Bloomberg News

Merkel-Cameron Clash on Taxes, EU Exposes Widening Breach

November 25, 2011

(Updates with data on U.K. financial services in ninth paragraph, analyst’s comment in 24th. For more on the region’s debt crisis, see EXT4.)

Nov. 15 (Bloomberg) -- Germany and Britain clashed over taxes and the future shape of the European Union, as the euro- area sovereign debt crisis exposed a widening breach between the U.K. and its partners in the 27-nation bloc.

German Chancellor Angela Merkel won’t let the U.K. “get away” with its refusal to back a financial-transaction tax, a top official in her party said today. Hours earlier, British Prime Minister David Cameron rebuffed Merkel’s call for political union in Europe, dismissing it as “utopian visions.”

The war of words presages a tussle at a Dec. 9 summit to discuss an overhaul of the EU’s guiding treaty to bolster the euro. Cameron, a quarter of whose lawmakers have backed a call for a referendum on continued British EU membership, will meet Merkel in Berlin on Nov. 18 and has pledged to use any changes to the bloc’s rules to claw back powers from Brussels.

“Germany and the U.K. are on a collision course,” Jan Techau, director of the Brussels-based European center of the Carnegie Endowment for International Peace, said in a phone interview. “The clashes we see now about deepening ties in the EU have always been there, but the crisis makes them more visible. Now it’s crunch time.”

Financial Center

Germany has been at the forefront of calls for a European transaction tax, a levy Cameron is only willing to countenance if the U.S. and Asian nations join in to prevent financial services from deserting London’s financial center. The European Commission has proposed a plan that it says would raise 57 billion euros ($77 billion) a year.

“I can understand that the British don’t want that when they generate almost 30 percent of their gross domestic product from financial-market business in the City of London,” Volker Kauder, the parliamentary leader of the Christian Democratic Union, said in a speech to the party congress in Leipzig. “But Britain also carries responsibility for making Europe a success. Only being after their own benefit and refusing to contribute is not the message we’re letting the British get away with.”

U.K. Chancellor of the Exchequer George Osborne criticized the proposal as “a bullet aimed at the heart of London” in an article in yesterday’s Evening Standard newspaper.

‘Cheese Tax’

“In all the figures that we bandy around about the financial-transactions tax, it is worth bearing in mind the fact that around 80 percent of it would be raised from businesses in the United Kingdom,” Cameron told the House of Commons Nov. 7. “I am sometimes tempted to ask the French whether they would like a cheese tax.”

Finance and insurance services account for 8.9 percent of U.K. GDP, according to the Office for National Statistics in London. The broader category of business and finance makes up 29.1 percent of the economy.

While Austria and Belgium would support a levy that covers only the 17-nation euro region, Italy, Luxembourg and Ireland may oppose the tax without other countries participating. The commission proposal needs approval from all 27 EU members.

Speaking in London last night, Cameron laid out his opposition to German ideas, hours after Merkel had told the CDU conference that it’s time to push for closer political ties and tighter budget rules.

“We should look skeptically at grand plans and utopian visions; we’ve a right to ask what the European Union should and shouldn’t do,” Cameron said. Europe should be “outward- looking, with its eyes to the world, not gazing inwards” and should have “the flexibility of a network, not the rigidity of a bloc,” he said.

‘Ebb Back’

The EU should be an alliance “that understands and values national identity and sees the diversity of Europe’s nations as a source of strength,” the premier said. “Change brings opportunities: An opportunity to begin to refashion the EU so it better serves this nation’s interests and the interests of its other 26 nations too; an opportunity, in Britain’s case, for powers to ebb back instead of flow away.”

Merkel’s address marked an escalation in her rhetoric as the debt crisis that began in Greece in October 2009 sent Italian and Spanish borrowing costs to euro-era records last week and roiled French markets.

“The task of our generation now is to complete the economic and currency union in Europe and, step by step, create a political union,” Merkel said. “It’s time for a breakthrough to a new Europe.”

Resistance to Monti

The euro weakened further today as the cost of insuring French bonds climbed to a record, Spanish yields rose at an auction and Italian Prime Minister-designate Mario Monti faced political resistance in forming a Cabinet.

The single currency depreciated 0.6 percent to $1.3558 at 1:42 p.m. in London. European stocks retreated for a second day, with the Stoxx Europe 600 Index sinking 1.4 percent.

Dutch Prime Minister Mark Rutte, visiting London today, said the debate over the EU’s future was exacerbating divisions and deflecting attention from the fiscal crisis.

“My worry is that we have the 17 looking inward, that we have the U.K. and Poland, all the nations focused on growth and jobs, outside,” Rutte told a news conference. “All this institutional debate is taking energy away from what should be our main focus: getting growth going.” He said any treaty change should be “very limited.”

Europe’s economic expansion failed to accelerate in the third quarter. GDP increased 0.2 percent from the previous three months, when it rose at the same pace, the EU’s statistics office in Luxembourg said today.

Referendum Defiance

More than 80 Conservative Party lawmakers defied the Cabinet last month and voted for a referendum on British membership of the EU, underlining the pressure on Cameron to oppose further integration. Instead, the government has pledged a popular vote on any treaty changes that hand further powers to the bloc.

Cameron is performing a “plate-spinning act” as he tries “to convince the skeptics in his own party that he’s one of them, at the same time as keeping the Lib Dems on board and persuading his European ‘partners’ that he can do more than simply lecture them from the sidelines,” said Tim Bale, a professor of politics at the University of Sussex.

“Cameron’s only hope -- possibly a forlorn one -- is that this crisis doesn’t go on forever,” Bale said in an interview. “Otherwise, sooner or later, those spinning plates are going to come crashing down.”

‘Speaking German’

EU governments are increasingly backing Germany’s views, Kauder said.

“Now all of a sudden, Europe is speaking German,” he said. “Not as a language, but in its acceptance of the instruments for which Angela Merkel has fought so hard, and with success in the end.”

While the leaders of France and other euro countries refused to even consider debt brakes in their constitutions when Merkel first pushed for it, French President Nicolas Sarkozy is now referring to it as the “golden rule” everyone in Europe has to live by, the CDU parliamentary leader said.

“The French are grinding their teeth but will follow her along with Poland and a number of other eastern European member states,” Techau of the Carnegie Endowment said. “The sheer weight of Germany is pushing everything to the side.”

--With assistance from Robert Hutton and Thomas Penny in London and Brian Parkin and Tony Czuczka in Leipzig, Germany. Editors: Eddie Buckle, Andrew Atkinson

To contact the reporters on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net; Leon Mangasarian in Berlin at lmangasarian@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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