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Dutch Central Bank Deems FTT 'Unworkable'

by Ulrika Lomas,, Brussels

10 February 2012

The Dutch central bank (DNB) has recently insisted that the introduction of a European financial transaction tax (FTT) is ‘undesirable’, and warned that it is indeed doubtful whether it will counteract risky market behaviour.

The DNB argues that the European Commission’s current proposal will merely slow down economic growth, and estimates that the FTT would set Dutch banks, pension funds and insurers back EUR4bn per year.

In late September 2011, the European Commission launched a proposal for the introduction of a financial transaction tax in the European Union (EU), levied on the purchase and sale of nearly all securities, including shares, debt securities and derivatives. The rate on shares and debt securities would be 0.1% and on derivatives 0.01%.

Pointing out that the aim of the levy is “to discourage risky trading (including speculation) and to make the financial sector pay for part of the damage caused by the crisis”, the bank questions whether the proposal will in fact realise those goals, while warning that “the negative impact on the economy is a certainty”.

It states: “The Netherlands will be affected relatively severely by an FTT on account of its large financial sector, including pension funds. The negative effects in terms of economic growth and arbitrage will be stronger, moreover, if tax is not levied on a global scale. Therefore the introduction of an FTT as proposed by the Commission is undesirable.”

It continues: “It is questionable whether an FTT would be successful in counteracting speculation and other undesirable market behaviour, thus enhancing financial stability. While an FTT might for instance counteract forms of arbitrage, such as high-frequency trading, it may also cause traders to relocate or to increase their risk appetite.”

“Pursuing a riskier trading strategy to protect one’s margins would run exactly counter to what the Commission’s proposal aims to achieve. Which of the two possible effects would win out is unpredictable. Moreover, it is questionable that an FTT would be effective in counteracting market volatility – which is one of the frequently cited benefits of an FTT.”

“Moreover, the Commission’s draft proposal raises several questions. The lower rate on derivatives compared to shares may provoke arbitrage. Secondly, it is uncertain what the per-transaction rate will turn out to be. Since the tax also applies to intermediaries in a transaction, the result may be a ‘cascade effect’ that will multiply the taxation rate. Thirdly, the effects of the FTT will include implications for the repo market, currently a major source of short-term funding for banks. To sum up, hard evidence that the FTT would yield a net stabilizing effect is lacking.”

Should the FTT prove inevitable, then global introduction is to be preferred, since it will provide an international level playing field and significantly limit the associated economic costs, the bank concludes.

TAGS: tax | investment | European Commission | Netherlands | speculation | banking | capital markets | international financial centres (IFC) | tobin tax | offshore | offshore banking | European Union (EU) | Europe

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