April 2, 2012 7:04 pm

The time bomb no one can defuse

Ingram Pinn Comment Page illustration pfeatures



This should be a great time to be a eurosceptic. The sceptics predicted the single currency would not work. They would love to gloat. Instead, they face a dilemma. For now the sceptics are being told that they must do everything possible to keep the euro together – or risk economic Armageddon.



This conundrum has provoked much head-scratching in Downing Street. Both David Cameron and George Osborne thought the euro was a bad idea – and neither man is surprised to see it in trouble.

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Instinct and intellect lead the British prime minister and his chancellor to believe that the single currency could well fall apart. If that is the case, then it would seem futile and counterproductive to pour money and energy into trying to prop up a doomed project.

 

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Yet all the briefings Mr Cameron and Mr Osborne are getting from the UK Treasury suggest that a break-up of the single currency could provoke an economic cataclysm – with banks and businesses collapsing across Europe, and the risk of another Great Depression.




Many of the academic and City economists consulted by the prime minister and his senior colleagues have been just as gloomy as the Treasury. Confronted with so many assurances that the break-up of the euro spells disaster, Britain’s leaders have reluctantly gone against their initial instincts. They are urging European colleagues to do everything they can to keep the single currency together. In a memorable phrase, Mr Osborne told eurozone leaders to follow the “remorseless logic” of monetary union and press on towards a true fiscal union in Europe.



Is there a way out of this euro-conundrum? Tuesday may see the first tentative answers emerge, with the announcement of the shortlist for the Wolfson Prize.


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Following the sound free-market principle that economic incentives can work wonders, Lord Wolfson, a Tory peer, has offered a prize of £250,000 for the best plan to break up the single European currency. If there is a safe way of defusing the euro-bomb, then the prize may offer the blueprint.



A British discussion about the euro is by nature a bit of a sideshow. While ideas that emerge from the Wolfson Prize and elsewhere might influence the debate, the UK is not in the euro, so the key decisions are not going to be made in London.



Instead the fate of the euro will be decided in countries such as Greece, Spain, Italy and, above all, Germany. So it is significant that, behind the scenes, a debate about the break-up of the euro is also taking place among senior figures in the German establishment.



There was always a group of top German economistscall them the Bundesbank tendency – who had deep misgivings about the whole single currency project. Now some of these German sceptics believe their concerns are being vindicated and are even suggesting that – despite the current calm in the marketsGreece may have to leave the euro within months.



One scenario doing the rounds in Frankfurt and Berlin is that the crisis could be provoked by the Greek elections, which are likely to be held in early May. A new Greek government might seek to unpick the latest debt deal, provoking a chain of events leading to Greece leaving the euro.



Technically, it is said that this would involve the sudden declaration of a temporary bank holiday, during which all euro-notes in Greek banks are stamped, to show that they are being reissued as drachmas. One obvious danger is that – as soon as this step was announced – there would be bank-runs in other vulnerable euro-area countries such as Portugal, as anxious account-holders rushed to move their money out of the country. This would be counteracted by the provision of massive emergency liquidity from the European Central Bank to financial institutions in vulnerable countries.



Doubtless, there are many flaws in this plan. But the very fact that such stark scenarios are doing the rounds in Germany may help to account for Chancellor Angela Merkel’s recent decision to give interviews proclaiming her belief in Greece staying inside the euro and suggesting that the single currency’s break-up would be a political disaster for Europe.



Ms Merkel’s view that the whole euro project would be gravely damaged by a Greek exit seems right. If, as the doomsayers predict, Greece was plunged into economic chaos after leaving, the rest of Europe could not simply stand by and watch. It would be sucked back into the resulting political and economic mess.


On the other hand, if a Greek exit went well, then other countries that are struggling inside the eurozone would be severely tempted to follow suit. There are senior Spanish officials, for example, who fear that another round of budgetary austerity – when youth unemployment is already at 45 per cent – could lead to political and economic devastation in Spain.



They argue that financial and economic crises in other European nations have rarely been solved by structural reform alone. In the cases of both Sweden in the 1990s and Iceland over the past couple of years, they also involved a major devaluation of the currency to boost competitivenesssomething that is impossible inside the euro. The implication is clear. Spain has to get out of the euro.



So far, these siren voices are being ignored because Spanish ministers – like their British counterparts – have been told that a euro break-up would lead to disaster. If the entrants to Lord Wolfson’s prize can show otherwise, they will have done the whole of Europe a service.


Copyright The Financial Times Limited 2012


Only the rich are benefiting from America’s recovery
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Robert Reich
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April 2, 2012



Luxury retailers are smiling. So are the owners of high-end restaurants, sellers of upscale cars, holiday planners, financial advisers and personal coaches. For them and their customers and clients, the recession is over. The recovery is now full speed.




But the rest of America isn’t enjoying a recovery. It’s still quite sick. The finances of many Americans remain in critical condition.



The Commerce Department reported last Thursday that the economy grew at a 3 per cent annual rate last quarter (far better than the measly 1.8 per cent in the third quarter of last year). Personal income also jumped. Americans raked in over $13tn, $3.3bn more than previously thought.



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Yet all the gains went to the top 10 per cent and the lion’s share to the top 1 per cent. More than a third of the gains went to 15,600 super-rich households in the top one-tenth of one per cent.


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We don’t know this for sure because all the data aren’t in for 2011. But this is what happened in 2010, the most recent year for which we have reliable figures (courtesy of my colleague Emmanuel Saez and Thomas Piketty, who analysed tax returns) and nothing about the direction of this recovery has changed since then.



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In 2010, 93 per cent of the gains went to the richest 1 per cent. Some 37 per cent gains went to the top one-tenth of one per cent. No one below the richest 10 per cent saw any gain at all.


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In fact, most of the bottom 90 per cent lost ground. Their average adjusted gross income was $29,840 in 2010. That’s down $127 from 2009 and down $4,843 from 2000 (all adjusted for inflation).
Meanwhile, employer-provided benefits continue to decline among the bottom 90 per cent. The share of people with health insurance from their employers dropped from 59.8 per cent in 2007 to 55.3 per cent in 2010, according to the Commerce Department. And the share of private-sector workers with retirement plans dropped from 42 per cent in 2007 to 39.5 per cent in 2010. Yet the so-calledtalent” in executive suites is getting gold-plated healthcare coverage for themselves and their families, along with deferred compensation and fat pensions subject to few, if any, taxes.



If you’re among the richest 10 per cent, a big chunk of your savings are in the stock market where you’ve had nice gains over the past two years. The value of financial assets held by American households increased by $1.46tn in the fourth quarter of 2011. And since 90 per cent of those financial assets are owned by the richest 10 per cent and 38 per cent by the top 1 per cent, the richest 10 per cent became $1.3tn richer and the top 1 per cent gained $554.8bn.



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But if you’re in the bottom 90 per cent, you probably own few, if any, shares of stock. Your biggest asset is your home. And that’s a big problem. Home prices are down over a third from their 2006 peak and they’re still dropping. The median house price in February was 6.2 per cent lower than a year ago.


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Which means if you’re in the bottom 90 per cent you’re likely to be even deeper underwaterowing more on your home than it’s worth. An estimated one in three homeowners with a mortgage are now holding their breath.


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This is the most lopsided recovery in US history.






When the American economy began recovering from the depths of the Great Depression, the gains were widespread. From 1933 to 1934 the bottom 90 per cent gained 8.8 per cent in average income.


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Yet recent recoveries have become more and more lopsided. The top 1 per cent got 45 per cent of Clinton-era economic growth and 65 per cent of the economic growth during the Bush era. So far in the Obama recovery, the top 1 per cent has pocketed 93 per cent of the gains.




.But Washington doesn’t want to talk about this lopsided recovery. The Obama administration would rather focus on the recovery without mentioning whose it is. Perhaps it’s because almost all Democratic and independent voters are in the bottom 90 per cent.




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Republicans would rather not talk about the lopsidedness of this recovery either because they’d rather not bring up the subject of inequality to begin with. Their reverse-Robin Hood budget plans cut taxes on the rich and slash public services everyone else depends on.



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Fed chairman Ben Bernanke – who doesn’t have to face voters on election daysays the US economy needs to grow faster if it’s to produce enough jobs to bring down unemployment. Well, yes. But he leaves out the critical point.


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We can’t possibly grow faster if the vast majority of Americans, who are still losing ground, don’t have the money to buy more of the things American workers produce. There’s no way spending by the richest 10 per cent will be enough to get the economy out of first gear.




The writer is the chancellor’s professor of public policy at the University of California at Berkeley and former US secretary of labour under President Bill Clinton. He is author of ‘Aftershock: The next economy and America’s future’


OPINION
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April 3, 2012, 5:50 p.m. ET
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The End of the Saudi Oil Reserve Margin
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Riyadh is less and less able to cushion supply shocks as it consumes more and more of its own oil.
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By JIM KRANE
Doha, Qatar



President Obama's sanctions plan on Iran follows an old Mideast policy playbook. Western moves against an oil-exporting country take place with the cooperation of Saudi Arabia. U.S. strategy requires the Saudis to ramp up production and replace Iranian exports in hope of avoiding a damaging spike in prices.


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It's a familiar scenario: At one time or another, the Saudis have been called upon to replace exports from Iran, Iraq, Kuwait and, most recently, Libya. The idea is to have your cake and eat it—to meet U.S. foreign policy goals without disrupting oil markets and antagonizing the American motorist.



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But the old playbook may have to be torn up. This time Saudi Arabia is struggling to assume its usual role as the oil market's swing supplier. This can be seen in current market tightness and in U.S. gasoline prices, which are edging toward $4, a dangerous prospect at election time.




The Obama administration's sanctions plan acknowledges Saudi weakness. Rather than try to impose a blanket ban, it has introduced piecemeal measures, such as encouraging China and South Korea to demand discounts for continued imports of Iranian crude. For the first time, Saudi Arabia's vaunted spare capacity appears insufficient to cover the loss of a major exporter.




When revolution last year took Libya's 1.5 million barrels a day off the market, the Saudis and other producers were able to fill the gap. A slack oil market helped. But Iran has been exporting roughly 2.2 million barrels a day. And now something else is afoot.
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krane
Bloomberg
Pilot Travel Center in Princeton, Ill.

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Saudi Arabia isn't the same depopulated petro-state that the West found itself so dependent on in the 1970s. The kingdom and its oil-rich neighbors have seen their populations and industrial bases swell. They have become huge consumers of their own energy. The ruling sheikhs have cemented themselves in power by erecting energy-driven welfare states which provide some of the world's cheapest electricity, natural gas and gasoline.


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With domestic electricity demand rising 10% per year in Saudi Arabia, the kingdom now devours more than a quarter of its oil productionnearly three million barrels per day. International Energy Agency figures show that Saudi Arabia now consumes more oil than Germany, an industrialized country with triple the population and an economy nearly five times as large.


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In the medium-term, Saudi Arabia is in danger of losing its all-important "reserve margin" of oil production that so often calms market volatility. Loss of this spare capacity would remove a crucial safety mechanism from the global economy, to say nothing of tying America's hands when it comes to future moves against oil states.




Longer-term, the kingdom's very exports are at risk. A projection by Jadwa Investment of Riyadh shows that, at current rates of consumption growth, the Saudi reserve margin will dwindle until it disappears sometime before 2020. At that point, the Saudis would begin diverting oil destined for export into the domestic market.



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Following the trend further, Jadwa finds that Saudi Arabia will consume its entire production capacity of 12.5 million barrels per day at home by 2043. London's Chatham House finds that the kingdom will become a net oil importer even earlier, by 2038.




.These projections don't take into account the possibility that Saudi Arabia's production could rise above an expected plateau of 13 million barrels a day, or that ruling sheikhs might stop encouraging their citizens to waste energy by dropping some of the world's deepest fossil-fuel subsidies.



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As U.S. drivers are now learning, however, the Gulf countries have limited ability to increase production beyond current capacity, and they show even less ability to curb their domestic demand. When it comes to competition for supply, they will retain a natural advantage. They own the supply.



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America's Middle East confrontations have long depended on Saudi spare capacity. Without it, as the faceoff with Iran already shows, Washington—and the world—will be less free to intervene in the region without raising gasoline prices at home.
And unless the Gulf Arab monarchies can gain control of their own consumption, their role in global energy markets will dwindle, as prices grow even more volatile.




Mr. Krane is the author of "City of Gold: Dubai and the Dream of Capitalism" (St. Martin's Press, 2009). He researches Gulf energy policy at Cambridge University's Judge Business School.


04/02/2012 03:20 PM
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The World from Berlin
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'Switzerland Has a Lot of Explaining to Do'
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Swiss arrest warrants issued over the weekend for German tax inspectors have sparked heated debate in Berlin over the ongoing tax evasion conflict with Bern. German commentators on Monday discuss how renewed tensions could endanger a preventative deal between the two nations.



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Tensions over tax evasion have flared up between Germany and Switzerland once again with the weekend announcement of Swiss arrest warrants for German tax inspectors accused of industrial espionage. The spying charges have opposition politicians so riled up that a tax evasion prevention deal currently under negotiation between the neighboring countries may now be at risk.



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While both countries have signalled their willingness to sign the deal, they still need parliamentary approval -- which is now at risk after Swiss prosecutors on Saturday issued arrest warrants for three German tax inspectors from the state of North Rhine-Westphalia. The officials had federal approval to buy stolen bank information leaked from Credit Suisse in 2010, a move that triggered a wave of tax declarations by Germans seeking to avoid tax evasion charges.



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The pending deal would require Switzerland to impose taxes on accounts held by Germans, in addition to handing out fines for undeclared assets, but would spare the country from having to reveal the identities of its valuable wealthy banking customers. With this, Berlin hopes to collect unpaid taxes on an estimated €130 billion to €180 billion socked away in the Alpine haven by its citizens.



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But on Sunday, talks on the agreement reportedly broke down. The negotiations were aimed at concerns voiced by German states governed by the center-left Social Democrats. The party is in a position to block any deal in the Bundesrat, Germany's upper legislative chamber.



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The arrest warrants seem to have further complicated the delicate issue. North Rhine-Westphalia governor Hannelore Kraft, an SPD member who is among those who could ultimately torpedo the deal in the Bundesrat, called the move by Swiss authorities an outrage on Sunday. "The NRW tax investigators were simply doing their job tracking down German tax dodgers who stashed undeclared money in Swiss banks," she said. Her party and the environmentalist Greens have both resisted the agreement, saying it doesn't go far enough despite concessions from the Swiss.




SPD member and North Rhine-Westphalia Finance Minister Norbert Walter-Borjans told daily Berliner Zeitung that the arrest warrants were a "massive intimidation attempt," adding that his state would not give up its efforts to fight tax evasion.



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Opposition Demands Action from Schäuble



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On Monday, the opposition in Berlin demanded a clear position on the issue from Finance Minister Wolfgang Schäuble, who is a member of Chancellor Angela Merkel's conservative Christian Democrats.



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"Schäuble must make it unmistakeably clear that he will stand up for the enforcement of our tax law," deputy parliamentary leader for the SPD, Joachim Poss, told Die Welt on Monday, adding that Switzerland must give up its "business model" of protecting tax evaders.



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Meanwhile, senior SPD parliamentarian Thomas Oppermann told mass-circulation daily Bild that the tax inspectors accused of espionage by Switzerland should get Germany's federal order of merit. The trio "deserves it for their fight against money laundering and tax evasion for the nation," he said.



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But members of Chancellor Angela Merkel's center-right governing coalition have encouraged the opposition to approve the deal. "The federal government is convinced that it has negotiated a good agreement that will finally clarify open questions between Germany and Switzerland," Merkel's spokesman Steffen Seibert told Die Welt.


..German commentators on Monday weigh in on the conflict:


.Center-left daily Süddeutsche Zeitung writes:



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"The outrage in Germany, fueled by election campaigns, is understandable. Has the Swiss justice system now allowed itself to be used in the struggle between Bern and Berlin, and is it the long arm of a government fighting for its banks by playing hardball and dirty tricks? No, Switzerland is not a banana republic, and its investigators are absolutely in a position to resist influence from the executive branch."



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"Still, a bitter taste remains. The atmosphere is as poisoned as it was after the first stolen data CDs cropped up two years ago. A satisfactory solution to the conflict is foundering on irreconcilable differences. Here there are the Germans, who believe morality is on their side. After all, they are hunting mainly rich people (in their efforts to bring in) billions in tax revenue. And then there are the Swiss, who are defending their economic interests and hope to preserve for as long as possible the situation that has secured their advantage as a financial center for decades."



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"It can't be a good political goal to bring Switzerland to its knees for an indefinite period with stolen data. The agreement with Switzerland is certainly not perfect, but it's a basis for a thriving cooperation. It shouldn't be allowed to fail."


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Conservative daily Die Welt writes:


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"For Germany, the issue is one of tax fraud, leading the country to authorize three tax inspectors to buy leaked stolen data on tax evaders in 2010. This legally dubious approach wasn't an issue domestically because of the common belief that the state was collecting its alleged due and it effects only 'the rich.' But in reality, because Switzerland has different laws, the officials acquired stolen property to use as evidence, and paid the thieves €2.5 million for it. Anyone who dismisses this as a trifle needs legal tutoring."



.."Because Switzerland is a sovereign state in Europe, and not a colony to which one sends the cavalry, there was and is no other way: One must negotiate... Those who want it all often get nothing."



The left-leaning Die Tageszeitung writes:


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"Switzerland has a lot of explaining to do. Why is an arrest warrant against three tax investigators only being issued now, some two years after the purchase of an illegally copied CD full of tax data? Why is the move taking place precisely at the point when negotiations over a German-Swiss tax treaty appear to be on the brink of collapse? It looks very much as if Switzerland is trying to apply pressure."



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"Despite all the outrage, one should not overlook the fact that the purchase of illegally copied tax data is also controversial under German law. ... It would be sensible to create a clear legal basis for the purchase of illegally obtained evidence."



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Conservative daily Frankfurter Allgemeine Zeitung writes:



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"It is a fact that Switzerland has profited from legal and illegal tax refugees from Germany and elsewhere. Foreigners attracted by the lax tax laws, live like kings. It is good for them, but bad for the German Finance Ministry. Those who have secretively moved their money across the border are invisible.

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Some of them have recently come clean due to the purchase of data by German finance officials. And growing foreign pressure has led Switzerland to rethink its position on bank secrecy."



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"But Germany isn't blameless on the issue either. The country has done business with data thieves, leaving itself open to accusations of trading in stolen goods. As such, Germany has incited criminal behavior in Switzerland. Just imagine how Germany would react were the Chinese government to buy automobile designs from German car company employees to speed up industrial development -- with the argument that patent laws are too strong in the West."


.Business daily Financial Times Deutschland writes:


."Even if the timing of the arrest warrant seems strange, there is little to suggest this was a political maneuver by Switzerland. The federal prosecutor's office in Bern is independent and doesn't take orders from the government.


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Besides, Switzerland would have no interest in torpedoing the tax agreement. On the contrary, the current plans would serve it quite well: The Alpine Republic would continue to be able to keep the names of German investors secret and could thereby protect the financial sector that is so important for the country's prosperity. If Switzerland were to deliberately endanger the tax agreement, it would be scoring a huge own goal."


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"And the agreement isn't bad for Germany either. Germany wouldn't get the names of the tax refugees, but it would be able to retroactively levy taxes on German capital deposited in Swiss banks. It's a good compromise and it would be unrealistic to demand even more concessions from Switzerland."


.Financial daily Handelsblatt writes:



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"It's doesn't take long to figure out why Schäuble is staying silent. The Finance Ministry must have known for a long time that the German tax inspectors were being investigated in Switzerland. The arrest warrants hardly came as a surprise."


."In particular, the indignation of the opposition parties ... will soon emerge as nothing more than hot air, since under Swiss law the purchase of tax data is a criminal offense, a fact that has been known for some time. The two countries have distinct interests.


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The Swiss banks want to protect their own customers' information and right to confidentiality. Germany wants to retrieve hidden assets and bought the tax evasion data in the knowledge that it could be prosecuted for doing so."



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"The opposition parties and independent tax body have described the action as 'grotesque' and 'outrageous.' The SPD and Greens could quickly provide a solution, if they stopped blocking the Swiss-German agreement in the Bundesrat. ... It's a smart and simple solution. But the opposition parties don't want to give the finance minister credit for its success. In the meantime, the German tax inspectors must prepare to be investigated in Switzerland."


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-- Kristen Allen