European Commission Plans to Argue Against a Financial Transaction Tax at ECOFIN meeting
The meeting tomorrow of the Economic and Financial Affairs Council (ECOFIN) is being heralded as one of its most significant since the crisis began because of the potentially far reaching decisions that the new proposals for economic governance will have for every country within the European Union.
Once we find out what the European commission has to say about the Irish government’s plans for Anglo Irish Bank, the Irish media might report on the proposal that has been getting the most attention up to now: the “European Semester”-a six-month period every year when the commission and fellow EU governments would scrutinize the broad outlines of each nation’s budget plans for three years ahead.
However, another proposal, that of a Financial Transaction Tax (FTT) - a form of Tobin tax that would take a tiny percentage of the profits from transactions made by banks, hedge funds and other financial services when conducting high frequency deals, often completed in a matter of seconds on the stock exchange - is getting less attention.
The coverage in the European press so far has been on the news that those bastions of progress, the IMF, who were originally critical of the idea, have started to become less chilly. Reporting in the Observer yesterday economic editor Larry Eliot says the IMF paper, “suggests that there is little evidence that such taxes distort markets and might help to dampen the “herding behaviour” encouraged by computer-program trading”.
Eliot quotes the paper:
“Unilateral STTs, even if levied on fairly narrow bases, are certainly feasible as witnessed by their use in numerous developed countries. The fact that major financial centers such as the UK, Switzerland, Hong Kong, Singapore, and South Africa levy forms of STTs indicates that such taxes do not automatically drive out financial activity to an unacceptable extent.”
However, the proposal, currently supported by France, Germany, Belgium, and Austria, and which is due to be discussed tomorrow, does not seem to have any fans within the EU commission itself.
Responding to the news that Algirdas Semetas, European commissioner for tax affairs has drawn up a paper for the ECOFIN meeting dismissing the feasibility of a European FTT, Philippe Lamberts, co-spokesperson of the European Green Party (EGP) said Semeta’s paper rejects the adoption of a possible tax on purely ideological grounds. Indeed,
“…this dogmatic approach clearly runs counter to the position adopted by the European Parliament as well as the results of other feasibility studies carried out by well-respected academics”.
According to a Factsheet put together by the World Economy, Ecology & Development coalition in response the internal EC paper Semeta’s dismissal shows on what grounds the European Commission are rejecting a financial transaction tax (FTT).
Going by the WEED document, the EC papers argues that a FTT would:
- increase the cost of capital for the economy as well as for the states (government bonds)
- negatively affect the price discovery mechanism in markets
- increase volatility
- create less revenues than is claimed by its supporters, and
- distributes these revenues unequally.
These criticisms, they say, do not really deal with the arguments brought forward by supporters of a FTT and suggest that they haven’t learned any lessons from the now three year long financial crisis. One might suspect that the close links that have been known to exist between financial lobbyists and the European Commission are as strong as they were under EU Commissioner Charlie McCreevey - something to note when Irish commentators suggest that the EU will not take any guff from the Irish government when putting forward its proposals for Anglo.
However, the WEED document deals with each objection in turn.
On whether a FTT would cause an increase in capital costs they argue that contrary to the idea that a FTT would increase interest rates on bonds because investors would try and compensate themselves through price the tax itself would not be on the value of the asset, which affects price, but on the trade itself.
Speculative short term trading would be affected, but this is based on trends and not on real economic value, which a longer term investor would base their investment on. The latter, because they buy and sell less frequently would be less affected by the tax.
FTT does not distort the price discovery process they say
“Because high-frequency trading is not based on real economic information, it does not encourage rational price discovery, but rather complicates it. This acceleration does not permit rational choice. Instead a competition for faster and faster computers and for the best algorithms is evolving. The professional traders of the major banks and funds are the big winners at the expense of the other investors. High frequency trading and the explosion of trading volume have increased instability of the markets. Volatility has dramatically increased.”
On the point about whether it distributes revenues unequally, and the suggestion that London would generate the lion’s share (70%) of all FTT revenues they argue that modern technology has provided the solution:
“Because the origin, as well as the destination of every transaction is now already electronically registered, the buyer and the seller (who both pay the FTT), as well as their national assignment can be identified, and the tax can be transferred to the particular central bank.”
You can download the whole factsheet here. Right-click and select Save As to download the PDF.
The right-wing agenda behind many of the EU Commissions responses to the financial crisis is already well known, but their resistance to even this modest reform of a financial sector who consider the coffers of various national treasuries as part of their own capital base still needs to be highlighted.
I await with interest to see if the plans for the further laundering of workers wages through the European banking system gets a mention in the Irish media after tomorrows meeting.
Discussion
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Comment by: Pope Epopt
Sep 6th 2010 at 23:09
But hey, the crisis is over! Isn’t it?
Well, it figures. Even if it went ahead the ConDem City-spiv government would veto it.
This was in the German papers a couple of days ago - as you say, it will be interesting to see whether any of the dozy Irish media pick it up.
Comment by: Donagh
Sep 7th 2010 at 09:09
On Morning Ireland today Richard Downes was talking about the US economy and the looming prospect of a ‘double-dip’ recessioner. He said something like, the US government have done all the right things, and it seemed to work, but there is now a lack of confidence in the economy because of what is happening in Europe. He said this line a couple of times, as if he’d come across it in an op-ed, thought it was cool and wrote it down. Having a little more time to fill than he had things written down to say, he had to just repeat it.
Anyway, off the point. One of the arguments for it is that the LibCon Tory government have implemented a similiar scheme - a tax on shares, apparently without any determinental effect on the economy that the Commish ascribe to FTT. Tis bollix though, as the FTT is supposed to be a way of avoiding bubbles in the stock market as much of the high frequency trading veers towards trends leading to ‘herding behavour, which is what Eliot was on about rather than basing buying and selling on ‘real economic value’.
I got the WEED factsheet on Friday afternoon, and I realise I should of had it up faster than a crack addict can nick a tourist’s wallet, but I thought, feck it, who but Pope Epopt would be bothered to read it.
Sorry for not replying to your other comment - was much appreciated. Clearly need to tighten things up if this is to be a serious leftwing newsagency type thing - encouraging intelligent chat about stuff.
Comment by: Tomboktu
Oct 4th 2010 at 21:10
And now the European Central Bank’s top cat has come out against it:
http://euobserver.com/9/30943/?rk=1