A tiny tax on tea destroyed the first British empire by driving the 13 colonies into revolt; will a tiny little tax on financial transactions split the European Union?
The Tobin tax (first proposed by economist James Tobin in 1972) is a small tax that would be levied on all financial transactions and would, proponents argue, discourage speculation, promote the stability of financial markets, and focus the financial sector on the funding of real world economic activity rather than on complicated financial strategies and games.
It would also raise a lot of money for hungry national governments.
The biggest trouble with a Tobin tax is that unless it is introduced globally, its effect would be to shift financial market activity out of countries with the tax and into those who don’t collect it.
The desirability of a Tobin tax in Europe is one of the points where France and Germany agree. Both countries view financial speculation with grave suspicion, and both countries are looking for revenue sources. It doesn’t hurt that the free-wheeling City of London, Europe’s largest and most liberally regulated financial center, would be seriously affected as banks and investors left the UK for Tobin taxless jurisdictions. The idea of a tax that would be collected in Britain and spent throughout the EU is an attractive one for a number of European countries who are tired of Britain’s endless complaints about the European Union.
The idea of a Tobin tax has been floated for years; it now seems to be getting more serious attention from European policy makers. Germany’s finance minister Wolfgang Schäuble (rhymes with “foible”) is proposing a European Tobin tax as part of the EU response to the financial crisis.
The UK would never voluntarily agree to a European Tobin tax; the tax would be the end of London’s leading role in international finance — a mainstay of British wealth since the late 17th century. Such a tax would boost New York’s fortunes and accelerate the rise of financial centers in the Gulf and in Asia as investors moved their transactions to friendlier venues. Under EU rules, David Cameron has the power to block the tax, and Britain would certainly use its veto to protect its financial industry.
So why is Schäuble raising the idea at all?
Besides the policy arguments in favor of a Tobin tax, introducing the subject now is good politics both domestically and internationally. Domestically, Chancellor Merkel’s embattled government is well aware that voters are bitterly hostile to the huge bailouts of Club Med governments and fat cat bankers. But a Club Med breakdown would undoubtedly hurt Germany and perhaps break the EU, and the banks do need to be saved; the government wants to wrap its bailouts and guarantees in as much anti-capitalist bunting as possible. The Tobin tax, whatever its policy merits and demerits, is a signal to German voters that Merkel’s government is not turning into some kind of Anglo-Saxon loving, sugar daddy for free wheeling speculators and banking fat cats.
Internationally, advocating the tax helps strengthen Germany’s frayed relationship with France. The Tobin tax has long been advocated by French governments; strong support from Germany now helps sustain the partnership between the EU’s two biggest economies at a difficult time. The combination of an attack on speculators and the creation of a new revenue source is also an attractive prospect for other European governments trying to cope with the consequences of the euro-disaster.
Schäuble is perfectly aware that the UK is unlikely to go along, telling the Financial Times in an interview that if the UK won’t accept the tax, the 17 member eurozone will do it on its own. The French and the Germans are clearly moving towards a much more closer union among the eurozone countries in order to make the currency work. Countries would have to accept strict rules about spending and tax policies, and there would be a common financial ministry with broad powers of oversight.
It is likely that over time the 17 member eurozone would expand and become more cohesive; the EU would increasingly be split between a strong and integrated center using the euro and a weaker periphery that observes some but not all of the core’s rules. Raising the Tobin tax is one way of forcing the issue and forcing Britain out of the inner European sanctum.
The UK hates this prospect. The stronger the eurozone core becomes, the more Britain is marginalized in European debates. If the eurozone becomes the most cohesive and influential part of the EU, the real decisions about Europe’s future will increasingly be made in rooms where the British don’t sit. But the kind of tightly integrated supranational governance the Germans propose for the eurozone is something British public opinion cannot accept — and the loss of the City’s position in world finance is a blow Britain cannot really afford.
But if joining a cohesive eurozone is impossible, staying out will hurt the City too. As the new eurozone structures develop, the Germans and the French will be looking for ways to weaken London’s position in European finance. Frankfurt and Paris both have ambitions to grow as financial centers; there are many ways that clever bureaucrats can find to subtly or not so subtly steer business away from London toward its continental rivals. Over time it seems likely that the eurozone will develop other economic policies that disadvantage outsiders.
To the Germans, simple common sense is driving the process. The eurozone cannot be allowed to fail; this clearly requires more revenue and tighter control over member states. The Tobin tax and stronger eurozone governance are necessary to save the euro. Since from the German perspective the euro is a necessary part of the European project as Germans see it, Britain’s steadfast refusal to be part of the solution leaves Germany no choice but to create a solution that excludes the UK.
The EU may be splitting into two pieces: an inner core that is more and more a superstate within which Germany and France will wrestle for control, and an outer core of bystanders and spectators in European affairs. Germany may not really enjoy the change; France looks poised to go into a tighter eurozone as the captain of Club Med, a cohesive group of countries who will try to force Latin economics on a reluctant North.
The euro crisis is still young, and there will be many twists and turns before the final resolution takes shape, but major changes in the way Europe works are clearly on the way. It is hard to envision an outcome at this point that doesn’t leave Britain considerably more isolated and less influential at the core of the European experiment.
That may not be such a bad thing for the UK in the long run; Britain has historically prospered as a global economy. But problems over the relationship with Europe are the bane of Conservative governments, and the presence of the pro-Europe Liberal Democrats in the coalition won’t make life any easier. The European turmoil is already darkening Britain’s economic outlook; the coalition’s budget austerity measures are going to be biting even as the private economy staggers.
The Tobin tax could end up making almost as much trouble for David Cameron as the tea tax made for Lord North.