Reining in the speculative strategies employed by the banking sector has been the popular cause of the media and eager-to-please politicians ever since the 2008 financial crisis did such damage to the reputation of the financial services industry. One frequently considered method is a financial transactions tax (FTT), which would levy a small percentage on every transaction made by financial institutions. However, it has proven particularly contentious within the global banking community.
In the wake of the 2008 financial crisis, the subject of an FTT was again raised by those wanting to claw back some of the money used to bail out financial institutions, as well as prevent those institutions from acting in such a speculative manner. However, debate has raged over whether it is too much of an imposition on a banking sector already struggling to return to profitability, while others think it is a necessary measure to help end the age of rampant speculation that caused the downturn in the first place.
Proponents of an FTT were cheered when the European Commission announced that 11 EU member states would be introducing such a levy that it hoped would prevent financial institutions from speculative trades, as well as shifting trades abroad to avoid local taxes. The tax would see 0.1 percent charged against exchanges of shares and bonds between financial institutions, while 0.01 percent would be levied on derivatives.
Signing on
The countries that will sign up to it are Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain; accounting for 90 percent of the EU’s GDP. This hardly represents a consensus of the world’s leading economies, and many observers feel the tax is doomed to fail.
Because of the number of countries signing up to the levy, EU policymakers have proposed that the FTT will be charged not just on transactions taking place in the 11 signatory countries, but on any transactions that involves shares and bond issued by them. This could result in brokers based outside Europe being taxed on stocks they trade off European companies that might be listed elsewhere, such as in New York or Singapore.
The UK will of course not be joining other European countries in adopting the FTT, and the country’s Chancellor of the Exchequer, George Osborne, has been vocal in his opposition to the new tax, saying it will harm the competitiveness of European banks on the global market. He wrote in a letter to lobby groups in June: “The proposal does nothing to enhance the EU’s standing in key international discussions and calls its commitment to growth into question, just at the time we need to show international leadership.
“If this FTT is to proceed, then I believe it should be significantly scaled back, with the objective of growth central to the thinking of policy makers in any redesign.”
Even in Germany, economists are worried about the implications of the FTT. Bundesbank President, Jens Weidmann, spoke in April about his concerns saying: “From a monetary policy point of view, the financial transactions tax in its current form is to be viewed very critically.”
He added: “If it doesn’t function properly, the transactions are deflected onto the Eurosystem [European system of central banks], and central banks will continue to be heavily involved in liquidity equalisation between banks well after the crisis. This shows how important it is to examine a regulatory measure before it is implemented. And this
takes time.”
Implications for banking
The implications of such a tax on an already fragile banking industry are grave. Although it is supposed to encourage longer-term investments over short, speculative trades, some feel it will have an adverse affect on relatively conservative investments too. Writing in the Financial Times in May, Allianz Global Investors’ CEO Elizabeth Corley said how opposition to the tax from the financial industry had reached a “cacophony”, due to concerns over its blanket levy on all transactions. She said: “While it might deter certain high-volume trading activity deemed by some socially useless, it might also undermine secondary investment in bonds and other important low-margin activity that could not absorb additional fictional costs.”
There will also be consequences for the EU as a whole, with investment flowing out of the region towards other, lower-tax territories. Chris Cummings, CEO of campaign group TheCityUK, spoke of the harm the FTT could have on the EU’s banking sector: “It will undermine the competitiveness of the whole of the EU, making the region less attractive for business and reducing trade and investment. In fact, research has shown that the tax is likely to increase the cost of capital for governments across Europe; meaning they may be forced to increase taxation or reduce spending to lessen the shortfall. This will impact on ordinary taxpayers. Ultimately, the tax could lead to financial services companies relocating away from the region – damaging the economy and reducing EU gross domestic product.”
Although initially there were fears within the countries signing up to the FTT that business would flee to neighbouring countries remaining outside of the rules, such as the UK, the amendment that says all trades done with a member country would be covered has reduced that possibility. The result, however, is that countries like the UK have challenged the rules in the European Court, while the US is thought to be considering following suit.
Corley said: “The FTT’s architects appear to have foreseen the likelihood that it could lead to business relocating, as when Sweden introduced such a tax. The commission’s solution has been to include levels of extraterritoriality – whereby the scope of tax extends to more parties than would be the traditional practice – unseen outside the US, causing rancour among countries that have not signed up for the tax. The UK government, for instance, has launched a legal challenge, and there are mutterings from the US suggesting it too could respond adversely if the proposal proceeds in its current form. But the commission’s proposal has been developed in isolation, with little regard for other jurisdictions, the delicate ecosystem of financial markets or who will pay the price.
“For the sake of the investors and issuers that financial markets exist to serve, this ill-designed proposal should be dropped.”
Enormous scepticism
Although the FTT has proven a popular strategy for politicians to support in light of the anti-banking sentiment prevalent across Europe, many are said to be privately concerned about the implications. Outgoing Governor of the Bank of England Sir Mervyn King hinted at this in his final report on UK inflation in May: “I can understand why some politicians feel reluctant to express their true scepticism about this idea in public, but I can assure you I do hear an enormous scepticism even from quarters which are alleged to be behind it.”
With so much opposition to the new rules – and growing scepticism from within the country’s implementing them – it is hard see any positive impact they will have. Dreamt up as a populist method to rein in big banks and recoup some money for the state, it has become a burden around the necks of European economies that should be scrapped if they want to remain competitive.