This is a series of think pieces by participants at the 2nd Development Forum for the G20: Exploring Alternative Development Strategies. The discussions at the forum aimed to feed into the G20 process and help position alternative development strategies at the centre of the G20 agenda.
In the midst of the ongoing Eurocrisis, the European Commission is arguing that a fairly comprehensive FTT is both feasible and desirable. This represents a welcome departure from neoliberal orthodoxy, and some recognition of the need for measures to address market failures and systemic risks in the financial sector. But it is also a disappointment for the global justice movement and alter-globalizers: far from providing resources for development and poverty eradication, the Commission is looking for an alternative to national contributions for financing the EU budget. As such, the campaign for a global currency transaction tax is as necessary as ever.
is Professor, Department of Political and Economic Research, University of Helsinki and Chair, Attac Finland.
On 28 September 2011, the European Commission published a document titled ”Proposal for a Council Directive on a common system of financial transaction tax (FTT) and amending Directive 2008/7/EC”.1
This was the first official proposal for an EU-wide (rather than global) currency or financial transaction tax. A key idea behind the Commission’s proposal was to introduce a new and independent source of EU funding, which would, as a by-product, enhance the powers of the Commission vis-a-vis the member states. The proposal is for the implementation of an FTT across the EU as a whole. It remains uncertain whether the Commission’s proposal in its current form can be agreed upon by all, or even key, EMU countries. However, if the United Kingdom and some other non-EMU members continue to oppose the idea, the procedure of “enhanced cooperation” might provide a way forward.2
For years, the Commission opposed the idea of a currency transaction tax, alternatively known as the Tobin tax, advocated by global civil society organizations. Now, in the midst of the ongoing Eurocrisis, the Commission argues that a fairly comprehensive FTT is both feasible and desirable. What is more, the Commission is clearly distancing itself from the so-called efficient market hypothesis that has shaped the neoliberal policies of the Bretton Woods institutions and the EU itself. According to the Commission, the present proposal is a first step:
- to ensure that financial institutions make a fair contribution in covering the costs of the recent crisis and to ensure a level playing field with other sectors from a taxation point of view; and
- to create appropriate disincentives for transactions that do not enhance the efficiency of financial markets, thereby complementing regulatory measures aimed at avoiding future crises.
As a result of the global financial crisis of 2008-9, EU member states spent €4.6 trillion on support to the financial sector. Apart from the obvious problems of moral hazard, the Commission stresses that “this has aggravated the situation of public finances” and is a key reason for the acute Eurocrisis. The Commission also notes that the financial sector is exempt from VAT and, moreover, that other indicators point to preferential tax-treatment. Fairness requires that the financial sector contribute more to public funding. Yet this is only one step. It is easy to calculate that with tax revenues of €50 billion per annum, it would take 92 years to recover €4.6 trillion. With an additional financial activities tax (FAT), the time of recovery of the rescue funds could be shortened to 60-70 years. It is thus understandable why further steps, such as an FAT, are being considered as well.
The Commission proposal acknowledges “market failures and systemic risks in the financial sector”. This is clearly different from the orthodoxy of the efficient market hypothesis, still strongly supported by the IMF (consulted by the Commission). The Commission argues that “the [global financial] crisis resulted from the complex interaction of market failures, global financial and monetary imbalances, inappropriate regulation, weak supervision and poor macro-prudential oversight”. In the aftermath of the crisis, the EU has organized “an ambitious regulatory reform programme in the financial sector”, and the FTT is proposed to complement that programme.3
These recent developments indicate a shift towards a more Keynesian understanding of the need for a stronger role to be played by public institutions, here in particular the Commission, in constituting and regulating the economy.
Compared to the ambitions of the global Currency Transaction Tax Movement, the most apparent problem with the EU proposal concerns the use of revenues. The CTT was supposed to be a global Robin Hood tax, providing funding for development, poverty eradication and other global concerns. However, this is not the purpose of the Commission. Quite the contrary, the idea is to build a basis for an independent EU budget, controlled to a significant degree by the Commission itself (although the Parliament also plays a significant role in the annual budget procedure of the EU): “The Commission considers that the following non-exclusive list of financing means could be possible candidates for own resources to gradually displace national contributions, leaving a lesser burden on national treasuries: - EU taxation of the financial sector.”4
The “Proposal for a Council Decision on the system of own resources of the European Union” (29 June 2011) identified an FTT “as a new own resource to be entered in the budget of the EU. Consequently, this proposal will be complemented by separate own resource proposals setting out how the Commission proposes that the FTT will serve as a source for the EU budget.”5
When the EU called for an FTT to be included on the agenda of the G20, by implication it was proposing that each country should adopt an FTT and use the revenues as part of their own budgets. Thus the FTT would not be a global tax but a globally coordinated and harmonized system of national taxation (in effect the Commission is taking the EU to be a national state). It is unclear whether this kind of coordination and harmonization is supposed to require an international treaty or merely informal agreement. In any case, while this proposal may be close to James Tobin’s original intentions regarding the CTT, and while there may well be a case for a more fiscally federal EU, it is a major disappointment for the global justice movement and alter-globalizers.
There are two additional problems with the Commission’s proposal. The first concerns democracy. The Commission is now initiating a major move towards fiscal federalism without addressing the problems of democratic legitimization. Famously, the American Revolution started when the British adopted a policy that the colonies should pay an increased proportion of the costs associated with keeping them in the Empire. Thus Britain imposed a series of direct taxes and other laws intended to demonstrate British authority, all of which proved extremely unpopular in America. Obviously, the context is now rather different. The FTT is directed against the widely unpopular financial sector, and each member state and also their citizens have some representation in the EU, especially through the Parliament. However, the problem of democracy is not addressed in the Commission’s proposal. Relations of representation and accountability are organized in such a complicated and indirect manner in the EU that they often verge on irrelevance from the citizen’s point of view. There is thus a problem of democratic legitimization that may be aggravated by fiscal federalism.
The second further problem is related to the exclusion of spot currency transactions from the proposed FTT. The exclusion of “primary markets” (insurance contracts, mortgage lending, consumer credit and payment services, as well as spot currency transactions) is justified with the idea that these financial activities are important for citizens and non-financial businesses. This is hardly true for spot currency transactions, most of which are speculative in nature. Indeed, the Commission specifies that “currency transactions on spot markets are outside the scope [of the] FTT, which preserves the free movement of capital”. Therefore the key issue here concerns the quasi-constitutional EU principle of freedom of capital movements. The Commission is adopting the standard central bank and financial sector interpretation, which questions the compatibility of a currency transaction tax with the EU Treaty freedoms.
The Commission’s departure from the efficient market hypothesis is thus rather ambiguous or half-hearted. The justification for an FTT is articulated in terms of increased fairness and efficiency, whereas the exclusion of spot currency transactions remains premised on the orthodoxy of the efficient market hypothesis. So where does the Commission really stand, and to whom is the Commission accountable?
A political opportunity
The irony of the Commission’s proposal is that the exclusion of the most valuable transactions—namely, spot market trades—from the FTT provides an opportunity to continue campaigning for a global currency transaction tax. This tax can have any combination of three main aims, all of which are incorporated into a proposed Draft Treaty on Global Currency Transaction Tax.6
- To curb foreign exchange markets and reduce and slow down transnational flows of short-term capital for the sake of stability and autonomy.
- To create funds for global common goods.
- To gain some global democratic control over global financial markets and the social forces they have helped to unleash and strengthen.
The emancipatory potential of a CTT depends on the way it is realized. The Draft Treaty outlines a model in line with the aspirations of Attac and other organizations and movements participating in the World Social Forum process. The basic assumption of this model is that global financial markets are undemocratic and tend to be unstable. As explained by James Tobin in the 1970s, “national economies and national governments are not capable of adjusting to massive movements of funds across the foreign exchanges, without real hardship and without significant sacrifice of the objectives of national economic policy with respect to employment, output, and inflation”. (The same applies to the Eurozone as a whole.)
According to the Draft Treaty, the CTT should be set at a sufficiently high level to curb the power of transnational financial flows. (Global finance also constitutes structural power.) Any sufficiently large grouping of states could establish the tax regime. A new democratic body—a CTT Organization (CTTO)—would be required to ensure a fair, transparent and accountable process of decision making concerning the allocation of funds. Such an organization would need to be capable of learning and self-transformation; open to different points of view; able to react rapidly to unexpected changes; and qualified to assume new tasks if needed. Only an efficient and open democratic organization can meet these essential requirements. A CTTO could stimulate the development of new forms of democratic participation and accountability in global economic governance, by virtue of its exemplary structure and initiatives.
A global CTT would thus be a socio-economic experiment on a large scale. It would also be a potential “icebreaker in international law”,7
by setting an example of post-sovereign global regulation and taxation that could be applied to other fields.
This is a procedure through which a minimum of nine member states agree to cooperate in an area within EU structures, without the other members being involved. The Schengen Agreement is an example of the use of this procedure.
The issue of financial sector taxation was part of the Commission Communication on the EU Budget Review of 19 October 2010.
Available at http://docs.nigd.org/nan/nigd/ctt
Lieven A. Denys, “The Currency Transaction Tax as an Icebreaker in International Law”, a talk given at the University of Helsinki, 18 November 2004.