The European FTT Is Finished

By Rebecca Healey, TABB Group

Originally published on TABB Forum 

In a supposed victory for banks and trading organizations, the European Commission apparently will scale back the financial transaction tax significantly. But here are 5 reasons why the anti-FTT lobby should not relax just yet. 

A report from Reuters yesterday confirms weeks of suspicion that most of the politicians in Brussels were beginning to realize that the EU-11FTT was just too complex and draconian to implement in its current form. Yet understanding that the FTT will have a devastating impact on any economic recovery – it is not just a damaging tax on financial services that we can ill afford – is a vital argument that must not get lost in the political rhetoric.

The apparent revised proposals, according to Reuters, will be scaled back considerably; it is estimated that annual revenues could fall to as little as €3.5bn. The tax will fall to just 0.01% on shares and bonds, rather than the 0.1% initially proposed. In addition, the Jan. 1, 2014, start date will be delayed, with the tax on bonds held off until 2016; the planned levy on derivatives could be dropped altogether. 

As we discussed in our recent video, “FTT: The Cold, Hard Facts,” the announcement by Bayer and Siemens of the impact of the FTT on European companies, their day-to-day financial dealings and, most important, the impact on workers’ pensions would appear to have sent the right message to Brussels. Yet the current discussions remain in the corridors of political power: European politicians may have realized the folly of the initial proposals, but this will be a difficult message to sell to the general public. There will be no public support for this proposal from German Chancellor Angela Merkel’s coalition until after the election in September.

However, this is no landmark victory – the anti-FTT lobby should not relax just yet. We need to continue highlighting the folly of such a tax for the following reasons:

1. These latest proposals, together with an announcement by France yesterday, indicate a shift toward allowing derivatives trading to continue unfettered. Initially, the tax was proposed as a way to make the financial sector bear some of the costs of the economic crisis and reduce systemic risk. The executive committee of the EC estimated that the FTT could lead to a 15 percent decline in the trade of shares and bonds and a 75 percent reduction in the volume of derivatives trading – widely regarded as the most risky form of financial speculation rather than a valued hedging tool. The latest proposals would appear to leave the “risky” element wide open and equities bearing the full brunt of the tax. There will be a backlash to this at some point. 
2. Current taxes are unaffected. Discrepancies among national governments remain and are unlikely to be resolved.France announced that it is interested in scaling back the tax on derivatives markets while controversially extending the levy to currency trades. Meanwhile, Italy remains committed to excluding bonds from the tax. The considerable administrative burden in adhering to European taxes still exists. 
3. Even a revised EU-11 FTT will not collect the funds it claims – it fundamentally goes against market behavior. If the tax is reduced and imposed purely on equities and bonds, the incentive remains for market participants to shift to alternatives, either in terms of asset class or geography. 
4. In addition, the countries involved would still have little say in how the funds are spent, and where. This is something that is of increasing concern to certain nation states. Germany, the Netherlands and the UK categorically do not want a European tax where revenues would flow into the EU's own budget. 
5. The latest announcements of youth unemployment in Italy reaching 40.5% -- the highest level in 36 years -- as well as record levels in Spain and Greece show that tackling youth unemployment is as essential as ever. But would we be better served by encouraging financial services firms to offer apprentice schemes rather than crushing banking institutions? 

While shrinking economies and rising unemployment continue to challenge European governments, some nation states will continue to push for an FTT. Arguments that financial trading is under-taxed relative to the rest of the economy may be technically correct, but the idea that implementing the FTT is beneficial because banks derive excessive profit from trading shows how little some politicians understand capital markets today.