This summer, France went ahead and unilaterally launched a financial transaction tax. Sarkozy started it, with plans for a 0.1% levy on the country’s biggest stocks. Hollande doubled it to 0.2%. The reaction from business was predictable.
‘Bets grow on impending French stock market slide’ said one headline. The Spectator explained how “global investors will just skedaddle to other markets where the fiscal regime is less onerous”. London mayor Boris Johnson personally invited French bankers to switch to London: “if your own president does not want the jobs, the opportunities and the economic growth that you generate, we do.” Some went so far as to predict the total collapse of the French finance industry: ‘Au revoir CAC 40′ said one blogger, advising readers to “liquidate your positions while you still can.”
This was always going to be rather overblown, considering that even after the taxes, France is still a cheaper place to trade than London – a levy of 0.2% against London’s stamp duty of 0.5%. There was never going to be an exodus out of the French markets.
This month the government starts collecting the tax, so let’s take a look. Has there been any impact on trading in France? Here’s how the French CAC 40 has performed over the past three months, compared to London’s FTSE in yellow and Germany’s DAX in grey.
The FTT came into force on August 1st, and there clearly hasn’t been a collapse, or a slide, or a mass exodus of traders. It looks pretty steady to me. The CAC 40 above is only the biggest French companies, out of 109 affected in total, so let’s look a little further.
If the French markets have been devastated as some were predicting, you’d think it would be easier to find out about it. But there’s little to find. An internet search on the French financial tax brings up very little, even if you search in French. Clearly the financial apocalypse failed to materialise.
That doesn’t mean there haven’t been any effects, only that nothing dramatic happened. I can only find two articles examining the effects of the tax. The first suggests that there was a minor slump, and then a full recovery. It also suggests that not all companies have been affected equally – smaller companies have experienced a bigger decline in trades, down around 26% for some. That’s a decline in the number of trades, not the value, and you’d expect to see fewer trades with a transaction tax in place. That article is behind a paywall, and it refers to a Credit Suisse report that I haven’t been able to find online. (If anyone has a link, let me know)
The second article is more concerning. It suggests that the reason why there’s been little news about the tax is that it is being circumvented by the people it was supposed to be targeting. Rather than buying and selling the shares themselves, speculators are using derivatives that allow them to bet on whether share prices will rise or fall without owning them. It’s almost impossible to tax these complex financial instruments, and the companies that create them pay more than the regulators do. They have all the smartest people, and it’s their job to find loopholes.
This was expected too. New rules create new incentives to ‘innovate’, and the details of the tax have been kept open so that it can be reviewed. There are new measures expected in January, and a banking bill in December could make additional tweaks.
It’s too early to tell whether the financial transaction tax is working or not. Three months isn’t long enough, and we need to wait and see what the tax take is at the end of the year before we know how effective it is. Revenue could come in below expectations, showing the tax is too light. Or smaller traders could be bundled out of the market, showing the tax has hit the wrong people. Events in the Eurozone could overtake the markets or there could be another banking crisis, and that would muddy the waters and make it impossible to tell the FTT’s effect from everything else. We shall see.
One thing we do know: France is still here, and so is its financial sector. Those 11 countries discussing a Europe-wide financial transaction tax should proceed with the planning, and continue to watch this space.