The new German coalition agreement may have settled nerves of political observers, but it will likely prompt renewed fears in the City as it retained a commitment to implement a financial transaction tax (FTT).
The agreement between Angela Merkel’s Christian Democratic Union and grand coalition partners the Social Democratic Party, reached yesterday, said the parties want to “conclude the introduction of a substantial financial transaction tax”.
The agreement said: “We hold fast to the previous goal of introducing a financial transactions tax in the European context.”
The idea of an FTT has gained traction among various EU member states since the financial crisis, although the presence of the UK has so far ensured that any move to implement it has faced large hurdles. The original proposal was for a 0.1 per cent tax on trades in shares and bonds and 0.01 per cent on derivatives such as options and futures.
However, the absence of the most strident voice against an FTT after Brexit could theoretically allow the EU to bring it in, with a small possibility it could even be brought in during the transition period after March 2019.
Chancellor Philip Hammond today said the government is seeking “a good faith assurance that short-cut processes won’t be adopted to fast-track legislation which would clearly be discriminatory against us”.
Speaking to MPs on the EU scrutiny committee, Hammond said the government would not be blindsided by an FTT, with “very good visibility of the pipeline of potential legislation”.
The FTT is currently being discussed by 10 EU member states in so-called enhanced cooperation, which allows a group of states to work on new laws separately before bringing them properly to the European Parliament.
Germany is among the 10 states in the enhanced cooperation group, along with France and Italy, although other member states such as the Netherlands are likely to oppose the move.
Nigel Farage, the former leader of the UK Independence Party, said that the introduction of an FTT would represent a “cutting off their own nose strategy to ensure that the UK financial markets are damaged post-Brexit.”
The FTT, also known as a Robin Hood tax by some, was originally proposed by US Nobel Prize-winning economist James Tobin, who argued it could stop short-term trading and thereby stop damaging market movements.
However, after the financial crisis some politicians gave a different rationale, namely that it would help raise money and make the banking sector contribute more to economic recovery.