EUROPE is turning on its tax dodgers. Next month a European Union summit will discuss how to recover some of the €1 trillion ($1.3 trillion) in revenues lost yearly through tax evasion and avoidance. President François Hollande wants to eradicate tax havens. Nine countries have plans to share more tax information automatically. Even Luxembourg is giving up bank secrecy. In these days of austerity, there is no love lost for those who evade taxes. Perhaps the surprise is that action has taken so long.

Eye-catching revelations are one reason things are moving. In Britain it was the derisory corporate tax paid by Starbucks and other multinationals. In France it was the disgrace of the former budget minister, Jérôme Cahuzac, who stashed money in a secret Swiss bank account. In Germany tax authorities have been buying black-market data on accounts in Liechtenstein and Switzerland. The sheer scale of recent offshore leaks, with revelations of 120,000 companies and trusts in havens like the British Virgin Islands, demanded action. The EU bail-out that crushed two banks in Cyprus, stuffed with Russian money, is another warning that offshore havens are no longer safe.

The most important force for change is the least visible: America’s readiness to wield blunt financial power beyond its borders. Under the Foreign Account Tax Compliance Act, financial institutions must reveal details of American clients abroad or face a 30% withholding tax on any income earned in America. EU members are negotiating to provide the information, reducing the administrative burden and allowing a reciprocal deal for America to pass on information about European citizens.

Most EU governments (except Luxembourg and Austria) already swap information on bank interest earned by foreign EU nationals, under the EU’s savings directive. From next year a separate law will extend this practice to other forms of revenue—including employment earnings, directors’ fees, pensions, life insurance and rents. It also stipulates that, if an EU member agrees to wider co-operation with a third country, the same provisions must apply to its fellows: so if EU countries swap information with America they must also give it to others within the EU.

Luxembourg has bowed to the inevitable, and declared that it will apply the savings directive from 2015. German politicians’ poor jokes about invading Luxembourg as “in the old times” may have offended the Grand Duchy, but it was the threat of being cut off from the American financial system that forced it to embrace “white” money. “We can only thank America,” says Sven Giegold, a German Green MEP. But Austria, with a constitutionally enshrined right to bank secrecy, is holding out. Maria Fekter, its finance minister, calls herself a “hunter of tax cheats but also protector of honest savers”. The chancellor, Werner Faymann, seems readier to change. In Brussels the reckoning is that Austria’s resistance will not last much beyond September’s election.

Once these EU diehards are defeated, Eurocrats hope to conclude a broader version of the savings directive. And they want a strong mandate to negotiate automatic data-exchange with Switzerland, Liechtenstein and other non-EU tax havens. For the moment these shelters apply a withholding tax on EU citizens’ accounts and remit the money to governments anonymously; they also provide information “on request” if fraud is suspected.

The gradual death of bank secrecy in Europe will do little to confront legal tax schemes that allow big multinational firms to “pay only as much tax as they choose”, as one EU diplomat puts it. Part of the problem involves offshore havens offering secrecy, light regulation and low (or no) taxation. But part is onshore. The EU may have a single market that allows free movement of capital and goods, but it has 27 national tax jurisdictions. Whether through deliberate competition or inadvertent mismatches in tax rules, efforts to avoid double taxation often result in no taxation. Some of the best-known schemes are named after EU members: the “double Irish” and the “Dutch sandwich”. London tolerates many dodgy shell companies and limited-liability partnerships.

How sovereign?

Tax policy is, for the most part, a jealously guarded national competence in the EU. The authority to tax citizens is seen as a central attribute of sovereignty. Critics say a refusal to pool powers at EU level risks creating a “race to the bottom”, with each country trying to outdo its neighbour. Yet if so, the danger in harmonisation must be of more oppressive taxation. Smaller, poorer countries on Europe’s periphery have every right to levy low rates of tax. Britain should not have to sign up to a financial-transactions tax it dislikes. If France insists on taxing its rich citizens at a rate of 75%, it can blame only itself when they leave.

Yet co-operation in an age of mobile capital is necessary to ensure that international companies pay their taxes. A tougher policy of naming and shaming tax havens is a start. More transparency on where companies earn money, employ staff and pay tax is desirable. Renegotiating double-taxation agreements could close some loopholes. But all this is best done globally. Agreement within the EU would help, but is held back by a mutual suspicion. At one end stand European institutions seeking to build their empires. At the other stands Britain, with its innate aversion to any arrangement that has a European label.

Countries need to find a middle way. Not all tax competition is “harmful”, even if in some forms it may be. Elaborate tax schemes can give big multinationals an unfair advantage over smaller domestic firms. Joint action should not be an excuse to force up Ireland’s 12.5% rate of corporate tax. But inaction that allows firms to engineer a rate more like 2.5% for themselves is inexcusable. In such a world, sovereignty comes at a cost that too often goes unrecognised.

Economist.com/blogs/charlemagne