspects of the public debt crisis take into account the exacerbation of tensions in
sovereign debt markets, which has exerted increasing pressure on the banks in the European Union
and loss of investor confidence in the credit instruments. The link between public debt and private
banks is obvious, as the States have attended the course of rapid and short-term loans from private
Considering these issues, in 2008-2009, the European Commission adopted special rules on the
State aid to allow EU Member States to support the banking system during the financial crisis and
maintain financial stability, taking care to avoid undue Single Market competition imbalances.
See a rt. 3 of GEO no. 64/2007 on public debt, published in the Official Journal, Part I, nr.439/29 Jun. 2007, as
subsequently amended and supplemented.
See I. Gliga, Drept financiar (Financial Law), Humanita s Publishing House, Bucharest, p. 352
See J. Gaston , Cours de finances publiques, M. Giard, Paris, 1929, p. 191 et seq.
The so-called 1992 Maastricht criteria
See A. Brociner, Europa monetară. SME, UEM, moneda unică (European currency. EMS, EM U, single
currency), The European Institute, Bucharest, p. 34.
The purpose of these regulations envisages the way one can ensure the State’s appropriate
remuneration in case - as it is increasingly likely to happen in the future - Member States agree to
refinance their banks using tools such as ordinary shares, whose remuneration is not set beforehand.
European Commission will continue to require Member States to present a restructuring plan
(or an updated version of a previously approved plan) for all banks receiving government support in
the form of refinancing or impaired asset relief measures, from national or European Union sources.
Another set of European regulatory measures implemented to recover debts is included in the
Green Paper on Eurobonds
, which aims to assess the feasibility of sovereign bonds joint issuance
by the euro zone Member States. The adoption of this Green Paper lies in the need to merge the
issuance Eurobonds, because, until now, issuance of sovereign bonds in the euro zone was
performed by the Member States in a decentralized manner, using different issuance methods.
In this respect, the Eurobond issuance could be either performed centrally, at the level of a
Community agency, or would remain decentralized, carried out by each Member State, settling,
however, a close coordination among States. This Paper adoption’s main objective is the change of
Eurobonds purpose, which would be a necessary tool to cover daily euro zone governments funding
needs by joint issuance. Thus, a new type of bonds issued within the European Union would
emerge, as, for example, those intended for funding foreign assistance to Member States and third
countries. Therefore, joint stability bonds would have a much wider geographical coverage, would
be more of them and would have a constant rate of issuance.
The most important legislative measure at the European Union level is the adoption of a fiscal
. Through this Treaty, the Member States undertake to reduce public debt by observing
certain conditions, which mainly are stipulated for in the Maastricht Treaty of 1992. These
conditions are:
- Structural deficits limited to 0.5% of GDP; a structural deficit not exceeding 1% of GDP is
accepted under certain circumstances;
- The public debt cannot exceed 60% of GDP; at this moment, this applies only for 14 European
- Maximum cyclical budget deficit plus the structural one shall fall within 3% of GDP.
The Treaty shall enter into force on January 1, 2013 if signed by 12 of the 27 EU Member
. Although the Fiscal Treaty requirements are similar to those laid down in the Maastricht
Treaty of 1992, this regulation brings forth a technical and two legal novelties in the field.
The first provision is technical and refers to the setting out of two budget deficit indicators: the
structural budget deficit and the cyclical budget deficit. It is imperative to bound the two concepts
because, by introducing the calculation of structural budget deficit, discipline for State spending is
to be achieved, together with a more accurately revenues forecast, i.e. “State’s financial discipline”,
enforcing the rule that no state may spend more than it produces. Thus, if the cyclical budget deficit
indicates the difference between revenue and expenditure in a financial year (i.e. the actual budget
deficit) reported to State's gross domestic product achieved in the respective year
, the structural
budget deficit is related to the potential gross domestic product which is calculated depending on
the country's economic and financial power. In other words, the potential GDP will be calculated by
Eurostat based on certain elements of the Member States, such as population, natural resources,
technical potential etc.
Green Paper on the feasibility of introducing Stability Bonds, ad opted by the European Commission in
November 2011 in Brussels.
Treaty for S tability, Coordinati on and Convergence in the European Union, known as “the Fiscal Treaty”,
Bruxelles, March 2012.
The signin g of the Fiscal Treat y was scheduled for ear ly March 2012. Except for Great Britain and Czech
Republic, the treaty was signed by 25 representati ves of the Member States.
Specifically, it is about the figures actually incurred in the f inancial year according to the statistics.
The second provision sanctions the Member States not complying with the requirements
imposed by the Fiscal Treaty. Where the Treaty maximum acceptable values are exceeded, a
correction mechanism is triggered automatically allowing the European Commission to refer the
matter to the European Court of Justice. Depending on the judgment of this Court, the European
Commission may impose the State found guilty a financial penalty of up to 0.1% of that country's
The third provision concerns a legal regulation of the Treaty, which requires Member States to
review their national Constitutions by including the Treaty provisions on achieving fiscal deficit.
Although difficult, this goal can be achieved if each state ratifies the Fiscal Treaty, thus being
bound to review their national Constitutions.
According to the immediate applicability of European law principle, Community law is
naturally embedded in the domestic legal order of the Member States, with no need for any special
introduction formula; however, this principle does not operate within the fiscal treaty, as it will
come into effect following its ratification by the signatory states (at least 12 Member States). In
other words, the possibility of European Union to implement the Fiscal Treaty will be achieved
through powers transferred from the Member States
The importance of the Fiscal Treaty results from the fact that the States to ratify the document
are bound by its provisions to bring substantial amendments to the domestic law in the field of
public finance and public credit, which are to establish fiscal discipline, and by default,
responsibility and accountability of those in charge with managing public money.
3. Public debt. The Romanian case
Even if Romania looks well in this respect
, our country's legislation does not contain
provisions that would limit the amount of public debt in terms of the administrative-territorial debt
However, signs that some localities may face budgetary crisis at any time are visible. According
to Law no.273/2006 on local public finance
, territorial administrative units are allowed to register
a debt not exceeding 30% of the local budget; this rate can fluctuate depending on the income level.
And, as local budgets incomes largely depend on disaggregated shares, deducted amounts and
transfers from the state budget, local government may lose control of local public debt. In this case,
the Romanian Government will have to guarantee a large part of the credits contracted by local
authorities, controlling thus, indirectly, the local communities’ public debt.
Also, the Romanian Government shall periodically draw up public debt management policies,
aimed at managing government debt as well as local public debt approval and monitoring.
In terms of the total public debt of our country, for the next period we predict a moderate and
steady growth of the public debt but also a possible stabilization at the level of 35-40% of GDP,
depending on the budget deficits for the years 2012 to 2015.
The Fiscal Treaty compulsory measures shall require Romania to adopt a series of budget
strategies based on reducing expenditures, especially social, and increasing revenues by bounding
black economy, the absorption of European funds and tax reform.
In view of the above, we can draw several conclusions from this study.
See I. M. Anghe l, Personali tatea juridic ă şi competenŃele C omunităŃilor Europene/Un iunii Europen e,
(Legal status and p owers of the European Com munities / E uropean Unio n), Lumina L ex Publishin g House,
Buchar est, 2006, p. 119
Romania’s public debt is well below 60% of GDP.
Law no. 273/2006 on local government finances, publishe d in the Official Journal, Part I, no. 618/18 Jul. 2006,
as subsequently amended and supplemented
Primarily, we consider that first one needs to stabilize the sovereign debts, the affected states
having to borrow just to refinance maturing loans, the starting point being the change in internal
regulations on public debt and budget deficit. The only solutions to cut GDP debt ratio are
economic growth (increasing GDP) and spending reduction. Stabilization is not only a necessity but
also an opportunity because growth is long in coming.
Secondly, we consider that sovereign debt crisis exit can be achieved through a political
consensus at the European level and a transposition of EU relevant legislation on to national level.
The new European provisions for reducing the government debts of Member States aim at
budgetary monitoring and removal of national public finances imbalances.
Budget discipline is no longer an alternative but it becomes a binding obligation; in this respect,
modifying the principles of public finances within the internal legal order of EU Member States is
imminent. Establishment of “tough” European rules for the States failing to achieve a series of
indicators which are intended to be “the euro zone saviours” is noticed.
Finally, we have an eye to the situation of Romania which, as an EU Member State, has not
exceeded the debt threshold, keeping it within reasonable limits. The fact that Romania does not
have large public debt does not mean that the country’s budgetary discipline is a role model.
Romania will have to adjust a legislative package designed to improve the taxes and fees collection
system, to force local authorities to carry out community funds projects to reduce social spending,
subsidies and tax amnesties.
Anghel M. Ion (2006), Personalitatea juridică şi competenŃele ComunităŃilor Europene/Uniunii
Europene (Legal status and powers of the European Communities / European Union), Lumina Lex
Publishing House, Bucharest;
Brociner Andrew (1999), Europa monetară. SME, UEM, moneda unică (European currency.
EMS, EMU, single currency), European Institute, Bucharest;
Gaston Jeze (1929), Cours de finances publiques, M. Giard, Paris;
GEO no. 64/2007 on public debt, published in the Official Journal, Part I, no. 439/29 Jun. 2007,
as subsequently amended and supplemented.
Gliga Ioan (1998), Drept financiar (Financial Law), Humanitas Publishing House, Bucharest;
Green Paper on the feasibility of introducing Stability Bonds, adopted by the European
Commission in November 2011 in Brussels;
Law no. 273/2006 on local government finances, published in the Official Journal, Part I, no.
618/18 Jul. 2006, as subsequently amended and supplemented;
Maastricht Treaty of 1992;
Treaty for Stability, Coordination and Convergence in the European Union, Bruxelles, March