For those that don't know, the combined intellect of the European Union's financial brains has come up with a tax first conceived in a university lecture in the seventies. The EU wants to impose an EU-wide financial transactions tax, aka the Tobin tax after the aforementioned lecturer, Nobel laureate James Tobin. The financial transactions tax is a penalty on all spot conversions from one currency into another.
It is actually a pretty good idea as a solution to the EU's current problems. The Euro is a risky currency, and in Europe but outside the Euro countries like Switzerland are cash-havens, and people are rightly converting and investing in these havens to secure their worth. The British Chancellor George Osborne certainly doesn't agree; arguing that the damage it would do to Britain and other member states would more than negate the benefits.
According to recent research by the Adam Smith Institute, based on European Commission impact assessments the tax would cost the UK economy £25.5bn, and hit EU member state economies by £185bn in the long term.
"This report reveals the huge damage that a Financial Transaction Tax would cause to the UK. It would wipe out London’s derivatives sector, destroying jobs and driving other traders overseas. By destroying a critical part of Britain’s most lucrative industry, an EU Financial Transaction Tax would be killing the goose that lays the golden eggs," said Sam Bowman, head of research at the institute.
Billions of pounds, thousands of jobs and an entire section of an important industry wiped out and that is just in Britain. That said: it is Britain that would undeniably be hit hardest by the tax. The London financial services sector is legendary not only in Europe, but in the world. As much as many of us might hate the bankers and their bonuses, the capital's leading industry will be a big part of our recovery when it eventually comes.
We are with George Osborne in being understandably dead against the tax, as it would have a big impact on property investment in Europe, even if only making us all change our procedures and models for currency conversion. Osborne certainly pulled no punches at a recent meeting of financial ministers in Brussels, he said:
"The commission itself points out that a European financial transactions tax would have a serious impact on European growth, it would hit the UK economy, it could reduce European GDP by up to 3.5 per cent. But the commission takes the central view that it's only going to reduce European GDP by 1.76 per cent, that's a central estimate, and it is going to cost half a million jobs across the European continent."
Osborne continued: "The commission also estimates that 70 to 90 per cent of all transactions will leave the European continent as a result. We are talking about something that is going to push a major global business out of the European continent."
Osborne went further, saying that there isn't a banker in the world who would pay the tax, but that if by some miracle the tax could be collected, what it would collected "has already been spent four times over by the people around this table". The chancellor suggested that time would be better spent discussing "what is in effect a crisis in the European economy", as the Eurozone debt crisis was in danger of spreading from Greece to Italy.
However, German finance minister Wolfgang Schauble said Osborne’s views were "just an excuse for doing nothing". He added: “We will wait 20 years before doing anything if we wait for the last island on this planet."
Tensions and emotions are obviously running high, which is of course understandable. If Italy does fall in to crisis the current bailout fund will be pennies compared to what is needed. With global investors far less keen to bulk up the fund than it was hoped, it will likely fall to Germany to save the euro, heaven forbid if Spain, the second biggest economy should also succumb to the crisis, which still can't be ruled out.
So, Germany is obviously jumping at any chance that would see all European countries, those in the euro and outside it play a bigger part. While you can obviously understand the likes of Britain's retention to risking its economic future on saving a currency it never supported. It doesn't look like the financial transactions tax will become a reality, but we shall have to wait and see what they come up with next.
- Wednesday 07 December 2011