Just a quick thought on the Franco-German proposals for financial harmonization.
I think the heart of what is being proposed is the financial transaction tax. Much of the rest, while Germany might like to daydream, is being mentioned, I think, to provide cover for the Transaction tax. Let people object to all sorts of ideas which will never fly, like harmonizing the corporate tax rate, in order that the transaction tax, seems less threatening on its own. Exaggerate to compromise.
What Merkel and Sarkozy want to find is a way of bailing out Italy and Spain without it all falling purely on Germany’s angry tax payers. The major problem is that neither the EFSF, nor the ECB has any means of funding itself. This limits what funds they have and how they spend them. Taxation is the basis of all power. So what the ECB needs is a tax base.
At the moment the banks don’t want to be taxed and EU nations don’t want to see the EU start to become a tax power in its own right. But what if – and this is very much a ‘what if’ – what if they said don’t worry this is a one off tax, not the beginning of an EU tax grab, it is a tax only upon the banks and the proceeds will be ring fenced to be spent only on the banks?
The tax’s proponents would be able to argue that this tax was not going to be levied upon banks only for the proceeds then to be siphoned off to subsidize pilchard fisheries. That would sugar the pill for the banks. They still wouldn’t like it but it makes their opposition to it weaker.
France and Germany would like because it would give an EU institution its own direct tax base. And THAT is the beginnings of real sovereign European level power. They would claim it was a one off, ring fenced, emergency temporary etc etc. But it would be the beginning. And what a beginning! Start, under the guise of an ’emergency’ with the most important thing – revenue. A tax base for the ECB, the heart of a Federal and fiscally Germanic EU.
Merkel and Sarkozy could sell it to their respective voters as finally getting the Banks to bear some of the cost of bailing out the mess they have made. Doing it this way also wouldn’t be offending the sacred bond holders. At least not directly in a way the bond holders could easily argue in the press.
It would begin the process of creating a Federal integrated Europe with the most important part – the ability to raise a tax.
Of course the banks wouldn’t like it at all and some would try to shift their transactions abroad. I think Hong Kong is the destination they are all negotiating for. I firmly believe the Swiss banks are already aiming quite consciously, and indeed have started, to create, Switzerland-Asia in Hong Kong.
But because the tax would be ring-fenced to clear up their mess, keep them solvent and maintain – almost perpetuate and enshrine in the heart of a new Federal Europe – the principle of Too Big To Fail – by means of the tax which would guarantee it – they too might see an advantage.
What I think the banks would want is some sweetener on the side which they would argue they should be given to ‘level’ the playing field with the US banks who would not be paying such a levy on Wall Street transactions. I think the EU mandarins and leaders would oblige. They always do. Some loosening of other regulations or accounting standards in Basel III.
I think this would be a terrible idea for Europe’s people and for European democracy but I think it is an idea which would appeal to our present leaders and seem to them to offer the kind of solution they have been looking for.
As I say this is pure ‘what if’.
To me it seems clear this is a stalling operation, simply because both realise that at present the politics aren't with Merkel to do anything else.
However. in contrast to the Eurocracy the situation is very dynamic. We've just seen German GDP growth stall and I'm not sure how that will play in Germany. Will it increase the German blame game or will it lead to a "wait a minute, maybe we are all in this together" panic.
I think practical ways of kicking the can appear to be running out, the policy now seem to be more one of delay and obfuscation in the hope the politics will become more positive on fiscal union.
Cant see how taxing the transactions of a bunch of bankrupt banks will solve the massive aggregate debt problem and bring back economic 'growth'. Too little too late?
At risk of being slightly off-topic, I'd like to bring people's attention to an excellent post by Gail Tvberg at the Oil Drum.
Its an easily-accessible argument that economic crisis is inevitable in times of declining fuel availability. I'm posting this here as it seems that the financial blogs such as Davids, and the peak-oil analysts are coming up with much the same results but starting from different viewpoints.
Even so, there seems to be little crossover between their constituencies. And maybe such a mixing of ideas would be fertile as we look to see where the hell we can go from here, and how. So for readers here, if you are interested in a bigger-picture article that complements Davids writings well, check out:
Oil Limits, Recession, and Bumping Against the Growth Ceiling
http://www.theoildrum.com/node/8268#more
@Keekster, I agree, while the Transaction Tax looks attractive on the surface, it does assume that there will be growth in the future.
It is a very good question, if all the banks are severely insolvent rather than illiquid, then how on earth can anything backed by a banking tax be used to fix the problem?
Ben, Keekster,
I agree that it won't solve the bank debt problem. In fact by cutting in to their profits it would make them even less solvent. BUT it is a tax on transactions not on profits. So even as they die it would still raise money.
The other part of it of course is that it might.. might damp specualtive trading. Depending on how it was written it might suck some of the juice out of High Frequency Trading. Both of those are , I think, good things.
But over all I was wirting about it not because I think it woud be great but because I think it could happen.
Ben,
Thank you for the link. I think you're right about the beneficial effect of some sort of cross fertilization and cross over.
I thought the object of a Tobin tax was to cut down on short-term speculative trading, particularly the automated high frequency trading that increases volatility for no sound reason?
Meanwhile in Denmark, the goverment is spooked by its own brilliantly eficient bank legislation and tries to "sidestep" it in favour of bond holders… Equality before the law…?
http://www.bloomberg.com/news/2011-08-18/denmark-s-regional-banks-dump-assets-to-escape-debt-funding-wall.html
Ben
Thanks for the link.
I’ve read some of Gail Tverberg before and she is very good at linking money & energy resources.
Gregor.us is very clued up on this too, see:
http://gregor.us/economics/paper-vs-real-exit-from-normal-ecological-economics-and-probabilistic-regimes-in-one-chart/
I’m hoping do a post soon on the sources of wealth. I don’t want to spoil the ending, but it might have something to do with energy!
This one book by Frederick Soddy says it all:
http://en.wikipedia.org/wiki/Wealth,_Virtual_Wealth_and_Debt
Charlie,
That is exactly what it was proposed for. And I think it is a very good idea. But that leaves open where the revenue for the tax would go. I am simply suggesting that Merkel and Sarkozy might see the revenue it would generate as a way of giving the ECB a source of funding which it could happiliy use to underpin its 'new' role as buyer of last resort of rubbish bank debt.
In addition to which it begins the longer term project of giving the EU level of government its own tax base.
From the BBC at midday today (Thursday):
"Bank shares were hit again after the European Central Bank (ECB) lent dollars to an unnamed eurozone bank.
The loan, on Wednesday, was the first of its kind since February, and a further sign of worries within the eurozone economy.
One bidder borrowed $500m (£303m) the ECB said, but did not disclose the identity of the bank.
[…]
In London, Royal Bank of Scotland fell by 4.6%, Barclays fell 4.7%, HSBC Holdings was down 3.4%, and Lloyds Banking Group shed 4.2%.
In Germany, Deutsche Bank was down 4%, while in France, Societe Generale fell 5.2% and Credit Agricole dropped 4%."
has anyone else noticed the high street banks are gradually reducing their shared ATM access?
Obviously this is bad news for a lot of customers who don't live near to the relevant bank, but I wonder if it's also intended to make the banks decouple and increase stability? As it is, a public run on one bank could conceivably bring all the others down due to the shared cashpoints. Reducing the access like this should make them a bit less vulnerable to that, which is probably a good thing…
there was an interesting comment piece in the times ( paywall ) to the effect that the best solution to europes troubles would be a federation of france, italy spain, latin countries + some east europen countries with floated currency +separately a german mark based alliance.
the article quotes a precedent for a " latin countries currency alliance " at end of nineteenth century for fourty years post 1866
It was a fun bit of theater was it not?
nothing is going to happen until the fat lady sings which is sometime in Sept.
http://vicepilot.blogspot.com/2011/07/sensitive-constellation.html
From Monday's Independent:
"[…] borrowing from the ECB's overnight lending facility jumped from €147m (£129m) on Tuesday night to €4.1bn overnight by Thursday. In money markets, the three-month Euribor:OIS spread, a measure of credit/liquidity risk in wholesale funding markets, has risen sharply to its highest level since April 2009."
Germany and "temporary" taxes? LOL
Kaiser William introduced the champagne tax to build his High Seas Fleet. Now, those Dreadnoughts have been scuttled in Scapa 90 years ago yet the Germans are still paying this very tax with each bottle of sparkling wine they purchase. 😉
The Telegraph is running live coverage of the debt crisis. One point: "the yields on 10-year US government bonds (Treasuries) fell below 2pc for the first time EVER this afternoon".
Such a tax could be used to create an insurance fund for banks to call on instead of the public purse. It could even be voluntary – on condition that those choosing to opt out would be ineligible for any future bail-outs.
The idea that such a tax would reduce efficiency and profits could be countered by the evidence that the accelerated speculation of recent years hasn't been a resounding success. It's time to save the market fundamentalists from themselves.