24 Nov 2012

The solution to the EU budget crisis? A simple Europe-wide FTT of 0.0033%

The leaders of the 27 EU governments failed to reach a compromise over the future budget for the European Unio, and Herman Von Rompuy  the president of the European council, threw in the towel after an alliance of the EU's richest countries, led by Britain and Germany, declined to accept a €971bn (£786bn) budget for 2014-2020.

The solution should be obvious to anyone with an open mind.  We are talking about a total EU budget of around €140 billion a year. Compare that with the levels of transactions with the EU. As I calculated recently, transactions in the 17 Eurozone countries topped €2 Quadrillion in 2011. Those in the UK are around £1.76 Quadillion... or  €2.19 Quadrillion.  To these numbers, we can add the numbers for the other Non-Euro countries, namely Bulgaria, the Czech Republic, Denmark, Latvia, Lithuania, Hungary, Poland, Romania and Sweden. Only one of those countries is covered by the BIS reports, namely Sweden, where financial transactions totalled $21.3 trillion in 2011. But I note that the ECB's data shows that €96.6 trillion of the €240.3 trillion in Payment and Terminal transactions within the EU occured in Non-Euro countries - i.e. nearly 40%.

I think we can safely conclude that the total is going to be at least €4.2 quadrillion, a number that is 30,000 times larger than the entire EU budget. It follows that if the EU imposed a tax on transactions of just  0.0033%, the entire EU budget would be paid for.

Some may argue that 0.0033% is excessive, and would lead to the total collapse of the entire financial system. All the traders would move from the City of London to somewhere outside the European Union. Frankly, this is complete rubbish.

But, even if the 0.0033% tax resulted in a drop in the revenue, it would be absolutely trivial to make the rate vary automatically to guarantee that the entire EU budget is covered. If transactions drop by 50% (a good thing), you simply increase the rate to 0.0066%. Noone would even notice. The rate could be varied on a daily basis if necessary. It really would be that simple.

Of course, the UK will complain that they would end up paying nearly half the budget (since around 50% of all transactions go through the City). In my humble opinion, this argument holds no water at all. Yes, the City of London does a lot of the transactions for all the Eurozone, but you cannot argue that onlypeople in UK would deserve to reap the benefits. It's exactly the same problem when Starbucks, Amazon and Google claim that they don't earn any money in the UK because they declare everything in Luxembourg, Ireland, Bermada or wherever. This is clearly just an accounting trick that has no basis in justice.

No. It would be entirely normal if the proceeds from a Europe-wide transaction tax went to the European Commission directly. And that way, there would be no more arguments about rebates etc. The European Commission could simply distribute the money to the places where it is most neeeded.

And if people subsequently decide that it might be a good idea to triple the EU budget by increasing the tax to 0.01%, then so be it.

Finally, note that once each country has introduced this tiny FTT to pay for the the EU budget, it would be extremely simple for them to add an extra component to pay for national funding requirements. Thus the UK, with over €2 quadrillion in transactions,  would be able to use a 0.0033% tax to pay for a hefty share of the EU budget (making the UK very popular with the rest of Europe). But then, by increasing the rate to 0.05%, it would generate enough revenue to allow it to scrap all its exisiting taxes - income tax, corporation tax and VAT.

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