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Tuesday, April 23, 2013

EXCLUSIVE: Internal documents reveal countries' concerns with FTT proposal (or when ideology meets economic reality)

The European Commission, of course, doesn't get what the fuss is about, but some countries that are meant to participate in the much-criticised EU financial transaction tax now seem to be going very cold on the idea. Or at least on the way the tax is drafted at the moment.

We have got our hands on the memo from the eleven countries that under "enhanced cooperation" have signed up to the tax - reported in yesterday's press summary - which raises a series of concerns about the Commission's draft. Exclusively, we today publish the full six-page memo here.

The memo, which in painful EU-jargon is known as a "non-paper", was last week discussed amongst civil servants from EU member states, at a meeting behind behind closed doors. So this isn't reflecting any final position on behalf of the eleven (who disagree amongst themselves on a number of issues). 

However, this is revealing stuff - it's clear that though several countries are supportive of the FTT in public, they have a whole host of concerns in private.  The document is desperately looking for answers on how the Tobin tax would work in practice. This is, of course, in addition to the more fundamental objections to the FTT raised by the UK's ECJ legal challenge, now also supported by Luxembourg, which we have analysed here.

You can read the whole thing here, but the key points that struck us are outlined below:
  • There are calls to clarify how collection of revenues would work in practice.
  • The countries complain that the European Commission’s impact assessment “is not fully clear on how the taxation on government bonds would interact with the cost of national debt” and whether an increase in the cost “could be counterbalanced by the revenues of the FTT.”
  • In addition, there are concerns about the impact on repurchase operations on sovereign bonds. "The tax will induce an additional cost that is not sustainable for the market participants,” according to the document. “Repo operations are very useful for managing the treasury liquidity, and the disappearance of this market combined with the lack of viable alternatives will induce serious problems about risk management.” Ever so worried about skyrocketing government borrowing costs, Italy seems particularly worried about this.
  • Given the way ‘territoriality’ works under the Commission proposal in particular, each member state would not be allowed “to collect the whole EU FTT paid on the bonds issued by the same member state. As a result, the increase of cost of government debt…would not necessarily be compensated by the collection of the tax on the same instruments.” This sort of links to UK concerns that the tax would hit a firm based in one country, but be collected by (and therefore the revenue will be enjoyed by) a government in another. Taxation without representation some would say.
  • The rate levied is also an issue: “The 0.1% uniform tax rate proposed by the Commission might create an inappropriate burden on short-term bonds…compared to long-term bonds.”
  • And the concerns are not only limited to government bonds. The countries note that, “Businesses have expressed worries that the same effect described above for government bonds would replicate on the corporate issuers, with negative effects on the financing capability of companies.” As we've argued repeatedly, this is the risk that the tax will hit business at a time when these are already struggling to balance their books (and are facing particularly high borrowing costs in the south).
  • Uncertainty over the impact of the FTT on high-frequency trading.
  • The member states also ask the Commission to clarify a number of definitions in its proposal (e.g. ‘purchase and sale of a financial instrument’, ‘cancellation or rectification of a financial transaction’, and so forth).
In other words, even among its supposed champions, the potential impact and practicality of the FTT are shrouded in uncertainty and a lot of concerns, particularly when it comes to effects on the real economy at a time when the eurozone is desperate looking for growth.

For anyone with an ounce of grasp of economics, this internal memo strongly supports the accusation that the FTT has a lot more to do with politics than evidence-based policy.

When ideology meets economic reality.


Anonymous said...

well done guys

Edward Spalton said...

I thought the original idea of a Tobin tax was one on spot currency contracts to put a brake on purely speculative trading whilst not affecting "genuine" currency trading to pay for real goods and services. It is now a proposal for a tax on all financial transactions.

Obviously the ambition is for it to be an EU-wide tax, possibly creating that Holy Grail of EU federalists - a permanent source of "own resource" funding beyond the recall of member states.

In that form, it will be highly discriminatory against Britain where the majority of European financial transactions take place.

This reminds me of the US tariff which did much to start the Civil War - largely paid for by importers in the Southern states for the benefit of Yankee manufacturers.

Whilst one hopes that bloodshed will be avoided, maybe it will bring us the blessing of secession when we come into our own again.

Derek R said...

If the UK doesn't sign up to the FTT, and subsequently a transaction occurs in London that the EU says is liable to FTT, what will happen if we ignore it?
Will Cameron go to the European Court of (so called) Justice?

Rik said...

On increase of costs of borrowing.

This looks perfectly clear how this will play out. Simply the ones that made the report havenot got a clue. No exact percentages can be given but a pretty good indication.

The people with a choice will at the end of the day (may be not at first) oncharge that to their counterparty or to someone else.
So national buyers investors might have to settle for somewhat lower yields. But international ones will oncharge it and at the end of the day demand higher yields (everything else being the same of course).
The ultimate result will be somewhere in the middle likely considerably closer to the fully oncharged end. For the following reason: EZ/FTT countries have the option to move to EZ/non-FTT countries.

Anyway next to this we will see a lot of tax-planning. tax planning starts when not the rates are high but when the absolute amounts are high. And they likely will be for the potential ultimate buyers. So we will see taxplanning in one form or another. And like will all legislation it is likely to work. And especially here where there is no experience and changing it because of wholes will be very difficult.

Yields will also rise because there will be less volatility and a smaller market (in the way that a lot of traders especially will move away and take their money with them). As such less volatility in normal circumstances leads to lower yields. With government bonds as we can see in the EZ there is clearly an economy of scale thing. Simply being bigger is more important than having less volatility. Compare Finland and Germany. Germany more volatile and equally risky still considerably lower yields seen the total yields. Only to be explained by size. Donot extend the meaning of your wife's word's to bondmarkets. Size does matter.

If marketmakers move away it will most likely be much worse.

So seen the above it looks highly uncertain that on gov bonds it will be a big earner. With the multinational part of the private sector moving their financial vehicles to non-FTT territory also there it just makes doing business simply more complicated. More red tape if you like. At worst you pay one time over the whole duration iso with every sale and it looks there are ways even to avoid that.

Overall hard to see that at the end this will be a big earner. Simply politicized legislation by people who donot have a clue. Hollande stuff for the general public's underbelly feeling but at the end counterproductive.

Anonymous said...

Generally speaking, when were supposed to be the next EU parliament elections (means: a new EU commission)?
Moderated, you say. Moderated or censored I would like to know.

christina speight said...

Derek R - This is the crucial bit. Our case at the ECJ is - inter alia - that the 11 cannot under the terms of the " enhanced cooperation" impose any tax on any of the other 16 countries.

The whole thing has been dreamt up as a way of destroying the City of London so that the benefits will go to Paris and Frankfurt. One way or another we must not pay and this in other contexts would be accepted as a 'casus belli'. ("a Latin expression meaning the justification for acts of war.")

The whole thing is brought about solely because the EU will not face facts. The Euro is now the main cause of the WORLD-WIDE recession and which will continue for all of us until they scrap the Euro entirely. Even the IMF (francophile to its core) won't address the elephant in the room and is now given to standing on its head and acting in a grossly stupid manner because it and the EU leaders cannot admit that their life's work was a horrible mistake.

The FTT is a side issue in this but it gives the colleagues a shot of adrenaline to be doing anything even if it's totally the wrong thing.

Anonymous said...

The French introduced their own FTT about six months ago. It's a huge flop, raising only about 25% of the projected revenues, increasing capital costs and driving investment capital out of France. It's a net negative tax (the total costs are greater than the revenue raised). This is exactly what Berkeley Economics Professor, Barry Eichengreen, predicted would happen.

While 11 of the 27 EU countries are attempting to put an FTT in place, a majority of EU Nations (16 of 27 countries) have said they will not participate because it will damage their economies and harm ordinary working men and women. The Secretary General of the European Federation for Retirement Provision says the FTT is not a tax on Wall Street, but rather a tax on retirement savings and other “innocent bystanders.”

A study by the Dutch Central Bank showed that 40% of the FTT would be paid by pensions and retirement savings, 10% would be paid by insurance companies (driving up everyone's insurance costs), 25% would be passed on to customers, and only 25% of the FTT would be paid by banks and financial institutions.