True Economics is about original economic ideas and analysis concerning everyday events, news, policy views and their impact on the markets and you.
Enjoy and engage!
Showing posts with label EU financial transactions tax. Show all posts
Showing posts with label EU financial transactions tax. Show all posts
"Following years of EU-wide in-fighting over various FTT proposals, ten European Union member states are finally approaching a binding agreement on the subject... Ireland, The Netherlands, Luxembourg, Malta and Cyprus – the five countries known for aggressively competing for higher value-added services employers and tax optimising multinationals – are not interested."
"The rate will be set at 0.2 per cent and apply to the sales of shares in companies with market capitalisation in excess of €1 billion. This will cover also equity sales in European banks." Pension funds, trading in bonds and derivatives, and new rights issuance will be exempt.
One major fall out is that FTT "can result in higher volumes of sales at the times of markets corrections, sharper flash crashes and deeper markets sell-offs. In other words, lower short-term volatility from reduced speculation can be traded for higher longer-term volatility, and especially pronounced volatility during the crises. ... FTT is also likely to push more equities trading off-exchange, into the ‘dark pools’ and proprietary venues set up offshore, thereby further reducing pricing transparency and efficiency in the public markets."
This chapter presents the results of the comprehensive literature survey and supportive empirical assessment of the potential impacts of the Financial Transactions Tax recently adopted by the European Commission in response to the significant financial sector misallocations arising from the Global Financial Crisis. A survey of fifty academic articles relating to both Financial Transaction Taxes and Tobin Taxes shows that although a reduction in liquidity can be expected from such taxes, the impacts this will have on volatility and efficiency in a market is less obvious. A regression model quantifying what the possible effect of an introduction of a 0.1% tax on financial transactions would be on trading volumes and levels of volatility in the European equity market confirms the survey results in broader terms. These results can be used to infer that such a tax would likely increase volatility levels but may not have much effect on trading volumes. As a result the proposed tax can be viewed as an exercise in revenue generation but not as a macro-prudential tool for addressing potential future shocks and imbalances within the European financial system.
An important piece of analysis of the European Financial Transactions Tax (FTT or 'Robin Hood' Tax) by Clifford Chance from January this year.
The importance here is in detailed note on application of the FTT as contrasted with existent stamp duties (see page 3) and the extra-territorial nature of the FTT (see page 2).
FTT - Financial Transactions Tax - has been the pet project of pure love for Eurocrats and Socialistas in the Member States, hungry for revenue. It has been labelled a 'Robin Hood Tax' because the politicians attempted to sell it as a tax on filthy-rich financial services to redistribute to starving unemployed, presumably, despite the simple fact that in the un-competitive and fragmented market for financial services that is Europe, such a tax - any tax - will be fully passed onto ordinary savers, investors, depositors and in general onto the users of financial services.
The EU Commission published volumes of commissioned - made-to-order - research that shows just how brilliant an idea the FTT really is: it will raise loads of revenues, harm no one and will not reduce financial markets efficiency. Stopping just short of declaring the FTT to be a panacea to common cold, the EU enthusiastically propagandized the idea despite the simple fact that vast majority of academic research on the topic of transactions taxes finds that they are either ineffective as means for revenue raising or costly in terms of economic efficiency.
I wrote about this (see link at the bottom of this post below) and will continue to write, not because I long for an easy life for the bankers or financial investors, but because I recognise the fact that investment markets are necessary to the functioning of the society and the economy, and because I also recognise that more open, less restricted, but well-regulated and strictly enforced financial services are better than anything that Brussels et al can conceive in their technocratic dreams.
So in line with the past record, here's another study (http://www.cpb.nl/en/publication/an-evaluation-of-the-financial-transaction-tax) that explores "...whether the FTT is likely to correct the market failures that have contributed to the financial crisis, how well the FTT is likely to succeed in raising revenues, and how the FTT compares to alternative taxes in terms of efficiency."
The study finds (emphasis is mine) "... little evidence that the FTT will be effective in correcting
market failures. Taxing of transactions is not well targeted at behaviour that leads to excessive risk and
systemic risk creation. The empirical evidence does not suggest that the introduction of an FTT reduces
volatility or asset price bubbles. Transaction taxes will likely reduce investment in trading activity and
information acquisition, but also raise the costs of insurance against currency and interest risks by
companies, insurers and pension funds. The welfare effect of that is unclear."
"The FTT will likely raise significant revenues, in spite of the fact that the tax base is highly elastic. In the short term, the incidence of the tax will be chiefly on the current holders of securities. Ultimately, the tax will be borne in part by end users, and we estimate the likely effects on economic growth."
"When compared to alternative forms of taxation of the financial sector, the FTT is likely less efficient given the amount of revenues. In particular, taxes that more directly address existing distortions (such as the current VAT exemption for banks, and the bias towards debt financing) provide more efficient alternatives."
Quote: "The Commission's response ranges from weak to capricious to outright ridiculous. For example, when it says that "we're not aware of any credit crunch" in Europe."
Links to past articles on FTT: http://trueeconomics.blogspot.ie/search?q=FTT&max-results=20&by-date=true
You can search this blog for key words and sort the posts by relevance or date.
Looks like the EU is now climbing down another over-hyped policy hillock. After scrapping plans to ban / regulate olive oil in restaurants, the EU is now moving in the direction of drastically undercutting original plans for the Financial Transactions Tax (FTT).
The real problem is that there is no way to structure a reasonably efficient FTT. None at all. Any FTT proposal will strike either one or some of the outcomes below:
Raise too much revenue, chocking off market efficiency and damaging liquidity
Raise too little revenue, making no real differences in any direction
Push high volume (liquidity-enhancing) and low margin (information-disclosing) transactions out of open markets platforms into dark pools and off-shore
Incentivise even more debt over equity
At some point in time, we must realise that any defence of FTT is at this stage is nothing but political face-saving.
FT.com reports (http://www.ft.com/intl/cms/s/0/c3121802-c480-11e2-9ac0-00144feab7de.html?ftcamp=published_links%2Frss%2Fhome_us%2Ffeed%2F%2Fproduct#axzz2UQE68h14) that "The European Central Bank has offered to help the EU redesign its financial transactions tax to avoid any ‘negative impact’ on market stability, highlighting official fears about the implementation of the levy." So far so good, as FTT indeed is likely to cut liquidity in the markets, reducing markets efficiency, and potentially increasing volatility, rather thane educing it. Of course, the original idea the EU came up involved levying tax on trading in bonds, equities and derivatives. So one would expect the following prioritisation from the ECB concerned with markets impacts: 1) Not to distinguish between bonds and equities in tax application and rates, as the two instruments are de facto long-only instruments in either corporate (real) economy, banks (financial economy) and sovereigns (for bonds - which somewhat qualifies as a real economy as well). 2) Levy tax primarily on derivative instruments (although here, tax can be avoided much easier) 3) Recognise that in the restricted competition environment and with legacy subsidies from the crisis period still in place for incumbent financial institutions, any FTT will be at least in part passed onto retail investors and savers, and in more extreme cases - e.g. duopoly model of banking in Ireland - onto all retail users of banking services) 4) Real economy - incomes, investment, entrepreneurship, unemployment, etc - will be most impacted by the FTT levied on real assets - equities and some (not all) bonds and this effect will be stronger the stronger is the banking and investment banking sector concentration in the economy. Alas, as is clear from the FT.com article, the ECB is not concerned with (3) and (4) whatsoever, and it is unconcerned with (1) either. It also seems to be aware of (2) pitfalls. Aside from that, ECB is concerned with the perennial task faced by all European Government - the obsession of raising as much tax revenue as possible while incentivising more debt pumped into sovereign bond markets. Per FT.com: "The ECB believes markets should efficiently “transmit” changes in interest rates to the real economy." You might think that this means transmitting higher (lower) ECB rates into higher (lower) (a) Government bond yields and (b) higher/lower cost of private credit. Err… you would be wrong. Per FT.com there are rumours that "…the ECB would prefer to have a limited UK-style stamp duty on equities". What can possibly go wrong, then? ECB concern is clearly to grease the wheels of sovereign bond markets. The fact that FTT will reduce markets liquidity in real instruments & will cost retail investors in the end - well, that is hardly ECB's concern at all. ECB like the EU Governments is only worried about own coffers & give no attention to the economy. Equity markets volatility (FTT original raison d'être is to reduce volatility) had NOTHING to do with the current crises. The ECB focus on 'UK-styled stamp duty on equities', if confirmed, thus exposes FTT as a pure scam to raise more tax revenues, not a measure to deal with 'markets instability'. As FT.com quotes one of the market participants: "bond markets were a “phenomenally attractive” way of channelling savings into investment." Alas, it is not - corporate bonds are debt. Shoving more debt while disincentivising equity investment is not a great idea for long term sustainable funding. In Europe, lending money to Governments, including to fund dodgy unfunded pensions and white elephant projects, is tax-wise deemed to be more laudable than to invest in equity of real enterprises. By corollary, lending to companies is also deemed to be more preferential than funding them via equity. One of the outcomes of this decades-long preferential treatment of debt is the current crisis: over-bloated and under-funded public spending coupled with too much private debt (including banking debt) against too little equity (the latter imbalance drove the bailouts of banks in euro area periphery). With this in mind, talking about 'Robin Hood' taxes on Financial Services in EU is equivalent to believing in Santa's Magic raindeer as a viable alternative for public transport.
This is an unedited version of my article in the current issue of Business & Finance magazine.
Behind the headlines about the ongoing eurozone fiscal crisis, three significant events have taken place on both sides of the Atlantic in recent weeks.
First, in April, assets under management in hedge funds domiciled in North America reached above $1 trillion mark for the first time in 18 months. Currently, North American funds account for two thirds of the total global assets under management.
Second, both the US and Canadian governments, preparing for the upcoming G20 summit have signalled their unwillingness to join European leaders in their crusade against financial markets. In fact the US has taken a distinctly different approach to dealing with the aftermath of the financial crisis, focusing on banks stability and addressing balance sheet risks in the recent finance reform packages that cleared US Congress.
Third, bloodied and bruised by the bonds markets and the voters, European politicians, led by Angela Merkel, have been gearing up for an all-out fight with so-called financial speculators.
As unconnected as these events might appear today, make no mistake, should the EU continue down the path consistent with its recent rhetoric, Toronto, New York, Chicago and Boston, alongside other major financial services centres around the world will be boom towns courtesy of the investors fleeing populist and politicized EU.
German plans for an EU-wide revision of fiscal and financial architecture range from suspending voting rights of the member states to national bankruptcy proceedings, from regulating hedge funds to introducing a tax on financial transactions.
A global or at the very least an EU-wide financial services transaction tax has been an on-and-off topic of discussion amongst the member states and Brussels for some years. Back in 2006 I was asked to review one of such proposals for a senior European decision maker from one of the continental member states. Having systematically overtaxed and overspend their economies, European sovereigns have been seeking new means of getting their hands on taxpayers cash since at least 2002-2003. Like a junkie in a desperate search of the next hit, the EU states are now searching for a convenient and politically, if not economically, easy target to mug. A Tobin-styled transaction levy on financial instruments is just that.
Transactions tax has been proposed back in 1972 as a theoretical construct to reduce the volumes of high frequency trading in foreign exchange markets. The rationale for it was a naïve belief that currencies should only be traded internationally for the purpose of physical commerce – exporting and importing. Any other trading, such as using foreign exchange as either a hedge or a flight to safety instrument against inflation, low economic growth, excessive state graft on personal income, sovereign insolvency and other fundamentals was viewed as speculative. In reality, modern currency is cash and cash is more than a facilitator of physical transactions. It is an asset.
Fallacious in application to Forex markets, Tobin tax would be even more erroneous were it to be applied to a broader set of financial instruments.
Take Ireland: a gravely sick financial system with plenty of financial services taxes, including a stamp duty on transactions. Has the presence of the Tobin tax here helped to prevent or even moderate the crisis? No. Worse than that, over the last 5 years, Irish markets have shown remarkably high volatility, despite having one of the highest stamp duty rates in the developed world. If anything, our stamp duty can be blamed for artificially reducing liquidity in the Irish stock market and, as a result, for adversely (albeit extremely modestly) contributing to the collapse of Irish shares.
Sweden toyed with transactions tax on financial markets back in 1984, imposing moderate levels of a stamp duty on stocks and derivatives. Within one week of the new law coming into effect, Swedish bond market saw an 85% collapse in volumes traded, futures trades fell 98% and options trading ceased all together. Swedes finally abandoned this self-destructive tax in 1991. Finland faced exactly the same experience. Japan was forced to abandon Tobin-style tax in 1999. Switzerland – a global financial services hub – does charge, in theory, a transaction tax, set at a fraction of the one Germany is rumoured to favour. However, in a typical example of Swiss flexibility, authorities there have power to grant exemption from this tax for specific investors.
OECD has issued the following official position on Tobin-style taxes back in 2002: “A “Tobin tax” penalises high frequency trading without discriminating between trades which may be de-stabilising and those which help to anchor markets by providing liquidity and information. Indirect evidence from other financial markets where a securities transaction tax has been in place suggests a substantial effect on trading volume but either no effect, or a small one of uncertain direction, on price volatility.”
Tobin tax will not work for Europe:
The tax is avoidable by conducting trades and structuring portfolia outside the EU. The end game will be higher cost of capital raising for European companies, selection bias in favour of larger companies in access to the capital market, selection bias in favour of larger financial assets trading platforms, to the detriment of smaller exchanges, and lower after-tax returns to investors. Which part of this equation makes any economic sense?
The tax will not fund sufficient insurance cover for future crises. Given the magnitude of bailouts witnessed in the last two years, the levels of taxation would have to be so high – well in excess of benign rate of 0.1-0.2% currently levied in some countries – that there will be no European financial markets left.
This tax on financial transactions will retard economic development in Europe for decades to come.
One of the reasons why European banks are so sick right now is European companies’ disproportionate, by international standards, over-reliance on debt financing. This contrasts the US corporates, which use more equity financing to raise capital. When the debt financing meets an asset bubble, banks balance sheets swell with bad loans. There is no equity cushion on European corporate balancesheets to underwrite the resulting losses. Instead, taxpayers get thrown to the wolves to rescue banks. Mrs Merkel & Co latest plans for ‘reforms’ will, therefore, mean even greater risks of bailouts in the future, and less growth and fewer jobs.
Next, of course, in Berlin’s line of fire were the hedge funds. Per populist rhetoric in European capitals, they had to be reined in because… well, no one actually knows, why. Hedge funds did not cause the current fiscal crisis (they had no control over the EU governments’ borrowing and spending excesses), nor did they cause the crash of our financial systems (hedgies did not pollute banks balance sheets and account for no more than 5% of the global financial assets). The hedge funds are not responsible for the property bubble or for exuberant stock markets overvaluations achieved in 2007-2008 worldwide.
The sole reason for this ‘reform’ is that for European leadership, ‘Doing right’ means ‘Doing politically easy’. Hedgies have no strong political lobby backing them, unlike banks, property developers, sovereign bondholders and issuers, or civil servants. So the EU prefers to attack a bystander in order to pretend that we are tackling the criminal. While taxpayers are being skinned alive to rescue reckless governments and banks, hedge funds are being presented as villain supremo. Farce? No – it’s politics.
After hedgies, came in even more sci-fi villains. Following Mrs Merkel’s ‘reforms’ talk, Germany banned naked short-selling and the trading of naked credit default swaps in euro zone debt. It turns out that European crisis was, after all, not about absurdly high levels of public debt carried by the PIIGS, nor by fraudulent (yes, fraudulent) deception by some countries of European authorities and investors about the true extent of national deficits. It was not exacerbated by the decade-long recessions turning into bubbles of exuberant lending and borrowing by companies and households, nor by a resultant severe depression that afflicted Euro area since 2008. The cause of these were the investors who were betting on all of these factors adding up to an unsustainable fiscal and economic situation in Europe. Farcical, really!
Worse than that, on top of the ridiculous financial services policies decisions Chancellor Merkel has also been working hard “on far-reaching changes to the treaty underpinning Europe's common currency”. German government would like to increase monitoring of member states' annual budgets, the introduction of stiff sanctions for those in violation of euro-zone debt rules and the suspension of voting rights in the European Council. Furthermore, Germany wants to establish “bankruptcy proceedings for insolvent euro-zone countries.”
The problem with the first part of Mrs Merkel’s fiscal policy proposal is that there are no independent organizations in Europe left that could oversee member states’ budgets. The ECB is a full hostage to Europe’s whims on monetary policy, engaging in the most reckless forms of monetary interventionism known to mankind – direct purchases of risky states’ debt. Outside the ECB ‘Yes, Minister’-styled ‘independent’ states-sponsored institutes populate the realm of European economic policymaking. By-and-large, they have no capability of delivering any independent analysis. Even the likes of the OECD – a very capable organization with some degree of independence – is subject to direct political and bureaucratic interference from its own members.
As far as German proposals for euro zone rules enforcement go, member states that do not conform to deficit reduction rules will be temporarily cut off from receiving structural funds. The galling dis-proportionality and lack of realism in this proposition does not even occur to the EU leaders supporting the idea.
Greece today is recipient of €110 billion bailout. Will suspending a few billion worth of discretionary structural funds commitment be a significant deterrent to a state like that?
This idea is potentially quite dangerous economically. Structural funds go to finance long term infrastructure investment programmes which often rely on co-funding from the Member States and/or private partners. All have private sub-contractors. Withholding EU funds will either destabilise these investments (if the measures to have any punitive powers), thus preventing economic growth necessary for fiscal stabilization or will do nothing. In short, Mrs Merkel’s proposal is a cure that threatens to make the disease incurable.
Earlier in May, German officials also mentioned the possibility of suspending member states' votes should they find themselves in violation of European debt rules. Of course, should this come to pass, Italy, Greece… no wait virtually the entire Eurozone, including Germany will have to be suspended from voting.
In short, in contrast to the US Congressional blueprints for financial sector reforms, European proposals to date can be described as a bizarre amalgamation of the impossible, the improbable, and the outright reckless. Their likeliest outcomes would be a large scale capital flight out of Europe and perpetuation of the status quo of continued sovereign and banks bailouts across the continent. Already struggling under the unsustainable burden of European taxation, the real economy – exportable and non-traded services and manufacturing – will be left holding the bag for these politically driven ‘reforms’. In addition to having an acute solvency problem, the EU will be saddled with a crippling lack of liquidity that only financial markets can provide.
Thursday was another day of great ideas from Berlin on “How to wreck world financial infrastructure while earning little political capital: the Angela Merkel Way”.
For a couple of weeks now, global investors have shown Madam Chance-a-lot (oops… Chancellor) that Greek Tragedy rule 1 applies: If you want to write a tragedy, set up a story where an irrational, arrogant and morally reprehensible sovereign challenges the Gods. Inevitably, in Greek classical tradition, the Gods win, while having a laugh. Mrs Merkel’s epic battle with the markets is exactly that. Markets, like Greek deities, are inevitably going to prevail. And Mrs Merkel and the retinue of euro area leaders – bent on ring-fencing their own politically connected banking sectors and shielding them from any meaningful pain for the errors committed in the past – will lose. The only thing that still might be at stake here is the degree of vengeance the markets will deal to the EU, should the euro zone embrace German proposals. With every new ‘bright idea’ on punishing the markets coming, the likelihood of an awesome spectacle of the Gods punishment meted out to Europe is rising too.
Following new taxes and short selling ban (covered by me yesterday) Mrs Merkel has now unveiled her third pillar of the reform strategy: a European ratings agency. It’s bonkers, folks. Just as the rest of the European financial sector reforms proposals so far:
EU Rating Agency will never be independent of political interference, so no one, save for the institutionalised writers in the EU official press will ever pay any attention to whatever the agency might produce. In so far as delivering anything usable by the market or by anyone, save Eurocrats, the EURA will be a complete waste of taxpayers’ money.
EU premise for launching EURA will be as crooked as an old local authorities politico with development firm in his backyard. Germany has departed on the EURA trip from the assertion that Euro needs an agency that can honestly upraise the extent of fiscal risks on sovereign balance sheets. Were EURA to do so, its ratings will have to be even gloomier than those of the Big 3 private rating agencies.
EURA is unlikely to have any serious competency in what it does because unlike the Big 3 it will never be a rating agency for non-EU sovereign debt. In other words, EURA, having no recognition of non-EU sovereigns, will be forced to look at the EUniverse, a subset of the world bond markets. Which makes a proposal equivalent to simulating a tsunami in a coffee mug.
And, of course, as any other rating agency, EURA will be no more than a lagging indicator, which means that its musings on bond valuations are going to be read only by retired intellectuals, plus pensions funds with automatic quality mandates. And even then, EURA will be forced to follow, in the news hierarchy, the Big 3.
In response to Mrs Merkel’s expensive (and it is expensive, from the point of view of European economy and taxpayers – see here) populism, Canadian finance minister told Mrs Merkel into her face last night that his country would not take part in either one of the three European policy follies. You see, Canada has a healthy banking system. And it has the intellectual and policy capital to understand that finance is crucial to country economic prosperity.
Americans, like Canadians and the Brits, think that the idea of a transaction tax is downright potty. All three have done the right things in trying to reform their banks. The EU, so far, is staunchly refusing to do the same. Why should the sane join the outright gaga club of countries that keep preserving rotten banking system at the expense of the real economy?
Even Finnish finance minister is saying Germany’s short sale ban had surprised everybody, unpleasantly. Finns can see through the German plans to the point where a Tobin tax on financial services will exert adverse selection against smaller exchanges in favour of the larger ones (again, see more on this here).
Why? Because the problem with financial institutions today has nothing to do with volatility in financial assets prices. It has everything to do with reckless lending by the banks and the willingness of bondholders to underwrite excessive borrowing (including that by the sovereigns). In the real world banks are willing to write poor loans because they and their shareholders and bondholders know that they will be rescued by the state, should things go pear-shape. And, of course, governments always oblige. Look no further than Nama. Wrecking regulatory vengeance on the markets in order to address the problems with the banks – as Mrs Merkel is doing – is hardly a way forward.
Only a massive scale intervention by the ECB, going most likely well beyond simple sterilization of €20 billion of sovereign bonds purchased by the bank so far, has pushed the euro up against the dollar. But at what cost, one might wonder, especially in the environment where deflation is creeping back into the US stats? I don’t have the data on ECB operations this week, but something was certainly hitting the markets for FX and bonds. Of course, sterilizing and supporting currency are two individually costly propositions. But for ECB to engage in this double game for a prolonged period of time will spell significant drying up of the liquidity. It is like an overweight elderly amateur playing alone against, simultaneously, Roger Federer and Rafael Nadal. The result will be painful, quick and devastating.
Sterilized cash can be re-injected into the banks reserves, without cash hitting the streets, but that would only mean more real money being trapped in the liquidity sucking spiral of government financing via ECB lending to the banks. We’ve been there for the last 24 months and it is not pretty.
In addition, there is a pesky issue of the US position. In effect, Japan, China, Germany and the entire euro zone are playing beggar-thy-neighbour game with the US by artificially suppressing the cost of their exports to America. The problem, as I have pointed out before (here) is that this requires US consumers to start borrowing again to sustain massive trade deficits. If this fails to materialise, and it is hard to see how it can, then the entire pyramid scheme of global trade will collapse. In the end, the double dip, this time caused by trade tensions and falling exports, is on the cards for all, as undervalued currencies in the three major powerhouses of global trade will prevent their consumers from expanding their own imports demand.
Such an outcome, however, will be preceded by a significant pain for Europe’s domestic economy. While a 10% devaluation of the Euro against a basket of global currencies can be expected to lead to a significant boost in Euro area economy (ca +0.7% in year one after devaluation and up to +1.8% in year 4), this exports-led growth will be associated with massive increases in the interest rates (+85bps in year one, to +220bps in year 3). These estimates are taken from Econbrowser (here). Obviously, the rest of the world will be just cheering EU and Mrs Merkel in this destruction of economic growth... or not?
“Berlin means business” says Spiegel about the latest plans by German Government for an EU-wide revision of fiscal and financial architecture.
This Tuesday, “EU finance ministers announced efforts to both rein in hedge funds operating in Europe and to introduce a tax on financial transactions”.
Wait a second, folks – take Ireland: a sick financial system with plenty of financial services taxes, including a stamp duty on transactions, all the way down to bank cards levies. Has the presence of the Tobin tax here helped to prevent the crisis? Will it work in Europe? Not really. Why? For several reasons:
Tax is avoidable by offshoring trades outside the EU. The effect of this will be – higher cost of capital raising for companies, selection bias in favour of larger companies in access to the capital market (AIG advantage anyone?),lower after-tax returns to investors and higher cost of financial services to all of us. Falling listings in Europe and greater state pensions reliance. Which part of this equation makes any economic sense?
The tax will not fund sufficient insurance provision against the need for future bailouts. When you think of the magnitude of bailouts we’ve witnessed, the levels of taxation would have to be so high, there will be no financial markets in Europe left.
The tax will, however, fund general Government spending in the Eurozone. Which, of course, means more of our money (yes, yours and mine – as long as we have pensions, savings, investments or if we work for companies that have listed shares or have plcs as their clients…) will be going to noble causes of public sector retirement and wages packages, social welfare spending, politically motivated pet projects, and so on.
The tax will retard economic development in Europe. One of the reason why European banks are so sick is because European companies are heavily reliant on banks lending. European businesses are based on loans, not equity - in other words, they are based on debt. Vast amounts of debt. And when such culture of financing collides with an asset bubble drivers of exuberant expectations, banks balance sheets swell with bad loans. The new tax will only perpetuate this inherently inefficient utilization of equity financing across Europe. Which means less growth, fewer businesses and fewer jobs.
Next, of course, in the line of fire are the hedge funds. They had to be reined in because… no wait, remind me, why exactly? Hedge funds did not cause the current fiscal crisis (they have no control over the Governments’ borrowings and spending), nor did they pollute banks balance sheets or caused the property bubbles. Why are they a target then? Because for European leadership, ‘Doing right’ means ‘Doing politically easy’. Hedgies have no strong lobbyist interest behind them, unlike the banks, property developers, sovereign bondholders, sovereign bond issuers, farmers, trade unions and public 'servants' - all who inhabit the vast ques to the trough of Government subsidies. So here you are – we attack a bystander to pretend that we are tackling the criminal in sight.
After hedgies, came in other imaginary villains. On Tuesday night the EU banned naked short-selling and the trading of naked credit default swaps involving euro-zone debt. Oops.. before Tuesday night we knew what markets were betting on into the future – the short positions revealed actual expectations with the power of having real money put behind them. Now we do not. This, per EU leaders, is some sort of transparency. Socratic cave analogy comes to mind.
The EU ban target two types of trading that “have been blamed for exacerbating the financial crisis and Europe's sovereign debt crisis.” Actually, IMF explicitly said (here) in its report last week that the entire CDS markets - not just short sales in these markets - were not enough to cause the crisis. Never mind - EU leaders know how to deal with independent advice from international experts. Any hope, then, that Mrs Merkel's pipe dream of 'independent budgets oversight' (see below) can come true in this land of pure politicization of everything - from rating agencies, to traders, to investors?
It turns out, folks, that European crisis was, after all, not about absurdly high levels of public debt carried by PIIGS, nor by fraudulent (yes, fraudulent) deception by some Governments of investors about the true extent of national deficits. It was not exacerbated by the decade-long low growth recession across the Euro area, nor by a recent severe depression that afflicted Euro area economies. Nope. The cause of this, per Mrs Merkel & Co, were investors who were betting on all of these factors adding up to an unsustainable fiscal and economic situation in Europe. Off we fighting the evil windmills, then, Don Quixote from Berlin!
Worse than that, on top of the ridiculous policies decisions made over the last two days, Chancellor Merkel has also been working hard “on far-reaching changes to the treaty underpinning Europe's common currency, the euro.” Per Der Speigel, “Merkel would like to see increased monitoring of member states' annual budgets, the introduction of stiff sanctions for those in violation of euro-zone debt rules and the suspension of voting rights in the European Council. Furthermore, Germany wants to establish bankruptcy proceedings for insolvent euro-zone countries.”
Really? I wrote about the actual chances of any of this working to the desired effect in the earlier post (here). But now we have some details to the plan:
“According to the document, Germany would like to see annual budgets in euro-zone countries undergo a "strict and independent check." Berlin proposes that the job be taken over by the European Central Bank or by a collection of economic research institutes.”
Now, the problem with this part is that there are no independent organizations in Europe left. The ECB is now a full hostage to Europe’s push for retaining fiscal sovereignty while maintaining unsustainable prolificacy. ‘Institutes’ Mrs Merkel has in mind are a host of EU-funded ‘Yes, Minister’ organizations that populate the realm of economic policymaking on the continent (with a number of them operating in Ireland). By-and-large, they have no capability of delivering anything of real value, let alone anything independent. Even the likes of the OECD – a very capable organization with some degree of independence – is not free from European political interference.
"Euro-zone member states that do not conform to deficit reduction rules should temporarily be disallowed from receiving structural funds," the draft reads. In extreme cases, that funding could be permanently eliminated.”
Imagine Greece today, receiving €110 billion bailout today, being told, ‘Naughty! We will withhold some €5 billion in funds.”Apart from being unrealistic, this idea is potentially quite dangerous. Structural funds go to finance infrastructure and other longer term investment programmes. Many of these rely on co-funding from the Member States and/or private partners. All have private contractors. Impose this potential penalty and cost of public projects financing will have to rise due to uncertain nature of the funding stream.
Withholding these funds will either be meaningless (if the funds withheld are small, as it will cause no damage and will have no power of prevention) or it will cause an economic mayhem as bills go unpaid and workers lose jobs (in which case the sanction will be undermining the process of fiscal recovery and triggering more bailouts).
In short, the threat is either toothless or self-defeating. Either way – it is a cure that threatens to make the disease incurable.
Two more proposals are mentioned in the Spiegel.
“Earlier this month, Schäuble had mentioned the possibility of suspending member states' votes should they find themselves in violation of European debt rules, an idea which is mentioned in the draft proposal.”
This should make wonders of the EU efforts to strengthen its democratic legitimacy. And would this extend to suspending MEPs powers too? European court judges? Commissioners? Where does the buck stop? Should this come to pass, Italy, Greece… no wait – at 60% debt to GDP level, virtually the entire EU will be suspended (see table here). Who will end up voting in Europe? Germany won’t – its own debt/GDP ratio is 72.5%... Ditto for the deficits benchmark.
Finally, per plan: “Should all else fail, the draft calls for a plan to be established for euro-zone members to declare bankruptcy.”
Err… what? Hold on – bankruptcy? Given that the EU own rules to date have so spectacularly failed to contain debts and deficits from breaching EU-own rules, that would be a collective bankruptcy then… One presumes with Germany in tow?
This blog represents my personal views and is not reflective of the views or opinions held by any company, contractor, client or employer I work for currently or have worked for in the past. These views are not an endorsement to take any action in the markets or of any political position, figures or parties.
This blog represents my personal views and is not reflective of the views or opinions held by any company, contractor, client or employer I work for currently or have worked for in the past. These views are not an endorsement to take any action in the markets or of any political position, figures or parties.
