The Economist 07Dec2019

The EconomistDecember 7th 2019 Finance & economics 73

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stantial” deal with China that he boasted

was imminent in October. On December

3rd he teased that he might postpone talks

until after the 2020 election, saying that

“the China trade deal is dependent on one

thing: do I want to make it?” But the more

the president predicates success on his

mood rather than substantive problems

laid out by bureaucrats working on his be-

half, the less it makes sense for China to of-

fer meaningful concessions.

Tariffs can be announced by tweet, but

crafting deals to remove them is slower and

harder. Mr Trump is lucky, then, that the

ustr is in charge of delivering his other

trade-policy objective: passing the usmca.

Robert Lighthizer, the ustr’s top official,

has been negotiating with Democratic law-

makers to recast it in a form that they can

support. If a deal is done, it will be because

politicians and officials have managed to

tune the president out.  7

A

fter repairwork during the sover-

eign-debt crisis in 2009-15, further

fixes to the euro zone’s architecture have

been few and slow. Northern countries

have been unwilling to assume cross-bor-

der risks, as long as debts and non-per-

forming loans in southern ones were high.

Now quarrels within one of those southern

countries, Italy, threaten what little pro-

gress has been made.

Three reforms are on the table: beefing

up the European Stability Mechanism

(esm), the euro zone’s sovereign-bail-out

fund; setting up a common deposit-insur-

ance scheme for banks; and creating a com-

mon euro-zone budget. On December 4th

finance ministers discussed plans for fur-

ther work on these “pillars”, which are sup-

posed to be agreed by heads of state on De-

cember 13th. The meeting failed to clear up

much. Among the plans to be signed off

was a revisedesm treaty, but eleventh-hour

opposition from Italy seemingly delayed

that until early next year.

Planned reforms to the esm include

measures to boost support for both trou-

bled banks and sovereigns. It will become

the backstop for the zone’s bank-resolution

fund. The rules for its precautionary credit

lines, to which troubled countries can turn

even before they lose access to financial

markets, have been clarified. And to help

countries with unsustainable borrowing to

recover, new government-bond contracts

will contain clauses that make it harder for

investors to block debt restructuring.

All this had been nodded through by

members in June—including Italy, which,

with its huge public debt and sluggish

economy, looks the most likely customer

for a future bail-out. But populists from the

Northern League and the Five Star Move-

ment (m5s)—the very parties that were go-

verning in June—have begun campaigning

against the plans. Matteo Salvini, the

League’s leader, and deputy prime minister

until he quit the government in September,

says he did not see them, implying that the

prime minister had acted in secret.

Critics claim the reforms would force It-

aly to restructure its debt in any future cri-

sis. New clauses in debt contracts, they say,

would make its bonds less attractive to in-

vestors. But the complaints ring hollow.

Though some countries had wanted bail-

outs to require restructuring, says Lorenzo

Codogno, a former chief economist of the

Italian treasury, Italy successfully lobbied

Splits in Italy threaten to derail

reforms to the currency union

The euro area

Looking wobbly

“U

nacceptable”, harrumphed

France’s finance minister. Worthy

of a “pugnacious” response, thundered a

colleague. The object of this Gallic ire

was the Trump administration’s threat

this week to impose 100% tariffs on some

of France’s tastiest exports, from cheese

to champagne, in response to its govern-

ment’s planned digital-sales tax.

Corporate tax has become a major

source of transatlantic tension since

various European countries began to

cook up levies to capture more revenue

from the likes of Google and Facebook,

whose effective European tax rates often

look suspiciously low—sometimes a

mere percent or two. France has gone

furthest, with a 3% levy on sales that will

be backdated to the start of 2019. Britain’s

version, levying 2%, is set to kick in next

April. America’s Treasury calls such taxes

“discriminatory”.

Both sides accept there is an un-

derlying problem. The imfreckons

governments lose at least $500bn a year

from multinationals shifting profits to

tax havens. This siphoning has become a

gush with the growth of tech and other

businesses whose assets are mostly

intangible, and thus easier to move.

Most large economies—including

America—accept that the treaty-based

international corporate-tax system,

which dates back to the 1920s, needs a

refit. But negotiations, led by the oecd,

have dragged on for six years. Frustrated

by the delays, the Europeans began work-

ing on unilateral taxes (as well as a Euro-

pean Union-wide one, which has gone

nowhere), aiming to force the issue in

multilateral talks. They view their taxes

as stopgaps that would be scrapped if a

global deal is reached.

The oecd, prompted by the G20, has

stepped up efforts to forge one by the end

of 2020. It wants new rules that better

capture profits of firms that do business

in places where they have no physical

presence, and an agreed minimum glo-

bal tax rate for multinationals.

Even before anything has been

agreed, however, critics are circling. A

French assessment found that the oecd

plan would bring in little extra revenue.

icrict, a group of economists focused

on corporate tax, laments the oecd’s

reluctance to abandon transfer-pricing,

under which multinationals should

account for cross-border transactions

between subsidiaries at market rates, as

if they were unrelated to each other—a

principle built on fiction, they complain.

icrictand the g24group of devel-

oping countries, which includes China

and Brazil, are among those who would

prefer a new, “unitary” approach, where-

by companies’ worldwide operations

would be lumped together, and taxing

rights divided up according to a range of

metrics, including the location of staff

and customers. But any global deal, if

one can be agreed, is likely to be more

modest. Those hoping for a radical over-

haul should keep the champagne on ice.

Bottle shock

Transatlantic tax tensions

Tax our tech and we’ll blacklist your bubbly