Tax disputes show nothing has changed in Euroland

THESE ARE heady days to be a British Eurosceptic. The euro is weak. (These days a currency is never merely low or high or - perish the thought - competitive or uncompetitive). The German economy, if not that of France, is still in all sorts of gratifying trouble. The beef war, however wilfully misunderstood, did the xenophobic cause no end of good. The Conservative party has gone some way towards rejuvenating itself by unequivocally identifying opposition to the single currency as the issue on which to fight the next election.

Best of all, Tony Blair is heading, at the Helsinki summit this week, for his worst European row yet, over the plans for an EU-wide tax on savings that the City - and a salivating press - regard as a monstrous, sovereignty- sapping onslaught on London's a financial centre that Thatcher-like obduracy will be needed to resist. It is, surely, high noon.

Well, only up to a point. For while the row on withholding tax is real, the cataclysmic reading of it misunderstands the underlying context in which it will take place. For a start, this is not quite the fundamental clash between nation and superstate that some in Brussels as well as London would like it to be. The City of London may have exaggerated its fears about the proposal, to make its point. But the fears are not baseless.

The UK is being asked to sign up to a proposal that would tax savings deposited in one EU country by residents of another - or, a much overlooked alternative - require the tax authorities in the saver's home country to be informed about the cross-border savings he has made. The idea is to prevent citizens avoiding savings tax in their own country by banking money in another. And while this may sound sensible, the City believes that it could adversely affect London's position as a highly competitive (and European) Eurobond trading centre, with a likely loss of at least some business to - say - New York.

The starting-point of Tony Blair and Gordon Brown, therefore, is not quite as lofty as the Eurosceptics would like it to be. This is rather a pragmatic defence of a domestic interest of a sort utterly familiar to all European leaders; Jacques Chirac's opposition to the proposal for reforming the Common Agricultural Policy at the Berlin summit being only one of a dozen recent examples. If they are Thatcher at all, they are the early-Eighties, hard-bargaining Thatcher of Fontainebleau rather than the temple-rending Thatcher of the second Rome summit in 1990.

To elevate the row into something vastly more momentous is to indulge in a number of fallacies about both Europe, and Britain's relations with it.

The first of these is the underlying assumption that, whether the UK resists it or not, the withholding directive is merely the prelude to a programme of reckless and comprehensive Lafontaine-style tax harmonisation by the superstate madmen of the EU.

Well, for a start this is an old proposal, which arose in the late Eighties from German frustration that the prosperous middle classes were able to park their money in nice high-interest accounts in Luxembourg, where there is banking secrecy, and so avoid paying German savings taxes. Then it was vetoed - by Luxembourg.

It's true, of course, that the Commission would like further harmonisation, for example of indirect taxes - not least because it is a logical extension of the single market to ensure that goods traded across borders all attract sales tax. True, too, that this could in theory lead to imposition of VAT on - say - children's clothes and food - about as electorally neuralgic an idea in Britain as it is possible to imagine.

But whether this - or any of the other manifold poisonous fiscal snakes that Europhobes see emerging from every drain - is really going to happen, is another matter. A pamphlet to be published after the Helsinki summit, by Kitty Ussher of the Centre for European Reform, goes a long way to demystifying the perceived Euro-tax threat. Ms Ussher coolly points to weaknesses in the - then - German finance minister's plans for harmonised rates of corporation tax. She points out, first, that overall tax revenues have been rising in the EU, and that therefore his contention that higher corporation tax is needed to protect public services is invalid; but, second, that the real reason corporation tax is lower in Germany than it might be is the large number of exemptions for various industries - a fact not lost on other EU member states besides the UK. If ever there were to be harmonisation, she argues, it would be much more sensible - and likely - for it to be on what is taxed, rather than on rates. And that would help Britain, where the exemptions are many fewer.

She is also persuasive in arguing that while harmonisation of VAT may well be economically desirable, it is unlikely to happen because of the other governments beside Britain for whom it would be electorally disastrous.

But even if you accept this reasoning - and many don't - isn't the withholding tax conflict still an apocalyptic moment of truth for the Blair Government's approach to the EU? Well not quite as much as it looks. For Blair is certainly being no less communautaire than Chancellor Gerhard Schroder. No one has been more forthright in criticising the UK for holding out against the directive. Yet under pressure - not least from the threat to his support in his reselection as SPD leader this week - the Chancellor denounces the hostile takeover by one European company, Vodafone, of another, Mannesmann. He then cheerfully ploughs pounds 80m of taxpayers' money into the Philipp Holzmann construction group. Step forward another fallacy.

Ah, yes, say the Eurosceptics, but all this just shows once again what a disaster zone euroland is and why we should have nothing to do with it. Except that, as with beef exports to France, it is with the EU authorities that salvation, if there is to be any, lies. First the Holzmann subsidy attracts the attention of the EU competition authorities; then last Friday Wim Duisenberg, President of the European Central Bank, and since Lafontaine's departure the principal foreign devil in Sun demonology, condemns it in ways that cannot fail to be embarrassing for the German Chancellor.

None of this is to suggest that a veto would not mean a setback, or that a compromise would be undesirable. After all, the Government is now preparing hard for a summit on economic and other reforms throughout the EU in Lisbon next year, which it regards as almost as important as the single market.

It will be that much more difficult if there is a bust-up in Helsinki. The EU majority would like Britain to agree at least to the information provisions of the withholding directive. Britain would like the EU to agree to exempt Eurobonds, easily the most desirable of the available outcomes from Blair's point of view. But even without a compromise - and that means a British veto - Helsinki is unlikely to fulfil the expectations of those who would like to see this weekend change Blair's relations with the EU for ever - and so extinguish any possibility of British euro-entry. It matters. But in the end, its not high noon. It's business as usual.

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