A light bulb goes off at Bercy

20 November 2013


Every now and then we all have an "aha!" moment: with a flash of inspiration, we see a new way to solve a problem or unravel a mystery.

The French finance ministry had one of these moments last week. After years of championing the idea of financial transaction taxes, it suddenly dawned on them that there is a fatal contradiction. Put simply, it will kill their dream of a new exchange rising in Paris to challenge the Anglo-Saxon giants. 

It may seem obvious to anyone familiar with how exchanges function that theycannot exist without market-makers. By their very nature, market-makers must engage in many more transactions than ordinary investors. So obviously a tax on transactions will fall most heavily on the market-makers. 

Until recently this has not bothered the officials at Bercy. In fact, France has led the fight for a European-wide financial transaction to discourage speculation and protect "the real economy" from high-frequency trading. 

Now enter stage right the seemingly unrelated figure of Jeff Sprecher, an entrepreneur from Atlanta who has engineered the takeover of NYSE Euronext.Sprecher is now preparing to "rationalize" his acquisition. Step one is the spinoff of Euronext, which consists of several stock markets in continental Europe centered around, yes, Paris. 

Sprecher has encouraged the French government to think of Euronext as the centerpiece of a major financial center that Paris once was and could be again. Right on cue Finance Minister Pierre Moscovici has been pressing the major French banks to support the project by becoming loyal shareholders in Euronext- the so-called "noyau dur". And this is where the vision crashed into reality and Bercy finally had its "aha!" moment. 

Last week it emerged that the French banks are unwilling to put their money into the new exchange unless it has reasonable business prospects. The banks recognize that the financial transaction tax will kill those prospects by discouraging trading on Euronext. 

"I find it bizarre to be promoting a transaction tax while at the sametime extolling the importance of Euronext," François Pérol, the chairman of Groupe BPCE, France's second largest bank, told Bloomberg. "I understand the importance of maintaining Paris as a financial center but the government needs a coherent policy." 

Pérol is a former Treasury aide himself and worked as an aide to former French president Nicolas Sarkozy. His comments will not go unnoticed at Bercy. France can promote the financial transaction tax as a cure for speculation, or it can promote Paris as a financial center. The light bulb has gone off --France can have one or the other, but not both.

The views expressed in this blog post are the personal opinions of the author and do not necessarily reflect the official policies or positions of the FIA European Principal Traders Association or the Futures Industry Association.

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