THOUGH most ought to have ceased to be surprised by off-the-wall Eurozone policy announcements and scapegoating speeches, you can always rely on European ministers to pull something out of the bag. And yesterday, Jose Manuel Barroso, the European Commission president, did not disappoint. As the Eurozone quakes in its boots at the prospect of Greek default and a number of banks could eventually go the way of Lehman Brothers, Barroso refused to be dragged into trivial matters such as trying to address the structural flaws in the Eurozone model. Instead, he recycled the idea of imposing a tax on European financial transactions.
In a speech to the European Commission yesterday, Barroso justified his support of the tax by saying that “it’s a question of fairness” and that “it is time for the financial sector to make a contribution back to society.” Leaving aside the dubious logic behind this statement or the enormous levels of corporation tax, national insurance contributions, and income tax that is paid by the financial sector in order to allow European public servants to live the lifestyles to which they have become accustomed, a financial transactions tax is a shortsighted, unworkable and financially reckless proposal.
It is also a proposal that would hit the UK forex sector and the City as a whole particularly hard. The UK is home to the largest share of the global forex trading market – a market with a £2.5 trillion average daily turnover. “The proposed financial transaction tax will damage the competitiveness of Europe, hinder economic recovery and increase the level of risk in the financial system,” says Alex McDonald, chief executive of the Wholesale Market Brokers’ Association. “It is an expensive and counter-productive attempt at achieving poorly defined objectives.”
UNWORKABLE AND WRONG
According to Chris Sanger, head of tax policy at Ernst and Young: “There are many questions left unanswered by the proposal, such as how the commission could ensure that costs would not be passed directly onto end customers in Europe, or whether the tax would in fact create an off-shore industry, driving firms outside of regulatory control.”
Some who defend the tax – including the coalition, which opposes the EU proposal – add the caveat that it would have to be implemented on a global scale. This would require the likes of Canada, Britain, the United States, Australia and China to come to a multi-lateral agreement to commit self-mutilation on their own economies. The chances of that happening are slim to none.
Barroso’s support of this damaging tax could be written off as political posturing – a proposal that will never be implemented but ticks all the right banker bashing boxes to keep his Commission underlings happy. But the financial transactions tax has been proposed with increasing frequency of late – a very dangerous development for the UK’s forex institutions and the City as a whole.