Cause and Effect in European Politics and Law

France and Germany Want Tax Coordination in the EU

Adelina Marini, January 27, 2012

The European Council has to send strong signals for more growth and employment. This is the main message of France and Germany in their joint letter, published by EurActiv on Tuesday, to their colleagues on the occasion of the upcoming European Council on January 30 and the spring council on March 1-2. One of the biggest pieces of news in that letter is their call for tax coordination, the main purpose of which is boosting economic growth.

It has already become a tradition, Berlin and Paris to come up with joint ideas before a large council, which usually set the tone of the talks. This time, though, these ideas are complementary to the negotiations on the fiscal compact, which will also be a major topic at the summit on Monday. The issue of economic growth and unemployment so far remained on the sidelines of the leaders' agenda, who were forced to walk a step behind the markets, insisting for quick and long-term solution of the debt crisis in the euro area.

Economic analysts have been warning for a long time that measures for fiscal discipline alone will not solve the current economic problem because it is necessary the economy to grow and the European institutions raised the issue a number of times last year including. Last autumn it was underlined several times that there was no need new measures to be invented but just to implement the old ones. This is precisely what France and Germany propose in their letter, in which they call, the spring summit in particular, for ways to be sought for a more rapid implementation of the goals of the current 10-year strategy of the EU for growth Europe 2020. It is also asked for an acceleration of the implementation of what has been agreed last spring in the Euro+ Pact.

The four main goals of the pact, approved by the spring European Council in 2011, are boosting competitiveness, employment, sustainability of public finances and the stability of the financial sector. By the way, in the process of drafting of the fiscal discipline pact (the fiscal pact) the Euro+ Pact was mentioned a number of times, which Bulgaria also joined. According to Deputy Prime Minister and Minister of Finance Simeon Djankov, who took part in the financial ministers council on Monday and Tuesday (23-24 January), Bulgaria will most probably join the fiscal compact but, in his words, the Euro+ Pact has a third-grade importance - a thesis often expressed by the Bulgarian minister of finance.

As it seems, for Germany and France there is still life in this pact, probably because it pays attention precisely on economic development, while the fiscal compact is focusing on the fiscal side, especially in the eurozone.

6 measures to increase growth

Under a title in the imperative mood - "Ways Out of the Crisis - Strengthen Growth Now!" - the two countries propose six measures: European efforts to tackle unemployment, especially youth unemployment; development of adequate instruments for financing Europe's companies; better use of the European funds; completion of the framework for financial regulation; common European efforts to modernise public administrations; improving access to third markets. As probably draws attention, these measures are deep and comprehensive.

On the first measure to tackle unemployment it is envisaged the Commission to present a detailed analysis of the situation of labour markets in the member states, in which the weaknesses to be outlined and specific proposals to be given. Germany and France expect this analysis to provide a comparison of the vocational training systems between the member states. It is important to note that the two countries put a big focus on the common European efforts for tackling unemployment in the context of fading labour market restrictions. One of the proposals is the European Council to agree a European Apprentice Plan to be endorsed at the European level, because it is deemed that this is youth-type of employment, which has to be promoted.

Besides, it is proposed a thought to be given on ways of improving transborder job search, which is a serious step forward toward opening of the labour market, restricted until recently by the more developed and older member states in terms of the newer ones. In the letter it is recommended the member states to consider ways to reduce the tax burden on labour in order to facilitate hiring and jobs creation. In this line of thinking, the two countries expect from the council on Monday the leaders to decide on organising a special social forum in the first semester of the year.

Again it is said that small and medium enterprises (SME) are the backbone of the European economic success. And precisely in this second point are some of the most interesting ideas in the Franco-German letter. It is proposed the European Council to ask for the fast implementation of the Commission's proposals for venture capital. What is meant is national instruments the purpose of which will be to promote this type of financing of new companies with the support of the European Investment Fund. It is required the member states to endorse a new regulation for the creation of a European Fund for Venture Capital. For this type of funding also spoke Bulgarian MEP Ms Nadejda Neynsky during euinside's discussion in November "Economic Governance of the EU - the Political Way Ahead". She shared her experience as president of the Union of Small and Medium Enterprises with the European People's Party (EPP).

The third very interesting proposal is related to better use of EU funds. The Franco-German letter recommends the creation of a fund for promoting growth and competitiveness in the bailout countries, as well as in other countries facing significant structural challenges. The proposal at this stage is the fund to be financed by 25% of the automatic decommitments. Those are commitments of national budgets for co-financing of operational programmes, the money for which was not used and this is why the European Commission regularly "decommits" it. According to Paris and Berlin, the fund should be managed by the Commission in liaison with the European Investment Bank (EIB). The fund's activities are proposed to be limited to projects with clear objectives, that can be identified and implemented in 2012. The idea is with money from the fund small and medium enterprises to be financed, as well as investors with much favourable conditions (probably via intermediary commercial banks).

Moreover, it is proposed, aside from the use of money from this fund, expert assistance to be used from the EIB, as well as direct financial instruments from the existing European funds to finance projects in priority sectors, outlined by the Commission on the basis of their contribution to growth and competitiveness. There is also a deadline (the beginning of February) a relevant proposal to be presented for a regulation of the Commission. It is recommended an assessment to be made of the existing operational programmes, funded by the structural funds and if necessary these programmes to be revised in order to improve their impact on growth and competitiveness. This is a very important point, because it might lead to the transfer of money from one operational programme to another. It is important to note that the operational programmes are drafted by the member states themselves and approved by the Commission.

The fourth point also draws attention because in it it is recommended the European institutions to agree on achieving the EU financial market regulation agenda while taking due consideration of its impact on the financing of the real economy, SMEs and households, in addition to central banks' actions. It is obvious that the two countries have come to the conclusion that over-regulation of the financial sector leads to shrinking of lending, especially for SME's and households, which prevents the real economy from growing. And it is here where the analysts saw an attempt for softening of the banking regulation rules, known as the Basel III. The way it is written in the letter it is pointed out that Germany and France stick to "to the agreed time frame of new regulatory provisions that may have a negative effect on the lending capacity of banks and fully respect transitional periods that have been devised to avoid negative effect on the lending capacity of banks".

Nonetheless, it is recommended the new rules for capital requirements (precisely Basel III) to take into account the specificities of European banking systems and especially their role for lending to SMEs.

Tax coordination

The great terror of many of the small or underdeveloped EU member states is already clearly enshrined in the German-French proposal. "European institutions and Members States should accelerate the process of tax coordination in order to foster growth, removing obstacles to the functioning of the single market and preventing tax abuse and harmful tax practises". The two countries thrust deeper in the wound by recommending acceleration of the negotiations on the European Commission's proposal for a energy tax directive, Common consolidated Corporate tax base and Common system of Financial Transaction Tax. Germany and France will by the end of February present proposals for convergence of their corporate taxes.

Paris and Berlin for a long time have been preparing such a convergence and obviously the objective is to set an example for their EU partners by starting from themselves. So far, many member states have expressed their resistance for the financial transactions tax, Bulgaria among them, as well as fears from the Common consolidated Corporate tax base, which at this stage from the Commission's proposal is voluntary. euinside wrote in details about this and provoked heated debates.

The last two points in the letter are not in the least less interesting, although, at this stage, no specific measures are foreseen, except from asking the Commission to make an analysis of to what extent the public administrations in the member states function, especially those in the eurozone. The purpose of such an analysis would be to see how can the efficiency of the public sector be improved. The two countries expect from the Council on January 30 to express their political will for stimulating free trade with third countries on the basis of reciprocity, precisely as it is enshrined in the Commission's trade strategy.

Quite in the spirit of the Franco-German letter on Monday it is expected the European Commission chief, Jose Manuel Barroso, to present especially for the council proposals for economic growth. It is curious that on the day of the publication of the Franco-German letter Mr Barroso said that the Commission's proposal would focus on youth unemployment and support for the small business. The issue of economic growth and employment was central in the series of mini summits between the leaders of Germany and Italy, of Britain and Italy, as well as during the visits of European Council President Herman Van Rompuy in Rome and Madrid a week ago.