Heikki Patomäki is Professor, Department of Political and Economic Research, University of Helsinki and Chair of Attac Finland
Introduction
The Commission published its proposal for a Council Directive on a common system of financial transaction tax and amending Directive 2008/7/EC on 28 September 2011 (main document plus 18 impact assessment documents). This is a proposal for the first EU tax ever, not for a global currency or financial transaction tax. The tax base would be very broad, yet it would exclude transactions on primary markets both for securities (shares, bonds) and for currencies (the total turnover on the currency market is roughly four trillion USD per day, out of which 1,5 trillion are spot market transactions). The proposed tax rate is 0,1% for shares and bonds, and 0,01% for derivatives. The estimates about potential revenues are very uncertain, but the FTT could generate, according to the Commission, revenues in the order of 50-100 billion Euros and possibly, with alternative assumptions, much more.
Commision’s idea is to introduce a new and independent source of EU funding, which would enhance the powers of the Commission vis-a-vis the member states. The proposal is to implement the FTT in the EU as a whole. However, if the UK and some other non-EMU members continue to reject the FTT, the Euro-zone is considered an area of enhanced cooperation. This is a procedure, where at last nine member states can agree something in an intra-European coalition of the willing. This model is for instance used for the Schengen Agreement on migration. However, it is uncertain whether the Commission’s proposal in its current form is agreeable, in all its details, to all or key EMU countries. There will be a debate between member-state nationalism and Europeanism especially with regard to the use of tax revenues.
Positive developments
For years, the Commision used to oppose the idea of a currency transaction tax (CTT), alternatively known as the Tobin tax, advocated by global civil society organizations. Now, in the midst of the on-going Eurocrisis, itself part of wider financial and economic maldevelopments, the Commission argues that a fairly comprehensive FTT is both feasible and desirable (also the CTT would be feasible, but there other reasons to exclude it). What is more, the Commission clearly distances itself from the so-called efficient market hypothesis that has grounded the neoliberal policies of the Bretton Woods institutions and the EU itself. According to the Commission, the present proposal is a first step to:
· to ensure that financial institutions make a fair contribution to covering the costs of the recent crisis and to ensure a level playing field with other sectors from a taxation point of view;
· to create appropriate disincentives for transactions that do not enhance the efficiency of financial markets thereby complementing regulatory measures aimed at avoiding future crises.
Due to the global financial crisis 2008-9, EU member states spent 4,6 trillion euros in supporting the financial sector. Apart from the obvious problems of moral hazard, the Commission stresses that “this has aggravated the situation of public finances” and is a key reason for the acute Eurocrisis. It also notes that the financial is exempted from VAT and, moreover, that there are also other indicators of preferential tax-treatment. Fairness requires that the financial sector contributes more to public funding. Yet this is only a step. It is easy to calculate that with tax revenues of 50 billion euros per annum, it would take 92 years to recover 4,6 trillion euros. With an additional FAT, the time of recovery of the rescue funds could be shortened to 60-70 years. It is thus easy to understand why further steps, such as financial activities tax (FAT), are being considered as well.
The Commission proposal is also premised on “market failures and systemic risks in the financial sector”. This is clearly different from the orthodoxy of the efficient market hypothesis, still strongly supported by the IMF (consulted by the Commission). The Commission argues that “the [global financial] crisis resulted from the complex interaction of market failures, global financial and monetary imbalances, inappropriate regulation, weak supervision and poor macro-prudential oversight”. In the aftermath of the crisis, the EU has organized “an ambitious regulatory reform programme in the financial sector”, and the FTT is proposed to complement that programme. All this means a shift towards a bit more Keynesian understanding of the need for a strong role of public institutions in constituting and regulating the economy. In the context of the EU, this of course also implies a stronger role for the Commission. Power considerations notwithstanding, this shift vindicates the arguments of those who have criticized the neoliberal design of the EMU.
Problems
Compared to the ambitions of the global CTT movement, the most apparent problem concerns the use of revenues. The CTT was supposed to be a global Robin Hood tax, providing funding for eradication of poverty, development and other global common goods. This is not the purpose of the Commission. Quite to the contrary, the idea is to build a basis for an independent EU budget, to a significant degree controlled by the Commission itself:
“The issue of financial sector taxation was also part of the Commission Communication on the EU Budget Review of 19 October 2010 which states that ‘The Commission considers that the following non-exclusive list of financing means could be possible candidates for own resources to gradually displace national contributions, leaving a lesser burden on national treasuries: - EU taxation of the financial sector.’ The subsequent Proposal for a Council Decision on the system of own resources of the European Union of 29 June 20117 identified a FTT as a new own resource to be entered in the budget of the EU. Consequently, this proposal will be complemented by separate own resource proposals setting out how the Commission proposes that the FTT will serve as a source for the EU budget.”
When the EU is pushing the FTT onto the agenda of the G-20, by implication it is proposing that each country should adopt the FTT and use the revenues as part of their own budgets. Thus the FTT would not be a global tax but a globally co-ordinated and harmonized system of national taxations (in effect the Commission is taking the EU to be a national state). It is unclear whether this kind of co-ordination and harmonization is supposed to require an international treaty or mere informal agreement. In any case, while this proposal may be close to James Tobin’s original intentions regarding the CTT, it goes against the aims and ambitions of the ATTAC movements and other civil society organizations (CSOs). Or to phrase the same point from a slightly different angle, while there may well be a case for a more fiscally federal EU, the Commission proposal for the FTT is a major disappointment from the point of view of the aspirations of global justice movement and alter-globalisers.
There are two further problems with the Commission proposal. The first concerns democracy. The Commission is now initiating a major move towards fiscal federalism without addressing the problems of democratic legitimation. Famously, the American revolution started when the British adopted a policy that the colonies should pay an increased proportion of the costs associated with keeping them in the Empire. Thus Britain imposed a series of direct taxes followed by other laws intended to demonstrate British authority, all of which proved extremely unpopular in America. Obviously, the context is now rather different. The FTT is directed against the widely unpopular financial sector and each member state and also their citizens have some representation in the EU. However, the EU-relations of representation and accountability are organized in such a complicated and indirect manner that often they are verging on irrelevance. There is thus a problem of democratic legitimation. This would be aggravated by a move to fiscal federalism.
The second further problem is related to the reasons for excluding spot currency transactions from the FTT. The exclusion of “primary markets” (insurance contracts, mortgage lending, consumer credits and payment services as well as spot currency transactions) is justified with the idea that these financial activities are important for citizens and non-financial businesses. However, for the spot currency transactions, this is hardly true, as most of these activities are speculative in their nature. Indeed, the Commission further specifies that “currency transactions on spot markets are outside the scope FTT, which preserves the free movement of capital”. The key issue here concerns thus the quasi-constitutional EU-principle of freedom of capital movements. The Commission is thus adopting the standard central bank and financial sector interpretation, which questions the compatibility of a currency transaction tax with the EU Treaty freedoms. As explained on the Commision website:
“Free movement of capital is at the heart of the Single Market and is one of its 'four freedoms'. It enables integrated, open, competitive and efficient European financial markets and services - which bring many advantages to us all.”
Commission’s departure from the efficient market hypothesis is thus rather ambiguous or half-hearted. The justification of the FTT is articulated in terms of increased fairness and efficiency, whereas the exclusion of spot currency transactions remains premised on the orthodoxy of efficient market hypothesis. The question is, where does the Commission really stand? Moreover, to whom is the Commission accountable?
A political opportunity
The irony of the Commission’s proposal is that the exclusion of the most valuable (namely spot) currency transactions from the FTT provides an opportunity to continue campaigning for a global currency transaction tax. The tax can have any combination of the three main aims, all of which are incorporated into the Draft Treaty on Global Currency Transaction Tax (available at http://docs.nigd.org/nan/nigd/ctt):
(1) To curb foreign exchange markets and reduce and slow down transnational flows of short-term capital for the sake of stability and autonomy.
(2) To create funds for global common goods.
(3) To gain some global-democratic control over global financial markets and the social forces they have helped to unleash and strengthen.
The emancipatory potential of the CTT depends on the way it is realised. The Draft Treaty outlines a model in line with the aspirations of ATTAC and other organisations and movements participating in the World Social Forum process. The basic assumption of this model is that global financial markets are undemocratic and tend to be unstable. As explained by James Tobin already in the 1970s, well before the numerous financial crises that we have seen since, “national economies and national governments are not capable of adjusting to massive movements of funds across the foreign exchanges, without real hardship and without significant acrifice of the objectives of national economic policy with respect to employment, output, and inflation” (James Tobin).
According to the Draft Treaty, the tax is set at a sufficiently high level to curb the power of transnational financial flows. Global finance also constitutes structural power. The CTT should thus be a multilaterally agreed global tax controlled by a new democratic body, capable of mitigating the effects of the power of finance. Any sufficiently large grouping of states can establish the tax regime. The Treaty on Global CTT also has the potential to act as an “icebreaker in international law” (Lieven Denys), by setting an example of post-sovereign global regulation and taxation that can also be applied in other fields.
However, the new CTT Organisation must be capable of learning and self-transformation. A global CTT would be a socio-economic experiment on a large scale. The CTTO must be open to different points of view; react rapidly to unexpected changes; and be qualified to assume new tasks if needed. Moreover, there must be a fair, transparent and accountable process whereby decisions concerning the allocation of funds can be reached. Only an efficient and open democratic organisation can meet these essential requirements. A CTTO could stimulate the development of new forms of democratic participation and accountability in global economic governance, by virtue of its exemplary structure and initiatives.