EU Economic Policy Remains a ‘Political Project’
Courtesy of We have previously written extensively about the idiotic 'Robin Hood' tax on trading that the EU – led by, you guessed it, socialist France – wants to impose. Sweden imposed such a tax in the 1990s and has warned the rest of the EU in no uncertain terms not to make the same mistake. Several studies exist that show clearly that such a tax does enormous economic harm. The damage it inflicts on capital markets is so great that any tax revenue it might generate pales by comparison. More revenue will actually be lost elsewhere than will be gained by this tax.
However, the economics of the tax are the last thing on the mind of the eurocrats. They see an opportunity to grab more loot, and besides, it is held that voters like the idea (mainly because they are economically ignorant and have been inundated with pro-transactions tax propaganda for a long time). As is often the case, voters don't realize that the directcosts of this tax will come out of their retirement funds. The indirect and not immediately seen costs are of course an order of magnitude greater. They will consist of a marked retardation of economic progress and all that comes with it.
In other words, the eurocracy is once again taking economic policy measures based on political instead of economic considerations – which is precisely what ails the euro as well. The downfall of Europe seems almost preordained. They have learned nothing.
“Germany, France and nine other euro zone countries will get the go-ahead on Tuesday to start work on a financial transactions tax, a measure likely to unsettle banks and trading houses but which will please voters and could raise much-needed revenue.
European Union finance ministers are expected to give their approval at a meeting in Brussels, allowing 11 states – Germany, France, Italy, Spain, Austria, Portugal, Belgium, Estonia, Greece, Slovakia and Slovenia – to start preparations for imposing a tax on all financial market transactions.
The levy, based on an idea proposed by U.S. economist James Tobin more than 40 years ago but largely ignored until now, is symbolically important in showing that politicians, who have fumbled their way through five years of financial crisis, are getting to grips with the banks blamed for causing it. Some believe that the tax could raise up to 20 billion euros a year, although estimates vary widely.
"There is sufficient support from ministers … and it looks likely they will allow the 11 to go ahead with enhanced cooperation on a financial transactions tax," said one diplomat. Under EU rules, a minimum of nine countries can cooperate on legislation without all member states using a process called enhanced cooperation, as long as a weighted majority of the EU's 27 countries give their permission.
Germany and France decided to push ahead with a smaller group after efforts to impose a tax across the whole EU and later among just the 17euro zone states foundered. Sweden, which tried and abandoned its own such tax, cautioned that the levy would push trading elsewhere.
Critics are also concerned that the levy could open another rift in Europe, where the 17 states using the euro are deepening ties in order to underpin the currency, and there is the growing risk that Britain could even leave the European Union.
Britain has criticized the tax, and will not adopt it, as trading in the region's biggest financial center, London, will be affected. If either the buyer or seller in a trade is based in one of the countries imposing the tax, the levy can be imposed regardless of where the transaction takes place.
The tax's proponents, including German Finance Minister Wolfgang Schaeuble, believe it can tackle activity many deem speculative, such as high-frequency trading, by imposing a charge on every split-second deal. But Nicolas Veron, a financial market expert at Brussels think-tank Bruegel, said the tax is misguided.
"There are so many things that we don't understand about the financial system, in much the same way that 17th-century doctors could understand a couple of things about the human body but not the whole picture," he said. "Using a tax on financial transactions to tackle the ills of finance such as high-frequency trading could turn out to the equivalent to a 17th-century course of leeches."
Some countries are already counting on the new income, a welcome windfall for countries where shrinking economies and rising unemployment are sapping other tax income. Officials previously estimated that if the scheme were implemented across all 27 EU countries, it could raise 57 billion euros ($76 billion) a year. Estimates for the amount that could be raised from the 11 euro zone states vary widely.
As soon as ministers give the 11-nation plan the go-ahead, the next step is for the European Commission to redraft its plans for the tax. It is likely to suggest taxing stock and bond trades at the rate of 0.1 percent and derivatives trades at 0.01 percent. (emphasis added)
OK, so they want to adopt the idea of an arch neo-Keynesian – no big surprise there. The tax has actually been named after Tobin (it should normally be every economist's nightmare to have a tax named after him).
Let us count the ways in which the idea is misguided:
1. the banks will not be 'punished' at all (the ostensible 'reason' for introducing the tax). Individual traders will be punished immediately (compared to the flat rates paid for trading currently, the tax will add a huge amount to trading costs in spite of 'looking small'). Ultimately though every citizen will pay the price, as the banks will simply pass the cost on.
2. Liquidity will evaporate, as short term trading tactics will no longer make sense. Bid/ask spreads will commensurately widen. Every investor will bear a large cost over time, and that includes of course everyone, as pension funds and insurance companies invest on behalf of retirees and policyholders. A lot of trading activity will simply shift to markets where there is no transaction tax.
3. Raising capital will become more difficult and costly for companies contemplating a listing as a result of the diminished market liquidity. If they can, they will instead opt to raise capital in markets where no such tax exists.
4. The revenue projections are all wet. The tax won't 'bring the much needed revenue' the highway robbers are dreaming of, as trading activity will collapse (this by the way may also lead to a marked decline in share prices). So we know already (since we know how they operate) that the level of the tax will be increased as the hoped for tax take doesn't materialize. As we have pointed out in our previous write-up, the tax is a Trojan horse. Moreover, due to the economic damage the tax will inflict, revenues will decline overall.
5. Can this be compared to medieval doctors applying leeches to every ailment? Absolutely! In fact, medieval doctors were probably harmless by comparison.
6. Sweden has warned repeatedly that the tax is harmful and will have a plethora of unintended consequences. The fact that this warning is brushed aside by the eurocrats tells us all we need to know: the tax is a political measure. Sound economic policy is once again sacrificed on the altar of political expedience. This is par for the course for the eurocrats.
7. UK citizens are probably the only ones that can look forward to a positive effect: this tax brings a UK exit from the EU that much closer.
We find it simply astonishing that the EU's political class has nothing better to do than conjure up new taxes in the middle of a depression. Have these people lost their mind completely?
