The idea of an international financial transaction tax (FTT) has been a recurrent theme in European political circles over the past decade. This idea was first put forward in 1978 by American economist James Tobin, who intended the tax to counter the volatility of financial markets and avert financial crises. Yet, before the outset of the Great Recession and the Eurozone crisis, the project of a European FTT never really took off. Indeed, in early 2000 the European Parliament rejected a resolution that would have asked the Commission to study the feasibility of such a measure. The issue was revived during the ECOFIN of 22 September 2001 in Liège by the Belgian Presidency, but even in that case the debate was soon cut off.
Following the spread of financial panic after 2008, the idea of a FTT started being considered more seriously. Following a request emerged during the September 2009 G20 summit, the International Monetary Fund started reviewing a financial transactions tax as a way of rescuing defaulting financial institutions and removing the debt burden from the taxpayer’s shoulders. In a similar vein, EU leaders renewed their interest in this instrument and the European Commission attempted to achieve substantial advancements on the issue. The first proposal came on 28 September 2011 and was aimed at harmonising the tax base and set minimum rates for all transactions on secondary financial markets. However, by mid-2012, EU Finance Ministers decided at ECOFIN that they could not reach a consensus on the proposal for a EU-wide FTT for the foreseeable future.
A second proposal was presented on 14 February 2013: this mirrored the scope and objectives of the original FTT proposal, while also strengthening the anti-relocation and anti-abuse rules. This time the terms of the initiative appeared to be clearer, with annual revenues being estimated by the Commission to be around €30-35bn. A Council working group started immediately after the proposal was tabled, and involved a wide array of actors. Nonetheless, despite the Commission’s efforts to promote the new tax, and notwithstanding significant advancements on the issue, the initiative appeared to lose political salience over time, especially since a number of divergences among member states appeared to be more and more difficult to be ironed out.
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The intergovernmental initiative on the FTT became quite intense in Spring 2012, when finance ministers of nine EU countries—France, Germany, Italy, Spain, Belgium, Austria, Portugal, Finland and Greece—asked the Danish presidency to consider compromise alternatives to the FTT. While this initiative failed, it constituted an important step in the definition of a coalition of Member States supporting the FTT proposal. Indeed, this coalition consolidated and came to include also Slovakia and Estonia, thus becoming the so-called “Group of Eleven”. Ministers at the ECOFIN meeting in Brussels on 22 January 2013 formally gave consent for this group to adopt an enhanced co-operation procedure to implement the FTT (this was only the third time that this special procedure was adopted). Further progress in the definition of the terms of the FTT was also announced by Italian finance minister Pier Carlo Padoan at the end of 2014, during the Italian semester of presidency.
These advancements seemed to be the natural result of the Franco-German convergence on the necessity of a Tobin Tax at the European level. Indeed, on the one hand, France has always showed unconditional support to a EU-wide tax, under the presidencies of both Nicolas Sarkozy and François Hollande. A high degree of cohesion on this issue also exists in Germany, with both centre-right CDU and the Social Democrats looking favourably at the FTT. It is worth noting that the renewal of the issue and its new momentum was partly originated by a joint letter to the Belgian EU Presidency by France and Germany’s finance ministers, Christine Lagarde and Wolfgang Schäuble, after the outset of the Eurozone crisis in the Summer of 2010.
Conversely, the UK has showed fierce opposition to the Franco-German initiative: fearful of the impact of an FTT on the City of London, Britain has always made clear its intention to obstruct such a measure unless it is adopted on a global scale. In the midst of the 2013 negotiations, former British chancellor George Osborne attacked EU plans to create a FTT, describing it as “poorly designed, badly timed and unlawfully extraterritorial”. The same stance had often been expressed by former British Prime Minister David Cameron, who vowed to veto the FTT initiative, but also clarified that France and Germany should be free to go it alone and introduce a Tobin tax if they so wish. British criticism within the ECOFIN was echoed by Swedish finance minister Anders Borg. At the roots of Sweden’s opposition is the country’s experience of economic turmoil after it introduced its own FTT in the 1980s, and the scepticism towards measures that might hurt a certain type of Swedish investment company, a model used by leading businesses such as Volvo and Eriksson.
Yet, given that the institutional setting of the EU allows reluctant countries to opt-out, why has the Group of Eleven not yet been effective in translating the FTT proposal into action? The first, economic reason revolves around the potential drawbacks from implementing a FTT in a subset of EU member states. Indeed, the measure might result in a diversion financial capital from countries with the FTT to the other member states, thereby determining negative growth effects without generating a significant tax revenue. The second, more political reason is to be attributed to substantial divergences within the Group of Elevel concerning the terms of implementation of the FTT. In particular, one of the greatest matters of contention appears to be the inclusion of state bonds in the set of taxed instruments. Italy’s permanent representative in Brussels, Ferdinando Nelli Feroci described the exclusion of government bonds from the FTT as a “red line”, non-negotiable issue for Italy. This created substantial friction, given EU officials’ opinion that removing sovereign bonds from the scope would considerably impact the anticipated revenue of the FTT, and also signaled that agreement between the participating countries on what form the tax will take was still some way off at the end of 2014.
An important role in determining the fate of the FTT proposal has also been played by supranational institutions. First, in April 2013 the UK lodged a formal complaint on the FTT before the European Court of Justice. A year later the ECJ rejected the British legal challenge, arguing that, since the proposal had not been adopted, the UK case was restricted to challenging the right of the eleven countries, led by France and Germany, to proceed with it. Thus, the ECJ appeared to be a key actor in allowing the proposal not to be entirely dismissed. In a similar vein, the European Parliament—and especially, Green and Socialist MEPs—has often expressed enthusiasm towards the proposal, even though its role in determining the advancement seems to have been rather marginal. A more cautious stance on the feasibility and convenience of the FTT has instead been taken by the European Central Bank, with both former ECB President Jean-Claude Trichet and current President Mario Draghi expressing concerns over the impact of such a tax on investment.
After 2014, progress on the FTT has stalled, with no significant development taking place at the intergovernmental level. However, the changing scenario of European politics following the British EU Referendum of June 2016 may have a strong impact on the likelihood of a political compromise in the upcoming months and years. Indeed, as argued by Professor Simon Hix of the London School of Economics, the absence of the UK in the EU Council and Parliament would possibly translate into a stronger majority for the FTT. This will be especially the case if the terms of the Brexit deal will be tough, with substantial exclusion of the UK from the EU Single Market, thus making it more difficult for European financial investors to divert investment to more profitable havens.
However, the terms of the Brexit deal will also define whether a substantial re-localization of financial services from the UK to the continent will take place. As suggested by a recent interview of French Green MP Eva Sas, the patterns of interests of EU Member States with regard to the FTT might radically change, should a big move of financial operations out of the City take place. Indeed, both Paris’s and Frankfurt’s hopes to capitalize on Brexit in order to take over from London as the EU’s major financial hub might end up conflicting with the Franco-German long-standing ambition to introduce a EU-wide FTT.
Photo Credits CC Domiriel
Also published on Medium.