The threatening morphing pact

The future of the euro is still in the balance. The euro was a bold and ambitious project from the very start. It defied conventional economic thinking (and history), which held that a currency union involving a number of countries will survive only if there is monetary and fiscal convergence. The Maastricht criteria were intended to create a loose framework within which fiscal discipline could be enforced.

Ten years of success helped the euro establish itself as a global currency. It even started to challenge the supremacy of the US dollar. Success bred a spirit of nonchalance and too many compromises were made in enforcing the Maastricht criteria. Then, the monetary tsunami struck and the eurozone was caught unprepared. Europe’s flagship started to flounder; the euro is fast becoming a symbol of divisiveness rather than European unity. The big divide is between the disciplined, steadily-growing north and the debt-ridden, stagnant south.

The euro crisis is forcing the EU to shape up into a greater Germany. Economically, this is no bad thing. Mediterranean culture is the biggest obstacle. Culture pervades throughout political, social and economic systems. Berlin has little choice. It is caught between protecting German taxpayers and bailing out spendthrift eurozone partners. (In reality, the German dilemma is also about saving the hefty investments by its banks in the southern countries). The German electorate is not happy with this situation. In the recent regional elections, Angela Merkel’s CDU lost Baden-Wurttemberg after 60 years of rule.

Chancellor Merkel realised that the European Financial Stability Facility set up last year had insufficient funds to placate the market. She proposed the setting up, as from 2013, of a permanent European Stability Mechanism, which will enjoy a triple-A status and have a lending capacity of €500 billion. The price she asked for providing about a third of the required funds was that the eurozone agrees to a “Competitiveness Pact”.

This was a bit of an anomaly given that Brussels, with its Europe 2020 programme and all that, was already meant to be fully committed to a competitive Europe. Co-authored with the French, the pact was presented at the February EU summit. Its objectives included abolishing wage indexation, raising pension ages, creating a common base for corporate tax, legislating national debt limits and promoting further labour flexibility. Many interpreted this Franco-German initiative as an attempt to create a euro-union within the European Union. The proposed pact generally met with stiff resistance by leaders of the euro-countries.

Then José Manuel Barroso and Herman Van Rompuy moved in. They watered-down the proposal, brought it in line with other EU initiatives and renamed it the “Pact for the euro”. The Commission will be responsible for overseeing the pact and to ensure that countries do not resort to “creative accounting” and fiddling with the books. The March EU summit failed to take a final decision on the proposed pact. This has now been postponed for the June summit. Still, it appears that a broad consensus has been reached. Rebranded the “Euro Plus Pact” (what’s in a name?), membership in the scheme was offered also to non-eurozone EU members. Four countries (the UK, Sweden, Hungary and the Czech Republic) decided to stay out.

Little of all this reached the Maltese public. Our media’s attention was focused elsewhere. The Brussels correspondent of The Times commented that “Malta has committed itself to tough reforms on taxation, pensions and budgets in the coming years” (The Sunday Times, March13). Subsequently, it was reported that the deal would save Malta €16 million over five years. Still, we will have to pay (borrow) a further €56 million and, according to our Prime Minister, “percentagewise Malta was shouldering the same financial burden... as Germany” (The Times, April 5). Malta already has a problem to reduce the national debt so as to comply with the Maastricht criteria.

Perhaps even more critical for Malta is the pact’s insisting on a common consolidated corporate tax base (CCCTB). At present, taxation within the EU is a sort of Pandora’s box. Officially, Ireland has the lowest corporate tax rate (12.5 per cent) but practically every member state offers a range of incentives and exemptions that lowers the effective rate paid. The CCCTB is meant to reduce administrative procedures and compliance costs for companies operating across the EU. In itself, it is a good thing and is essential for the future of the euro.

The CCCTB is bad news for Malta. Over the years, we have achieved competitive advantage by skilfully manipulating our tax systems. This has enabled us to attract significant amounts of foreign investment in manufacturing, ship registration, financial services and i-gaming. The EU insists that the CCCTB does not equate to tax harmonisation. However, as newly-elected Taoiseach Enda Kenny pointed out, the CCCTB can be the back door to tax harmonisation.

Up to now, Malta, together with a few other countries, has been resisting the CCCTB. Tax harmonisation would induce many of our existing foreign investors to go elsewhere. The morphing pact could turn out to be a major threat to our economy.

We have become too dependent on tax advantages to compensate for our other economic shortcomings. And, yet, with no pact, the future of the euro is seriously jeopardised.

fms18@onvol.net