Eurocrats retreat from dangerous FTT

Jonathan Lindsell, 3 June 2013

The Financial Transaction Tax was agreed last October and has faced strong criticism ever since. A recent Civitas report explains the potential damages of the original plans (Does the EU impede the UK’s economic growth? pp.5-6). The European Commission itself estimated continent-wide job losses of up to 812,000 as a result of the ‘cascading effect’ making banking more expensive. This would disproportionately affect London, even though the UK is not a Eurozone member. The threat of job and revenue losses from businesses moving overseas to America or Hong Kong remains large.

George Osborne initiated a legal challenge against the FTT in April. The European Court of Justice will have to decide whether the plans would damage the European single market or undermine the rights of EU countries such as the UK which did not participate in the enhanced cooperation that advanced the FTT. The chancellor’s fears are well founded – when Sweden introduced a similar tax in the late 1980s, over 50% of trades were driven to London and the volume of bonds and futures trades fell by 85% and 98% respectively.

Such a measure is thus threatening to EU stability as a whole, and Osborne’s resistance is not entirely a matter of British self-interest. Many nations such as Slovenia and Spain have highly vulnerable banking systems, already on the verge of collapse. Although their governments stand to benefit from tax receipts, looming damage to the overall economy is giving some cold feet. There are also unresolved pragmatism concerns regarding collection of highly complex instruments such as derivatives.

EU officials have begun to see sense, and are watering down measures. They will reduce the rate on bonds and shares from 0.1% to 0.01%, and thus adjust the expected tax receipts from EUR 35 billion to EUR 3.5 billion.  The tax is also likely to come in more gradually, initially levelled only on shares in 2014. Bonds were originally to be included in next year’s measure but may be put off until 2015, and plans for derivatives are unclear.

This ‘softly softly’ approach still aims to gradually ratchet up the tax to 0.1% eventually, but retains the flexibility to halt or retreat if the initial steps drive business overseas in droves. Confirmation of the changes are yet to be confirmed, but Algirdas Šemeta, the Lithuanian EC Tax Commissioner, admitted that “January 2014 is looking less likely.”