It’s not good – but EU’s Tobin tax won’t be as bad as feared

Allister Heath
FOR once, goodish news for the City – or at least a development that is significantly less bad than previously feared. The Eurozone is bowing to economic reality and fierce political opposition in countries such as the UK and significantly diluting its proposed financial transactions tax. The levy may now be just 0.01 per cent on transactions, rather than the 0.1 per cent previously proposed, reducing the expected tax raised from a demented and utterly unrealistic €35bn to a more manageable €3.5bn a year. Only shares will be taxed at first, it seems, though bonds and derivatives may still eventually be affected. The outrageous extra-territoriality of the original proposals will also be drastically reduced.

That said, the new proposals are worse than the status quo and should hardly be welcomed. They will still reduce the liquidity of markets, increase the cost of capital, hit savers, depress the value of pensions and make it harder for companies to raise money. They will make countries poorer and cost jobs. Fortunately, the damage will be much smaller and more bearable than it could have been, though the costs will rise if the tax is extended over time. The original proposals would have destroyed markets; this one merely extracts a little more money from already over-taxed, crisis-ridden economies.

One of the grimmest stories of the week is that French unemployment has hit its highest ever level: Francois Hollande’s policies are unbelievably bad and slowly bringing France to its knees. His solution, however, remains to tax capital even more, which shows that he simply has no clue about how economies work. Politicians in other countries should follow a simple rule: when it comes to economic policy, tax and spend, take a look at what Hollande is doing and make sure you do the exact opposite. That applies as much to financial transaction taxes, even of the present, more moderate kind, which of course Hollande loves, as it does to every one of his other stupid ideas.

Yet this is the second area where the EU’s power grab over the financial services industry has been partly diluted – its reform of accountancy firms will be less destructive than many had feared, or so it would currently seem, with provisions to impose the switching of auditors after a certain period of time watered down. In this area too, however, the new rules will be worse than the existing ones.

Those in the City tempted to celebrate or to claim that “Brussels is finally moving our way” should go and take a cold shower. It won’t be as bad as they feared – but it still won’t be good.

THE OECD is right: house prices are over-valued, and the problem is getting worse. The body points out that UK homes cost 22 per cent too much when compared to wages (using a long-run price to earnings ratio) and 31 per cent too much when compared to rents. Prices in some countries remain cheap – including the US, which managed to properly purge its excesses and return to normality, as well as in Germany and Japan. Yet prices are 33-35 per cent over-valued in France, giving Hollande yet another headache. In Australia, they are 21-37 per cent over-valued and in Belgium 49-63 per cent. Most worryingly of all, perhaps, is that homes are 30-64 per cent too pricey in Canada, the country whose monetary policy is currently run by Mark Carney, the incoming Bank of England governor. The fact that his housing bubble is even greater than ours ought to provide real cause for concern.
Follow me on Twitter: @allisterheath