Hedge trade body warns Tobin tax threatens Europe’s struggling recovery

Europe’s economy could suffer a drop of up to 2% in its struggling recovery because of the proposed financial transaction tax, according to a report published today by the Alternative Investment Management Association.

The hedge fund trade body urged European authorities to reconsider implementing the so-called Tobin tax.

Aima argued it could cause job losses throughout Europe’s financial industry, as businesses re-locate outside the EU to avoid the levy.

The tax could also lower liquidity and raise spreads on markets, and make it harder for prices to find ‘true value’.

This is because fast-traders, who provide liquidity to markets, would slow activities to reduce tax, Aima said.

“There is a strong possibility of a non-trivial volume of financial transactions migrating away from Europe,” Aima said.

“In an environment where economic growth has virtually halted in the euro-zone, a measure that is likely to negatively impact the EU GDP should be given further consideration.

“The FTT is likely to affect EU taxpayers and pensioners the most, by reducing their savings and retirement income at a crucial point when Europe‟s savers, pensioners and households are still recovering from the financial crisis.”

The tax is proposed to be 0.1% of trade value for stocks and bonds, and 0.01% for derivatives. This asymmetry, said Aima, would lead Europe’s fund managers to prefer complex derivatives before “investment in the real economy and discourage corporate governance and long term engagement”.

Aima pointed to estimates from APG that Dutch pensions would pay €3bn a year – or 5.5% of total planned tax revenues – in the tax.

The European Commission wants the tax from 2014, to raise €25bn-€43bn annually. It is still being strongly opposed by the UK. Paris has suggested it could implement the tax alone if need be.

 

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