GDP evidence this morning that the UK economy’s three canons – manufacturing, services and construction, all grew by at least 3% over the last year, is perhaps some comfort that a looming European Financial Transaction Tax will have less impact on the economy than it otherwise might.
But for the financial services industry it remains no smug matter.
The FTT is resisted by the City, the UK FinMin George Osborne and London Mayor Boris Johnson.
But Brussels is adamant to introduce it. The European Court of Justice is to rule in an accelerated decision on the UK’s challenge to the “Tobin” style tax on Wednesday. But a mid-2014 start for the FTT looks unlikely as France and Germany have some way to go to convince the other 9 EU nations who agreed to a FTT in principle that the right structure for it has been found.
There can be no doubt that some means to protect consumers from a future European debt crisis are laudable. But a levy on success and a tax on prudence is not the best way to achieve it.
What Europe has done has left, as London MP Mark Field called it this week, bourses in New York and Singapore “licking their lips” at the prospect of under-cutting London’s transaction fees.
It is folly to take a lead but have no troops behind you. We need New York and Singapore implementing a similar, nay, identical levy.
But Europe never made a convincing case for why we need a FTT which punishes a wide-range of financial products.
Frankly, banning toxic products via stiffer regulation is overtly the best way to tackle problems and protect consumers now and in the future. Better to police and rout a problem than letting it grow and requiring copious cash to fix later. A tax is just a tax. Like parking tickets and many speed cameras they are seen as a way to make money or make good a fiscal black hole.
Sure the funds can be offset against the next market catastrophe but it is hardly an intellectual response. Far better we use pincers to remove contamination rather than finance the bailout of the City’s next catastrophe whose dimensions, timing and variety we are unable to gauge today anyway.
What is worse is that it is not altogether clear what the FTT hopes to fund. In September 2011, president of the European Commission Jose Barroso officially presented a plan to create a new financial transactions tax “to make the financial sector pay its fair share”, pointing out that the financial sector received EUR4.6 trillion from EU member states during the crisis which began in 2007.
So this is a kind of unlimited “Payback tax”. Unlimited because there is no political will for the EU to say it would repeal the FTT when that revenue of EUR4.6 trillion was recovered.
As it is, the tax that could raise EUR 57 billion per year if implemented across the entire EU. Even if the UK opposes it, the tax will be triggered on any transaction involving at least one EU financial institution.
The FTT was the brainchild of the European Union’s executive which in June 2010 said it would study whether the European Union should go alone in imposing a tax on financial transactions after G20 leaders failed to agree on the issue. The United States is one of the most vociferous opponents of a global FTT.
If that was not enough, the proposed EU financial transaction tax would be separate from a bank levy which some governments are also proposing to impose on banks to insure them against the costs of any future bailouts. Well, at least now we hear that the less-discussed bank levy is the component that might help protect consumers, savers and taxpayers!
WEAKENING OUR DEFENCE
When the FTT was first mooted a few years ago London took its debate to Europe in a misguided territorial dispute. All the worst suspicions of Frankfurt and others ganging up and backing FTT as a way to damage London were on parade. How lame.
The reality is rival Frankfurt will not get a share of glory from this. All Europe is in effect bound by FTT. Doing business in Europe will become more expensive, especially on transactions involving fixed income or interest rate products where the lion’s share of the receipts will be raised. Europe will be weakened collectively rather than strengthened collectively.
Without a global response any FTT or other pool scheme is doomed to punish success. A case of throwing out the baby with the bathwater.