Who pays for the crisis? Is the EU ready for bank levies, bonus taxes & financial transaction taxes?
Acting like fire fighters, the European governments provided billions to save their banks from bankruptcy. Who must now pay the price for the most serious economic crisis in the history of the European Union, is a different matter altogether. The banks grandly avoid the issue; the now discussed German proposal for a bank levy reminds of a better kind of handout. AK EUROPA, the Brussels Office of the Austrian Federal Chamber of Labour and the European Office of the Austrian Trade Union Federation (ÖGB) therefore invited representatives of the EU institutions and Think Tanks to a discussion on the subject “Who pays for the crisis - Is Europe ready for a Financial Transaction Tax, Bank Levy and Bonus Tax” in the Permanent Representation of Austria to the EU. Unfortunately, bank representatives were not prepared to comment on this issue…
Monks: workers are once again asked to foot the bill
John Monks, General Secretary of the European Trade Union Confederation regards the Financial Transaction Tax as a simple idea to get money into the empty coffers of the households of the individual Member States. As the idea is targeted at speculators, accuracy would be guaranteed. Currently only the workers are paying for the crisis. Monks cited Ireland, Latvia, Lithuania and Iceland, where the working population had to deal with drastic cuts. When governments think of saving, they target public spending first. Pension and wage cuts are then the order of the day. Therefore, it is now high time that at last those will be asked to pay who can afford it. This is aimed in particular at the banks, because governments spent billions to bail them out.
De Laet, Caballero Sanz: Bank levy the most realistic solution
To start with, Jean-Pierre de Laet and Francisco Caballero Sanz of the European Commission presented a work document that should help European governments among others in the decision-making process on financing the crisis. The recession is responsible for the fact that the debt in all Member States has increased. By 2011, Greece, Italy and Belgium will be three Member States with debts amounting to over 100 % of the Gross Domestic Product. Concerning the taxation of the financial sector, the Commission envisages the following options: a bank levy (in accordance with the Swedish model), a Financial Transaction Tax, a bonus tax or an increase in profit tax for the financial sector. These options have been assessed from the point of view of revenue potential, efficiency and stability, equity as well as feasibility. At EU level, the bank levy could generate about € 10 billion and would not put financial stability at risk. The Financial Transaction Tax could generate € 20 or even € 300 billion if one takes derivative transactions into account. The Commission, however, is sceptical about the latter estimate because of the reduction or relocation of transactions to countries where such a tax would not be imposed. A bonus tax or profit tax increase could generate about € 4 billion each.
This was a political issue, which had to be dealt with here. The Commission is currently preparing a number of new regulatory proposals to prevent a new crisis.
Kapoor: FTT generates income and reduces perverse incentives
According to Sony Kapoor, Head of the Think Tanks Re-Define, he is one of the most profound experts of the Financial Transaction Tax (FTT). He had advised a large number of European governments on this subject. Kapoor commented that the FTT and bank levies would not exclude each other; both were necessary. The FTT would also not target banks, but primarily hedge funds, investment banks and their managers, who would fuel speculative trading around the globe. The irrational pressure to achieve higher and higher returns, which is exerted by this sector, was mainly responsible for a completely misguided incentive system. The measure of all things for financial investors was the “Return on Equity ROE”, a measured value for the profit, which is generated by the capital invested. The greed for higher and higher returns on equity – the public demand for 25 % by Deutsche Bank boss Ackermann is an example – had resulted in the fact that the banks would use increasingly less equity, push up the overall debt level and would have equity buffers, which were too low in times of crisis. This would dramatically increase the risk for the entire financial system. The FTT would be one of the tools to counteract this trend. Kapoor does not believe the financial propaganda, according to which the introduction of the FTT would spark a massive bank exodus. “We are talking of a 0.05 % tax. I know from my time as an investment banker, that the bankers earn more during a short loo break”, said Kapoor.
Darvas: FTT is the best political solution for a whole range of targets
Download Bruegel study here.
Zsolt Darvas, a Research Fellow of the Brussels economic Think Tank Bruegel, clearly came out in favour of introducing a FTT. Bruegel prepared a study on behalf of the European Parliament, which, under the title “Small is beautiful”, reaches the conclusion that the coordinated introduction of a FTT with a low percentage rate would be the best political solution for a number of objectives. The FTT would not only generate an income for the national budgets, which were badly scarred by the crisis. In addition, also those financial transactions could be reduced, which would cause more social damage than benefit and increase the overall risk for the financial system. Darvas named the derivatives as an example, whose trading volume is now amounting to 70 times the value of the global economic output. The FTT could also contribute to the reduction of the existing disparities in the tax systems and to inequality in income distribution. From a purely economic point of view, there would probably be more optimal solutions for all these problems; however, the big advantage of the FTT would be that they could all be tackled at a single political stroke. Darvas also disagreed with the view, repeatedly propagated by the banking lobby, that the FTT could not be implemented practically. It would be very easy technically to introduce such a tax.
Lamberts: Now the time has come for the coalition of willing partners
In his opening words, Philippe Lamberts, MEP and Co-President of the European Greens remarked that the discussion in the European Parliament on the Financial Transaction Tax would not go in a common direction. He fears that the issue will be talked to death. He regards hoping for a global solution as utterly useless. Only those would indulge in hope who did not want a solution. He strongly criticised the speculators. These would not create any concrete benefit for the real economy. That is why they were not needed. Lamberts does not believe that the capital would leave Europe after the introduction of a Financial Transaction Tax. Nobody does forego a market with 500 million people just like that, said Lamberts. What he regards as positive is the fact that politics in Europe is not yet as dependent on the financial industry as it is the case in the USA. Lamberts is convinced that the time has come for a coalition of willing partners. These includes among others Germany and Great Britain, where 90 % of all financial speculations take place. In his concluding words, Lamberts advocated an EU-wide regulation. However, the opportunity of each individual Member State to veto could be a problem.
Otto Farny, Chamber of Labour: Bank tax and Financial Transaction Tax: we need both!
Otto Farny, tax expert of the Austrian Chamber of Labour, states that, despite of all concerns, the introduction of a Financial Transaction Tax would be possible and necessary. Even if the European Union cannot bring itself to implement a common concept, it is in the hands of the Member States to introduce this tax at national level. “No tax has ever been implemented at international level first before being taken over by the national states; it has always been the other way round.”
Due to the impact of the economic crisis, a consolidation of the national budgets had become inevitable. On the one hand, the Austrian Conservatives wanted to achieve this by imposing new mass taxes as the suggested mineral oil tax and by reducing social expenditure on the other. This approach was clearly rejected by Farny.
It was not a question of whether to introduce a bank levy or a Financial Transaction Tax. “We need both” concluded the Head of the Tax Policy Department of the Chamber of Labour, Vienna at the end of the event.