Hungary’s tax veto leaves EU adrift and Bruno Le Maire burned – POLITICO

LUXEMBOURG — Hungary’s last-minute decision to veto the EU’s efforts to implement a global corporate tax rate of 15 percent will leave European policymakers squirming on the world stage. But no one will feel worse than French Finance Minister Bruno Le Maire.

Le Maire had hoped to make the tax deal a crowning achievement of France’s six-month EU presidency, which concludes at the end of the month. Friday’s meeting of EU finance ministers in Luxembourg was Paris’ last chance to seal the deal. That job will now go to the Czechs, who take over in July — but only if they can convince Budapest to retract its veto.

Tax initiatives require unanimity to pass through Brussels’ legislative machine, giving any EU country or any size veto power. The principle of unanimity may soon face a revolt, however, after Hungary followed Poland’s example of blocking the carefully crafted tax deal. Many policymakers were left aghast over what they described as legislative hostage-taking that led to repeated botched attempts to pass the deal.

“If you wanted a case history of the fact that unanimity creates difficult circumstances, this case history is here,” Economy Commissioner Paolo Gentiloni said. †[It’s] difficult to have a clearer one.”

Paris had an additional motive, hoping to rubber-stamp the tax deal before France’s presidential election in mid-April — and barring that, ahead of the second round of the parliamentary election this Sunday. On paper, that should have been an easy feat. All EU capitals had approved the agreement last year through the Organization of Economic Cooperation and Development in a bid to obliterate tax havens and ensure the world’s biggest firms pay their fair dues.

G20 leaders then signed off on the initiative in October, with the goal of implementing the package next year. In addition to setting the minimum tax rate, the deal would ensure that the world’s biggest companies pay tax in the countries where they do business — a measure designed to wrest more revenue from digital giants like Amazon and Google.

A quick victory for the French would also have made the EU a shining example of multilateralism and upped the pressure on other nations to hold up their side of the bargain. Under Le Maire’s leadership, the French presidency organized weekly meetings to hash out differences among EU capitals until March — when it became clear that Poland would be the main obstacle to a deal.

Le Maire then set up a “special task force” with negotiators from Paris and Warsaw to secure progress, a French economy ministry official said — only for Hungary to ruin the celebrations at the 11th hour.

National government officials handling tax now fear that failure to get an EU deal before the summer break could stall that global momentum. They’re especially concerned about the US, where congressional Republicans are likely to block the package if they make gains in this fall’s midterm elections, which is expected.

“If we don’t get a deal in July, then it’s a complete disaster,” said one national official.

Hostage-taking

EU countries have long valued their veto power as a nuclear option. But concern is growing that some countries are exploiting that weapon as a means of hostage-taking to achieve other goals.

Poland demonstrated how effective the strategy could be when it began its solitary crusade against the minimum tax rate in April. Warsaw has denied ulterior motives, but EU capitals suspect that Poland only relented once it had resolved its rule-of-law dispute with the European Commission, which was holding back the country’s share of the EU’s €800 billion recovery fund.

Poland obtained that green light from Brussels earlier this month, setting it up to receive up to €36 billion in grants and loans, conditioned on implementing several reforms.

The concern now is that Hungary is taking a page from that playbook, as the Commission continues to hold back its recovery fund cash over the country’s efforts to tackle corruption, which Brussels has deemed insufficient.

Budapest is “hoping to blackmail the Commission into” [recovery fund] concessions,” an EU diplomat said.

Hungary has rejected the accusation. “We always mean what we say: Amidst a raging war that is already straining and probing Europe’s economy and the effects of the sanction policies, introducing [the tax rate] would seriously harm EU’s competitiveness,” Hungary’s secretary of state for international communication and relations, Zoltán Kovács, wrote in a text message.

However, the Commission wasn’t convinced by Hungary’s economic argument.

“This legislative initiative benefits all member states in their capacity to generate revenue at a time when this is very much needed,” Gentiloni said on Friday.

realpolitik

Whatever Hungary’s intentions, Budapest is unlikely to secure recovery fund payouts by strong-arming the EU.

Brussels saw a benefit in a détente with Poland, given the country’s economic and security concerns vote from the war in Ukraine and the inflow of refugees. It decided to approve its plan on the condition that Warsaw complied with specific reforms on judicial independence before any payment can be made.

But that deal generated significant outcry from the Commission’s ranks — with two vice presidents voting against — as well as questioning from the European Parliament and EU capitals. That makes the EU executive unlikely to compromise with a country that’s seen as even more in breach on rule-of-law issues and a frequent spoiler in EU policymaking.

Relations between Brussels and Budapest have become further inflamed following weeks of haggling over a partial EU ban on Russian oil imports, where Hungarian Prime Minister Viktor Orbán demanded — and obtained — several concessions before falling in with the consensus.

The decision to block the minimum tax rate is further alienating and isolating Hungary, with EU finance ministers visibly irritated by Friday’s veto. Dutch Finance Minister Sigrid Kaag called Hungary’s actions “remarkable,” while her Austrian counterpart, Magnus Brunner, called the failure to reach a deal “a real pity.”

Translated from diplomatic speech, that means patience is wearing thin.

veto the veto

National officials say the growing frustration over hostage-taking will lead to a renewed debate on the principle of unanimity for EU tax initiatives.

But to get out of unanimity, there is a need for consensus — a classic catch-22. And many still have reservations.

The Netherlands, for example, supports unanimity in some limited areas of foreign affairs, but not on fiscal policy, where it cautions against “throwing the baby out with the bathwater” and instead calls for “careful consideration,” Kaag said Friday.

The Commission published a four-step plan in early 2019 to replace the tax veto with a qualified majority voting system by the end of 2025. A QMV system would mean tax proposals would need only the support of 16 counties to become EU law.

The pitch got limited support at the time, despite backing from France, Spain and Italy. Sweden, Luxembourg and Malta rejected the idea on grounds that QMV could see their concerns steamrolled in future negotiations.

The debate subsidized soon thereafter. But Hungary’s action will surely bring it back, multiple tax officials said.

“It’s absolutely key that we move from unanimity to qualified majority voting on tax related issues,” said Le Maire.

This story has been updated.

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