Financial services tax

Why Cameron Had to Say No

I am not a great fan of David Cameron. Just as Tony Blair modelled himself on Margaret Thatcher, Cameron seems to have modelled himself on Blair – glib, populist but not perhaps as egotistical as Blair.

Cameron has been vilified by the French press and much of the British press too for his refusal to sign up to the new pact which is intended to save the Euro, but he had little choice. If you are cynical, you could say that it would have been electoral suicide for him to have signed it (and I haven’t seen Sarkozy doing what he thought was right rather than what he thought would be popular). However, Cameron need not have worried about electoral suicide, as signing would probably have ensured that he would have been ousted by his backbenchers long before the next election. For all I know, hanging on to his job may have been a motivating factor for Cameron but it is unfair to assume that.

Ed Miliband (the Labour Party’s own Mr Bean) predictably attacked Cameron for his stance on this matter but if you read what he has said he doesn’t suggest that he would have signed up for this absurd pact. Of course he doesn’t, because Ed Miliband must know that it would be just as unpopular in the Labour Party as it is in the Conservative Party. He also knows that, however attractive the idea of taking some money away from those in financial services is, the proposed tax of financial transactions would be a financial catastrophe, not only for the UK but for the EU in general.

The EU’s own figures indicate that a financial transaction tax would cost the UK £25.5 billion and would have a detrimental impact on the EU’s GDP:

The model used to analyse the macroeconomic impacts suggests that at 0.1%, a transaction tax on securities could, without the application of mitigating effects, reduce future GDP growth in the long run by 1.76% of GDP and of 0.17% at a rate of 0.01%.

Now, these figures are little more than guess work, but they assume that between 70 and 90% of these transactions would move outside the EU. Since London is by far the most important financial centre in the EU, most of this loss of trade would be felt in the UK. And for what? To reduce the EU’s GDP.

Why would Merkozy propose such a suicidal tax? There are, I think, four possible explanations:

  1. Both France and Germany have long been jealous of Britain’s dominant position in the financial markets and they hope that by destroying the City of London they will benefit. It is hard to see how. Perhaps they would just leave the tax in place for long enough to destroy London’s dominance and then remove it.
  2. They are very, very stupid. Given their inability to sort out the problems of the Euro Zone this is a distinct possibility.
  3. It is a deliberate attempt to sideline Britain by proposing something which they knew could not be accepted by any British Prime Minister. This seems a distinct possibility. After all, the last thing that Merkel and Sarkozy need at the moment is anyone listening to British politicians, politicians who have dared to suggest that the Euro cannot survive. Although such a Machiavellian plot is not in any way uncharacteristic of the prevailing philosophy in Berlin and Paris, I can’t help wondering if the useless dimwits who have presided over the destruction of the Euro would be capable of anything so clever.
  4. A variation on 3 above. Merkozy think the Euro will fail and they want someone else to blame.
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