On April 29th the European Court of Justice, EU’s highest judiciary has rejected the UK’s bid against what could eventually become an EU-wide tax Financial Transactions Tax (FTT). While we are highly unlikely to see such tax being raised particularly soon, one definitely can’t afford the complacency of not treating it as a genuine possibility of even underestimating the importance of such possibility. As it stands, the case of the European FTT has three dimensions: political, legal and economic, all three of which render the FTT one of the most difficult problems ever tackled by the European Community to date. Let us start with a dash of history – in truth, not very ancient. The intellectual root for the European FTT stretches all the way back to 1972, when James Tobin, a Nobel Laureate economist proposed a special tax on the currency transactions (CTT) following the dismantlement of the Bretton Woods system. The reasoning was rather simple: if every currency transaction was to be taxed, fewer transactions would occur – and the transactions that would most likely not occur were presumed to be such of speculative nature, believed to lead to dangerous market volatility. The tax would then serve as a bulwark against the flows of the speculative ‘hot money’, as well as give the lawmakers a new tool for raising revenue. CTT and its more radical form – FTT – have seen little application since then, though Sweden went through an FTT phase in 1980’s, and some countries – Poland amongst them – use some limited form of either CTT or an FTT. On EU level, the formal proposal can be traced back to September 2011, when the European Commission proposed a harmonised .1% FTT rate applying to all instruments traded on all markets by all actors within the EU’s boundaries. By 2012 this project, unable to gain unanimous support has been dropped, although some 11 countries including Germany, France and Italy decided to proceed with the issue through the mechanism of the Enhanced Cooperation – a procedure that allows a group of willing member-countries to pursue further selective integration within the EU structures. Such integration would instate a minimum national tax of .1% on basic financial instruments and .01% on financial derivatives, with exception on the operations with the institutions of the European Central Bank System. It is the Commission’s decision sanctioning the enhanced cooperation that the UK tried to unsuccessfully challenge. Politically, FTT is useful, but also incredibly dangerous for the EU and the countries attempting to impose it. On the country level, the mechanism is explicitly meant to be a revenue-raising machine, intended as a way to induce the financial sector to pay for the risks of the recession it brought around. Speaking in numbers, a 2013 impact assessment by the FTT-instating countries produced a goal of the .5% of EU-11 GDP to be raised as the risk-compensation, though only .3-.4% (circa EUR 34-8bn) is actually expected to be raised. As we can all be sure, in the post-recession years of austerity, this is not a sum to be spared. Furthermore, the FTT – sometimes dubbed a Robin Hood Tax – involved a strong publicity element – with its edge aimed straight at the big finance, it fits spectacularly with the bankers-bashing spirits of the population, and could possibly bring some new legitimacy to the project worn out by the years of crisis. In February, Algirdas Šemeta, EU’s commissioner responsible for taxation described the FTT as the Europe’s chance to reconnect with its citizens – which is probably true, given that such solution has an approximately 64% support, according to Eurobarometer. However, as things are rarely so pleasantly smooth, there is a political cost to the FTT – namely, isolating some of the Europe’s most important financial centres. The Britons are already rallying in defence of the City (even as some don green hats and march in favour of the Robin Hood tax), and to many this is yet another step in the process of the European alienation. Such alienation can only be fuelled by one legally curious aspect of the proposed FTT: the EU-11 will also attempt to tax operations that take place outside its borders. The fact that capital has a troubling tendency to cross borders with ease, leaking – or rather bursting – towards more lax regulation is common knowledge, and European regulators are no strangers to it. They have therefore prepared a way to still reach out for tax from operations taking place in the Londons, Luxembourgs and the Cayman Islands of this World. Whenever any of the four conditions of sufficient connection between an operation and any of the EU-11 countries is met, tax is to be paid. Those conditions include the legal residence of the sellers and buyers (as separate criteria), place of transaction and the place of issue of the product traded. Whenever, then, a French bank will buy or sell securities in London, a tax is incurred. Whenever a Japanese bank sells Russian securities in Frankfurt, a tax is incurred. Whenever a Colombian bank purchases a French security in Sao Paulo, a tax is incurred – and so forth. Surely, while enforcement of such tax in more exotic places may be too much of a hassle, London probably is not far enough – and neither are Cyprus or Warsaw. This legal solution is the core of what the UK attempted to challenge in front of the ECJ; it only found that its own decision not to exercise its right to impose a tax on its territory does not interfere with other countries’ ability to do so. Even if it chose to do so, after all, the agents would merely face double taxation, which is as legal as it is inconvenient. Every policy solution, however, eventually faces a hard question: is it likely to work? In this case, ‘working’ consists of three layers of problem: Will the raise enough revenue to fulfil the policy objective of compensating the society for the risks of the financial sector? Will it perform any stabilising function towards the markets? Is it going to affect the liquidity and market rates? Ideally, for the FTT to be a worthwhile endeavour, we should require two positives and a negative. The evidence, however, is somewhat mixed. In the Swedish case, which remains the par excellence example of an FTT introduction, the tax never raised nowhere near the expected amount – in fact, while it was expected to yield approximately 1.5bn kronor per annum, the average annual revenue over the seven years (1984-1991) of its functioning was a pitiful 50m. The EU-11 case will, surely, be substantially different, as a Tobin-type tax is much more easily enforceable within a block of states – and since the EU’s lower rate (.1 or .01% compared to the Swedish aggregate 1%) will pose a smaller incentive for capital dislocation. What the Swedish case tells us, however, is that the capital’s ability to dislocate is spectacularly hard to predict: once the tax was imposed, volume of bond trading fell by 85%, futures’ by 98%, just to name a few instruments. By 1990, over 50% of all Swedish trading moved to London. One would be wrong to think that European authorities are oblivious of such risk: the Economist has quoted Christian Noyer of the Bank of France warning against extensive damage to the French financial industry – and its real economy. Furthermore, no policy acts in the vacuum. The FTT will hit the markets just as the EU is rolling out its new set of regulatory principles as part of the Banking Union – which is set to at the very least inflate the compliance cost for all market actors – and possibly feed into the market rates making finance more costly when the recovering Europe needs it most – even if the upside were to be more stable risk appetites and less volatile markets. Combined with tighter regulation, the FTT could render the capital dislocation an even more attractive option – making the European markets less liquid not just by pushing the High Frequency Traders out of business, but also incentivising much needed capital to emigrate. The principle behind the FTT remains, however, correct, as in the marketplace risk requires compensation and externalities should be paid for. Its realisation, however, carries on its own a hefty dose of political risk of pushing the periphery out of the Europe’s core, as well as slightly squeezing the tap of finance exactly when it is likely to be needed most.