Batuk Gathani

(In London)

THE EUROPEAN Union (EU), comprising 25 member States with a population of nearly 350 million citizens, is passing through a phase of much uncertainty as its institutions seek to establish their identity, legitimacy and, above all, credibility.

Austria is currently holding the rotating six-month presidency and Chancellor, Mr Wolfgang Schussel, is proposing that European citizens pay a "direct tax" to the European Commission to finance EU's 123-billion euro budget. Earlier, the European Parliament which has a budget veto power voted against the 862 billion euro seven-year budget agreed by the 25 EU leaders last December.

The EU receives about 75 per cent of its money direct from the member governments and 25 per cent from sources such as value-added tax and Customs duties. The European citizens pay their taxes to individual governments. Hence, there is mounting and "stiff" opposition to the latest Austrian proposal calling on European citizens to pay direct tax to the EU. The British Chancellor of Exchequer stated earlier that the UK could not agree to comply with the Austrian Chancellor's call for new taxes to finance the EU's budget.

The European Commission is also proposing that EU citizens pay separate tax on holiday travel, international travel and sea travel. The idea of EU tax has the backing of European Commission the administrative and civil service arm of the European Union which has over 17,000 employees in Brussels and the German Chancellor, Ms Angela Merkel. The Germans want the European member states to jointly contribute to the EU budget as Germany has been "substantially" financing the EU institutions and services. The proposed German strategy cannot be implemented unless it has unanimous support of all member states. According to observers "this may not happen in immediate future". Hence, richer EU member states led by Germany, France, Italy and the UK would carry "substantial" portion of the EU budget.

Chancellor Schussel also proposed that financial "speculators" should also face EU taxation. It is argued that if such a proposal is implemented, the financial "square mile in heart of the city of London" would be affected. London has emerged as the largest global hub of financial activity after Wall Street in New York. The British authorities stated that the UK is opposed to paying any new EU taxes. The member states based in Central and East European regions are also not happy about this.

It is also feared that with introduction or imposition of EU tax on financial services, a substantial portion of investment activity could shift to the US. This would be a major setback for London where three-and-a-half lakh people are engaged in financial services with both domestic and global parameters. The Europeans are also worried that global emphasis on financial services is also slowly, but surely, shifting to the East Asian region where Singapore, Hong Kong, Shanghai and Tokyo are seen as fast emerging global financial players.

The European Commission is keen to reduce EU's dependence on national budgets of EU member states, but how this strategy could be implemented in future remains to be seen, as average EU citizens and member state governments are opposed to paying any direct EU tax. The average EU citizen has no direct benefit. Over 70 per cent of the EU budget is spent on maintaining "an army" of civil servants in the European Commission as this is rated as an unacceptable facet of EU's so-called "gloated bureaucracy".

The EU still has no common foreign or defence policy and EU institutions are yet to establish their popularity and credibility. The European Union still has a sort of `club' image in the global market place.

(This article was published in the Business Line print edition dated January 27, 2006)
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