Outlook: Withholding tax

THE CORPORATION of London needs all the help it can get for its campaign against a European-wide withholding tax on investment income. Even so, it must be rather wishing it could cut loose from its growing band of Eurosceptic camp followers. They hardly do the cause much credit.

As an example of attempted tax harmonisation across Europe, the issue has been seized upon by those who want to see the single currency fail. And because the tax could be so disastrous for the City, it has to be admitted that it does provide a highly effective propaganda tool.

The difficulty arises because the Corporation's battle - and indeed the position of the City, the British Government and our captains of industry - can no longer be against the single currency as such. That fight was lost long ago. The euro is happening and as Lord Levene, Lord Mayor of London, told an Emu conference in the capital yesterday, it is in everyone's interests, including the City's, that it succeeds. The consequences of failure are too awful to contemplate, plunging Europe into a political and economic crisis more profound than anything seen since the war.

A successful euro, moreover, presents the City with unparalleled opportunities for growth and expansion. This is not to say that the City should deferentially be going along with everything proposed by Brussels, or, more alarmingly, with Oskar Lafontaine. The euro, it is true, is a cause for tax harmonisation, but the process, as in the United States, should through competition for capital, business and enterprise, be downwards towards the lowest common denominator, not upwards to the highest.

This is why the debate over withholding taxes is such an important one, and also why it would be wrong to think that Britain and the City has already lost it. If the euro is to succeed long term, it needs to be underpinned by the creation of deep and highly liquid capital markets. The City can provide these markets, but it cannot do so if hindered by the clutter of a withholding tax; capital would shift offshore, Euroland, the single currency, and indeed the City, would all be the poorer for it.

You might have thought the Germans and French would have taken this on board. They know only too well from their own experience about the capacity of withholding taxes to cause a flight of capital. Fortunately this is not yet a lost cause. There is every chance that the euro can still be moulded towards its original purpose of free market liberalism; most of the necessary safeguards remain in place.

In ensuring the future success of the euro, as well as its own, it is vital the City and the Government stay with the case.