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 operations involving foreign exchange, banknotes and currency (CON/2004/34)
Date: 2004-11-04
Institutions: European Central Bank
Subjects: Belgium, euro, exchange transaction, foreign exchange market, money, national law, tax

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 operations 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  exchange  operations  involving  foreign 

exchange, banknotes and currency (hereinafter the ‘draft law’). 

2. 

The  ECB  is  competent  to  deliver  an  opinion,  since  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 provisions1, as the draft law: 

(i) 

deals with foreign exchange, banknotes and currencies 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 significant 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 (international) financial markets. 

3. 

The  purpose  of  the  draft  law  is  to  impose  a  tax  on  all  exchange  transactions  involving  foreign 

exchange  (hereinafter  ‘foreign  exchange  transactions’)  taking  place  in  Belgium.  It  contains  the 

following elements: 

1 

OJ L 189, 3.7.1998, p. 42. 

 
 
 
                                                           
(i) 

The  draft  law  defines  foreign  exchange  transactions  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 factors determining whether a foreign exchange 

transaction is deemed to take place in Belgium and, thus, whether such transaction will be 

taxable  under  the  draft  law.  According  to  the  draft  law,  the  place  of  establishment  in 

Belgium  of  one  of  the  parties  or  intermediaries  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, the tax provided for in the draft 

law  would  apply  to  each  foreign  exchange  transaction  involving  the  euro,  wherever  the 

transaction is negotiated, concluded 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;  and  (ii)  a  tax  rate  of  up  to  80%  on  foreign 

exchange  transactions  carried  out  at  an  exchange  rate  outside  a  predetermined  fluctuation 

margin around a 20 day moving average.  

The draft law provides that it will only enter into force if either all Member States of the Economic 

and Monetary Union (EMU) include in their legislation 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  underlying  the  draft  law.  However,  for  the  reasons 

mentioned hereunder, the ECB considers that pursuing these intentions through the imposition of a 

tax such as envisaged by the draft law raises 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 maximum tax of 0.1% on foreign exchange 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’. 

2 

 
                                                           
referred to as Tobin tax. This letter was written in view 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  mitigate  the  part  of  exchange  rate 

fluctuations  that  is  not  directly  related  to  fundamentals  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 terms 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 economic 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 empirical evidence indicate that there is reasonable doubt 

with regard to the general validity of each of these  three conditions and that the tax could instead 

give rise to significant costs. First, economic literature provides little evidence that a transaction tax 

such  as  the  Tobin  tax  would  reduce  exchange  rate  volatility.  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. Therefore, the effectiveness of the tax with regard to its 

main  objective  could  be  seriously  questioned.  Second,  as  regards  the  impact  of  the  tax  on  market 

efficiency and allocation, while daily turnover in short-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 implementation. Furthermore, since the demise of the Bretton 

Woods  system,  there  is  a  widespread  view  among  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  play  an  important  role  in  cushioning  asymmetric 

shocks. Also, strong empirical evidence that exchange 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, significant 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  macroeconomic  imbalances  and  cannot  schematically  be 

interpreted as being excessive. In these circumstances, the tax would on the one hand largely focus 

on  the  symptoms,  while  on  the  other  hand  financial  market  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. 

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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  variant  is  presented  as  being  more  effective  in 

regulating  capital  flows  and  avoiding  speculative  attacks.  However,  the  ECB  notes  that  economic 

theory often argues against variable-rate taxes because they create price uncertainty in the markets. 

In  this  case,  ensuing  widened  spreads  in  financial  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  world,  monetary  and  exchange-rate  autonomy  would 

economically  benefit  from  such  a  tax.  Experience  suggests  that,  in  the  main  currency  areas, 

sufficient monetary policy autonomy exists and there 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 financial 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 financial markets and the likely difficulties in agreeing 

on  universal  implementation  of  the  tax  at  international  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 questionable, 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 expected with respect to its implementation. 

Legal assessment 

13.  The euro area’s exchange-rate policy is an exclusive Community competence. As the purpose of the 

tax envisaged by the draft law is to influence the euro’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 which the tax is imposed. Also, the tax will imply 

4 

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 transaction in euro only. It is underlined in this context 

that  EMU’s  proper  functioning  depends  on  the  fundamental  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  movement  of  capital  and  payments  is  a  centrepiece 

(Article 14(2) of the Treaty). 

15.  Furthermore,  the  ECB  considers  that  the  exceptions  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  their  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  interpretation  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 paragraph of Article 4). EMU includes all Member States 

and, thus, also the Member States that have not adopted the euro as their currency (these Member 

States are either in the second stage or in the third 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  draft  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 currencies of the non-euro area Member States are currencies 

of the same ‘State’. 

17.  According to Article 5§1 of the draft law, ‘the proceeds 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  level  to  the  EU.  However,  the  creation  of  new 

Community tasks by national legislation does not appear 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  decision3  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. 

5 

                                                           
provides that such a tax will only apply ‘after the competent European authorities have given their 

agreement’ (second paragraph of Article 13). Article 59 of the Treaty concerns safeguard measures 

with regard to third countries where, in exceptional circumstances, movements of capital to or from 

third  countries  cause,  or  threaten  to  cause,  serious  difficulties  for  the  operation  of  Economic  and 

Monetary  Union.  It  provides  for  an  exclusive  Community  competence,  whereby  the  measures  are 

taken by the Council on a proposal from the Commission 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 maximum 80% do not comply with Article 59 of the 

Treaty.  Also,  if  and  when  the  conditions  for  applying  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, without 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  law  provides  that  the  provision  that  a  foreign 

exchange transaction is deemed to take place in Belgium if one of the involved currencies is the euro 

will only apply ‘after the competent European authorities will have given their agreement’. The ECB 

refers  on  this  issue  to  the  preceding  paragraph  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. However, 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  their  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  national  legislation.  The  draft  law  requires,  as  an 

alternative condition for its entry into force, ‘a European 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  opinion  (draft  national  legislation)  and,  therefore, 

without assessing the introduction of such a tax at Community level, the ECB refers also as regards 

this alternative condition to the above observations regarding the exclusive Community competence 

for exchange-rate policy of the euro 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  draft  law,  is  incompatible  with  the  Treaty.  This 

6 

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 

7