Shifting sands: what a Tobin tax could mean for the UK's relationship with the eurozone

A Franco-German summit has managed to scare the markets and the financials in particular by resurrecting the idea of a Robin Hood tax. Even ignoring the economic damage the introduction of this tax could do, what are the stakes for UK politicians and can they identify which route holds the greater risk?

MPs must weigh up domestic politics with European integration
Simon Miller
On 19 August 2011 13:15

Isn't it always the way? You take your summer break and all-hell breaks loose, be it US downgrades, market runs or riots on the streets of London.

However, in Europe the roller-coaster is still rolling.

On Tuesday, the Franco-German summit failed to convince markets that there was an action plan in place to save the eurozone, indeed, proposals were resurrected to put fear into the stock exchanges with financials particularly taking a hit following the announcement.

One proposal that has definitely scared the markets in general and financials in particular is the idea of a Tobin tax, that is a tax on every share traded within European stock exchanges.

A Tobin tax cannot work unilaterally. Money moves and, in this electronic age, money can move very quickly. Despite the individual costs being relatively low, it will add up and traders will shift to more friendly markets - in particular the burgeoning middle east bourses will, I suspect, benefit as will New York.

OK, so you would think that the current Cresta run in the markets in general and in financials in particular would put paid to the idea of a Tobin tax wouldn’t you?

Well not exactly. The UK Treasury is “minded” to oppose any new tax and the German Economy Minister Philipp Roesler says he has reservations about a Tobin tax.

However, if you look carefully at what he told German daily Stuttgarter Zeitung, Roesler said that the Free Democratic Party would “only back a tax on financial transactions if it is applied in all 27 countries of the European Union”. This is essentially what is on the plate anyway.

Indeed, the ban of short-selling in various European countries and the possibility of a short-selling ban in Britain, coupled with political disgust with high frequency trading, could actually be used to enhance the argument to introduce a transaction tax.

From a UK political perspective, this raises an extremely interesting scenario. The Conservatives have, for the most part, successfully clamped down on the European argument in their own party which threatened to overwhelm them with an image of being a one-issue party. Also, despite being portrayed to the contrary, Labour is also riddled with divides over Europe, indeed until the mid-80s it was Labour that was vehemently opposed to European union.

So the two biggest parties in the UK will find themselves in possible internal civil war with MPs from both the left and the right of the spectrum rising up against a further erosion of financial independence.

The Lib-Dems will, inevitably, shift in the sand to the most politically convenient outcome for their party as personal manifestos make perfectly clear around the country, there is no real uniformed Lib-Dem policy among its MPs, just convenient politicking.

And yet the question remains of whether there is anything the government can do to stop this tax? The Lisbon Treaty is an enabling document - that is it can continually be changed to suit circumstances. However, it has yet to be fully tested so it will be interesting to see what, if anything can happen if the UK becomes a blocking point.

The so-called lines-in-the-sand that all UK governments boast about are about to be swept up in the wave of European tax proposals and it could mean that the only solution is the one that all leaders appear to fear, the eventual departure from the EU to the European Free Trade Area by the UK.

Implausible? Possibly. But when you consider that the Tobin tax would essentially tax London, which is not in the eurozone, to bailout the eurozone and possibly kill-off a key component of the UK economy, the question becomes one of what risks are more important to the politicians – domestic politics or European integration?

Simon Miller is the Editor of Financial Risks Today

blog comments powered by Disqus

We are wholly dependent on the kindness of our readers for our continued work. We thank you in advance for any support you can offer.