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G7 nations hope corporate tax accord will trigger global domino effect

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Good morning and welcome to Europe Express.

Finance ministers from the Group of Seven industrial nations are hoping to agree the outlines of a deal on corporate taxation in London today, in a move they hope will add to momentum behind a broad global deal. We’ll unpack what a deal would enable, and what dominoes still need to fall before meaningful legislation can be set forth.

We’ll also explore the latest EU draft proposal for a carbon border tax, and particularly the contentious elements it conveniently leaves out.

And we’ll have a look at the growing Tea Party-like movement within the German Christian Democratic Union — and what that will mean for the post-Merkel era.

But before we get into any of that, a quick update on the no-nonsense European Public Prosecutor we wrote about here and here. Speaking to a group of Brussels-based journalists yesterday, Laura Kovesi said she is considering returning some of the €7m in extra funding her office has received, because she says it may not be used for hiring extra staff. “What am I going to spend it on, buying plants?” she asked.

The European Commission (which approved the extra funding) said it would review the request for extra staff in the coming months, once the caseload builds up.

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A twist in the taxation tale

Finance ministers from the Group of Seven countries are tantalisingly close to forging a common position on corporate taxation, as they prepare for meetings in the UK today and Saturday, write Sam Fleming and Mehreen Khan in Brussels. 

Such a move would represent an important step towards a long-elusive shake-up of global corporate taxation rules, with the goal of curbing the ability of multinational companies to exploit low-tax jurisdictions to scrunch down their tax liabilities. 

But given the general excitement about the potential taxation shake-up, it’s worth examining a bit more closely what an accord at G7 level actually unlocks.

Such an understanding would, after all, encompass only a small (if influential) group of nations. How would this impact discussions at G20 level, and indeed talks among a far larger group of more than 100 nations under the auspices of the Paris-based OECD? 

First of all, what is likely to be settled in the next day or so? If all goes well, G7 finance ministers will reach an understanding on two key fronts: 

  • A new right should be created to tax the very largest multinationals’ profits based on where they make their sales (dubbed Pillar 1) 

  • A global minimum corporate tax rate should be set at an effective rate of 15 per cent (so-called Pillar 2)

The G7 countries are betting that an understanding at their level would, given the involvement of key players including the US, Japan and Germany, generate political impetus among the G20 countries to adopt a similar position. 

That said, the big powers need to tread delicately or risk appearing to railroad big trading partners among the G20 to fall into line. 

When it comes to the Pillar 2 minimum rate, having major powers including the US on board creates its own natural momentum towards wider acceptance. If smaller countries (take Ireland, for instance) were to resist signing up to the 15 per cent rate, the US could simply top up the difference when it levies taxes on a given company under its own regime.

On Pillar 1, the OECD countries need to sign up politically to the principle and then all 139 members involved in the tax process need to ratify for it to take effect. 

Enacting it within the EU is particularly complex. The European Commission has promised to propose binding legislation to enforce the measures within the bloc. Passage of laws on both Pillar 1 and Pillar 2 would require a unanimous decision among member states, however. 

Pillar 1 is particularly contentious, because it would be seeking to arrange the allocation of taxing rights between EU countries. That could end up being hampered by individual member states as they haggle over the details.

But the uncertainty doesn’t only lie in the EU. There is no guarantee that the Biden administration will be able to push the necessary legislation through Congress. As a result, a number of European states are retaining the right to implement a digital tax in their own jurisdiction if matters get snarled on Capitol Hill. 

The simple reality is that when it comes to international taxation, any big breakthrough tends to reveal a fresh set of hurdles just around the corner. 

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CBAM lacks ka-boom (for now)

Brussels’ has begun sketching out legal plans for how its novel carbon border adjustment will operate, but Europe’s big polluting industries are still left wondering how exactly it will protect them, writes Mehreen Khan in Brussels.

A leaked draft of the European Commission’s proposal for a Carbon Border Adjustment Mechanism (CBAM) confirms many of the things we already knew: the tool will be strictly limited to target a handful of imports such as steel, cement, power generation, and fertilisers. The system will require a complex and bureaucracy-heavy network of independent auditors to ensure foreign companies are accurately reporting the carbon footprint of said materials.

The CBAM is one of the most highly anticipated tools in the EU’s new green deal armoury. Trading partners like Russia and Ukraine are worried it will disproportionately target their companies, while the US is making noises about setting up its own version.

But this week’s leaked draft leaves out many of the crucial details that EU industries have been demanding. The tool has been hailed as a measure to protect European business from being undercut by foreign rivals who don’t have to abide by onerous emissions regulations or pay the EU’s domestic carbon price.

Crucially, groups such as the steel industry have demanded Brussels maintain the free carbon permits that many industries enjoy under the bloc’s emissions trading scheme. They argue that reducing these allowances to zero — as Brussels has said it will do — before the CBAM is set up will hit them with a doubly whammy of rising carbon prices and little protection from foreign competition.

Brussels’ draft doesn’t sketch out the relationship between the CBAM and how to manage free allowances. The text only refers to an undefined “transition” period whereby free credits are temporarily maintained. Separately, Europe Express has seen internal commission estimates which suggest Brussels is working towards a full phasing out by either 2030 or 2035.

The final decision will undoubtedly be subject to intense bargaining from Europe’s governments, which will need to decide how far to protect homegrown industries.

Chart du jour: Insurers lag on cyber attacks

Insurers pull back on cyber

After a flurry of high-profile hacks in 2021, including on Ireland’s Health Service Executive, insurers are edging away from underwriting cyber threats like ransomware. Instead, companies pin their hopes on governments to intervene and stem the flow of attacks. (Read more here)

German Tea Party

For years, Germany’s Christian Democrats have been wrestling with a small but noisy group of rightwingers in their ranks who want to take the CDU back to its conservative roots, writes Guy Chazan in Berlin.

This group, known as the WerteUnion, or the Values union, has long been the party’s problem child. Last Saturday it became a juvenile delinquent — with arsonist tendencies.

On that day its members elected Max Otte as their new leader — a man reviled by moderates in the CDU. A fund manager and prolific author, he’s notorious for praising the Alternative for Germany, a far-right party that most Christian Democrats see as beyond the pale. At the last Bundestag election in 2017, he said he would be voting AfD, describing Angela Merkel as unelectable.

The WerteUnion was set up in 2017 to represent disgruntled conservatives angry at the leftward drift of the CDU under Merkel, and especially at her “everybody-is-welcome” refugee policy.

But Otte’s election takes it into uncharted territory. Even ultraconservatives such as Hans-Georg Maassen, the former head of German domestic intelligence who has become a rightwing standard-bearer (as we wrote back in April), have problems with Otte: he announced this week that he was suspending his membership of the group.

The Otte election is fuelling fears in Berlin that the CDU could end up being hijacked by the right after Merkel’s departure from power later this year — just as the Republican party was by the Tea Party movement and the Trumpists.

Armin Laschet, the CDU’s candidate for chancellor in September’s election, has scrambled to distance himself from Otte, telling Deutschlandfunk radio this week that the WerteUnion is not a constituent part of the CDU and has “nothing to do” with the party. “I don’t share Herr Otte’s views and we will not be holding talks with him,” he said.

But politicians from other parties are demanding he go further — possibly by expelling Otte from the CDU. Lars Klingbeil, secretary-general of the Social Democrats, called Otte’s election a “putsch by the AfD loyalists” and called on the CDU to make a clean break with the WerteUnion.

“The CDU/CSU must be careful that the policy vacuum left behind by Merkel isn’t filled by rightwing populists,” tweeted Volker Wissing, secretary-general of the liberal FDP. 

Two things to watch today

  1. G7 finance ministers gather in London for a two-day meeting

  2. Slovenian president Borut Pahor is in Brussels

Smart reads

  • The successful French-German relationship may be at the core of the European project, but the gulf between the two in defence and security policy is causing frustration in Paris and Berlin. (GC)

  • After a recent EU deal on tax disclosures for corporations, new research suggests that investors focusing on those figures without a larger context may get the wrong impression, for instance in highly cyclical industries like air travel.

  • When the G7 summit between world leaders takes place in the UK next week, one of the aims will be to come up with a global infrastructure plan to rival China’s Belt and Road Initiative, according to an internal report seen by Handelsblatt.

FT Event: Made in Italy, Setting a new course

On June 8, the Financial Times, Il Sole 24 Ore and Sky TG24 are partnering for a digital event that will explore key measures planned for relaunching the Italian economy in the post-pandemic landscape. Register here today.

Are you enjoying Europe Express? Sign up here to have it delivered straight to your inbox every workday at 7am CET. Do tell us what you think, we love to hear from you: europe.express@ft.com.

Today’s Europe Express team: sam.fleming@ft.com, mehreen.khan@ft.com, guy.chazan@ft.com, david.hindley@ft.com, valentina.pop@ft.com. Follow us on Twitter: @Sam1Fleming, @MehreenKhn, @GuyChazan, @valentinapop





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Biden says he is open to exchange of cybercriminals with Putin

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US president Joe Biden said he was open to Russian president Vladimir Putin’s proposal to hand over cybercriminals to the US if Washington did the same for Moscow, just days before the two leaders meet for a summit in Geneva.

Biden and Putin will sit down in Switzerland on Wednesday for their first face-to-face meeting since the former was sworn in as US president. Both leaders said at the weekend that relations between their two countries were at a low point, but Biden’s latest comments suggested there could be room for co-operation.

Speaking at the conclusion of a meeting of G7 leaders in the UK on Sunday, Biden told reporters he was receptive to Putin’s suggestion of reciprocal extradition of cybercriminals responsible for disruptive ransomware attacks.

Earlier on Sunday, Russian state TV aired an interview with Putin in which the Russian president said that Moscow and Washington must “assume equal commitments”.

“Russia will naturally do that but only if the other side — in this case the United States — agrees to the same and will also extradite corresponding criminals to the Russian Federation.”

Asked about Putin’s comments, Biden said: “Yes, I am open to, if there are crimes committed against Russia, that in fact are people committing those crimes are being harboured in the United States, I am committed to holding them accountable.”

“I was told as I was flying here, that [Putin] said that,” Biden added. “I think that is potentially a good sign of progress.”

An increasing number of audacious ransomware attacks has paralysed companies in recent weeks. These have included the disruption of the Colonial Pipeline, which provides petroleum supplies for much of the US east coast, as well as operations at JBS, the Brazilian meat processing company. The White House has said it believes both attacks originated in Russia.

Jake Sullivan, US national security adviser, later clarified that Biden had not signed up to a “prisoner swap”.

“What he was saying was that if Vladimir Putin wants to come and say I am prepared to make sure that cyber criminals are held accountable, Joe Biden is perfectly willing to show up and say cyber criminals can be held accountable in America, because they already are. That is what we do,” Sullivan told reporters on Air Force One en route to the Nato summit in Brussels, the second leg of Biden’s first foreign tour as president.

“This is not about exchanges or swaps or anything like that.”

Putin told NBC News in an interview that aired on Friday that relations between the US and Russia were at their “lowest point in recent years”. Biden on Sunday said that he agreed with the characterisation, but also pointed out areas where he believed the two countries could work together.

The White House confirmed on Saturday that Biden would hold a solo press conference following the summit with Putin, rather than share a stage as his predecessor Donald Trump did with the Russian president in Helsinki in 2018.

Joe Biden disembarks from Air Force One in Belgium on Sunday for a Nato summit
Joe Biden disembarks from Air Force One in Belgium on Sunday for a Nato summit © Benoit Doppagne/POOL/EPA-EFE/Shutterstock

“This is not a contest about who can do better in front of a press conference or try to embarrass each other,” Biden said. “It is about making myself very clear what the conditions are to get a better relationship.”

He added: “Russia has engaged in activities which we believe are contrary to international norms. But they have also bitten off some real problems they are going to have trouble chewing on. For example, the rebuilding of Syria, of Libya.”

“I am hopeful that we can find an accommodation that can save the lives of people in, for example, Libya.”



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Construction sector warns rising costs will eat into EU recovery plan

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Construction industry executives across Europe have warned that “dangerous” price rises and shortages of many building materials risk undermining the EU’s flagship €800bn economic stimulus programme.

The EU construction sector generates almost 10 per cent of the bloc’s economic output and vast infrastructure projects make up a sizeable proportion of Brussels’ recovery fund, which will distribute grants and loans to rebuild member states’ economies after the Covid-19 pandemic.

But prices of construction materials from steel and wood to concrete and copper have begun to rise sharply in recent weeks as the economic rebound both in Europe and elsewhere — including the US and China — triggers a building boom.

According to the European Construction Industry Federation (FIEC), bitumen prices have risen 15 per cent in only three months, cement prices were up 10 per cent in a single month and wood prices were up over 20 per cent.

Public infrastructure projects usually impose penalties on builders for delays, while contractors often have to bear the cost of unexpected price increases.

Domenico Campogrande, director-general of FIEC, warned that the price rises and extra delays risked diluting the impact of the EU funds.

“The danger is that we have this big EU recovery plan but if 30 to 40 per cent of these funds are absorbed in extra financial instruments to cover the higher prices, it would be a real nonsense as it won’t go into the real economy,” he said. 

In a recent letter to the European Commission, the FIEC expressed “alarm” at the price rises and shortages of materials, including a more than doubling of the Italian price of steel bars used to make reinforced concrete in four months to March. 

“This phenomenon is jeopardising the construction sector’s contribution to economic recovery and is threatening the potential impact of European recovery programmes,” it said.

In Italy — the biggest beneficiary of the stimulus cash from Brussels — the government is planning to spend more than €100bn of its EU funding on building new infrastructure over the next five years. But the construction sector has warned officials that it will struggle to rise to the challenge without major reforms.

“We are facing shortages of many basic materials for construction and this is very dangerous as Italy is being hit harder than the rest of Europe,” said Flavio Monosilio, research director at ANCE, the association of Italian construction companies. “This crisis is at the heart of the new EU recovery plan.”

Line chart of Price indices rebased in US dollar terms showing Construction materials prices soar

Construction executives blame several factors for the bottlenecks, including the sharp rebound in demand which has outstripped the supply of materials in many countries, as well as pandemic-related disruption to supply chains and continued trade tensions.

Some materials have been hit by additional problems such as a bark beetle infestation that has hit wood production, and delays in the redistribution of unused steel.

Thomas Birtel, chief executive of Austrian construction group Strabag, said price rises had “increased tremendously in the last two weeks” and the company had to “report delays on individual construction sites because the material is simply no longer available”. 

Strabag, which built the Copenhagen Metro in Denmark and the Limerick Tunnel in Ireland, operates its own concrete and asphalt plants, but Birtel said: “Construction is a small-scale business and it is not even possible to control the supply chains for all building materials.”

In Germany, 44 per cent of construction companies surveyed by the Ifo Institute in May reported problems procuring materials on time, up from less than 6 per cent in March.

“We haven’t seen a bottleneck like this since 1991,” said Felix Leiss at Ifo. “This evidently caused construction activity to slow down in April, at least temporarily.”

Production in the German construction industry fell 4.3 per cent in April from the previous month, despite companies in the sector reporting a record order backlog of €62bn in March.

“Many producers are unable to supply the materials before the end of the year and that’s a real problem,” said Stephan Rabe at the German construction industry association. “A lot of money is going into public and private sector construction projects in the US and China and that is sucking up a lot of materials. Wood is being produced in Germany and exported to the US, so it is in short supply here.”

Some German politicians have called on Berlin to seek temporary EU export restrictions on wood and other materials.

As the US government prepares to launch a $1.7tn infrastructure programme and the global economic rebound is expected to gain pace, the pressures are expected to remain high in the coming months.

“It will take time to go back to normal — at least the end of the year,” said Campogrande.

Some countries, such as France and Germany, have responded by easing the rules on some public sector construction contracts, waiving fees for delays and compensating contractors for unforeseen price rises.

Monosilio said Rome was yet to offer any relief to the sector, which has been battered by a decade-long fall in public infrastructure investment, a lack of funding from banks and long delays in project approvals and payments.

Italy’s prime minister Mario Draghi has said the “destiny of the country” depends on the success of a €248bn package of investments and reforms mostly funded by the EU’s Recovery and Resilience Plan. It includes investment in high-speed train lines, renewable energy facilities, smart electricity grids and energy efficient buildings. 

EU states have a poor record in distributing funds; in the six years to 2020, they on average only spent just over half the money they were allocated by Brussels. 

Without reforms to address the Italian construction sector’s problems, Monosilio said similar problems could bedevil the EU’s recovery spending efforts.

“The Draghi government absolutely wants to improve the situation,” he said. “[But] it is a sword of Damocles hanging over the whole European project.”



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Macron warns Johnson to keep his word on Northern Ireland

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Emmanuel Macron, French president, has warned Boris Johnson that efforts to reset relations between Paris and London depend on the UK prime minister keeping his word over the Brexit deal in Northern Ireland.

The EU has threatened to punish Britain — including imposing trade sanctions — if Johnson unilaterally breaks commitments on border checks made in the Northern Ireland protocol, part of his Brexit deal.

At a breakfast meeting on the margins of the G7 summit in Cornwall, Macron made it clear he expected Johnson to honour the Brexit deal sealed with the EU last December.

Macron is seen by Downing Street as the most hardline EU leader on the issue. Arguments between French presidents and British prime ministers at global summits are common — and often play well domestically.

But Macron’s warning underscored the seriousness with which the EU regards the mounting crisis in Northern Ireland.

Joe Biden, US president, has signalled his deep concern over the future of the peace process.

An Elysée source said Macron told Johnson at a breakfast meeting at Carbis Bay that he was ready to reset relations with London and that Britain and France had many common interests.

“The president, however, strongly underlined that this re-engagement requires the British to honour the promises made to Europeans and to respect the Brexit agreement,” the Elysée source said.

The protocol requires Britain to check certain goods moving between Great Britain and Northern Ireland to avoid them passing unchecked across the open border to Ireland, an EU member, and into the single market.

The introduction of an effective trade border within the UK’s territory has infuriated pro-UK unionists in Northern Ireland and added to tension in the region.

Johnson argues that the EU is being intransigent in the way it applies the protocol and Dominic Raab, UK foreign secretary, has accused Brussels of being “bloody minded”.

A clash is approaching later this month on exports of chilled meat products across the Irish Sea; the EU only permits trade in frozen meat. A “grace period” to allow continued sale of British sausages, minced beef and chicken nuggets in NI expires at the end of June.

Johnson has left open the option of unilaterally ignoring the ban in a move which the EU has warned could trigger retaliation under the terms of the EU/UK Brexit trade and co-operation agreement.

Maros Sefcovic, European Commission vice-president, confirmed last week that this could include trade sanctions, spawning fears of a trade war or — in tabloid headlines — a “sausage war”.

Johnson also held talks on Saturday morning with Angela Merkel, German chancellor, and European Council president Charles Michel and European Commission president Ursula von der Leyen.

Downing Street said after the meetings that Johnson was “confident” in his tough line on the protocol and that he had agreed with his European counterparts there was a need to find solutions “at speed”.

Johnson’s spokesman said “all options are on the table” if no solutions were found; Downing Street has not excluded suspending parts of the protocol. He added that none of the European leaders explicitly mentioned the threat of trade sanctions against the UK.

Von der Leyen said in a tweet that the Good Friday Agreement and peace on the island of Ireland were paramount.

“We negotiated a protocol that preserves this, signed and ratified by the UK and EU,” she said. “We want the best possible relations with the UK. Both sides must implement what we agreed on. There is complete EU unity on this.”



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