EU finance ministers studied updated proposals from France and eight other governments yesterday to impose a cross-border tax on the finance industry against stiff resistance from Britain.
Four decades after the idea of the tax devised by economist James Tobin, the financial transactions tax is aimed at raising revenues from financial firms after banks especially benefited heavily from taxpayer bailouts when the US mortgage meltdown triggered the 2008 global financial crisis.
The City of London is home to 80 per cent of Europe’s finance industry, and Britain fears that the initiative by France and its eight backer countries (Austria, Belgium, Finland, Germany, Greece, Italy, Portugal and Spain) would weaken a vital part of the British economy.
Tax questions require unanimity across the 27-state European Union, and with further opposition from Sweden, which cites a failed experiment of its own, and the Czech Republic, there is no chance of the tax being taken up across the board.
But a special provision of the EU’s Lisbon Treaty does allow for at least one third of the EU’s member states to trail blaze new laws among a smaller group of nations, using so-called “enhanced cooperation”.
It is therefore significant that a group of nine has assembled to promote the scheme, but no decisions on the tax were expected at the meeting in Brussels.
German Finance Minister Wolfgang Schaeuble said on entering the talks that if there is no chance of bloc-wide agreement, “you have to think about alternatives and compromises”.
He said: “If you always knew before what’s not possible, the world would never have been created.”
He also said that since Europe imposes a value-added tax on products and services, “we have to think about whether the exemption for financial products and financial services is justified.”
He added: “I think it is rather not justified.”
However, Sweden’s Anders Borg maintained: “We believe a financial transaction tax is difficult to accept, it will increase the lending cost, the cost of capital for companies and the cost for governments. So it is a proposal that is not good for European growth.”
President Nicolas Sarkozy announced in January that a financial transactions tax in France would take effect in August, saying it would add €1 billion annually to state revenues.
British Prime Minister David Cameron retorted that French banks would simply move to the City of London to escape the tax.
But experts say the tax would likely hit any financial institution that has any foothold in the nine countries, thereby affecting the City as well.
With Chancellor of the Exchequer George Osborne en route for the United States, Britain sent its financial services minister Mark Hoban to the talks.
A diplomat said that in preparatory discussions among officials, “more questions have been raised than answers”.
The nine said in a letter demanding that the EU examine their plans that the tax is necessary “to ensure a fair contribution from the financial sector to the costs of the financial crisis, but also to improve the regulation of markets.”
The provision for “enhanced cooperation” has already been used to overcome difficulties in harmonising some aspects of cross-border divorce law, and is also currently the vehicle for a single EU patent.
But Denmark, currently in the EU chair, has stressed that this provision is applicable only as a “last resort.”
Diplomats have recalled that the patents push is making progress only now after decades in legal limbo following challenges from Italy and Spain on that issue.