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This isn’t just any solution; this is an M&S solution

17 August 2011

6:03 PM

17 August 2011

6:03 PM

Banks and financial institutions endured a painful day’s trading, following Angela Merkel and Nicolas Sarkozy’s announcement yesterday that the Eurozone should adopt
a ‘Tobin tax’, a charge on financial transactions.

Once again, M&S chose piecemeal changes over the grand structural scheme desired by markets. The Tobin tax was just one proposal of three. The other two were: to create “genuine economic
governance of the Eurozone” under, for the moment, EU President Herbert van Rompuy. The second: to impose a ‘Golden Rule’ on the budgets of Eurozone members. The
‘Golden Rule’ will bind national parliaments to agree to limits on national debt levels and impose statutory requirements on mastering budget deficits. The two nations also pledged to
harmonise corporation tax in their jurisdictions.

Most of these proposals, which unquestionably set the region on the path to integration in the future, were contained in March’s ‘Pact for the Euro’, another Franco-German affair.
But the revival of the Tobin tax has caught both the attention and anger of observers in Europe. The policy originated in the European Commission at the outset of the recession, was rejected and
then subsisted in the nether regions of European Parliament. The European Central Bank is openly
hostile to the tax
and Ireland has voiced the concerns of traders in the Eurozone who insist that Tobin cannot be
applied to the Eurozone alone. Sources in Whitehall tell me that attempts to impose the charge on the European Union as a whole will be met with blunt resistance from Britain and, among others,

France and Germany’s support for the tax reveals a shift in their collective mood, and strategy. It seems there is to be no more money, only austerity. The proposed expansion of the EFSF and
the invention of Eurobonds have both been shelved. Sarkozy said:

“If we tripled the fund (EFSF), then at the next press conference you would ask us ‘why didn’t you multiply it by four’. We’re trying to manage it seriously and
reasonably. We believe the fund is sufficient.”

The expansion of the EFSF was a key French policy just two days ago, as was the
creation of Eurobonds. Sarkozy’s change of heart reveals the extent of Merkel’s influence and her determination to manage the situation without rushing into a political union under
which Germans subsidise for the fecklessness of others. As Simon Heffer has argued, Merkel plans that Germany will have total discretion over the
stringent controls proposed yesterday, assuming they are introduced.

The Golden Rule will face a tricky passage through the French legislative houses, says an article in this morning’s Le Figaro. Changes to the
constitution require the approval of three fifths of the votes cast. Sarkozy accepts the difficulty. He told reporters yesterday that Prime Minister Fillon will “take the necessary steps with
all political forces” to obtain a majority. Other countries are likely to encounter similar difficulties and further EU-wide treaties will be required, which present their own problems.
Perhaps this is what Gordon Brown meant by the deleterious
effects of “the exigencies of domestic politics” in Europe.  

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