Ask not for whom the bell tolls: it tolls for the UK, as Jennifer Hughes has it…
A UK newspaper is said to have once run the headline “Fog over Channel, Continent Isolated”.
British attitudes may have changed since, but there will be some in London watching the eurozone wrangles over Greece and thanking the UK’s monetary isolation. But this would not reflect the market reality: while headlines have focused on Greece and the other weak eurozone members, investors have been steadily selling UK debt.
On Thursday this reached some milestones; 10-year gilt yields hit 15-month highs and the spread, or premium the UK pays over German borrowing costs, reached a full percentage point for the first time in four years. The UK now pays as much to borrow as Italy, considered one of the more vulnerable eurozone members and – at best – rated two notches below Britain.
“Very substantial drawbacks.” “Big problems attached to it.” “It is very difficult to advocate a tax that has been, in a sense, rejected by the person who put the proposal forward.”
Just three of the observations that Gordon Brown has made in the past about the Tobin Tax. All the more surprising, then, that the Prime Minister should have come out in favour of it in a surprise speech at this weekend’s G20 Finance Ministers – at least until fierce opposition from Tim Geithner forced the UK to back off. (No mention of the idea in Gordon Brown’s FT op-ed on financial institutions this morning, you’ll notice.)
Now that the dust is settling, two questions stand out. First, why the Damascene conversion? And second, how – if at all – does this alter prospects for implementation of the tax?
Start with the reasons why. Of course, some argue that Brown’s endorsement of the idea is no more than ‘tough on banks’ political positioning. Fraser Nelson, for instance, sees it as “the desperate vote-seeking move of a Prime Minister who knows he’s going down”. Beating up on the banks may be part of the story, but it doesn’t sound convincing enough on its own: you have to wonder whether anything as nerdy as an international currency transaction tax is really going to resonate with the public at large.
John Hilary, the Executive Director of War on Want – the UK NGO that, more than any other, has led the charge on the Tobin Tax – argues that to understand the move, you have to look further back than FSA head Adair Turner’s advocacy of the idea in August: back, in fact, over the last two years, during which several European governments (in particular Norway and latterly France) have been analysing the Tobin tax in detail.
Two weeks ago, John told me this morning, French Foreign Minister Bernard Kouchner hosted the first meeting of a new Task Force on international financial transactions (terms of reference here), which Financial Secretary to the Treasury Stephen Timms attended for the UK. When John met Stephen Timms after that meeting, Timms told him that the UK’s previous resistance to the tax had been misplaced – and the UK was now on board.
Now, you might think that Timms’s reversal of long-standing HM Treasury policy was probably the result of prodding from Downing Street, and you’d probably be right. But that’s not at odds with the proposition that Brown’s reversal is primarily because he’s become persuaded of the idea’s merits and feasibility. After all, Brown has more form on global Marshall Plan ideas than most: whatever reservations people have about his International Finance Facility (and I have a few), you can’t doubt the seriousness of his personal commitment to the idea.
As to the style of the announcement (of which Chris Giles justly observes, “just imagine if Tony Blair had arrived uninvited when Gordon Brown was chairing a G7 finance ministers’ meeting and upstaged the agenda by talking about things that had been kicked into the long grass. Brown would have exploded”): well, since when did Gordon Brown ever unveil radical new global proposals in a consultative way?
Back in March, I flagged up the significance of a proposal from Zhou Xiaochuan, China’s central bank governor, for the dollar to be replaced as the world’s reserve currency with a new, more multilateral system based on Special Drawing Rights – and noted that his proposal harked back explicitly to discussions at the Bretton Woods summit in 1944.
As Ngaire Woods points out over at the GEG blog, this is just one component of a Chinese strategy for pursuing power shift in the international monetary order. Another is the increasingly emphatic Chinese tone on the need for IMF reform – with Wen Jiabao making clear back in March that much-needed additional Chinese contributions to the IMF would be contingent on more voice for developing countries.
Now, another important plank of their reform drive has been unveiled: a new $120 billion emergency currency pool based on the existing Chiang Mai initiative. Details according to the WSJ:
The initiative aims to create a network of bilateral currency-swap arrangements among Asean and the three East Asian countries. Asean includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.
Japan, South Korea and China will provide 80% of the $120 billion currency pool and Asean members the remaining 20%. Japan will contribute $38.4 billion, while China, including Hong Kong, will also offer $38.4 billion. South Korea will provide $19.2 billion. Under terms of the program, smaller Asian economies will be able to borrow larger amounts in proportion to their contributions than the more-developed economies.
As Ngaire observes, proposals in the late 1990s for a new Asian Monetary Fund were publicly torpedoed by the US, but it’s the bilateral swap arrangements that Asian nations started to agree then that have grown into the initiative announced yesterday. And, she stresses,
It is worth highlighting that while China is politely offering something to the IMF (it announced a contribution of $40 billion), it has just announced an almost equivalent contribution ($38.4 billion) to the Asian pool.
All this creates useful independence from the IMF, she continues:
…the ASEAN+3 countries have created for themselves an alternative to borrowing from the IMF. Their arrangements actually use the IMF as a monitor, but crucially guard control (within the region) over their shared reserves. It has emerged in no small part because countries in the region see the IMF as a useful but American instrument of economic coordination.