Europe’s financial transaction tax faces challenges

November 24, 2013 01:31 PM
Tax likely wouldn't address risk

Europe’s planned tax on financial transactions may fail to reduce market risks and could increase household costs, according to a PricewaterhouseCoopers LLP study commissioned by the financial industry.

A financial transaction tax, or FTT, may reduce gross domestic product growth by 0.3 percent to 2.4 percent, according to the report, which examined published studies on the proposal. It may also fail to address the market’s key sources of systemic risk, such as the interconnectedness of financial institutions, PwC said.

“To think the proposal for an FTT will raise the revenue expected is unreal,” Anthony Belchambers, chief executive officer of the Futures & Options Association, said during an interview. “To imagine there will not be a serious loss of trading volumes depending on the market is unreal, and to suggest that this is a cost only to banks is unreal.”

French President Francois Hollande, who called finance his “greatest adversary” before he won office last year, has since enacted a tax on stock trading. German Chancellor Angela Merkel last year backed a European Commission plan for a broad-based tax on trades in stocks, bonds, derivatives and other assets. The European Commission has sent an initial proposal for an FTT that would affect all 11 nations of the European Union that have agreed to implement it.

The PwC report was commissioned by 27 trade groups, including the FOA, Paris Europlace, the British Bankers Association and the Investment Management Association.

The European Commission published an initial proposal for a financial transaction tax in 2011, seeking to curb volatility and make markets safer for investors. The commission said the objectives of the tax are to create “disincentives” for trading when it doesn’t make the market more efficient, ensure financial institutions contribute to “covering the costs of the recent crisis” and harmonize indirect tax legislation.

The proposal came in the aftermath of the global credit crisis, which was the worst financial catastrophe since the Great Depression, and amid the European debt crisis.

About the Author