October 15, 2012

On the margins of this week’s EcoFin, eleven euro-area countries (DE, FR, IT, ES, PT, BE, AT, GR, EE, SK, SI) agreed to press ahead with a tax on financial transactions (FTT). With more than the required nine states this initiative gained the critical mass to request making use of the “enhanced cooperation” clause in the EU Treaty. The European Commission (COM) intends to already present a proposal for an FTT at the council meeting on Nov 13. It can build on its original proposal from Sept 2011 since Germany and France want to keep its scope and objectives: a levy of 0.1% for bond, share and security transactions and 0.01% on derivatives trading. Any proposal for enhanced cooperation by the COM has to be approved by the EP and a qualified majority of all EU-27 before work to shape the legislation can be started by the smaller group. As predicted, it proved impossible to agree on an FTT in the EU-27. However, getting there will be difficult even in the limited group of 11 – for procedural and material reasons. Procedural: i) The group of 11 will have insufficient votes to form its own qualified majority to push through this enhanced cooperation and will therefore depend on a number of other EU partners to support the initiative without joining it. Those critical of the FTT – such as the UK, Sweden or Ireland – will be only prepared to do so if the final design of the FTT will have no negative impact on the EU as a whole and their financial markets. ii) The decision on the final legislation itself has to be taken unanimously in the sub-group. This will not be easy given member states’ different interests – for example, they disagree on whether the proceeds should be channelled into the domestic or a future eurozone budget. On the material aspects, old and new problems abound: i) The COM already has listed a raft of exemptions – a list that will only grow in the legislative process until the whole tax base has become so full of holes that evasion will be rampant. ii) With the FTT applying to only a sub-group of countries, formulating arrangements that will not result in tax evasion will be even more difficult. iii) By reducing liquidity, the tax will increase rather than reduce volatility and will raise capital and hedging costs for companies.