Future in Mind, E.U. Plans for Less Unanimity

01/02/2012 21:21

NYT:  BRUSSELS — For decades, any European Union nation could block proposed laws in the most sensitive policy areas, like taxation, consigning them to the scrap heap if they encroached too much on its power.

But, as the union expands, the notion of universal consent is seen as increasingly unworkable and could be starting to break down. Legislators here are devising new approaches that will enable smaller groups of countries to adopt laws among themselves — without the threat of a veto if all 27 member nations fail to agree.

The move toward smaller groupings reflects a growing fragmentation of the European Union and has been developing for some time. But it took on added significance after a spectacular dispute at the European summit meeting in December, when Prime Minister David Cameron failed to achieve new safeguards from European Union laws for Britain’s financial-services sector. In retaliation, he blocked a proposed treaty change aimed at helping to strengthen the euro.

Under current rules, groups of at least nine nations may go ahead with legislation if an agreement has stalled. However, they can do so only after all 27 countries have been through the time-consuming process of trying and failing to agree. So far, that has happened in only two cases, but others in which this principle may apply are working their way slowly through the system.

Most prominent are two pieces of draft tax legislation that have been drawn up in a way that ensures that they could work without the cooperation of the British if necessary. Moreover, they seem designed to operate in a way that could prevent Britain from gaining a big competitive advantage from staying outside the plan and undercutting other nations that adopt it.

The most sensitive proposal involves a financial transaction tax, which has been proposed by the European Commission and could raise about $74 billion a year, starting in 2014. Under the plan, the tax would be levied at a rate of one-tenth of 1 percent on all transactions between institutions. Derivatives contracts would be taxed at the rate of one-hundredth of 1 percent.

French and German policy makers see this as a “Robin Hood tax,” a way of discouraging speculative transactions and raising cash from the bankers who provoked the financial crisis.

Financial analysts say that it was Britain’s concern over this impending legislation — and the potential damage it could do to its banking industry — that was at least partly responsible for its unyielding stance at the December meeting. British leaders feared that in the absence of global regulations, banks would simply relocate from London to New York, Singapore or other lower-tax domains. The British government points out that even a study by the European Commission, the executive arm of the European Union, suggests that the tax could reduce European gross domestic product by 1.76 percent.

Under the proposed legislation, a British veto would no longer prevent nine or more nations that wanted to go ahead from doing so. In principle, this would allow Britain to continue as a partial tax haven. But a clause in the law would require banks in the smaller group of nations to pay the tax on some transactions, even if they operate in the City of London.

Similarly, moves to harmonize the base on which corporate taxes are assessed in Europe could work among a smaller number of nations even if Britain did not take part. Large corporations operating across borders would be able to opt for a unified tax system in the countries that sign up for the plan. That would simplify tax issues for companies operating in the participating nations and might even tempt some to relocate to them at the expense of Britain, which is likely to stay out.

“Obviously, these proposals are both on the table for 27 member states, and we would like to see them agreed by the 27,” said Emer Traynor, spokeswoman on taxation for the European Commission. “However, if that is not possible, these proposals are also workable if done by a smaller group. It is still completely feasible for a smaller group of member states to go ahead with them and deliver big benefits.”

Despite Britain’s December veto of the treaty change on the euro, no additional protection for financial services was secured by the British. Neither of the two tax plans have yet been discussed fully by the 27 member nations, and smaller groups of countries could not contemplate forging ahead unless they were rejected.

The new way of designing laws is not always aimed against Britain. The British have, in fact, joined one plan, which aims to build a European system for patent protection. But the shift in the way the union is legislating is significant because it changes the rules of the game.

Some European officials argue that Britain, which has long promoted the idea of a more variable model of European integration, with countries free to pick and choose the degree of cooperation, is now experiencing the downside. Laws are being drafted in the knowledge that Britain may not take part and so are designed to prevent it from reaping a competitive advantage by staying out.


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