Transaction Tax Will Cripple European Economy, Warn Market Users

Terry Flanagan

Market participants in Europe are warning that the introduction by a number of eurozone countries of a financial transaction tax will bring with it dire economic consequences to the region.

Last month, 11 of the 27 European Union nations including the four biggest eurozone economies—Germany, France, Italy and Spain—committed to a project that is expected to raise up to €35 billion a year in trading taxes and which is aimed at making the financial services sector pay for the global financial crisis.

With the final details still yet to be finalized, it is possible that there will be a 0.1% tax imposed on all share and bond transactions involving firms based in the participating areas and a 0.01% levy on derivatives trades. These were the original measures proposed by the European Commission for a tax spanning all 27 member states. This, though, was vetoed last year by the U.K. and others.

In August, France, one of the pioneers of the EU-wide tax proposals, ploughed ahead with its own slightly different version of the transaction tax in a bid to capture extra revenue from trading by introducing a 0.2% tax on the purchase of shares in French firms with a market capitalization of over €1 billion.

And from March 1, Italy is set to launch its own nation-wide levy while Spain is also considering a draft bill on the matter.

“I am obviously disappointed with the decision [to introduce the financial transaction tax in parts of Europe],” said Mark Spanbroek, secretary-general of FIA European Principal Traders Association (FIA Epta), a Brussels-based proprietary trading group.

“But, on the other hand, let them see, like the French now do, that liquidity goes down and volumes go down. You are shooting yourselves in the foot. Let’s see if the politicians can justify these measures that will cost 1.5 basis points of gross national product. Let them be the ones explaining it to the end users and not us. It is a political thing.”

French equity volumes dipped immediately after its introduction last year. Although there are suggestions that it is only the retail investor who is actually paying for the tax as institutional investors, for whom the tax is primarily aimed at, have devised ways round paying the levy.

And in an open letter to the European Commission last week, Noel Amenc, professor of finance at Edhec Business School, a French academic institution, said that “the theoretical arguments in support of the FTT as a measure to reduce volatility are, at best, mixed; the empirical evidence, on the other hand, indicates that a FTT has either no effect on volatility or it actually increases volatility; and, introducing an FTT faces serious implementation challenges”.

He added: “Before seeking to impose a tax on European stocks, Edhec recommends that the Commission draw lessons from the recent failed introduction of the FTT in France. The taxed French stocks have recorded an average fall of 15% in volume compared to stocks that were not concerned.”

Others also have doubts over the project.

“The basic case against it is that it will shrink finance, raise price volatility and won’t raise a bean: indeed, it will shrink the economy so much that total tax revenues will fall,” said Tim Worstall, a senior fellow at the Adam Smith Institute, a U.K.-based free market think tank, in a recent blog.

The 11 nations set to introduce the FTT are Germany, France, Italy, Spain, Belgium, Austria, Greece, Portugal, Slovakia, Slovenia and Estonia.

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