Watchdog Says ECB Role Adds Tension To Tobin Tax Debate

The European Central Bank’s increasingly outspoken role in the debate over a financial-transaction tax ratchets up tension between governments seeking new revenue and bankers trying to prevent the levy, said Richard Murphy, director of U.K.-based Tax Research LLP.

“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,” Murphy said today in an e-mail exchange. “The ECB intervention increases the tension in the policy debate -- but only by bringing its own role in imposing austerity to support the free flow of capital into focus.”

Murphy said comments from central bank officials don’t change the overall standoff between the proposal’s backers in the European Union and detractors. Those who support the plan favor its role in slowing down financial markets to “put some grit in the motion and slow down the flow of capital which can be destructive in so many ways,” he said.

The EU has proposed the tax for trades involving 11 willing nations in an effort to rein in speculative trading it sees as having exacerbated the financial crisis. The plan would charge a 0.1 percent rate for stock and bond trades and 0.01 percent for derivatives transactions, with some exemptions for primary-market sales and trades with the ECB.

ECB Executive Board members Yves Mersch and Benoit Coeure both questioned the tax’s design this month, and the ECB’s Bond Market Contact Group said in a May 6 report that the proposal would hurt banks and disrupt markets.

Negative Implications

“Attention needs to be drawn to possible negative implications for the implementation of monetary policy and financial stability,” Mersch said in a May 6 speech in Luxembourg. He said the current proposal could distort short-term money markets and reduce bond market liquidity.

The proposed EU transaction tax would affect companies outside the tax’s zone because of provisions that would allow participating countries to collect revenues on worldwide trading with ties to their financial sector. The European Banking Federation and eight other financial-services groups said this week that EU planners are underestimating the consequences of the tax’s design.

“We hold serious reservations that policymakers are persevering in putting forward a measure that can clearly unbalance and even harm the internal market for financial services and distort competition among operators,” the nine tax groups said in a May 21 letter to EU finance ministers.

The tax’s costs could be as much as 10 times higher than the commission’s proposed rate because of the way trades can involve a chain of firms, the financial-services group said. They also said nations joining the tax “would put an extremely high pressure on these countries’ financial services operators and will significantly increase their governments’ dependence on financial markets outside the FTT zone and outside Europe.”

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