Behind Europe’s Tobin tax row

This is my latest Perspective column for Fund Strategy.

The financial transaction tax (FTT) is an old idea suddenly being debated with new venom. For a long time it was simply a theoretical proposal that might be implemented at some distant point in the future. In the past two months it has become the focus of angry debate between Britain on one side with the European Commission (EC), France and Germany on the other.

For the City of London in particular the stakes are extremely high. It fears that the imposition of an FTT on bonds, equities and foreign exchange transactions could do huge damage. Many market participants could leave the City for more hospitable financial centres outside the European Union (EU). As a result the British economy could be hit hard.

But the core countries of the eurozone, along with the EC, are adamant that an FTT is needed. For them it is part of a broader strategy to curb the economically damaging volatility of the financial markets. It could also raise desperately needed revenue to fund EU bail-outs.

To understand the FTT more clearly it is necessary to take a step back from the debate. Some aspects of the discussion are relatively clear but others are more opaque. Not all of the claims made in the row over the FTT should be taken at face value.

In broad terms there are two main purposes usually put forward for any FTT. The most important is usually its role as a disincentive to financial speculation. When James Tobin, later to win a Nobel prize in economics, proposed the idea in 1972 it was mainly to curb the emergence of speculation in currency trading. He saw it as the development of an international version of John Maynard Keynes’ proposal for a transaction tax on Wall Street in his General Theory (1936).

The other main goal is to raise revenue for whatever its advocates regard as a worthy cause. Until 2010 its proponents usually favoured the tax as a way of raising money to pay for foreign aid. In 1998 a campaigning organisation called Attac, the Association pour la Taxation des Transactions financière et l’Aide aux Citoyens (the Association for the Taxation of Financial Transactions and Aid to Citizens), was set up in France to pursue that goal. In early 2010, long after Attac had won widespread international support, a campaign for a “Robin Hood Tax” was established in Britain. The British campaign was supported by, among others, Actionaid, Bernardo’s, Oxfam and the Trades Union Congress.

But it was with the emergence of the eurozone crisis that the debate began to change fundamentally. The institutions of the EU, backed by France and Germany, started to push the FTT as a way of tackling the EU’s crisis. The FTT was seen as an important component of tighter financial regulation and the revenue raised could go towards EU bail-out funds. European leaders also favoured a harmonised regional implementation of such taxes rather than their haphazard implementation on a national level.

Things started to come to a head in September. José Manuel Barroso, the president of the EC, formally proposed a FTT in his State of the Union address to the European parliament. It was the first step in implementing such a tax rather than simply researching its feasibility.

At the same it was made clear that EU leaders would introduce the tax unilaterally even if it were not accepted on a global level. For example, Wolfgang Schäuble, the German finance minister, said in an interview in the Financial Times that: “I would prefer us to reach agreement in the G20. But before we use the G20 as an excuse for doing nothing for a long time, if we cannot reach agreement there, I am in favour of going ahead in Europe.” So if Britain refused to accept the FTT it could simply be introduced on a eurozone level. Britain would then be marginalised from a central element of the debate about European integration.

From Britain’s perspective it is this last step, introducing a FTT on a European level, which is unacceptable. The government, at least on paper, says that it would accept such a tax if it were introduced globally. Indeed some forms of FTT, such as the stamp duty on share trading, already exist. But George Osborne, the chancellor, has declared that the full-blown implementation of the FTT in Europe alone would be “suicide”. Boris Johnson, the mayor of London, and the Confederation of British Industry have also expressed their opposition.

At this stage it is necessary to go beyond the rhetoric to fully appreciate the significance of the debate on the FTT. All sides were happy to go along with the discussion as long as it was merely a form of moral posturing. For politicians the debate over the FTT was a useful way of blaming speculators for the economic crisis. Discussing the FTT allowed politicians to distance themselves from any culpability and to avoid awkward debates about the need for structural reform.

But the start of a move to implement such a tax, rather than simply talking about it, has revealed tensions within the EU. Reading between the lines the FTT, at least in part, is an implicit punishment for Britain refusing to participate in eurozone bail-outs. From this perspective Britain’s refusal to help out is an outrageous rejection of its obligations as a member of the EU. On the other hand, from Britain’s viewpoint, the FTT represents a grossly unfair EU intrusion into the affairs of one of its prime economic assets. There are strong vested interests on both sides of the debate.

The heated row over the FTT should be seen as an expression of the broader European realignments that are emerging alongside the eurozone crisis.