The European Commission has backed plans from 10 countries to launch a financial transactions tax to help raise funds to tackle the debt crisis. Germany, France, Italy, Spain, Austria, Belgium, Greece, Portugal, Slovakia and Slovenia want to push ahead with the tax after failing to win support from all members of the European Union. “This is about fairness“, said Commission President Juan Manuel Barroso. “We need to ensure the costs of the crisis are shared by the financial sector instead of shouldered by ordinary citizens.”
Financial institutions caused the crisis – so it is the right idea to make them pay for it. But doing this by imposing a financial transactions tax is the wrong way, especially if only 10 countries participate. Escaping from countries that are putting a tax on financial transactions will be quite easy: The bigger players will just move to a country that doesn’t apply the tax – Great Britain or Luxemburg for example. And smaller banks will simply make their customers pay – that way the costs of the crisis are still shouldered by ordinary citizens.
But there are better ways to keep the costs of the crisis off the shoulders of ordinary people and to keep banks and other financial institutions from taking excessive risks. One of these ways has been discussed at the GES 2009 at Plön Castle: The debt issued by systemically relevant financial institutions should be “solvency-convertible”, so that if such an institution becomes insolvent, the debt would automatically be converted into equity, proposed Dennis Snower, the President of the Kiel Institute.
This simple measure would ensure that all financial institutions that are “too large to fail” in fact don’t fail. Because as soon as insolvency threatens, enough debt would be converted into equity for solvency to be restored. Through solvency-convertible debt, these institutions would in effect have a solvency guarantee. But unlike the bailouts we have seen during the financial crisis, this guarantee would not be financed by the taxpayers, but rather by the stockholders of these institutions. Maximizing shareholder value would then mean avoiding excessive risk. This would be the right way to accomplish, that those who cause a problem also pay the price for it – instead of taxpayers.