Poland Pays for French, German Sins

On Monday there was a meeting in Warsaw of the finance ministers of the so-called “Weimar Troika,” i.e. Germany (Hans Eichel), France (Nicholas Sarkozy), and Poland (Andrzej Raczko). The result was basically bad news for Poland; as the title of an article on the meeting in Rzeczpospolita by Jedrzej Bielecki puts it, Poland Will Pay for the Difficulties of France and Germany.

This meeting occurred just before yesterday’s ruling by the European Court of Justice that EU finance ministers acted contrary to EU law when they suspended action against Germany and France for violating, for the third year in a row, the provision of the euro-zone’s Growth and Stability Pact that forbids government budget deficits higher than 3% of GDP. That ECJ judgment is still not expected to lead to those countries actually being subject to the heavy fines that are supposed to result from violating the Pact. (Anyway, that admittedly makes no sense. I won’t rehash that argument; you can read it in a past EuroSavant entry here.) Still, Eichel and Sarkozy apparently took advantage of Polish hospitality in Warsaw to put forward the somewhat petulant stance of “if you expect us to stay under the 3% budget deficit limit, well then we suppose that means there will be less money for helping poorer EU member-states.”

BUDGET-CUT LOSERS

It all ultimately revolves around that long-term EU budget, discussed briefly in my entry about the Dutch presidency of a few days ago, for the period 2007 to 2013, which the Commission is projecting to amount to even around 1.2% of total EU GDP, according to Bielecki’s article. But I mentioned that the main contributors to the EU coffers certainly do not want that long-term budget to exceed the mere 1% of EU GDP that has been the case up until now, and that was what Eichel and Sarkozy were putting in no uncertain terms at this “Trojka” financial summit. When it’s not going to be 1.2% but rather 1%, so you have to cut money out of a budget – amounting here to 20 to 30 billion euros cut per year – then who loses? The answer is definitely those who were otherwise looking forward to EU regional aid, i.e. the Union’s poorer member-states, among which Poland occupies a prominent place. For those losses are not going to come out of money for the Common Agricultural Policy (CAP), because CAP funds were frozen over that period by a prior agreement that finally stopped everybody from arguing about the CAP for a while.

So the finance ministers finally met the press in Warsaw, and the inevitable question was posed: Would you say Poland is paying for the refusal in France and Germany to undertake needed economic reform? Sarkozy immediately became irritated, and declared in a raised voice: “Does it seem to the gentleman that we are not undertaking sufficiently swift steps towards satisfying the Maastricht criteria? I invite you to France, so that we can witness together the reform of EDF [Electricit√© de France, the French state-run monopoly provider of electricity and gas], which we approved just last week.” And then he added: “France is a country where it is possible to reform without any problem! But no one has yet explained to me how it is possible to diminish the budget deficit by spending more.” Eichel was more mild-mannered; he merely pointed out that a higher EU budget means higher contributions from all member-states, including Poland, which puts more pressure on all those states to control their own budget deficits. (It was a disingenuous answer, though, because under the Commission’s proposed budget Poland would then win back more money than she contributes.)

“HARMONIZATION” IN POLISH, FRENCH, GERMAN

Another issue that came up at that Warsaw meeting was that of “harmonizing” tax rates more among the member-states, in particular taxes levied on business. France and Germany tend to be high corporate-tax states, while especially the new Eastern European members are definitely low corporate-tax states. The high-tax states don’t like that because it’s yet another reason for companies to move east and take their jobs with them.

So you can be sure that, ultimately, “harmonization” means those eastern states being strong-armed to raise their corporate taxes up to more Western European levels. Nonetheless, no one was willing to admit that outright in Warsaw on Monday. Instead, there was all sorts of dancing around the issue, as recounted not only in Bielecki’s article in RZ but also in a brief piece in Zycie Warszawy (Taxes Like in the Union – as if Poland is still not yet part of it!). Bielecki reports that what the three finance ministers actually agreed to was a common methodology towards calculating the rate that each EU member-state’s corporate tax amounts to. According to Eichel and Sarkozy at that press conference, this common methodology was the first step towards setting up a bracket, or range (from the Polish widelki, or “fork”) of allowed rates of corporate tax for member-states. (Sarkozy, questioned as to how much the lower boundary of that bracket could amount to, responded “That depends on Poland.”) However, Raczko simply called the common methodology a “point of departure.” Meanwhile, in Zycie Warszawy we have Raczko agreeing that a “harmonization” of tax law among member-states is necessary, but that that did not mean a “making more uniform” of individual tax rates. Eichel and Sarkozy maintained that it did mean that; and Sarkozy specifically pointed out Estonia’s corporate tax rate of 0% (compared to Poland’s 19%, and France’s and Germany’s c. 40%) as doomed to an early destruction, if he has anything to say about it.

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