Fiscal stimulus withdrawal and a Tobin tax

EU leaders had money on their minds at the summit.

Unsurprisingly, at the end of a year marked by profound financial and economic woes, EU leaders had money on their minds – and not just in relation to funding climate-change mitigation and adaptation.

They endorsed the common approach developed during the year to financial market supervision, both at the corporate and macroeconomic level, and they agreed on the need to co-ordinate the withdrawal, as of 2011, of  fiscal stimulus measures introduced in response to the financial crisis. 

‘Super-tax’

Specifically on the financial sector, the tone was set by UK and French announcements of a ‘super-tax’ on bonuses paid out by banks rescued from the brink of collapse by EU member states. The UK’s finance minister, Alistair Darling, revealed the day before the summit that a 50% tax would be imposed on end-of-year financial sector bonuses of over £25,000 (€27,600).

As the summit opened, French President Nicolas Sarkozy announced a similar measure, perhaps extending beyond the 2009 bonus season. German Chancellor Angela Merkel described the idea as “charming”, although impossible in her country “this year” because of “constitutional concerns”.

The Council more drily invited the financial sector to “implement sound compensation practices”. But the support in principle for the concept was also apparent in its emphasis on “renewing the economic and social contract between financial institutions and the society they serve”. Calling for the public to be “protected from risk”, it gave explicit encouragement to the consideration of insurance fees, resolution funds, contingent capital arrangements and even a global financial transaction levy.

Fact File

 

Merkel openly backed the idea of an EU version of a ‘Tobin tax’. “We also need a transaction tax”, she said. Meanwhile, the European Commission and Swedish presidency of the EU announced that the EU is to explore setting up a financial transaction tax not just to provide for any future bail-outs of the banking sector, but also to support developing countries in their efforts to limit and adapt to climate change.

José Manuel Barroso, the president of the Commission, said that the Commission will look at a levy on “cross-border financial transactions” in a pending report on ‘innovative’ financing methods to support developing countries. “If we want to help developing countries, we have to find additional sources of finance,” he said.