EU Passess Ill-Advised Transactions Tax

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EU states get blessing for financial trading tax | Reuters.

The only way Europe will resolve its debt crisis is by growing its economy; yet, it pursues measures that subtract from economic growth. The latest example of a growth-sapping idea was just passed by France, Germany, Italy, Spain, Austria, Portugal, Belgium, Estonia, Greece, Slovakia and Slovenia in the form of a financial transactions tax of 0.1% on securities and .01% on derivatives.

The purported reasoning behind the tax is to raise money for eurocrisis fighting efforts. German Finance Minister Wolfgang Schaeuble even says so, but the projected revenue from the tax, €35bn, won’t even bail out little Portugal. The actual revenue it raises after business flees to cheaper jurisdictions won’t begin to pay for the mess in Cyprus.

The problem with this tax is that it is not being applied throughout the eurozone. As such, people will move these transactions to non-taxed jurisdictions. Europe supposedly is attempting to become closer with a banking union and even a fiscal union, but it continues to pursue policies that divide the countries. There is effectively a dual-zone banking system composed of the core countries in the North and periphery countries in the South. This new tax will create two securities markets in Europe.

Sweden actually tried imposing this tax several years ago. It reduced business dramatically as transactions fled to other jurisdictions. The Swedes discontinued it and have been warning the Eurozone about its experiment throughout the politicking, but their words have fallen on deaf ears.

The tax is slated to be levied starting in the beginning of next year. I predict a rise in business before the tax is implemented followed by a mad rush to the freer markets of the U.K. and the other non-signatories.

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4 thoughts on “EU Passess Ill-Advised Transactions Tax

  1. Watch a reprise of capital flight/bank “jog” in 3, 2, 1…
    Even those last of my acquaintances who continued to keep their investments in spain in denial of country risk, are going to move out on this one…

    • Happy New Year!

      I don’t see any good coming of this tax. Intangible assets that can be moved at the stroke of a key are not good for raising revenue. There’s nothing to stop people from opening brokerage accounts in non-EU jurisdictions to avoid the tax.

  2. Actually, I believe the tax is a good thing. Of course, there are problems with trade moving to other countries. But I expect the long term investor trade will stay, whereas the hedging trade will move. With the huge level of computerization of the latter, I am happy to see it move. At some time, earlier or later, the computerized trade will lead to a meltdown, and the further one is away from this meltdown, the better.

    Raising money to fight against the crisis is maybe the stated reason for the crisis, but long term stabilisation and less exposure (ie blackmailability) to trading are the real reasons. Any single country (except the U.S.) cannot push this through, but maybe a group of countries can.

    • Thank you for your thoughtful comments on this topic.

      You’re right that any single country could not push this through, but what we would need is for the entire world to adopt this tax in order for it to be successful. Otherwise, there will always be a place where a firm could take advantage of lower transactions costs.

      While the long term investors may stay while the hedgers leave, the problem is that the hedgers (and speculators) make up most of the market. People like you and me account for a very tiny portion. Frequent traders are useful because they provide liquidity. If they flee a market, it becomes less liquid with transaction costs rising as a result.

      When a crisis arises in the world nowadays, there is nowhere to hide. All of these markets are linked through computers. A transaction tax will not serve as a barrier to a financial crisis developing.

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