Carl Jackson is amazed at the EU’s economic myopia over its damaging Financial Transactions Tax
Sometimes I wonder if the Eurozone’s leaders actually want the whole thing to fail.
If so, they are doing a great job of it. The Eurozone is in recession and sinking fast. Every new set of unemployment figures beats the previous month’s record high. Zombie economies in Ireland, Portugal and Greece stagger on, propped up with bailout loans they can never hope to pay back.
And let’s not forget Cyprus, where attempts to pay for a bailout by robbing citizens’ savings was a PR disaster that could only be topped if the UK Government decided to dedicate its pension reforms to the memory of Harold Shipman.
The next kamikaze policy on the Eurozone agenda is the financial transactions tax. Also known as a “Tobin tax”, this measure would impose a 0.1% levy on equity and debt transactions and a 0.01% charge on derivative transactions.
It is supported by the governments of eleven Eurozone countries – the “Tobin Eleven” – including Germany, France and Italy. They argue that it is a small levy which will nevertheless raise over 30 billion euros a year from banks to help alleviate the Eurozone crisis.
I hardly know where to begin.
First, whilst 0.01% or 0.1% might not sound like much of a tax, it adds up to a seriously sizeable cost given the almost unimaginably colossal sums involved in financial transactions in Europe every single day.
Second, even if the tax is tiny in percentage terms, if it is a tax not imposed elsewhere in the world then financial services will leave the Eurozone for lower cost regimes. For proof, Eurozone leaders need look no further than Sweden. From 1984-89 the Swedish government introduced a series of financial transactions taxes. They never raised more than 5% of the revenues expected, and by 1990 more than half of all Swedish trading had moved to London.
Third, the Tobin Tax will punish not just bankers, but other businesses too. Yesterday twenty-four of Germany’s largest companies, from pharmaceutical giant Bayer to electronics conglomerate Siemens, spoke out against the tax. These companies do not provide financial services, but such will be the economic damage caused by the Tobin Tax that they fear it will cost them tens of millions of euros a year.
“So what?” you might think. After all, Britain has not signed up to the Tobin Tax, nor can it be forced to. Our Government has even had the decency to warn its more clueless continental counterparts about the inevitable disastrous consequences. If some of them decide to ignore that advice then it is not our problem. Surely we should sit back and wait for wealthy financial services refugees to flee Frankfurt and come to London?
Sadly, it is not quite that simple.
Even though one in three Eurozone governments does not support it, the Tobin Eleven have decided that the financial transactions tax will apply not just throughout the Eurozone, but on euro trades worldwide. Under the current plans, therefore, the tax could even be levied on a trade in a euro-denominated financial instrument conducted in Singapore by an American and a British bank.
That is where UK comes in. Even though George Osborne rightly rejected the Tobin Tax, the UK financial services sector could still be hit by it. This is totally unacceptable. If the Eurozone wishes to engage in economic self-harm then so be it, but they must do it alone.
Perhaps the most tragic thing about the Tobin tax is what it tells us about EU and Eurozone leaders. The initial plan – an EU-wide financial transactions tax – was nothing more than a green-eyed assault by France and Germany on the success of the City of London. Even in its more limited form, the tax will drive financial services away from Europe and into the open arms of New York and Singapore, and would not raise anything like as much money as its supporters claim.
Faced with a worsening recession and almost 20 million unemployed, the best that Eurozone leaders can offer is jealousy, banker-bashing and more regulation. So many of the Eurozone’s weaknesses stem from the fact that its creation was driven by political ambitions rather than economic reality. The Tobin tax proposals show that, sadly, nothing has changed.