Should European Union treasuries be allowed to scoop revenue from financial transactions?

The financial market levy is still on the agenda in Europe. But opposition from London means it is likely to be watered down – By Malte Kreuzfeldt

The idea of imposing a small tax on financial transactions to prevent speculation on minimal price fluctuations as well as tap into new sources of revenue is not new. As early as 1998, it led to the foundation of the activist organization, Attac.

Not until the major financial crisis of 2009 did it seem likely that the financial levy might actually become reality. At the time there was widespread demand to stabilize markets and ensure that those who caused the crisis shared in the cost of solving it. The proposal, long considered utopian, made it onto the G20 agenda.

At the G20 summit in Toronto in 2010, however, it became apparent that a global tax on all financial transactions would not be introduced. Both the UK and the US rejected the idea, and several emerging nations also expressed their reservations. But while the plan for a global tax was virtually laid to rest at the G20 summit in Cannes last fall, the debate began to gain momentum on a European level.

Faced by the crisis, the conservative governments of France and Germany had transformed into decisive advocates of the tax and were now looking for a Europe-wide solution. “We agree that we need this tax in Europe,” German Chancellor Angela Merkel said after a meeting with President Nicolas Sarkozy last summer. “It is an absolute priority for us,” Sarkozy emphasized.

But there is no consensus within the EU either. To be sure, the public as well as the European Parliament highly approve of the plan. Even the EU Commission, which had long been skeptical, has switched sides: Last September it presented a detailed proposal for implementing the tax, suggesting a levy of 0.1 percent on shares and bond transactions starting in 2014. The rate for derivatives trades would be 0.01 percent.

The EU aims to prevent avoidance of the tax by introducing several regulations: It would be levied in real time based on the electronic trading platforms independent of location. The tax would also apply if only one of the trading partners is from Europe. The expected annual revenue is €50 billion ($66 billion).

Observers like Peter Wahl, who has been fighting for the tax on behalf of Attac and the NGO Weed for 15 years, were impressed with the draft proposals. “The EU Commission’s bill is a political breakthrough,” he said. Even so, a Europe-wide introduction seems unlikely as decisions concerning tax issues have to be taken unanimously by all EU members. Although the formal reply is still pending from London, the British government has already clearly indicated that it will not agree to the transaction tax.

In January, Prime Minister David Cameron called it a “crazy idea.” Sweden, Ireland, the Netherlands, the Czech Republic, Luxemburg, Cyprus and Malta have also expressed their reservations. But an alliance of nine member states – France, Germany, Austria, Belgium, Spain, Finland, Greece, Portugal and Italy – is pressing hard for the implementation of the Commission’s plan.

A number of initial concerns about the tax have been largely dealt with. While high frequency trading responsible for severe price fluctuations would be taxed heavily, small investors and those paying into a private pension fund would hardly be affected, according to estimates. Relocating the trading activities to trading centers beyond EU borders would not work with the EU model, as long as one of the trading partners remains based on EU territory.

Some experts predict the tax could have a negative effect on economic growth. Algirdas Šemeta, the European Taxation Commissioner, is convinced of the opposite: “If cleverly invested the revenue from this tax can actually generate growth,” he recently told the German weekly Die Zeit. “There are no serious arguments against this tax.”

But because Britain will still oppose the levy out of concern for the profits of its financial industry, two alternative approaches are being pursued. German Finance Minister Wolfgang Schäuble suggested introducing a downgraded version of the tax for the time being: a stamp duty on stock exchange transactions similar to one already in place in the UK and Belgium.

In contrast to the financial transaction tax, the levy would only apply to share trades, and only to domestic businesses. Such a tax could be levied Europe-wide and could possibly be extended to derivates, Schäuble suggested. In a second step, it could be upgraded to a real financial transaction tax on all financial products. EU Commissioner Šemeta called it “an interesting proposal.”

Alternatively, the transaction tax could be introduced in its entirety but not in all EU states. The so-called “enhanced cooperation” procedure allows for groups of at least nine EU states to jointly introduce regulations that can later also be accepted by other countries. “Such a coalition of the willing is the right approach,” said NGO representative Peter Wahl. EU Commissioner Šemeta suggests that if the UK sticks to their ‘No’, “we will carry on with a smaller group.”

The Free Democratic Party, Chancellor Angela Merkel’s junior coalition partner, is against this plan. Yet as the party is expected to lose even further ground in upcoming regional elections, its influence on German government policy may continue to dwindle. In France the pressure in favor of the tax will increase in the event of a victory by François Hollande in the presidential election.

Both German government representatives as well as globalization activists hope that the introduction of the financial transaction tax will be adopted by a group of EU member states by the end of this year. However, it would not be the first time that predictions of an imminent breakthrough in this area have proved hasty.