Europe is holding back its planned financial transactions tax (FTT), cutting back the level of the tax, and largely limiting its scope after leaders realised it could cause big damage to the economy.
The FTT is now just likely to affect share trades at first, rather than bonds and derivatives as originally planned, and at a rate that is a tenth of the initial proposal.
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The climbdown is being viewed as a major victory for the finance industry, which has been lobbying against to convince the tax, claiming it would hit savers and investors hard, hurting the real economy.
Warning bells
On 27 May, nine European trade associations co-signed a letter addressed to the Irish Minister of Finance and President of the ECOFIN, Michael Noonan, to warn about the negative effects of the proposed FTT on financial activities, such as government financing, risk hedging and corporate access to finance.
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By GlobalDataThe organisations believed that the negative consequences of the tax will be proportionate to its huge effective magnitude and will dis-incentivise on-exchange trading and clearing, contrary to regulatory reforms implementing the G20 objectives whilst the real economy will mostly have to bear the additional costs arising from the FTT.
A report by consulting firm Oxera, earlier in May, said the European Commission’s proposed FTT could make many current financial transactions uneconomic and will have "disastrous consequences" at a time when the Continent’s struggling economies are desperate to kickstart growth.
Initial plans
Eleven EU countries wanted to implement the charge, with the logic that it would make banks pay for the financial crisis and raise up to EUR35 billion for cash-strapped governments.
But the tax has raised barely half its expected level in early adoptee Hungary in 2013, as it hit trading volumes and pushed business abroad. Italy and Spain governments have also raised fear regarding the charge on bonds, which would increase their own borrowing costs.
