Blair's pointless Euro-war

An EU savings tax would affect very few people, so why is the PM risking his whole European strategy to fight it?

He may be Europe's most senior finance minister, but when the Chancellor, Gordon Brown, gave a rare press conference in Brussels last week, he had domestic politics on his mind. With Britain opposing a planned EU tax on savings, Mr Brown was guaranteed glowing headlines in the Euro- sceptic press by threatening to veto the measure. He duly played to the gallery and was showered with praise the next morning.

Hundreds of miles away in Frankfurt, another press conference last week was hosted by the President of the European Central Bank, Wim Duisenberg. The stooping, grey-haired Dutchman is worried by the German government's attempt to bail out an ailing German construction group and said so in public. This time the headlines were not so good, as the markets took fright and dragged the euro below the sacred $1 threshold.

Taken together these separate events may mark a significant turning point for Britain. In both cases, symbols about Europe are concealing the reality, and the consequences steer the Government inexorably away from its stated goal of membership of the euro.

Not since the Conservative era have relations between the Government and its EU partners been so tense as over the savings tax, which reaches its climax in Helsinki this week. When Tony Blair lands in the freezing Finnish capital for a summit on Thursday night he can expect a reception in keeping with the temperature outside.

Mr Blair has fought his corner before, once over the role of Britain in the running of the euro (he lost) and once over the British rebate (he gained a creditable draw). On this occasion he is isolated and will attract maximum odium if, as is likely, he vetoes the tax plan.

The gulf between the sides is big and a mood of compromise is not expected to be in the chilly Helsinki air. Some of Mr Blair's most powerful counterparts, including Germany's Chancellor Gerhard Schroder, are incredulous that the Government should risk so much unpopularity around the capitals of Europe for so little.

Why is the Government so exercised about an issue which hardly affects the man in the street? The proposed legislation aims to prevent EU citizens investing in neighbouring countries to escape paying tax on interest in their own. It would force member states either to levy a tax - probably 20 per cent - on interest paid to EU citizens who are non-resident, or to inform tax authorities in their native country about those earnings.

While in opposition, New Labour made hay with its attack on the "fat cats". Now it argues that this plan is unacceptable because of the risk to London's Eurobond market, for which it has demanded a blanket exemption. Such is the disinformation about the plan (the leader column of the Daily Telegraph claimed bizarrely last week that the revenue from the savings tax would go to the European Commission itself), that it has assumed talismanic proportions in Westminster. Even pro-Europeans now believe that the Government has left itself no room to compromise this week because to do so would open Mr Blair to the charge of permitting a new "Euro-tax".

The reality is rather different. The measures would affect only between 3 and 5 per cent of the Eurobond market; chiefly, residents of other EU countries investing small sums in new bonds. Moreover, the Government would not even need to impose a tax. Instead it has the option of providing the information to the tax authorities of the country of the resident, allowing them to recoup the cash.

Brussels wants to widen the struggle against tax evasion and has grounds to hope that, if the EU could sign up to a package to tackle tax evasion, so could Switzerland, the United States and other financial centres (indeed the Swiss have already indicated a willingness to talk about the issue).

Shorn of rhetoric, the Government's practical argument comes down to one point: the tax will impose a new administrative burden which will drive up costs and force business out of the EU. Ministers have put no figure on this and seem to rely on assurances from the City that, even in the age of the computer, this will still add significantly to costs. A cynic might even conclude that the bond dealers can see little gain in deterring the tax dodgers.

The practical consequences of Britain's refusal to compromise are only now dawning. They could reverberate throughout the EU for many months. First, the move will fuel calls for the abolition of the national veto over tax - putting Mr Blair on the defensive during a round of treaty negotiations next year and giving ammunition to the Euro-sceptics. Second, it will reduce the prospects of agreement on liberalisation of financial services, thereby illustrating the benefits of European co-operation. Third, it is a reminder to the 11 nations within the euro zone that Britain would be an awkward collaborator uninterested in achieving a level playing field on tax if any interests are at stake.

Now for Mr Duisenberg, whose period of stewardship of the single currency has been anything but sure-footed. Since its launch 11 months ago the euro has lost 16 per cent of its value and the bank and Europe's leaders have struggled to co-ordinate a consistent message.

Undoubtedly the euro has suffered from the relative strength of the US dollar and the improvement in the Japanese economy. But does this reflect real weakness in euroland? The 11-nation bloc has low interest rates, controlled inflation and rosy economic prospects as exporters reap the reward of a beneficial exchange rate.

The recovery in France has already taken hold and seems destined to spread. Ten days ago the European Commission's latest economic survey struck an upbeat tone, predicting a big jump in real gross domestic product next year in the 11-nation zone from 2.1 per cent in 1999 to 2.9 per cent in both of the next two years.

Yet in Germany the failings of the currency on the foreign-exchange market have produced nostalgia for the days of the Deutschmark, that potent symbol of post-war recovery. (The irony is that it is Germany's reluctance to complete structural reform which underlines market worries, highlighted by Mr Duisenberg's intervention). Throughout euroland and beyond, confidence is brittle as the currency's slide becomes a powerful symbol of weakness.

Meanwhile, for Britain, a little-noticed date is almost upon us, one with a distinct bearing on our prospects of joining the euro. The UK matches all the necessary criteria for admission bar one: a stable currency. Enshrined in the Maastricht Treaty is a requirement for exchange-rate continuity against the euro for a period of two years. If Mr Blair envisages membership in 2002, the pound's present high rate against the euro is a real and immediate problem; joining at the current rate could provoke a ruinous repeat of Britain's ERM catastrophe.

In Europe, of course, it is often possible to reach a political deal with the help of powerful allies. But after this week Mr Blair may find he has fewer of those than he thinks.