Franco-German axis revived in EU tax reform plan

France and Germany have bolstered their rejuvenated diplomatic alliance with plans to push important tax harmonisation measures through the European Union.

The initiative, which would cover corporate tax and VAT, is part of a concerted effort by the governments in Paris and Berlin to revive the partnership between the two capitals that has traditionally dominated the EU. It also threatens to revive the bitter dispute that broke out in autumn 1998 when London blocked a similar Franco-German drive for tax harmonisation.

Since 1998, the Franco- German motor had stalled, leaving Tony Blair able to set the agenda on important issues such as economic reform.

But at a summit in Brussels in October, President Jacques Chirac and Chancellor Gerhard Schröder surprised other leaders, including Mr Blair, by striking a pre-emptive deal over the future of the common agricultural policy.

Since then the French and German governments have agreed joint policy documents on European defence and justice and home affairs, and are drawing up a paper on the future shape of EU decision- taking early next year.

Their finance ministries are also discussing a joint position on economic governance, including tax, which will be sent to a convention on the future of Europe chaired by the former French president Valéry Giscard d'Estaing.

The Franco-German proposals on economic governance would not cover income or property taxes. It would be designed to create a level playing field across the EU's internal market. On VAT there is already EU-wide co-operation, with minimum rates agreed for most products.

M. Giscard has already said he wants to identify areas where tax policy could undermine the single market, and that he would propose that decisions in these spheres were taken by majority voting. Diplomats believe that Mr Blair, and his Irish counterpart, Bertie Ahern, will resist any attempt to introduce further tax harmonisation, or to scrap the veto on tax issues that each EU member can invoke.

News of the new Franco-German drive on tax harmonisation came on the eve of a crucial discussion today in Brussels when EU finance ministers haggle over the fate of long-running plans to introduce a tax on savings across the 15 member states.

Luxembourg has said it may veto an accord that would require member states to share data on EU residents' savings.