Robbing the "Robin Hood" tax: the European Central Bank weighs in
The European Central Bank is "helping" the Commission and the Council design a future Financial Transaction Tax for Europe. This should be of major concern to its proponents, as the ECB can only be expected to side with the financial lobby.
The most heated financial regulation debate of the moment is over the creation of a European Financial Transaction Tax (FTT). Beginning with 11 EU member states the FTT would tax financial shares, bonds and derivatives, intended to create financial stability against further crises and raise considerable revenue. But the European Central Bank is now taking a key role in the development of the tax. The heavy influence of the financial lobby opposed to the FTT in the ECB could mean that the bank's participation may fatally undermine the new tax.
At first sight, the ECB's involvement might appear constructive. Speaking at a European Parliament hearing on the 8th of July, President of the European Central Bank Mario Draghi claimed his institution shares the objectives of the Financial Transaction Tax "in principle". However, his stress that it has "many undesirable implications for our monetary policy" and the ECB is working with the Commission to "repair these aspects of the FTT" sounds a warning alarm.
Bringing in the leadership of the Bank as "repair" men is hardly a dream scenario for those who have campaigned for years to have the tax adopted in Europe. First, because Draghi's vague commitment to the tax obscures the fact that what he and his institution wants is to reduce the scope and possibly the size of the tax considerably. Secondly, because ECB involvement in the design of the tax may be or may become a Trojan horse manoeuvre by the financial lobby which has a forceful presence in ECB advisory groups. The financial lobby is using all means available to defeat the tax; having the ECB act on their behalf could turn out to be their most effective weapon at this point.
The financial lobby already has the upper hand, it seems. Since the Commission launched its proposal in early February, big banks, investment funds, law firms, consultancies, and financial lobby associations have intensified their scaremongering campaign (see box 1) and seem to be pulling all strings available to them.
Indeed, the EU Tax Commissioner Algirdas Semeta calls them "probably the most powerful lobby in the world" for good reason. There are clear signs of a worrying retreat from within the governments of the 11 EU member states who adopted the tax in the hope that others would join at a later stage. (The 11 are Germany, France, Italy, Spain, Greece, Austria, Belgium, Slovenia, Slovakia, Portugal and Estonia.) In late May, there were many reports that inside the group of these 11 member states, negotiators are displaying increasingly cold feet. Most prominently, the French government is rallying other governments to its cause – to cut the size of the tax and reduce its scope. While the proposal of the Commission is to tax sales of bonds and shares at 0,1 percent, and the more speculative and more complex financial instruments (called derivatives) at 0,01 percent, it is now seriously considering going for just a tenth of those percentages.
Missing the target
A French attempt – with the support of the Italian and Spanish governments – to free most derivatives from taxation is no less worrying. The whole point of the FTT in its original form is to reduce the number of transactions, considered a source of instability and predatory speculation, and this would be unlikely to succeed if the bulk of them, the derivatives, were exempt. At the same time, the Belgian and Austrian governments are trying to exempt pension funds from the tax altogether.
In fact, at the moment it seems the European FTT pioneering project could be reduced to a mere repetition of the "stamp duty" on shares and bonds sales now at work in the UK and France. The name may be the same, but it will have little to do with the FTT as it was originally intended. It will be a small tax on selected transactions, and as such it will not have the effect the FTT is supposed to: to discourage a large number of trades in order to bring the total number of transactions down considerably. Rather than an FTT, it would be a TTFFT – a Tiny Tax on a Few Financial Transactions (see box 1 on the FTT).
But the battle is far from over. While struggling to downsize the FTT on other accounts, the French would like to see currency transactions included – which were not included in the Commission's proposal. Also, the German Government has been somewhat silent and will probably continue to be until after the German elections in September. And according to a deal struck with the Social Democrats in that country, that party and the Green party would support the so-called Fiscal Compact imposing strict budgetary discipline on most EU member states, provided the German government works towards the FTT. Should the FTT not become a reality it will presumably be a major embarrassment to the two parties, and a blow to their strategy on EU crisis policy.
BOX: What is the FTT?
The “Robin Hood Tax” is about the money, but it’s not just about the money
The Financial Transaction Tax (or FTT) is a small tax imposed on every trade with a financial product. A tax of 0,1 percent on all trades is a standard proposal. It doesn’t sound much, but bear in mind that millions of trades take place every day, and that many traders on financial markets sell and buy in milliseconds. So, even a small tax can lead to substantial revenues.
Campaigners in favour of an FTT demand that revenues should be spent on fighting climate change, on development aid and welfare. Since the money comes from the wealthy financial corporations, the tax is often called “the Robin Hood Tax”. The FTT discussed in the EU at the moment, however, has not marked revenues for these purposes. The German government, though, has signalled it is prepared to increase its development aid when the FTT is instated.
The Commission repeatedly states the FTT is about making the financial sector pay “its fair share” of the costs of the financial crisis. That may be contested, though. The bailouts of banks alone have cost member states the equivalent of 50 years income from an FTT such as the one proposed.
But actually, the key objective with the FTT is not the revenue, but the effect it is bound to have on financial markets. Even with a tiny tax, many of the millions or billions of trades will be discouraged, because they are about speculation in tiny margins of profit. Removing many of these trades, which do not make sense to the real economy or may even be detrimental, will increase stability.
"No central banker supports the FTT"
At this delicate moment, central bankers are placing themselves into the centre of the debate, and their agenda is certainly not to strengthen the proposal. Central bankers (and members of the ECB governing council) spearheaded by Governor of the Bank of France Christian Noyer and Jens Weidman of the Bundesbank, and members of the ECB Executive Board Peter Praet, Yves Mersch and Benoît Cœuré, have all voiced criticism of the FTT in public.
Their weighing in on the debate confirms what Sir Mervyn King, until recently Governor of the Bank of England, stated at a press conference in May: "Within Europe, I can't find anyone in the central banking community who thinks it's a good idea."
In that light, Draghi's stated support for the "principles of the transaction tax" begins to sound unlikely. Could it be that Sir Mervyn King is not aware of Draghi's position? Hardly. Both of them have been members for many years of the Group of Thirty, an exclusive club of central bankers and CEOs from Wall Street banks – a group that includes King's replacement, Mark Carney. Carney in turn shares a past at Goldman Sachs with the President of the ECB. As with both King and Carney, Draghi belongs to a family of central bankers for whom the line between a central bank and a big private bank is a rather fine one. And as President he takes utter care to maintain a close dialogue with the big players of the financial world. They know what each other stand for, and their views on financial regulation are of the same strain.
So rather than taking Draghi's statement at face value, it would be a more plausible explanation that his alleged support is a siren song by the ECB to lure people into a false sense of security, as all the while his staff make their way into the real negotiations on the tax in order to scuttle or sink it.
A false friend to the FTT
In his words to the European Parliament, Draghi was careful to stress the ECB would approach the FTT on issues strictly within the Bank's mandate: monetary policy. This could mean the ECB will focus on exempting bond purchases and 'repos' (repurchasing agreements which enables a trader to sell e.g. a bond with an agreement to buy it back shortly after) from the scope of the tax. This in itself would be a substantial change as repos make up a considerable part of financial transactions – with a total value of contracts at 5,6 trillion euro in December 2012, for instance. These are all topics in the remit of financial regulation, and as such are not necessarily within the ECB’s mandate. But the question is whether the ECB will stop there, or if it will continue to go for more exemptions.
For the criticism of the tax from within the ECB seems to be broader, for example Board Member Benoît Cœuré, who told the Financial Times: “We’re willing to engage constructively with governments and the European Commission to ensure that the tax has no negative impact on financial stability.”
The statement is ironic because the proponents of the FTT have intended financial stability to be its heart from the very beginning. It's also telling that it touches on financial regulation in general, which is not in the mandate of the ECB, supposedly restricted to monetary matters. Ralph Atkins of the Financial Times who reports on the financial lobby, not least on their opposition to the FTT, reveals the real agenda when he writes that the ECB's "offer to 'engage constructively' in the design of the tax suggests that, privately, it has deep reservations about its impact on financial markets and the real economy."
The ECB contact groups
The involvement of the ECB in the design of the FTT is good news for the financial lobby in another way, and a move they've been working on for months. This can be seen in the minutes of several of the advisory groups – or "contact groups" as they're called – to the ECB, made up entirely of representatives of financial corporations, most of whom are vocal in their opposition to the FTT.
Formally, these groups are set up to "facilitate dialogue" and provide a "discussion forum" between the ECB and the financial sector, but statements made by private bankers, as well as ECB staff, make it clear that there is a close working relationship between them. In February this year, ECB executive board member Peter Praet in a speech to an audience of financial lobbyists said that the ECB “strives to ensure that regulatory reform do not impose restrictions which may hinder the efficient functioning of markets or impair their liquidity”, and underlined the bank’s intention to consult with the financial sector, not least via its own contact groups. Also, reports from interest groups and associations such as the International Capital Market Association, reveal that the contact groups are involved in very specific debates over the design of EU financial regulation. They have such a high standing that even the financial press sometimes see the members as "officials".
FTT widely discussed in the groups
A look at the minutes from the meetings for the past months, reveals that there has been intensive discussion between ECB officials and financial corporations about the FTT in the contact groups:
• At a meeting on the 18th of March this year representatives of some of the biggest banks in Europe, members of the "Monetary Market Contact Group", voiced comprehensive criticism of the FTT far beyond the remit of the advisory body.1
• At its meeting on the 9th of April, the Bond Market Contact Group (this too dominated by the biggest banks) also suggested far-reaching changes to the FTT proposal, including major exemptions and a removal of the principle that would enable taxation of transactions formally traded outside the FTT zone, but related to traders or assets in the area.
• Later, the Operations Managers Contact Group discussed the FTT at a meeting on the 12th of June.
• Finally, the Foreign Exchange Contact Group (FXCG), had a similar discussion two days later. Here too, members used the opportunity to fire all guns against the FTT,2 attacked its core principles and ended up "listing proposals" to improve definitions. In the framework of an ECB advisory group, it is hard to understand such proposals as anything else than getting the ECB on board in changing the remit of the FTT.
Interestingly, the members of these groups are the biggest banks and the fiercest opponents of the FTT. An ECB role in the design of the FTT can only be welcomed by these group members as a further inroad to influence, and a further tool to undermine the tax.
Why is the ECB involved?
Only two months ago, representatives of the ECB stated the Bank had no position on the FTT, and that it would not be part of the debate due to limits to its mandate. In late May, however, the ECB openly offered its "help". And today, President Draghi reveals the Bank is indeed working with the Commission to refine the proposal.
How should campaigners on the FTT respond to this challenge? A first step would be to warn the public about the antagonistic position the ECB is bound to take. As British tax expert Richard Murphy stated: “The ECB is for these purposes just another bank with all a bank’s prejudices about the free flow of capital – which they see FTTs impeding.”16
There are at least three more key points that need to be raised in this respect:
- What is the ECB even doing in the process? Does the ECB have a mandate to work with the Commission on a proposal such as the one on the FTT?
- Is the ECB really the right choice of advisor, given that it isn't accountable to anybody by treaty, and given its natural born hostility to any obstacle to the further strengthening of the financial sector?
- Is there a risk that ECB involvement will provide the financial lobby with another tool to water down the FTT? And if so, will the public be able to learn about it, given the very poor record of transparency that the ECB has been able to uphold?
The involvement of the European Central Bank is a clear and present danger that the purpose of the tax once named after Robin Hood is in danger of being stolen away.
BOX: Opportunistic scaremongering
Whether the financial lobby reports the revenues will be enormous or tiny, depends on they want to achieve with their PR campaigns.
Over the past year, any big bank and any financial lobby association which could be affected by the FTT has issued a report that warns legislators against supposedly dire consequences of imposing a tax on financial transactions. Deutsche Bank, Morgan Stanley, JPMorgan, ISDA, ICMA, AFME, IIF, FOA, AIMA etc. The list is a "who's who" of financial markets and the financial lobby. The reports foresee different kinds of market collapses, and most try to convince legislators that a tax will have a damaging effect on the real economy – an argument used ad nauseam for years and refuted by considerable evidence, but which the financial lobby is now trying to revive.
Though the financial lobby prefers to stand united, its dire predictions vary widely. . A good example is the research from Goldman Sachs and Deutsche Börse Group respectively, into the actual revenue a tax would yield. In an attempt to alarm the financial sector about the frightful tax burden ahead Goldman Sachs says it will amount to 170 billion euro, according to an article in its research newsletter titled "Financial Transaction Tax: how severe?", –a figure far higher than the Commission's estimate of 34 billion euro annually.
Deutsche Börse Group, on the other hand, tries a different tactic. In its pamphlet "Will the Financial Transaction Tax reach its objectives" – clearly intended to show legislators their dream of considerable income is in vain – the group claims the revenue will hardly amount to more than 12 billion euro. "It is unlikely that the financial transaction tax will be able to meet the financial expectations that have been placed on it. Empirical studies have concluded that by moving financial transactions beyond the scope of the tax’s applicability its potential revenue will be lower by up to two thirds than expected," Deutsche Börse Group states.
Photo by Robin Hood (CC BY 2.0) via Flickr
- 1. From the minutes of the meeting in the Monetary Markets Contact Group (MMCG), 18/3 2013: "MMCG members pointed out some drawbacks of the current FTT proposal, stressing (i) a possible adverse impact on short-term funding markets as the level of tax is not adjusted to maturity of the instrument, (ii) a larger incentive to rely on the central bank funding as it was exempt from the tax, (iii) uncertainty about the treatment of tri-party repo (collateral substitutions) and sell/buy backs; (iv) an adverse impact on the bond market liquidity due to a reduction of market making activities; (v) a possible increase in the level of risk by making hedging activities more expensive as well as a number of other implications. The MMCG deemed also important to consider similar cases of taxes, e.g. Sweden, and their impact on the market."
- 2. From the minutes of the meeting on the 13th of June, ECB Foreign Exchange Contact Group: "On the FTT, some members questioned the Commission’s tax receipts estimates. Others expressed concerns as regards the introduction of a competitive disadvantage for banks located in participating Member States, the potential detrimental impact on market liquidity and saw some risks of reduced hedging activity by corporates or investors, thus increasing the overall level of risk among end-users. Some members raised the risk of relocation for financial instruments without issuance principle, which is the case for FX instruments. Members listed proposals to improve the tax definition: among others, the exemption for some products like FX swaps, of market making and of hedging activity."