On January 17th the Global Financial Markets Association (GFMA) released a new study examining and quantifying the potential impacts of a financial transaction tax on the foreign exchange market in Europe. The study found that due to the tight margins seen by traders and operators in the FX market, a new tax would have disproportionately heavy effects on liquidity and profits, and ultimately have a negative overall effect on the European economy.

The report examined the potential impact of a 0.01 percent financial transaction tax, as was previously proposed by the EU Commission. If implemented, the tax would directly increase the cost of a standard transaction on the foreign exchange market by up to 7 times. In some limited cases, the cost of the transaction may increase by as much as 18 times. As a result of the new tax’s implementation, the added expense could lead to as much as three quarters of all foreign exchange transactions being relocated to a jurisdiction outside of the EU.

The new costs arising from the introduction of a financial transaction tax would likely be passed entirely to the end consumer. The authors of the report specifically mentioned pension funds, asset managers, insurers and multinational corporations as likely candidates to see significant increases in costs and a drop in profits following the implementation of the tax.

After taking into account the decreased market liquidity and widespread effects of the tax, the report claims that the proposed regulation is an inefficient tool for raising additional tax revenues, and would cost the economy more than it raised for national budgets.

Commenting on the results of the study, the managing director of the GFMA Global FX Division James Kemp said that the financial transaction tax would effectively punish European companies for using FX products to manage currency fluctuation risks.

Photo by scruffdog1231

In a radio interview given on January 8th, Benoist Apparu, a Secretary of State of France, confirmed that a new bill will soon be presented to French parliament, introducing a financial transaction tax into the national tax system.

Benoist Apparu indicated that a bill with new tax may be tabled in parliament by the end of February, and a detailed proposal for the implementation of the tax may be completed by the government as soon as the end of this month, despite the fact that the government is yet to decided what transaction the new levy will apply to, and the mechanism for the tax has not yet been clarified.

The Minister’s comments come only days after President Nicolas Sarkozy stated that France will instate a financial transaction tax by the end 2012, regardless of whether any other countries follow suit. According to Benoist Apparu, the President will discuss the tax with Chancellor of Germany Angela Merkel on January 9th, and try to persuade her to instate similar measures in Germany. However, analysts have suggested that Germany, which has been a long time supporter of the new tax, is unlikely to adopt a financial transaction tax at this stage, unless similar tax measures are instated by all nations in the European Union.

The Prime Minister of the UK David Cameron was quick to comment on plans for the tax, saying that France is free to instate the measure nationally, but he would veto any proposal to implement the tax across the EU. The Prime Minister said that he would not support the tax at all, unless it was implemented globally.

Photo by Richard Ying

The idea of imposing a global financial transaction tax was raised once again at the Meeting of G20 Finance Ministers and Central Bank Governors over the weekend. Following the meeting the Finance Minister of Germany Wolfgang Schaeuble spoke to members of the press and said that throughout discussions it had been “clearly shown we should introduce it [a financial transaction tax] in Europe.”
When questioned on the likelihood of the tax being imposed on a global scale, the Minister conceded that some countries are still showing strong resistance to the proposed levy. He added that in the current political and economic environment it seems unrealistic to impose the financial transaction tax globally. However he went on to say that Germany will continue to campaign for the tax to be brought in across the EU, and will even instate the levy alone if it receives no international support. The Minister said that the financial transaction tax will be an important discussion point at the G20 Summit in November.

German Chancellor Angela Merkel also commented on the tax during the weekend, saying that the measure is the type of “reasonable regulation” currently needed to inspire confidence in the current economic situation. She also issued criticism to the US and Canada for refusing to support a financial transaction tax, saying, “…it’s not acceptable that especially those [countries] outside the euro region, who are time and again pushing us to take broad- based action to manage the debt crisis, are at the same time flatly refusing to impose a financial transactions tax.”

Photo by World Economic Forum

In an address to the European Parliament on September 28th the President of the European Commission José Manuel Barroso made the official proposal to instate a financial transaction tax to be applied to the activities of banks and financial institutions in countries across all European nations.

The proposed tax will be applied a wide range of financial transactions between financial institutions operating in European countries. The President said that the tax would be charged at 0.1 percent for transactions of bonds or shares, and at 0.01 percent on derivative products. The tax would be applicable to each party participating in the transaction. Each EU member state would be free to apply higher rates, if they choose to do so.

According to José Manuel Barroso the proposed tax needs to be levied simultaneously across all EU member countries in order to minimize the occurrence of tax evasion or major shifts in investment between European financial centers. Implementing the tax would also set the stage for further fiscal and legislative reforms aimed at creating a greater unification in European financial markets.

If instated, the financial transaction tax would raise approximately EUR 55 billion per year. During his speech José Manuel Barroso said that throughout recent economic turmoil, financial institutions across the EU have received nearly EUR 4 trillion in guarantees and support, and it was time for the industry to repay its debts to taxpayers. He described the situation as “a question of fairness”, saying that it is the turn for the financial sector to make its contribution to the EU taxpayers.

Photo by World Economic Forum

In an interview published by French media on August 28th the Finance Minister of France Francois Baroin said that representatives from the German and French governments are now working on a new proposal for a international financial transactions tax.
The Minister said that the governments of France and Germany are determined to see positive results and progress for their joint proposal before the end of the year. Technical details of the tax are expected to be finalized within a month, and be presented to the European Union by the end of September.

In the past the European Central Bank President Jean-Claude Trichet has said that having the approval of the USA and the UK would be especially important in seeing the proposed tax become a reality. In order to address this oft repeated concern, Francois Baroin says that the tax will be reintroduced at the G20 summit in the November of this year. The Minister said that he is determined to see positive results at the summit, and work towards implementing the tax would begin soon after.

Proposals for a financial transactions tax have been met with failure in the past, as too many European politicians oppose the idea. Financial institutions from across Europe have jointly maintained the opinion that in order for the tax to be effective, it would first need to be a globally approved system which enjoys support from governments across the world.

Photo by fondapol