It's being greeted as a breakthrough -- but it remains open whether it really is. When the 27 European Union finance ministers meet in Brussels on Tuesday, they plan to discuss the introduction of a financial transaction tax in Europe. It's the first time that the issue has been on the agenda at such a meeting, and supporters of the tax argue that is a sign that the tax is making progress in its long journey through the EU's institutions.
Indeed, a certain amount of progress can be seen in the ongoing battle over a tax on financial transactions -- at least on paper. French President Nicolas Sarkozy and German Chancellor Angela Merkel, the EU's two most powerful leaders, have made the issue a priority. And in September 2011, the European Commission presented a draft directive which foresees a financial transaction tax on all stock, bond and derivative transactions within the EU. The tax could come into force in 2014 -- provided all 27 EU members agree to it.
Therein lies the rub. There is little chance of such an agreement. Officially, supporters of the tax are still hoping for the "comprehensive solution," as the Commission's proposal is dubbed by the German government. But an agreement is already regarded as a pipedream. A whole row of naysayers, led by Britain and Sweden, are opposed to the tax unless it is introduced globally. They consider it to be detrimental to growth and fear that they will become less competitive on the international playing field if they introduce a tax. The unanimity principle applies to tax matters within the EU, so even a single veto would be sufficient to derail the plan.
Internally, the governments in Paris and Berlin seem to have already accepted the fact that some EU partners cannot be convinced. As a result, talk in recent months has focused on the idea of only introducing the tax in the euro zone. But even this contingency plan seems doomed to failure. The euro zone is divided on the issue, as can be seen from a letter that was recently sent to the Danish finance minister. In it, nine euro-zone members called for Denmark, which currently holds the EU's rotating presidency, to "accelerate" efforts to introduce the financial transaction tax. It was signed by the finance ministers of Germany, Austria, Finland, France, Belgium, Spain, Portugal and Greece, as well as Italian Prime Minister Mario Monti, who is also the country's finance minister.
The most significant thing, however, is the fact that eight euro-zone countries did not sign the letter, namely Ireland, Netherlands, Luxembourg, Slovakia, Slovenia, Estonia, Malta and Cyprus. Admittedly, they are not the largest and most influential countries in the currency union, and not all of them are explicitly opposed to the tax -- but some of them are putting up considerable resistance.
For example, the Irish government, with an eye to neighboring Britain, only wants to introduce the financial tax if the rest of the EU plays along. Sources in Dublin say that, as long as the tax does not apply in London, the Irish will not support it. The coalition government of the conservative Fine Gael and the center-left Labour Party are worried about the prospects for its young international funds sector, which the republic has wooed and supported over the past three decades. Should a levy be introduced only in the euro zone, Dublin fears that many companies would simply move from Ireland to London. Unlike financial firms' routine threats to move to Asia, which are usually empty, this risk has to be taken seriously.
There are similar reservations in the Netherlands. Two recent studies by the Dutch central bank and the country's independent statistical agency have advised against the financial transaction tax. The minority conservative coalition government, which is dependent on support from the opposition center-left Labour Party on European issues, has so far not taken a position on the issue, and is said to be examining the proposals. They are in fact playing for time: The government is hoping that the issue will resolve itself.
In Slovakia, which previously opposed the tax, the political situation has taken a decisive turn. After the victory of Robert Fico and his center-left Direction - Social Democracy party in this weekend's election, Slovakia has suddenly joined the ranks of the tax's supporters. It is not hard for the country to support the levy, as it has no significant financial sector and therefore does not need to fear any side effects.
The Stamp Solution
Nevertheless, there are still plenty of governments that are opposed to the euro zone going it alone in introducing the tax. The government in Luxembourg is divided. Even in Germany, where Merkel's conservatives are pushing for the tax, their junior coalition partner, the business-friendly Free Democratic Party (FDP), opposes it.
There is, however, a possible way out of the impasse. A number of parties, including Germany's FDP, have proposed, as an alternative to a comprehensive financial transaction tax, a so-called stamp duty based on the British model. In London, stamp duty already applies to trades in stocks, but not to bonds and derivatives. Such a stamp duty already exists in Ireland, and France will also introduce one in August, if Sarkozy gets his way.
The advantage of opting for a stamp duty would be that it would probably be possible to get all 27 EU members on board. There is, however, one serious flaw in the plan. The Europeans would have failed in their goal to curtail speculation in complex financial products.