A tax on financial transactions in Europe could reduce harmful speculation and help restore some political control over the markets. So why don't we have one yet?
Here are a few facts:
1) In the postwar period, the amount of money that Wall Street dealt with every year represented approximately 15 percent of the US GDP. In 1975 it was 17 percent, at the end of the 80s it was up to 35 percent and ten years later it reached 150 percent of the US GDP. In 2006, before the subprime bubble burst, it exceeded 350 percent. In other words, the money that circulated every year on the New York Stock Exchange amounted to three and a half times the total wealth created in the US over the same period.
2) Two-thirds of the financial transactions made in Wall Street are carried out by computers within a few thousandths of a second, without any human intervention. In Europe, these high frequency trading operations “only” represent 40 percent of all financial operations.
3) A single private bank (JPMorgan Chase) holds derivatives with a notional value of some 78 trillion dollars, a figure higher than the world GDP.
These are but a few of the many possible examples that demonstrate how finance has completely lost its social role of being an instrument at the service of the real economy, and instead became a gigantic casino. A casino which dragged us into the worst crisis in decades. Paradoxically, the whole responsibility and the entire cost of the crisis are now put on citizens and states which have to accept austerity plans and cuts in public spending to “restore confidence in the markets”. As if it wasn’t this hypertrophic finance that had to change course to win back our confidence. New rules, controls and limits are urgently, and dramatically, needed.
Many networks of civil society organizations have pushed for years for the introduction of a financial transactions tax (FTT). Simply put, the FTT would be an extremely low tax – around 0.05 percent – on every transaction on financial instruments. Such a low rate would not discourage “normal” investment, while speculators who buy and sell securities within milliseconds should pay the fee for each transaction. The amount to pay becomes progressively higher the more short-termed the goals are.
But the FTT is far from being the panacea to solve all the problems of finance. This is why, parallel to the introduction of the FTT, new rules are needed in order to shut down tax havens, separate commercial banks from investment banks, dramatically increase transparency in the markets, and so on. This said, the financial transaction tax is an extraordinarily effective tool to counter speculation, with negligible effects for small savers and enormous advantages for the economic system and the society as a whole. At the same time, the financial markets are so huge that even such a small tax would generate tens of billion euro of revenue each year in Europe alone. A revenue that could be used to promote welfare and public services, to finance international cooperation and, why not, to fight the consequences of climate change.
Despite the recurring critiques on the need to apply such a tax on a worldwide scale in order for it to be effective, several studies and research show that a FTT would be perfectly feasible even in a limited number of countries. After years of campaigning, and also because of the devastating impact of the financial crisis, the European Union finally took some concrete steps towards the implementation of this tax. In 2012, the European Parliament voted with a large majority in favor of its introduction. Notwithstanding, due to the opposition of some countries, namely the UK, it was impossible to reach unanimous agreement at a European level. The EU has therefore initiated an enhanced cooperation procedure, which states that if a sufficient number of countries agree to implement a common rule, the EU institutions can proceed even in the absence of consent from all of its 27 members.
In October 2012, with the support of a dozen European nations including Germany, France, Spain and Italy, the ECOFIN Council gave its green light to the opening of the enhanced cooperation procedure and instructed the European Commission to publish its own draft directive.
The draft, published in February 2013, has several interesting aspects and follows many recommendations of the networks that are pushing for the introduction of the FTT. The tax would be applied to all financial instruments, including derivatives, thus ensuring both a proper fight against speculation and a large tax base. The taxation should be based both on the principle of residence (nationality of the person making the transaction) and according to the principle of emission (domicile of the issuer of the securities subject to taxation). This double approach would sharply decrease the chances of avoiding the FTT by moving in jurisdictions that do not apply it. Moreover, the exemptions to the application of the tax are few and limited.
In the words of the Commission, one of the main objectives is to make sure that the financial institutions give a fair and substantial contribution to cover the costs of the recent crisis. Going even further, the Commission insists on the need to establish a principle of fairness with respect to the taxation to which other productive sectors are already subjected. It also seeks to discourage a financial model that generates inefficiencies, and take a measure complementary to other under discussion to regulate finance.
To sum up, the Commission draft is an important step in the right direction, even though the path is still long. Several times in recent memory, financial lobbies have worked hard to dilute and weaken other regulative proposals. A signal in this direction arrived from the UK, backed by Luxembourg, which went as far as filing a lawsuit before the European Court of Justice to challenge the Commission’s proposal.
This is not very surprising, coming from two countries where the financial sector plays a huge role and has a similarly big influence. It is however somehow harder to explain the position of the Italian government, which asked for the exclusion of government bonds from the tax base. Quite disappointingly, so far fear of the reaction of the financial markets won over the long-term need to avoid speculative attacks on government bonds, as we witnessed in several European countries, not least in Italy itself.
It should be pointed out that in parallel to the European process, some EU countries, most notably France and Italy, have already introduced their own proposals for an FTT. However, these measures are very partial and weak, and can at best be considered a first step towards the application of a real tax on financial transactions, which could curb speculation and reduce instability in the markets. The Commission draft is thus a much better proposal to move towards these goals. The discussion and the approval now mainly depends on the European Council, i.e. the governments of the involved states.
Even before the objective of countering speculation or generating a revenue, a proper FTT would be a strong signal of the political will to control, and not to accommodate and please, the financial markets. Even more, it would be a step towards bringing finance back to the service of economy and society, and not an end in itself – to make money out of money in the shortest possible term. The coming months will tell us if Europe will finally show the strength, and the courage to send such a signal.
Andrea Baranes is Chair of the Fondazione Culturale Responsabilità Etica, the cultural foundation created by the Italian Ethical Bank (Banca Etica). He is the spokesperson of the Sbilanciamoci! campaign and the former spokesperson of the Italian campaign for a Financial Transaction Tax. His latest book is Finanza Per Indignati (Ponte alle Grazie, 2012).
Article courtesy of Open Democracy