Specter Of European Transaction Tax Looms Large

Terry Flanagan

Calls are growing from market participants across Europe for “seriously misguided” politicians to scrap the proposed financial transaction tax for the region, as German chancellor Angela Merkel steps up plans to introduce the levy.

Merkel said on Monday that she would campaign for the tax, joining French president Francois Hollande as one of the most prominent supporters of the levy. The German chancellor is expected to bring the issue up at a meeting in Rome on June 22 with the leaders of Spain, France and Italy. Other nations, such as the UK, are vehemently opposed to the plans.

“The latest regulatory ‘innovation’ is a proposed European financial transaction tax,” said Dr Christian Voigt, business solutions architect at trading and technology company Fidessa, in a white paper examining the regulatory pressures facing the financial industry in Europe.

“Since governments have had to bail out numerous financial institutions, the argument goes, it is only fair that the financial industry as a whole should contribute to the recovery by paying a tax. But, again, politicians are seriously misguided on this issue and it is highly unlikely that a financial transaction tax will change the behavior that led to the collapse of Lehman Brothers.

“Instead, any such tax would be financed by those who had nothing to do with the financial crisis. We must understand that a financial transaction tax is just another cost component to trading. From a bank’s perspective nothing much changes, except that its clients may very well trade less as a result of the higher costs.

“But, if all intermediaries were to pass these additional costs on, everyone who trades securities would eventually pay the price. Ultimately, that includes everyone who is investing in some way. Not only would end investors have to cover these costs themselves but they would also miss out on the interest they might have earned if the tax monies had been invested.”

The European Commission is proposing a 0.1% tax on all share and bond transactions and a 0.01% levy on derivatives trades, but thinks that pension funds should be the only sector exempt from the tax.

“An exemption for pension funds or market makers might look like a good remedy, but only half-heartedly addresses the underlying issue,” said Dr Voigt.

“It’s also hard to imagine that high-frequency trading firms will qualify under any exemption given the current tenor of public opinion towards them. You can say what you like about HFT firms and you may even argue that they caused the ‘Flash Crash’ in the US—but surely everyone can agree that they cannot be held responsible for the collapse of Lehman or for the need for government bailouts to secure the futures of Freddie Mac, Fannie Mae and Northern Rock. After all, HFT firms usually have a flat position at the end of the day.”

It has also been reported that the European Commission thinks that a financial transaction tax could become law if as few as nine member states agree to it by July as nine countries in agreement is the minimum required for a common initiative in a smaller group in case not all 27 members agree on a particular issue.

“While it is still unclear which countries will adopt a financial transaction tax, and regardless of how many exemptions are defined, it is almost certain that the intended results will not be delivered,” added Dr Voigt.

“Large professional businesses will invest a great deal of time and money to work out how to take advantage of any exemptions, while the small retail traders will be caught in a web of new complex regulations.”

Earlier this week, the UK government said that it would block any move by the European Union to introduce a financial transaction tax. It said that it would only back any such levy if it was applied globally.

“The UK government is against an EU-27 financial transaction tax and, if necessary, we would use our veto,” a UK Treasury spokesman said.

Sweden, Denmark, Malta, Ireland, the Czech Republic, Bulgaria and Romania also oppose the tax while the Netherlands, which is officially neutral on the matter, issued a recent report from their Ministry of Economic Affairs calling the levy a “bad idea”. Switzerland, meanwhile, although not a member of the EU, opposes the tax on the grounds that it will harm the greater European economy.

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