By Tom Thatcher
A financial transaction tax may bring economic benefits in some circumstances, but it would be the wrong policy for the European Union at this time.
If Europe’s business community were worried about proposals for a Tobin Tax in August, by the end of September they were positively dismayed. Amid ongoing strife in the markets, Commission President Jose Manuel Barroso formally unveiled plans for a levy on all financial transactions to be imposed across the European Union. The issue became front page news almost overnight, and for the first time economists begun to seriously examine the effect an FTT might have if introduced.
Certainly, there are no shortage of arguments in its favour and the raft of distinguished policy makers who have lined up behind it – not least in the European Commission – mean that the idea may at least be worth considering. Indeed, if one moves away from the inherently negative ‘banker bashing’ which has pervaded the debate thus far, it quickly becomes evident that there are some more rational aspects to calls for its introduction. Broadly, these more considered approaches have two distinct strands.
Firstly, there has been an increasingly influential lobby arguing that a transaction tax would help bring about more stability in European markets. According to this narrative, an inevitable side effect of the plan to charge a levy of between 0.01% and 0.1% on financial transactions would be a reduction in the appetite of traders for ultra short term computer generated trades, as an increased volume of trades would lead to both an increase costs and potential reduction in profit margin.
Given that these short-term trades are often responsible for greater market volatility, regularly spooking lenders and inducing panic for no apparent reason, this could be viewed as a positive step.
The second major argument in favour of a financial transaction tax focuses on the semantics of the phrase, as well as historical examples of the FTT in practice. Most observers thus far have assumed that a European Tobin tax would involve a straight forward surcharge on transactions, similar to that trialled disastrously by the Swedish government during the 1980s, during which time much of the country’s financial services sector decamped to London. However, other have contended that deductions could have more in common with Britain’s stamp duty – a toll paid for listing shares rather than buying or selling them.
It is worth noting that Britain has not only maintained its financial sector since introducing the tax in 1986, but has in fact expanded it – a sign that Tobin taxes need not necessarily be detrimental to economic development, depending on one’s definition of them.
These two arguments have been touted in some quarters as economic justification for a policy which is clearly both expedient and convenient politically for the Commission – imagine how much easier things would be for them if the EU had its own source of funding.
Yet neither argument really attempts to get to grips with contextual problems unique to the EU’s current predicament, a fact which significantly both diminishes their value and damages the logical foundations underpinning any future European Tobin tax.
As opponents of the FTT have always stressed, the major problem is not the concept of the tax itself but rather plans to introduce it exclusively within the European Union. Without the acquiescence and compliance of other G20 nations, there is a very real possibility that financial services companies will simply move out of the area altogether to avoid it. Aside from damaging the EU’s economy at a time when most member states can ill afford it, member states would still be susceptible to the same shocks caused by volatile markets as they are now, with the caveat that the largest markets would now lie outside their jurisdiction.
Moreover, although a ‘pay-per-listing system’ may have worked as a method of taxing financial services companies in London, the EU Commission has shown little appetite for introducing this kind of levy. Its official proposal explicitly states that the programme under consideration would involve a straight percentage deduction on all transactions, with the rate varying depending on the type of transaction being carried out. Debating the merits of stamp duty may therefore be an instructive exercise but it is also a redundant one in this case, given that a listings tax is not on the agenda.
There is, of course, a political aspect here too. At a time when support for the European Union seems generally to be on the wane, it seems imprudent to so obviously isolate Council members with large financial sectors. Although reports coming from Britain that the City of London would be forced to contribute up to 80% of the revenue generated by a Tobin tax seem to be exaggerated, the worries within various member states over the impact of a financial transaction tax are significant enough to be taken seriously. The Commission would do well to consider the potential consequences of its actions before proceeding further.
All this pales into insignificance, however, when compared with the final reason why the EU is not yet ready for a Tobin tax. The economic area is currently experiencing negligible economic growth rates almost without exception, a trend which seems set to continue at least in the short term. In such an environment, a financial transaction tax makes little economic sense, particularly when the Commission’s own impact assessment predicts that it could reduce the continent’s economic output by up to 1.8%. Fiscal consolidation only truly works if economies are able to grow at the same time – a fact which has been demonstrated by the ongoing trials of some EU member states, in spite of their austerity measures.
The financial transaction tax could risk upsetting this balance, no matter how much the Commission and some members of the Council want it to work.
It is simply the wrong policy for the EU at this time.