Europe scare stories will run and run

AS GORDON Brown began his Brussels press conference yesterday, the lights flickered and the Chancellor of the Exchequer stumbled before reaching the podium. "Thank goodness there were no cameras", said Mr Brown. It was one of the Chancellor's few strokes of luck on the day New Labour's high-profile love-in with Europe's new socialist leaders developed into another presentational nightmare.

Just yards from where Mr Brown was speaking, the new German Finance Minister, Oskar Lafontaine, was busy making an incendiary call for Britain to give up its veto on tax policy. His French counterpart, Dominique Strauss-Kahn, asked within hours if he backed Mr Lafontaine's ideas, responded with one word: "Absolutely." All of this left Mr Brown facing a familiar British political problem - the Euro-sceptic media backlash.

It is difficult to believe that, only 10 days ago, some were trumpeting a new dawn of harmony between Britain and the new socialist consensus in Europe, with Mr Brown wooing his new allies.

Like all the best courtships it began with a gourmet dinner - in this case, the location was the Swissotel, in the heart of Brussels.

With Gordon Brown, the Chancellor, seated next to MrLafontaine, the festivities began. The ministers tucked into quail mousse with pine nuts, guinea fowl with chicory, followed by ice-cream. But throughout the dinner, Mr Brown and Mr Lafontaine set the tone for what was to follow by disagreeing consistently.

The issue under discussion was a paper prepared for the socialist group of finance ministers, which proposed the harmonisation of corporate tax rates. Mr Brown did not concur.

But at a finance ministers' meeting in Brussels the nextday, Mr Lafontaine backed the proposal, setting the stage for a new offensive by Euro- sceptic politicians and media.

The Daily Mail seized on the issue and ran with it day in and day out. The Sun joined in and questioned whether Mr Lafontaine was the "most dangerous man in Europe" - printing its suggestion in German for good measure.

Throughout a torrid 10 days, different European tax measures were thrown into the media pot. At the top of the list was the Lafontaine suggestion of harmonisation of business taxes - an idea that could spell the end of Britain's status as a haven for inward investors.

But suggestions included an end to Britain's current zero rating on VAT for children's clothes, books and newspapers (despite the lack of any proposal to that effect) and to tax breaks for the British film industry.

And there were even reports that income tax itself might be harmonised. Underlying it all was the implicit suggestion that the tax harmonisation would inevitably accompany any British decision to join the European single currency. Although several stories bore only the slightest approximation to reality, collectively they forced a shift to a more sceptical tone from a government which had been seeking a new relationship with Europe.

Mr Brown's most clear-cut problems stem from formal European Commission proposals. These include a measure to reduce "harmful" tax competition through a voluntary code of conduct, work on which is being chaired by a British Treasury minister, Dawn Primarolo. This seemed uncontroversial enough until presented by some newspapers as a harmonisation threat.

Mr Brown now argues that one British measure highlighted in Ms Primarolo's report, tax breaks for the film industry, is defensible and need not be sacrificed.

More problematic is a proposal for a withholding tax on savings, designed to combat the problem caused by the ability of investors to avoid tax on interest payments by investing in foreign countries.

Until this week, British opposition to the measure, which the UK can veto, was based on the fact that it would harm London's lucrative Eurobond market by requiring a 20 per cent deduction on interest payments across the board. That, the City of London argues, would drive the Eurobond trade out of London, threatening as many as 11,000 jobs.

In the new media climate, Britain has hardened its opposition, attacking the measure in principle because it fails to address the "real" problem - namely banking secrecy in Germany and Luxembourg. Both these measures are on the agenda and they cannot be avoided indefinitely.

Next summer at the latest, Mr Brown will have to choose between wielding the veto and losing influence in Brussels, or backing down and fuelling the Eurosceptic frenzy.

Then there is the broader push for business tax harmonisation. The European Commission has opted not to embrace further proposals partly because it knows that, with different tax bases in each of the 15 EU nations, even comparing regimes is problematic. In any event, Britain could veto any new package. But Mr Lafontaine, whose experience in regional government has inspired a hatred of tax "dumping", seems to be determined to keep up the political pressure.

Finance ministers have now called for a study of the business tax regimes in all of the 15 states as a basis for future work. Yesterday, Mr Lafontaine went further, calling for harmonisation of the threshold, the base and the rates of corporate tax, and will pursue the issue with the socialist group of finance ministers. They will try to agree a position ahead of next year's Euro elections, again presenting Mr Brown with an impossible dilemma.

If Mr Brown blocks this, he will pay a political price with socialist colleagues; if he agrees, the Eurosceptic press will revolt. Little wonder that the Chancellor's entourage dislikes its outings to Brussels.

Mayor's warning, page 8