Wednesday, December 07, 2005

A most determined case of economic suicide

Some weeks ago the body of a leading member of the opposition in Kazakhstan was found with two gunshots in the chest and one in the head. A week or so before the actual election, which returned President Nazurbayev with 91 per cent of the vote, the police produced its report. The man had clearly committed suicide, they said. A most determined case of suicide, one might add.

With greater justification, one might say that Germany is a most determined case of would-be economic suicide.

It seems that the German government will not allow a continuation of a reduced level of VAT (5 per cent) on services such as house renovation, bike repairs, hairdressing etc. If no agreement is reached on it, the derogation will fall and the minimum of 15 per cent will be charged from January 1, 2006.

The German argument, needless to say, is that the people hired to do repairs of various kinds, tend to be East Europeans and by not allowing lower VAT, they are protecting their own workers.

To some extent, this view is supported by the new member states, who have benefited from the derogation, although as EUObserver says:
“Eleven countries (nine "old" member states plus the Czech Republic and Poland)currently take advantage of the derogation scheme, with the European Builders Confederation (EBC) saying 250,000 jobs could go if VAT and prices suddenly jump up.”
Why anyone should wish for even higher unemployment in the EU is something of a mystery. An even bigger mystery is why the German government is incapable of understanding that economic activity is good for a country while taxation that is so high that it prevents such activity is not. After all, if there is a lot of house repairing going on, German builders might be able to get in on the act as well.

There is some indication that the German government might change its mind in time for the derogation (a small enough thing) to be agreed to remain in place. We shall see whether Chancellor Merkel is up to even a small gesture.

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