Tax on trading threatens new division in Europe

Wed Oct 10, 2012 10:08am EDT

* Group of 11 countries agree to impose transactions levy

* Move to impose tax criticised by industry

* Regulator warns of Europe's diverse regulation

By John O'Donnell

BRUSSELS, Oct 10 (Reuters) - A plan by a group of euro zone countries to introduce a tax on financial transactions threatens to drive more trading to London from centres such as Frankfurt, exacerbating divisions in Europe as it struggles to overcome an economic crisis.

On Tuesday, 11 countries agreed to press ahead with a tax set to fall on the trading of shares, bonds and derivatives, although it may take up to two years before the necessary legislation is in place and the scheme starts.

Commonly known as a "Tobin tax" after Nobel-prize winning U.S. economist James Tobin, who proposed one in 1972 as a way of reducing financial market volatility, it has become a political symbol to make banks, hedge funds and high-frequency traders pay towards cleaning up a debt crisis shaking the continent.

But the move threatens to open yet another rift in Europe, where countries already diverge in their regulation of finance and politicians have long argued over how best to control the banks blamed for triggering financial turmoil in 2007.

Proponents first tried to introduce the tax worldwide in 2008 via the Group of 20 major economies. Faced with U.S., Swiss and Chinese opposition, they tried to persuade the 27-member European Union to lead the way, or even the 17-nation euro zone. But each organisation had its sceptics.

Following an aborted attempt to introduce its own such levy in the mid-1980s, Sweden has repeatedly warned that introducing the tax will simply drive trading elsewhere. Britain, home to the region's biggest financial centre, London, will not join.

Germany, France, Italy and Spain have made it clear, however, they will be among a group that will impose the charge that is set to be 0.1 percent on the trading of bonds and shares and 0.01 percent for derivatives deals.

But the move by the group, which includes Austria, Belgium, Slovenia, Portugal, Greece, Estonia and Slovakia, has been greeted with scepticism by analysts and industry, who believe it fragments Europe's approach to regulating finance at a time when a separate plan tries to unify euro zone banking supervision.

The pioneers do not agree among themselves where the proceeds should go -- to national treasuries or EU coffers -- or how they should be spent.

The tax, championed by Germany's Finance Minister Wolfgang Schaeuble, has irritated many in Frankfurt, the country's financial centre and rival to London.

Germany's debt and equity issuers are a key part of Europe's financial markets. Its issuers, including companies and government, accounted for more than 16 percent of debt sold in 2011 and more than one fifth of equities.

London, already Europe's biggest stock and derivatives trading centre, will not take part in the transaction tax.

"This will be a setback for any country that does introduce the tax because trading will simply move to those centres that do not have it, such as London," said Franz-Josef Leven, a director with the German Equity Institute, a group that represents issuers.

The head of Portugal's banking association also expressed concerns that the tax would put the country's lenders at a disadvantage to rivals that are not subject to the charge.

LONDON CALLING

As it stands, in a proposal from the European Commission, the tax would fall due as soon as a link between the parties to a deal can be established to a country, such as Germany or France, th a t charges the tax.

The Brussels executive has estimated that if the tax were implemented EU-wide on shares, bonds and derivatives, it could raise 57 billion euros a year.

Bankers say it would yield far less in reality because banks would relocate trading activity to avoid the levy where possible, moving jobs away from implementing countries.

A trade would trigger the tax although there are exemptions such as foreign exchange deals or primary issuance.

"For a U.S. firm looking to trade in Europe, they would move from Frankfurt to London," said Leven.

"For investors in Germany, they would have to pay the tax, regardless or where (trading) takes place. It means more costs for pension funds who invest on the stock market or companies that hedge using derivatives."

Deutsche Boerse, Europe's largest exchange operator, said only the introduction of the levy across all 27 countries in the European Union would avoid distorting competition.

"This is a short-sighted tax," said Peter Lenardos, an analyst with RBC Capital Markets. "When Sweden did it, trading volumes fell by 97 percent year on year."

For many analysts studying Europe's handling of the crisis, the move of a splinter group to go it alone with the tax is just the latest example of the region's fragmented approach to dealing with its problems.

"Although significant progress has been made with the establishment of the European Stability Mechanism, there is still no cohesive approach in Europe," said Paul De Grauwe, an economist at the London School of Economics.

"With the financial transactions tax, I don't see any trend to set up something that would be coherent."

The region is also embroiled in a divisive debate about establishing a banking union, a system that would allow the European Central Bank supervise lenders and ultimately would see central funds to support or close problem lenders and protect savers.

Winning broad support for a prompt introduction of the new supervision framework is important because it should allow the euro zone's rescue fund, the European Stability Mechanism, to directly inject much-needed capital into banks, such as those in Spain.

However, the plan has sparked concerns among the 10 countries in the European Union which do not use the euro that they will be indirectly affected by the ECB's new supervisory powers and put at a competitive disadvantage, whether they join the scheme or not.

On Wednesday, one of Europe's top regulators warned of the risks of Europe's "diverse regulatory and supervisory framework".

Speaking to lawmakers in the European Parliament, the head of the European Banking Authority argued the case for a banking union to counter a "wide variety of supervisory approaches".

"There is still a fairly wide scope of national discretion," said Andrea Enria. "This hampers the objective of a true single rulebook in key areas of banking regulation."

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