Brussels should learn from failure of French Tobin tax – EDHEC
EUROPE – The European Commission's imminent financial transaction tax (FTT) is likely to have no effect on volatility and could actually increase volatility in a worst-case scenario, according to the EDHEC-Risk Institute.
In an open letter to European Commission president José Manuel Barroso, professor Noël Amenc, director at EDHEC-Risk Institute, said introducing an FTT – also known as a Tobin tax – faced "serious" implementation challenges.
According to him, reducing the convenience of deals by increasing taxes made the optimal management of long-term investments – "which should be dynamic and not static" – more costly.
"This has been shown from more than 30 years of research results, notably those of Robert Merton, Nobel Prize in economics laureate in 1997, and in the work on the optimal management of risk budgets that EDHEC-Risk Institute has been conducting in recent years as part of its research programme on asset-liability management," he said.
Additionally, Amenc argued that the FTT could increase the liquidity premium on stocks as well as make markets less efficient and restrict price discovery.
"Ultimately, all these elements would lead to an increase in the risk premium required by investors, including long-term investors, and to a rise in the cost of capital, with a consequential negative impact on economic growth in Europe," he said.
EDHEC called on the Commission to "draw lessons" from the recent failed introduction of the FTT in France.
"The taxed French stocks have recorded an average fall of 15% in volume compared with stocks that were not concerned," Amenc said.
"Substitution effects have occurred between French and foreign stocks from the same sector."
Amenc went on to say that some investors decided to modify their equity portfolios by underweighting French stocks in favour of non-taxed European firms as a result of the French FTT.
"This substitution effect will not fail to have consequences on the price of French firms and their capacity to raise capital in order to invest and create employment," he added.
EDHEC finally claimed that implementing the FTT based not only on the location of the transaction or the headquarters of the financial intermediary but also on the primary listing or the nationality of the company was "irrelevant".
"It would simply lead to European stocks being disadvantaged in comparison with other geographical regions," Amenc said.
Last month, EU finance ministers gave 11 member states the green light to implement the controversial FTT.
The news came a month after a majority of MEPs gave the same member states the go-ahead to introduce the tax.