Following a year of wrangling, the European Commission on Wednesday announced it was pressing forward with proposals for the adoption of a financial transaction tax (FTT). Member-states and financial analysts are sharply divided over the consequences and desirability of such a tax, but EC President Jose Manuel Barroso was undeterred as he made the announcement in a state of the union speech to the European Parliament.
The proposed tax will be levied on all financial instruments between financial institutions in which at least one party to the transaction is located in the European Union. The exchange of shares and bonds would be taxed at 0.1 per cent and derivative contracts at 0.01 per cent. The EC estimates that ¤57 billion would be generated as a result.
Barroso said that in the aftermath of the 2008 global financial crisis, members of the 27-nation bloc had granted aid and provided guarantees totaling ¤4.6 trillion to the financial sector. He, thus, claimed the FTT was a way for the financial services sector to make a “contribution”.
The tax’s main proponents are the governments of France and Germany. It is opposed by that of Britain, home to some of the most important financial markets in the world. Even as the EC claims the tax is a fair way to make those most responsible for the financial crisis pay for it, a report in the UK business daily, the Financial Times, says an internal EC report admits the tax would wipe out or displace up to 90 per cent of derivatives transactions and hit the bloc’s economic output by almost 1.8 per cent over the long term.
However, a statement issued by the EC argued the low rate of the tax would help limit the hit on the bloc’s economic output to around 0.5 per cent over the long term, in part because the money collected will be invested in areas to stimulate growth.
PROBLEMS
The essential problem is that the tax would be a unilateral move by the EU, without any corresponding taxation at the global level. Given the globalised, inter-connected nature of the financial world, a financial tax has to be global if markets are not simply to shift their operations to where they will not be taxed.
The EC said on Wednesday it would be pursuing the possibility of a global tax at the next G20 meeting in Cannes, in early November. Timothy Geithner, the US treasury secretary, voiced US opposition to the move at a meeting of European finance ministers last week. He said an FTT would raise the cost of capital and weaken the already-fragile economic recovery.
The popularity of the proposal in Brussels, Berlin, Paris and elsewhere has to do with the fact that it appears to be a morally just way of raising the funds that could be used to deal with future banking collapses, rather than leaving it to taxpayers to pay for the sins of “irresponsible” bankers.
Those opposed argue that such a tax might worsen the ongoing crisis by weakening the euro zone’s banks, which are in urgent need of recapitalisation, rather than a tax.
Given the strong opposition of the UK to the proposal, it is possible that it will be shot down when debated by the European Council later in the year. An alternative plan being talked about in Brussels would then have the tax adopted only by the 17 members of the euro zone.
