ECOFIN: Protecting bankers and tax-evaders

ECOFIN Council of 10/12/2013. From left to right, in the foreground, Wolfgang Schauble, Federal Minister for Finance of Germany, Jutta Pauliina Urpilainen, Minister for Finance of Finland and Pierre Moscovici Minister for Finance of France. (The Council of the European Union).

ECOFIN Council of 10/12/2013. From left to right, in the foreground, Wolfgang Schauble, Federal Minister for Finance of Germany, Jutta Pauliina Urpilainen, Minister for Finance of Finland and Pierre Moscovici Minister for Finance of France. (The Council of the European Union).

It is customary for the European Union, when the club cannot arrive at a decision acceptable by everybody, the outcome is a distorted compromise. Of course, the burning issue of the resolution of failing banks could not depart from this rule yesterday at the ECOFIN Council, with the 28 ministers of Finance discussing this issue well into yesterday’s night. At the end they didn’t manage to conclude an agreement and the Council will convene again next Wednesday with only this issue on the agenda.

Earlier in the day the 28 ministers proved also unable to agree on effective measures to curb tax evasion within the EU. It was such a disappointment for every taxpaying worker in the union, that even the responsible Commissioner accused the ministers that they are all words and do nothing. Algirdas Šemeta, Commissioner responsible for Taxation and Customs Union, Statistics, Audit and Anti-fraud, exclaimed like that, “But for real results, words are not enough. They must be turned into action. So, for the sake of fair and efficient taxation, 2014 must be the year of delivery”.

Ministers protecting tax-evasion?

A few minutes before that the Commissioner told them that their unwillingness to agree on effective anti-tax evasion measures cannot be explained. He said, “Today, we heard many Member States profess a willingness to lead the way in implementing this new global standard (for fair taxation of interest incomes on deposits). They want to keep Europe at the international forefront when it comes to good governance. Therefore, it is not just disappointing that we could not agree on the Savings Directive today – it is incomprehensible”.

In a free translation, what Šemeta told the ministers is tantamount to accusing them of openly protecting the tax evaders in their countries. He even became ironic when he told them that, “Today, we heard many Member States profess a willingness” to curb tax evasion. The end result was that those same ministers, when the moment of truth came, they backed off from taking any concrete measures. This is really a devastating fact for the millions of hard working Europeans, who out of meagre remuneration dully pay their taxes and social insurance contributions.

The European Sting has repeatedly accused the European political elites of nurturing tax evasion. Last September, the Commission pubpaylished a study showing that VAT evasion reaches the astronomical amount of €196 billion every year. Yet no European leader did anything to stop that. On that occasion the Sting writer Suzan A. Kane wrote on 20 September, “In any case this study gives us a good base to estimate the dimensions of corruption and the degree of tolerance that the political elites in some countries show to tax evasion and fraud. The Commission by not telling the whole truth about all that is actually susceptible in sharing the accusation of tolerating corruption and fraud in tax and customs administrations of certain member states”.

Commissioner accusing ministers

However, this time this EU Commissioner didn’t chew his words. He accused directly some ministers as tax evader’s champions. He also reminded them that those anti-tax-evasion proposals are on the table many years now but no measures are taken. He told the 28 government ministers “By now, I’ve said all that there is to be said on this topic. After all, this file has been on the table since before I took office”.

Protecting the banks

But it’s not only tax evaders that the ministers of Finance decisively protected yesterday. They also protected the fraudulent bankers of their countries, by fighting to water down the European Banking Union. Germany and its close allies reject for many months now the idea of a common responsibility, while resolving a failing Eurozone bank. They propose instead the solution followed in the case of Cyprus, where the EU support was restricted to lending the money to the Republic and then the Cypriot state paid the price to resolve the banks.

However, what if the amounts needed to resolve a bank surpass the ability of a given member state to borrow? Between 2008 and October 2012,the European Commission approved €5085.95 billion (equivalent to 40.3% of EU GDP) of state aid measures (including guarantees) to financial institutions. Ireland and Spain paid this dear price.

If the responsibility to counter the problem of bank failures doesn’t have a central character, with at least a sizeable part of the cost being covered in common by all member states, then there won’t be a real banking union. The reason is very simply that if every country is held solely responsible for its banks, then the financial fragmentation of Eurozone will become standard feature. Probably this is what Germany wants.

Berlin to keep the prerogatrive

Of course mutualising the financial responsibilities may sound as if the banking union is a method to sidestep the moral issue. In a money-zone though is not like that. No country can go to the money printing press and start printing money and give it to its banks. There exists also the reverse case, when the banks borrow and lend the money to the government and then both may go bankrupt. Would it be fair for the taxpayers of another country to save them both?

Of course the right answer is negative. But today this financial sort-circuit (as it happened in Greece) cannot be repeated, because the European Central Bank will be auditing all the major banks of the Eurozone. Understandably this supervision will be constant and no bank will be able to expose itself to risks that cannot support with its own capital.

It’s not the moral risk then that makes Germany to oppose a strong and close banking union. Not to forget that it was the German and the French banks which lent billions to Greece all along the previous decade. Clearly Germany is now fighting to protect its prerogative to borrow at lower, cheaper interest rates than anybody else in the Eurozone. This cannot be accepted and the outcome will be a distorted compromise, taking care only of the banks.

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Comments

  1. Great article! Simple yet all substance.

  2. There’s definately a lot to learn about this topic.
    I like all the points you have made.

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