THROUGH the crisis, European taxpayers have bailed out first the banks, and then busted states. So it is little wonder that many governments are reluctant to consider either of the main options to end the euro-zone crisis: opening up the wallet (by enlarging the euro-zone rescue fund), or letting others borrow one’s credit-card (issuing joint Eurbonds).
Germany and France want somebody else to start paying. And who better to punish than the reckless bankers and speculators who, in their view, caused the trouble in the first place?
The idea of imposing a financial transaction tax (FTT) has been around since the start of the crisis, indeed for several decades since it was mooted by the late Nobel laureate, James Tobin. But has faced a seemingly insurmountable problem: in a globalised connected financial world, a financial tax has to be global if markets are not simply to shift their operations to where they will not be taxed.
As Timothy Geithner, America’s Treasury Secretary, repeated to European finance ministers in a less-than-cordial encounter (see previous posting) in the Polish city of Wroclaw this week, the United States opposes the FTT on the grounds that it would raise the cost of capital and weaken the already-fragile economic recovery.
Undeterred, Germany and France last week called for the tax to be imposed by the European Union alone (see joint letter from the German and French finance ministers here). The European Commission is also supporting the idea, and will unveil proposals in the coming weeks. Michel Barnier, commissioner for the single market, said his proposals would be “technically simple, economically bearable by the financial sector, financially productive and politically just”. He gave no figures for how much money could be raised.
Supporters of a more localised FTT would argue that this is an opportunity for Europe to show the way in taking action that is both moral and remunerative. As with emissions-trading to curb climate change, others will follow. Indeed, European officials are already arguing over who should take the proceeds of an FTT: national exchequers, the European Union or a special-purpose European fund to deal with future banking collapses?
Even so, the idea is running into the firm objections of, among others, Britain. Jacek Rostowski, the Polish finance minister who holds the rotating presidency, said the EU was “very, very divided” on the issue when it was discussed in Wroclaw. In any case, he said, “nobody expects this element to be crucial in our attempt to stabilise the situation, both fiscally and financially.” In other words, the FTT is not worth the trouble it would cause.
Thus the idea that gathered strength yesterday: a financial transaction tax within the 17 countries of euro zone. “I’m sure that if it’s impossible at the worldwide level, we’ll need to organise that in the European Union, or at least in the euro zone.” To reduce the risk of avoidance, he said, an FTT in the euro zone would have to be imposed at a lower rate than a global tax. In an interview, his German counterpart, Wolfgang Schäuble, supported the idea.
One might question whether an FTT in an ever-smaller geographical area makes sense, particularly given that it excludes London, Europe’s main financial centre. The pony-tailed Swedish finance minister, Anders Borg had some words of caution:
We have substantial experience in Sweden. Basically most of our derivative and bond trading went to London during the years we had a financial transaction tax. So if you don’t get a solution that is universal it is very likely to be detrimental for European financial markets. And from the Swedish perspective, we cannot foresee that we would introduce such a tax in our system again.
The idea of an FTT at 17 raises another intriguing question: might it become the first fracture in the EU from the move to integrate the euro zone to confront its debt crisis? An FTT is no longer a question of monitoring budgets and maintaining fiscal discipline, but a move to integrate taxation, which in turn influences the EU’s single market.
Britain may consider a FTT at anything other than the global level to be self-defeating. But what of a common base for corporate tax in the euro zone? Even if British tax rates are lower, a simplified and uniform system for calculating and paying corporate tax in the much of the European market may prove attractive to some companies.
Such issues worry British officials. But for now the greater alarm is over a collapse of the euro, so the British have become among the loudest cheerleaders for euro-zone integration. “Time is running out,” said George Osbone, Britain’s Chancellor of the Exchequer. “They have got to get a grip and deliver a solution to the uncertainty in the markets.”
If the ordinary citizen has to pay tax on a daily financial transaction, like buying a toothbrush, there can be little moral argument against taxing financial transactions. But at a time of crisis, the question is an FTT might actually worsen the crisis. Might a euro-area FTT not weaken the euro area’s banks? After all, the IMF is urging governments urgently to recapitalise their banks - not to draw money out off them - to halt the spread of contagion from their exposure to the sovereign debt of vulnerable European countries. Two French banks were downgraded this week due to their exposure to Greek debt
It would not be the first time that Germany and others, in taking aim at the bankers, shoot themselves in the foot. The demand that the financial sector pay for a share of the second bail-out of Greece (which has not yet been approved) caused delay, destabilised the markets and had to be buttressed by offers of government cash to protect the European Central Bank and Greek institutions. It raised comparatively little money. If the euro zone believed the creditors should take the hit, it should have allowed a proper restructuring of Greece’s unsustainable debt. Instead it came up with a fudge that did more harm than good.
The resentment of bankers, and the desire to protect the taxpayer is understandable. But the grudging and erratic response of the euro zone’s governments has been as much part of the problem as of the solution. The citizen will be placed at ever greater risk unless the crisis is tamed quickly. To do that, two destabilising feedback loops have to be broken. The first is between collapsing banks and collapsing treasuries; the other is between panicking markets and hesitating governments. An EU or euro-area FTT helps with neither. For now, it is a distraction - and could make things worse.
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