More Criticism of EU Financial Transaction Tax
The Financial Transactions Tax (FTT) proposed by 11 European Union (EU) member states risks devastating the countries’ banks and leaving them dependent on central bank funding, according to Jens Weidmann, president of the Deutsche Bundesbank.
“From a monetary policy point of view, the financial transactions tax in its current form is to be viewed very critically,” Weidmann said. “Regulation is not an end in itself, and the costs and usefulness of any planned measure must be weighed against each other.
“Some effects cannot be seen immediately but can turn out to be explosive. An example of this is the planned FTT.” Although the tax had been fundamentally agreed “the unforeseen side effects can be substantial” he added.
As currently envisaged, the FTT would extend to asset-backed money market transactions or so-called repurchase (repo) agreements. Weidmann said that the repo market plays a central role in equalisation of liquidity between commercial banks.
“If it doesn’t function properly, the transactions are deflected onto the Eurosystem [European system of central banks], and central banks will continue to be heavily involved in liquidity equalisation between banks well after the crisis,” he suggested
There was also criticism of the FTT from across the Atlantic, as the Washington-based Institute of International Finance (IIF), a global association of more than 470 financial institutions (FIs), released a position paper compiled by its Council on Asset and Investment Management (CAIM).
While acknowledging that the proposed FTT is motivated by worthwhile goals, CAIM raised concerns that any revenue it would generate would be considerably outweighed by the potential costs in terms of burden on end-users of financial services, potentially weaker economic growth and job losses. Overall, the FTT would likely prove ineffective and fail to meet its goals.
Among the key drawbacks noted in the position paper were the following:
“An FTT would ultimately hurt savers and pensioners, at a time when many are already struggling to achieve adequate returns,” stated Walter Kielholz, chairman of the board of directors at reinsurer Swiss Re.
“Moreover, the FTT could greatly reduce liquidity and impair financial stability, particularly against the backdrop of still-fragile financial markets. Imposing such a tax would create additional headwinds to growth and job creation in Europe.”
Richard Kushel, deputy chief operating officer (COO), BlackRock, added: “We are deeply concerned that the proposed EU FTT could create unintended investment incentives, contradicting the principles of sound investment management.
“We fear, for instance, that the tax could have a particularly negative effect on some of the most safety-conscious investors, whose portfolios invest in shorter-duration bonds, as these are subject to a greater number of transactions. Worse still, the tax would penalise hedging transactions and other forms of risk management.”