EKIP– Expert Club for Economics and Politics A Different Opinion
On January 30, French President Nicolas Sarkozy announced that regardless of whether the European Union (EU) imposes a tax on financial transactions (the so-called Tobin Tax), this type of bet will be introduced by France as early as August this year. The tax will be 0.1% of each transaction, will be paid by buyers and will affect trading in shares, derivatives and so-called 'high frequency trading' (trading of financial assets using computer algorithms). Sarkozy's arguments are that it is time for those who caused the crisis to pay for it and that this tax will help reduce France's budget deficit.
In my opinion, both of Sarkozy's arguments are worthless and imposing such a tax would create more problems than benefits. First, without going into details about who is to blame for the economic crisis, I do not think that taxing buyers of financial instruments will lead to any kind of justice. If I am an investor in bonds, for example, and I want to insure myself against the bankruptcy of the country that issued these instruments, buying bankruptcy insurance through so-called Credit Default Swaps will become more expensive. What will this lead to? I will go to carry out my transaction in another market where I will not be imposed this tax - Switzerland or Singapore are good destinations. As for the deficit, according to Sarkozy for 2011 it will be in the order of 5.3 - 5.4% of France's GDP, which according to my calculations is around 140 - 145 billion euros. According to the French president, the imposition of a tax on financial transactions would bring in 1 billion euros in revenue for the treasury. Given the expected reduction in transactions as a result of the imposition of this tax, it is highly doubtful that even this amount is realistic. In any case, it is insignificant compared to the country's huge deficit.
The Swedish experience
The imposition of a financial transaction tax is not just a theory. According to a report by The Peterson Institute of International Economics, in 1983, the then Social Democratic government of Sweden introduced this type of tax on stocks, bonds, options and some other instruments. The rate varied between 0.1% for stocks, 0.15% for most government debt instruments and 1% for options. The result? A complete failure. The Swedish government expected the measure to bring in 1.5 billion Swedish kronor in revenue, but the result was only 80 million. Most of the trading in financial instruments in Sweden has moved to other markets, mainly Oslo and London. Just as an example, a tax of 0.003% on 5-year Swedish government bonds led to a drop in trading volumes of 85% in the first week. As a result of this failure, the tax was abolished in 1991 and Swedes now do not want to hear about it.
Tobin Tax in the EU
Sweden's experience shows that imposing a financial transaction tax across the European Union will inevitably lead to several things:
1. Reduction in volumes
If such a tax were to be introduced across the EU, it would lead to capital flight. Many financial institutions would relocate their headquarters. Many hedge funds and banks from the City of London are already considering this option.
2. Liquidity reduction
Due to reduced activity, market liquidity will decline, leading to higher transaction costs and hence even greater capital outflows. Furthermore, with less liquidity , the market will become more volatile and more vulnerable to large shocks.
3. Fall in asset prices
Analysts will quickly factor this tax into their models, and this will lead to a sell- off in the prices of all affected assets.
According to a study by Ernst & Young, the imposition of a Tobin tax across the EU could generate revenues of €37 billion, but the net result (due to reduced economic activity and a drop in revenues from other taxes) would be in the range of a loss of €2 to €116 billion.
The imposition of a tax on financial transactions seems attractive mostly because of its social function, associated with the exploits of Robin Hood – steal from the rich and give to the poor. But the introduction of this type of tax will not benefit either one or the other. On the contrary, everyone will lose. France is trying to convince Germany to implement a Tobin tax, but it is doubtful whether this will happen after the Germans and the whole of Europe witness the negative consequences for the French state.
And while the French are destroying their banking industry, the mayor of London, Boris Johnson, has invited Parisian financiers to move to the "City". The Poles are building a modern financial center in their capital, and the Swiss are happy to accept multi-million dollar companies fleeing left-wing populism. The picture is more than clear - Europe is not a homogeneous whole and it is important for Bulgaria to look and choose thoughtfully - what is useful for us and what is not.
My opinion, regarding the blame for the crisis (because the consequences of the tax, in my opinion, will be more than clear), is that it is quite ridiculous to blame financial speculators, bankers in general, or any other investment intermediaries and participants in the financial markets in general. Moreover, one even hears and feels opinions that these are people who have unjustly become rich, are too rich, or their activity is socially unproductive... All things that sound quite easy for the average person to perceive and generally develop some kind of hatred and distrust towards the listed professions, so that politicians have to intervene and dispense misunderstood justice.
In my opinion, however, there is no greater justice than that of the free market, formed by free individuals who participate for their own risk and benefit. Well, when the balance of risk and benefit is disturbed, there is no way to expect that the financial markets will function and distribute profits fairly, or that they will be as stable as possible. In principle, the financial markets are too complex and important to make almost any regulation on them. So I personally am in favor of minimal state intervention and creating conditions for fair distribution of profits, again with almost zero support and role of the state, that is, there should be a clearly expressed direct relationship between risk and profit. Then people will be able to relax that the banks are not "robbing" them, and that the financial markets are not actually a casino that can explode at any moment. But they will also have to take full responsibility for their savings, or entrust it to sufficiently responsible people, who in turn compete with enough other people for this role.
Kosyo, I completely share your opinion. There has been a lot of talk lately that capitalism has failed and that a new order needs to be invented. The reason for the financial crisis is that the principles of capitalism and free markets have been violated by the state many times over the years. That is, you cannot claim that a system has failed when it has not existed in the way it should exist.
(Stoyan)
The problem is that the crisis has given strength to the already strong leftists in Western Europe (and in the US, too). Look at what the French presidential candidate, a socialist who is leading in the polls, is saying. He wants to lower the retirement age, hire thousands of new teachers, and this in a country where redistribution is 57% of GDP.
Such people will determine the voice of the EU in the future, and we will be trump cards.
I don't think the socialists will win the war... they rather have an advantage in today's difficult situation for many people. Also, in many of the countries in the EU, for example in the former socialist countries of Eastern Europe, I think there is a relatively strong pro-capitalist public attitude. And such changes can happen elsewhere. So capitalism can migrate to other countries, which will accordingly outpace the less progressive super-regulated countries with their growth and force them to change. This has always been the case, the most successful ones carry their success and are copied by the more backward ones. Of course, the problem is that time is wasted experimenting with losing systems, but maybe this is useful because it accumulates as human experience.
(Stoyan)
You may be right, Kosyo. Our problem is that we listen to what the Europeans are doing. A strong argument here is - "Paris does it this way". It seems dangerous to me in that sense. I am a little disillusioned about the future of Europe when I see what things are being discussed and pushed through.
And, we are against the tax on financial transactions, and we do not support fiscal harmonization. Our position may not be so ironclad, but in general, opinions in the EU are so different that it is almost impossible to reach such an extreme option that we all become like France. And the rules on budgetary discipline should cool down the ambitions for any excessive spending, of course, if France does not renegotiate its terms. The biggest risk for the EU definitely comes from the largest countries and how they will coordinate, rather than the smaller ones.
(Stoyan)
Just as they have stopped spending so far, they will do so in the future. Look at what the EU voter wants - he doesn't want to reduce spending. The welfare state is rooted in thinking. We'll see about Bulgaria, let's hope we are consistent in fiscal policy. Many people don't like the flat tax.