European Central Banker Rejects Idea Of EU-Wide 'Tobin Tax'

by Ulrika Lomas, Tax-News.com, Brussels

28 January 2004

Klaus Liebscher, a member of the European Central Bank’s governing council, has stated that use of a so-called ‘Tobin tax’ on foreign exchange transactions in order to help fund the EU’s budget would have a negative impact on investment within the community.

"A (so called) Tobin Tax would pour sand in the engines of the financial markets, scare away investment, affect economic growth and endanger jobs," argued Liebscher, warning that global investors would be deterred from participating in European money markets as a result of the measure.

The main aim of a 'Tobin Tax' (named after the late Nobel Prize winner, James Tobin) is to dampen the volume in the foreign currency markets in a bid to calm periods of volatility driven by speculation. The idea has gained support amongst many pressure groups as a way of minimising damage caused to developing economies from wild currency fluctuations. However, the political establishments in many countries have been, at best, divided on the proposal.

It is not the first time the issue of the Tobin tax has surfaced in European circles. A report released by the Commission in 2002 dismissed the proposal as unrealistic, and European leaders remain deeply divided on the issue.

Similarly, an OECD report in the same year concluded that there is no evidence that a tax on currency transactions would achieve its desired effect. The study examined a number of markets where transaction charges have been imposed, and found that “the effect on volatility is at best mixed."

"In some cases, there was no appreciable reduction - in others volatility actually rose,” observed the report's authors.

The OECD’s analysis of the tax also concluded that the measure would be unworkable unless imposed on a global basis.

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