Yesterday, in Brussels, the British Chancellor, George Osborne, delayed his flight back to Blighty to berate his European counterparts for becoming bogged down in a pointless debate about an EU wide transaction tax rather than taking practical action to save the Eurozone from imminent collapse.
Despite his undiplomatic language it is unlikely that his European compatriots will heed his warning and with Pope Benedict actively supporting the idea the debate looks likely to run for some time to come.
So who’s right? Is the proposal just another example of wishful thinking by naïve Europeans struggling for good ideas to regulate the market? Is Osborne putting the interests of the City of London ahead of the common good?
Advocates argue that such a simple and unobtrusive tax could raise significant funds for good causes, but as any accountant will tell you no tax is ever simple let alone unobtrusive.
Ten years ago, when the idea of a Tobin Tax first entered public debate, development NGOs justified it on the grounds that funds accrued could finance the fight against poverty. Ten years on we are told that proceedings will help finance, in typical Robin Hood style, worthy projects at home and abroad.
Regretfully public finances just don’t work in such a simple transferable way. In reality, the resulting money would just revert to the Treasury to help refinance the public purse. No bad thing at one level given the perilous state of pubic finances across Europe, but such an act in and of itself would not create any new public spending commitments.
The Prime Minister raised in Parliament last week a broader ethical concern, namely, whether such a tax risked letting countries of the hook when it came to living up to their commitments to finance Overseas Development Aid (ODA).
If there is a convincing moral and political case to be made for ODA then it needs to be financed through normal rather than extraodinary budgetary channels. Relying on a transaction tax to finance long-standing ODA commitments merely reinforces the perception that ODA is an unnecessary luxury – it obviously isn’t.
The argument runs that since the US, Canada, Australia - to say nothing of China – are somewhat lukewarm about the idea, that any unilateral measure taken by Europe risks making Europe even less competitive than it already is. Critics naturally point to the Swedish example in the 1990s to prove the point.
The counter-argument to this is that Europe needs to take the moral lead in the hope and expectation that others might follow. That was very much the case made by Dr Wolfgang Schäuble, Germany’s Federal Minister of Finance, in his talk at Chatham House last month. The EU, he reasoned, represents a critical mass that if properly deployed could galvanise others into action.
While I’m a keen supporter of Europe’s civilising mission, the reality, as we have seen in other policy areas like climate change, is that when Europe leads no-one tends to follow. Regretfully, Europe’s civilising mission only extends as far as its own immediate neighbourhood and even then that can be a challenge.
If you look more closely at Schäuble’s speech - and it is worth reading in full – what you find underpinning his argument is the belief that the financial crisis is the result of the Anglo-Saxon model. He is not alone in this. France’s President Sarkozy has spoken of the “death of unregulated Anglo-Saxon finance”, while Chancellor Merkel has declared that Germany will no longer be dictated to by the City of London.
The euro-zone debt crisis has only reinforced continental suspicions of Britain and the City. Since the financial crisis, politicians in Germany and France have seen it as their task to bring Britain and the City of London to heel. They think that the City is home to ‘speculators’ who are bent on destroying the euro; and they believe that it marches to the tune of a euro-sceptic government and a local media that is hostile to, and ignorant of, the EU.
For once in my life I do feel a little sorry for Osborne and the City. Their opposition to the transaction tax makes the UK look like the country of old: that is, isolated and fighting to dilute EU initiatives targeting the financial sector. The gulf between Britain and Europe has never looked as wide as it currently does and that can’t be healthy for any party.
The UK realises that it has comparative advantage in a sector that imposes large costs on society when things go wrong. The whole thrust of government policy since 2008 has been to try to reduce the vast contingent liability that the financial sector places on British taxpayers. That was the main rationale for the Vickers Commission.
Few detached observers seriously doubt that Britain’s era of ‘light touch’ regulation is over. Britain has implemented reforms before similar measures were even proposed at EU level (sparking typical European grumbles about British unilateralism); and in some areas (such as the structural separation of retail and investment banking activities), it intends to go further than other EU countries can countenance.
The result of these reforms has seen some hedge funds relocate overseas, while large UK banks have threatened to follow suit in response to the Vickers Commission.
All of this suggests that if political rhetoric is anything to go by, perceptions in other European member-states have yet to adjust to this new reality. The last thing Britain, and for that matter the City, needs at this critical juncture is ill-conceived and costly initiatives that reflect political grandstanding in other EU countries designed to secure political points at home.
Where Schäuble is right and where there is general agreement across the board, “is that financial market participants need to convincingly demonstrate to taxpayers and their fellow citizens that they are willing to contribute to clean up the mess they helped to create.”
It does not follow, however, that a EU wide transaction tax is the answer – it isn’t. It’s time for our European colleagues to think again.