Split over EU-wide financial tax plan
France and Germany push for tax on dealing but there is concern over driving investors away from the EU.
With turmoil persisting in the eurozone, France and Germany are sharpening their plans to engage the financial sector more directly in delivering solutions. Their finance ministers last Friday (9 September) wrote to the European Commission in support of a financial transaction tax (FTT) – raising the stakes in politicians’ attempts to demonstrate that they are learning lessons from the fall-out from the financial crisis.
The two countries’ determination to keep the spotlight on a tax on dealing is no surprise. They have been pushing the concept for more than a year, first at the G20 group of the richest and emerging economies in Toronto in June 2010, then at the summit of leaders of EU member states in Brussels last March.
As the tremors of the financial crisis continue, François Baroin and Wolfgang Schäuble sense popular support for taxing some of the alleged culprits – who are in addition repeatedly suspected of not paying their fair share of tax. A spot of banker-bashing always goes down well, particular if it can help, as claimed, to calm volatility in the markets.
However, there is little agreement either at global level or within the EU itself on such a levy. The letter throws down the gauntlet to the United Kingdom in particular. The UK, home to much of the financial services industry, opposes a uniquely EU-focused financial transaction tax.
Since the Commission envisages more than two-thirds of the tax’s revenue coming from transactions carried out in the UK, the fear that investors would simply leave the City of London and take their business away from the EU is all too obvious.
City fears
The worry about geographical arbitrage drives UK opposition. “I am against an EU tax,” said George Osborne, the UK’s finance minister, at the summit of the G7 group of industrialised economies in Marseille on Saturday (10 September). “There would be no point introducing a financial transaction tax that led the next day to our foreign exchange markets moving to New York or Singapore or anywhere else.”
Osborne is not against the tax per se, but he is determined to block any attempt for an EU-only levy.
Fact File
Tax plan
The European Commission is expected to publish its proposal for a tax on financial transactions next month.
It is likely to comprise a 0.1% levy on a stock or bond trade and a 0.01% tax on derivatives trades.
Assuming this tax rate, the Commission estimates the revenue at €20 billion, based only on exchange-traded bonds.
If derivatives were included, some studies say that the revenue could rise to €150bn.
A currency transaction levy of 0.005%, based on the worlds’ most traded currencies, could yield €24bn.
His challenge will be to avoid the UK being branded as a soft touch, allowing the financial sector to escape its part in the “fair burden-sharing” promoted in the Baroin-Schäuble letter.
France and Germany already know that the G20, when it meets in Cannes in November, is likely to reject the move at a global level. For the UK, this should be the end of the matter – but the French and German governments do not want the issue to rest. “We strongly believe that the implementation of a financial transaction tax at the European level would be a crucial step on the path to reaching a global consensus in a way that does not affect European competitiveness,” said the ministers’ letter. “The financial transaction tax… should be put in place internationally or within the EU.”
The Commission is thinking along similar lines. Officials have been working on a plan for a financial transaction tax since the summer of 2010, and will publish a proposal within weeks.
The UK will need allies if it is to win the argument rather than just rely on its veto. Its government will draw on the views of Jean-Claude Trichet, the president of the European Central Bank, who is opposed to an EU-only levy, or on the International Monetary Fund’s insistence, in a working document published last month, on “international co-operation” as a crucial factor in avoiding “dislocation of trading”.
“FTTs have been found to be an inefficient instrument for raising revenue because, along with the revenue that they generate, they also reduce the value of securities, increase the cost of capital to users, and lower liquidity in financial markets,” the IMF said.
While turkeys never vote for Christmas, it is worth noting the strength of the financial sector’s discomfort over the plans.
Some industry insiders even question the validity of the Commission’s objectives, and suggest that there is little evidence that the plan would raise significant revenues or change investor behaviour.
They also question the assertion that the financial-services sector as a whole is under-taxed in the first place, believing this is just a convenient excuse to justify their call for better “burden-sharing”.
Knock-on effects
Investors warn that the knock-on effects of an EU-only levy would be significant. Not only could investors decide to take their trade elsewhere, but businesses would end up bearing the cost of the additional tax.
“The foreign exchange market underpins international trade, and a tax on these currency trades would increase costs for a large section of European industry, to the detriment of economic growth,” an AFME spokesman warned.
Growth might be the UK’s trump card. One EU source predicts that the UK will favour this argument, thus avoiding accusations of mere self-interest. As Europe teeters on the brink of another recession, invoking the risk of impeding recovery becomes an increasingly powerful argument against a financial transaction tax. But it will still be a tough challenge and the fight has barely started.
Other questions will come later. If the UK continues to oppose, could the eurozone go it alone? That has already been rejected by some member states, notably Ireland. In addition, supporters of the tax want to defer politically sensitive discussions of how revenue should be used until the plan is approved.
The Commission is in favour of using the proceeds to replace some of the funds that national governments hand over to the EU; others, including France’s Europe minister, Jean Leonetti, suggest it could be used to boost the coffers of the eurozone bail-out fund, the European Financial Stability Facility.
Whatever the outcome, France and Germany stand to derive some benefit. If they secure the introduction of a financial transaction tax, they will have satisfied their voters in cracking down on the financial-services sector. If the UK succeeds in torpedoing the plan, France and Germany will be presented with an easily identifiable target for vilification and blame.
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