Should Europe Institute the Tobin Tax?

In recent weeks, chatter in Europe has increasingly turned to the so-called "Tobin Tax". Named after Nobel award winning economist James Tobin who first proposed to regulate international currency markets, this tax would affect financial transactions. Advocated by Germany and readily supported by France, Italy and Spain, supporters push for the tax on the grounds that it hurts financial speculation. The more transactions, the higher the tax bill, and the less convenient it becomes to speculate on trades. While it would bring in welcomed revenue to European governments, the Tobin Tax has its downsides. First, it would likely result in a reduction of liquidity in the market as the number of financial transactions decline. Furthermore, it raises the possibility of “capital flight"--speculators could flee to cheaper markets. It's just this consideration on which Great Britain justifies its refusal to endorse the tax. London, one of the world's capitals of finance, bases much of its economy on financial services. If speculators should decide to move their base of operations elsewhere, the economic damage to the British economy could be enormous. If the Tobin Tax were applied only to the 17 Eurozone economies and not to all the 27 EU countries, the tax could be ineffective. Still, should European lawmakers really attempt to combat speculation in the financial markets? Financial speculation is made by large investors (banks, sovereign state funds, foundations) who want to profit from perceived asymmetries in the financial markets. Generally, they anticipate the vicissitudes of the real economy, sometimes they prevent them. A recent example: the widening of spreads between Italian and Spanish government bonds and German bonds. This widening in yields, triggered by financial speculation, brought government deficits to the forefront of political discussion. Although the speculation may have prompted the sweeping changes in Europe, deficit spending has long been a problem for these countries. It's clear that there is a moral issue when talking about speculation, as some investors gain at the expense of others. But the usefulness of signs indicating the direction of the market remains; without it, other “players” must grasp the sense and act accordingly. If the justification for the Tobin Tax is fiscal, we can also discuss the need to introduce a new instrument designed to bring in revenue. However, if the reasons are based on the "war" against speculation, I think this tax is useless because of its ineffectiveness and motivation.