Juncker and the Luxembourg Tax Scandal

Last week it came to light that there were serious tax avoidance practices in Luxembourg that allowed companies to funnel profits through the Grand Duchy in order to avoid paying tax in the countries the profits were generated.  After avoiding commenting on the scandal for a week the “cool” Commission President Jean-Claude Juncker has denied that he was involved in anything illegal in Luxembourg, and says that everything was done in “compliance with national legislation and international rules that apply in this matter”.

The new Commission President was prime minister of Luxembourg for 19 years (as well as finance minister for most of that time), so the denial is hardly going to silence his critics. Juncker himself said that he was politically responsible for what happened throughout Luxembourg during his time in office. In an extraordinary debate on tax avoidance in the European Parliament, Juncker admitted that “there probably was a certain amount of tax avoidance in Luxembourg, as in other EU countries. We find this everywhere in Europe because there is insufficient tax harmonisation in Europe”.

The International Consortium of Investigative Journalists is releasing 548 “comfort letters” (effectively private tax rulings that clarify for specific companies on how their corporate tax will be calculated) between 2002 and 2010 which Luxembourg provided to corporations for favourable tax treatment. The investigation that Juncker’s own Competition Commissioner Vestager will be looking into is whether or not Luxembourg’s support for these corporations through the tax system amounts to illegal state aid (earlier in October the previous Commission launched an investigation into the taxation of Amazon in Luxembourg). In the case of the FedEx Corp, the ICIJ found that Luxembourg agreed to tax only 0.25% of FedEx’s non-dividend income that flowed through the country through its tax arrangements.

There are two aspects to this: whether comfort letters for specific companies constitute illegal state aid (and the extent to which Luxembourg was using these), and the extent to which there is legal tax avoidance through tax competition. Europe has gone through years of austerity and it is politically poisonous to have tax avoidance at such levels where companies are only paying 0.25% corporation tax through certain Luxembourgish tax arrangements. If illegal state aid is found, then it will dramatically increase the pressure on Juncker.  If no illegal state aid is found then there could still be significant political damage – “how could such practices be allowed to continue?” would be the question in most Europeans’ minds.

In the European Parliament Guy Verhofstadt, leader of the Liberals, proposed setting up a special investigative committee into tax evasion by the Parliament, saying “This is also a clear case where we need more Europe – to set up common tax compliance legislation and a convergence code not general harmonisation, because we don't know at what level to harmonise.” Such an investigation would require the backing of the Economic and Monetary Affairs committee and would probably look into the various ways companies limit their tax bills. Juncker wouldn’t have any say in such an investigation as it would be purely run by the Parliament.

This scandal is so toxic because it has a highly political idea of tax fairness at the heart of it. Juncker will probably be able to hang on in office if there are no or only limited infringements on state aid rules, but the first political Commission would be politically stunned if it could not properly address the tax avoidance issue. The Commission President has already stated that Commissioner Moscovici will “initiate proposals for an automatic exchange of information regarding national tax rulings”, but Junker, and the Commission, needs to go further.

Tax is a sensitive issue, and it would be difficult to bring Member States along with even mild proposals on tax systems, but Juncker needs to display political initiative by pushing forward on tax transparency and by articulating a position on corporate taxation in the EU. Juncker's political Commission could very easily be undone by politics and his own record as Luxembourg's premier - if he's to survive, Juncker has to show that his Commission can take a political lead that will address citizens' concerns on tax fairness.

Farage's EFDD Group collapses

The Euroskeptic Europe of Freedom and Direct Democracy Group in the European Parliament has collapsed after the Lativan MEP Iveta Grigule withdrew from the group. This means that the group no longer has MEPs from the minimum 7 EU Member States required to be recognised as a political group within the Parliament (it has more than the 25 MEPs required as the second criteria). Having group status wins the group more resources, claims on positions within the Parliament and speaking time, so the collapse of the EFDD will hurt its member parties, the biggest of which are UKIP and the 5 Star Movement.

There has been speculation over what induced Grigule to withdraw her support from the EFDD.  Farage and the EFDD have claimed that it's part of a scheme by the bigger pro-European parties to deprive the Euroskeptic group of a bigger say in the Parliament. They say that Grigule was bribed with a post on the Kazakhstan parliamentary delegation. However others have said that she left the EFDD due to differences with Farage over his pro-Russian stance (Farage has said that he admires Putin). Grigule's Latvian Farmers' Union is currently in coalition talks for a Latvian government.

Some of the main Europarties have acted to squeeze the Euroskeptics from prominent parliamentary positions, which is indefensible after the elections saw a boost in the Euroskeptic vote (no EFDD member holds a chair of an EP committee, while the United Left holds the chair of one committee).  there may be a parliamentary majority for a Juncker Commission, but the Euroskeptic voice should be heard within the EU; the pro-EU Europarties only shoot themselves in the foot by denying the Euroskeptics a say proportionate to their weight in the EP.

Currently the speculation is swirling around the former EFDD member parties: will some be poached by the Front Nationale and Geert Wilders' PVV in a new attempt to form a far-right grouping? Will the 5 Star Movement be lured off to the Greens (unlikely given the 5SM's anti-EU views)?

Pro-EU Europarties should beware of gloating too much at the EFDD's demise. Regardless of how easily it (or how difficult it will find it to) reforms, playing games with representation in the EP is hardly worthy political action. Rather, the arguments of the Euroskeptics should be tackled head on.  This way, the larger parties risk portraying themselves as childish (or worse, blundering if this paves the way to a more far-right grouping). They may not have been involved in this case (I think it could be a combination of dissatisfaction with Farage's pro-Russian stance and the parliamentary arithmetic of getting the delegation post), but the Euroskeptic representation deserves more representation in the Parliament than it currently has.

Federalism in the UK?: the Flexible Constitution warped

The referendum in Scotland was a great example of democracy, with high levels of engagement over a fundamental issue dealt with peacefully (though I suspect that if the result had been a Yes for independence, the negotiations for separation would have been less civil). The morning after the result, UK Prime Minister David Cameron said that Scotland would get the extra powers the pro-Union parties promised, but that devolutionary measures for England would have to be brought in in tandem. Linking the two means that great constitutional change has to be brought about in the UK before the next election, which is a mind-boggling task.

Given the short time frame, the Conservatives were quick to promote their idea of "English votes for English laws". Since the Scottish Parliament will have wide powers on most domestic matters, such as health and education, the argument is that Scottish MPs in the UK Parliament should not be allowed to vote on draft laws that only affect England. It's a neat idea as, the Tories argue, it can be brought in quickly and without the need for more politicians, as the English members of the current UK Parliament can simply sit as the English Parliament for a day or two each week. However, the Labour Party, traditionally strong in Scotland, is suspicious that this is simply a plan to rob the Labour Party of a workable majority after the next general election if it wins by essentially disqualifying their Scottish MPs (the Conservatives are a very minor party in Scotland).

It's not just the worrying party-political nature of the proposal that's concerning, but there are other problems that carving a part-time English Parliament out of the UK Parliament would have.

First of all, it causes a problem with how the government is to be formed, since ministers are generally drawn from MPs (some ministers are brought into Parliament by being made Life Peers who sit in the unelected House of Lords). If the ministers of Education and Health work on an England-only basis, then there will be pressure for those ministers to only be drawn from English MPs. And these ministers would be accountable to the English Parliament within the UK Parliament, while other ministers would be responsible to the UK Parliament as a whole. There would need to be a "double majority" of English and UK-wide MPs to form a stable government. It seems odd that a Tory party that largely opposed the Alternative Vote on the grounds that First Past the Post produces (generally) stable governments, now want to introduce a divided government with loyalties to a divided Parliament.

It's not just that it would complicate the government, but that no real thought has gone into the powers and policies that need to be looked at from a UK-wide and a national or regional level. The NHS - the National Health Service - is supposed to be a UK-wide institution, and as England makes up the vast majority of the population and spending power within this, English decisions would have a bigger impact on the other parts of the UK without the Scottish, Welsh or Northern Irish having much of a say. If certain policy decisions on health were located at national and UK level this would be less of a problem, but it's a tougher question for taxation and spending if there isn't a divide between different pots of money (UK and English), which would cause plenty of government divides and tensions in itself. (Just as people have drawn parallels between the unionist case for Scotland staying in the UK and the UK's in-or-out debate on the EU, maybe we'll see some more being drawn if and when it's argued that the Eurzone MEPs should be the only ones permitted to vote on Eurozone matters).

Ironically for a proposal supposedly designed to strengthen the union by giving the English more powers, having a UK Parliament where large parts of the UK government are English-only would be a great symbol of English dominance within the union that won't help its image in the Celtic nations. Surely for devolution - or a federal arrangement - to work and really mean something, there should be a Union Parliament and government at one level, and state governments below it, with a thought-out division of responsibilities and powers?

Sadly in comparison to the Scottish referendum, little debate engaging civil society is taking place as Westminster MPs try to rush this to their Scottish timetable (to get Scottish devolution measures passed before the general election in May). Would the simple division of MPs into English MPs and the rest actually mean much more democracy for England? Hardly. There is no opportunity to explore the idea of English regions as states, empowering, say Yorkshire (which is about the same population size as Scotland), to make its owns decisions and rebalancing England as a whole away from the over-dominant South East and London. Regional parliaments may not be a hot topic in England at the moment, but the fact that there is no debate or discussion over it at all when English devolution is supposedly the topic is damning in itself.

The British constitution's strength is said to be its flexibility. Unfortunately this is a clear example of how such flexibility works in practice: (part of) the Westminster elite spots a potential constitutional issue, tries to quickly turn it to its advantage and shape reform according to its own interests, while closing out proper public debate. It's hard to see how this can result in good decision-making, never mind good constitutional reform, for either England or the whole UK - and harder to imagine that these decisions are really being taken in the best interests of the citizens in whose name they are being made.

The Bulc Question: a good pick for the Commission?

When the Slovenian candidate to become the Commissioner for Energy Union and a Vice President of the Commission, Alenka Bratusek, was overwhelmingly rejected by the European Parliament's industry and environment committees, the Socialists and Democrats were quick to signal their support for the Socialist MEP Tanja Fajon as her replacement. The EPP also backed Fajon as she was the second choice of the Slovenian government over the summer.

The problem with this was that there has been a change of government in the meantime, with a completely new political party sweeping into office. The new Prime Minister, Miro Cerar, condemned the cross-party backing for the Socialist MEP as meddling with the decision of a national government, and selected a political newcomer Violeta Bulc as Bratusek's replacement.

Bulc has only briefly been a minister in Cerar's newly-formed government, and a minister for Development, Strategic Projects and Cohesion. She has experience as a businesswoman (EUObserver reports that she has also trained as a shaman and firewalker - she went to the Shamanic Academy in Scotland in 2008 [PDF]), but no really relevant policy experience for the portfolio of Energy Union. In fact, it's hard to get a grip on what her business experience is actually in, although the word "innovation" is mentioned a lot. Since Bratusek was rejected due to her terrible performance when grilled by MEPs, it seems odd to pick someone with less political experience, but then Cerar's party was only formed just before the Slovenian elections earlier this year in June, and Cerar himself is new to the political game.

And now it also looks like the opposition is pressing for an anti-corruption investigation into Bulc's nomination as her nomination was only passed by the Slovenian government due to a procedural rule which permits absent ministers' vote to be counted in favour of a motion. Bratusek herself was brought down as Prime Minister by the anti-corruption commission, and nominated herself as commission candidate before she was kicked out of office.

In the Parliament the Socialists have backed off slightly, stating that it will be Bulc's performance in Parliament that will matter and that they will only reject her if her performance is worse than Bratusek's. But with opinions of Bulc already low and her nomination subject to domestic political battles, the focus should still be on whether or not she's up to the job.

It is unlikely that Bulc will get the Energy Union post and there will probably be a small reshuffle of the posts to take into account how the candidates have been received by Parliament. Currently the Education, Culture, Youth and Citizenship portfolio, which was controversially given to Hungarian candidate Tibor Navracsis, is the favourite as it will allow Juncker to shuffle Navracsis away to a less contentious post. Fajon, too, had little experience when it came to energy union, but as an MEP since 2009 who has been a member of the Parliament's Civi Liberities, Justice and Home Affairs Committee, she has more policy experience for the tipped new portfolio than Bulc.

Cerar is right that the nomination is Slovenia's choice and not the Parliament's, even if Parliament can reject her as part of the proposed Commission, but has he made the less credible pick? It certainly looks like that way at the moment, but the parliamentary hearing will be the big test for Bulc.

Detoxification was so last decade; say hello to UKIP-lite

David Cameron once told the Conservative Party to "stop banging on about Europe". Now, having let it be known that he could support a Brexit if there isn't sufficient repatriation of powers, it's hard to see how he's going to be able to stop banging on about Europe himself, never mind the Conservatives. It's yet another step the right wing of the party have forced Cameron to take: first he brought the Conservatives out of the European People's Party, then he tried to veto the Fiscal Stability Pact, then he held his big speech on Europe and promised a renegotiation and referendum by 2017. Far from bringing the right-wing of the party onside, the Tories are in a state of near civil war.

The Conservatives themselves have been hit by 2 defections by sitting MPs to UKIP: Douglas Carswell and Mark Reckless.  Both of them have resigned their seats to contest by-elections, which appears to be a strategy to keep the political pressure and momentum running in UKIP's favour: with staggered out by-elections in the lead up to the general election, UKIP could have the Tories constantly looking over their shoulders for UKIP.

But if the decision to stay or leave the European Union is a pragmatic decision for Cameron (if, I suspect, one where the security of his premiership weighs quite heavily as a factor), it's a reckoning for others. John Redwood, a former Conservative cabinet minister, has warned businesses not to speak out in favour of remaining within the EU:

"If they don't understand that now they will find those of us organising the 'get out' campaign will then make life difficult for them by making sure that their customers, their employees and their shareholders who disagree with them - and there will be a lot who disagree with them - will be expressing their views very forcefully and will be destabilising their corporate governance."

It's not often you hear a Tory talk about destablising corporate governance! (I can't wait to see Redwood camped outside the Confederation of British Industry telling worker of the world to unite). For me this sums up how much leaving the EU has become an article of faith for much of the Conservative party. Leaving the EU itself seems to be a symbol for being able to push ahead with other right-wing policies: cutting red tape, getting even tougher on immigration, cutting taxes... When Cameron was first elected leader of the Conservative party, he wanted to detoxify the Nasty Party, but now much of the party is set on turning to "true conservativism" in the belief that this is the only way for the party to win (or be worthy of winning) elections. And increasingly the Conservatives are equating true conservatism with UKIP.

Merkel's CDU and Alternativ fuer Deutschland: the Saxon result

The euro-skeptic (rather than Euroskeptic) German party Alternativ fuer Deutschland won almost 10% of the vote in the state elections in Saxony, coming in ahead of the Green Party. The win has been a big boost for the party, propelling it into the Saxon Landtag while the liberal FDP and far-right NDP drop out as they didn't win enough votes to clear the threshold for entry.

The rise of the AfD has been reported on elsewhere on how it could impact Angela Merkel's CDU and her EU policy (it's hard to imagine even 5 years ago so much interest being shown in a German state election). But I don't see the result as one that would pressure the CDU to take a more Euroskeptic stance. It's important to note two facts when thinking about the AfD's impact on the CDU: that the CDU has retained almost 40% of the vote, its percentage dropping only slightly since the last election, and the turnout was very low at 49%.

Concern over the "splintering of the right" in Germany is another angle that's being reported on, but it also looks a bit overblown - the last federal elections saw the economically right-wing FDP party lose all their seats, with the CDU the largest beneficiary - a huge consolidation on the right, at least federally. In some ways the AfD, with its economically right-wing positions, is starting to fill the political vacuum left by the decline of the FDP.

Of course, the AfD is not the FDP: it's a protest party and hard to pin down on many of its positions, but its leadership is on the economic right and it has attracted a socially conservative membership who may have been former CDU supporters disappointed that the CDU has become socially more centrist (though there are still plenty of socially conservative voices in the CDU too). Saxony is also a state that has seen support for the far-right NDP, a nationalist party that is periodically the subject of banning attempts. So it makes sense that the AfD took votes from the FDP and a small number from the NDP (not to mention that it would be more respectable to vote for the AfD than the nationalist NDP). Oddly for a protest party, it looks like those who voted for it in Saxony are largely satisfied with their own economic position.

The CDU has kept its distance from the AfD, leaving the Social Democrats and the Greens as its two possible coalition partners for the state government, and a similar stance is being taken on the federal level. Its euro-skeptic stance and protest party style makes it an unsuitable and probably unstable coalition partner, and a coalition with it could toxify the CDU when it is the biggest of the 2 big tent parties and is comfortable with coalitions with the centre-left. The rising profile of the AfD could boost the socially conservative and anti-transfer union voices in the CDU, but at the moment the AfD hasn't actually eaten into the CDU's vote to a significant degree. And it should be remembered that the CDU is in coalition with the Social Democrats at the moment - a party that would like to ease austerity in Europe - so Merkel's government is probably relatively insulated from the AfD's politics.

President Tusk and High Representative Mogherini

Polish Prime Minister Donald Tusk and Italian Foreign Minister Federica Mogherini are set to take two of the top EU posts: European Council President and the EU's High Representative for Foreign Affairs respectively. So what does this choice tell us about the EU's direction?


President Tusk

The choice of Tusk for EC President is being hailed as demonstrating the importance of Poland - and the growing integration of the new Member States within the EU (apparently former Polish PM Jerzy Buzek being President of the European Parliament back in 2009 doesn't count anymore). Politically, Tusk is part of the centre-right European People's Party and has a close relationship with Germany. But in the UK Tusk is seen as a counter-weight to Juncker's federalism; it's reported that Cameron and Tusk have agreed on the need for welfare reform within the EU despite their previous bust-up over free movement rights.

In terms of treaty-change and EU reform, having a sympathetic EC President will be worth more to Cameron than a sympathetic Commission President. As EC President, Van Rompuy was often asked to look into economic and institutional solutions to the various crises over the last 5 years, so the EC President is well placed to influence the EU's institutional direction. However issues like welfare are largely controlled by the Member States, which is why the UK can change its laws in the way it wants already, even if there isn't that much of a problem to begin with.


High Representative

Mogherini was the most controversial choice. Like her predecessor, Catherine Ashton, back in 2009, Mogherini's great political strengths are that she balances out Tusk and Juncker as a (PES) woman in one of the top EU jobs. However, while she hasn't had much more than 6 months ministerial experience, unlike Ashton, foreign policy seems to be her area of study and expertise. How good she will be in the job remains to be seen, but it is worth remembering that it's hard to really use the office to great effect during a crisis. Ashton's foreign policy achievements - apart from trying to build up the External Action Service - were mostly where she undertook unglamourous and time-consuming negotiations, such as with Iran and Serbia and Kosovo.

So when concerns were voiced over Mogherini's actions in the Russia-Ukraine crisis, we should remember that the Council has taken the lead on this - and the Iraq/Syria crisis - rather than Ashton. The High Representative has a coordinating role, and Mogherini's background and linguistic skills appear to make her better suited to the job than Ashton when she first took the post. The office needs time and hard work to build up its effectiveness: under Ashton institution-building was the priority. Mogherini will probably be a more publicly active High Representative, and could help build the credibility of the office further - depending, of course, on how good she is at bringing the Member States together.