Europe’s liquidity tax will sacrifice innovation for a false promise of stability
THINGS are finally looking up for Europe’s beleaguered economies. So it is incomprehensible that we are still taking the idea of implementing a European Financial Transaction Tax (FTT) seriously.
Last week, the French and German governments pledged to continue pushing for a FTT, while Greece hosted a meeting of the 11 states working on the initiative to forge a way forward. The European Commissioner for tax Algirdas Šemeta has urged MEPs to push a FTT through, suggesting that opponents are driven by narrow, vested interests. But this view is deeply flawed. A FTT would be a hammer blow to jobs and growth across Europe.
The people of Europe rightly wish to ensure there is no repeat of the financial crisis. There is plenty of scope for constructive reform, such as ensuring sufficient capital reserves. But few within the industry believe a FTT is the right way forward – and for good reason. The European Commission’s own impact assessment report on the proposal concluded that it could stifle GDP to the tune of 1.76 per cent.
The priority in the wake of the crisis is to find a way to return Europe to strong growth and create jobs. The FTT, no matter how it is ultimately formulated, can only damage these two objectives. The measure should be called what it is – a tax on liquidity. It will trigger a flight of business and capital to countries without a FTT. It will lower trading volumes while increasing transaction costs. It will hit share prices and diminish returns. As a result, European exchanges will be less attractive places to raise funds, and less adept at pricing assets.
These may sound like problems only for bankers and others in capital markets, but nothing could be further from the truth. Our equity markets play a crucial role in the wider economy. First, increased transaction costs will directly hit pension fund returns – research from London Economics last week suggested the tax could wipe £3.6bn from British savings (without producing a penny of revenue for the Treasury). The UK rightly doesn’t wish to participate, but will still be affected.
Secondly, anything that harms our equity markets also harms the ability of European businesses to raise capital. This impedes those companies’ ability to invest, grow, and create jobs, denting economic growth. Britain is putting its weight behind its innovative tech sector (and the wave of IPO announcements last week shows the potential). But what might happen if the future Facebooks and Apples of Google Campus and Tech City struggle to raise funds once they reach a certain size? They will go elsewhere.
And for what? Stability? In the wake of the crisis, we can understand those who would sacrifice some growth for some stability. But the FTT will not make our markets more stable. The real problem Europe faces is high unemployment. For the solution, we must look to policies that maximise rather than reduce the amount of funds available to those who want to invest and create new jobs, whether from the venture capital, private, bond or equity markets. The casualties of a FTT will not be the wallets of bankers, but the growth and jobs upon which we all depend.
Hans-Ole Jochumsen is executive vice president of transaction services for Nordics at Nasdaq OMX.