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such measures would cause riots in France

Kitty Miv, Editor
26 June, 2014

Kitty's Kountry Rankings are below, with a description of how they are kompiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

Since it's still before breakfast (for me, that is) I will choose to believe something impossible, which is that the French Government is going to cut its expenses and reduce taxes. The Court of Auditors, having had a very substantial breakfast, doesn't believe the Government, however, and in the past the Court has consistently been more accurate than the Finance Ministry. It's impossible to discern where the President is standing in this: he began from a very far-Left position more or less indistinguishable from Communism, but has been rocked by adverse election results and the lowest approval rating of any President, ever. "I hear you," he says, but presumably only because he has no choice. The choices are going to be made at the Matignon, whence the Prime Minister will be leaning on the Finance Minister, Michel Sapin, to come up with the goods, being a package which will satisfy both the electorate and the EU Commission – and that's where the impossibility comes in. The Auditors say that the Government will miss its 3.8 percent deficit target this year, which is already far higher than what the Commission had been promised, and could lead the country into an "excessive deficit procedure" in which the Troika or some other extra-national task force imposes tighter fiscal discipline on a miscreant country. But such measures would cause riots in France, or worse, and would surely lead to a summary end to Francois Hollande's tenure of the Elysee. Therefore the Commission will do what it did after Maastricht, when it was Germany that broke the fiscal rules, and bend them, especially if arch-fixer Jean-Claude Juncker has been installed as President, because France is too big to be crossed. Well, here comes my breakfast, so I will mark up France's bonus point while I still have belief and before I tuck into that scrumptious croissant au chocolat.

The EU Commission's rather curious attack on countries hosting multinationals smacks of politicking, although the machinations of the Berlaymont (have they finished extracting the asbestos yet?) make the word Byzantine seem like an exercise in transparency. At all events, Ireland has hit back quickly and effectively, sensing yet another concealed attack on its low tax rate, which probably does make up a certain proportion of the Commission's logic. The other two countries in the Commission's sights, Luxembourg and the Netherlands, are also "the usual suspects," with low-tax credentials. It may be significant that the Commission has chosen to act in this way at the end of its current term, possibly wishing to send a pro-OECD message to show that it has taken the BEPS initiative seriously, and it is not difficult to imagine that the OECD, which has seen its BEPS project considerably undermined in the last couple of weeks, particularly from the USA, has played a part in asking the EU to take action before it is paralyzed for several months by the nomination process for new Commissioners and the EU's top jobs, which looks to be more than usually protracted on this occasion. It's notable also that of the three multinationals being picked on, two are American (it's true that Apple and Starbucks are the two most obvious BEPS targets), while Fiat, the third, has strong US connections, and can't any longer be regarded as a truly European company. You see how impossible it is to understand Commissioner Almunia's actual motivation? The one thing you can be sure of though is that the Commission is against low taxation, so inasmuch as I am giving Ireland a bouquet, the EU will descend yet another notch in my fiscal bestiary. "Some multinationals are using tax planning strategies," says Almunia. Shock! Horror! What did he expect? And that, in a nutshell, sums up the EU's problem: it only pretends to support business.

We are not supposed to knock Brazil during the World Cup, I imagine, but I am suspicious about the reintroduction of the Reintegra program, which gives tax credits to exporters. When it suspended the program last year after two years, the Government said it was too expensive. Well, what has changed? Growth was 2.3 percent in 2013 but will fall to 2 percent this year, at best; inflation is running at 6.5 percent, way ahead of the central bank's 4.5 percent target; the budget deficit is likely to increase from last year's 3 percent, not least because of heavy spending on the sacred World Cup, which most economists do not think will stimulate the economy much, if at all – in fact investment fell in the first quarter of the year. Interest rates are at 11 percent, up over the last eighteen months from 7.25 percent as the Government struggles to control inflation. It's not a pretty picture, and business is not helped by the Government's propensity for incessant fiddling with rates and regulations. Something that is new is the imminent Presidential election in which Dilma Roussef will try for a second term, and the Government's economic actions need to be seen in that light. Reintegra itself will obviously be welcomed by all Brazilian exporters, but does not seem to be an overtly political measure. Maybe they hope that it will stimulate economic activity in the months before the election. The measure is not overtly protectionist, although the tax credits are only given in respect of products with at least 60 percent local content. Perhaps that is not unreasonable, in order to target genuine manufacturing rather than re-exporting assembly plants. Yet I wonder.

Last Monday was bad news day for many Italians, with large tax bills coming due. Of itself, that would not necessarily be an issue – the problem is that the rates of tax are so high, worsened by the complication of the system. Even the IMF, which almost universally advises governments to increase taxes, thinks that rates are too high. The economy contracted by 0.1 percent in Q1, making minus 0.5 percent in the last 12 months. Like France, Italy is missing its deficit goals, and was reported to have asked the EU last week for an extra year to achieve them. Supposedly, Matteo Renzi, who by the way is unelected, is prepared to support the candidature of Jean-Claude Juncker in exchange for relief from Brussels. Apart from being a dreadful example of the sort of unprincipled "consensus" politics that have brought Europe to its knees, any slackening of the screws on Italy would be catastrophic: it is not the deficit itself, which is not so very large, less than the magic Maastricht 3 percent; the problem is the debt, which is over 130 percent of GDP and rising. It will rise even further if Italy is allowed bread and circuses; and this in a week when the Governor of the Bank of England talks of "fiscal tightening," that is to say, higher interest rates.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 110th) one or more countries are given encomiums and one or more are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is at neutral, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc and now it's on plus 1 again.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums:

France and la vie en rose

Ireland 1, Brussels 0

And Kitty's Execrations:

Brazil buffeted

Italy in a bind




About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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