The ECB has taken upon itself to challenge the Spanish government over a temporary tax on the profits of commercial banks.
The European Central Bank should supervise banks on behalf of European citizens. Since this monetary authority became supervisor of all ‘significant’ eurozone banks in 2014, it has however been doing the opposite: it supervises member states on behalf of commercial banks.
Take its opinion ‘on the implementation of temporary levies on certain credit institutions’ which the Spanish government has been considering. The opinion was published in November and attempts to shield banks from taxation. It is further evidence that the relationship between the ECB and commercial banks is symbiotic: the ECB helps banks to remain not only ‘too big to fail’ but also too politically connected to tax.
The Spanish socialist government—which replied that it would go ahead with the law—intends to tax the interest and commission incomes (the fees) of banks. The tax can hardly be considered excessive. It is effective during two years (2023-24), it only applies to banks reporting more than €800 million in income, it only covers net income and the rate is only 4.8 per cent. The proposal is motivated by the wish to distribute more evenly the burden of inflation in Spain.
The ECB does acknowledge that net interest income ‘tends to expand on impact as policy rates increase’ and that ‘[l]ow-income households are hit harder’ by soaring energy prices, as they ‘spend a higher proportion of their budget on energy-related goods’. The drawback of the tax seems to be that shareholders and bankers will see their bonuses and dividends respectively reduced.
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For the ECB, taxing banks jeopardises the financial stability of the eurozone—identifying this generic notion with the ‘resilience’ of banks before reducing that to their profitability. Dampened profits would in turn affect growth, as banks would lend at higher interest. The ECB further advises against taxing financial institutions to fund government spending: fiscal and monetary policy, it says, should be separate. It also objects that competition between banks would be impaired by the proposal.
With equity rates of 4-5 per cent, banks are indeed borderline insolvent, by design. It might very well be that modestly taxing profits would thus spell trouble. Apart from banks themselves, however, the architect of this constant threat of failure is their supervisor—the ECB. If the ECB (rightfully) judges banks fragile, it should impose higher equity requirements, starting with a moratorium on dividend and bonus payments.
Since the 2008 global financial crash, banks have had to be rescued with taxpayers’ money, as they have a monopoly on the execution of financial transactions and the offering of financial accounts. The privatisation of these two vital public functions (as the economist Karl Polanyi would have put it) of course justifies supervising commercial banks. The ECB has been in charge of that since 2014 but it does not act accordingly.
Rather, it allows the too-big-to-fail blackmail to continue, by suggesting that banks will increase interest rates if modestly taxed. This though increasing interest rates is exactly what the ECB has itself been doing in 2022. It could instead attach lending conditions to banks borrowing from it.
The call to separate fiscal and monetary policy betrays further cognitive dissonance. Ever since 2008, the ECB has endorsed rescuing banks (monetary) with taxpayers’ money (fiscal). In 2010 it sent secret letters to the Irish government, to press Dublin to use public expenditure to make banks bondholders’ whole—against the threat that ‘emergency liquidity assistance’ would be withheld from insolvent banks, thereby bankrupting the entire system.
In its role as a member (with the European Commission and the International Monetary Fund) of the ‘troika’, the ECB also forced Greece in 2010-15 to repay bank creditors by raising taxes on households and consumption (VAT). Taxation on citizens should thus be increased to pay off banks but banks may not be taxed to fund government spending supporting citizens.
It was immaterial to the ECB whether spending cuts lessened the ‘resilience’ of the Greek public. Indeed the Memoranda of Understanding (MoU) with Greece could not be challenged on grounds of violating labour or social rights, because the European Stability Mechanism—which borrowed from banks and then lent to Greece, which then repaid the very same banks, the ECB and the IMF—falls outside European Union law.
This asymmetric conflation of fiscal and monetary policy is reiterated in the opinion on Spain. The ECB advises against generic fiscal support for households, as this would threaten debt sustainability—it being one of Spain’s creditors, alongside commercial banks.
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As to the ECB’s claim on competition, it is indeed somewhat unsatisfying that only Spanish banks are to be taxed. In 2010-13 the ECB, however, fought tooth-and-nail to block an EU-wide tax on financial transactions, which a number of member states supported. The then ECB president, Jean-Claude Trichet, opposed it as putting ‘sand in the machine’. Differentiation of tax levels is moreover part and parcel of the EU. Corporation tax is lowest in Ireland, tax exemption for Greek churches has survived all MoUs and ECB employees are not taxed at all. For better or worse, fiscal policy is the prerogative of member states.
Of course, many actors are trying to influence governments to lower taxation for themselves or their allies. One is the ECB, which consistently opposes any taxation of financial actors. It advised for example in 2019 against a legislative proposal in the Lithuanian parliament to tax ‘assets of certain financial market participants’.
The only truly supranational EU institution is actively working against European citizens, to enrich shareholders and the employees of banks. This is hardly surprising, given its activities in the eurozone crisis and the revolving door between the ECB and commercial banks. But it is deeply anti-European all the same.