Outlook They make unlikely bedfellows, especially as Germany has spent much of this week carping about Britain's self-interested approach to reform of financial regulation, but on one thing, the country's finance minister, Peer Steinbrück, and Lord Turner, head of the Financial Services Authority, are agreed. Both believe that a tax on financial transactions – the so-called Tobin tax – is one measure on which the G20 should settle today.
Interestingly, however, the two men have different motivations in calling for this new tax, which would probably be levied at 0.05 per cent on all trades of financial products, whether exchange-based or over-the-counter.
Lord Turner sees a Tobin tax as a weapon with which to attack excessive profit and pay in the banking sector. Mr Steinbrück, on the other hand, suggests the tax would be a good way to get the financial sector to make a greater contribution to national exchequers, which are out of pocket after all those bail-outs – and to be seen to be making a contribution, which might be just as important, given the public opprobrium still being hurled the way of bankers.
Of the two arguments, the latter makes more sense. If you are concerned about the levels of remuneration in the banking sector, it would be much more sensible simply to tax pay and benefits directly. If Lord Turner sees those problems as symptoms of a wider issue – the bloated and "socially worthless" nature of parts of the financial sector – then that issue needs attacking more directly.
It is worth remembering that there is already a transaction tax on the UK housing market, in the form of Stamp Duty. It certainly did not prevent a house-price bubble. And a transaction tax would, in any case, hit frequent traders hardest – in the securities market at least, frequent trading has more often been associated with risk-management practices, which do have some social value, than with speculation, which generally does not.
By contrast, Mr Steinbrück's assertion that the banks should help pay to rebuild the public finances has some appeal. The banking sector is already making a contribution, through fees and premiums on State-funded guarantees and insurance, but with profits – and bonuses – returning, it can afford to do more.
Mr Steinbrück's advisers say a Tobin tax would yield almost $700bn (£435bn) a year if the G20 and European Union nations all agreed to levy the duty. That doesn't begin to cover the $11trn (£6.9trn) global cost of the financial crisis, but it's not a bad start.
Everyone would have to sign up. Previous attempts to introduce this sort of tax – such as the duty the Swedish introduced in the Eighties – have failed, because investors simply placed their trades in overseas markets. Yet, were we to secure an agreement on this tax at the current G20 meeting, we would ensure there was no escaping the duty – the G20 and EU collectively account for 97 per cent of exchange activity, the Germans point out.
Off-the-record briefings ahead of the G20 have suggested the US and Britain are unlikely to support the German proposal, which also has the support of the French. Both London and New York seem to fear that as bigger financial centres, they have more to lose from taxes that damage competitiveness.
However, while Boris Johnson, London's mayor, worked himself into a fury when Lord Turner first pitched the idea of this tax, such fears look unfounded assuming collective action. If everyone has the same tax, there is no loss of competitive edge.
What is certainly the case is that a Tobin tax has more merit than the sort of crackdown on bankers' bonuses that the French government, in particular, has been calling for so aggressively.
There's no doubt that bonuses attract huge ire – and some rules are necessary – but the obsession with pay to the exclusion of all other issues is becoming deeply unhelpful. Is President Sarkozy really going to walk out of the G20 – jeopardising deals on regulation, trade, IMF reforms and so on – if he doesn't get his way? That would be political grandstanding of the worst kind.
The focus on guaranteed bonuses is especially galling. The idea a bonus should be unrelated to performance might be objectionable, but it's the non-guaranteed bonuses you really want to worry about – the ones that depend on bankers taking excessive risks to hit demanding targets.Reuse content