EU seeks power to revive a scaled back Transaction Tax

Another opportunity for the UK to solidify its position as the European financial center

As a coalition of 11 Euro Zone member countries is struggling to introduce a new levy on financial products transactions and it is becoming increasingly clear that the division on the issue is more widespread than originally thought. While The Netherlands, UK, Sweden and Ireland are firmly opposed to its introduction, there is a rift between France and Germany (anyone surprised?) about the implementation on derivatives transactions.

While the French are against including derivatives, German finance minister Wolfgang Schaeuble is vociferously supporting their inclusion. The above mentioned 4 countries are supported by new Euro Zone member Latvia and Finland. The parties have declined participating in any deals to introduce the levy are likely to be quite firm considering their past experience with similar taxation mechanisms.

Sweden has already introduced a similar tax back in 1984 – revenues disappointed and the market impact was substantial with volumes and liquidity declining. The tax was abolished in 1991 and has brought increased activity throughout the remaining part of the 90’s. The main reason to scrap the tax was its poor design that allowed traders to use foreign brokerages and hence go around taxation.

So what can be done differently this time? According to the mentioned group of four not much. The main reason behind their stance is that business will be simply moved elsewhere and alternative instruments will be created by foreign entities to deal with increased costs. There is not much reason to believe that this time it will be any different, as business will be moved from continental Europe, most likely to the UK in this case.

The country has a long-standing tradition to rely on its financial sector in a big way and at this point in time any attempt to reduce that reliance would simply result in services being moved to US and Asia. The world has changed, politicians haven’t – they are attempting to raise tax revenue from a sector that has already taken quite a beating and regulatory scrutiny.

Of course – bashing banks has become somewhat of a habit of politicians lately and they certainly have a point, however the solution is not directly tied to a fresh batch of taxation. One has to eliminate the reasons for excessive speculation, not try to impose controls on it by introducing additional taxation.

Foreign exchange transactions are not planned to be included in current European plans, however CFDs might still be considered despite France’s opposition. For starters it is very likely that we will see the whole deal broken apart and transaction taxes will be introduced step-by-step for different instruments.

For more on the global Forex industry see the LeapRate-Dow Jones Forex Industry Report.

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