François Hollande’s aim of supporting a climate deal at the COP21 in Paris this year is noble and right, but he has chosen the wrong tool to do it, writes Matti Leppälä.
Matti Leppälä is Secretary-General of PensionsEurope, which promotes a multi-pillar pension model at European level in order to allow each member state to position its pension system according to its political preferences.
Next Monday, officials from the eleven member states willing to participate in the Financial Transaction Tax will meet in Brussels to discuss a new draft proposal prepared by the Commission.
Negotiations have been launched. However, European leaders are still a long way from agreeing how a FTT would work and how much money it would raise, but that has not stopped them from using the tax to tackle a remarkable variety of challenges. Climate change, the damage done to our planet by industrialisation, financial instability and excessive high-frequency trading – each of these issues has been identified as a problem that could be addressed by a tax on financial transactions. It sometimes seems the FTT is the all-purpose political treasure chest de nos jours – ever-ready for turning our politicians’ latest dreams into reality.
President Hollande’s particular dream – the COP 21 – could come true in Paris in December this year. For non-climate change aficionados, the COP 21 is the latest attempt to find a global climate agreement. A successor to the Kyoto Protocol must be found after the diplomatic disaster of the Copenhagen conference and it would be an historic coup for France’s President if he could be the man to secure the next big deal.
One of the sticking points is that neither Europe nor the world is really united on questions of climate change protection. So Hollande’s team has had the idea of making the economic cost more palatable (at least in the short-run) by using FTT revenues to support climate change measures in the developing world and thus persuading those countries to sign his “Paris Protocol”. The world would get a new climate deal and Hollande would have a good story for the 2017 election campaign. It would be win-win all round.
But is the FTT it really such a good idea? The reality is that a financial transaction tax would be less of a win for the European economy and more of a loss for everybody. The scenario painted by the eleven participating governments is not matched by the numbers. Even five years ago the IMF – a reliable partner to the European institutions – calculated that the costs of a FTT would be passed all the way down the investment chain to individual consumers. Households and businesses would be hit hard just as economic recovery was beginning. And a large number of research institutes such as the CPB Netherlands Bureau for Economic Policy Analysis have warned of the negative spill-over effects outside the EU-11 and financial sector.
The current FTT proposal would apply to the transactions of all types of financial institutions, regardless of their role in the system and regardless of whether they contributed to the financial crisis. There would be no distinction between short-term speculators investors and long-term investors.
It seems particularly bizarre that pension funds, which play a role of paramount importance in an ever-ageing society with crumbling state pension systems – are not exempted at all. Pension funds are the long-term investors par excellence, investing in high-maturity assets in order to match their long-term liabilities. Pension funds did not and do not engage in the short term-speculative investments that were the root of the financial crisis. In fact, they contributed to the recovery by keeping their long-term liabilities in the financial markets.
The potential impact of an FTT on European pension funds and consequently on future pensioners is alarming to say the least, as it would trigger higher premiums or reduced benefits, thereby aggravating the challenges posed by the ageing of Europe’s population.
The FTT would prevent the EU from building a Capital Markets Union as its ‘cascade effect’, this is levying the tax multiple times on a single transaction by applying it to every step in the investment chain, would deter long term investors from investing in the real economy.
The kind of FTT currently proposed by France and Austria – a low rate applied to a broad range of financial instruments – would have severe and damaging consequences for Europe’s society and economy. The benefits would be massively outweighed by the harm the FTT would do – and not just for the pensions sector. The inclusion of derivatives is a mistake, as they are used by pension funds to rebalance their portfolios and defend their liabilities, thereby reducing risk in the financial system.
President Hollande’s aim of supporting a climate deal is noble and right, but he has chosen the wrong tool to do it. Making climate projects investable by creating the right regulatory framework – in Europe and also in emerging markets, would be a much better way of directing capital to this cause without harming society, the economy and future pensioners. The FTT is not the answer.