Monday

20th Jan 2020

Sarkozy and Kenny draw swords as eurozone agrees pact in principle

  • Kenny (l) and Sarkozy (r):The discussion was heated, diplomats report (Photo: consilium.europa.eu)

Eurozone leaders meeting in Brussels have agreed on the broad outlines of the document formerly known as the 'Pact for Competitiveness' and subsequently watered down and rebranded a 'Pact for the Euro'. But even as the lines were being firmed up, French President Nicolas Sarkozy and Irish Prime Minister Enda Kenny drew swords over corporate taxation levels.

According to EU diplomats describing the heated exchange, as the Irish leader kept pressing for a reduction in the interest rate charged on the country's international loan, his French counterpart at one point reportedly snapped: "So we're supposed to give up millions and you're not even willing to talk about taxes?"

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Mr Sarkozy wants to see language referring to "distortive taxation rates" in a declaration by EU Council President Herman Van Rompuy following a eurozone summit in the European capital.

Dublin for its part, is looking for a one percent reduction on the 5.8 percent rate that is charged on the EU portion of an €85 billion joint EU-IMF loan. The rate is roughly three points higher than the bloc's borrowing costs, a 'margin' Brussels charges as a punitive measure to dissuade others from requesting a bail-out.

But economists and Irish officials say the rate will make reducing Ireland's debt pile in the years to come impossible.

Ireland also argues that the Dutch and the British only charge an interest rate of 3.2 percent on loans made to Iceland in 2010 following the collapse of the Icesave bank, and the funds are to be paid back over a longer period.

The Icelandic people rejected the harsh terms and interest rate in a referendum, forcing London and the Hague to back down.

France and Germany meanwhile argue that Ireland's low rate of corporate tax acts to make revenues vanish that they feel should otherwise be paid to Paris and Berlin

Even discussion of a common corporate tax base, said Kenny last night, is opening the path to a "harmonisation of taxes through the back door."

"I would be surprised if they weren't fighting," said a representative of a central European power. "Their positions are so far apart."

Beyond the scrap between Ireland and France's leaders, another EU diplomat told EUobserver all the leaders are "Pretty much at each others' throats. Once one leader raises one issue, it sparks an attack from another leader on another issue."

"11 March was always going to be too early for them to reach any consensus."

Elements of euro pact agreed

A fresh, watered-down version of the proposals, renamed a 'pact for the euro', have now however in principle been agreed.

Proposals from commission chief Jose Manuel Barroso and Van Rompuy reworking an earlier Franco-German 'Competitiveness Pact' had contained a laundry list of liberalising demands, including wage restraint across the eurozone; limiting public service spending; constitutional changes limiting government borrowing; raising retirement ages and moving away from labour-based taxation towards consumption-based taxation.

The new euro pact says that a constitutional 'debt brake' is just an example of what can be done; pension adjustments would be optional. 'Adjustment' rather than abolition of wage indexation would now be performed "where necessary".

Earlier demands "to enhance decentralisation in the bargaining process," have since been replaced with slightly more moderate wording that would see reforms to "adjust the wage-setting arrangements, notably the degree of centralisation in the bargaining process."

Leaders have also agreed that there will be a "structured discussion on tax policy" and a common co-ordinated tax base could be among the measures employed to improve the competitiveness of the EU in relation to its leading trade partners.

Countries remain far apart on the flexibility of how EU rescue mechanisms will operate, with no agreement yet on suggestions that both the EFSF and its permanent replacement from 2013, the European Stability Mechanism, be allowed to buy bonds itself as the ECB is currently doing, or let its loans be used for governments to buy debt back on primary or secondary markets, allowing a less disruptive form of restructuring to take place. There is also a proposal that the EFSF and ESM provide credit lines to troubled countries.

There was also no agreement on Friday on an expansion of the effective lending capacity of bail-out funds or on a series of six proposed directives on economic governance first put forward by the European Commission last September.

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