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German resurgence

May 21, 2010

German Finance Minister Wolfgang Schaeuble said Friday the national financial-transaction tax (FTT) German lawmakers are campaigning for “makes no sense,” but he’s in favor of it on an European Union (EU) level. He believes a G20 FTT is unlikely.

I’m concerned about Germany's unilateral resurgence. This week, the German Finance Ministry outlawed naked short-selling of European government bonds, credit default swaps and some stocks. This shocking move portends more serious action ahead soon, especially considering Germany didn’t back down when other EU members protested the ban.

The anti-TARP backlash and populism will be far greater in Germany than in the UK and U.S. The U.S. and UK backed off from a FTT when push came to shove, but Germany may not. The good news is Germany isn’t just looking for a quick fix — it wants to deal with the underlying problems including entitlements, financial irresponsibility and corruption. And it has the stomach to tackle all of these issues.

But there is a dangerous part too. Germany has an infamous history of attacking bankers, lenders and traders, and going over board to discredit the value of finance vs. manufacturing. German politicians have recently classified speculators, traders and bankers as scapegoats for government corruption, budget cheating and overspending in PIIGS. Finance minister Schaeuble’s words this week indicate he’s caving on the FTT issue, after previously opposing the tax. He reportedly declared the financial markets "out of control" and said bankers can't be trusted.

If the UK becomes desperate amidst its own financial crisis including a declining pound, it may bend to German wishes for a Eurozone FTT. After all, the UK already has a securities transaction tax in place. Achieving EU unanimity for a Euro tax may be extremely difficult under normal conditions, but if the meltdown gets worse, the UK may acquiesce to Germany as a political move to keep Germany from opting out of the Euro bailouts. UK may lean this way because it could be in need of bailout assistance too.

Germany has said its involvement in the Greek bailout is predicated on either a FTT or other bank taxes to recoup the bailout funds. It's the same concept as Obama's bank tax to repay TARP, only the Germans are making it conditional upfront rather than after-the-fact. Germany watched the U.S. crisis and learned a lesson. But it’s important to remember the Greek bailout isn’t a done deal. The EU, IMF and U.S. want the markets to believe in the bailout to stop a run on liquidity, but there are too many moving parts — strikes in Greece, rejection of austerity and a fractured EU structure.

I’m hopeful there won't be a FTT anywhere. Talk of a U.S. FTT has subsided, but Americans trading EU markets will feel the pinch of an EU-only FTT. It will be priced into trades as EU taxpayers try to account for the higher taxes.

Bottom line: If this meltdown becomes more severe, Germany may demand its own way or threaten to leave a crumbling Euro. Will Germany see this crisis as an opening to reassert itself?

A version of this has been published on the Forbes blog "Great Speculations."