Bloomberg News

Germany Poised to Woo U.K. With Transaction Tax Alternative

January 26, 2012

(Updates with comment from Cameron’s spokesman in ninth paragraph.)

Jan. 26 (Bloomberg) -- Germany is preparing plans for a form of European stamp duty on shares linked to tougher trading rules as an alternative to a financial-transaction tax, as it seeks to win U.K. support for a European Union-wide levy.

Chancellor Angela Merkel’s Christian Democrats and their Free Democratic Party allies are coalescing around an FDP proposal for a Europe-wide tax along the lines of the U.K.’s levy on shares. Such a solution is a “good option” if accompanied by rules that limit “abusive excesses” in automated trading, the Free Democrats said in a paper drafted by former Economy Minister Rainer Bruederle.

“What’s emerging in the coalition is consensus that maximum demands such as those put forward by the European Commission are just not realistic,” Ralph Brinkhaus, a Christian Democrat who sits on parliament’s finance committee, said by telephone late yesterday. “We’re looking at multiple proposals that can possibly add to the U.K.’s instrument, that is ‘stamp duty plus X’.”

The German move is an acknowledgement that the transaction tax championed by Merkel and French President Nicolas Sarkozy is unlikely to come to fruition without the backing of the U.K., home to Europe’s biggest financial district in the City of London. It is also a potential blow to Sarkozy as he faces re- election in April, after he suggested that France would impose the levy even if others didn’t.

The European Commission, the EU’s executive body, has proposed a bloc-wide tax that it says could raise 57 billion euros ($74.8 billion) per year. The U.K. has led opposition to the tax, saying it would be ineffective unless applied globally.

Tax ‘Madness’

U.K. Prime Minister David Cameron said today that it is “madness” to even consider introducing a Europe-wide tax on financial transactions at a time when governments are struggling to get their economies growing. Speaking at the World Economic Forum in Davos, Switzerland, he put the economic cost of such a tax at 200 billion euros and 500,000 jobs.

“Of course it’s right that the financial sector should pay their share,” Cameron said. “In the U.K. we are doing exactly that through our bank levies and stamp duty on shares. And these are options which other countries can adopt.”

Investors buying U.K. shares pay a tax of 0.5 percent on the price. The stamp duty is also levied on options to buy shares and rights arising from shares. It is not levied on foreign shares. Stamp duty on shares raised 3 billion pounds ($4.7 billion) in the year to April 2010, according to the government.

“We’re very happy to talk to other countries about our experience of this tax,” Steve Field, Cameron’s spokesman, told reporters in London today when asked about the German proposals.

Waiting for Schaeuble

German lawmakers are awaiting the outcome of Finance Minister Wolfgang Schaeuble’s efforts to secure a transaction tax in all 27 EU countries, said Michael Meister, the CDU’s deputy floor leader and finance spokesman in parliament. The coalition will review its stance “if he comes back with a negative answer,” Meister said in an interview.

Merkel’s government seeks to decelerate trading, make the financial sector pay for some of the costs of the financial crisis and reap money for federal coffers, he said. The CDU is “open” to other solutions, and a stamp duty and rules to curb high-frequency trading “wouldn’t be outside the corridor” of what’s needed to meet those goals.

An EU-wide tax on securities transactions would help Merkel appease voters frustrated with the role of banks in the financial crisis and avoid a potential loss of business to the City of London. It might also help heal a conflict with the FDP, which has resisted agreements that don’t include the U.K.

EU Plan

The EU plan would tax stocks, bonds, money-market instruments and derivatives at source, including at banks, hedge funds and insurance companies. It would exclude government bond auctions, while including secondary-market trading and repurchase-agreement markets, according to EU documents. The financial-transaction tax would be set at 0.1 percent for stocks and bonds and 0.01 percent for derivatives.

Merkel, who favors an EU-wide levy given that U.S. opposition bars its introduction globally, has said that there is no agreement yet that would allow a European tax.

A three-pronged approach that copies the U.K. model, while imposing strict regulatory requirements for computer-based trading and includes a Europe-wide rescue fund for banks that’s fed by levies on lenders can help “reach the goals of a financial-transaction tax without hurting ourselves or weakening Europe,” Bruederle said in his draft.

‘Abusive Trading’

Targeted regulation is better suited to prevent “abusive trading strategies” than imposing a tax, Bruederle said. All computer-based trading platforms and their users should be required to seek a license and unregulated platforms such as so- called dark pools must be supervised.

A Europe-wide bank levy along the lines of the German model, which penalizes risky bank business, would help manage the cross-border repercussions of failing banks even while the first responsibility of saving lenders would still lie with national authorities, according to Bruederle’s draft.

“The FDP’s proposals are a good basis for moving forward,” said Brinkhaus of Merkel’s party. “Discussions are taking a positive course in the coalition and there is optimism that we can achieve a compromise at EU level.”

--With assistance from Rebecca Christie in Brussels and Robert Hutton, Tom Penny and Gonzalo Vina in London. Editors: Alan Crawford, Eddie Buckle

To contact the reporters on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net; Brian Parkin in Berlin at bparkin@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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