Defense, euro zone center stage for Franco-German alliance as Brexit looms

PARIS (Reuters) – France and Germany set out plans to make fighter jets together and tighten euro zone cooperation on Thursday as the European Union’s two biggest economies look to life beyond Brexit.

Speaking after a joint meeting of their cabinet ministers in Paris, the first since this year’s French presidential and parliamentary elections, Chancellor Angela Merkel and President Emmanuel Macron also flagged their aim to harmonize taxes within the EU and develop a coherent digital strategy for the bloc.

“I believe that we have shown shortly after the new government here was installed that we are ready to activate Franco-German relations with a new impetus,” Merkel told reporters at a joint news conference.

Most of what the pair announced went over old ground, but the plans to develop Europe’s next generation of fighter planes together could shape the future of the European fighter industry and its three existing programs – Eurofighter, France’s Rafale and Sweden’s Gripen.

It also comes as Britain’s decision to leave the European Union changes the balance of interests for a country that is both a key defense industry player and a military power.

France and Germany said their new combat system, which analysts say could involve a mixture of manned and unmanned aircraft, would replace both the Rafale and the Eurofighter.

That marks the end of a decades-long split which saw France withdraw from the Eurofighter project in the 1980s to produce its own Rafale warplane under Dassault Aviation. The two aircraft compete fiercely for global sales.

“It is a sign to the British. It means ‘you are leaving the EU and we are driving forward. We are no longer interested in you blocking the EU on defense’,” a senior German defense industry official told Reuters.

The deal could push Britain further towards co-operation with the United States where London-listed BAE Systems, also part of the Eurofighter program, helps Lockheed Martin make the F-35.

Euro Zone Focus

Tighter cooperation in the euro zone currency bloc was also flagged by the leaders – continuing a theme running through the core members of the European Union since Britain’s vote to leave shook its foundations just over a year ago.

“We agreed we must stabilize the euro zone and develop it further, that a standstill is always close to going backwards so we need some dynamism,” Merkel said.

Concrete steps in the direction of tax harmonization would, however, be required to make real progress on that integration, and neither leader gave any real details on progress.

France and Germany have long pushed for convergence in the way taxes are calculated in the euro zone, but have made little progress even agreeing among each other.

German business newspaper Handelsblatt nevertheless said finance ministers from both countries would present a roadmap by mid-September on the subject.

The plan would be finalised by December and could then be adopted next year, Handelsblatt added, citing sources involved in the negotiations.

Going beyond taxes, broader economic convergence in the euro zone could prove tricky. Macron told regional daily L’Ouest France that changes to the EU’s governing treaties were needed, a process that has in the past proved a tortuous endeavor.

The emergence of big internet companies that reduce their tax bills by domiciling their EU tax bases in countries with the lowest rates has also given a new impetus to efforts to harmonize taxation.

A French court struck down on Wednesday the tax administration’s demand for Google to pay backtaxes worth 1.1 billion euros, ruling that Google Ireland Limited was not subject to corporate and value-added taxes for the period under consideration, from 2005-2010.

Finance Minister Bruno Le Maire said on Sunday that the European Union had to ensure big U.S. internet companies such as Google paid their share of taxes.

Among other measures set out by the meeting was a broad-based EU plan for the digital industry aimed at tackling tax avoidance by the industry’s big players and organizing finance for start-ups and cyber security to be prepared for the EU digital summit taking place at the end of September.

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