The English Channel is 21 miles wide at its narrowest point; the distance from Dover to Calais can pass so quickly on the Eurostar train that a person who dozes can wake up unsure if it is the British or French countryside visible out the window. But that 21 miles of water between Britain and continental Europe has felt wider this week than it has in decades.
Most dramatically, British Prime Minister David Cameron proposed a referendum on whether the United Kingdom should remain in the European Union, throwing in doubt the idea that Britain participate in the 27-nation compact that has been the vehicle for unity on a continent long ravaged by war and discord. By the long list of regulations handed down by EU bureaucrats in Brussels—and no doubt also nostalgic the days when Britain was the world’s great power—much of Cameron’s conservative party wants less to do with the rest of Europe, and Cameron is playing a delicate game of trying to manage his own coalition. But it is a risky gambit that could pollute relations with Britain’s leading trading partners and add a pall of uncertainty for the nation’s stagnant economy.
A second development this week attracted smaller headlines, but is a more concrete example of where Britain finds itself at odds with its neighbors across the channel. Eleven European nations, led by France and Germany, are moving forward to establish a “financial transactions tax,” which will charge a tenth of a percent of the value of any stock or bond trade.
It is an old idea whose time may have come. Economist James Tobin proposed the idea in the early 1970s, recognizing that a world where financial assets can be traded across the globe in an instant can actually be destabilizing to economies, causing cycles of boom and bust. There’s a big difference between building a factory in Estonia and buying shares of an Estonian company, even if the two are treated the same in the nation’s capital account; the former is a long-term investment that creates jobs for Estonian workers and can’t be easily reversed the minute the economy takes a dip, whereas a hedge fund might dump an Estonian stock at a moment’s notice. The theory goes that having just a little bit of sand in the gears of global capital markets—the transactions tax—might reduce the wild swings of financial markets. (Estonia, incidentally, is one of the countries joining with France and Germany on a financial transactions tax).
Tobin could hardly have imagined the world we have now, when “high frequency trading” is an overwhelming driver of stock market volume, with billions of dollars sloshing around trying to exploit every millisecond of advantage that can be gleaned on trading patterns. A financial transactions tax, if it were global and if it can be enforced, could slow that business down measurably. The great danger in the tax is that it will succeed in taxing ordinary German and French and Italian savers and investors, but fail in clamping down on the “hot money” that it is aimed at. After all, it is the largest and most savvy investors who have every incentive to relocate to London or New York or Hong Kong or any number of other cities looking to claim a share of the global financial services market (Singapore? Dubai? Zurich?).
Here’s what Britain’s rethinking its relationship with the EU and the transactions tax have in common. The United Kingdom is being squeezed between its culture and its geography. There is a strain within British politics that wants very much to ally with the “Anglosphere” of former colonies—the United States, Canada, Australia, New Zealand, which share both the English language and an entrepreneurial culture averse to regulation. To nations in that tradition, a financial transaction tax, however sound its economic logic, is an affront to the free flow of capital. British newspapers routinely make sport pointing out absurd-sounding European Commission regulations (one, restricting the allowable curvature of bananas, was eliminated only after much chortling, leaving hundreds of millions of Europeans responsible for judging acceptable shapes for produce on their own).
But while in language and culture, London has quite a lot in common with New York and Toronto, sheer geographic logic means that Britain should be economically intertwined with Paris and Frankfurt. Britain exported 158 billion pounds worth of goods and services to other EU nations in 2011—and only 137 billion pounds to the entire rest of the world.
So the path Britain chooses comes down to this: Are you willing to risk annoying your biggest customers out of cultural affinity and annoyance at some meddlesome regulations?