By Stelios Orphanides
European Commission President Jean-Claude Juncker’s favouring of a relaxation in EU decision-making rules based on qualified majorities on matters including further harmonisation of tax rates, is likely to have implications for certain member states including Cyprus.
Juncker, who was delivering his State of the EU address at the European Parliament on Wednesday, said that “so-called ‘passerelle clauses’ in the current treaties allow us to move from unanimity to qualified majority voting in certain areas,” provided all heads of state or government give their consent.
“I am also strongly in favour of moving to qualified majority voting for decisions on the common consolidated corporate tax base, on value added tax, on fair taxes for the digital industry and on the financial transaction tax,” the former Luxembourgian prime minister, who was addressing the parliament in French and German, said according to the English translation of his speech on the website of the European Commission. “Europe has to be able to act quicker and more decisively”.
The harmonisation of the corporate tax rate, already on the agenda of the European Commission since October when it tabled proposals for a common corporate tax base (CCTB) and a common consolidated corporate tax base (CCCTB), is considered anathema in Cyprus, which taxes corporate profits at 12.5 per cent. As one of the lowest rates in the EU, the island regards it as a comparative advantage for the business services sector.
Six months ago, the parliamentary energy, commerce, industry and tourism committee dismissed the European Commission’s proposals after consulting stakeholders, including law and accounting firms and the executive branch.
Other member states, also expressed reservations about the harmonisation of tax rates in the past, including Luxembourg, Ireland and the UK, which last year decided to leave the EU, thus weakening opposition to CCTB and CCCTB.
“The discussions on a common consolidated corporate tax base should serve as a warning for us in order to start planning how to diversify our economy which to a great extent is currently relying on services,” said Andreas Assiotis, Hellenic Bank’s chief economist.
The Cypriot economy, the euro area’s second smallest, emerged two years ago from a prolonged recession as traditional key sectors, such as tourism, the business sector and construction saw their output in the years continuously rise following the fiscal and banking crisis. Key reforms agreed with international creditors, including the overhaul of the civil service, privatisations, the modernisation of legislation governing the financial sector and the opening of professions were not partially implemented, if at all.
Juncker also advocated in favour of transforming the European Stability Mechanism (ESM) into a “European Monetary Fund” and the office of the European Commissioner of Economic and Financial Affairs into that of a European Minister of Economy and Finance.
The ESM, established five years ago during the euro crisis –which engulfed five EU members–, to finance bailouts in the euro area together with the International Monetary Fund (IMF). The latter supervised the bailouts, including that of Cyprus, jointly with the European Central Bank and the European Commission.
A European minister –“ideally also a vice-president” and president of the Eurogroup– promoting and supporting structural reforms in member states “can build on the work the Commission has been doing since 2015 with our structural reform support service,” a body helping EU members design and implement reforms, said Juncker who served as chairman of the Eurogroup, the informal body of the euro area finance ministers until early 2013.
“The new minister should coordinate all EU financial instruments that can be deployed when a member state is in a recession or hit by a fundamental crisis”.
The Commission will submit concrete proposals about the future of ESM in December, Juncker said and added that “we do not need a budget for the Euro area but a strong Euro area budget line within the EU budget”.
Michalis Florentiades, chief economist at the online financial service provider XM.com said in an interview that he is not taking for granted that Juncker’s agenda will be finally implemented. “His job is to present his vision but whether the heads of state and government will ultimately do, that’s another story,” he said.
Much may be determined following the German elections scheduled for September, he continued. “The Germans want a European finance minister with lots of powers and small budget but it is the other way around with the French,” who elected a new government and parliament in the second quarter of the year, he said.
Still, the focus in the EU will shift to reform following the completion of the election cycle when Italians elect a new parliament before May next year, said Ioannis Tirkides, who heads Bank of Cyprus’s economic research division.
“Whilst everybody agrees on the need for reform there is less agreement amongst member countries on the nature of the reforms that are needed,” Tirkides continued. He added that reforms proposed by the president of the Commission and likely to centre on budget risk sharing measures including a common unemployment insurance programme, “will not be easy and negotiations will likely be tense”.
The Bank of Cyprus economist added that he considers it certain that the euro area’s north will seek more say over national fiscal policies.
“In principle, I am in favour of European integration,” Hellenic Bank’s Assiotis said adding that this process should prevent widening the gap among member states by undermining their competitive advantages.