Dutch central bank condemns financial transaction tax

A European financial transaction tax (FTT) may not counteract disruptive market behaviour and will slow down economic growth rendering it “undesirable,” the Dutch central bank has stated.

De Nederlandsche Bank (DNB) estimates the proposed FTT would set Dutch banks, pension funds and insurers back €4bn a year.

It is also unconvinced the tax would achieve the European Commission’s stated intentions of reducing volatility and making the financial sector contribute to public funds in recognition of the impact of the financial crisis.

“While an FTT might for instance counteract forms of arbitrage, such as high-frequency trading, it may also cause traders to relocate or to increase their risk appetite,” a statement issued by the DNB noted.

“The Netherlands will be affected relatively severely by an FTT on account of its large financial sector, including pension funds. The negative effects in terms of economic growth and arbitrage will be stronger, moreover, if tax is not levied on a global scale,” the bank added.

The DNB is one of several groups to have spoken out against the proposed tax in recent weeks, and many agree its implementation in Europe alone would be futile, potentially hindering the continent’s financial competitiveness.

A recently published Oliver Wyman study indicated the tax would encourage 70-75% of tax-eligible volumes to migrate outside of Europe, most of which would be business from mobile firms such as banks and hedge funds.

Camille Thommes, director general of the Luxembourg fund association (Alfi), said the FTT would “potentially end the distribution of fund products outside Europe as they will inevitably become less attractive and will consequently have a serious impact on the European asset management and fund industry.”

A report published by the CPB, the Netherlands Bureau for Economic Policy Analysis, echoed the DNB’s concerns that the tax would not meet the European Commission’s original goals.

“We find little evidence that the FTT will be effective in correcting market failures. Taxing of transactions is not well targeted at behaviour that leads to excessive risk and systemic risk creation. The empirical evidence does not suggest that the introduction of an FTT reduces volatility or asset price bubbles,” the CPB report stated.

The European Commission launched a proposal for the introduction of an FTT in the European Union in late September 2011.

The tax would be levied on the purchase and sale of nearly all securities, including shares, debt securities and derivatives. The rate on shares and debt securities would be 0.1% and on derivatives 0.01%.

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