It’s always seemed like the wrangling over regulation in Europe’s capital markets was, in many ways, a proxy for the broader political debate raging across the region. No surprise, then, that on the eve of today’s speech by David Cameron we saw that the European finance ministers have agreed the creation of a vanguard transaction tax bloc that will implement its own Tobin-style financial transaction tax across 11 countries, including France, Germany, Italy and Spain but not the UK. Reading in the FT this morning how the tax is supposed to work, it seems that this approach is full of potential loopholes and get-arounds and will certainly keep the consulting firms and accountants busy as they try to iron out these inconsistencies. More importantly, it illustrates yet again that regulators acting individually or in cosy clubs will never be able to shoot all the regulatory ducks they are aiming at.
It is also unclear exactly why the tax is being introduced (maybe I am just being pedantic). Is it to reduce “speculative” trading as the BBC reports; to purge the industry of HFT; or to retroactively punish naughty bankers that supposedly drove us to the edge of the fiscal cliff? On this last point, no one in the back of the bus that was over-leveraging with cheap houses and holidays seemed to be complaining at the time, but that’s another story.
Making financial markets work safely, efficiently and for the greater good is a serious matter. But, whilst European regulators seek to tackle these problems with unilateral or “vanguard group” legislation, the market will simply get more distorted and complex – hardly an ideal outcome. The other observation is that carrots tend to work better than sticks when it comes to shaping behaviour.
Anyway, the key questions about this initiative are why, will it work and how long will it take before it is actually implemented? Just like with the broader political agenda on closer European union, the answers are, respectively, ill-defined, probably not, and don’t hold your breath.