Europe’s Zombie Tax on Trading Kept Alive by Election Season

  • Domestic politics prevents plug being pulled on proposed levy
  • European saga has run almost as long as the Greek debt crisis

The French, left, German, and European flag, right, fly outside the French-German Economical and Financial Meeting in Paris, France, Monday, January 24, 2005.

Photographer: Lucas Schifres/Bloomberg

A European proposal for a tax on financial transactions is trapped in limbo: financial realities won’t let it come to life while political opportunism is preventing a quick death.

The tax initiative is being kept alive largely for domestic political reasons as German Chancellor Angela Merkel bids for a fourth term and France prepares for presidential elections this year.

“It’s dead, but nobody dares to say it, especially in an election year,” Karel Lannoo, chief executive officer of Brussels-based think tank CEPS, said in an interview. “It would create controversy for the Socialists in France and for Merkel, given their longstanding backing for the idea.”

Forged in the wake of the 2008 crisis, the financial transaction tax took shape in 2011 with a proposal for levies on stock, bond, derivative and other trading as a way to curb speculation and force the industry to make a “fair contribution” -- projected at 57 billion euros ($61 billion) a year -- to state budgets. Trouble is, such a tax risks scaring off banks looking for a new jurisdiction just as the U.K. prepares to leave the 28-nation European Union.

The proposal failed to garner the required unanimous support of EU governments and was revived in late 2012 by a smaller group under European “enhanced cooperation” rules that depend on the participation of at least nine member states. More than four years on, amid worries about the the FTT’s economic and political side effects, 10 signatory countries, including Austria, France, Slovakia and Germany, have kept the idle plan on a drip feed.

Every missed deadline produces political declarations of incremental progress and a new timeline. A December 2015 meeting aimed at sealing an agreement ended in disarray, with an 11th member of the group -- Estonia -- abandoning the project. A missed mid-2016 target date rolled into later in the year, and when that wasn’t realized the European Commission pledged a fresh legislative proposal by the middle of 2017.

That timetable keeps the FTT on the official EU agenda through France’s presidential election scheduled for April 23 and May 7. In France, the ruling Socialists under outgoing President Francois Hollande support the FTT plan.

Merkel, running for re-election on Sept. 24, is hemmed in by her junior coalition partners, the Social Democrats, who are firm backers of a European FTT.

For the leaders in both countries, trapped by their pledges to pursue the tax at European level, continued work on the plan offers political cover.

To read about how the FTT complicates banks’ post-Brexit plans, click here

While the European election season provides oxygen to the initiative, it may ultimately be killed off by more recent financial development: the U.K.’s decision to leave the EU. With Frankfurt and Paris seeking to lure banking business from London before Brexit in 2019, pursuing the FTT -- even for purely domestic political purposes -- could dissuade financial firms from relocating to a jurisdiction that has the tax.

Meanwhile, the participating countries struggle to keep a united front and put on a brave face. Last week, Belgian Finance Minister Johan Van Overtveldt floated a new condition for staying involved: the participation of the Netherlands and Luxembourg, which are staunch opponents of the FTT. And his Austrian counterpart, Hans Joerg Schelling, who chairs the group, canceled a Jan. 26 meeting on the FTT in Brussels because of more pressing domestic business.

“Progress is achievable” and “technically we will be moving,” Slovak Finance Minister Peter Kazimir told Bloomberg News in Brussels the following day. “But this year we are waiting for so many outcomes.”

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