European Commission José Manuel Barroso yesterday (28 September) called for a financial transaction tax as a way of rebuilding public finances in the European Union. 

The EU-wide financial transaction tax was at the centre of plans for deeper economic integration that Barroso presented to the European Parliament in Strasbourg in his second annual state of the union speech.

Barroso said that this initiative could raise €57 billion a year – and that the EU’s financial-services sector had to pay its “fair share” to help the EU out, after it had received €4.6 trillion in aid and guarantees from member states during the financial crisis. “It is time for the financial sector to make a contribution back to society,” said Barroso.

Tax on trading

Commission officials envisage the tax being levied on some 85% of all financial transactions in which at least one party to the transaction is located in the EU. The proposal is for a tax of 0.1% on the trading of stocks and bonds, and of 0.01% on derivatives contracts.

Ten member states already have some form of transaction levy in force, and these would be harmonised by the Commission proposal, creating a minimum EU tax rate to limit competitive distortions and prevent risky trading activities. The tax would come into force from 1 January 2014 and the revenues would be shared between member states and the EU – which would use contributions as a revenue source for the EU budget.

UK opposition

The plan is contentious. France and Germany support it in principle, but the UK has denounced any such EU tax for fear of seeing its financial-services sector weakened and banks moving out of London to tax-friendlier countries. The UK Treasury said that it would accept such a tax only if non-EU countries adopted it as well.

“All a European financial transaction tax will do is hand a huge advantage to our overseas competitors,” said Kay Swinburne, a UK Conservative MEP.

Neil Bentley, the deputy director-general of the Confederation of British Industry, said that the Commission’s decision to press ahead with a financial transaction tax was “completely misguided at a time when it’s clear that Europe needs a relentless focus on growth”.

Guido Ravoet, the chief executive of the European Banking Federation, also warned of negative effects of the tax. “No taxation measure should be detrimental to growth, impede European competition and end up driving business out of Europe,” he said.

‘Greatest-ever challenges’

Barroso revealed his plans in the course of a blunt ‘state of the union’ speech to the Parliament, in which he warned that the economic and financial problems facing the EU needed much closer economic and political co-ordination and stronger leadership. “Today, we are facing the biggest challenges this union has ever had to face throughout its history,” Barroso said. “If we do not move forward with more unification, we will suffer fragmentation.”

The Commission president, who has come under increased fire from MEPs and others for failing to take initiatives, laid out his agenda and a working plan on how the Commission aims to solve the eurozone’s debt crisis and economic malaise in the coming months.

Barroso also called for much deeper economic integration as a response to the eurozone crisis, including creating common bonds for the eurozone. The EU’s decision-making processes needed to change to prevent one member state from holding up others on such issues as expanding the role of the European Financial Stability Facility (EFSF). “A member state has the right not to move. But not the right to block the moves of others,” he said. He promised to present further plans on closer economic integration ahead of the European Council on 17-18 October.

Guy Verhofstadt, the leader of the liberal ALDE group in the Parliament, welcomed Barroso’s speech, but said he “had to go further” in pushing for more integration. “The only way out of this crisis is a new transfer of powers to the European Union,” he said. Martin Schulz, leader of the Socialists and Democrats (S&D) group called on Barroso to solve the EU’s “crisis of leadership”.