In a big push towards the adoption of a similar measure globally, the European Parliament voted overwhelmingly last month for a financial transaction tax across the bloc of 27 states. The objective behind the move is to ensure that the financial sector contributes its share to a more broad-based European economic recovery. After all, taxpayer money to the tune of €4.6 trillion was committed to this sector during the economic crisis. The European Commission proposes a levy on all transactions on instruments between financial institutions when one of the parties is located in the European Union. The European Parliament would like those outside also to be covered where securities originating in the EU are involved. The modest levy of 0.1 per cent on shares and bonds and 0.01 per cent on derivatives is expected to encourage compliance, make relocation costlier and potentially raise €57 billion annually. Moreover, the revenues from the new tax could reduce national contribution to the EU budget by half. Significantly, house mortgages, bank loans, insurance contracts and small businesses fall outside the scope of the tax. Legislators have also advocated an exemption for pension funds.
A Euro barometer survey claims 66 per cent support among Europeans for the Franco-German initiative; ordinary Europeans clearly see the measure as a sign of a more even sharing of the burden of the financial crisis. The fact that this sector is under-taxed in comparison with others in the EU perhaps strengthens the case further. Not to mention the €18 billion tax advantage owing to the VAT exemption on financial services every year, according to the European Commission. But implementation is clearly a long way yet, with Britain and other countries rejecting the move, arguing that such a tax would do little to address the real issues. The Conservative-led coalition of David Cameron has even voiced strong concern over the proposal's impact on London's pre-eminence as the world's biggest financial hub. In terms of procedure, the proposal has to be unanimously approved by the finance ministers of all the EU states and would come into force not before 2015. Given the financial distress that Greece and other countries of southern Europe are faced with, coupled with crippling austerity measures, a device such as the financial transaction tax would give governments a certain cushion against future contingencies. The progress on the EU tax will to a large extent determine the prospects of establishing a similar tax at the global level, attempts towards which have been spearheaded by France and Germany.