Europe’s Effort To Protect Economy From Another Financial Crash Dealt Setback

A group of European countries that set out in 2012 to implement a 0.1 percent tax on financial transactions is scaling the plan back, Reuters reported Thursday, after the industry “lobbied furiously against a scheme aimed at making them contribute to the costs of the financial crisis.” Unnamed sources close to the process told the wire service that the European Commission now seeks just a 0.01 percent tax on a smaller subset of financial transactions, and would hope to raise the rate and expand its reach “on a staggered basis” in the future.

While slashing the proposed rate by a factor of ten would dramatically reduce the revenues the tax would provide to cash-strapped governments in the region, the bigger problem is the reported shift to exempting the riskiest, least-productive types of financial behavior. Reuters’ sources say derivatives trades would no longer be taxed initially, and that the revised proposal would essentially punt the derivatives question into the future.

The idea behind the microscopic tax on trades dates to the Great Depression-era desire to curb “the predominance of speculation over enterprise” that had blown up the economy. Eight decades later, with the world still climbing out of a Great Recession caused in part by technologically-accelerated speculation, the idea is gaining renewed traction around the globe. As markets become increasingly beholden to computers that can execute thousands of trades every second, they grow dangerously volatile, as demonstrated in 2010 by a “flash crash” caused by high-frequency traders (HFTs). The European reforms that are now decaying sought in part to guard the broader economy from the risks of such crashes by discouraging HFTs.

Similar proposals from Progressive Caucus members in the U.S. House have yet to catch on more broadly among lawmakers, although a long list of economists, business tycoons, faith leaders, and other public figures have endorsed the idea. But as in Europe, the policy’s American targets have ratcheted up their efforts at influencing policy. HFTs spent nearly 8 times as much to influence elections in 2012 as they spent in 2008.

One version of the American financial transactions tax, proposed by Rep. Keith Ellison (D-MN), included a separate micro-tax on the market in derivatives, which was the epicenter of the financial crisis that precipitated the great recession. Another version set a flat rate for all financial transactions.

While the designs of the proposals vary, the arguments against them are generally the same: raising the cost of trading will hurt growth. But as the Center for Economic and Policy Research’s Dean Baker has shown, the benefits of taxing financial transactions seem likely to outweigh the costs, and reasonable, enforceable taxes of this sort would help create economic growth that’s more sustainable, and possibly even more robust.