Financial Transaction Tax: European Union Report

Lord Giddens Excerpts

Wednesday 11th July 2012 Grand Committee

[Lord Giddens]

My Lords, I also congratulate the noble Lord, Lord Harrison, and his colleagues on the report. However, I have some disagreements with it and therefore my position is different from that of previous speakers.

A tax on currency transactions, as was noted by the noble Lord, Lord Harrison, was mooted by James Tobin in 1972 in a now famous lecture at Princeton shortly after the US dollar was no longer tied to gold. Tobin’s proposal was a tax operating on a global basis that would dissuade speculators from trying to profit from very short-term rate fluctuations. In perhaps one of the most famous phrases in economics, he said that the point was to throw some “sand in the wheels” of currency markets—a quotation that has been repeated many times since.

It is important to recognise that the notion of a Tobin tax has gone through many different versions since then. We are discussing one such version now, which has surfaced in the form of a generalised financial transaction tax—the FTT. It is a big mistake—although I recognise the motives involved—to call it a Robin Hood tax, because it was produced by a Nobel prize-winning economist with a view to having an impact on world financial markets and we should keep that in view.

There are basically two reasons why an FTT has come back on the agenda. The first is obvious—the need to cope with systemic weaknesses in international financial markets. I know that I am not a substitute for the noble professor of economics who was referred to, the noble Lord, Lord Skidelsky, but JM Keynes made this point very well when he said:

“Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation”.

He was very good when writing about such issues.

The second contextual reason is obviously the one that we are here to discuss—the specific problems of the EU after 2008 when financial markets had homed in on real or perceived weaknesses of the euro. The report, as has been said, levels an array of criticisms at the proposals for a European FTT made by the Commission a while ago. The report was produced a while ago; it still refers to President Sarkozy, and so on, and a few things have happened since then. As such, it is a valuable contribution to the ensuing debate over those proposals and their subsequent elaboration within EU circles. However, I do not think that it is as conclusive in its critique as the noble Lords who are its authors seem to think.

It also worries me that, in the report, the views of individuals and groups who have clear special interests seem to be given the same weight as those who are likely to be more impartial. For example, in the summary near the beginning, it says that

“leading economists have criticised the concept—

of a European FTT—

“as fundamentally flawed”.

It then says that,

“the financial sector has been fervent in its opposition to the idea”.

Those two statements do not have the same status in my eyes. Moreover, many leading economists, such as Joseph Stilitz, have endorsed the idea of a European FTT, or have certainly stressed that it should be taken seriously.

I would therefore argue in contradistinction to the report that consideration of a European FTT will and should stay on the agenda. President Hollande and Chancellor Angela Merkel both endorse it, as do a number of other eurozone states’ leaders. It is right that the proposals should be further considered and developed and the risks and benefits scrutinised in detail before a decision is taken by the interested eurozone countries who might very well participate in such a tax. The issue of the FTT still needs to be scrutinised but it will stay on the agenda and it is still possible that it could be instituted.

I have one or two questions for the Minister in respect of these observations. First, near the beginning of the report, high frequency trading is discussed. What is the Government’s view on the desirability—which, after all prompted the original work of James Tobin—of throwing some sand in the wheels of high frequency trading? I found the discussion in the report rather inadequate. It does not offer evidence either way; it simply quotes one or two opinions. In my view, high frequency trading is, as the noble Lord, Lord Turner, says, largely socially useless and creates systemic risk in financial markets. I not think that the report discusses this adequately.

Secondly, there is the issue mentioned by the noble Baroness and stressed strongly in the report that if an FTT is introduced, businesses will move away from Europe. I spent some of my academic career studying this issue and I am not at all convinced that the evidence for it is strong. One has to look at it systematically, not just take specific examples. There are many reasons why it would be difficult for financial companies to move away from Europe and get a better financial position, wherever they went, because certain other taxes exist in other areas of the world to which they might move. In June, the Commission looked at this issue in detail and rejected the idea that there would simply be an outflow of companies from Europe. Speaking as a social scientist and an economist, I think that the issue is still much more moot than in the casual opinions which are mentioned in the report. I would like the Minister to comment on that. It is plainly part of the Government’s position but I do not see that there is systematic evidence either way, when one spends some time studying it.

Finally, I ask the Minister to respond to the same question that the noble Lord, Lord Harrison, raised. Do the Government support a global Tobin tax? That was where we started in 1972; Tobin said that it should be a global tax. There seems to be a certain contradiction, as the report says, between the Government’s view of this in regional and in global terms. It is obviously possible not to support a regional tax but to support a global tax but, as the noble Lord said, the Government should decide whether they are a strong advocate of a global tax of some kind. My view is that this debate still has a long way to go and that a lot of work is needed on it from academic economists. We have to look at the whole thing with more scrutiny before deciding on these issues, either regionally or internationally.

[Lord Kerr of Kinlochard]

My Lords, the national debate on the Commission’s proposal operated at a lower level of academic rigour than what we have just heard from the noble Lord, Lord Giddens. I thought that three myths infected the national debate. First, there was the myth that this was an EU tax, in the sense that it was a tax the proceeds of which would be used to help fund the EU budget. That was widely believed in this country and is completely untrue. There was a gleam in the Commission’s eye but it is clear from the preparatory text and the background that the proposal itself was for a series of national taxes collected by national tax authorities and going into national budgets. That myth produced a very adverse reaction in this country.

The second myth produced a strongly positive reaction. That was the Robin Hood myth: that it was to be a hypothecated tax, which was to be used for international development or to combat climate change. This was completely untrue and it was a bit implausible that at a time of concern about deficits, to put it mildly, Governments would be so altruistic. Anyway, no Government said that they would and the Commission did not propose that they should.

The third myth produced a strongly negative reaction in this country. It was the myth—fed a bit, I fear, by government—that the FTT proposal was a dagger aimed at the heart of London and that it was a malicious proposal from a malign commissioner and designed deliberately to damage the City. Usually, the Commissioner was said to be Barnier, although in fact he was not the commissioner involved at all. This was completely untrue but it was encouraged a bit—possibly because the more ferocious the dragon looks, the more valorous St George must be when he slays it. There was absolutely no doubt that we could slay this dragon whenever we chose, because unanimity is required for tax proposals.

I disagree slightly with the noble Lord, Lord Giddens, on his criticism: “Some FTTs could be quite good, so why were we so against an FTT?”. The members of the committee—I was lucky enough to serve under the noble Lord, Lord Harrison and we were unanimous in producing this report—were not attempting to argue that all FTTs are by definition bad; what we were unanimous about was that this proposal, this FTT, was unwise and unworkable, for reasons that are, to be fair, set out in some detail in the report.

The motivation of the proposal was none of those in our midst; it was, I think, a general wish to see the financial sector contribute in part to the cost of the crisis that it had caused and a particular wish to discourage high-frequency trading as inherently evil. I do not want to cross swords with the noble Lord, Lord Giddens, on high-frequency trading and whether it is indeed inherently evil. I do not think the committee reached a view on that. In fact, I do not think we attempted to reach a view on that issue in this report.

[Lord Giddens]

The report quotes someone from the Treasury who says that it is not harmful and it appears to endorse that. It is just an opinion from someone in the Treasury.

[Lord Kerr of Kinlochard]

I do not think we addressed the issue of whether high-frequency trading is or is not a good thing in this report, but there is no doubt that in the Commission’s mind it is a bad thing and that one of the purposes of this tax is to reduce it.

As the noble Baroness, Lady Randerson, said, the proposal was extremely oddly timed. I do not need to repeat the argument she made so eloquently. Setting out deliberately to reduce EU GDP by, it says, 0.5% seems an odd thing to do at a time of sharp recession. I think that 0.5% seriously underestimates the effect on GDP because the relocation effect was not taken into account in that part of the calculation.

Where are we now? First, I would like to consider whether St George fought well. I fear that I am in the school of the noble Lord, Lord Hannay, on this. I do not think we fought terribly well. I think the arguments we should have used were European Union arguments: arguments about the possibility of having one great financial market between the Asian market and the American market; arguments about London being the candidate; or arguments about damage to London being damage to the EU. I find such arguments play pretty well in many parts of Europe, although not in all. The best argument against a financial transaction tax that we should have used was the EU argument. Instead, we tended to wave the Union Jack, invoke Dunkirk, denounce Barnier and then, on 9 December, tried to make a UK opt-out from an FTT that the others could have if they wanted, a carve-out for us, a condition for our agreement to their move to the fiscal union to which we were urging them to move. It struck me as a really odd position to have got ourselves into.

However, that is all in the past. What do we do now? The dragon is not dead. I can reassure the noble Lord, Lord Giddens, on that. The dragon is alive and well. The noble Lord, Lord Hannay, has read out the European Council conclusions. Since the proposal would not be adopted EU-wide, several member states would instead seek to bring it in among themselves under the enhanced co-operation procedures—that is Article 20 of TEU and Article 329 of TFEU. So the Commission will produce a new proposal, presumably very similar to the one it produced for the Council as a whole. Those who wish to introduce such taxes will aim to agree a common scheme, and they have set themselves a target of the end of the year.

Should we mind? If they succeed, will they just damage themselves? Will the London market benefit at the expense of Paris and Frankfurt and anybody else who joins in? Should we, in the Prime Minister’s phrase, simply roll out the red carpet and cheer? I do not think so. Although our report was written some time ago, the Select Committee thought not. We noted that if the situation, which is now foreseen by the European Council, came about, UK financial institutions entering into transactions with institutions in FTT levying states would still be liable for the tax and if financial institutions from FTT levying states conducted transactions between themselves but in the City of London, they would be liable for the tax. In both cases, it would be for the UK authorities, HMRC, to collect the tax and forward it to the appropriate national fiscal authorities. We did not much like the sound of that. We would land the costs of collecting the tax but no revenue from it and, more seriously, the relocation effect would still be real. There would be a deterrent to transactions here and hence damage to the City. That is why, in our report, we said:

“We urge the Government to work to ensure that UK financial institutions are not damaged, and that UK tax authorities’ workload is not increased, by an FTT introduced by certain EU Member States”.

That seems to me to be the key message we should still be conveying to the Government. It was a point not really addressed, as the noble Lord, Lord Harrison, has noted in the reply we had from the Financial Secretary to the Treasury. In particular, he did not address our concern at the UK having to collect in London a tax from which we would not benefit. I hope the Minister will deal with that point more substantively tonight.

Is the die cast? Are we now out of the game? Is it all over? Can we go home? No. Under the enhanced co-operation procedures which they intend to use we have a seat in the room. Only those proposing to introduce the tax will have a vote but everybody will be entitled to speak and if we want to we can seek to influence what we do. In my view, provided we make EU arguments, not exclusively UK ones, they are likely to listen because the health of the City, as a lot of them recognise, matters to them too. We need to be there, sounding constructive, influencing the debate. I hope the Minister will assure us that is what the Government intend to do as this enhanced co-operation is pursued. I really hope we do not just climb onto our charger and ride off.

I have one additional point. Under Article 20 we do not have to leave the others to devise the tax without any advice from the representatives of the biggest financial market. As the others, possibly a slightly different group of others, go ahead with trying to work out some form of banking union, and they are proposing to do that under Article 127, precisely the same arguments apply. Article 127 is the Council as a whole. We would not be able to vote but we would be able to speak. We could be there. We cannot be the banking capital of Europe and let a negotiation about a banking union in Europe go on without our being there. You have to be in to win. We have got to be there.

The other day, Mats Persson of the Open Europe think tank—who is slightly more Eurosceptic than me and whom I would not normally cite—said of the risk of a eurozone banking union that it,

“is probably necessary in the long term, but is also a potential minefield for the UK. First, will it create barriers to UK financial firms doing business in the eurozone in turn fragmenting the single market? Secondly, will supervision spill over to regulation, with the eurozone effectively writing the rules for all 27 countries?”.

These are extremely good questions and the only way of making sure that the answers the European Union comes up with are the right ones is for us to be active participants. I was worried by the Prime Minister’s delight that he had he managed to strike out from the European Council conclusions all references to a common supervisory structure. They pop up in the eurozone annexe to the conclusions but they are to be discussed and negotiated in full Council with everybody there. I really hope we will occupy our seat and use it well.

--- Later in debate ---

[Lord De Mauley]

No, my Lords, I do not think I was addressing that point but rather than delaying the Committee this evening, I will look into it and write to the noble Lord. It is a complicated area.

[Lord Giddens]

I would like to disagree, quickly, on high-frequency trading and what the Minister seemed to say about it. There is simply an ongoing debate among economists about how you best model it. I do not think it is at all the case that, as he said, the issue is resolved. It is still a matter of ongoing modelling and economists are reaching different conclusions about it.

[Lord De Mauley]

I hope that when the noble Lord reads my words, he will not see that I said that anything was resolved. In fact, I said that we are expecting a report this autumn, which is not quite the same thing.