The financial transaction tax that Angela Merkel and Nicolas Sarkozy proposed yesterday for the 27 countries in the EU has lead to some expected criticism.Market participants, analysts, debt experts, and more all have three chief concerns about the tax, which would charge a small (but significant) amount for every financial transaction.
The three problems everyone sees with the proposal:
1. It doesn’t solve the problem in the Eurozone: too much sovereign debt. In fact, it could cause more debt.
Christian Muschick, analyst with Sylvia Quandt Research, says the tax wouldn’t solve the euro area’s fundamental problem of excessive sovereign debt. If at all, a financial activity tax would help avoid regulatory arbitrage.
The Association for Financial Markets in Europe says the tax would hamper economic growth, and the financial services industry–already one of the largest contributors of tax revenue– “should not be seen as an additional source of tax revenue but as an essential part of a stable and sustainable economy.”
2. Deals will take place off-market, where they aren’t regulated
The Vienna bourse says it has concerns that a transaction tax will push market deals onto dark pools or the OTC market. “If an EU-wide financial transaction tax is introduced then we ask that it does not cover only securities but all financial transactions, especially those which happen off-bourse.”
Deutsche Boerse says the tax’s having its desired regulatory and financial impact is doubtful because the recording of all financial transactions is patchy now. And encouraging off-market transactions would not change that: A financial transactions tax would “incentivise shifting even more business into non-transparent, unregulated financial centres and financial products worldwide, distort competition and lead to regulatory arbitrage–to be avoided as one of the lessons learned during the financial crisis. Even if the tax covered a large geographic area, whether it had the desired regulatory and financial impact can be doubted, not least because the recording of all financial transactions will likely remain patchy.”
Traders would rush to those stock markets without such a transaction tax, creating imbalances in liquidity and volume, says Minyanville.
3. Targeting the EU only would put it at a competitive disadvantage
Norbert Barthle, Merkel’s budget expert, says it could be “difficult to implement” and would “make no sense on a national level, so it must happen on a European level.” (Merkel and Sarkozy had failed to communicate that the tax would be Euro-wide, and not just in the 17 Eurozone countries, during a press conference yesterday.)
Ireland’s finance minister Michael Noonan says the tax should apply to all 27 counties in the EU: “One of the key things we need to watch is that if some kind of transaction tax comes in that it would apply to the whole 27 (European Union countries) rather than the 17 euro zone countries.”
Dutch Finance Minister De Jager says it should be global: “We are very much against European taxes. We as the Dutch government have always pointed out that such a (financial transaction) tax could be implemented globally but if you don’t do it (globally) … there will be a big distortion. People can very easily shift taxes to another jurisdiction.”
Minyanville says It would not only put tens of thousands of people out of jobs overnight in a fragile job market, it would greatly reduce revenues for major exchanges.