Europe to Halt a Favorite Travelers' Perk: Tax-Free Shopping

It's not only sightseeing that attracts 2,500 tourists to a ferry ride between this Baltic harbor town and the Danish island of Aero every day. It's cheap shopping.

During the 2-1/2 hour trip, the vessel's duty-free store stays busy. By stocking up on tax-exempt goodies like perfume, tourists who board the Cassen Eils line save a few marks and keep this small ferry company afloat.

Yet this travelers' perk is likely coming to an end. In a decision that some opponents say will lead to the loss of as many as 140,000 jobs across a continent already struggling with high unemployment, duty- and tax-free shopping will be abolished within the 15 European Union member nations next June.

"This is an approach of principle," says an official with the EU's Council of Finance Ministers in Brussels. In an era when Europe is trying to build a single market, it's important to eliminate the tax advantage ferry operators and airports have over domestic stores that impose national taxes. Officials in Brussels say they hope the abolition will encourage countries with high taxes to lower them.

But as the decision's cost becomes apparent, countries like Ireland, France, and Germany are stepping up their pressure to keep duty-free shopping alive.

The fight shows just how enormous the social and political difficulties of building a unified Europe can be.

"The abrupt application of the law would lead to an economic, social, financial, and political catastrophe contradictory with the progress of a single market," warns Andre Capet, a French Socialist minister representing the Calais region. With one third of its business activity generated by cross-channel traffic, and 3,000 jobs at risk, his region could be the most affected in France. It already has a 20 percent unemployment rate.

A study by the European Travel Research Foundation in Britain estimates that Germany would lose 10,000 jobs, France and Britain 20,000 jobs each, Spain 22,000, and Sweden 7,000. With $13 billion in annual duty-free sales, Europe accounts for more than half the $22 billion worldwide total. Proponents say it is a crucial economic engine in transport-dependent regions. In the Baltic and North Sea coasts, for instance, the regions' attractiveness would be gone if duty-free shopping were abolished.

"Without duty free, the ports will be empty in this area," says Gunter Becker, owner of FRS in Flensburg, one of the most established day-excursion ferry lines in Germany. "Tourists will be looking in vain for vessels to carry them around."

In September, Mr. Becker will start handing out 400 pink slips. The impact could ripple through the economy, affecting firms from travel agencies to bus lines.

Born in Ireland as an incentive to keep Shannon Airport alive when long-haul flights began in the 1950s, duty-free shopping now is a hefty business in Europe. It thrives because European nations still have drastically different tax rates.

Some opponents of duty free say it should be abolished only after EU members have harmonized their tax rates. "The big battleground for Europe today is the tax system," says Uwe Jenisch, a lawyer for the Ministry of Economics, Technology, and Transport stationed in northern Germany. "[The EU] should focus on harmonizing the tax systems and levels instead of killing one little branch of the economy."

Only a unanimous vote by the EU's Council of Finance Ministers can repeal the decision to end duty-free shopping. That move is seen as unlikely.