A proposed financial transactions tax that France hopes other European countries will also adopt is likely to be ineffective and difficult to implement, analysts say.

"/> A proposed financial transactions tax that France hopes other European countries will also adopt is likely to be ineffective and difficult to implement, analysts say.

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ECONOMY

Financial transactions tax ineffective: analysts

A proposed financial transactions tax that France hopes other European countries will also adopt is likely to be ineffective and difficult to implement, analysts say.

Financial transactions tax ineffective: analysts
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The plan, promoted by President Nicolas Sarkozy as part of efforts to tame the eurozone debt crisis, centres on a 0.1 percent tax on buying shares in firms with a French headquarters and more than one billion euros in capital.

The finance ministry estimates the tax, which if passed by parliament would take effect on August 1, will bring in €1.1 billion ($1.45 billion) annually to state coffers.

The project will also include a 0.01 tax on naked Credit Default Swaps — a bet that a country will default on its debt — and on high-frequency trading, both features of modern markets which critics say stoke volatility and risk.

“Putting such a tax in place, in the run-up to the presidential election, is much more of a political move than an economic one,” said Frederik Ducrozet at Credit Agricole CIB.

“In the past, the introduction of such a tax unilaterally in one country has never been proof of its effectiveness,” Ducrozet said.

Sweden adopted a transactions tax in the 1980s but had to reverse course when its banks and bankers simply moved offshore, mostly to the City of London, and the proceeds were much lower than anticipated.

“Paris hopes to raise a billion euros a year but we do not know how the government arrived at that figure. Working that out looks very difficult because transaction volumes can vary a great deal,” said Jean-Louis Mourier at brokers Aurel BGC.

Analysts said the restricted basis for the tax, which will cover trades in only the largest firms, also crimps its effectiveness.

“As a matter of fairness, it’s regrettable that many foreign companies operating (in France) will not be included,” said Gilles Moec, chief economist at Deutsche Bank.

As for the tax curbing speculative trading activity, that too is open to question.

“Speculation is far from being only a French problem and does not only affect stock markets — commodities, currencies and derivative instruments are all even much more involved,” said Renaud Murail at Barclays Bourse.

Likewise, the main high frequency trading houses are all based in the United States while from a legal point of view, it is hard to see how such a transaction tax can be put in place.

“How will the state be able to tax transactions which take place on other financial markets? It is not at all clear on this issue,” said Mourier of Aurel BGC, with many companies listed on overseas bourses.

For other analysts, however, fears about the tax sparking an exodus of companies to other financial centres are overdone.

“There is no reason for a massive shift,” Murail said.

“Paris is a much more essential market place than Stockholm and the tax at 0.1 percent is minimal and should not hit brokerage house profits,” he added.

For Daniel Lebegue, a former French treasury head and currently head of the country’s branch of the anti-corruption group Transparency International, “the idea of companies moving out is a joke.”

Instead, companies “would more likely come to Paris from London where the stock transaction tax is much higher,” Lebegue said, referring to the British system of investors paying stamp duty on their trades.

“The tax is just a little bump, the take is small, it does not apply to all transactions and the proceeds expected are much less than those raised in Britain or in Switzerland, for example,” he said in remarks to La Croix daily.

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ECONOMY

How is Denmark’s economy handling inflation and rate rises?

Denmark's economy is now expected to avoid a recession in the coming years, with fewer people losing their jobs than expected, despite high levels of inflation and rising interest rates, The Danish Economic Council has said in a new report.

How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year. 

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’,  Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.  

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn. 

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment? 

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024  about 1 percent below the estimated structural level. 

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending? 

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”.  The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”. 

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025. 

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023. 

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write. 

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers. 

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.” 

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