Those Whom the Gods Destroy…

by Andrew Stuttaford

The Daily Telegraph’s Ambrose Evans-Pritchard takes a look at the prelude to the EU’s Financial Transaction Tax, and is, shall we say, unimpressed. Mr. Evans-Pritchard is never knowingly out-alarmed, but this is an important article that merits more than extracts. Nevertheless here goes:

France’s experiment with the Tobin Tax has proved a spectacular flop. Its finance ministry admits that the scattershot levy on financial transactions has raised just a third of the money expected since August.  Total takings will be a paltry €800m in 2013, but that overlooks the much greater damage inflicted on French finance, industry and the government’s own tax base…. Nobody seems to be listening to warnings, even when they come from Maya Atig, the soft-spoken director of French debt agency. She said any revenue from the tax would merely offset “the extra costs that we might have to pay” as liquidity drains away and yield spreads rise. Instantly proving her right, Denmark’s €110bn pension fund ATP said it is no longer accepting French bonds as collateral.  Italy has not done much better since it launched its Tobin tax. Undaunted, 11 EMU states, including Germany [and, to its shame, supposedly supposedly sensible Estonia], will press ahead together in 2014, to the delight of Singapore or New York….

One wonders how much self-inflicted damage the eurozone can endure. Spot gas prices are already four times higher than in the US. Energy prices as a whole are three times higher. You might as well shut down the European chemical, steel and glass industries. Yet France has a moratorium on shale gas. Germany is running down its nuclear reactors, relying on a utopian dash for renewables and Baltic wind-power. Italy says it won’t touch shale or nuclear. Buona fortuna.

… ICAP market analysts warn that the tax will “undermine prospects for sustainable economic recovery in the eurozone”, raise borrowing and hedging costs across the board, make EU companies sitting ducks for takeovers and hobble banks as they grapple with €4 trillion of deleveraging. It does not make Europe safer. It will “increase the vulnerability of the financial system”.  The International Capital Market Association says it would devastate the repo market, a vast pawn shop that allows banks to raise funds quickly and easily by pledging assets. It expects transactions to plunge by two-thirds overnight.

ICAP and ICMA have dogs in this fight, but is this an experiment that the euro zone—with its undercapitalized banks—needs to be running?

Evans-Pritchard continues:

The repo market – $8 trillion in the EU and US combined – is a crucial lubricant of global finance. It was a failure of the repo system after the Lehman crash that set off the downward spiral in 2008. “The collapse of the repo market contributed to a liquidity shock that had far-reaching consequences for the global financial system,” said an IMF study. ICMA says that much of the current collateral system for banks will “cease to be viable” under the current plan. Investors will be driven into “unsecured deposits” not covered by the tax. The European Central Bank would struggle to conduct monetary policy. It would be some comfort if London were at least able to offer refuge for those fleeing this misadventure, but the tax is drafted in such a way that it catches much of the City’s business. The text covers all assets issued in the Tobin bloc or if there is a Tobin counterparty, even if the trade is in London, and territoriality be damned.

The extraterritorial angle is also something that  US Treasury Secretary Lew has described as “very troubling”.

For Britain, it’s more than that. As Evans-Pritchard notes:

Whether or not you think there is a concerted assault on Britain, the fact is that for the first time in EU history a major country has been overridden in a field where it is the dominant player and has a vital interest. The rules of the game are that Germany is never threatened on the car industry, nor France on agriculture. This principle has been breached. It is a declaration of economic war.

And David Cameron’s response has been feeble. To be fair, he has some obstacles to overcome. Taking a stance that would be caricatured as going in to bat for bankers is not the easiest of tasks in the current public mood in Britain (notwithstanding the importance of the financial sector to the UK) and, of course, he has to face the reality of coalition with the eurofundamentalist Liberal Democrats. Nevertheless there are times, as Margaret Thatcher could have told him, when leaders have to lead. And that means Cameron has to show that he can play hardball just as well as Britain’s EU ‘partners’.  To start with, that means advancing the date of the in/out referendum to coincide with the next general election (due in 2015).

Evans-Pritchard concludes:

It is hard to see how this crisis can be defused. Germany’s Wolfgang Schauble has belatedly realised that the EU is playing with fire by pushing the UK too far. British exit would be “catastrophic”, he said, asking how the EU could convince anybody in Asia that it has a future if a key member is walking out. This olive branch comes late in the day. Euroland leaders cannot exempt Britain from the Tobin tax because they know that their own finance will migrate en masse to London if they do, yet they are too committed to this suicidal enterprise to retreat altogether. So we must fight.

Ah yes, the EU…bringing Europeans together. You know how it goes.

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