Last week an internal document was made public which revealed that the European Investment Bank (EIB) is seeking an exemption on the Financial Transaction Tax (FTT).
After speaking out against US legislation regulating over-the-counter financial derivatives trading last year, it is the second time the EIB advocates the need to be exempt from much-needed financial regulation. The incident tells us several things about the business model of the ‘EU house bank’ and raises many questions about its added value which should lie in boosting the real economy and satisfying long term finance needs in line with EU objectives.
Speculative financial flows - which outnumber investments in the productive economy by many times - have been at the core of the current financial crisis. By marginally taxing these speculative transactions the European Commission wants to disincentivise these capital flows which have the ability to destabilise our economy but don’t add anything substantially to it.
At the same time the taxes generated – which are as low as 0.1% on shares and bonds and 0.01% for derivatives – could create up to €60bn in revenues for cash-strapped governments which have taken up a lot of debt created by the financial sector e.g. by bailing out banks. This money can be invested again in the productive economy to cope with the current crisis.
The FTT proposed by the Commission has so far defied fierce lobbying from the financial sector and from countries with a big financial sector, such as the UK. Eleven EU member states (among which are France, Germany, Italy and Spain) have agreed to take the transaction tax forward. But with discussions within member states on how to implement the FTT exactly gathering more urgency, the financial sector has found a new ally in the EIB.
This is remarkable if you consider, that as a policy driven bank, the EIB’s objectives are similar to those promised by the FTT, namely boosting the productive economy and helping to satisfy the financing needs of cash-strapped governments.
Therefore an exemption on the initial issuing of financial products could be defensible as it would encourage investors to put their money in financing the EIB for the presumed good of long term counter-cyclical investment into EU economic recovery. But similar exemptions on trading public bonds on secondary markets are unacceptable as they boost speculation rather than anything else. Through the very act of seeking an exemption from the FTT, the EU Bank shows it is not merely driven by EU policies, as it usually claims, but has its own agenda to follow.
This agenda might be closely related to the €1.65bn in costs the EIB claims it would lose as a result of the transaction tax, a surprisingly high figure which suggests the EIB’s heavy involvement in financial trading.
Both the FTT and the EIB appeal to the financial markets to generate revenues but while the FTT is designed to limit speculative financial flows to a certain extent, the EIB actually expands them by getting involved in trading financial products on secondary markets. And yes, some short term trading might be justifiable to hedge the risks of long term investments. But if a transaction tax from 0.01% to 0.1% undermines the financial viability of the EIB’s investments and costs it up to €1.65bn, this goes much beyond healthy risk hedging. It is a strong indicator that the bank’s speculative activities have become predominant. The related risks could potentially undermine the EIB’s role as a long term investor for the public good.
More transparency required
To estimate the real risk to which the bank is exposed it is crucial to have an idea of the products it trades and how it hedges the risks related to its bonds and other investments. This requires more transparency from EIB management because it is putting at risk in the medium term the AAA rating of the EIB too and thus the taxpayers’ money of its shareholders, the EU member states. Detailed reporting to the Council and the European Parliament seems essential in this regard.
By deepening the financialisation of public finance, the EIB also has to abide by its logic. Following that logic, the obstacle of a marginal rise in transaction costs (which wouldn’t undermine its ability to lend below market rates as other banks face the same regulation) is deemed more important than the FTT’s underlying policy goal of boosting the economy and limiting speculative flows.
The more the EIB becomes dependent on financial markets, the more this logic will determine the banks investments and its agenda instead of public policies. The figure of €1.65bn is a good indicator of how deeply it has become involved - apparently much deeper than anybody imagined. Granting it an exemption on the FTT will only make this worse.
The writer works for Counter Balance, a European coalition of development and environmental non-governmental organisations, formed in 2007 to specifically challenge the European Investment Bank