Bundesbank President Urges Caution On EU FTT
29 April 2013
Posted by: Author: Ulrika Lomas
Source: Ulrika Lomas
President of the German Bundesbank Jens Weidmann has warned of the negative implications of the planned European financial transactions tax (FTT) on monetary policy, stating that the short-term refinancing operations of banks will be affected.
During a recent banking conference in Dresden, Weidmann stressed that although the introduction of the levy has been fundamentally agreed, the unintentional side effects of the tax might be considerable.
Weidmann explained that in its current form, the tax would include money market or so-called "repo" transactions. This will significantly impact upon the repo market, which plays a central role in liquidity balance between commercial banks, Weidmann pointed out. The consequences of this market not functioning properly will be that the transactions are then deflected into the European system of central banks or Eurosystem, meaning that central banks will be heavily involved in liquidity balance between banks for a long time after the crisis.
The Bundesbank president emphasized that from a monetary point of view, the FTT in its current form is to therefore be viewed "very critically," demonstrating how important it is to carefully examine a regulatory measure ahead of its introduction. This takes time, however, Weidmann made clear.
The European Commission unveiled its plans for a European FTT back in February. Due to be adopted by 11 European Union (EU) member states within the framework of enhanced cooperation, the Commission's proposal provides for a 0.1% tax to be imposed on share and bond transactions and for a 0.01% tax to be levied on derivative transactions. The tax is expected to generate annual revenues of between EUR30bn (USD39bn) and EUR35bn. However, there is currently a lack of consensus among the 11 participating member states as to how the proceeds of the levy should be used.
Former president of the European Central Bank Jean-Claude Trichet also criticized plans for the tax while in office. Trichet argued that an EU FTT would merely serve to penalize the European Union, if limited to Europe.