When ideology meets economic reality (part III): Germany squabbles over the Financial Transaction Tax

The Bundesbank, The Deutscher Aktieninstitute (DAI), and even EU civil servants from the 11 participating countries have all warned against the FTT in its current form.

Today saw yet another German voice raised again the tax – this time from the very party that is meant to be its greatest champion. Nils Schmid, Baden-Württemberg's Minister of Finance – from the German social democrats (SPD)— wrote a letter to German Finance Minister Wolfgang Schäuble condemning the FTT in its current form as “rubbish.” Ouch.

Schmid’s intervention, says that "If the financial transaction tax is implemented as is currently planned, initial estimates show that it is likely to have a serious impact on certain segments of the market (money and capital)." He then calls for a “proper configuration” of the FTT.

So why is this important? Twofold:  first, it shows that in light of the overwhelming evidence of the negative economic impact of the FTT in its current form, the support for the proposal is quickly evaporating.

This now extends to the German political parties that have strongly endorsed it. Remember, the FTT is one of the SPD’s main campaigning issues, and served as the party’s quid pro quo for accepting the EU fiscal treaty. Although Schmid caveated his position, saying that he is not opposed to the idea of a FTT in theory, the point has most definitely been made.

Secondly, the FTT controversy has legs to become battleground ahead of the German elections in September. It is an issue that may split politics, both, within the parties and on a national level.

Officially, Schmid’s letter was met with a standard diplomatic line from the German Finance Ministry – which says it is taking concerns raised by Schmid and German banks “seriously.” They won’t say so in public, but the German finance ministry was most likely nodding approvingly…

Meanwhile, deputy chairman of the FDP parliamentary group ,Volker Wissing, saw his opportunity to strike – and took it, saying that Schmid's letter shows with which "naivety" and "rose-tinted blindness", the SPD had driven the demand for a financial transaction tax.

So far the SPD have remained stumm on Schmid’s intervention. But watch this space. If influential figures within SPD are the latest to start make noises about this, then surely, the Commission’s proposal cannot stand?

Silvio: Who cares about increasing borrowing costs?

We noted on our blog yesterday (and in a piece in today's City AM) that Silvio Berlusconi was likely to opt for populist, anti-austerity (and, potentially, anti-German) rhetoric to regain some ground ahead of the Italian elections.

It took Il Cavaliere 24 hours to prove us right. He told Canale 5 this morning,

The fact that the elections have been brought forward following Monti's resignation is irrelevant, because we are talking about [holding them] just over a month earlier. Therefore, there's absolutely no real reason for the markets to be upset. 

With regard to borrowing costs, let's stop talking about this imbroglio, please. No-one had ever heard about the spread before. We have only heard about it during the past year. Who cares about how much interest we pay to people who invest in our [debt] obligations compared to what is paid to investors who invest in German public debt?

When the euro was introduced, we used to pay a 4.3% [interest rate on our debt], and Germany used to pay a 3.3%. Germany then decided to do one thing in its own interest. It ordered all its banks to sell all the Italian Treasury obligations they had in their coffers...The other American and international funds thought, 'Well, if Germany is selling [Italian debt] there must be something wrong with it.' So they started selling too. 

What matters to us is that the interest rates [on our debt]...have gone up by 2% - which, in a year, means less than €5bn to be added to the €80bn [Italy pays] to service our debt.

Therefore, all the stuff that was invented about the spread is a real imbroglio. The truth is that the spread was used to try and bring down a majority voted by Italians.

Enough German-bashing for one day? Nope,

I was one of the 2-3 most influential leaders in the European Council...[but] I continuously opposed German proposals and demands. I said 'no' when Mrs Merkel was demanding that Greece suffered cuts which, in my opinion, would have brought Greece - as it then happened - almost to civil war. I said 'no' to the Tobin Tax...I said 'no' to the fiscal pact, and I even used the veto...to flag up that Italy could not commit to reducing its [public] debt by €50bn a year.

As we noted before, it will be interesting to see how receptive Italian voters will be to this kind of rethoric - and if the promise of an end to German-imposed austerity will make them forget about Berlusconi's trials and all the rest.