The Tobin Tax is no substitute for a world currency

Guido Montani

By Guido Montani

In the Fall 2000 issue of World Federalist News, in an article on the World Federalist Movement’s programme (Tobin Tax Campaigns Take Off?), it is argued that federalists should support a campaign in favour of the Tobin Tax and fight for the introduction of a Currency Transaction Tax (CTT).

In-depth examination of the problem is advisable before venturing into an undertaking with ambiguous aspects. The fact that the Tobin Tax has become a very popular slogan among critics of globalisation is not a sufficient reason to make it an objective of the federalists’ strategy. Federalists must support proposals conducive to overcoming the national state, by creating supranational instruments to govern the economy. Proposing a tax on monetary transactions has in it a nationalistic trait we have to be aware of, lest we fall into the trap of those defending the international status-quo. The anti-globalisation movement, which showed its strength in Seattle, may easily take the wrong way and be working for the King of Prussia. The fact that in France the Tobin Tax is supported by right-wing (Mr Pasqua) and left-wing (Mr Chevènement) souverainistes should ring an alarm bell in our minds.

The idea of the Tobin Tax has specific historical roots. In the seventies, after the collapse of the Bretton Woods system of fixed exchange rates, brought about also by the first effects of financial globalisation, economists put forward several proposals to allow national governments and national central banks to regain control of the economic process, in a context of increasing monetary disorder and world-wide economic crisis. In fact, the seventies were the years of stagflation. Tobin proposed to put “some sand in the wheels” of our excessively efficient international money market, so as to allow the central banks to control more efficiently their domestic interest rates by partially isolating their national economies from the world markets. Tobin was aware of the limits in his proposal, due both to the practical difficulty of its implementation, and to the fact that it was the “second best” solution after the radical one of creating a common currency~ as the European countries were discussing at the time for the European Community. It is obvious, and Tobin says so very clearly, that the right cure for speculation on exchange rates is the abolition of the exchange rates themselves by the creation of a common currency. As to the infra-national movements of capital, nobody seriously proposes to tax capital moving from one region to another, for example, from Virginia to Arizona, or from Bavaria to Saxony. Entrepreneurs must be free to invest wherever better opportunities for profit are present. But the State must be free to tax profits, just as it taxes labour and other incomes. The real problem is to tax profits, not the movements of capital.

Compared to the situation of the seventies, the present world picture has changed in three significant aspects. The first concerns the increase in extension and importance of globalisation. International movements of capital have soared and production activities have become more and more multinational. The globalisation process has consolidated after the end of the cold war. Countries of the former communist area, from Russia to China, are pushing hard to become part of the western productive and financial system. They are insistently knocking on the doors of the G7 and the IMF. A truly world-wide market is forming~ more and more integrated but with very weak instruments available for governing it. As the world market strength grows, the ability of the USA and the international bodies, like the IMF, to counter economic shocks is decreasing. The crisis of 1997, according to a statement by Mr Camdessus, a former IMP director, brought the whole world to the brink of an abyss, luckily escaping a tumble into it, unlike in the thirties.

Secondly, third-world countries have thoroughly changed their attitude towards international investments. In the sixties, these investments were considered a form of neo-colonialism. Today, third-world governments vie with each other to attract capital and entrepreneurs. The case of the Asian Tigers is symbolic of this. Their swift development in the eighties and nineties would have been unthinkable without the flow of western capital. But the recent crisis, which propagated from Asia to Russia and Brazil, is a serious indication of the fragility of the international financial system. An individual in the Ardennes or in Ontario confidently entrusts his savings to a local Investment Fund, without knowing that it will in turn invest them in Thailand or Bolivia at very high risk. The world financial system is nowadays deeply integrated. But the information channels are made of clumsy institutions, lacking effective powers of control.

The third difference to take into account is the creation of the European monetary union. It is not yet regarded as a revolutionary novelty in the international scene, because the transfer of monetary sovereignty from the European national states to the Union did not bring with it the creation of a European federal government. The euro’s weakness relative to the dollar and the yen is a symptom of this. But federalists must not be carried away by the current public opinion which is unable to see, beyond the euro, the next step leading to the European federal state. The birth of the euro has put an end, forever, to the possibility monetary speculation on exchange rates among European currencies. This is a big success in the struggle for overcoming national sovereign which opens up new perspectives for reform even at the world level. Among the European countries~ a Tobin Tax is no longer necessary and if the European federalists’ fight for giving a democratic government to the Union is successful, Europe will become a new world power, comparable the USA, but independent from it.

What shall we do then, in this new world situation? Which shall the federalists’ strategy be for proceeding towards the world government of globalisation? Based on the above considerations and the European monetary experiment, it is possible to set down clearly the outlines of the ideal arrival point: a world currency and a democratic world government. Of course, as soon as the final objective is worded in such terms, the objection is immediately raised that this is a utopian view and that the urgent remedies must be found elsewhere. Politics is the art of the possible, it is true. But with a small correction. Jean Monnet used to say that politics is the art of making possible what is necessary. Now, globalisation is a challenge to governments and national states, which are losing control over the old levers of command. Today it is not possible to oppose the globalisation process, just as it would have been foolish two centuries ago to oppose the first industrial revolution. The Luddites did it at the beginning of the XIX century but Socialists realised that the real issue was how to govern and control capitalism, not how to resist its technological and social achievements. The same must be done today: globalisation must be governed. This is possible if new supranational governing instruments are created. Although a democratic world government is not realisable in the present political cycle, appreciable steps in this direction are possible.

The federalists’ strategy for a new economic world order could be based on the following proposals:

1) endow the UN with financial resources of its own, in order for it to act efficiently for sustainable development, manage sudden financial crises and free itself from the continuous blackmailing by national governments, which by not paying their dues make it unable to operate. Somebody may believe that providing the UN with its own resources is implicit in the proposal of a tax on monetary transactions – although national governments do not agree, because they intend to keep the proceeds of the Tobin Tax in their budgets. However, it is better to keep the two things separate. If the UN is to be financed, it is advisable to draw on other accounts, like a tax on airline tickets, on energy, on polluting materials, on multinational companies’ profits, and so on. But just considering that the European Union, even though it already has a single currency, still lacks sufficient powers directly to tax European firms and capital, is enough to appreciate the difficulties to be overcome at the world level.

2) a New Bretton Woods for stabilising the exchange rates between big monetary areas and for strengthening the intervention powers of the IMF. Stabilising the exchange rates between the dollar, the euro and the yen means stabilising 80% of the world economy. Of course, the New Bretton Woods must involve the third-world countries, which today are important destinations of international capital movements and find themselves in great hardship in keeping their weak national currencies alive. The road proposed by the American government, that is, making the dollarisation of Third World countries feasible, as shown by the experiment in Ecuador and Timor, has to be rejected, because of its neo-colonialist nature and its danger for world stability. If this were the road followed by many countries, the USA would in the end wield the absolute power of deciding the monetary policy for the rest of the planet. On the contrary, the IMF, in the reformed Council of which representatives of all peoples should sit, should make available to the countries asking for it a world currency of its own, free to circulate alongside the present major currencies, like the dollar, the euro and the yen. This IMF currency, or “world currency in embryo”, could be of the same importance as the yen, the euro or the dollar in the financial markets, if a sizeable group of third-world countries adopt it.

3) make closer and closer the relationship between world monetary unification and democratisation of the UN. Europe’s experience has shown that the two integration processes, economic and political, can proceed in parallel, strengthening each other.

In conclusion, the Tobin Tax is an ambiguous proposal. If the problem is how to provide the UN with resources of its own, then these should be openly asked for. The problem can be solved, provided the political determination is there, with other means. The Tobin Tax represents a treacherous instrument which national governments could use for imposing controls on capital (and people), strengthening in the end their national currencies. Protectionism is a typical instrument of the economic nationalism of the past, which it is better not to resurrect. Protesting against anarchical globalisation must by no means offer the pretext to nationalist forces for taking the world economy back to the situation of the thirties. Globalisation has to be governed by new supranational institutions.

A world currency is a supranational institution, albeit admittedly it is not a short-term goal. However, significant steps towards a world currency can be taken, such as calling for a New Bretton Woods in order to create a new global economic order, especially if Europe is able to become a new actor in world politics. The WFM must champion a strategic objective with expressly federalist contents. Only thus will it become the critical vanguard of the world people in the making.

Guido Montani is Secretary-General of Movimento Federalista Europeo, the Italian equivalent of Federal Union. He may be contacted at opinions expressed are those of the author and not necessarily those of Federal Union. First published March 2001.

More information

Meeting on the Tobin Tax to be chaired by Baroness Williams – 31 October 2001 – available at newsletter_september01

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