If set at a low enough rate, a tax on financial transactions (FTT) would hinder speculation on sovereign debt while avoiding a massive relocation of banks to safe offshore locations, argues Michel Barnier, the EU's internal market commissioner. Brussels is expected to present plans for an FTT in the autumn.
However, the tax has one powerful opponent â the UK. Britain's opposition has not wavered as the country's government is adamant that it will not introduce new taxes at a time when banks are struggling to prove their liquidity.
In spite of London's staunch resistance, the European Commission said it will come up with a draft FTT in the autumn, arguing it will help hinder speculation on sovereign debt.
The argument comes as eurozone leaders prepare to meet in Brussels on Thursday (21 July) to agree a second bail-out plan to rescue Greece from its mounting debt pile.
"We know it will be difficult, we know there needs to be unanimity [among EU member states]," Commissioner Barnier told members of the press recently.
But he thinks it is worth trying. "We believe that this tax is economically sustainable by markets as long as the rate is modest," he said. The tax, he added, would be "technically easy, financially productive and politically appropriate" given the huge amount of taxpayers' money that governments invested to rescue the banking sector during the 2008 financial crisis.
"If Europeans do not take the initiative, there is no chance that anyone will talk about this tax. So the Europeans are right to suggest it," Barnier said.
Traders moving offshore?
The FTT has faced criticism since it was invented by American economist James Tobin in 1972, with some arguing banks will respond by moving their transactions offshore in countries with no such tax.
But if the tax is low enough, banks will have more to lose than gain from fleeing Europe, the Commission believes. "If the rate is sufficiently modest, we think there will be enormous costs to moving offshore, without being certain to evade the tax," a senior EU official told EurActiv.
The official admitted that an FTT would create a risk of "evaporation" of trading activity to exotic places. "You can of course create a company in the Cayman Islands that will trade with an MIF platform in the Bahamas."
But he said the risk is manageable as long as the rate is low and sanctions are enforced. "At the end of the day, you are a European tax resident, you buy a European share on a European marketplace, so if you get caughtâ¦up to you." ( WHAT POWERS DO THE EU HAVE TO PUNISH TRADERS WHO ARE SET UP OFFSHORE?)
Tackling high frequency trading
According to plans being considered in Brussels, the tax would vary according to the products being traded â shares, bonds or derivatives. The objective is to discourage the most harmful trades such as high frequency trading and derivatives, which can destabilise markets.
"At the end of the day, the tax is going to weigh on the speculators," the official said. "It is going to weigh in particular on hedge funds, which will be obliged to register in Europe and have a passport if they want to be players here."
Stephan Schulmeister, an Austrian economist advising the Commission, agrees. In an interview with EurActiv, he claims that high-frequency traders cannot move offshore because their computer servers need to be located as close as possible to the servers of exchanges, like the LSE, to minimise the time span between the beginning and end of the trade, a prerequisite for any speculator.
Schulmeister has long lobbied in favour of the tax, which he claims is now more relevant than ever as it would dampen speculation on sovereign debt.
Countering critics who argue the tax will increase costs for the consumer, Schulmeister points out that it is not aimed at every institution but at the likes of Goldman Sachs, which gained infamy for trades based on short-term bets.
"Short-term trading with high leverage is predominantly done by hedge funds which engage in high frequency trading, some 'finance alchemy banks,' and by the increasing number of amateur traders. To whom should Goldman transfer the tax burden?" the economist asks.
Though there is little proof that a planned !!!!!!!0.25%!!!!!!!! levy on financial transactions will dampen speculation, Schulmeister is adamant that the maths will stand up and that speculation, such as credit default swaps used by hedge funds to bet against indebted governments, will take a hit if such a tax is implemented.
Schulmeister adds that the UK would do well to approve an FTT. As the financial nerve centre of the EU is in the UK, the economist claims the British treasury would make the most revenue out of the tax with MINIMAL DAMAGE to its industry.
http://www.euractiv.com/en/euro-finance/eu-builds-case-finance-tax-ahead-draft-proposals-news-506654
They seem to be approaching this more and more from the perspective of stopping speculation on sovereign debt - so the market should not factor in and react to the disastrous fundamentals of these country's?
God help me.
