When the UK voted to leave the European Union in June, many believed the EU might actually benefit in some ways, particularly in relation to business shifting from an uncertain UK. That outlook may have been turned rather on its head recently when some EU finance ministers agreed on October 10 to put forth a proposal to impose a financial transaction tax on trading.
This could be an exceedingly unforced error that would prevent the EU from attracting more economic activity to the continent.
An EU FTT was initially proposed in 2011, although efforts to move forward have repeatedly been stalled – the UK being the most strident opposing obstruction. It was seen as dying a slow death, which made sense because FTTs have failed for good reasons in countries like Sweden, Switzerland, Japan and Brazil.
Yet new life was given to the concept via the finance ministers who are expected to produce a legislative text by year’s end pursuant to what are termed “enhanced cooperation procedures” under which the European Commission will then consider the proposal, followed by the European Parliament and Council.
A rude reality, however, might be grasped by FTT proponents when confronted with the truth about supposed revenues. It is suggested the FTT would rise between €30 billion and €35 billion each year, but the expected revenues in many nations that have mandated such a tax have failed to materialize. The revenues never come. In fact, trading venues – exchanges – have shuttered. That’s because trading migrates to venues in other nations which don’t have such an FTT.
Today’s markets are global, operating 24-7-365. It doesn’t matter much where a trading venue is physically housed. If a venue operates smoothly and has adequate liquidity, traders simply desire to pay the least for their transactions. As additional overhead, costs, and regulatory burden, an FTT will simply prompt them to trade elsewhere. Altering trading venues is a quick click of the mouse away.
That’s where London markets might actually reap a big benefit by not only retaining the tremendous trading prowess that currently exists, but by furthering trading via market migration from places like Paris, Brussels, Madrid or Amsterdam. It is the precise opposite of what many thought might occur. In fact, trading venues in New York and Chicago could even benefit from such market migration (assuming US elected officials don’t go down the same dangerous road that the EU has begun travelling again).
Finally, even if traders didn’t totally abandon high-tax trading venues, they would certainly reduce their trading. This would create less efficient pricing (price discovery) because with less liquidity and competition, spreads will be greater. Such poor pricing impacts all investors, from end users simply trying to hedge their business risks to pension funds and even individual mom and pop investors. That’s not conjecture or economic theory, but fact.
What an ironic state of affairs. At a time when the EU could be seizing upon a financial benefit of Brexit, they apparently appear to be on the verge of shooting themselves in the financial foot.
By Bart Chilton for Financial News