Tuesday, November 8, 2011

European Financial Transaction Tax – the story of a broken dream

The G20 summit last week made significant advances in the introduction of a global financial transaction tax (FTT). Not only France, Spain and Germany but also Argentina, Brazil, Ethiopia and South Africa have declared themselves in favor of an FTT, or Robin Hood tax, which is set to take money from the traders and distribute it to the world’s poor. International NGOs like Oxfam, CIDSE and ActionAid build momentum around this tax that could for example be used to finance climate change mitigation in the global South. The European Parliament has long supported the introduction of an FTT. And even the European Commission has recently declared itself in favor of an FTT, albeit claiming its benefits for the European budget rather than for developing countries.

A pan-European financial transaction tax, however, always seemed unlikely because of the UK’s defiant veto in the Council of Ministers. The city, British politicians fear, would take a heavy blow if every transaction lost 0,05% of its value to the state. And this despite the fact that, according to Sony Kapoor, a trader who takes a 10-minute coffee break comes back to a far higher change in stock prices than just 0,05%.

If a European financial transaction tax cannot be established, German and French politicians recently suggested that the Eurozone should simply go ahead and introduce the tax on its own. Other parts of the world would certainly fall in line behind the biggest economy in the world once the tax had been introduced. However, not only does the EU's impact assessment show that the Eurozone would lose 80% of its financial transactions to London and other stock exchanges according to Dr. Bart Van Vooren, Assistant Professor of EU law at Copenhagen University. The introduction of a universally applicable FTT would also heavily conflict with the freedom of capital mobility enshrined in the European treaties: “(A)ll restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited” (Article 63 TFEU). Countries may discriminate between inner-European transactions and foreign direct investment, but within the common market, an FTT would not stand before the European Court of Justice, says Dr. Bart Van Vooren.

The only means of introducing a Financial Transaction Tax therefore seems to be a global agreement. But would elected governments ever trust an international organization to enforce the first global tax in history? Realism seems to win this battle in a second.

See below my video interview with Dr. Bart Van Vooren:

Update 08-11-2011: The Economic and Financial Affairs Council today debates the Commission's proposal for an FTT. But according to Sony Kapoor and Dr. Bart Van Vooren, the FTT is a welcome object of political talk. Public opinion is in favor of it, and its implementation reaches beyond the political life of most heads of government and ministers. Talk about a European FTT without the UK's consent is therefore not much more than cosmetics.