Down payments Laughing All the Way to the Bank

European finance ministers will this week try to hammer out a controversial new financial transactions tax. But whether they reach a deal or not, banks may already have won their battle against it.
Backroom lobbyists may have won an important victory for the banks.

Bankers laughed at the idea back in 2001.

When Sven Giegold, a European parliamentarian for the Green Party who founded the globalization network Attac, first proposed the idea of taxing financial transactions in Europe, few took him seriously. The politician was a leftist idealist who had no hope of putting his ideas into action, they thought.

But the money men are not laughing now, as a tax on financial transactions seems increasingly likely.

On Tuesday, finance ministers from 11 European countries are set to meet for the final time this year to hammer out the details of a transaction tax. It would essentially force the financial sector to contribute to the costs of the 2008 global crisis, and would be a first in the financial world. The move follows a separate agreement to charge European banks an insurance fee to protect against future crises.

If bankers fail to agree the details of the financial transaction tax by the end of this year, it would push the introduction to 2017.

And yet lobbyists for the banks, who have mounted a concerted campaign against the tax, may still have won a partial victory for their clients. E.U. finance ministers are divided over exactly how a financial transactions tax should be implemented – and may yet again miss a self-imposed deadline to agree the final details by the end of this year.

If the bankers fail to agree the details by then, it would push the introduction of a financial tax back another year - to 2017 – as ministers have said it will take a year for the plan to be implemented after an agreement.

Banks, investors, asset managers and their lobbyists have been fighting the transaction tax proposals tooth and nail for months. Whether or not ministers reach a final deal this week, lobbyists have already succeeded in significantly watering down the plans.

The proposal on the table this week has little to do with the initial outline by the European Commission back in 2011.

The European Commission, the executive arm of the European Union, initially aimed to tax the transactions of all financial institutions, all markets and all financial instruments. Brussels bureaucrats called it the “Big-Bang approach.”

Germany’s coalition government, formed last year between Chancellor Angela Merkel’s center-right Christian Democrats and the center-left Social Democrats, also committed itself to a tax on “stocks, bonds, investments, foreign exchange and derivatives.”

But in the end it looks as if the tax will only apply to stocks and a select few derivatives – a small portion of the overall financial market. Finance ministers in May said the goal is now to start small and then consider building on the initial tax in following years.

According to a study by regulatory consultant firm Copenhagen Economics, commissioned by the German government, the tax in its current form will earn governments about €2.5 billion ($3 billion). That is down from €17.6 billion in revenues estimated from the original tax as proposed by the Commission.

Goldman Sachs estimated the tax would cost banks €170 billion. The European Commission had estimated the cost at only €35 billion.

The battle over the transaction tax has demonstrated the power of the banking lobby like few other issues.

Austrian economist Stephan Schulmeister spoke of a “concerted campaign by the financial lobby” against the tax.

Banks and investment strategists have been peppering policymakers from all European countries for months with studies, as well as through personal conversations and targeted ad placements, all designed to foment uncertainty.

It is only recently that the banking lobby stepped into high gear, after it was caught unprepared when the European Commission first submitted a draft proposal back in 2011.

“The financial industry for a long time didn’t take the calls for a transactions tax seriously,” said Dorothea Schäfer of the Berlin-based economics institute DIW.

This was partially justified as negotiations between heads of state in Europe dragged on for a long time. It took two years for the European Commission’s draft proposal to become an actual proposal. Even then, only 11 of the European Union’s 28 members agreed to take the matter forward.

The lobbyists were not caught napping though, and were ready to counter in 2013 when the details of the initial plan were announced.

Banks, associations and consulting firms piled in with studies about the negative impact that a transactions tax could have on Europe’s financial industry. It wasn’t really about quality but about quantity, said Mr. Schulmeister. The idea was to scare policymakers and create uncertainty by sheer mass.

The biggest impact came from a paper by Goldman Sachs, which warned that a tax could drive Europe’s largest banks from profit into loss, pushing traders into the arms of competitors from other parts of the world. It argued that France and Germany – the two biggest champions of a tax in the first place – would be most affected.

Goldman Sachs offered up some scary numbers. It estimated that the tax would cost banks €170 billion. The European Commission had estimated the cost at only €35 billion.

In Germany, it was the German stocks association DAI that led the campaign against the transactions tax. Its lobbyists warned that the fee would not affect banks but rather companies and savers  - the little people.

A study by consultants Oliver Wyman, commissioned by the DAI, said the tax would cost this group between €5 billion and €7 billion annually. Pensioners would also be affected.

The idea is to pit finance ministry officials against each other – the Germans against the French, the E.U. officials against the national finance ministries.

“The government is calling for serious government-subsidized retirement savings accounts on the one hand and taking the money away from savers again through taxes on the other hand,” said Thomas Richter, head of the BVI, an association for investors that backed the DAI's campaign.

That the tax could threaten pensions is an argument that has been used repeatedly. Ms. Schäfer argues that the consequences have been “overestimated.” After all, money for retirement goes into long-term investments. By contrast, the transaction tax will primarily impact those who repeatedly make trades.

Lobbyists haven’t only resorted to studies – they’ve also sought personal contacts. Ms. Schäfer said he has watched how officials from finance ministries were repeatedly hounded by bank representatives on the sidelines of official events.

Ms. Schäfer believes the idea is to pit finance ministry officials against each other – the Germans against the French, the E.U. officials against the national finance ministries.

Whether or not ministers agree the final details this week, the fact that it will take at least a year to implement the plan will give banking groups enough time to prepare for the next phase in the battle – finding loopholes around the tax.

 

Carla Neuhaus writes for the newspaper Der Tagesspiegel and mostly covers finance and market related issues. Chris Cermak is an editor with Handelsblatt Global Edition writing about the banking sector. To contact the authors: [email protected], [email protected]