The Association for Financial Markets in Europe (AFME), a sell-side industry body, has warned of risks to European economic growth after the European Parliament (EP) voted to implement a financial transaction tax (FTT) earlier this week.
“The real impact of a possible transaction tax needs to be understood,” said Simon Lewis, chief executive at AFME. “Many financial transactions are carried out on behalf of businesses who would bear the cost. For example, the foreign exchange market underpins international trade and a tax on these currency trades would increase costs for a large section of European industry, to the detriment of economic growth.”
In a vote in Strasbourg on 8 June, MEPs voted through an amendment that called for a FTT to be a future source of revenue for the European Union (EU). The amendment was part of the parliament's report on a new multi-annual financial framework to fund the EU from 2014.
In its report, the EP challenged member states that have proposed freezing the EU's long-term budget between 2014 and 2020. For the EU to meet all agreed objectives and policies, a minimum budget increase of 5% over 2013 levels would be needed, said MEPs, adding that a tax on financial transactions would help achieve this objective.
A non-legislative resolution on innovative financing that was voted through by the EP on 8 March 2011 stated that introducing a low-rate FTT could raise up to €200 billion per year in Europe and would be easily and cheaply implemented at the clearing and settlement level. In October 2010, a study from the Institute of Development Studies at the University of Sussex, England, noted that a tax rate of 0.116% on equity trades – equal to 10% of existing transaction costs – would yield US$100 billion (€71.6 billion) globally.
According to the EP, a FTT could “help to tackle the highly damaging trading patterns in financial markets, such as some short-term and automated high-frequency trading transactions, and curb speculation”, adding that it would also improve market efficiency.
The European Commission has not yet responded to the EP's report, but said after the 8 March vote that it expects to present an in-depth analysis of the possible options for taxing the financial sector by the summer.
The idea of a FTT was first introduced by economist James Tobin, a former Nobel Prize laureate who suggested that a tax be applied to foreign exchange markets to penalise short-term speculative behaviour.