Ten European Union members recently tried once again to introduce a tax on financial transactions – the so-called Tobin tax. Despite agreement on the general principle, some countries are hesitating. Others seem less than eager to reach a conclusion soon: the revenues appear relatively modest and the risk of encouraging companies to migrate to more tax-friendly locations is substantial.
Some sort of a Tobin tax is likely to be introduced eventually, but mainly to save face. More importantly, this attempt has shown that the “enhanced cooperation” procedure within which the 10 countries have been developing this project for about five years does not have much traction. Since the procedure was created, it has seldom been applied. It has also failed to encourage deeper cooperation throughout the EU or promote policymaking by groups of countries rather than the central bureaucracy.
The stalling of the Tobin tax therefore marks a double defeat. First, those who believe that capital markets are the root of all evil have been stopped from implementing a tool that is questionable at best. However, it is also a setback for those who hoped to weaken the central planners in Brussels and offer a new vision for the future of the EU.
In early October, the representatives of 10 eurozone countries met to restart the process of introducing a tax on financial transactions – the so-called Tobin tax, named after Nobel laureate James Tobin. The meeting took place within the framework of the EU’s “enhanced cooperation” initiative, a mechanism that allows nine or more European Union member states launch legislation that binds only the countries involved.
The case for the Tobin tax has not been successfully made. When the proposal was put forward by the European Commission in 2011, it was flatly rejected by several countries. A year later, large members like the United Kingdom and Poland refused to consider the issue at all. Now heavyweights including Germany, France, Italy and Spain, as well as six other EU countries, are still pressing for the tax. However, some of them – including Belgium, Slovenia and Slovakia – are having second thoughts. If two of these countries drop out, a European Tobin tax may never see the light of day.
Despite these difficulties, EU authorities would like to see the first round of negotiations end by early 2017, in order to implement the Tobin tax in 2018. According to the estimates released by the European Commission, the tax would generate annual revenue of about 22 billion euros. Authorities say this sum could be used to finance programs for job creation and poverty relief.
It is worth considering two issues that the recent debate on the Tobin tax has underscored. First, the slow pace of the bargaining process shows that a tax on financial transactions has lost its appeal, and that introducing one would be a matter of demagoguery rather than economic common sense. Second, the negotiations on the tax project prove that enhanced cooperation is an ineffective tool. These conclusions allow us to forecast scenarios regarding the future of taxing financial transactions and the way EU policymaking mechanisms might evolve in the future.
The advocates of the Tobin tax argue that it works to rein in alleged speculators who reap profits by high-frequency trading of financial instruments, with each operation involving very small gains or losses. Certainly, the Tobin tax is applied to frequent transactions involving small margins. However, there has been no explanation as to why such operations are harmful to anybody, especially if one considers that by discouraging quick responses (buying and selling) when prices are erratic, the Tobin tax would increase volatility and magnify the consequences of uncertainty.
There are other reasons to doubt the economic rationale for a Tobin tax. For example, it would generate rather modest revenues. As mentioned earlier, if applied to the 10 EU countries involved in the project, the tax would bring in some 22 billion euros, mostly concentrated in France and Germany. But these revenue estimates may be greatly exaggerated. Italy expected to raise 2 billion euros from its own national Tobin tax, but only raised 0.7 billion euros.
Such a tax would make it expensive to raise capital and discourage corporations from settling or remaining in countries that have one. London and other major financial centers would be more than happy to welcome companies that fear greedy tax authorities, especially if additional EU members followed the lead of the countries involved in the project.
The scenario derived from this picture is rather simple. Since few decision makers feel the need to introduce a European Tobin tax, legislation in this domain is unlikely to take off soon. It could become an issue in domestic politics, since parties that are traditionally hostile to the world of finance would find it hard to backpedal. However, these very parties probably realize now that the fiscal benefits are small and that the initiative is likely to encourage companies to migrate to other countries. This gives little incentive to accelerate the negotiations, and plenty of excuses to blame other EU countries for delaying or shelving the project.
A win for centralization
The difficulties met by the financial transaction tax also cast a shadow on the usefulness of the enhanced cooperation procedure, which now is only being applied in divorce law and patents. The idea behind this procedure was simple: to allow a group of EU countries to launch common legislation with the blessing of the EU Commission and Parliament. It should have been a way to partially circumvent dissenting members’ veto power. More recently, this procedure has become a way to test a strategy for overhauling the EU and creating different clubs within it – each with different members, agendas and rules.
Enhanced cooperation’s record is poor. The half-baked solution that will probably emerge for the Tobin tax could scuttle the mechanism forever. This is both good and bad news. The good news is that the enhanced cooperation’s failure demonstrates that bad ideas fail even when they take advantage of procedural shortcuts. Hopefully, less time and money will be devoted to projects based solely on demagoguery. The bad news is that this experience is grist to the mill of those who consider EU lawmaking a top-down process, in which initiatives are launched and managed by Brussels rather than by single countries or small groups of members. The failure of enhanced cooperation is the failure of multilateral cooperation and strengthens the position of those who advocate centralization.
With the Tobin tax initiative stalling, the European Union is unlikely to try to augment its budget by drawing substantial resources from the financial sector. In this light, Brexit has been a blessing, since it is obvious that the introduction of a financial transactions tax would have only benefited the City of London. Now, Brussels and other EU capital cities are unlikely to push such measures.
However, this episode has strengthened the Commission and weakened one promising avenue for the EU’s future evolution. In that scenario, local overregulation could have been held in greater check by institutional competition. Good governments would have been rewarded with an influx of new business, while bad governments would have been punished accordingly. That is now less likely to happen.