Franco-German plan to tax market sparks share slump
Published 17/08/2011 | 05:00
Markets immediately fell last night after hearing about proposals for a transaction tax being promoted by French President Nicolas Sarkozy and German Chancellor Angela Merkel.
While on the margins on EU debates for over a year now, markets were caught by surprise when the leaders said they would be proposing such an idea. Few details on how it would work were released.
Mr Sarkozy has been a supporter of the idea of a financial transaction tax (known as a Tobin tax) for several years, but the German government has been lukewarm. The tax usually operates by letting governments place a small levy on the millions of transactions that go through the financial system every day. Many of these transactions would be currency exchanges, but the tax could be levied on wider share transactions. Whatever its form, the markets reacted negatively last night with both US markets falling more than 1.5pc in midday trading in the US.
US stocks fell for the first time in four days and the euro slid from a three-week high against the dollar after the transaction announcement.
Stock exchange groups NYSE Euronext and Nasdaq OMX Group, two of the biggest operators in Europe, dropped at least 5.8pc. The tax was described last night by economists as placing an extra burden on business and financial trade. Many of them said it would change little on Europe's debt problem. The exact use of the proceeds was not outlined although it would be collected by national governments, most sources speculated last night. Unless the UK signs up for such a proposal, it would be hard to see it getting ratified in a European context.
Finance Minister Michael Noonan said: "While I note that the French and German finance ministers will table a joint proposal at the EU level next September for a tax on financial transactions, this issue was considered at last European council meeting and it was not included in the final agreement."
"Europe will continue to be an overhang until they come up with realistic policies," Peter Jankovskis, who helps manage around $2.6bn (€1.8bn) at Oakbrook Investments in Lisle, Illinois, said. "We've already got disappointing economic numbers out of Europe earlier today.
"Then, you have a programme which is not really doing anything to address that."
Germany and France are working on "ambitious" joint proposals to defend the euro, Mr Sarkozy said. The two countries share an "absolute determination" to defend the euro, He said the two countries would propose a financial transaction tax in September.
The meeting comes after debt concerns rattled France, the second-largest euro economy after Germany, last week; while calls are growing for the leaders to discuss joint borrowing or a mutual guarantee among the 17 euro states, policies that Germany and France have previously rejected.
Mr Sarkozy said that euro bonds may be "imaginable one day", but there's not enough integration to justify their introduction now. Global stocks slumped as a report showed European economic growth slowed more than forecast in the second quarter as Germany's recovery almost ground to a halt amid the worsening sovereign-debt crisis.
Gross domestic product in the 17-nation euro area rose 0.2pc from the first quarter, the worst performance since the euro region emerged from a recession in late 2009. Economists had forecast growth of 0.3pc, according to the median of estimates in a Bloomberg News survey.
"People are desperate for stability in unpredictable times," Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc, which oversees $4bn, said. "The economy and consumers are not as strong as people thought regardless of how bad they wanted the market to go up. Europe is a mess." (Additional reporting by Bloomberg)