Europe’s financial transactions tax sparks big fight
During the six years of economic crisis in Europe, its elites have not just attacked the living standards of workers, unemployed and poor. They’ve also been engaged in a three-and-a-half year scrap among themselves.
Their fight is over a financial transactions tax (FTT), first mooted by the European Commission (EC) in October 2010 for all 28 members states of the European Union. It was finally agreed to in January last year by 11 Eurozone members ― Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia (the “EU11”).
The FTT has three aims. First, to increase the finance sector’s contribution to public finance ― especially given the €4.6 trillion (nearly $7 trillion) in bailouts it has received from the EU and national European governments.
Second, to discourage the kind of high frequency trading in financial derivatives that contributed to the collapse of Lehman Brothers. And third, to facilitate “harmonisation of indirect tax legislation” across Europe.
If introduced in its present form, it will apply to all financial institutions, finanial markets (except foreign exchange) and all financial instruments. It will tax transactions in shares and already-issued bonds at 0.1% and transactions in financial derivatives at 0.01%.
It will also cover all transactions where one party is a resident in one of the EU11 nations or where the financial instrument being taxed was created in one ― regardless of where the transaction takes place.
The EC estimates of the annual tax take from the FTT range from €34 billion to €56 billion, to be shared between member states and the EU’s own budget. This is up to 0.5% of the EU11’s GDP, much more than national FTTs, but still trifling compared with the sums needed for the level of public investment that would start to cut back unemployment queues.
The tax was originally due to start on January 1. However, its introduction was held up by a British government appeal to the European Court of Justice alleging that it undermines UK sovereignty and violates the EU’s single market principles.
On April 30, the court rejected the appeal on procedural grounds, ruling it was “directed at the elements of a future tax” that have yet to be specified. UK treasurer George Osborne then promised that his legal offensive would continue.
However, the EU11 FTT is a shrunken remnant of the kind of measures G20 leaders suggested at their September 2009 summit in Pittsburg, a year after the crash of Lehman Brothers ushered in the Great Recession. Even conservatives like Nicolas Sarkozy and Angela Merkel talked big about making global finance pay for its role in the biggest economic and financial disaster since the 1930s.
For a short time, the hopes of the campaigners for a worldwide tax on financial speculation, organised in the Robin Hood Tax campaign and Association for the Taxation of Financial Transactions and for Citizens' Action (ATTAC), seemed to have some chance of coming true.
But since that summit handed the International Monetary Fund (IMF) the job of designing the taxes and regulatory framework that would “put finance back at the service of the real economy”, hopes that this would lead to a global tax on speculative trading have been dashed.
First, G20 leaders could not agree on introducing an FTT after the IMF said it would not be useful against financial instability and could be passed on to consumers.
Then the EC’s September 2011 proposal for an FTT to apply on “all transactions on financial instruments between financial institutions when at least one party to the transaction is located in the EU” provoked outrage from Britain, Luxembourg and smaller finance-centre players like Cyprus and Malta. This ended any chance of EU-wide application.
Finance sector fury
The EU-11 FTT won’t even cover all Eurozone economies ― major financial players like Holland and Luxembourg are non-starters. Yet it is invasive enough to provoke fury among business and finance sectors.
Mervyn King, former governor of the Bank of England, said he could not “find anyone within the central banking community who thinks it is a good idea”. King said: “I hear an enormous scepticism even from quarters which are alleged to be behind it.”
For one French banker, the FTT was “a weapon of mass destruction that is going to ruin our financial sector”.
German multinational giants Bayer and Siemens claimed the FTT would cost them up to €45 million and €100 million a year respectively. The chief executive of the organisation representing German listed companies called it “a direct strike against the export-oriented German economy”.
To date, British Daily Telegraph columnist Ambrose Evans-Prichard has been the most apocalyptic, saying: “We are literally watching the moment when Europe loses its footing in the world.”
Why does the EC persist in the face of such resolute opposition by powerful people? A big reason is political pressure: the idea of a tax on financial transactions is embraced by millions in Europe as the weapon with which to get “finance” ― crooked, subsidised, parasitic and run by obscenely overpaid executives ―under some sort of social control.
A 2012 Eurobarometer survey of 27,000 interviewees found 64% of Europeans support an FTT. The figure reached 72% in France and 82% in Germany.
Support for an FTT is gospel for Europe’s social democrats, vulnerable to attack from their left for their history of capitulations to the banking sector, and increasingly anxious to manufacture difference from the conservative parties.
German social democratic Friedrich Ebert foundation called the FTT “sensible, feasible and overdue”. Its leaders last year made support for the tax a precondition of governing in coalition with Angela Merkel’s Christian Democratic Union.
Can the FTT achieve its objectives? It depends who you ask.
At one extreme, the case against the FTT is barely disguised fiction. The best example is a Goldman Sachs report from May last year into its effect on 42 of their client banks. It “calculates” that the tax would not collect €34 to €56 billion a year, but €170 billion (from Goldman Sachs clients alone), cutting their profitability by 22% and forcing them to close entire lines of business.
The Goldman Sachs report derived figures for the impact of the FTT that are between three and five times the EC’s own estimates by simply ignoring the FTT’s impact on the volume of trading and multiplying existing volumes by the proposed tax rate.
Yet if there’s one piece of evidence about FTTs that is reliable, it’s that they reduce turnover to the point that income from the tax is less than predicted. This was the experience with the 1984-1991 Swedish FTT and with recently introduced FTTs in France, Hungary and Italy.
However, even if an FTT can eliminate the profitability of very low-margin, high-volume trades, that can’t count as success ― unless the funds driven from these newly taxed markets end up financing productive investment in some other area covered by the FTT.
If the impact is a rise in interest rates, destabilisation of markets or the flight of funds to regions outside the FTT’s domain, any rise in investment (and growth) is unlikely.
Such was the experience with the Swedish FTT. It was abandoned because it made hardly any money for the government and didn’t stimulate investment and growth in Sweden because the market players went “offshore” to Britain.
What does serious research say about the likely result for the EC’s FTT? The evidence is inconclusive, because a multi-national FTT hasn’t existed before and modelling is highly sensitive to assumptions.
Take its likely impact on growth, which various studies rate as between 0% and -2.43% of GDP. EU tax director Manfred Bergmann said the effect on growth will be -0.01% annually with the tax generating nearly 0.5% of GDP annually.
Bergmann said: “These figures do not even take into account a proper growth-enhancing recycling of the revenue collected.”
Will the burden of the tax end up falling largely on households? The EC says no, the IMF says yes. Will it increase financial instability? Ten studies say yes, five say no.
Will it reduce the likelihood of crises? Some economists say yes, others, like John Vella, say “the FTT does not address any of the recognised causes of the recent crisis”.
Will the FTT drive potential investment funds “offshore”? The tax designers claim they can create mechanisms to ensure that their residents pay the tax, no matter where the trades are registered.
But economist Barry Eichengreen says: “Banks are widely reported to be devising new instruments to enable their clients to avoid the tax. On whom would you bet ― the tax authorities or the financial engineers?”
The key variable missing in these disputes is the organised social pressure that can be brought to bear to create the conditions for FTT success by blocking finance sector attempts at blackmail. For no matter how modest this tax, it is an inroad into the prerogatives of finance, which is determined to kill it, or shrivel it into insignificance.
One of the most potent weapons of blackmail in the hands of the “banksters” is the threat that the tax will lead to a rise in interest rates on government debt, potentially cancelling out any income gains.
The only response to that threat is bank nationalisation ― of giving the blackmailers the choice between behaving or going out of existence.
The present political balance of forces in Europe makes such a response unlikely. But the educational value of the experience for the millions who are looking to the FTT to start imposing social control over the great beast of finance will be great.