City & Business: Sun editor caught in bed with German

AN MI6 report has come into our possession:

Time: 1730.

Date: 5 December.

Place: "Auf Wiedersehen Pet" Lounge, Frankfurt Airport.

Speaker one: "Sun" newspaper editor David Yelland, in wig and sunglasses.

Speaker two: German finance minister Oskar Lafontaine, in Lederhosen and Tyrolean hat.

Edited transcript of taped conversation:

Yelland: I just can't bloody believe it! I cannot bloody believe it! Everybody, and I mean everybody, took the bait.

Lafontaine: It went all right. It could have gone better.

Yelland: Whaddaya mean, could have gone better? Our circulation is up 9 per cent. You're a household name from that funny place where they have reindeer to the Costa.

Lafontaine: We've seized the initiative, ja. But we haven't won the war.

Yelland: Bloody pessimist. All right, speak, Oskar. What would winning the war mean?

Lafontaine: Mein Freund: a little history.

Yelland: History? You never said anything about history. Listen, mate, we're not having any history in my paper. (Pulls out Wednesday's front page of 'The Sun'.) "The Sun today sends Euro-crazy Oskar Lafontaine a blunt two-word message. And we send it on behalf of YOU - our 10 million readers. The German finance minister yesterday stomped all over Britain's democratic rights by threatening to take away our power to say No! to higher taxes. That's the last straw, Oskar. This time you've gone too far." (Slams paper down on bar.) That's our side of the deal. We lived up to it. You never said nuffink about history. You want history, let's talk Adolf. Jawohl, Herr Hitler!

Lafontaine: Mein Freund. Calm yourself. Have another beer. Tax harmonisation: a short history. No pain, I promise. It began as an initiative by the European Commission's internal affairs director, Mario Monti, an Italian conservative. Mario wanted to iron out a few tax discrepancies in the EU, no more. Harmonised VAT, maybe. Harmonised tax on interest from bank savings, maybe. Harmonised tax on income earned on stocks and bonds, maybe.

Yelland: So what's the Chancellor got against this Eye-Tie lark, then?

Lafontaine: He sees it as the thin end of the wedge. To be frank, the City of London is a great financial centre. A tribute to Adam Smith and laissez-faire capitalism. It generates nearly a fifth of your national income. And it's founded on the eurobond market, a market where tax on income is not withheld at source, but paid afterwards, only when investors declare it.

Yelland: Way over my head, guv.

Lafontaine: And, to be frank, your Chancellor is right. I do plan to use Mario Monti's initiative as the thin end of the wedge. Not, however, so crudely as your paper has suggested. Tax harmonisation is a diversionary issue for us. Germany can't afford its social security system anymore. We have to trim our welfare state just as you are trimming yours. Before we begin cutting, we need to cover ourselves - with a scapegoat. So we invoke the idea that Germans bear a heavier burden inside the EU than anyone else.

Yelland: Rommel in the desert?

Lafontaine: When your Mr Brown threatens to veto tax harmonisation, we parry by declaring we want the EU to move from single-nation veto power to majority rule.

Yelland: You read it in The Sun first, guv.

Lafontaine: Ja, but what no one read in your paper is what we're doing now. There is a recession coming, mein Freund. A bad one. You noted the co-ordinated interest rate cuts in the 11 EMU countries on Thursday? That was in response to recession fears.

Yelland: Yeh, we covered it.

Lafontaine: To offset this recession I have a plan: Raise the workers' wages. Let them spend more. Let them spend us out of recession.

Yelland: Where's the extra dosh coming from?

Lafontaine: Precisely. Your Chancellor asks this. He thinks if the money comes from government, our budgets will go into the red, and make investors frightened. If the money comes out of company profits, it will make companies run.

Yelland: So Brown wants a free market and a liberal financial centre that allows Britain to compete its way out of the recession?

Lafontaine: Good for you, Englander! You're catching on. And we can't allow Mr Brown his free market and liberal financial centre. Hence our idea for the harmonisation of corporate taxes. Britain must have the same taxes as us, so people don't rush to invest in Britain.

Yelland: And the Tories say: "Sod it all, mate," right? They want nothing to do with tax harmonisation, monetary union, or anything at all to do with Europe. They want Britain to be a little island off Europe like Hong Kong off China.

Lafontaine: Right, and we can live with that. Or we can live with Britain toeing our line. But we can't live with Mr Brown being a sceptical voice of reason questioning our policies. So we have our little deal with you, eh? To destroy the voice of reason.

Yelland: Keep that bit under your hat, will you, guv? Anyway, what's this voice of reason game?

Lafontaine: Keep this under your hat too, please. Our proposals for imposing withholding tax on eurobonds aren't very sensible. We say we want the withholding tax to stop eurobond investors from evading tax. But an equally good, and more thorough way, would be to harmonise bank disclosure.

Yelland: Harmonise bank disclosure, not taxes?

Lafontaine: Pressure Switzerland, Luxembourg, and the Channel Islands to let our tax people know who has money there. That way we could collect taxes and still let London remain a great, liberal financial centre. That way the eurobond market wouldn't be driven back to the US where it came from in the 1960s after the US got rough on US investors.

Yelland: Told you. Hate history.

Lafontaine: Don't worry, mein Freund. Just keep churning out the rubbish. Leave the rest to me.