German Courting of London Banks May Falter on Tobin Tax Pledge

  • Financial levy could put off banks considering move from U.K.
  • Finance ministers meet in Brussels on Thursday to discuss tax

Germany’s efforts to lure U.K.-based banks unsettled by Brexit may stumble over an obstacle of its own making -- a proposed tax on financial transactions.

Chancellor Angela Merkel’s government remains committed to the levy, though some lawmakers in her party question the wisdom of pursuing it as Frankfurt competes with Paris, Dublin and other cities for banking jobs expected to be relocated from London, according to a person with knowledge of the matter.

Finance ministers from 10 European Union countries, including Germany’s Wolfgang Schaeuble, plan to convene in Brussels on Thursday to discuss the tax. The Social Democratic Party in Merkel’s ruling coalition insist on forging ahead, leaving Schaeuble little room for maneuver, especially with an election scheduled for September. France, which has also pushed for the levy, goes to the polls in April.

“Germany and France are expending quite a lot of effort trying to entice financial services to Frankfurt and Paris, including derivatives desks,” said Dan Neidle, a partner at Clifford Chance in London. “This isn’t going to work if the financial transaction tax is introduced by Germany and France.”

Right Tool

The European Commission, the EU’s executive arm, proposed the tax in 2011 to make sure the industry paid its fair share after the costs borne by taxpayers during the financial crisis. When the plan failed among all EU nations, a smaller group sought a compromise under “enhanced cooperation” rules, which require consensus from at least nine countries. Austria, Belgium, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain are still at the table.

A decision to impose the tax could benefit Ireland and Luxembourg, which have also actively courted the big banks and are not part of the group pursuing the tax.

Schaeuble said in December that enhanced cooperation may not be the right tool for the plan, renewing his push for a global tax. “Everyone in Europe who will implement an FTT, and his neighbor will not, faces a lot of problems,” he said.

This line of thinking was echoed on Tuesday by Michael Fuchs, deputy parliamentary chairman of Merkel’s Christian Democratic Union.

“A financial transaction tax only makes sense if as many countries as possible introduce it,” he said. “Otherwise, financial transactions will just shift to other financial centers. The competitiveness of the German financial center must not be endangered” by the tax.

Stamp Duty

Yet finance ministers including Schaeuble and his Austrian counterpart, Hans Joerg Schelling, who’s leading the talks, can’t easily walk away because of the coalition agreements at home with Social Democrats who support the tax.

“Despite Brexit, the SPD faction supports the introduction of a financial transaction tax by way of enhanced cooperation,” said Lothar Binding, the SPD’s lead lawmaker in the Finance Committee of the Bundestag, the lower house of Germany’s parliament. “We don’t expect any disadvantages for the financial markets of the countries involved compared with the U.K., if only because of the stamp duty that’s levied there.”

The German Finance Ministry confirmed on Tuesday that it will continue to pursue the tax. Under the country’s coalition agreement, the government must make sure the levy has no negative consequences for pensions, retail investors, the financial system or the economy, a ministry spokesman said.

Meanwhile, banks are working on their Brexit contingency plans now that Prime Minister Theresa May has made clear the U.K. will quit the single market and instead seek a “bold and ambitious” trade agreement that maintains market access. To retain so-called passporting rights to sell their services cross-border throughout the EU, banks may need subsidiaries located in the bloc.

‘Job Movement’

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon has said that “it looks like there will be more job movement than we hoped for,” while HSBC Holdings Plc CEO Stuart Gulliver said staff generating about 20 percent of London revenue may move to Paris.

Banks may be “more relaxed then they should be” about the tax, Neidle said. “If I was a bank and I thought there was a 15 percent chance that the tax will happen, then I would think carefully before moving into an FTT jurisdiction.”

Under a compromise proposal put forward by Austria last year, “harmonized taxation” would initially be applied to transactions of stocks issued in one of the participating countries. “All shares” would be taxed after a transition period “unless participating member states decide otherwise.” The tax would also cover derivatives, with some exemptions.

The commission, which is responsible for drafting legislation, has said that a text could be ready by mid-year.

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