Call it whatever you like, but a financial transaction tax is bad news

You really would have thought that Europe’s finance ministers had better things to talk about. But, no, when they gather in Italy at the end of next week, a good portion of the agenda will be taken up with discussions about introducing a financial transaction tax in the European Union.

Yep, that hoary old chestnut. FTT, Tobin tax, Robin Hood tax – call it what you will. It’s the idea Bill Nighy – that nice actor in Love Actually – got so excited about at the G20 summit in Cannes just three short years ago. What? You’d forgotten all about that?

Maybe you thought that common sense had prevailed. Maybe you thought that this particular hare-brained idea had died a quiet but much-deserved death. Maybe you thought that, rather than introducing new taxes that will likely make it harder for companies to raise money or hedge their exposure to certain risk, politicians might be focusing on making the structural reforms necessary to fix their battered economies.

No, I’m afraid not. The celebrity endorsement may have quietened down but the idea of adding a levy on trades made between financial institutions is still very much on the cards.

Those European finance ministers will certainly have much to discuss. While they’re all broadly in favour of the tax – in public at least – they are somewhat divided about the details. First up, they haven’t decided on when they’ll introduce it, although there have been some vague commitments to set something up by the beginning of next year. Given the extent of the disagreement in other areas, that looks optimistic.

They also haven’t decided what will be covered by the tax. Equity trading will almost certainly be included but potentially not the shares of smaller companies; derivatives probably will be and bonds might be.

They also don’t know who exactly will pay the tax, who will collect the tax, what impact the tax will have on economies or how countries not implementing the tax will be compensated for enforcing it in their jurisdictions. You see, although the levy will apply to eurozone securities it will do so wherever in the world they might be traded (otherwise there’s a risk that the market for, say, Italian equities would just shift to, say, London). But that also means that a US hedge fund trading a European equity-linked derivative in Hong Kong would be liable. And that might be quite tricky to police.

What’s wrong with the financial transaction tax? How long have you got? It will almost certainly lead to a slump in trading volumes. That’s what happened when Italy introduced its own version in March 2013, meaning that estimates about the amount of revenue the tax would raise proved to be hopelessly over-optimistic. And less trading generally equals more expensive trading.

But that’s fine because the tax will only hit those nasty old banks, right? Hardly. Banks are agents. For the most part they are trading on behalf of their clients. And their clients are companies and investors. And those investors are pension schemes, which means, of course, that they are you and me.

Many in the City seem to assume that the financial transaction tax is so patently wrong-headed and the difficulties in implementing it are so vast, that the proposal will quietly be watered down. And, certainly something like that happened in France.

François Hollande was elected on the back of a number of populist policies that included the introduction of a financial transaction tax. But once in the Élysée Palace he started to see things a little differently.

The French, you see, are very good at maths. They have won more Fields Medals, which is like the Nobel prize for maths, than any other country apart from the US. Why is this relevant? Well, it means that French banks are very, very good at derivatives trading. It’s close to being one of the country’s last national industries.

Once this was pointed out to the new president, pragmatism body-slammed ideology and Mr Hollande’s much-trumpeted financial transaction tax ended up being even more limited in scope than the UK’s stamp duty on shares.

Nevertheless, France is still pushing for a eurozone-wide version. And so, in particular, is Italy, which currently holds the rotating presidency of the Council of the European Union. Perhaps, having already introduced their own levies, France and Italy are determined that all of their neighbours are similarly handicapped. Germany is, as you might expect, a bit more lukewarm about the whole thing.

Those who bet that the financial transaction tax would quietly be brushed under the carpet have so far been frustrated. It’s unlikely that anything concrete will emerge from next week’s meeting. But it’s worth remembering that many in the financial industry also thought that short-selling rules and the bonus cap were too far-fetched and self-defeating to ever be implemented. Right up until the point when they were.

Sterling’s Scottish jitters

It looks like the markets are finally waking up to the dangers of Scottish independence. Certain corners of the financial industry have for some time been warning about the inherent risks of a Yes vote in the referendum.

But, up until now, the markets have broadly taken this in their stride with most investors figuring that the vote was too far off, and the chances of independence too remote, to get worried about.

That all changed on Tuesday. Sterling took a sharp dive against the dollar as a YouGov poll showed support for independence had increased by eight points in the past month with 47pc in the Yes camp compared with 53pc who plan to vote No. Implied one-month volatility in sterling – which basically measures how jittery investors are – spiked. BlackRock, the world’s biggest fund manager, recently revealed that it has started betting against the pound ahead of the vote. The share price of UK banks also took a tumble.

And that was all before Danny Alexander, the Liberal Democrat Chief Secretary to the Treasury, revealed that Brussels believes “sterlingisation” – use of the pound without full currency union – was incompatible with Scottish membership of the European Union. It remains to be seen how the markets take this news.

All of which goes to show that geopolitical risk is no longer something that just happens in other countries.