EDHEC-Risk Institute warns EC’s Barroso again on Tobin Tax

France’s highly-regarded EDHEC-Risk Institute has again warned the European Commission, in an open letter to President Jose Manuel Barroso, against introducing the proposed Tobin or Financial Transactions Tax (FTT) across the eurozone.

Professor Noel Amenc has reiterated the Institute’s research findings which show the theoretical arguments that FTT might reduce volatility are, “at best, mixed; the empirical evidence on the other hand, indicates that a FTT has either no effect on volatility or it actually increases volatility, and introducing an FTT faces serious implementation challenges.”

Amenc, who is also professor of Finance at EDHEC Business School, says the FTT risks making optimal management of long-term investments, which should be dynamic and not static, more costly.

He said this has been shown from more than 30 years of research results, notably those of Robert Merton, Nobel Prize in Economics Laureate in 1997, and in the work on the optimal management of risk budgets that EDHEC-Risk Institute has been conducting in recent years as part of its research programme on asset-liability management.

A FTT would also increase the liquidity premium on stocks and make markets less efficient and restricts price discovery phenomena, the letter pointed out.
“Ultimately, all these elements would lead to an increase in the risk premium required by investors, including long-term investors, and to a rise in the cost of capital, with a consequential negative impact on economic growth in Europe.”

Before seeking to impose a tax on European stocks, EDHEC-Risk Institute recommends that the Commission draw lessons from the recent failed introduction of the FTT in France.

The taxed French stocks have recorded an average fall of 15% in volume compared to stocks that were not concerned. “Substitution effects” have occurred between French and foreign stocks from the same sector.

Some investors have decided to modify their equity portfolio by underweighting French stocks in favour of non-taxed European firms. This substitution effect will not fail to have consequences on the price of French firms and their capacity to raise capital in order to invest and create employment.

The letter to Barroso notes: “The frequently-mentioned argument that substitution effects would not occur in the case of a tax that is expanded to a wider geographical zone and, as proposed by the Commission, based not only on the location of the transaction or the headquarters of the financial intermediary but also on the primary listing or the nationality of the company, seems to EDHEC-Risk Institute to be irrelevant. It would simply lead to European stocks being disadvantaged in comparison with other geographical regions.”

A copy of the open letter can be found here:

EDHEC-Risk Institute Letter to European Commission President Barroso, January 30, 2013

A copy of the EDHEC-Risk Institute position paper on the Tobin Tax can be found here:

EDHEC-Risk Institute Position Paper A Short Note on the Tobin Tax: The Costs and Benefits of a Tax on Financial Transactions


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