Yhere may be no halting this tax juggernaut

There may be no halting this tax juggernaut


The latest brainwave from Brussels has the City in its sights, even if
Britain goes it alone








The Financial Transaction Tax
has become a real and present danger to the British economy Photo: Alamy






By Jeremy Warner

8:21PM BST 16 May 2013


128 Comments




Of all the nonsense to have come out of Brussels over the years, there is
little quite so self-defeating, politically driven, and generally threatening to
economic wellbeing as the proposed new Financial Transaction Tax (FTT), which,
as the name suggests, imposes a levy on every transaction between financial
institutions. As this week’s dismal GDP figures demonstrate, Europe desperately
needs some kind of deregulatory growth agenda, and yet it seems determined only
on the reverse. To be pushing ahead with such a stifling and invasive initiative
at a time of deepening recession fair takes the breath away.


There is not a central banker in Europe who thinks the FTT is a good idea,
and even among those who publicly support the tax there are grave reservations
in private. Yet the proposal seems to have developed a momentum all of its own,
which even the British Government’s legal challenge through the European courts
will struggle to halt. And they wonder why so many in Britain want to leave the
European Union.


Not that exit would in this case do any good, for being out doesn’t enable
the UK to avoid the destructive impact of the tax.


In recently arguing that we would be better off out, Lord Lawson cited the
FTT as a prime example of the harm Europe was doing to British interests, yet it
might just as easily be argued the other way around. As an enthusiastic member
of the EU, Britain would stand some chance of at least watering the FTT down, if
not stopping it outright. There is a sense in which Europe has given up worrying
about the British interest now that divorce seems all too likely.


In any case, the City is only just beginning to wake up to the existential
threat posed by the new tax, due for implementation at the start of next year.
Even the European Commission, which naturally tends to play down the destructive
impact of its directives, concedes that the proposal could result in a 75 per
cent drop in derivative transactions and a 15 per cent reduction in cash
volumes.



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Others think the impact will be greater still. Since much of this business
goes through London, the tax has become a real and present danger to the British
economy. Analysis by Goldman Sachs finds that the FTT in its proposed form would
render some business lines, including large areas of the swaps and repo market,
completely unviable.

The cost to profits among Europe’s major banks is estimated at around 170
billion euros, or 16 per cent of their capital – this at a time when regulators
are demanding that banks hold much more capital to bolster solvency.

Five years of mayhem and scandal have largely stripped finance of any defence
it may once have deserved; and it is indeed hard to feel much sympathy over
bankers’ bonuses. Yet the damage outside the seemingly worthless rent-seeking
characteristics of finance looks set to be equally catastrophic, significantly
raising the cost of capital, adding to consumer prices and further undermining
pension savings. German industrialists have warned that the tax will seriously
impair their ability to hedge risk, and therefore be yet another negative for
competitiveness.

By leaving the European Union, Britain could theoretically do what some US
legislators are threatening, and simply make the tax illegal on these shores.
Congress has rightly seen red over Europe’s attempt to tax activity that takes
place on American soil, and will if necessary simply cut it off at the knees,
thereby removing all American liquidity from European securities trading. Yet
for Britain, the choice is not so easy. By making the tax illegal, we’d only be
cutting off our nose to spite our face.

London is Europe’s de facto financial centre, with most European banks
choosing to locate their securities and derivatives trading in the City. Such
business would migrate back to Europe if we chose to go the American route. The
City would halve in size overnight.

That said, this is not an automatic outcome, and there are certainly those
who argue that the impact on the City would not be so bad, as Europe would
simply switch its finance into non-euro currencies. In such circumstances, the
City might actually benefit. Even so, this is another terrible muddle Europe is
getting itself into, and that cannot ultimately be good for Britain.

Like much of what comes out of Brussels, the underlying intention and indeed
some of the motive look reasonable enough. The main purpose is to raise revenue
for cash-strapped governments, all of whom blame finance for their fiscal and
economic collapse. This way of thinking misdiagnoses the nature of Europe’s
crisis, but there is no denying its popular appeal.

The other main, stated purpose is to throw grit in the wheels of finance, to
discourage short-termism and reincentivise long-term investment. No one is going
to quarrel too much with these ambitions after all that’s gone wrong. But as any
mechanic will know, if you throw grit in the engine, the big end will eventually
go and you’ll end up with no engine at all.

Europeans don’t really understand markets, and in particular they don’t seem
to get that attempting to bend them to a particular political purpose is a
contradiction in terms. This is one of the things that separates Britain from
the rest in a way that may never be bridgeable. Culturally and temperamentally,
we are different. Yet whether we like it or not, we are damned by geography to
be a part of Europe’s perennial outbreaks of madness. Would we be more
influential out than in? Britain’s legal challenge to the FTT may end up being
an important test of this question.