(CN) - An EU treaty that sets guidelines for a balanced budget and creates an automatic mechanism for corrective action will take effect on Jan. 1, lawmakers said.
The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, or TSCG, was signed in March 2012 by the leaders of 25 members of the European Union. Finland was the latest of 17 to ratify the deal by Friday, the Council of the European Union said in a statement.
Among its aims, the treaty intends to strengthen economies by having contracting parties increase their budgetary discipline. The scope of the treaty encompasses all EU member states on the euro to "strengthen the coordination of their economic policies and improve the governance of the euro area."
Lawmakers say the new treaty is "building upon economic policy coordination," as previously defined in the Treaty of the Functioning of the European Union.
It requires contracting parties to "take the necessary actions and measures in all areas which are essential to the proper functioning of the euro area in pursuit of the objectives of fostering competitiveness, promoting employment, contributing further to the sustainability of public finances and reinforcing financial stability," according to the treaty.
A fiscal compact laid out in Article 3 of the treaty states: "the budgetary position of the general government of the contracting party shall be balanced or in surplus ... with a lower limit of structural deficit of 0.5% of the gross domestic product at market prices."
The contracting parties must also "ensure rapid convergence towards their respective medium-term objective," which the European Commission will decide after taking country-specific variables into consideration.
At the latest, these rules take effect one year after the treaty is in force.
A contracting party that is not in compliance with Article 3(2) may face a lump-sum fine or a penalty payment by the Court of Justice of up to 0.1 percent of its gross domestic product, according to the treaty. The European Stability Mechanism will collect such penalties, or they will go to the EU general budget.
Contracting parties can discuss the rules at annual Euro Summit meetings.
The treaty will be open "to accession by member states of the European Union other than the contracting parties," according to the treaty. "Accession shall be effective upon depositing the instrument of accession with the depositary, which shall notify the other contracting parties."
Contracting parties must ratify the treaty in accordance to their respective constitutional requirements.
The treaty will be incorporated into the legal framework of the European Union within, at the most, five years of the date of entry.
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