In short, countries will either have to cut costs, or maintain the present high level of taxes to stay within the criteria of the currency zone, and to maintain public services, pay pensions and preserve social welfare systems. The European Commission, the executive arm of the European Union, warned that unless tax spending is checked the burden will shift increasingly to the least skilled or less mobile workers. Similarly, it said, small companies and craft industries that are important for job creation will be penalized more than mobile multinational companies. Taxes and social charges on labor have increased over the past 15 years while other costs, such as capital, energy and natural resources, have decreased. The European Commission says that taxes, as a percentage of GDP, in the EU set a record in 1996.
Tax competition is rife among European countries seeking to lure investors.
When two regions offer similar facilities and labor skills, the one offering the best tax breaks usually wins the deal. In a first move to iron out inequalities, EU members have agreed on a nonbinding code of conduct on business taxation. They said they would avoid ''harmful competition'' in taxation, meaning deals to attract investors to certain regions, enterprises or economic sectors. They also agreed to phase out such inducements where they already exist. Exactly what constitutes ''harmful'' was not explicitly defined, leaving the way open for future disputes.