Outlook The cries of outrage began even before José Manuel Barroso had finished making his formal announcementyesterday that the European Commission plans to bring forward legislation for a financial transactions tax (FTT). The tax will apparently mean banks move to other territories. It is, we are told, a thinly disguised attack on the City, because London is Europe's largest financial services centre. Also, it will supposedly be complicated to introduce and administer. It is all so predictable – and disappointing.
The British Government'sofficial policy is based on the first of these views. The current Chancellor has consistently opposed this tax on the grounds that unless it was introduced everywhere in the world, the City would lose business to FTT-free jurisdictions.
To which there are at least three responses. The first is to point out that actually, London is a real-life case study of how this sort of tax does not automatically mean financial institutions go elsewhere.
The UK is unusual in that it already operates an FTT. It is called stamp duty and it applies to all purchases of equities. So how come, on George Osborne's thesis, London is still such a thrivingcentre for equity trading?
Second, Mr Osborne insists he has no objection in principle to the tax, just a practical concern about London losing business. In which case, why doesn't the Chancellor choose to expend his energy making the case for the FTT to the rest of the G20, rather than battling against it back home in Europe? Wouldn't that be a more constructive use of his time?
Third, it is worth remembering that the point of an FTT, as envisaged by James Tobin in the 1970s, is not simply to raise revenue, handy though that money will prove. It is also to incentivise long-term investment decisions over short-term speculation, wherefrequent trading, which adds to market volatility, would attract much greater charges.
As for the other objections to Mr Barroso's plans, they are pretty weak. A thinly disguised attack on the City? No more than any other proposal for change in the financial services industry – anyway, we have only ourselves to blame for our dependence on financialservices and it is something this Government has vowed to address. As for administrative complexity, if finance houses have proper systems in place to record their transactions, which one would hope they do, linking that to their tax functions ought to be within the powers of those masters of the universe.
For a time, the campaign for an FTT looked dead in the water. But with Bill Gates among those pushing the case for the tax at the G20, and much of Europe signed up too, it now has a chance.
We are not going to be able to persuade every major financial jurisdiction in the world to sign up on day one. But if that is the test for any new reform, we are never going to do anything.
The FTT does not have to be all or nothing. If enough countries agree to levy the charge, we will get past the fear of losing our competitive edge – and we should not be afraid to make pariahs of the jurisdictions that refuse, let alone the minority of companies that choose to move to them.
That thought applies to Europe too, by the way. If Britain vetoes an EU-wide levy, the eurozone could still adopt the FTT – and make pariahs of us.
One other thought: we had better agree what the revenues raised by an FTT will be used for. Bill Gates thinks the money is going to fund the sort of projects in the developing world for which he has worked so tirelessly. Mr Barroso is under the impression the proceeds of a European FTT would flow back to the Commission. One can make a case for and against either use of the money – as well as others – but there will be only so much to go round.