Wednesday, June 27, 2012

Germany: No to Eurobonds, Yes to Financial Transaction Tax

Angela Merkel has firmly rejected the use of eurobonds ahead of a crucial summit in Brussels this week, ruling out jointly guaranteed eurozone debt for "as long as I live".

Ms Merkel told the German Parliament on Wednesday ahead of a European Union summit there is no "magic formula" that will make the crisis immediately go away.
She insists that Europe must tackle its problems at the roots - which she says are a lack of competitiveness and high debts - in a step-by-step process. Ms Merkel says any other approach is condemned to failure. 12.45pm: Germany is going to ask the EU commission to introduce a financial transaction tax. The tax would be levied on all transactions on financial instruments between financial institutions when at least one party to the transaction is located in the EU. It would cover 85% of the transactions between financial institutions (banks, investment firms, insurance companies, pension funds, hedge funds and others), but not affect citizens and businesses. House mortgages, bank loans to small and medium enterprises, contributions to insurance contracts, as well as spot currency exchange transactions and the raising of capital by enterprises or public bodies through the issuance of bonds and shares on the primary market would not be taxed, with the exception of trading bonds on secondary markets.[10]
Following the "R plus I" (residence plus issuance) solution an institution would pay the tax rate appropriate to the country of its residence, regardless of the location of the actual trade.[11] In other words, the tax would cover all transactions that involve European firms, no matter whether these transactions take place within the EU or elsewhere in the world. If acting on behalf of a client, e.g., when acting as a broker, it would be able to pass on the tax to the client. Hence, it would be impossible for say French or German banks to avoid the tax by moving their transactions offshore.[12]