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.
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.