Making Sense of the Financial Crisis

Text: Louise Stolt-Nielsen Holten
Photography: Luke Taylor

In an attempt to understand what is occupying the news these days, one must take a closer look at the debt crisis, the Occupy Wall Street movement, and the idea of a financial transaction tax. The FTT is a common element that has linked the euro-zone leaders and the Occupy protesters in recent weeks.

As it stands, the debt crisis is dangling by a vulnerable, Greek-produced thread. George Papandreou shocked members of the euro-zone in his call for a referendum on October 31^st. The referendum asked for the Greek people to approve a modified rescue plan presented by euro-zone leaders on October 27^th. The rescue plans would be a write off of 50% of the Greek debts, a request for banks to recapitalize to the sum of €106 billion, and to create a €1 trillion firewall to boost investor confidence. This plan will only be adopted if the Greek government ensures further austerity measures. In theory, Papandreou has every right to hold a referendum. In reality, Papandreou was washing his hands, or his cabinet’s hands, of the blame for imposing widely opposed austerity measures. Why this is so poorly timed, has to do with market confidence. Just as the euro-zone leaders, namely Angela Merkel and Nicolas Sarkozy, emerged with another bailout plan for the Greek government and a strategy to restore confidence in the markets, Papandreou completely removed that confidence by threatening not only Greece’s, but also Italy and other debt-ridden nations with bankruptcy. Had the referendum taken place and had that referendum voted against the bailout package, in all likelihood, Greece would have been forced out of the EU and consequently have an “uncontrolled” default sending a shock wave through the European banks. A suggestion by some leaders to contain this economic crisis is the establishment of a global FTT

On another note, the Occupy movement, originating on New York City’s Wall Street, has struck a cord in almost every major city on the globe. The exact aim of the movement is marked for its ambiguity. There is no coherent declaration of what the protestors demand. Their slogan, “we are the 99%,” is referring to the disparity between the 1% rich population and “the rest of us.” The unofficial website of the movement claims that Occupy Wall Street is “fighting back against the corrosive power of major banks and multinational corporations over the democratic process, and the role of Wall Street in creating an economic collapse that has caused the greatest recession in generations.” (http://occupywallst.org/about/) While they haven’t been shy in proclaiming why they are there, they are having a bit of difficulty coming up with a list of demands from governments. Nevertheless, one of the ideas that have been echoed at these protests is that of a FTT.

This FTT has been subject of debate amongst world leaders for quite some time. In Sarkozy’s recent press conference at the G20 summit in Cannes, he states, “the G20 recognizes the initiatives of some member states to tax the financial sector with various objectives including a tax on financial transactions to support development.” The UK’s David Cameron recently pledged his opposition to the idea of this global financial transaction tax even though Britain already has certain FTTs. Occupy Wall Street and London Stock Exchange has also heard sentiments of this proposal, most recently from the Archbishop of Canterbury’s proposal defending the Occupy London movement.

To the uncommitted newsreader such as myself, the details of financial transaction tax were seemingly daunting. In a closer study of this proposal, one can conclude that an FTT is simply a banking levy. However, one must not think that this is a tax on a particular financial institution. It is rather a tax on a particular financial exchange. This can be as commonplace as the sale of stocks. Ideally, this tax would generate a sizable income for governments. However basic the idea, the successful execution of such a tax is not nearly as straightforward. In order for the tax to be effective, it would need to be adopted worldwide. If only a collection of countries were to impose this tax, a company could very swiftly relocate to a country where the tax is not enforced.

Furthermore, the tax can be seen by some as an attempt to reallocate the expense of the economic turmoil to the larger banks and institutions that are blamed with causing the economic crisis of the past four years. However, the adoption of this tax towards financial institutions would in all likelihood raise the fees placed on the institutions’ clients, as the clients are ultimately the beneficiaries of the financial transaction in question. If this then becomes the case, then why bother creating this third party the tax must go through? Why not just tax the rich or whomever the tax is trying to get the money from, directly? There is an underlying dishonesty in whom this tax is really directed towards; whether it is the wealthier 1% or the larger financial institutions. With this thought, would the tax even hit them? George Osbourne suggests that those with the biggest burden from this tax are the pensioners. He argues that ultimately the beneficiaries are the ones paying the tax and in the UK, that is the pensioner. How constructive would this tax be? The European commission has recently stated that the introduction of a global FTT would in fact hinder economic growth in the EU.

What the governments should do is to ignore this FTT. As the tax requires a unanimous consent and current governments in the euro-zone and non-euro-zone have expressed opposing opinions about it, it seems highly unlikely that this FTT will have any immediate effect. This tax would be a distraction from the more urgent matters occupying Europe and counterproductive to their efforts of increasing economic growth. The euro-zone leaders cannot hope to reinstate market confidence with the growing polarization of supporting and non supporting countries over a tax that is not only misdirected but also potentially lethal to economic growth.

Louise Stolt-Nielsen Holten studies Modern History and Management at th University of St Andrews. She is Norwegian but was born and raised in the US.