How the financial industry mobilised against the European Financial Transaction Tax

Despite broad post-crisis support in Europe for a financial transaction tax, the financial industry successfully lobbied to water down proposals and delay its implementation.

2017 should be the year when the much-delayed and watered down European Financial Transaction Tax (FTT) is finally implemented – but this is looking increasingly unlikely.

After the 2008 financial crisis a large public coalition of civil society organisations, trade unions and some EU member states’ governments was in favour of making the financial sector pay its fair share towards the economic recovery. In 2011 the EU Commission brought forward an ambitious and broad-based proposal for an FTT that would place a small levy on the transactions of financial institutions and thus raise tens of billions of euros each year.  But six years on, the tax that may finally be implemented resembles a narrow tax with considerable exemptions for various financial instruments.  How did this happen?

My research into the massive financial industry lobbying against the tax, exacerbating differences among EU member states, shows how the FTT was successfully watered down.

From a theoretical point of view, the lobbying success of the financial industry in the post-crisis era is somewhat surprising. Under conditions of ‘noisy’ politics when the public is paying attention, highly organized business groups often lose, whereas under conditions of ‘quiet’ politics, when ‘special interest group’ politics takes place behind closed doors, business groups prevail.  How, then, can we explain the lobbying success of financial industry groups on a highly salient and ‘noisy’ issue such as the FTT?

Highlighting undesirable societal costs

One effect of the increased public attention about financial sector reform post-2008 was that opponents of an FTT were reticent in making a public case outright opposing the tax in the early phases of the policy process when the memory of the crisis was still fresh. Yet despite chances of legislative success for an FTT being greatly improved after a second Commission proposal in February 2013, public interest slowly starting to fade and financial industry groups started to actively push back, launching a concerted attack against the FTT from March to June 2013. Industry representatives went public with warnings about the potentially harmful economic implications of the proposed reform and of societal costs. In early 2013, Goldman Sachs, Deutsche Bank, Citigroup, Morgan Stanley and their lobbying associations (the International Banking Federation and the European Fund and Asset Management Association) published a range of research reports presenting empirical evidence against an FTT.  In its research report ‘Financial Transaction Tax: how severe?’, published in May 2013, Goldman Sachs claimed that the proposed FTT would lead to a massive tax burden for the banking sector, amounting to €170 billion. The report further claimed that ‘the burden of the FTT would fall on retail investors’.

Financial industry groups were also careful to highlight the undesirable societal costs of the proposed tax reform. When arguing for exemptions from the scope of the tax, industry groups typically argued that the inclusion of certain financial instruments within the scope of the tax would lead to liquidity problems with detrimental consequences for the wider economy. In a research report from March 2013, Deutsche Bank stated its opposition to the proposed tax, presenting evidence that the FTT would raise the cost of capital ‘for households, firms and even states’ and therefore ‘hurt the real economy’. Several more studies, press releases and commentaries in major newspapers including the Financial Times and Bloomberg Business brought arguments and evidence forward against the FTT.

Building coalitions with corporate actors

With their expertise and credibility discredited by the crisis, industry groups had to choose their coalition partners wisely in order to be able to make convincing counter-arguments to the proposed policy reforms. As such, financial sector groups in the Eurozone deliberately chose not to organize joint campaigns with US and UK-based financial firms because there was a perception that arguments coming from the latter were rather counterproductive in efforts to convince EU policymakers to oppose an FTT. As one industry representative reported to me in an interview in London in June 2013: ‘There is a risk that lobbying […] is not very helpful because it is all a bit [of an] Anglo-Saxon conspiracy to preserve its financial markets […]. We share information but we are not involved in any joint initiatives’.  Although they refrained from joint campaigns with US and UK-based firms, financial groups took advantage of the counter-mobilization of non-financial groups within the business community.

Policymakers were not eager to publicly support the finance industry’s arguments opposing regulatory reform, but they equally shied away from publicly supporting regulatory reforms that could be seen to negatively affect corporate activity and economic growth. So, in an effort to leverage their political influence, financial industry groups also tried to tie their interests to those of other private sector groups indirectly affected by the introduction of an FTT.  These included a significant number of corporate actors who actively mobilized against the introduction of an FTT.  In May 2013, German multinational companies including Bayer and Siemens voiced their opposition to the proposed FTT, highlighting its damaging effects for companies and the export-oriented German economy. One financial industry representative explained the lobbying strategy as follows: ‘The better way for the financial sector to address this topic is to get other parties on board. When Deutsche Bank complains, people say it must be good but if Siemens says it is detrimental to clients, you make a strong argument’ (interview with financial industry lobbyist, May 2013).

Although non-financial business actors were not the actual target of the regulation, they feared that one of the downstream costs of the tax would be to raise the cost of corporate debt. Rather than stressing the potential effects of the tax on financial markets, business associations emphasized the damaging consequences for growth and corporate activity.  Accordingly, the American Chamber of Commerce argued in letters sent to participating EU member states that the tax ‘will have serious implications not just for the financial institutions but for the “real economy” – on businesses in every sector who legitimately use financial instruments in the normal course of their business’.  This argument was made in a non-public paper on the FTT from April 2013, provided by a London-based bank lobbyist. Citing these arguments financial sector groups actively lobbied against the FTT – a campaign that Der Spiegel, a German weekly news magazine described as a ‘revolt’ aimed at delaying its implementation.

After the sustained range of public and private reports and lobbying by the financial industry had shed considerable doubt on the desirability of the tax, political support faded. In May 2014, German finance minister Wolfgang Schäuble declared that the options, interests and situation of the various participants were so divergent that states should start by introducing a limited taxation of shares and some derivatives. The industry’s lobbying strategy using the high public concern about the FTT to their advantage had clearly paid off.

Latest reform proposals indicate that the FTT is likely to miss the mark of effectively raising revenue and tackling speculative trading. It now seems likely that the draft Directive will be significantly less ambitious than the original Commission proposal and will end up as a narrow-based FTT, similar to the 0.5 per cent UK Stamp Duty Reserve Tax on a limited number of transactions. Instead of the ‘all institutions, all markets, all instruments’ approach, the FTT has largely been emptied of its critical elements.  Even with significantly watered-down proposals, EU Council working group meetings throughout 2016 and 2017 have revealed significant differences among the ten remaining participants (with Estonia having dropped out in late 2015).  The implementation of an FTT any time soon remains highly questionable.

This blog first appeared here