It’s official: among the weapons Europe will try to deploy in its last-ditch effort to save its currency will be a “Robin Hood tax,” a miniscule fee on stock-market trades and other financial transactions.
That, at least, is was what José Manuel Barroso, the president of the European Commission, proposed in his “state of the union” speech to the European parliament on Wednesday morning. He was endorsing a draft directive issued by the Commission last week and strongly endorsed by the continent’s two largest economies, France and Germany.
It would, he claimed, raise 55-billion euros a year by skimming as little as 0.01 per cent from every financial transaction on European exchanges. This money would be used to finance the European Financial Stability Facility.
But the micro-tax, widely known as a Tobin Tax after its inventor, the economist James Tobin, is just as likely to divide Europe into deeper divisions and intractable feuds.
With the possibility of a Greek insolvency and a wider collapse of euro zone debt looming, Mr. Barroso and his colleagues are pulling out all the stops. He called for unity around a six-point plan, to be voted on by all the euro zone’s 17 parliaments this week, to boost the bailout fund to 440-billion euros in order to prevent the Greek collapse from causing a run on the debt of the far larger economies of Spain and Italy.
The European Tobin tax would be a small part of this. It has been endorsed strongly by the finance ministers of France and Germany, and the smaller economies on the continent are likely to back it. And Christine Lagarde, the former French finance minister who now heads the International Monetary Fund, is an outspoken advocate of such a tax. And software billionaire Bill Gates gave the tax his endorsement on Friday with a report suggesting it could aid international development.
But the elephant in the room is Britain, home to the highest volume of euro-denominated trading, whose current Conservative-Liberal government is firmly opposed to a transaction tax – as are the United States and Canada. When it was proposed at the Toronto G20 summit last year, it quickly sank. Last week Britain’s finance minister George Osborne suggested that Britain would veto the tax unless it was allowed an opt-out.
Without Anglo-American banking, the thinking goes, a Tobin tax would be pointless, because banks and traders would simply move their transactions to the tax-free side of the Channel and the Atlantic.
To forestall such a possibility, the European Central Bank is attempting to pass a policy requiring financial clearing houses that handle more than five per cent of the market in euro-denominated products to do their trading inside the 17-member euro zone (a great many are located in London). But this is unlikely to fly.
Would entire industries move abroad to avoid such a small tax? Well, many institutions nowadays depend on high-frequency trading, in which transactions are conducted more than 10,000 times per second: The fees would add up. Given that a huge chunk of international trading moved from New York to London in the 2000s as a result of Washington’s arguably less burdensome Sarbanes-Oxley regulations, the risk of capital flight is real.
Or is it? As Financial Times columnist John Plender argues this morning, Britain already has a Tobin tax, the 1694 stamp duty, which has “signally failed to prevent London’s ascendancy in international finance.” And, he notes, it could cause banks to switch from speculative interbank high-speed transactions to more productive and useful longer-term investments in corporations and households.
Indeed, it is the British who have actually studied the workings of Tobin taxes the most. A major review of the implications released this year concluded that “a Tobin tax is feasible and, if appropriately designed, could make a significant contribution to revenue without causing major distortions. However,” the research report notes mordantly, “it would be unlikely to reduce market volatility and could even increase it.”