Regulation  

United they stand, divided they fall

    CPD
    Approx.0min

    The EU financial transactions tax was first debated by the member states in mid-2010 when most governments across the continent, and indeed the world, were still struggling to contain the impact of the global financial crisis on their respective banking sectors. Lehman Brothers had collapsed the previous September, then in May of that year the flash crash on the New York Stock Exchange graphically demonstrated the dangers inherent in automated trading generally and, in particular, its troublesome progeny, high-frequency trading.

    This then was the backdrop against which, a month later, the EU sat down to discuss the state of the world. The sub-prime mortgage debacle in the US with its concomitant banking calamities in several European countries, the end of property booms in the UK, Ireland and Spain and the collapse of the house of cards that was the Icelandic Tiger all resulted in considerable, and comprehensible, public ire against banks and the wider financial sector. Legislators felt compelled, and indeed empowered, to come up with a muscular response.

    Estimates for the amounts of money poured into the relief actions to prop up the banks during the crisis vary depending on whether you take into account all the state guarantees on their wholesale funding as well as the actual funds released for the most seriously affected, who had required actual bailing out. At the end of last year the European Commission’s state aid scoreboard put the figure for union member countries alone at €1.6bn (£1.3bn) between October 2008 and December 2011. Understandably the taxpayers want some of it back, particularly when the media is full of stories of banks continuing to pay huge bonuses to high-flying employees in the midst of the crisis.

    Article continues after advert

    Just as understandably, therefore, the legislators felt it behoved them to act on this desire for payback. On one level there were suggestions that some sort of resolution levy be imposed on banks to form the basis of a fund for any future bailouts. Above and beyond that idea, however, there was the financial transactions tax designed for financial institutions to make more of a contribution to government coffers generally, providing revenue that the authorities could, and would, use for purposes other than bailing out troubled banks, such as maintaining roads or building schools.

    The idea, which became a formal proposal in September 2011, was for an EU-wide financial transactions tax of 0.1 per cent on the value of all transactions in shares and bonds, and of 0.01 per cent on deals involving derivatives linked to equities, interest rates and currencies. The initial calculation was that at such levels it would generate an annual €57bn (£48bn), with the bulk of that revenue going directly to the governments of the individual member states. The UK, for instance, would stand to receive around €10bn (£8.43bn) according to the EC’s official study on the subject. More recently that overall figure has been revised downwards to an annual €30bn to €35bn (£25bn to £29bn).

    A year later, after EU members had failed to reach unanimity on the proposal, it was agreed that a financial transactions tax could be introduced under a scheme of so-called enhanced co-operation. This involved a minimum of nine member states working on a particular project within the structure of the EU, implementing legislation with the idea that members outside the group could emulate with their own national version later. In the event 11 member states, representing more than 90 per cent of the EU’s gross domestic product, supported the idea. In February the EC put forward a revised proposal for a financial transactions tax to be introduced under enhanced co-operation and that proposal now awaits approval (which must be unanimous) by the European Parliament.