arch/ive/ief (2000 - 2005)

ATTAC on EU-Report on Globalisation:

- No convincing arguments against a Currency Transaction Tax
- Success of the international movement against corporate
driven globalization

Brussels, February 18th, 2002

The European affiliates of the international ATTAC mouvement make the following statement on the Report of the European Commission "Responses to the Challenges of Globalisation":

The report is in many parts an interesting document and can serve as a basis for serious discussion. With regard to the International and Monetary and Financial System the Commission recognises for the first time the existence of "systemic issues" which have led to "increased frequency and intensity of financial crises" with an "increased risk of crises becoming contagious and self-fulfilling". It also recognises that the fact that during the last decade mostly developing countries have been severely affected by such crises is not in the first place the result of bad policies in these countries but of the inherent weaknesses of the international financial system. The report gives also a rather comprehensive account of the ongoing discussion on the reform of the international financial system, without flatly dismissing every proposal which has been brought forward by the critics of the neo-liberal globalisation.

ATTAC considers this as a success of the movement and an encouragement to continue with even more energy its campaign for the regulation of finance markets.

But there are also many weaknesses, omissions and wrong arguments in the report, too.

Outstanding amongst these are the few pages spent on the question of a Currency Transaction Tax.(CTT) The Commission raises five arguments against the CTT:

First, it would reduce the volume of currency transactions and therefore the liquidity of the markets, and this would lead to higher instead of lower volatility of exchange rates.

Second, the CTT will maintain higher bid-ask spreads, which would reduce the volume of arbitrage operations and thus prevent the formation of uniform exchange rates for every currency pair all over the world.

Third, the CTT would lead to a higher degree of use of electronic currency trade and to higher concentration amongst the participating banks.

Fourth, the CTT would be borne by all economic agents including exporters and importers, and its harmful effects to the latter would offset the benefits of lower exchange rate risks.

Fifth, the CTT would not be efficient against speculative attacks betting on high exchange rate risks and speculative profits within a very short period of time.

All these arguments have been dealt with extensively in the discussion during the last few years, and all have been refuted. Briefly, the counterarguments against the five points are the following:

1.Yes, the CTT will reduce the volume of currency trade. This is the explicit purpose of the tax. It is an instrument to reduce the excessive liquidity of the markets which amount to a volume about 50 times higher than world trade and international investment flows. This excessive liquidity is a source of instability, because since it is not necessary for trade and investment it tries to make profits in betting on changes in exchange rates, thereby causing such changes to occur without any fundamental justification. The stability of the international monetary system will benefit, if the volume of such betting is reduced.

On the other hand, it is not to be feared, that the reduction will be so large to endanger the liquidity necessary to maintain the smooth functioning of the international payment system for international trade and investment, which of course must be much higher than their sheer volume. The danger that a small tax of 0,1% would reduce the total amount of currency trade by 83% is highly exaggerated, and the French Ministry of Finance, which has launched this figure, has never revealed the empirical basis underlying this figure.

But even with a strong reduction of trade there is no reason to assume that this would result in higher volatility, because volatility is – as far as it is known – mainly used by insecurity of expectations and/or scarcity of liquidity. As a CTT will stabilise expectations and in spite of the reduction in trade not lead to scarcity of money, there is no reason to expect higher volatility as a result of the CTT.

2. Yes, the CTT will reduce the volume of arbitrage operations. Arbitrage is often regarded as a very useful operation, because it leads to a uniform exchange rate between two currencies independently from the geographical location of the markets. In reality, however, it is very difficult to differentiate between arbitrage and speculation. Contrary to the allegation of the Commission arbitrage will not be suppressed. It will only maintain higher margins between buyers' and sellers' exchange rate. This is the situation which prevailed in the 1960s and 1970s without doing any harm to the productive economy, quite the opposite. On the other hand, banks will make less profit, and this is what really upsets them.

3. With regard to the foreign exchange market the report is behind the real development. By now – without a CTT - already more than 90% of the currency trade on the forex market is effectuated by electronic trading, and the number of participating banks is steadily diminishing. This same process is affecting the relationship between banks and their customers. If the Commission thinks that this increasing concentration is harmful, why does it not take measures against it. This would be a rare occasion that the European Commission would be opposed to the markets. In any case there is no reason whatsoever to assume that the introduction of a CTT would accelerate the process of concentration and "electronisation" of trade. On the other hand, the more concentrated the foreign exchange market is and the more it is organised on an electronic basis, the easier will it be to implement a CTT.

4. The tax would in the first place be paid by the banks as being the only legal participants on the wholesale foreign exchange market. But it would also partly be borne by the banks' customers, i.e. corporations, insurance companies, and various investment funds, amongst them hedge funds, but not by individuals who are exempted. Since these customers are speculating like the banks do it is only fair if they pay the tax. Without such speculation on the side of bank customers and restriction of changing money to trade and investment purposes the cost of the tax would be minimal and not affect productive operations. One must also take into account that stabilisation of exchange rates as a result of a CTT would mean lower costs for hedging against (lower) currency risks than before and this cost reduction may well be more important than the minimal cost increase caused by the tax. Lower hedging costs are particularly important for developing countries (who would also be the man recipients of the tax revenue).

5. The arguments against the efficiency of a CTT in times of turbulence are also not convincing and show that the Commission has not really followed the discussion. The proponents of the CTT are since long time proposing a tax on two levels (or a tax with variable tax rate) It would work as follows: In quiet times with weak exchange rate fluctuations the tax rate would be very low, say 0,1% or even lower. When fluctuations in the course of a speculative wave pass a predetermined threshold a higher tax rate would be applied which in the last instance could reach prohibitively high levels und thus serve as circuit breaker. This design of the CTT, which reaches far beyond the original idea of James Tobin, will make it possible to fight efficiently against strong speculative attacks. It is particularly deplorable that the Commission mentions the idea of a two level tax, obviously without recognising its innovative character. It raises an objection, to which exactly the idea of a two level or variable tax is a convincing response.

In summarising it must be stated that the Commission does not present a single new argument and particularly not a single serious argument against the feasibility, the usefulness and therefore the desirability of the CTT. This reinforces our conviction that the EU could take the initiative in creating a CTT in Europe. This is no technical question but a question of political determination.