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There may be no halting this tax juggernaut
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There may be no halting this tax juggernaut
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.

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.

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