Yellen turns the screws to kill EU digital tax

Good morning and welcome to Europe Express.

EU officials argue that their planned digital tax is complementary to the tentative deal on corporate taxation struck at the global level. But US Treasury secretary Janet Yellen is having none of that. We will explore each side’s arguments and why Yellen’s shuttle diplomacy in Europe is likely to succeed.

Among the last events hosted by Germany’s chancellor Angela Merkel before she bows out of the political scene in September was a (virtual) summit in Berlin with Balkan leaders. I will dig into the significance of that format and what her departure spells for the EU’s somewhat forgotten region.

And with Slovenia’s prime minister Janez Jansa appearing in the European parliament in Strasbourg today, we will explore one of his priorities listed in the official programme that has baffled MEPs focused on the rule of law.

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Unilateral measures

US Treasury secretary Janet Yellen dials in for talks with Brussels’ tech chief Margrethe Vestager today to discuss an issue that has strained transatlantic ties since Donald Trump’s presidency: Europe’s digital tax ambitions, writes Mehreen Khan in Brussels.

Washington is increasing diplomatic pressure on European capitals to shelve Brussels’ looming proposal for an EU tech tax due this month. It follows on from tit-for-tat trade tariffs first applied by Trump’s administration on EU capitals, which in turn have pursued national tech levies that the US has argued target American tech giants. 

A US diplomatic note called for Brussels to delay the EU’s attempt at a digital levy, arguing that the go-it-alone approach would “threaten” parallel talks on rewriting corporate taxation rules taking place at the OECD. 

“The timing of this proposed levy would risk entirely derailing the tax negotiations at a sensitive juncture when:

  1. The EU is hoping to signal further alignment on a consensus position at the July 9 G20 Finance Ministerial

  2. The United States is hoping to make progress on domestic tax reform, and

  3. Collectively we would like to reach a final OECD/G20 Inclusive Framework agreement by October,” says the note. 

Yellen is likely to ram home that message to Vestager today and again in person when she travels to Brussels to meet EU finance ministers next week. Washington’s quiet fury at what it calls the EU’s “unilateral” tax measures has helped convince Brussels to push back the planned publication of its proposal by at least a week, to July 20.

The European Commission has been scrambling to make clear that the plan — which is its second attempt in three years to agree an EU digital tax — is compatible with an OECD agreement to rewrite taxation rules for multinationals.

Rather than targeting tech giants, it will be designed as a broad and very low rate tax (likely to be less than 1 per cent) on hundreds of companies that have digital operations, officials told Europe Express. Vestager last week said it was more of a “levy” than a tax.

The commission’s hands have been tied by its promise to come up with the digital tax 2.0 along with a series of other money-raising tools to help pay back hundreds of billions of euros of Covid-19 recovery debt. But Brussels’ entreaties seemed to have fallen on deaf US ears.

Encouragingly for Yellen, she won’t have to do much to convince EU governments that they should consign the latest iteration of a European digital tax to the dustbin. A number of EU diplomats think the plan — which has been firmly usurped by the OECD — is likely to be dead on arrival. (More here)

And as with all EU tax plans, it will need unanimous approval to become a reality.

Chart du jour: Covid relief in action

The billions of euros in government support helping households during the coronavirus crisis seem to have worked, according to Eurostat. But the headline figures hide the impact of the pandemic on younger workers in countries such as Hungary, Greece and Italy, where incomes fell more than 5 per cent. (More here)

Quo vadis western Balkans?

With Angela Merkel on her way out, the western Balkans, a region largely ignored by many EU leaders, stands to lose an important ally.

Even though Merkel was a “late convert” to the strategic relevance of keeping Balkan countries engaged and on track to join the bloc one day, she stayed committed and sought to dial up the pressure whenever a country was backsliding, one EU official involved in the process recalls.

“She wasn’t a jubilant fan of enlargement, yet she invested political capital at a point when it wasn’t popular in her own party, in Germany or in the European Council,” the official said. 

What made her change her mind on enlargement was Russia’s increasing influence in the region in 2012-14, and later, China’s amped up investment strategy. 

Since 2014, the so-called Berlin process, a gathering of EU and western Balkans leaders, has sought to achieve practical goals in the absence of much progress on the EU membership track. One such concrete measure was last week’s lifting of roaming costs when calling from one country in the region to another.

But even with all of Merkel’s involvement, the main issue with countries such as North Macedonia and Albania is the EU having failed to deliver on its promise to start accession talks. Meagre levels of EU funding have also contributed to the region turning to Russian and Chinese investments.

“The EU did not support its quest for strategic autonomy in the western Balkans with adequate financial resources . . . so it was doomed to flop,” writes Dušan Reljić, who runs the Brussels office of the German Institute for International and Security Affairs think-tank.

Speaking at the Berlin summit yesterday, commission president Ursula von der Leyen said that her “first priority is to accelerate the enlargement agenda across the region and support our western Balkan partners in their work to deliver on the necessary reforms to advance on their European path”.

But just one of the German parties — the Greens — is seriously committed to enlargement. The mood in France, the Netherlands and other countries is still firmly against any steps in that direction. And Bulgaria remains determined to block North Macedonia’s next step on the accession track.

It is accordingly difficult to see how any of those promises can be fulfilled.

Slovenian institution-building

When Janez Jansa, Slovenia’s prime minister, faces MEPs today he will probably be quizzed over his Twitter assaults against journalists, his attacks on the judiciary and his frosty press conference last week with commission president Ursula von der Leyen.

Here’s another topic MEPs may decide to raise, writes Sam Fleming: Slovenia’s presidency programme includes an idea to create a new institution to oversee how Brussels monitors adherence to EU rule of law principles.

Slovenia is proposing the creation of a new European foundation for constitutional democracy — which it offers to host within its own borders. This institution would bring together national experts to provide the commission with “autonomous and independent analyses of specific issues concerning the rule of law”.

Crucially, the foundation would “fill the gap in the monitoring of compliance with the rule of law by EU institutions, whose operation must also not be beyond external control”, the presidency programme says.

The idea seems to stem in part from Jansa’s claims that Brussels has been insensitive to political, historical and cultural differences between member states and has applied “double standards” that disadvantaged Slovenia and like-minded countries.

But the proposal has provoked bemusement, given that EU institutions are already subject to legal oversight by the union’s top court, based in Luxembourg.

Daniel Freund, a Green MEP, argued the proposed institute was part of an attempt by Jansa to “create his own reality” in which attacks on independent media or the judiciary don’t violate EU rules.

“We already have an institution in charge of defining the rule of law for the EU: the European Court of Justice,” he said. “Jansa’s attempt to create alternate national versions of the rule of law are in themselves an attack on the rule of law and our common EU values.”

What to watch today

  1. The European Commission puts forward a strategy on sustainable finance

  2. Slovenia’s PM Janez Jansa presents his country’s priorities for the EU presidency in the European parliament in Strasbourg

Notable, Quotable

  • The Greens vs the debt brake: Most German parties have said they hope to restore the country’s debt brake by 2023. The Greens are the only ones in favour of overhauling the constitutional cap to allow for more investment-focused borrowing in Germany.

  • Belarus migrants: The PM of Greece and European Council president Charles Michel expressed solidarity with Lithuania and condemned the use of migrants as political tool after Belarus sent an unprecedented number of people — mostly of Iraqi nationality — across the border.

  • Inflation central: Several central European nations are at the forefront of a surge in inflationary pressures: inflation in Poland hit 4.7 per cent in May, while Hungary has the highest inflation in the EU at 5.1 per cent. This has the potential to create tensions between central banks and their free-spending nationalist governments.

  • Swedish comeback: Sweden’s prime minister Stefan Lofven is on the cusp of forming another government despite having lost a no-confidence vote. But the political arithmetic hinges on a single vote that could move the scales in either direction.

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