No European bailout cash for the black sheep of business
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No European bailout cash for the black sheep of business

Wednesday, 22 July 2020
This is an opinion article by an external contributor. The views belong to the writer.
Angela Merkel at the European Council Summit meeting in July, 2020

Le Freeport Luxembourg, the €60 million duty-free warehouse next to Findel Airport, was once a source of pride for the Grand Duchy; government ministers and the Grand Duke brushed shoulders at the facility’s lavish 2014 opening.

Six years later, the freeport is in bad shape, financially and reputationally. With only 55% of its space rented out, Le Freeport is losing millions of euros a year. The former president of the board, Robert Goebbels, recently resigned from his post amid speculation that CEO Philippe Dauvergne might soon follow suit.

Despite the dark clouds looming over Le Freeport’s future, Luxembourgish finance minister Pierre Gramegna categorically ruled out state intervention to prevent the facility from going bankrupt. If the freeport collapses, Gramegna underlined, it would primarily be because Le Freeport’s management had failed to adequately enforce anti-money laundering rules.

Indeed, what one MEP  dubbed Le Freeport’s “extremely perfunctory” anti-money laundering controls, as well as the problematic reputational profile of its shareholders—the facility’s founder is “freeport king” Yves Bouvier, who has himself been accused of tax evasion and of defrauding a former client out of €1 billion—have taken some of the shine off of Le Freeport.

Gramegna’s refusal to prop up the ailing freeport and his emphatic declaration that “the freeport’s business model is no longer as appealing because we are following anti-money laundering laws in Luxembourg” is an encouraging development after previous Luxembourgish governments turned a blind eye to dubious financial flows. As European policymakers extend helping hands to thousands of companies in the wake of the coronavirus pandemic, they should take a lesson from Gramegna: under no circumstances should European governments prop up firms which are failing due to questionable business practices.

Keeping Covid recovery funds out of tax havens

This is particularly important given the current context. The European Commission recently announced that the EU is facing an even more severe recession than initially predicted, a steep contraction which may herald a wave of corporate insolvencies. The scale of the crisis has led to a nearly unprecedented appetite for investment in Brussels, as exemplified by the €750 billion recovery fund.

The EU only has to look across the Atlantic at the motley collection of recipients of US coronavirus loans—intended for small businesses, the funds instead went to everything from the luxury fashion brand Vera Wang to Donald Trump’s personal lawyers—to see how vital it will be for EU recovery funds to come with strict conditions.

Some member states are specifically adamant that any bailout funds should not go to tax dodgers. “If your headquarters are located in a tax haven, it is obvious that you will not be able to benefit from public aid”, French Finance Minister Bruno Le Maire emphasized.

Le Maire is right that EU-funded bailouts of tax evading firms should be a non-starter, given that the European bloc already loses a staggering €170 billion a year to tax dodging—nearly 20% of the EU’s entire budget. Despite the French finance minister’s emphatic words, however, more concrete action is required to ensure that the EU doesn’t end up subsidising tax avoiders.

Specifically, there still appears to be little appetite to impose restrictions on tax havens inside the EU. Both France and the EU’s blacklists of tax havens are missing notorious secrecy jurisdictions like the Netherlands, Malta and Luxembourg. These European tax havens often make up the lion’s share of lost tax rents for countries in the bloc—as an example, every year Germany loses 26% of the tax revenue it’s owed. A full 81% of that missing money is flowing to tax havens within the EU.

The EU should take a stronger line in general against member states facilitating tax avoidance—by including EU countries on tax haven blacklists, upping reporting requirements for companies, and agreeing on a minimum effective corporate tax rate. Ensuring that tax-avoidant firms are locked out of public bailout funds would nevertheless be an important step in the right direction.

Rewarding mismanagement?

Just as tax-dodging firms should be deemed ineligible for coronavirus bailouts, companies whose dire financial straits have more to do with their own gross mismanagement than the pandemic should not be allowed to use the recovery fund to smooth over their poor business decisions.

The airline industry, which has been nearly decimated by the pandemic, should come under particular scrutiny in this regard. The UK’s Flybe and Austria’s LEVEL have already folded, and countless others have been pushed to the brink. As one analyst put it, “every airline, regional or not, will go bankrupt unless it gets aid—either from investors, bankers, or the government”.

Many European governments are tempted to provide that lifeline, especially for national flag carriers. A more impartial look, however, makes it clear that many of these airlines have been relying on deeply flawed business plans for years and that the coronavirus pandemic merely hastened their inevitable collapse.

Croatia Airlines, for example, has asked for nearly €93 million in state aid to stay afloat. The Croatian flag carrier, however, was unprofitable long before the pandemic, posting a €10.7 million loss last year. Norwegian Airlines, meanwhile, got a €240 million bailout from Oslo in March, but has been on the verge of collapse for years. Indeed, the company has been haemorrhaging cash after an overly-hasty expansion into transatlantic routes and had to offer up its Gatwick take-off spots as collateral for an agreement with its creditors.

Given this kind of mismanagement, it’s not surprising that a survey of 230 of the world’s premier economic experts ranked bailing out the aviation industry dead last among a variety of economic measures in terms of long-term benefit.

In the months ahead, European policymakers will have to make tough choices regarding how to intervene to rescue ailing firms and kick the continent’s economy back into gear. One easy choice should be to exclude companies which are on the wrong side of international business norms, whether because they’re squirreling profits away in tax havens or because they’ve run their firm into the ground through mismanagement.