EU nearing 'competitiveness pact' agreement but divided over tax plans

 

EU DIPLOMATS are moving towards agreement on the text of a new “competitiveness pact” ahead of a key euro zone summit on Friday but they remain divided over tax co-ordination plans.

The debate is central to Ireland’s campaign to protect its contested corporate tax regime, a crucial challenge for incoming taoiseach Enda Kenny and his ministers.

The proposed pact, a demand of German chancellor Angela Merkel, has emerged as a crucial strand of a wider debate on reforms to the euro zone bailout fund.

After talks yesterday to prepare the ground for the summit, the main open question surrounds tax. The key point of difference is a proposed common consolidated corporate tax base (CCCTB) but this is not the only one, it is understood.

Dr Merkel’s original proposal, backed by French president Nicolas Sarkozy, met a storm of resistance from other EU leaders when she presented it to a European summit last month.

Many elements of the plan were toned down when European Council president Herman Van Rompuy and EU Commission chief José Manuel Barroso presented a joint compromise proposal to member states last week.

However, their paper took note of imminent legislation from the commission to create a CCCTB in the EU. Ireland has long resisted this initiative, but it is seen as less of a threat than the minimum corporate tax rate which Mr Sarkozy had pursued.

The commission will publish legislation to establish a CCCTB next week and it has indicated its intention to invoke an “enhanced co-operation” procedure under which countries that favour a set of measures can introduce common EU rules to apply only to them. This could put non-participants at a disadvantage.

Difficult talks on bailout fund reforms take place against the backdrop of pressure on euro zone interest rates due to the rising price of oil. European Central Bank chief Jean-Claude Trichet has played down suggestions that a series of rate increases is on the cards as the bank mulls its first rise for almost three years.

However, Germany’s outgoing Bundesbank chief Axel Weber said yesterday the ECB has embarked on a “normalisation” of rates and gave credence to market expectations of a cumulative 0.75 per cent rise this year from the current record low of 1 per cent.

Mr Weber was quoted by Bloomberg News saying, “I wouldn’t do anything here to try to correct market expectations at this point” when asked about investors pricing in an increase in the benchmark rate to 1.75 per cent by the end the year.

The ECB wanted to bring forward market expectations, he said. “I see no reason at this stage to signal any dissent with how markets priced future policies,” he said.

Mr Weber said inflation may be “more sustained and more fundamental” than the ECB’s own latest projections suggest. “There are a number of fundamentals in emerging markets, a number of effects which worsen the medium to long-term inflation outlook,” he said. “This has to be countered in a timely way. I do see considerable future price pressures.”

Oil has approached $120 per barrel since political unrest broke out in Libya. While saying forward energy markets point to oil at $100 per barrel, Mr Weber said he did not fully subscribe to that relatively optimistic view. “There’s a genuine underlying price pressure for energy and food. I think the ECB has done the right thing: they’ve sent a clear signal that we’re not going to tolerate inflation above our target and I think the market got that signal.”