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. 

Kiyosaki's promise: Quit your job, let your money work for you

Don't work for money, let your money work for you. That is the essence of an interesting book by Robert T. Kiyosaki called "Rich Dad, Poor Dad". Employment in a company with a fixed work contract, Kiyosaki says, will lead most people into a hamster's wheel. Looking to earn money to support their growing expenses (children, house, car etc.), most people tend to work harder to receive more pay. They promptly hand over a larger share of their income to the State as they enter a higher tax category. In 2010 for example, an average German citizen employed in a private firm was working for the government until July 4th, after which he started producing value for himself. If he decided to work harder, it might push Tax Freedom Day even farther away.

Let your money work for you/adapted from
Flickr CC BY esbjorn2

Kiyosaki therefore proposes to a) cut spending and b) invest the money thus saved. His book can be criticized for many reasons, but the idea of "making money work for you" sounded appealing. I'm all in favor of investment with a moral backbone, so I scrapped speculation on oil, currencies, pension funds and food commodities in favor of stock options. I invested a fictional 7740 EUR into a portfolio of big stable European companies on May 7th (if I wanted to do that annually, it would require me 645 EUR per month in real life). Commission fees etc. of approx. 2% would put it down to 7585 EUR.

Now, the DAX which reunites 30 of the strongest enterprises in Europe's economic locomotive, Germany, grew by roughly 26% in 2009 and 17% in 2010 (my calculations). If I was lucky and my European company portfolio outdid the DAX by a third, I'd be between 23% and 35%. After a year of foregoing spending, I'd have gained 1745-2654 EUR (again subject to taxes).

Let your money work for you? I couldn't quit my job and live on 2654 EUR per year. Nor could I do so after ten or 20 years. Investment, I guess, cannot replace a work contract. It can give you a bit of spending money, but it won't make you rich unless you put your money into high-risk endeavors like startups or low-priced stocks.

Besides, for the last month all of my big European company stocks have only seen one direction: down.

Desertec - Development for Africa

It's an ambitious undertaking which the German and international companies are going to launch today with the Desertec project. Until 2019, the project may be running and generate 15% of Europe's electricity needs. Until 2050 this could be enlarged to 20-25% of its needs.

If it works, the project could have remarkable political implications and benefit the world in three ways: Firstly, a successful project shows the maturity of renewable energy sources vis-à-vis conventional energy. In a first instance, it will allow Northern Africa and Europe to reduce their emissions, to preserve their environment and to export the successes of the project to the rest of the world. This takes away excuses from polluting countries to rely on carbon emitters and exerts pressure on reluctant governments and enterprises to change their policies as well. The success of the project can thereby bring a greater change in mentality than the catchphrases uttered by our heads of state at the G8.

Source: DESERTEC Foundation

Secondly, the investment by European companies not only benefits the climate, but it is also a tremendous help in African development. The security of a long-term investment and the need for skilled Northern African engineers and workers bring more knowledge and more purchasing power into the region. Other than development aid which has to travel through governments, the Desertec project directly benefits the local economies and stabilizes life for the citizens. Meanwhile, the international prestige of the project may force governments to support Desertec rather than to take the blame for failure. Whether this will also lead to more pressure for democratic governance...we will see.
Thirld, I think that the project and the economic boost given to the region will make other African countries want to take a piece of the cake. The southern line of the electricity grid runs far into the continent and could feed energy into sub-Saharan energy systems. Likewise, I am hoping that Desertec will incite more investment and research in solar technology in sub-Saharan countries. This can lead them to become energy self-sufficient and carbon-neutral in the long run.

However, the project also has enemies. The strongest one is the French nuclear lobby which would love to see French nuclear power stations rather than German solar panels in Morocco. After the recent quarries of Germany and France over the right way out of the financial crisis (Germany: budget cuts, France: deficit spending), I wonder in how far this new controversy will hamper the Franco-German friendship.
A second problem is the insecurity about the political development in Northern Africa. While Morocco has come closer to a base-democracy, Algeria and Tunesia still have de facto autocratic structures and Libya even more so. Critics - many of them Germans - would love to see the Desertec investment stalled until a functioning political administration can definitely be ensured. Yet, these critics don't consider the importance of an economic investment itself for stability in the region.

Overall, the project is definitely a milestone. Ahead of the Copenhagen Climate Change Summit in December, this is good news and a success for the defenders of the environment. The project will certainly meet controversy in future, but if it works the success will radiate across the world.

Here are two more soundbites about it, both in German unfortunately:

Short one (5 minutes, Tagesschau.de)

Long one (18 minutes, Deutschlandfunk)