Embattled French President Nicolas Sarkozy has announced his government is levying a 0.1% tax on financial transactions.
?What we want to do is provoke a shock, to set an example. There?s no reason why deregulated finance, which brought us to the current situation, can?t participate in the restoration of our accounts,? French President Nicolas Sarkozy said during a live prime-time television interview that lasted over an hour and watched by massive 16m viewers Monday night.
Brushing aside opposition from the nation?s banks and by unilaterally implementing a levy of between 0.01 and 0.1 percent on such as the trading of stocks and bonds called Financial Transactions Tax (FTT), France aims to gain up to ?12 billion a year, according to the International Monetary Fund. At the European level, about ?50 billion could be raised annually, the IMF hopes. Sarkozy said he expects revenue of ?1 billion euros from the tax ?that will go toward cutting the deficit.?
He also announced plans to raise VAT to 21.2% from 19.6% in last October to fund a cut in national insurance-type charges on companies. He hopes the changes will boost job creation and discourage French industry from moving abroad. “We have to re-ignite growth,” Sarkozy said. “We have to catch up in Europe and in the world. Our market share is declining. If we continue to burden our companies with charges that aren’t theirs to pay, how can we compete?”
French central bank, the Bank of France, has already questioned the feasibility of a tax that will only be imposed in France. The nation?s financial sector too has been very vocal in its opposition. ?A tax that?s limited to France would weigh on growth, lead to a loss of competitiveness, and create a heavy handicap for the financing of the French economy,? the French Banking Federation said in a statement last month.
Val?rie P?cresse, the budget minister, acknowledged that the tax would be circumvented if it were introduced solely in France. ?This tax makes no sense unless it is applied across Europe,? she said in a television interview. But she added that France?s intention was to take the lead and be the ?motor? for the wider introduction of the tax, which ministers insist should be in place by the end of this year.
The European Commission in September suggested a tax of 0.1% on equity, and bond transactions and 0.01 percent on derivatives, which it said could raise ?55 billion ($71 billion) a year. European Union finance ministers are due to discuss the levy in March.
The financial transactions tax is among measures Sarkozy unveiled to shrink the French budget deficit and spur growth. He is also increasing sales taxes and levies on financial incomes to fund a ?13 billion cut in payroll charges aimed at reducing labour costs and making France more competitive.
Sarkozy said that the French government will implement the tax in August without waiting for its European or G20 partners to come on board. “If France waits for others to tax finance, then finance will never be taxed,” the President said in his speech to the nation.
The United Kingdom and the United States opposed the so-called Robin Hood tax, with government officials saying that it would damage efforts to boost the economy and may cause financial firms to flee to other countries or regions.
In contrast, German Chancellor Angela Merkel has expressed support for the FTT but would like members of the 27-nation European Union to agree on the measure before its imposition. Merkel has said that the tax would be the “right signal to show that we have understood that financial markets have to contribute their share to the recovery of economies.”
That is a line that echoes the French position. France?s minister for cooperation, Henri de Raincourt, told parliamentarians were “absolutely unanimous on the need to find innovative financing and ready to consider that the financial sector, which is one of the sectors that profits from globalisation, should be made to provide this funding.”
France tried to put the tax on the agenda during its presidency last year of the G8 and G20 groups of countries, but the issue was sidelined as the euro-zone crisis worsened.
Shares of France?s three biggest banks immediately tumbled. BNP Paribas SA slid as much as 4.1%, trading 3.4% lower at ?33.45 ?in Paris. Societe Generale SA fell as much as 4.3% to ?20.17, while Credit Agricole SA declined as much as 2.75% to ?4.8.
Jean-Pierre Jouyet, president of the Autorite des Marches Financiers, France?s financial regulator, said last week that the tax on transactions advocated by Sarkozy would weaken the country?s position in the asset-management industry by pushing professionals and transactions elsewhere.
But Sarkozy said that his government has found a way to keep financial jobs in France and tax transactions related to the country even if they happen elsewhere, pointing to trades in credit default swaps as an example. He didn?t give further details.
?CDSs, which are speculative instruments against sovereign debt, will be taxed and online speculative purchases will be taxed,? he said. The tax will apply to share purchases, including high frequency trading, and CDS transactions. Unlike the European Commission proposal, it will not apply to bond trading.
Ernst & Young, an accounting company, has said in a report that while an EU transaction tax itself may raise as much as ?37 billion, its net effect could be negative by between ?2 billion and ?116 billion by decreasing economic activity and reducing revenue from other taxes.
Besides, Sarkozy brushed off the historic loss of Paris’ top credit rating for the first time since 1975, saying France’s policy would not be dictated by rating agencies. Political analysts suggest the credit rating agencies’ decision delivered a severe blow to his political career.
Therefore, FTT?has become a challenge for the French president, who faces elections in a two-round vote in April and May and wants to make good on a pledge he made to impose such a tax when France last year held the presidency of both the G-8 and G-20 group of countries.
Some accused him of using the tax as a political tactic, especially as the opposition Socialist party would feel compelled to support such a levy.
Socialist candidate Francois Hollande leads in the French presidential election polls. He has the support of 31% of voters in the first round, 6 points ahead of Sarkozy, and his second-round lead has risen to 20 points at 60%, according to a CSA poll published last week. Hollande, too, has pledged to impose a tax on financial transactions, if he?s elected.
?Whatever the motives, the end result would still be desirable if the FTT raises enough money to aid development, especially in poor countries?, says Daniel Pentzlin, sustainable finance campaigner for Friends of the Earth Europe.
“The financial transaction tax won?t harm normal people or the economy because the percentage is so low,” he said. “It might drive high-frequency speculative trading out of Europe, but actually we don?t need this market because of its harmful in the long run as we?ve seen.
“The FTT is nothing more than something like a value-added tax on financial transactions, and VAT levels are different from country to country,” Pentzlin continued. “This shows that everyone can set their own tariff. France shouldn?t have to wait on others for this.”
EU finance ministers are scheduled to discuss the tax in March, but French government officials say it could be presented here within this month. The Senate has already passed a bill in November approving the levy.
While France?s financial sector remains resistant to the idea, it has the approval of many non-governmental organisations, though support lags in other quarters. Non-governmental organisations point out that the financial sector is continuing to make profits despite the global economic crisis. And some of the profit-making is causing additional hardships to the world?s poor, they insist.
A report published by Friends of the Earth Europe states that “European banks, pension funds and insurance companies are increasing global hunger and poverty by speculating on food prices and financing land grabs in poorer countries.”
The report examines the activities of 29 European banks, pension funds and insurance companies, including Deutsche Bank, Barclays, RBS, Allianz, BNP Paribas, AXA, HSBC, Generali, Allianz, Unicredit and Credit Agricole. It suggests that there is “significant involvement of these financial institutions in food speculation, and the direct or indirect financing of land grabbing.”
Friends of the Earth Europe and other organizations are calling for strict regulation to rein in these activities, and they believe that a tax on financial transactions would also help to decrease speculative trading in commodities.
“Food speculation, with billions of euros flooding in and out of financial products based on foodstuffs, causes price volatility,” the group said in a statement this week. “These rapid and unpredictable price swings hit the most vulnerable hardest, threatening their right to food, and making it more difficult for farmers to maintain an income ? creating instability, hunger and poverty.”
In the mean time, French household spending dropped 0.7% in December from the month before and was down 3.1% from the year-earlier month, according to a Wall Street Journal report. Because consumer spending accounts for more than half of gross domestic product in France, the steep decline bodes ill for the fourth quarter.
Can a government bring prosperity to a country by imposing more and more new taxes? No. Will Sarkozy survive with his Robin Hood tax? I doubt. Let us wait and see!
Written by M.S. Shah Jahan, CEO of Taipan Trading Company, a Gem and Precious Stone Consultancy Company based in Colombo, Sri Lanka.