George Kerevan: Europe’s tax on transactions has been tried

The latest version is a proposal from the European Commission, backed by Germany, to introduce an FTT on secondary trading in bonds, equities and derivatives. It would be levied at 0.1 per cent on the value of equity and bond transactions, and 0.01 per cent on derivatives.

If applied over the whole 27-member EU, the City of London would generate 50 per cent of the expected revenue. Which explains why David Cameron was in Germany yesterday to tell Angela Merkel she can have her FTT for the narrower eurozone as long as the UK stays out.

My hunch is that we are going to see an FTT in the eurozone, so pay attention. This plan will rouse a cheer from NGOs, anyone who hates bankers, and eurozone governments who think it will curb speculative trading in their bonds. But like every previous attempt to tax “speculators” out of business by using a financial blunderbuss, the unintended consequences will be dire.

The commission’s FTT is not the famous Tobin Tax, which applies to spot currency transactions – and is explicitly excluded in the plan. Nor is it a “Robin Hood Tax” to give to poor nations. The income – as much as £49 billion a year on an EU-27 basis – will be split between the commission and European governments. This is a revenue-raising device disguised as a morality lesson.

Who will pay? Banks and hedge funds will be snared but also pension funds, asset managers and insurers. Thus the direct cost of the tax will fall on savers and pensioners as well as wicked derivatives traders. The latter, of course, can decamp to Asia. So it’s finally goodbye HSBC.

Even if the FTT is restricted to institutions belonging to eurozone members, they will pay on transactions conducted outside the zone, so London still takes a hit. A UK pension fund buying German bonds or Dutch equities will end up sharing the cost of the tax with its eurozone counter-party. That will hurt your pension pot.

The commission knows these side-effects. It thinks the risks are outweighed by the gains: less volatility in euro bond markets, and improved growth resulting from the enlarged EU budget. But we have empirical evidence from Sweden that the opposite could result.

Sweden introduced a transactions tax in 1984. But the promised revenues did not materialise after trading volumes fell. Lower market volumes also meant a reduction in income from the existing capital gains tax. As the bond market contracted, the cost of Swedish government borrowing rose. Reduced trading also made markets more volatile, not less. The Swedes abolished their FTT in 1991 and markets returned to normal.

Recently, European bond and equity markets have been marked by high intraday volatility as a result of the euro disaster. This has nothing to do with speculation and everything to do with fear. Slap on a FTT and those few long-term investors still around will disappear entirely. Try that for economic growth and stability.

Elves have been busy on their US supply chain

NOW for some good news. Santa has come early to America. Analysts are suddenly predicting faster US growth in the fourth quarter on the back of strong consumer demand and higher business investment.

JPMorgan Chase sees Q4 GDP rising at an annualised 3 per cent, up from 2.5 per cent in the third quarter. Others are forecasting as much as 4 per cent. In October, Americans bought more electronic gadgets than for two years. Claims for unemployment are down, suggesting the labour market may be thawing.

US Christmas cheer should be no surprise. Our modern Santa Claus was invented by the American humourist Thomas Nast, in his cartoon of 1863 depicting the old gent handing presents to Union soldiers. Will Santa get to Europe? Unfortunately, Lapland is in the eurozone.

George Kerevan: Europe’s tax on transactions has been tried – and it failed