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?

Share
Related Topics
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.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Senior Risk Manager - Banking - London - £650

£600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

Commercial Litigation Associate

Highly Attractive Package: Austen Lloyd: CITY - COMMERCIAL LITIGATION - GLOBAL...

Systems Manager - Dynamics AX

£65000 - £75000 per annum + Benefits: Progressive Recruitment: The client is a...

Service Delivery Manager (Software Development, Testing)

£40000 - £45000 per annum: Ashdown Group: A well-established software house ba...

Day In a Page

Read Next
The economy expanded by 0.8 per cent in the second quarter of 2014  

British economy: Government hails the latest GDP figures, but there is still room for skepticism over this 'glorious recovery'

Ben Chu
Comedy queen: Miranda Hart has said that she is excited about working on the new film  

There is no such thing as a middle-class laugh

David Lister
Evan Davis: The BBC’s wolf in sheep’s clothing to take over at Newsnight

The BBC’s wolf in sheep’s clothing

What will Evan Davis be like on Newsnight?
Finding the names for America’s shame: What happens to the immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert?

Finding the names for America’s shame

The immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert
Inside a church for Born Again Christians: Speaking to God in a Manchester multiplex

Inside a church for Born Again Christians

As Britain's Anglican church struggles to establish its modern identity, one branch of Christianity is booming
Rihanna, Kim Kardashian and me: How Olivier Rousteing is revitalising the house of Balmain

Olivier Rousteing is revitalising the house of Balmain

Parisian couturier Pierre Balmain made his name dressing the mid-century jet set. Today, Olivier Rousteing – heir to the house Pierre built – is celebrating their 21st-century equivalents. The result? Nothing short of Balmania
Cancer, cardiac arrest, HIV and homelessness - and he's only 39

Incredible survival story of David Tovey

Tovey went from cooking for the Queen to rifling through bins for his supper. His is a startling story of endurance against the odds – and of a social safety net failing at every turn
Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little