The reality of a Financial Transaction Tax (FTT) in Europe moved closer this week after 11 EU countries overcame the objections of some partners to support proposals for the tax on share, bond and derivative trades.
Germany and France, along with Italy, Spain, Austria, Portugal, Belgium, Estonia, Greece, Slovakia and Slovenia, voted for the tax, which will now be taken by the European Commission to be drafted into a law to be voted on – probably in mid-2013. The proposals are for a tax of 0.1% on share and bond transactions and 0.01% on derivatives (including all currency trades), the tax would apply to all market participants based in the EU, regardless of where the transaction was effected.
Proponents of the tax argue that it could raise anywhere between EUR 20-40 billion per year, however critics, including the Swedish Government which experimented with a similar tax and abandoned it, argue it will merely drive companies offshore and hit domestic pension funds, corporations and private investors more.
The UK voted against the tax and has vowed not to implement such a measure, a stance that received support from the Confederation of British Industry (CBI), whose director for competitive markets, Matthew Fell, says, “The UK government is right to reject a Financial Transaction Tax as damaging for jobs and growth. It is disappointing that Eurozone economies are pursuing the FTT, whose costs ultimately fall on consumers and businesses, and will be a drag on the Eurozone recovery.
“This tax must not impinge on non-participating member states by including extra-territorial reach into financial services activity conducted in the UK. As the UK’s largest single trading partner, a healthy European economy is in everyone’s interests so we urge participating member states to reconsider this tax.”
FX market participants are sanguine about the tax. “All that will happen is companies and trading firms will register elsewhere,” says the head of FX prime brokerage at a European bank. “The revenues will be lower than expected, liquidity will collapse in European markets, all of which will probably mean lower overall tax revenues. It’s taking a blunt instrument to a delicate problem and won’t work.”
The FTT is very much seen as targeting high frequency trading firms as Germany in particular seems intent on restricting market access to HFTs as much as possible. Again, however, the FXPB head sees the measure failing, “It’s a global market, people can trade on or offshore in most products – it could be that all that results from this is the EU losing control of its own financial markets.”