The EU heading towards a financial transactions tax?

By Atanaska Varbanova. Originally published on Feb 24th, 2012

The pos­sible imple­ment­a­tion of a com­mon sys­tem on tax­ing fin­an­cial trans­ac­tions on EU level in the middle of the loom­ing euro crisis may seem to some like a res­cue plan, but for oth­ers is simply reck­less. Opin­ions about the fin­an­cial trans­ac­tions tax (FTT) pro­posed last Septem­ber by the European Com­mis­sion not only diverge drastic­ally, but argu­ments evoke a whole wide vari­ety of geo­graph­ical asso­ci­ations, from the French Tobin tax to the UK City of London.

France and the European Com­mis­sion push for FTT implementation

When giv­ing his State of Union speech last Septem­ber, José Bar­roso, the Pres­id­ent of the European Com­mis­sion, presen­ted this pro­posal as an import­ant way for the fin­an­cial sec­tor to give its fair con­tri­bu­tion to solve the crisis. Des­pite the vague for­mu­la­tion this has become the main argu­ment of the FTT sup­port­ers. Con­ceived as a French ini­ti­at­ive, the FTT pro­posal now counts on the essen­tial sup­port of Ger­many, mainly born in the unpre­ced­en­ted French-German cooper­a­tion in the con­text of the “Merkozy” joint efforts to save the euro. France even pushes for the uni­lat­eral adop­tion of FTT on national level before the pres­id­en­tial elec­tions this year, a meas­ure which is not broadly accep­ted in the EU circles. Some are already ask­ing ‘how come’ if it was this very same cur­rent French legis­lature which three years ago abol­ished the Tobin tax, the French vari­ety for FTT.

Des­pite being a highly con­tro­ver­sial issue, recent dis­cus­sions in the European Par­lia­ment already out­lined the exist­ence of gen­eral sup­port for the pro­posal. Dur­ing the delib­er­a­tions in the Eco­nomic and Mon­et­ary Affairs com­mit­tee last month rep­res­ent­at­ives of the two biggest polit­ical groups in the Par­lia­ment – the EPP (European People’s Party) and S&D (Socialist&Democrats), expressed gen­er­ally pos­it­ive opin­ions on the FTT. How­ever, they were harshly con­tra­dicted by mem­bers of the Con­ser­vat­ives group (ECR). What dom­in­ated the dis­cus­sions was the con­cern about the prac­tical implic­a­tions of hav­ing an FTT imple­men­ted only in some of the mem­ber states and not EU 27 – wide.

And this is a real issue because agree­ment amongst all the 27 seems rather impossible as the UK is strongly oppos­ing and Sweden and the Neth­er­lands have expressed ser­i­ous reser­va­tions about the pro­ject, too. The Com­mis­sion recon­firmed its read­i­ness to pro­ceed with the pro­posal even on an euro­zone level at first, how­ever, implic­a­tions out of this can have a dam­aging effect on fin­an­cial ser­vices mar­ket in the EU. For instance, it is still to be con­sidered what would the implic­a­tions for the rather integ­rated Scand­inavian mar­ket be, should Hel­sinki imple­ment the FTT while Stock­holm decides to opt out.

Cri­ti­cising the FTT: pen­al­iz­ing the bank­ing sec­tor and impos­ing ‘a tax on Britain’

Neg­at­ive com­ments about the pro­posal are usu­ally centered around the view that FTT could hamper EU growth and invest­ments and even­tu­ally lead to the relo­ca­tion of fin­an­cial insti­tu­tions out of Europe. While this could turn out to be par­tially true as fin­an­cial act­ors would act in a way to avoid this addi­tional fin­an­cial bur­den, it is still not to under­es­tim­ate the import­ance of the single European mar­ket to them. Fur­ther­more, a massive relo­ca­tion out of the EU is highly improb­able in view of the applic­a­tion of the so called ‘res­id­ence prin­ciple’ upon which the Com­mis­sion has built its pro­posal. This means that FTT may be due even when only one of the insti­tu­tions par­ti­cip­at­ing in the trans­ac­tion is based in the EU, which makes the tax vir­tu­ally unavoid­able con­sid­er­ing the large share of fin­an­cial act­ors based in the EU. The costs they would incur relo­cat­ing their base might be well over the estim­ated loss caused by the FTT. This aspect of the FTT has made some of its crit­ics to call it ‘a tax on Bri­tain’, or ‘a tax on the City of Lon­don’ as most of the lead­ing fin­an­cial insti­tu­tions are based there. Another con­tro­ver­sial issue con­cerns the pos­sible implic­a­tions for cus­tom­ers. It is a widely shared view by FTT crit­ics that fin­an­cial insti­tu­tions may absorb the new tax in the short term but in the long term they will simply pass it on their cli­ents. There­fore, it is doubt­ful how such meas­ure could be called ‘banks’ fair share of respons­ib­il­ity for the crisis’.

Still, sup­port­ers of the FTT emphas­ize that under the cur­rent pro­posal primary mar­kets are excluded from this reg­u­la­tion and argue in favor of the tax as a tool to pre­vent tax eva­sion and ensure fin­an­cial mar­kets stability.

Hav­ing in mind this addi­tional tax bur­den, fin­an­cial insti­tu­tions may be less prone to par­ti­cip­ate in highly spec­u­lat­ive trad­ing involving high risk, thus, FTT can help decrease volat­il­ity in the mar­kets. The new reg­u­la­tion is expec­ted to cover deriv­at­ives and most of the fin­an­cial instru­ments such as bonds and secur­it­ies, while most of the day-to-day oper­a­tions con­cern­ing cit­izens and busi­nesses are not included in the FTT scope. While this can be regarded as a pos­it­ive argu­ment, it entails that the biggest part of the FTT bur­den will placed upon insti­tu­tions effec­tu­at­ing high fre­quency oper­a­tions and banks trad­ing on their own account on the sec­ond­ary mar­kets. Fur­ther­more, an import­ant piece of the whole argu­ment­a­tion of the Com­mis­sion to use the FTT as a poten­tial new source of EU rev­en­ues is still miss­ing. New stud­ies on the topic show that the prob­able fin­an­cial gains of the FTT for EU budget may not be as much as the Pres­id­ent Bar­roso indic­ated last Septem­ber – ‘a rev­enue of above € 55 bil­lion per year’. What is a more ‘itchy’ ques­tion for some, how­ever, is how this rev­enue is to be spent. Not an easy ques­tion, for sure.

Bar­gain­ing continues

The major­ity of those argu­ments out­lined above were already used by MEPs dur­ing the first dis­cus­sion on the pro­posal in the Par­lia­ment last month. Though it is still too early to bet on which ones are going to pre­vail, it is very import­ant to point out that on this issue the Par­lia­ment has only con­sultat­ive powers. Accord­ing to the pro­ced­ure in use, the Par­lia­ment steps back from its equal foot­ing with the Coun­cil as a co-legislator and can only provide a man­dat­ory opin­ion, which may not be taken into account later on by the 27 EU fin­an­cial min­is­ters. There­fore, the final decision is to be forged in the national cap­it­als where national interests rule. What seems cer­tain for now, though, is that some coun­tries won’t be shy to say ‘no’, thus bring­ing new divi­sions and more multi-speed ele­ments in the EU reality.