Capital Comment: Europe’s financial transaction tax is wholly self-defeating

WHETHER we like it or not, there seems to be no end to the all-consuming troubles facing the Eurozone. As its crisis rumbles on, with member state after member state coming under the spotlight despite efforts from political leaders and the European Central Bank, the Eurozone seems to be continually shooting itself in the foot.

Take, for example, Europe’s financial transaction tax. We have already seen a fall in volumes in those countries that have implemented it. Italy launched its tax in March, and figures from TMF Group suggest that it has cut trading volumes by 38 per cent already. People don’t seem to have learnt from the past. Sweden’s tax on financial transactions in the 1980s saw a huge decline in volumes, and the country was swift to see the error of its ways. The tax is self-defeating as it increases the cost of trading, making the Eurozone less competitive, while punishing anyone else who is counterparty to a trade made with another Eurozone member. This increase in cost will be borne by investors, and not just the financial services companies that attempt to provide them with the best value products available.

Financial markets need to be as efficient as possible to ensure costs to investors are kept low. Imposing new taxes is completely counterproductive, and it won’t even raise the sort sums that are hoped for. Once imposed, a tax is incredibly difficult to repeal and so it is likely to drive business from not only the Eurozone – which is in dire need of as much new business and enterprise it can get – but our shores as well.

It’s all very well bashing a banker and capping their bonuses (even though this is another draconian measure that is both unlikely to reduce risk taking and will arguably add further to the cost of banking and subsequently reduce lending). But imposing taxes on financial transactions is beyond the pale when so many are reliant on achieving the best possible returns from their pensions and investments to give them a comfortable retirement later on in life.

Europe needs to be opening itself up, implementing more growth measures, reforming itself and looking beyond its monetary union. Such insular measures will more likely than not add to Europe’s decline. But unfortunately many European politicians don’t see it that way, and continue to attack financial services – an integral part of each of our daily economic lives.

Angus Campbell is head of market analysis at Capital Spreads. You can follow him on Twitter @AngusCapSpreads

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