IT was almost a case of goodbye Angela Merkel and Nicolas Sarkozy; welcome Merkozy, the new Franco-German super-politician. Yesterday’s summit was classic Euro-fudge: radical and possibly disastrous proposals camouflaged by the fact that some other, equally disastrous proposals, were rejected. At any other time, the news that France and Germany could harmonise their corporation tax rates by 2013 would have been deemed hugely significant and a massive, blind leap into ever-closer EU centralisation; but because the issuance of common Eurozone-backed euro bonds was rejected, for the time being, many commentators dismissed the announcements as a damp squib. Merkel made it clear that such bonds would be possible but only once the Eurozone was more integrated.
She also made it clear that the European financial stability facility (EFSF) would not see its firepower expanded from the current €440bn. Whether such sentiments survive the next Italian or Spanish scare remains to be seen. Merkel is right to want to protect taxpayers – but she needs a plan B. At some point, the European Central Bank, which bought €22bn in Italian and Spanish bonds last week, will panic; and the EFSF will run out of money. Either all countries will be bailed out forever – and therefore a bigger EFSF or a Eurobond is needed – or countries will be allowed to go bust. If the latter, then a blueprint for an orderly default and euro exit is urgently needed, or else the consequences will be catastrophic. Sadly, we saw only denial and delay yesterday.
The other major announcement was that Germany and France will unveil plans for a pan EU Tobin tax on financial transactions by September. This is a declaration of war on the City, for which trading bonds, equities, currencies, commodities and derivatives amounts to huge business and sustains tens of thousands of jobs and billions in income tax revenues. Introducing a Tobin tax within the EU would send these jobs to New York or Singapore, while raising virtually no money. Even were it imposed globally, a Tobin tax would slash transaction volumes and make markets less liquid. Germany – which grew just 0.1 per cent in the second quarter, and France – which failed to expand – would suffer a bit (their biggest companies would have to pay more to raise capital or operate in the currency markets) but the UK would be tipped into a catastrophic recession.
France and Germany’s long-term plan appears to be to merge, forming a nucleus for an ever more integrated Eurozone. They want their taxes harmonised because they hate the fact that countries must compete for people and capital. Sarkozy dreams of a cartel of governments, which would give politicians more power over people. The plans for “a real economic government for the Eurozone”, on the other hand, were little more than window-dressing, with heads of government meeting twice a year, and thus achieving nothing. Introducing a constitutional balanced budget amendment would be good– but as we know from previous golden rules, including the laughably ineffective one introduced by Gordon Brown, they can easily be fiddled unless an independent body polices the budget. The problem is that there will be no extra sanctions to back up the new proposed amendments. All in all, lots of bad ideas – and some useless ones. No wonder Merkozy’s first outing didn’t impress.
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