ANALYSIS: The negative market reaction was the likely response to few new ideas and lots of filler

BY YESTERDAY morning in Berlin, Tuesday evening’s Paris proposals had a definite whiff of August about them.

In the mid-summer news drought, talk harmonising corporate tax rates stirred sleeping dogs in Dublin and exposed a Franco-German dilemma: how to talk down proposals to avoid accusations of a Paris-Berlin stitch-up while talking up the same proposals to try and calm financial markets?

Distracting traders by throwing them a bone was the real purpose of the meeting, providing a political bridge until parliaments pass July 21st summit findings to beef up the EFSF rescue fund.

The negative market reaction was the unsurprising response to the few new ideas and quite a bit of filler, as outlined in a letter to European Council president Herman Van Rompuy.

The most intriguing idea, for “real euro zone governance”, would bring together euro zone heads of state at least twice a year for talks.

These meetings would monitor euro zone economic and competitiveness data “to prevent the creation of imbalances” using new, unspecified “analysis capacities” that would operate in addition to existing oversight tools used by the bailout troika of ECB, commission and IMF.

The leaders reiterate the “Euro Plus” pact obligations to ensure balanced budgets in the near future, backed up with the added guarantee of a constitutional limitation of debt. If that is not possible an acceptable alternative, Berlin officials said, would be a law passed by a two-thirds parliamentary majority to put it beyond the reach of party politics.

The Franco-German proposals envisage a greater role for the European Commission in deciding how EU structural and cohesion funds are spent in recipient countries, with new powers to intervene in how funds are being used – even halting payments entirely – if competitiveness and growth goals are not prioritised.

Besides that the Franco-German “governance” proposals appear to sideline the commission. It has been less than enthused by the proposal for a financial transaction tax, reiterated in Paris. After complaints by member states that the commission was dragging its heels on the legislation, the Brussels body proposed that it could retain the tax for the EU budget, something dismissed in most EU capitals.

Officials in Paris an Berlin said they raised the financial transaction tax more to keep it on the EU agenda rather than unsettle financial markets.

The two leaders conclude their letter with a series of bilateral promises of no binding character.

They vow, at a bilateral level, to co-ordinate economic and budgetary policy, and have asked their finance ministers to come up with a plan to harmonise “from 2013” their “enterprise tax base and rates”. This is an umbrella term covering all fiscal burdens on businesses that includes corporation tax.

These bilateral tax talks would take place parallel to ongoing EU discussions for a common corporate tax base – a debate that stirs varied levels of enthusiasm in the union.

German finance ministry spokesman Martin Kotthaus said the Franco-German letter was an “appeal for countries to sign up with enthusiasm and take a step forward” towards tax harmonisation.

Chancellor Angela Merkel’s spokesman Steffen Seibert said the Franco-German proposals, if implemented, would create a new quality of “mutual commitment” among euro zone members.

He denied it would mark the emergence of a two-speed Europe if some countries agreed to back the Franco-German proposals and others declined. “Everything proposed is about stabilising the EU as a whole and moving on the EU as an entirety.”

Off the record officials were more sober about Tuesday’s endeavour. In Paris officials close to President Nicolas Sarkozy admitted the implementation of their own debt brake was far from certain. In Berlin officials conceded the purpose of Tuesday’s papers was to make no new proposals.

“For us there’s not much room to manoeuvre politically any more,” said a senior Berlin source.

“It would be a very bad idea to come up with more new ideas before the last new ideas are even voted on.”