How desperate are some European countries to make some extra moolah? As it turns out, quite a bit. 11 members of the European Union are looking to implement a small financial tax on the trading of stocks, bonds, and derivatives.
In their proposal, both the buyer and the seller will be paying a tax of 0.10% on stock and bond trades, while traders will have to pay a 0.01% levy on all derivatives transactions, as long as the underlying instrument is based in one of the participating countries.
The EU argues that by implementing the tax plan, it could help prevent traders from taking reckless trades, as the sheer volume of transactions could have a painful effect to the bottom line. For example, for pension funds, it would be a better strategy for traders to hold securities until maturity, instead of flipping them trying to earn a quick buck here and there.
Moreover, the reason why EU leaders are in favor of the financial tax plan is because they want to recuperate some of the losses that the government has been putting up with over the past few years while they’ve been bailing out banks left and right. Currently, the 11 EU members who have signed up for the tax plan are: Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Spain, Slovakia, and Slovenia.
The proposal though, is meeting tough resistance from all fronts. Across the Atlantic, the U.S. Treasury has already sent out feelers to the EU, saying that the financial tax would be too heavy of a burden for U.S. investors.
Big multinational banks and other governments are also expressing their dismay over plan, as they feel it is ludicrous. Why, you ask?
For example, let’s say you’re a trader from the U.K. and decide to purchase stocks of Volkswagen. Even though you already paid a stamp tax (as demanded by British financial law), you’d also pay the 0.10% tax to Germany, since Volkswagen is listed on the DAX.
You can imagine that with banks having offices all around the globe, these figures can add up to a pretty big chunk of change. In fact, the European Commission projects that this plan could raise as much as 35 billion EUR per year for the participating countries.
But beyond the actual tax revenues it brings in, there still lies the possibility that if the proposal does push through, it could lead to some serious consequences in the financial markets.
For one, it could lead to some banks and other financial institutions reallocating their funds and pulling their investments from Europe. With less hot money flowing into Europe, that would mean less demand for the euro, which may lead to some EUR weakness.
Furthermore, these market players may decide to move their funds into other markets where taxes may be more lax, like in emerging market nations. These countries may see a sudden flow of hot money into their economies, which could lead to a surge in the domestic currency. To counteract the potential negative effects that a rising currency could have on exports, the local government may eventually delve into currency manipulation tactics. Can someone say currency war?
Of course, there’s no telling whether this financial tax plan will ever gain enough support and push through. Nevertheless, I feel it’s important for all us forex fanatics to be aware of the issues that could potentially affect our trading practices.