Following the financial crisis of 2008, the European Commission introduced in 2011 a proposal for a tax to be levied on financial transactions. This did not meet with agreement from all member states, but eleven EU countries (Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain) agreed to introduce a European Financial Transaction Tax (EU FTT) under a special provision, the enhanced cooperation initiative, opened to groups of at least nine participants. The idea was to implement a 0.1% tax on bonds and shares and a 0.01% tax on derivatives by January 2016.
Unfortunately, participant countries vied to protect their own financial institutions and agreement was difficult on the details of the tax. The UK, a major opponent of the EU FTT, challenged it in the European Court of Justice in April 2013 on the basis that it would affect countries not party to the agreement.
In December 2015, ten member states entered a partial agreement on the outline of the EU FTT, with the aim of reaching a definite agreement within six months. Estonia did not sign the agreement, arguing that it would not benefit from the latest design of the tax.
On 10 March 2016, the project of an EU FTT suffered a new blow, as the Ministers for Finance of Austria, Germany and France had to concede that talks were deadlocked and would be put on hold until June. The reason given was that the political situation in Spain and Slovakia did not allow them to make a firm commitment to the project. However, there is another angle to this latest setback. The Belgian Minister for Finance, Johan Van Overtveldt, explicitly stated that the present design for the EU FTT was “unacceptable”. Amongst other criticisms, he pointed to the fact that the proposed tax was “incompatible” with the Capital Markets Union (CMU) project.
The CMU is a key project of EU President Jean Claude Juncker who entrusted it to Jonathan Hill, former leader of the House of Lords, for whom he set up a new portfolio of Commissioner for Financial Stability, Financial Services and Capital Markets Union. Lord Hill is also a former lobbyist and co-founded Quillers, a lobby consultancy which had the City of London Corporation among its clients.
The CMU is designed to bring European capital markets in line with those of the US, and, should benefit European financial centers, particularly the City of London, but the CMU and an EU FTT are perceived by the financial industry as being entirely incompatible. The International Capital Markets Association (ICMA) makes the very same point as the Belgian Minister for Finance:
“ICMA points to the faster economic recovery in the US than in the euro area. The organisation is concerned about divergence of policies between the US and Europe. It also warns that within Europe, there are still several barriers to cross-border capital markets business, including higher post-trade costs, differences between national laws and the planned financial transaction tax which is still being pursued by 10 member states in the euro area, despite being ‘not consistent with the objectives of EU Capital Markets Union’. The tax has been widely criticised as an ineffective measure which will hurt the very market participants it is meant to protect.”
Putting in place an EU CMU would necessitate a harmonisation between national laws and a centralisation of regulatory powers, which would raise issues of sovereignty for the UK at the very time when such issues are at the heart of the Brexit referendum debate. As the Financial Times points out:
“The key factor for the success of the Capital Markets Union is the United Kingdom. As the undisputed financial centre in Europe, the UK is set to gain disproportionally from deeper capital markets integration – if it remains in the EU. Harmonised accounting standards, new securitisation and venture capital practices would open up new opportunities for the City of London. Yet, the British Government opposes any move towards a common EU regulator, for example on auditing firms. More centralisation of EU power may not go down well with the Tories, but it is in the best interests of the UK’s financial industry. In a highly regulated market, such as financial services, the lesson of the past few years is that it is virtually impossible to harmonise regulations without centralising regulatory powers.”
The City of London is very much in favour of the UK staying in Europe, and has much to gain from it but continued insistence on the implementation of an FTT would affect the CMU project negatively, which may be another reason why it is being kept off the agenda for the time being.