Economic Policy Review ISSN 1313 - 0544

Europe and the Financial Markets

Author: Kaloyan Staykov / 21.10.2011
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Almost three years after the crisis hit in 2008 there are sill some EU leaders that demonstrate total misunderstanding in the way financial markets work. Obviously, Europe suffers from excessive government debt, but according to France and Germany the only feasible solution is hidden in the implementation of more taxes, which ought to increase the funds for financial bayouts of countries with high government debt, and also in launching new administrative structures for economical manipulation.

The proposal to tax the financial transactions is not a new one. Many countries have already considered that move in the past. Such examples are Finland – in 2000, France – 2001 (the tax was introduced and then annulled within less than 6 months), Belgium – 2004 (so called Spahn tax), in 2004 – Austria, Belgium, France, Germany, Greece, Ireland, Italy, Luxemburg, Holland, Norway, Portugal, Spain, Sweden, Switzerland, UK (as part of international initiative that gathered 864 signs from parliaments around the world), 2009 – France, England and Germany.

This week, the leaders of France and Germany yet again made propositions to establish a new tax and on the very next day the financial markets collapsed. The correction was leaded by companies operating trade platforms in the region, such as stock exchanges, financial intermediates, and specific financial services. To put it simple – the market got panicked because of some obvious reasons.

First, there is misunderstanding of the idea to establish such a tax, which is to keep down the amount of volatility in currency and equity trading. From the requirements set by the leaders of France and Germany we can assume that this tax was introduced in order to gain more public revenues. They ought to be used to straighten countries with high government debt. Such a purpose to introduce this tax is strongly rejected from its founder James Tobin.

Second, the idea itself is unclear: Is the new tax going to be introduced only for EU-17 (that is the eurozone), or for all 27 member states; over which transactions this tax will be imposed – equities, bonds, derivatives, currencies; which are the strengths and weaknesses of such an approach. This informational blackout combined with the current highly tensed markets in EU and USA, pushed them to expect the worse – shrinkage in revenues in the financial sector, decreased market share of the European financial centers shifted to places with lower tax burden, transition to more deals toward unregulated markets, loss of jobs, and more. But most importantly, the introduction of this tax is not going to solve the fundamental problem that stands in front of some EU governments – their excessive public debt. It is totally the opposite – its introduction in Europe will shrink the anemic economic growth, which will damage the debt situation even more.

At the same time there are talks for the creation of a new administrative structure, the so called Eurozone economic council. Its establishment will occupy more people, causing new spending for unproductive activities in times of chronically budged deficits within the EU.

The only feasible solution to this situation is for the European economies to become more competitive and to start producing more. This, in mid-term, will help them to fix their excessive public debt. However, this will not happen with new taxes, bigger administration and new stimulus. We are in need of structural reforms on a spending side and improved efficiency, better business environment, flexible labor markets, less administrative burdens and effective policies to keep down the budget deficits. It is not going to be easy, but the alternative – to continue this way - not only will delay the solution of the problems, but it will worsen them even more.