Tax on trading threatens new division in Europe

* Group of 11 countries agree to impose transactions levy

* Move to impose tax criticised by industry

* Regulator warns of Europe's diverse regulation

By John O'Donnell

BRUSSELS, Oct 10 (Reuters) - A plan by a group of euro zonecountries to introduce a tax on financial transactions threatensto drive more trading to London from centres such as Frankfurt,exacerbating divisions in Europe as it struggles to overcome aneconomic crisis.

On Tuesday, 11 countries agreed to press ahead with a taxset to fall on the trading of shares, bonds and derivatives,although it may take up to two years before the necessarylegislation is in place and the scheme starts.

Commonly known as a "Tobin tax" after Nobel-prize winningU.S. economist James Tobin, who proposed one in 1972 as a way ofreducing financial market volatility, it has become a politicalsymbol to make banks, hedge funds and high-frequency traders paytowards cleaning up a debt crisis shaking the continent.

But the move threatens to open yet another rift in Europe,where countries already diverge in their regulation of financeand politicians have long argued over how best to control thebanks blamed for triggering financial turmoil in 2007.

Proponents first tried to introduce the tax worldwide in2008 via the Group of 20 major economies. Faced with U.S., Swissand Chinese opposition, they tried to persuade the 27-memberEuropean Union to lead the way, or even the 17-nation euro zone.But each organisation had its sceptics.

Following an aborted attempt to introduce its own such levyin the mid-1980s, Sweden has repeatedly warned that introducingthe tax will simply drive trading elsewhere. Britain, home tothe region's biggest financial centre, London, will not join.

Germany, France, Italy and Spain have made it clear,however, they will be among a group that will impose the chargethat is set to be 0.1 percent on the trading of bonds and sharesand 0.01 percent for derivatives deals.

But the move by the group, which includes Austria, Belgium,Slovenia, Portugal, Greece, Estonia and Slovakia, has beengreeted with scepticism by analysts and industry, who believe itfragments Europe's approach to regulating finance at a time whena separate plan tries to unify euro zone banking supervision.

The pioneers do not agree among themselves where theproceeds should go -- to national treasuries or EU coffers -- orhow they should be spent.

The tax, championed by Germany's Finance Minister WolfgangSchaeuble, has irritated many in Frankfurt, the country'sfinancial centre and rival to London.

Germany's debt and equity issuers are a key part of Europe'sfinancial markets. Its issuers, including companies andgovernment, accounted for more than 16 percent of debt sold in2011 and more than one fifth of equities.

London, already Europe's biggest stock and derivativestrading centre, will not take part in the transaction tax.

"This will be a setback for any country that does introducethe tax because trading will simply move to those centres thatdo not have it, such as London," said Franz-Josef Leven, adirector with the German Equity Institute, a group thatrepresents issuers.

The head of Portugal's banking association also expressedconcerns that the tax would put the country's lenders at adisadvantage to rivals that are not subject to the charge.


As it stands, in a proposal from the European Commission,the tax would fall due as soon as a link between the parties toa deal can be established to a country, such as Germany orFrance, th a t charges the tax.

The Brussels executive has estimated that if the tax wereimplemented EU-wide on shares, bonds and derivatives, it couldraise 57 billion euros a year.

Bankers say it would yield far less in reality because bankswould relocate trading activity to avoid the levy wherepossible, moving jobs away from implementing countries.

A trade would trigger the tax although there are exemptionssuch as foreign exchange deals or primary issuance.

"For a U.S. firm looking to trade in Europe, they would movefrom Frankfurt to London," said Leven.

"For investors in Germany, they would have to pay the tax,regardless or where (trading) takes place. It means more costsfor pension funds who invest on the stock market or companiesthat hedge using derivatives."

Deutsche Boerse, Europe's largest exchange operator, saidonly the introduction of the levy across all 27 countries in theEuropean Union would avoid distorting competition.

"This is a short-sighted tax," said Peter Lenardos, ananalyst with RBC Capital Markets. "When Sweden did it, tradingvolumes fell by 97 percent year on year."

For many analysts studying Europe's handling of the crisis,the move of a splinter group to go it alone with the tax is justthe latest example of the region's fragmented approach todealing with its problems.

"Although significant progress has been made with theestablishment of the European Stability Mechanism, there isstill no cohesive approach in Europe," said Paul De Grauwe, aneconomist at the London School of Economics.

"With the financial transactions tax, I don't see any trendto set up something that would be coherent."

The region is also embroiled in a divisive debate aboutestablishing a banking union, a system that would allow theEuropean Central Bank supervise lenders and ultimately would seecentral funds to support or close problem lenders and protectsavers.

Winning broad support for a prompt introduction of the newsupervision framework is important because it should allow theeuro zone's rescue fund, the European Stability Mechanism, todirectly inject much-needed capital into banks, such as those inSpain.

However, the plan has sparked concerns among the 10countries in the European Union which do not use the euro thatthey will be indirectly affected by the ECB's new supervisorypowers and put at a competitive disadvantage, whether they jointhe scheme or not.

On Wednesday, one of Europe's top regulators warned of therisks of Europe's "diverse regulatory and supervisoryframework".

Speaking to lawmakers in the European Parliament, the headof the European Banking Authority argued the case for a bankingunion to counter a "wide variety of supervisory approaches".

"There is still a fairly wide scope of national discretion,"said Andrea Enria. "This hampers the objective of a true singlerulebook in key areas of banking regulation."

(Additional reporting by Andreas Kroener in Frankfurt; Editingby Paul Taylor)

((john.odonnell@thomsonreuters.com)(+32 2 287 68 17 or +32 47569 15 89)(Reuters Messaging:john.odonnell.thomsonreuters.com@reuters.net))