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France asks skeptical EU nations to slash fuel tax
June, 03rd 2008

French Finance Minister Christine Lagarde asked European Union nations on Monday to slash sales tax on fuel to help face high oil prices.

Other nations are already skeptical about the plan, however, saying it sends the wrong signal because it does nothing to encourage consumers to consume less energy or producers to pump more oil.

In a letter to EU colleagues and the European Commission, Lagarde said ``the oil prices reached in recent days signal that we have entered the era of expensive oil.''

``Our primary objective should be to prepare our economies for sustained high oil prices,'' she said. ``If the situation persists ... it would inevitably raise questions about sales tax on fuel.''

Europeans pay far more for fuel than people in other parts of the world because they face an excise tax on top of a national value-added tax that varies from country to country. This means gas costs on average US$9 (euro5.80) a gallon and filling up a car at the gas pump can cost some euro70 (US$108).

``There needs to be a political response to the situation,'' Lagarde told reporters. ``We must at least debate this.''

But the answer is to use less oil, not to cut fuel taxes, EU officials and some finance ministers from the 15 nations that share the euro said on the margins of talks at the European Central Bank in Frankfurt.

The head of the euro finance ministers' group, Jean-Claude Juncker of Luxembourg, said ``short-term tax measures could not be used to lighten the burden.''

Instead he called on EU leaders who will meet for a June 19-20 summit to think of specific measures to alleviate the cost of more expensive fuel for the poor and vulnerable.

He said ministers were watching energy markets to see if they could be made more efficient and were also looking at the role played by speculators in hiking prices.

France claims its plan is no different from plans backed by Britain to lower VAT on environmental products and says it also wants to see governments publish weekly oil stock levels to show what the real market situation is.

France would need the support of all the other 26 EU nations to make any changes to VAT, which countries can currently only charge at a rate between 15 percent and 25 percent.

Several other euro nations were not enthusiastic. ``We should not intervene politically'' on energy costs, said Germany's Peer Steinbrueck.

``We've got to get used to a world with higher oil prices,'' said Wouter Bos of the Netherlands, adding that the only answer was to lessen dependence on oil.

Spain's Pedro Solbes feared the French plan would send the wrong signal since Europe is trying to cut back on fossil fuels and use more alternative and renewable sources of power.

``If we want to reduce oil consumption and be more efficient in consumption then to reduce oil prices (by lowering taxes) is not a good idea,'' he told reporters.

The European Commission has said it would send the wrong message to oil producers that it is urging to increase supplies.

Soaring prices for the basic goods of daily life, transport, heating and food, is the biggest problem facing the European economy.

Yearly inflation in euro nations hit a record 3.6 percent in May, the EU statistical agency Eurostat said last week, the fastest pace in price increases since it started keeping records for each country in 1996.

Food prices have gone up more than 7 percent across the EU in the past year, double the rate of inflation, on poor harvests and growing demand from developing nations such as China and India. Dairy went up nearly 15 percent, while cooking oil and bread went up by more than a tenth.

Oil hit a new high point on May 22 when traders paid US$135.09 a barrel. Airlines warned on Monday that such prices are pushing them into the red, and could lose them US$6 billion (euro3.8 billion) this year.

``Oil prices at US$130 a barrel are changing the game for everyone. The situation is grim,'' said Giovanni Bisignani, CEO of the International Air Transport Association, in a speech he gave in Istanbul on Monday.

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