The idea to levy a tax on short-term currency transactions (CTT) is exactly 30 years old. It was during the Laneway Lectures at Princeton University in 1972 that the renowned economist and 1981 Nobel Prize Laureate James Tobin proposed the tax to curb the excessive volatility on international currency markets. For many years, the proposal was dismissed by economists and bankers as either unrealistic or even counterproductive although the idea was kept alive and kept coming up from time to time when a currency crisis struck the world. James Tobin himself recalled how Otmar Issing of the German Bundesbank called the tax "a Loch Ness Monster" which was popping up time and again.
But in 1994, French President Francois Mitterand at the World Social Summit in Copenhagen rediscovered the Tobin Tax as a potential source of additional revenue for international development. Since then, support for the tax has continued to grow, especially in the wake of the Asian financial crisis in 1997 which once again showed the devastating impact of international currency speculation on weak economies. Especially non-governmental organisations took an interest in the tax proposal because it promises to burden only the speculators who are moving up to US$ 1 600 a day around the globe in search of short-term gain, while trade and investments would remain almost unaffected by a small tax of around 0.1 per cent.
In 1998, the ATTAC movement started in France. ATTAC stands for "association pour la taxation des transactions financiers à l'aide des citoyennes and citoyens" (Association for the taxation of financial transfers in aid of the citizens). In the meantime, it has become a powerful movement uniting individuals, NGOs, trade unions, and politicians and it has the support of influential media such as 'Le Monde'in France. ATTAC is also active in several other European countries, including Germany, and has been the driving force behind the movements of globalisation critics and their mass protests at major international conferences such as Genova and more recently, Porto Alegre.
Ironically, the most important breakthrough for the CTT coincided with the death of the father of the idea, James Tobin, who died in New Haven, Connecticut, on March 11 at the age of 84. By the time of his death, Tobin had long dissociated himself from the protest movement, including ATTAC. "They are misusing my name", he complained in an interview with Der Spiegel last year. As a convinced supporter of free trade and international institutions such as IMF and World Bank, he refused to be counted among the crowd of globalisation critics.
This has not stopped the Tobin Tax to gain in acceptance in Western donor circles. In search of additional funds for development, NGOs and some governments are seeing a tax on speculative currency transactions as a promising new source of finance. The French parliament already decided to introduce such a tax if other countries are also prepared to do so. French premier Lionel Jospin and his minister for development assistance, Charles Josselin, are both supporters of the Tobin Tax. In Germany, the Minister for Economic Cooperation and Development, Heidemarie Wieczorek-Zeul, commissioned a study on the feasibility of a CTT by the Frankfurt-based professor for public finances and former staff member of the International Monetary Fund, Paul B. Spahn, which was published shortly before the world conference 'Finance for Development' in Monterrey, Mexico, in February.
In this study, Spahn comes to the conclusion that a CTT makes economic sense, that it is desirable as a means to stabilise currency exchange rates, that it is technically feasible, and that it will have no negative effects on capital flows to developing countries. More important, in view of the widespread opinion that a Tobin Tax would only be effective if all countries participate, Spahn says that a CTT would be useful if introduced only by the European Union (EU) and Switzerland. Contrary to earlier models where a tax rate would be 0.1 per cent on currency transactions was discussed, Spahn recommends a rate of only 0.01 per cent which would still result in an additional revenue of 17 to 20 billion EURO from the EU and Switzerland alone.
Spahn's expertise was presented at the Monterrey Conference by the German development minister who asked the participants to think seriously about the introduction of the Tobin Tax as a means to finance international development. "We cannot afford to have taboos in this matter" she said. But even within her own cabinet, Heidemarie Wieczorek-Zeul has few allies in this matter. Finance Minister Hans Eichel is no friend of a new tax, and Chancellor Gerhard Schröder keeps silent on the issue.
Support came from the side of the NGOs. Peter Mucke of terre des hommes commented on the Spahn study it was now time "that the German Federal Government takes a lead within the EU. Many studies and the experience of people in developing countries show that more money is necessary to overcome poverty and global environmental destruction. The CTT is an innovative source of finance for this purpose." Jens Martens of the NGO World Economy, Ecology and Development (WEED) said in Monterrey, the Spahn study was contradicting the essential arguments against the Tobin Tax. "Now it is no longer a matter of whether the tax should be introduced, but rather of how this is to be done".
However, opposition to the new tax remains widely spread. Ulrich Schröder of German Bank Research said the Tobin Tax would solve no problem. Even if it would raise new money, the additional burden would be carried by the consumers and enterprises. Even speculators would not suffer much. On the other hand, capital flows into developing countries might be affected. "I think the tax would only present new problems for capital-poor countries", he said.
The EU also remains sceptical. In a report on the challenges of globalisation published in February, the EU argues that a CTT would reduce the volume of currency transactions and thereby reduce international liquidity. This would lead to a higher rather than lower volatility of currency markets. The report also says the CTT was no effective measure to control speculative attacks against weak currencies. NGOs like WEED vehemently contradict the conclusions of the EU report, but this will have little impact on the conclusions drawn from the suty by the majority of European finance ministers.
30 years after the first mention of the CTT and in the year of James Tobin's death, the future of his idea of a tax on short-term speculative currency transactions still hangs in the balance. It is still highly unlikely that enough support can be mustered
to implement the idea within the next few years. However, never before has the proposal gained so much ground as in these days of the Monterrey Summit.
