Finance & economics | Europe’s financial-transactions tax

Oops

Worries grow about an ill-thought-out new European tax

WHEN the European Commission first mooted a financial-transactions tax (FTT) in 2011, the reaction was subdued. No longer. As plans for an FTT covering 11 European nations—including Germany, France, Italy and Spain, but not Britain—have advanced, opponents have grown more worried. Rather more unusually, supporters of the tax also seem to be more nervous.

In February the commission published a proposal that would allow the 11 countries to press ahead with an FTT without all the other European Union members. It hopes that by the start of 2014 they will begin to charge levies of 0.1% on equity and debt transactions and 0.01% on derivatives.

The proposed rules are designed to discourage firms from avoiding the tax by shifting trading abroad. The FTT will be charged not just on transactions that take place within the 11 countries, but on any transactions that involve shares or bonds issued by them. That would lead to a bizarre situation in which, say, a broker in America and another in Singapore trading in the stock of a European company listed on an exchange in Hong Kong would each have to pay a tax in Europe.

A shot across the bows was fired on April 19th when Britain, worried about the tax’s extra-territorial reach, said it had asked the European Court of Justice to stop the 11 countries from instituting the FTT. The fact that Britain is resorting to the courts tells a story in itself. Opposition from the EU’s biggest financial power would once have been enough to sink the tax. Now Britain is “impotent”, says one bank boss in London.

So the case against the tax is being made more directly, by lobbyists and others. One argument concerns the impact on Europe’s banks. Analysts at Citigroup reckon that banks in the 11 FTT countries borrow some $326 billion from American money-market funds, much of it via repurchase, or repo, agreements. This is a secure form of credit because the borrowing bank sells a liquid instrument such as a Treasury bond to its lender, and agrees to buy it back for a higher price on a specified date. The cost of borrowing overnight using repos is usually very low: Citi puts it at about 0.15% a year. The FTT would increase this rate by 0.1% a day, or 22% a year. “A €1 trillion [$1.3 trillion] market would cease to function quite literally overnight, unless a workaround is found,” the analysts note.

The tax is also likely to harm the international aspirations of big European banks, since they may be taxed on transactions in foreign shares or bonds conducted through their foreign branches. Banks such as Deutsche Bank or BNP Paribas, which have big operations in London, may struggle to compete with banks that do not face the tax, for example.

Some of the 11 countries now appear to be having second thoughts, too. In a “non-paper” (a curious Brussels term for a document that is intended to express a view but has no official status) released on April 16th, the 11 FTT countries raised concerns that the tax might increase their own governments’ borrowing costs. Even Germany’s Bundesbank is worried. Jens Weidmann, its president, lamented on April 24th that the tax “has basically been decided” but the “side effects could be considerable”. It will increase banks’ reliance on Europe’s central banks, he said. The FTT proposal may be badly designed, but the prospect of its passage is focusing minds.

This article appeared in the Finance & economics section of the print edition under the headline "Oops"

Race, colour, caste: Time to scrap affirmative action

From the April 27th 2013 edition

Discover stories from this section and more in the list of contents

Explore the edition

Discover more

China’s banks have a bad-debt problem

As is becoming increasingly obvious

Which country will be last to escape inflation?

A new dividing line in the global fight


How the “Magnificent Seven” misleads

Forget the supergroup of stockmarket darlings