Eurozone reform makes timid entry into EU debate

Paris – More than 15 years after the European Union launched the euro, many of the 19 countries using the single currency feel it is time to give the eurozone an overhaul.

An improving economy is an opportune moment to beef up the euro’s protections against shocks, they say, not long after the currency survived a financial crisis that brought Greece to the brink of an eurozone exit and raised questions about the single currency area’s cohesion and solidarity towards its weakest members.

Continent-wide scepticism about the effects of globalisation and the temptation for governments to go it alone are also undermining confidence in the currency.

Britain’s vote to leave the EU is proof that voters can very well opt out of their membership if they feel that Europe is no longer a satisfying arrangement for them.

French President Emmanuel Macron, who wants to spearhead a move towards a fresh project for the 28-member EU as well as the eurozone, has been talking for months about his wish to strengthen solidarity in the EU, notably via the creation of a eurozone budget.

“What is at stake for us at the heart of the eurozone is how to turn this zone into an economic power that can compete with China and the United States, and that is how we will solve what have failed to do for the past 10 years: to create jobs,” Macron said in September.

– Debate often tense –

The eurozone’s gross domestic product (GDP), at $11,934 billion, is comparable to that of China, but well below that of the United States with $18,624 billion, according to World Bank data.

The debate on eurozone reform is often tense between members.

Countries in the eurozone’s north, such as the Netherlands and powerhouse Germany, have great reservations about sharing their wealth with states further south, including France, Italy and Spain whose fiscal policy they judge to be too lax.

They would rather focus on more technical reforms aimed at ensuring better compliance with the stability pact which calls for a deficit below three percent of GDP and sovereign debt below 60 percent of GDP. That way, they hope, they will avoid any repetition of the financial crises seen at the beginning of the decade.

The EU Commission has been trying to find a compromise, suggesting on December 6 a package of measures, notably including the creation of a European monetary fund, and of a eurozone finance minister.

At the end of a EU summit on December 15, German Chancellor Angela Merkel seemed open to discussing the French president’s proposals.

“We will find a common position because it is necessary for Europe,” Merkel said at a news briefing, speaking alongside Macron after a summit focused mostly on Brexit.

– A eurozone budget? –

France’s Macron has been pushing for a sizeable eurozone budget which he says should represent “several points of GDP” generated in the area.

The budget could be fed by “European taxes in the digital or environmental areas”, and one day perhaps by contributions from harmonised corporate taxes.

In November, a number of finance ministers came out in favour of a budget used as a stabilising instrument in case of asymmetrical shocks — which affect one member country but not the others, such as catastrophic flooding.

But EU Commission chief Jean-Claude Juncker said a large budgetary line within the EU budget would be better suited to such a task.

Much depends on the German position, which in turn will be a function of the composition of Merkel’s future coalition which is still under discussion following an inconclusive September election.

Germany’s Social Democrats back Macron’s ideas for a eurozone budget and finance minister.

Merkel’s own Christian Democrats, meanwhile, don’t rule out the idea of a eurozone budget, but are waiting for details on its financing and exact purpose.

Merkel is also open to the finance minister idea, but she would see such a minister primarily as the guardian of deficit and debt discipline.

– European monetary fund –

After the International Monetary Fund’s perceived heel-dragging over the Greek debt crisis eurozone countries, including Germany, have come around to the idea of solving similar problems alone in the future with the help of a  European monetary fund.

Such a fund would take over from, and expand on, the European Stability Mechanism (ESM) which was created in 2012 after the eurozone debt crisis.

Financed by governments, it could act instead of the IMF in future aid programmes for countries in trouble.

Presenting a blueprint for such a fund on December 6, the EU Commission said it should be a an EU body and answerable to the European Parliament.

But Germany, the biggest contributor to the ESM, worries that Berlin may have less influence over a new fund because its voting power would be diluted.

The fund could also play a role in stabilising banks in difficulty when banking union measures prove to be inadequate.

The banking union is, of all the eurozone projects, the one closest to becoming a reality.

The idea is to make eurozone banks more solid and prevent taxpayer money from being used to save failing banks like during the crisis.

Two of the three elements of the banking union are already in place: banking supervision and help from the financial sector itself in the event of any bank slipping into crisis.

But the final measure, a European guarantee for deposits, is proving more difficult to push through.

After tabling a first project in November 2015, the EU Commission last October presented a less ambitious version in the hope of winning over reticent Germany which is, as always, worried that its savers would have to cough up for badly-managed southern banks.

– Tax competition –

There are other reform plans on the table, deemed to be crucial for EU cohesion, including the thorny topic of tax harmonisation which concerns all 28 EU members.

The debate focuses on corporate tax at a time when economists and politicians became increasingly aware of the devastating effect of fiscal competition in a union where capital, goods and people move around freely.

Between 1995 and 2016 the average basic tax rate on companies in the EU fell by 14 points, or 33 percent, according to a study by L’Observatoire des politiques economiques en Europe at the University of Strasbourg.

Especially in the crosshairs are the four American digital giants Google, Apple, Facebook and Amazon.

These behemoths have concentrated their results accounting in subsidiaries based in low-tax countries like Ireland and Luxembourg, although the bulk of their sales are generated in other EU countries.

According to the EU Commission, they have managed to bring their real tax rate to nine percent on average, compared to more than 20 percent usually applied to companies.

The impact of tax competition is also making itself felt in the bricks-and-mortar economy, as shown by an investigation launched in December by Brussels into Ikea’s tax regime.

The Commission said it was taking a closer look at the ways Ikea allegedly used a Dutch subsidiary to slash its tax bill on revenue from megastores around the world.

Coffee chain Starbucks and automaker Fiat have also been probed in the Netherlands and Luxembourg, respectively.

In October 2016, the Commission relaunched a project aimed at finding common rules for profit calculation.

The system, which would be mandatory for companies with sales over 750 million euros ($890 million), would still allow governments to fix their own tax rate, but all EU members would agree on harmonised accounting rules for earnings.

There would be a single jurisdiction for tax payments, and revenue would then be divided up between member states according to a company’s sales in each country, rather than according to profits booked at subsidiaries.

The project has yet to be approved by member countries and the European Parliament, but observers already foresee a rocky ride, as all tax decisions require unanimous approval by all 28 member states.

By Vanessa Carronnier and Laurent Barthelemy