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FTT could hit new member states harder

Wednesday 18 January 2012 - by Jiri Krol

A financial transaction tax will have a different impact on individual member states and may hit newer union members especially hard, says Jiri Krol, director of government and regulatory affairs at the Alternative Investment Management Association.

In assessing the impact of its proposed financial transaction tax, the European Commission has looked at the EU financial market as a whole, as if it were one single market like that of the United States, for example.

Now, we know that the creation of a true EU internal market in financial services is far from finished and that, despite a recent wave of exchange mergers and the proliferation of pan-EU trading platforms, the reality is often that of a patchwork of individual national markets.

It is therefore important to examine the effect a tax would have on the different member states and see whether that effect would be evenly distributed.

So let's have a quick look at the trading landscape in the EU. On the one hand, we have a small cluster of member states with sophisticated, deep and liquid markets in nearly all types of financial instruments which have developed for decades if not centuries.

At the other end of the spectrum, we have nascent markets such as many of those in Central and Eastern Europe.

The latter countries' capital markets are characterised by a relatively small number of shares admitted to trading on local exchanges, an underdeveloped derivatives market and a comparatively undersized domestic bond market, often dominated by government issuance denominated in a local currency.

What is more, those member states' economies often rely heavily on bank financing which flows to domestic banking subsidiaries and the economy via parent companies established in Western Europe.

Liquidity is heavily concentrated in the member states of the first group.

Looking at share trading, more than three quarters of liquid shares as defined by the EU Mifid directive are concentrated on exchanges of only six member states (UK, France, Germany, Netherlands, Italy, Sweden).

These very same top member states also concentrate similar if not larger size and liquidity in bond and derivatives markets. The bulk of any financial transaction tax intake would therefore come from these markets.

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