Earlier this month, the British government denounced the EU’s proposed financial transactions tax. In his speech to fellow EU finance ministers, Chancellor George Osborne said the UK couldn’t support a tax that would harm its standing as a global financial center (around 80% of European financial activity is based in the City of London ). Quite right, too—generally, increasing taxes on any good or service decreases the amount sold, so levying a surtax on financial transactions in Britain would likely cause some capital markets activity to shift from the Square Mile to a country with no such tax. Financial services comprise a large share of Britain ’s economy, so the tax would likely have negative economic consequences.
After the Chancellor’s speech, German and French officials—staunchly pro-tax—expressed disappointment in the UK’s stance, which effectively prevents the tax from taking effect on an EU-wide basis (all 27 nations must approve it). The rhetoric subsequently heated up, however, with these words from one member of German Chancellor Angela Merkel’s government:
“I can understand that the British don’t want [the transactions tax] when they generate almost 30% of their gross domestic product from financial-market business in the City of London. Only going after their own benefit and refusing to contribute is not the message we’re letting the British get away with.”
Tough words from one Volker Kauder! However, it’s not Germany’s, France’s or any other country’s place to determine British tax policy. The UK has every right to set policies it believes are in its best interest—other nations can complain, but they can’t force changes. For instance, earlier this year, some European nations urged business-friendly Ireland to raise its corporate tax rate, saying Ireland’s 12.5% rate gave it unfair advantages over the rest of the union. Ireland demurred, which is perhaps not surprising considering the country is ranked the world’s 10th best nation for ease of doing business, according to the World Bank. Germany is 19th. France is 29th.
Which raises the question: Why do some European nations insist on their neighbors playing down to their level? Think of football. Manchester City sits atop the Premier League and also won last season’s title. Three years ago, however, the club couldn’t compete with stalwarts Chelsea, Liverpool, Arsenal and Manchester United. Instead of complaining about unfairness or demanding concessions from other clubs, the owners chose to improve their own competitiveness, signing several high-profile players in 2009 and 2010.
Just as Man City harmonized its talent with the other top clubs, Germany and France may consider harmonizing their own policies with Ireland’s, Britain’s or whomever’s. After all, the UK can “get away with” its current tax policies no matter how much other nations grumble. Instead of arguing the UK should handicap itself, perhaps Germany and France would do better to find means of increasing their own economic competitiveness.