EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 4 November 2004 
at the request of the Belgian Ministry of Finance 
on a draft law introducing a tax on exchange op erations involving foreign exchange, banknotes and 
currency 
(CON/2004/34)  
 Introduction
 
1. On 12 July 2004 the European Central Bank (ECB) received a request from the Belgian Ministry of 
Finance for an opinion on  a draft law introducing a tax on exch ange operations involving foreign 
exchange, banknotes and currency  (hereinafter the ‘draft law’). 
2. The ECB is competent to deliver an opinion, sin ce the draft law – in view of its subject matter, 
purpose and effects – directly concerns the fields  of competence of the Eurosystem and the ECB. 
The ECB’s competence is, in particular, based on the second indent of Article 105(4) of the Treaty establishing the European Community and on the first,  second, third and sixth indents of Article 2(1) 
of Council Decision 98/415/EC of 29 June 1998 on the consultation of the European Central Bank 
by national authorities regarding draft legislative provisions
1, as the draft law: 
(i) deals with foreign exchange, banknotes and currencie s that are legal tender (third paragraph of 
Article 4); and 
(ii) provides for the possibility for agreements to be concluded with the ‘central bank which 
controls the legal tender in Belgium’, which would include verification measures regarding 
the application of the law (third  paragraph of Article 12); and 
(iii) excludes foreign exchange transactions conducted by, inter alia , central banks (Article 9(2)); 
and 
(iv) if it enters into force, might have a signifi cant impact on financial transactions conducted by 
financial institutions and on international capital flows, which, in view of their volume, might 
have a substantial impact on (int ernational) financial markets. 
3. The purpose of the draft law is to impose a tax on all exchange transactions involving foreign 
exchange (hereinafter ‘foreign exchange transacti ons’) taking place in Belgium. It contains the 
following elements: 
                                                           
1 OJ L 189, 3.7.1998, p. 42.  
2 (i) The draft law defines foreign exchange tran sactions extremely broadly (Article 2 and 
paragraphs 3 to 5 of Article 4). The tax envisaged by the draft law applies to transactions 
involving the exchange of the euro against a non-euro currency and vice versa , as well as 
involving the exchange of non-euro currencies. The ECB understands that a non-euro currency may be the currency of a Member State that has not adopted the euro (hereinafter 
‘non-euro area Member State’), or of a country outside the European Union. 
(ii) The draft law also defines very broadly the f actors determining whether a foreign exchange 
transaction is deemed to take place in Belgiu m and, thus, whether such transaction will be 
taxable under the draft law. According to th e draft law, the place of establishment in 
Belgium of one of the parties or intermediari es to the transaction is only one of the three 
alternative factors (Article 5§1(1)). The two other factors are (a) the payment of, or the 
negotiations or orders for, the transaction take place in Belgium (Article 5§1(2)); or (b) one 
of the currencies in the foreign exchange  transaction is legal tender in Belgium 
(Article 5§1(3)). Since the euro is legal tender in Belgium, th e tax provided for in the draft 
law would apply to each foreign exchange tr ansaction involving the euro, wherever the 
transaction is negotiated, concl uded or executed and whatever the residence of the parties or 
intermediaries to the transaction. It is noted that  the application of this third factor is subject 
to agreement by the ‘competent European authorities’ (paragraph 19). 
(iii) The tax envisaged by the draft law consists of a two-tier system with (i) a normal tax rate of 
0.02% on each foreign exchange transaction; a nd (ii) a tax rate of up to 80% on foreign 
exchange transactions carried out at an excha nge rate outside a predetermined fluctuation 
margin around a 20 day moving average.  
The draft law provides that it will only enter into fo rce if either all Member  States of the Economic 
and Monetary Union (EMU) include in their legisla tion a tax on foreign exchange transactions or if a 
Community directive or regulation is adopted on  this issue (third paragraph of Article 13)
2. 
 
Preliminary remark  
4. The ECB acknowledges the good intentions underlyi ng the draft law. However, for the reasons 
mentioned hereunder, the ECB considers that pursu ing these intentions through the imposition of a 
tax such as envisaged by the draft law ra ises serious economic and legal difficulties. 
Economic assessment  
5. In his letter to the President of the ECOFIN Council of 21 September 2001, the ECB’s President 
already conveyed the Eurosystem’s assessment of a tax on foreign exchange transactions, generally 
                                                           
2 The ECB notes that a law providing for such a tax has existed in France since the end of 2001 (see Article 235ter ZD of the 
French General Tax Code). The French law provides for a ma ximum tax of 0.1% on foreign ex change transactions and not 
for an extraordinary tax in the event of major exchange rate fluctuations. The French law provides that it will only enter 
into force from the date that ‘the EC Member States will have finished the integration in their legislation of the measures 
adopted by the Council that provide for the establishment, in all the Member States, of a tax on foreign exchange 
transactions, and at the earliest from 1 January 2003’.  
3 referred to as Tobin tax. This letter was written in vi ew of a discussion of this matter in the ECOFIN 
Council in 2001 under the Belgian Presidency of the EU. 
6. From the explanatory memorandum to the draft law, the ECB understands that the rationale for the 
draft law corresponds to the three main arguments  generally invoked for introducing such a tax. 
First, excessive short-term trading has often been  blamed for extremely high volatility in foreign 
exchange markets. The tax has, therefore, been proposed to mitig ate the part of exchange rate 
fluctuations that is not directly related to funda mentals and to allow a larger degree of monetary 
policy autonomy. Second, some variants of the tax, such as the Spahn variant, have been proposed as 
instruments to prevent and/or counteract speculative attacks. Third, the tax is considered as having 
great potential for raising revenue. However, in te rms of effectiveness, such a tax would fulfil the 
abovementioned expectations only if (i) excessive trading created significant excessive volatility; (ii) this volatility significantly affected other ec onomic activities, such as trading or investment; and 
(iii) the tax could reduce this excessive volatility without creating excessive distortions. 
7. The ECB notes that economic analysis and empirica l evidence indicate that there is reasonable doubt 
with regard to the general validity of each of th ese three conditions and that the tax could instead 
give rise to significant costs. First, economic litera ture provides little evidence that a transaction tax 
such as the Tobin tax would reduce exchange rate vol atility. In fact, the effect of such a tax on 
volatility is ambiguous, i.e. it could also increase volatility, as it may result in reduced depth and liquidity of the foreign exchange markets. Therefor e, the effectiveness of the tax with regard to its 
main objective could be seriously questioned. Seco nd, as regards the impact of the tax on market 
efficiency and allocation, while daily turnover in shor t-term transactions is very high, a large part of 
it is related to hedging and distribution of risks among market participants. To the extent that the 
functioning of financial markets might be hampered by the tax, the risk-sharing benefits of deep and 
liquid markets might be reduced by its implementati on. Furthermore, since the demise of the Bretton 
Woods system, there is a widespread view amon g economists that exchange rate volatility is 
inherent in floating exchange rate  regimes and is not necessarily detrimental to international trade. 
On the contrary, a flexible exchange rate can pl ay an important role in cushioning asymmetric 
shocks. Also, strong empirical evidence that excha nge rate volatility has a negative effect on trade, 
especially among developed economies, is lacking. 
8. The ECB also notes that, while excessive volatility  may adversely affect economic transactions, 
allocation of investment and, hence, growth, signi ficant exchange rate volatility and a high level of 
short-term capital flows do not necessarily signal market failure. Instead, they can frequently be interpreted as symptoms of underlying macro economic imbalances and cannot schematically be 
interpreted as being excessive. In these circumstan ces, the tax would on the one hand largely focus 
on the symptoms, while on the other hand financial mark et participants are likely to find ways to 
circumvent the tax. In particular, the tax might not  help prevent speculative attacks, as any proposed 
levy from such a tax would be small compared with  expected gains from exchange rate changes. 
4 9. The Spahn variant of the tax, which is also proposed  in the draft law, consists of a two-tier system 
with a very low ‘normal’ tax rate, and a very high ‘extraordinary’ tax rate in the event of extreme 
exchange rate market turbulence. The Spahn va riant is presented as being more effective in 
regulating capital flows and avoiding speculative a ttacks. However, the ECB notes that economic 
theory often argues against variab le-rate taxes because they create pr ice uncertainty in the markets. 
In this case, ensuing widened spreads in financ ial markets are likely to make investment more 
costly, especially in countries whose currencies seem  to be more prone to volatility, i.e. emerging 
markets. 
10. Also, there is little evidence that, in today’s wo rld, monetary and exchange-rate autonomy would 
economically benefit from such a tax. Experien ce suggests that, in the main currency areas, 
sufficient monetary policy autonomy exists and ther e is no need to enhance it by introducing further 
distortions to the asset price setting mechanisms. 
11. Finally, the introduction of such a tax would raise serious difficulties in terms of its implementation. 
The tax raises transaction costs and would create incentives among market participants to develop 
alternative instruments and/or to operate in financ ial centres not subject to the tax. In the latter case, 
offshore centres would become more attractive, thereby increasing opacity and facilitating fraud in 
financial transactions. Therefore, the feasibility of the tax is highly questionable, given the welfare 
costs arising from distortions in the working financ ial markets and the likely difficulties in agreeing 
on universal implementation of the tax at internatio nal level and bearing in mind the difficulty of 
enforcing sanctions against non-participants. 
12. Considering the above, the ECB concludes that the economic and monetary usefulness of a tax, such 
as envisaged by the draft law, is highly questionabl e, given the uncertainty of its claimed benefits 
and the likely welfare costs arising from distortions in the working of financial markets. This assessment is reinforced by the difficulties e xpected with respect to its implementation. 
Legal assessment
 
13. The euro area’s exchange-rate policy is an exclus ive Community competence. As the purpose of the 
tax envisaged by the draft law is to influence the eu ro’s exchange rate vis-à-vis another currency, in 
particular to smooth exchange-rate  developments and reduce volatility, the draft law would provide 
a national government with the means to impinge  on the Community’s authority to define and 
conduct exchange-rate policy. On these grounds, the draft law should be deemed incompatible with 
the Treaty, as its application would interfere with  the Community’s exclusive competence in the 
field of exchange-rate policy. 
14. Furthermore, under the ECB’s analysis, the tax provided  for in the draft law is incompatible with the 
free movement of capital and payments between Member States, and between Member States and third countries (Article 56 of the Treaty). This tax is indeed a measure imposed by a public authority 
which may or will, directly or indirectly, hinder  the conclusion and/or execution of the capital or 
payment transfer involving foreign exchange on wh ich the tax is imposed. Also, the tax will imply 
5 less favourable treatment of certain transactions in  the currency of a non-euro area Member State or 
a third country compared to the same kind of transacti on in euro only. It is underlined in this context 
that EMU’s proper functioning depends on the f undamental freedom of capital movement and 
payments both within and beyond the boundaries of the EU. EMU is indeed based on completion of 
the internal market, of which the free moveme nt of capital and payments is a centrepiece 
(Article 14(2) of the Treaty). 
15. Furthermore, the ECB considers that the excepti ons laid down in Article 57(1), Article 60(2), 
Articles 119 and 120, and Article 297 of the Treaty, which allow Member States to restrict under specific circumstances the free movement of capital and payments, do not cover the measures envisaged by the draft law. Also, Article 58(1)(a ) of the Treaty only justifies a tax measure that 
distinguishes between taxpayers on the basis of th eir place of residence or  the place where their 
capital is invested. However, the draft law does not  distinguish according to taxpayers, but according 
to transactions. Considering the narrow interpreta tion of ‘public policy’ and ‘public security’ in 
Article 58(1)(b) of the Treaty, as well as the exchange -rate policy nature of the tax envisaged by the 
draft law (paragraph 12), the ECB is of the opinion that such a tax may not be introduced on such grounds. Similarly, the ECB is of the opinion that  such a tax cannot be justified and objectively 
required for mandatory reasons of general interest. 
16. The draft law considers as a ‘State’ the ‘European  Economic and Monetary Union or every other 
territory with a single currency’ (second paragra ph of Article 4). EMU includes all Member States 
and, thus, also the Member States that have not adopted the euro as thei r currency (these Member 
States are either in the second stage or in the thir d stage with a derogation). A reference to EMU for 
the purposes of defining a currency area is therefore inappropriate. Also, considering EMU as a ‘State’ is inconsistent with the draf t law’s intention to impose the tax on, inter alia , transactions 
involving the exchange of euro for the currency of a non-euro area Member State (paragraph 3), 
since this implies that the euro and the currenci es of the non-euro area Member States are currencies 
of the same ‘State’. 
17. According to Article 5§1 of the draft law, ‘the pro ceeds of the tax (…) shall be paid in full into a 
fund, managed by the European Union and to be  allocated for cooperation and development, to 
promoting social and ecological justice and to  conserving and protecting international public 
property’. A legislator of an individual Member State adopting this provision would attribute the 
management of a fund established at national le vel to the EU. However, the creation of new 
Community tasks by national legislation does not app ear to be compatible with the Community legal 
framework and order. 
18. The second paragraph of Article 8 of the draft law provides that the tax rate of maximum 80% will 
be established ‘by a decision
3 adopted after deliberation in the [Belgian] Council of Ministers and 
respecting Article 59 of the EC Treaty and the secondary law derived from it’. The draft law also 
                                                           
3 It is understood that this will be a royal decree. 
6 provides that such a tax will only apply ‘after the competent European authorities have given their 
agreement’ (second paragraph of Article 13). Artic le 59 of the Treaty concerns safeguard measures 
with regard to third countries where, in exceptiona l circumstances, movements of capital to or from 
third countries cause, or threaten to cause, ser ious difficulties for the operation of Economic and 
Monetary Union. It provides for an exclusive Community competence, wh ereby the measures are 
taken by the Council on a proposal from the Commi ssion and after consulting the ECB – and not by, 
or on, a proposal from a Member State. Therefore, the procedures defined by the draft law for the adoption and implementation of the tax rate of ma ximum 80% do not comply with Article 59 of the 
Treaty. Also, if and when the conditions for a pplying Article 59 of the Treaty are fulfilled, the 
Community is free to assess whether or not to use this provision, as well as to assess and take any safeguard measure(s) that it deems appropriate, with out being subject to, or bound and restricted by, 
a Member State’s legislation, procedures or measures. 
19. The second paragraph of Article 13 of the draft la w provides that the provision that a foreign 
exchange transaction is deemed to take place in Belg ium if one of the involved currencies is the euro 
will only apply ‘after the competent European aut horities will have given their agreement’. The ECB 
refers on this issue to the preceding paragra ph 18 on the compatibility of the draft law with 
Article
 59 of the Treaty. 
20. The third paragraph of Article 13 of the draft law requires that ‘all Member States of the European 
Economic and Monetary Union have introduced a tax on the exchange of foreign exchange in their 
legislation’ as a condition precedent for the law to enter into force. Howeve r, a measure remains at 
Member State level and is not transformed into a Community measure if and because all Member States individually adopt such a measure under th eir respective laws. Therefore, the arguments 
raised in paragraphs 13 to 15 regarding a Member State’s competence to introduce a Tobin tax, as well as paragraph 18 regarding Article  59 of the Treaty, still fully apply if all Member States were to 
individually introduce such a tax in their nationa l legislation. The draft law requires, as an 
alternative condition for its entry into force, ‘a Eur opean directive or regulation’ (third paragraph of 
Article 13; the ECB understands that this would be a directive or regulation introducing such a tax). 
In view of the subject matter of the present opini on (draft national legislation) and, therefore, 
without assessing the introduction of such a tax at Co mmunity level, the ECB refers also as regards 
this alternative condition to the above observations  regarding the exclusiv e Community competence 
for exchange-rate policy of the eu ro area (paragraph 13) and to the relationship between Community 
and national law (paragraph 18). 
21. Considering the subject matter of the draft law and the measures it envisages, the ECB would need 
to be consulted on any act or decree implementing the law (see, inter alia , the second and third 
paragraphs of Article 8, Article 9( 2) and Article 12 of the draft law). 
22. On the basis of the assessment above, the ECB is of  the opinion that the introduction by a euro area 
Member State of a tax, such as envisaged by the dr aft law, is incompatible with the Treaty. This 
7 assessment is without prejudice to an assessment of the draft law by the Community institutions that 
are entrusted with ensuring the application and observance of the Treaty. 
Final remark  
23. This opinion will be published on the ECB’s website. 
  Done at Frankfurt am Main, 4 November 2004. 
 
[ signed ] 
 
The President of the ECB 
Jean-Claude TRICHET