Schroder Discusses Tax Rejected By German Economists

by Jeremy Hetherington-Gore, Tax-News.com, London

06 September 2001

Despite an international chorus of disapproval for French Prime Minister Lionel Jospin's disinterment of the Tobin Tax, the idea of a tax to deter speculative currency flows was added at the last minute to the agenda of last night's regular meeting between Gerhard Schroder, the German chancellor, France's President Jacques Chirac Mr Jospin himself. The meeting was originally supposed to focus on institutional reform of the European Union.

Discussion about reforming the EU to deal with enlargement was still the headline item for the talks, but German officials said the agenda had been extended to include discussion of how France and Germany might lead an initiative to address the legitimate concerns of the anti-globalisation movement.

Mr Schroder this week called on Berlin and Paris to lead such a debate, and pointed to "weak spots" in the world financial system, such as offshore centres, hedge funds and derivatives.

Does anyone remember the 'Gnomes of Zurich', much in vogue during the 'sixties as scapegoats for whatever went wrong with international financial systems and the world's top economies. Then as now, politicians hate what they can't control, and when they can't bury it they try to abuse it. Current targets include 'offshore' (which they have tried unsuccessfully to bury), hedge funds (outside their precious rules meant to prevent investors from making any money) and 'speculators'. They don't seem able to understand that speculation, as they call it, is a useful mechanism which tends to reduce financial volatility caused usually by their inept economic policies. So that's why the European leaders wasted a nice dinner on a futile discussion about moves to contain uncontrolled financial movements while at the same time appeasing the anti-globalisation protesters who have turned their cosy summits into a good imitation of the sack of Rome by the barbarians.

The German chancellor's comments, at an international economic conference in Berlin organised by his Social Democratic party, took up Mr Jospin's Tobin tax proposal, although he noted serious problems with the tax. His remarks were seen by anti-globalisation groups as a significant move in the German position.

German officials said Mr Schroder was concerned to address some of the objections of the anti-globalisation movement, and believed Europe had a particular role to play because of its more collectivist political and social traditions compared with the US or Asia.

But most economic commentators have thrown cold water on Mr Jospin's bright idea, including James Tobin himself, who went as close as he could last week to saying that his tax would not work in today's economic conditions. And on Tuesday Bundesbank President Ernst Welteke rejected the idea of a tax deterrent to curb speculation: "Such a tax would clearly lower transaction volume in international currency markets," Welteke said in a speech prepared for delivery in Dublin and made available by the German central bank in Frankfurt."It would come at too high a cost," the Bundesbank chief said, "Foreign trade in goods and services is bound to suffer as well. In the end, the wealth-enhancing division of labour will be hampered."

"Furthermore,' said Welteke, 'in times of distress, a Tobin tax is not effective. Expected returns on speculative capital movements during a crisis by far outweigh the costs of any sensible transaction tax. The Tobin tax simply cannot make up for a loss of confidence," he concluded.

German Finance Minister Hans Eichel also expressed strong doubts about the Tobin tax last week.

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