"GERMANY and France yesterday stayed on collision course with Britain as they pledged "rapid progress" in harmonising taxes and pushing forward more quickly towards a politically integrated Europe.
"The Franco-German relationship is more important than ever as a motor for the construction of Europe," Gerhard Schröder, the German Chancellor said, capping two days of talks with Jacques Chirac, the French President, and Lionel Jospin, the French Prime Minister. "With the help of very close co-ordination we are ready to take on this
responsibility."
Yet the two countries could not paper over the divisions on fundamental problems such as how to achieve a budget rebate for Germany, how to reform European finances as a whole and, most controversially, how to overhaul the common agricultural policy.
The main area of agreement yesterday was in territory charted out since September's German general election by Oskar Lafontaine, the German Finance Minister, and Dominique Strauss Kahn, his French counterpart: the creation of a common economic regime to coincide
with the introduction of the euro.
"We will move, at this critical time, towards a stronger co-ordination of economic policy - in particular among the 11 euroland states - press for rapid tax harmonisation and the creation of a real economic social model," a joint communiqué said.
"We deplore the unsatisfactory state of European discussion on social affairs . . . we will urge initiatives to encourage stronger harmonisation of the European social model."
M Jospin made clear that this was above all a Franco-German responsibility: "A real social agreement in Europe, progress on tax harmonisation, movement towards controls on international capital markets - all this is part of the new dynamic of the relationship."
Although Herr Lafontaine left the Potsdam summit early for a European Finance Ministers' meeting, the summit documents carry his imprint. The communiqué demanded stronger controls on international capital markets and a concerted move to boost the credibility of the
International Monetary Fund and World Bank.
"To this end there should be an international discussion aimed at making the Interim Committee (of the IMF) into a real 'Council of Finance Ministers'," it said.
Herr Schröder had promised that the broad contours of Agenda 2000, the financing of the European Union and agriculture reform would be ready for a package-deal settlement by next March. The French did not seem so confident. The German leaders promised the French that he would not pile on more pressure on the budget rebate question. "We hope, nonetheless, for the support of the French."
M Chirac added: "Yes, there is a problem and we are doing our best so that Germany can at least get part of what it wants. But we have to remember: everybody has a problem and they should all be laid on the table."
The French do not want to deal separately on the rebate. Concessions to Germany have to translate into concessions for the French, and above all for their farmers. The President's phrase for this was "global compromise".
Germany's six-month presidency of the European Union, beginning in January, may be setting off with over-optimistic expectations. Above all, Herr Schröder wants speedy, across-the-board results to deflect
attention from slow progress on domestic reforms. In contrast, France is ready to slow the pace until the balance of advance shifts in its direction.
Germany seemed yesterday to have taken over the French assumption that eastward enlargement of the European Union can only occur after European institutional reform. Herr Schröder called for fast
negotiations with central Europe but did not - unlike Helmut Kohl, his predecessor - set a date for entry.
M Jospin shifted responsibility for any delayed enlargement onto the central Europeans. "I have told the Czechs we are waiting for you. They have to tell us when they are ready to bear the shock of European Union membership."
Diplomats say there has been some narrowing of the French and German positions on budget contributions though there was no breakthrough in Potsdam. The French President agreed to keep European Union spending growth in line with inflation until 2006.
In turn, Herr Schröder is no longer demanding a "correction mechanism" to improve Germany's budgetary position. But the leaders are divided over whether to hand back to national Governments the responsibility for paying farmers direct subsidies.
The German Government did not budge from its view that direct farm subsidies should be co-financed by national authorities (a move that would substantially reduce Germany's contribution to the European budget). The French say this would kill the common agricultural policy. That is the long-term hope of the modernisers in the German Government though not, understandably, its Agricultural Minister.
Another potent area of disagreement yesterday was Germany's policies on civil nuclear energy and military nuclear power. A Franco-German working committee is to be set up to minimise the damage to France's nuclear programme of Germany withdrawing from atomic energy.
"France does not have the right to judge a political or economic decision made by Germany," said President Chirac, who nonetheless made plain that he did not like it.
Germany also told France that it would continue to lobby for a "no first use" nuclear strategy. President Chirac stressed that this had to be dealt with on a Nato level, presumably because he is sure that combined American, British and French opposition would squash the German idea.
What might happen
VAT
THE TAX SITUATION HERE
Standard rate: 17.5 per cent. Lower rate: 5 per cent (domestic fuel and power). Zero rated: children's clothing, books, newspapers and
magazines, food (excluding hot takeaway and restaurant food), passenger travel), water and sewerage services, drugs and medicines on prescription, supplies to charities, construction of new dwellings, ships and aircraft above a certain size, vehicles and other supplies to people with disabilities.
WHAT THE EUROPEAN UNION WANTS
The EU is about to renew existing VAT regimes unchanged. This fixes minimum standard rate of 15 per cent, with many exemptions, including newspapers, food and children's clothes in Britain. Highest rates currently applied in some other states are 25 per cent. There are no
plans for new rates. Some want to bring regimes closer into line for the sake of smoothing the path of monetary union.
WHAT GORDON BROWN SAYS
Government would veto any moves to force Britain to change VAT rates. The 17.5 per cent headline rate is a matter solely for Westminster. Only the Government can change the status of goods which are currently zero-rated in Britain, such as children's clothes, food and newspapers, or raise the 5 per cent lower rate on domestic fuel. Gordon Brown has ruled out changes to either for the lifetime of this Parliament.
WHAT MIGHT HAPPEN
Britain will retain its exemptions but pressure will grow for more harmonised rates within the next five years. As with all EU tax changes, this will require unanimity and is therefore subject to potential veto.
Corporate tax
THE TAX SITUATION HERE
Standard rate: 31 per cent (30 per cent from April 1999).
Small companies rate: 21 per cent (20 per cent from April 1999)
WHAT THE EUROPEAN UNION WANTS
The EU is working on a voluntary code of conduct, aimed at ironing out distortions caused by unfair taxation practices such as special regimes for foreign investors. Working group, chaired by Dawn Primarolo, Treasury Financial Secretary, has drawn up preliminary list of 85 schemes for examination and possible abolition in a year's time.
WHAT GORDON BROWN SAYS
They are ours to set. They are direct tax measures which are not the business of Brussels. The Government would resist, if necessary wielding Britain's veto, any pressure that began to build up.
WHAT MIGHT HAPPEN
Discussion of minimum rates is likely to run into stiff opposition from Nordic states, Ireland and others, in addition to Britain. Action is unlikely in short term, but pressure can be expected to grow in coming years.
Income tax
THE TAX SITUATION HERE
23 per cent for taxable earnings £4,301 to £27,100
40 per cent for taxable earnings above £27,100
WHAT THE EUROPEAN UNION WANTS
Talk of harmonising income tax is officially regarded as taboo, even to Germans and French. However enthusiasts in some continental Governments and the European Commission say some degree of co-ordination in income tax regimes may reach the agenda once monetary union has been operating for some time.
WHAT GORDON BROWN SAYS
The same response as above. But the Treasury points out that even the EU Tax Commissioner says there is no pressure in this area.
WHAT MIGHT HAPPEN
This is a long-term item, but deeper economic integration, with monetary union, may increase pressure within a few years for bringing national income tax practices more closely into line.
Tax havens
THE TAX SITUATION HERE
Crown Dependencies operate their own fiscal regimes: Jersey, Guernsey, Isle of Man. British Overseas Territories operate their own fiscal
regimes, some of these are known for attracting business as tax havens, including Bermuda, British Virgin Islands, Cayman Islands and Gibraltar.
WHAT THE EUROPEAN UNION WANTS
The EU, including Britain, is keen to abolish tax havens, which cost national exchequers billions of pounds a year. German and Belgian professionals are said to bank much of their savings in Luxembourg. The EU's weapon is a proposed 20 per cent levy on income from investments paid into accounts held by non-residents.
WHAT GORDON BROWN SAYS
Gordon Brown is unhappy with the proposals for the 'withholding tax'. He would veto the proposals as they stand. But he sees ground for negotiation, using the issue to clamp down on banking secrecy and for a greater exchange of information.
WHAT MIGHT HAPPEN
The EU will agree on a watered-down version of this proposed directive by the end of the German presidency in June.
Cars, cigarettes, drinks
THE TAX SITUATION HERE
Pint of lager £1.83. Excise duty: 26.0p, VAT 27.3p. Total tax 53.2p
Wine (75cl) £3.05. Excise duty £108.5p, VAT 45.4p. Total 153.9p
Whisky (70cl) £11.49. Excise duty 547.7p, VAT 171.1p. Total 718.8p
20 cigarettes (from 01/12/98), £3.64. Excise duty 230.6p, VAT 54.2p. Total 284.8p
Car tax: £150
WHAT THE EUROPEAN UNION WANTS
Cars are subject to VAT, set at national rates above. Cigarettes and alcohol are subject to nationally set excise tax. There are no plans to harmonise these although it is recognised that widely varying practices cause distortions, such as Britons' habit of buying alcohol and tobacco in foreign Channel ports.
WHAT GORDON BROWN SAYS
Britain's excise duty rates are higher than the EU minimum. Thanks to the fuel accelerator, they will continue to forge ahead on petrol and diesel. It is a national decision about how much tax we want to raise and how we want to raise it. The Government would oppose Brussels's attempts to limit its room for manoeuvre.
WHAT MIGHT HAPPEN
No action in the foreseeable future but pressure may grow, along with other moves to 'level the playing field' in the single market."
sunday-times.co.uk France and Germany's promise yesterday to accelerate moves toward European unity puts them on a collision course with Britain, reports Roger Boyes from Potsdam |
