When the G-20 meeting last November failed to agree on any tangible way forward for a global financial transaction tax, the hopes of its proponents — who believe it could serve the dual function of raising revenues for development and curbing speculative activity — rested with Europe.
There was reason for hope. Developments during the past year had suggested that the Euro Zone could become the first place where the tax — first championed by John Maynard Keynes and several decades later by James Tobin — can be applied on a comprehensive basis across an entire region.
Last March, the European Parliament voted overwhelmingly in favour of the tax. During the summer, Europe's executive body, the European Commission, which had once expressed strong reservations on the tax, if not applied globally, proposed its introduction.
A few months later, in September, the Commission set out a clear picture of the system it hoped to introduce as early as 2014.
It would be by far the most comprehensive attempt to tax financial transactions globally, covering some 85 per cent of transactions that take place between financial institutions in the EU — 0.1 per cent on bond and share transactions, and 0.01 per cent on transactions on derivative products but not public or private capital-raising or foreign exchange transactions.
Global forerunner
Part of it would go to national budgets, and some would go towards the EU joint budget itself, reducing the amount that member-states would have to contribute. The taxes could raise as much as 57 billion euros a year.
“With this proposal, the European Union becomes a forerunner in the global implementation of a financial transaction tax,” the EU Commissioner for Taxation, Algirdas Semeta, said at the time.
Some proponents of the FTT were surprised by the speed of the Commission's turnaround.
“It changed its position fundamentally,” says Stephan Schulmeister, a prominent Austrian economist who has published several academic papers in favour of the tax. “I still don't still understand what happened.”
It seemed that one of the most talked of, but rarely implemented, taxes might finally have its day.
Six months, later, however, the prospects for the European FTT appear bleak, despite the pleas of German Finance Minister, Mr Wolfgang Schaeuble, that enacting nothing would be “disastrous”.
It was on the agenda of a meeting of European finance ministers last Tuesday, but there was little headway, and the meeting ended with the rather non-eventful decision to consider “alternatives” — such as a Europe-wide stamp duty, including on derivatives, or a financial activities tax on the profits of the sector, ahead of the next meeting.
Weakening prospects
“I think the prospects for the commission's proposal for a pan-European FTT are getting very unfavourable,” says Sony Kapoor, managing director of Brussels-based think tank Re-Define, also a strong advocate of the tax.
The proposals have exposed long-existing fault lines within Europe, between those such as Germany and France (whose President, Mr Nicholas Sarkozy has pledged to implement a national stamp duty-style tax on equities and derivatives in August, regardless of whether the European proposal goes ahead) that view closer economic, fiscal and regulatory union as key to the region's recovery, and those wary of handing further power to Brussels.
Leading the opposition is the United Kingdom, which, like India, has its own limited form of a financial transaction tax — a 0.5 per cent stamp duty on equity transactions.
However, it is implacably opposed to any far-reaching tax that would harm its role as a top financial hub if it wasn't implemented at a G-20 level, as well as to Brussels' growing fiscal ambitions.
Sweden, whose introduction and withdrawal of a 0.5 per cent transaction tax in 1984, is widely cited by FTT critics as an example of why the system doesn't work, is equally opposed to such a tax without a global dimension.
Without their support, a EU-wide agreement can't happen, as any tax decision requires the endorsement of all 27 members.
Hopes for a euro-area wide agreement are also dwindling “Is it wise to apply such a tax if the US, China or Hong Kong won't introduce such a tax?” asked Luxembourg's Finance Minister, Mr Luc Frieden, at last week's meeting.
Last hope
“We should focus on jobs and growth.” Ireland, too, is opposed, fearful that it would lead to an exodus of business to Britain. The last hope for a pan-national project lies with the EU's so-called enhanced cooperation procedure, which requires nine member-states to sign up.
Chances of this are higher than anything else, as nine nations signed up to a letter to Denmark, which holds the rotating EU Presidency, urging swift action.
However, many fear that without the agreement of the remaining member-states, some of those supporters could get cold feet.
Part of the problem, some argue, is the design of the FTT. The attempt to corner some of the revenues for the central EU budget is unpalatable to many members, says James Goundry, an analyst at IHS Global Insight in London.
Re-Define's Mr Kapoor argues that its failure to make a more nuanced distinction between asset classes and the fact that the tax would be based on the location of the activity — creating more of a scope for avoidance — adds to its want of appeal.
SEEKING A COMPROMISE
The search for a compromise is now on: a Europe-wide stamp duty, similar to Britain's, but also applying to derivatives, or a value-added-tax, are among the ideas being touted.
However, the former could still struggle to win British support. And the latter would fail to satisfy many of the FTT's proponents, who argue that this option would fail to address one of the many arguments in its favour: that it would curb high-frequency speculative activity, as well as the volatility that has plagued European markets in recent months.
Europe often likes to position itself as the forerunner, the global champion of ideas that people daren't embrace: its decision to implement and maintain — despite widespread global protest — the carbon levy on airlines is one example.
However, as seems to be the case with the financial transaction tax, those aspirations often don't become a reality. More than 70 years after Mr Keynes and 40 years after Mr Tobin proposed the financial transaction tax, its widespread implementation seems as elusive as ever before.