Nol Amenc, director of the EDHEC-Risk Institute and professor of Finance at the EDHEC Business School, has written an open letter to European Commission President Jos Manuel Barroso opposing the so-called Tobin tax that may be implemented on financial transactions across the eurozone.
Last month, finance ministers from 11 eurozone countries gave the green light to proceed with a financial transaction tax (FTT). Details of the tax remain in the proposal stage. France implemented its own FTT last August, applying to investors purchases of French equities and naked sovereign credit default swaps.
Amenc in his note pointed to studies showing that the arguments in support of the FTT as a measure to reduce volatility are mixed, with empirical evidence indicating that an FTT has either no effect on volatility or may actually increase volatility. He also pointed out the challenges of implementing an FTT.
The professor says the burden of the tax on financial transactions would make the management of long-term investments more costly; increase liquidity premiums on stocks; make markets less efficient and restrict price discovery; and lead to an increase in risk premium by investors and a rise in the cost of capital. Amenc says this would have a negative impact on economic growth in Europe.
Amenc called the introduction of the FTT in France failed, noting an average fall of 15% in the volume of stocks that are taxed versus those that are not. Investors are replacing French stocks in their equity portfolios with non-taxed European alternatives, Amenc says.
The European Commission has said such a substitution effect would not occur if the transaction tax were expanded to a broader geography, but Amenc counters that European stocks as a whole would be at a disadvantage.
Amencs open letter to Barroso may be viewed here.
(CG)