Jospin raises the spectre of Tobin

French prime minister Lionel Jospin has resurrected the debate over the Tobin tax – a tax on international capital flows designed to discourage short-term currency speculation – by publicly supporting the concept in an address to the French nation.

Speaking during a television interview, Jospin said, “I am in favour of France taking an initiative so that Europe endorses the Tobin tax”. He added that France would raise the issue at the next European finance minister’s meeting, scheduled for next month.

The Tobin concept was developed by American Nobel prize-winning economist James Tobin in the 1970s, as a means of stabilising currency markets by inhibiting short-term speculation. His idea came as the Bretton Woods international currency system that fixed the price of the dollar in terms of gold was breaking up.

Tobin proposed a 0.5% charge on currency transactions, which anti-globalisation groups subsequently have said could be used to help poorer economies. But other economists have questioned whether such a charge would have prevented the Asian, Russian or Turkish currency crises in recent years.

The American economist himself believes such a tax could only be introduced with widespread international agreement, since unilateral taxation would only shift money flows to other financial centres. The US has long been opposed to such a scheme, making its introduction extremely unlikely.

At the European level, both Germany and the UK are firmly against an anti-speculation charge that they believe would seriously distort the derivatives markets. German deputy prime minister Caio Kock-Weser told the Financial Times Deutschland that a tax on foreign exchange transactions “has charm but will never fly”.

Given the lack of international support, Jospin’s comments are viewed as politically motivated. With presidential elections due next year, Jospin appears to be wooing far-left support to make a serious challenge to incumbent president Jacques Chirac.

While Tobin appears a non-starter, Kock-Weser’s proposal that there should be more regulation of derivatives and hedge funds as an alternative to taxes will cause concern in the financial market-place. The G7-sponsored Financial Stability Forum, a group of regulators headed by Bank for International Settlements general manager Andrew Crockett, has already been looking into the regulation of hedge funds.

But the last report issued by the BIS on the subject found there was little concern about hedge funds presenting systemic risk concerns.