French President Nicolas Sarkozy and German Chancellor Angela Merkel have announced a plan to impose a financial transactions tax (FTT) for the Eurozone, as part of an effort stem the bloc’s worsening debt crisis.
The policy would introduce a tiny tax on wholesale financial transactions – something long supported by European Union members Austria and Belgium. EU heads of state are expected to discuss the proposal at a meeting in October, ahead of the G20 summit in France in November.
The European Commission threw its support behind this tax in June, saying it could raise up to 50 billion euros a year by imposing 0.1% tax on stocks and bonds and 0.01% on derivatives.
The commission has even included potential funds raised by such a tax in its long-term budget forecasts for 2014-2020.
The tide is clearly turning in Europe and leaders are getting behind this idea.
I spoke at a forum on the tax at the European Parliament in March last year. Every seat was taken – and this most certainly was not people wanting to listen to me.
Meanwhile, the debate in Australia is basically non-existent. On one hand, this is fair enough – as Australia most certainly could not impose a FTT all by itself.
The risk of stock, bond and derivative trading moving offshore, if we were to go it alone, makes the idea a political impossibility.
Despite this fear, it is clear that Australia needs to pull its head out of the sand. We have a seat at the G20, and the deliberations on this tax at that forum will be important.
We have so far opposed the tax simply because the Americans have, which has become our default position on most foreign policy matters over the past 15 years.
Australia needs to examine the evidence and take a more informed view in the G20 forum.
Because of the scale of modern financial market activity, a tiny FTT would raise somewhere between $75 billion and $500 billion annually, if applied globally.
Civil society is campaigning vigorously for this tax around the world, because it sees in it a source of revenue to address global poverty and fund the climate change adaption that is much needed in poor countries. These civil society campaigns have had considerable impact in Europe, but very little here.
The great attraction of this idea is that it’s clearly rarest form of tax – a tax you should want irrespective of the revenue it might raise.
Keynes recommended such an impost in his seminal work, and 40 years ago the Nobel Laureate in economics, James Tobin, proposed the tax as a way to make markets more effective.
The idea is that an FTT would dissuade purely speculative short-term transactions and shift the balance of trading towards investors who are more focussed on the underlying value of the asset being bought and sold.
Since Tobin promoted the idea, there has been a sea change in market trading that makes the need for it much greater. In 2009, computer-driven trading accounted for at least 60% of equity market trading, 40% of futures trading in the US and 30% to 40% of European and Japanese equity trading.
This high-frequency trading is driven and executed by computer programs aimed at exploiting minor price fluctuations. The assets are often bought, held and sold in less than a second. No human mind is brought to bear on these individual trades, and the underlying real economic value of the asset being traded rarely influences the trade.
There is considerable evidence that the proliferation of this sort of trading has made markets less effective at their core function – setting prices.
Markets these days deviate for sustained periods from the prices that would be indicated by economic fundamentals. They are now driven by a tsunami of ultra-short-term trades.
An FTT would make such trades uneconomic, and the resulting markets would be able to perform their real functions of setting prices and allocating capital more effectively.
The United States has not supported an FTT, which is evidence of the power of that country’s banking lobby. Barack Obama supported an FTT as a presidential candidate, but the oval-office perspective is obviously different.
Could the introduction of a tax in Europe prompt US policymakers to reconsider their position? Once foreign exchange transactions between euros and US dollars are taxed in Europe, with none of the revenue going to the US, the incentive for the US to follow Europe’s lead will be massive.
But the pivotal nation in this debate today is not the US, for Europe can impose such a tax with little fear of any significant amount of trading moving to the US. The pivotal nation is the UK.
While continental Europe could impose this tax on foreign exchange transactions in euros, which clear and settle in Europe, applying the tax more broadly would risk trading in other asset classes moving to London.
Britain under Gordon Brown supported the tax, but not under the current government. So the scene is set for some interesting horse trading as Sarkozy and Merkel try to persuade David Cameron of the merits of, and need for, this crucial tax.