Tags: EU | EU | Financial | Crisis

EU Considers New Bank Levy to Shield Taxpayers

Tuesday, 07 Sep 2010 07:26 AM

 

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European Union countries will discuss a possible levy on banks and a tax on financial transactions to better control market forces and protect public finances from the costs of bailouts, as they gather Tuesday in an atmosphere more benign than when they last met in July.

Worries about the European economy and its ability to deal with large amounts of government debt have been eased by a run of better than expected data, progress by Greece in strengthening its bailed-out finances and the results of stress tests on 91 of the EU's banks.

The most apocalyptic scenarios openly discussed a few months ago, such as the collapse of the euro currency, have been put on the back burner.

But policymakers remain wary that the government debt crisis could flare up again, particularly as the 16 governments that use the euro are set to issue more debt this month than they did in August. Eurozone governments have bond repayments of 80 billion euros ($103 billion) in September, with around 30 billion euros due from Italy alone — the results of the debt sales will reveal what bond investors think of government finances.

Olli Rehn, European Commissioner for Economic and Monetary Affairs, said the EU has to continue to show strong solidarity if the recent economic stabilization is to continue.

"We are certainly not out of the woods yet," he said ahead of Tuesday's meeting.

A report in the Wall Street Journal claims the stress tests in July understated some lenders' holdings of potentially risky debt, reigniting fears about the banking system. Meanwhile, the Financial Times says Germany's top ten banks will have to raise as much as 105 billion euros to meet new capital requirements.

Given that backdrop, the EU's finance ministers will be loathe to show any signs of disunity or discord at Tuesday's meeting. A renewed market sell-off could drive borrowing costs higher again, exacerbating governments' financial troubles.

Top of the agenda will be the first discussions among finance ministers from all 27 EU member countries on the possible introduction of a bank levy and a separate tax on financial transactions, as governments try to find a way to protect against another banking crisis. The euro group ministers convene afterwards.

EU Commission President Jose Manuel Barroso said he would propose taxes on financial activities in the next month or two and field new proposals to tackle market speculation, which many have blamed for making the financial crisis worse, by the end of the month.

The leaders of the EU agreed at their June summit that bank levies should be introduced but technical issues, such as how the tax will be imposed and what the proceeds will be used for, need to be ironed out.

The leaders did not issue any guidelines on the transactions tax, which is often called the Tobin tax after the Nobel Prize laureate James Tobin who first made the proposal in the 1970s.

Proponents of the measures argue that they will curb excessive risk-taking and place the financial burden of any rescue package on financial institutions themselves instead of the taxpayer. During the financial crisis, governments across the EU provided financial institutions public support worth an astonishing 16.5 percent of the union's total worth.

The ministers are also set to approve a financial oversight structure that should anticipate financial crises and contain the excessive risks that have been blamed for the global financial crisis of the past two years.

The EU member nations and the European parliament have already agreed to the outlines of such a system but it needs the formal backing of the member states on Tuesday before it goes to the European legislature for further approval.

The finance ministers are also slated to approve a second installment of emergency loans — worth 9 billion euros — for Greece after the European Commission and the International Monetary Fund praised the country for the efforts it has made since the massive 110 billion euros bailout plan was agreed in May.

Germany, the eurozone's economic powerhouse, is expected to be at the forefront of calls to enforce stricter sanctions on profligate members of the single currency zone to make sure that another Greek-style debt crisis doesn't explode in the future.

Though suggestions to curb voting rights and access to EU funds are unlikely to get approval anytime soon, Germany's finance minister Wolfgang Schaeuble said Monday he will continue bringing the issue up with his peers. The current regime, which is supposed to limit a country's budget deficit to 3 percent of GDP and overall debt to 60 percent, has failed.

"For way too long we hid behind platitudes," said Jean-Claude Juncker, head of the eurozone finance ministers' group, which meets Tuesday afternoon after the Ecofin meeting. "If we do not agree on sharper measures we will add pressure in the eurogroup."

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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