The bill for the crisis is on its way. In the UK, VAT will rise from 17.5 percent to 20 percent as of January 2011. Germany is cutting unemployment benefits, Spain has relaxed personnel layoff laws, Portugal is downsizing public sector pension benefits, and France wants to extend retirement age for everyone.

Huge deficits plague most European countries and the US, and the Greek example shows that the patience of the debt-financing markets eventually comes to an end. But it is precisely the banking sector that is perceived as the main culprit responsible for the crisis that has brought many countries to the verge of bankruptcy. Shouldn’t it therefore contribute to rescuing the public finances, which helped it survive only recently?

From bank rescues to deficit reductions

The problem is that almost every government has a different view on the matter. The only thing agreed at the latest G20 summit, where policymakers of the world’s largest economies met, was that every country can proceed as it thinks it fit. Stephen Harper, the prime minister of Canada, which has safely braved the crisis, has from the beginning ruled out his support for any global bank taxing scheme. The Chinese, who do not want to put extra pressure on their banks, have done the same.

On the opposite side are countries that have had to rescue their banks and now have to reduce their deficits – first of all the US, Germany, the UK, and France. In order not to weaken their financial institutions’ competitive position, leaders like Angela Merkel or David Cameron would, of course, like to see the introduction of a global tax, identical in all countries. That would prevent the flight of capital from one country to another to avoid the new tax. However, the pro-tax camp is weak if only because of the fact that although all of its members demand extra duty from banks, they do not necessarily agree on what the money should be spent.

Obama plan dumped by Congress

President Barack Obama simply wants to recover the $100 billion (€76.5 billion) the US troubled asset relief program has cost. A new tax would apply to the largest institutions only and vary depending on their operating profile. Banks involved in high-risk investment strategies would pay more. But for now the plan has been dumped by Congress, the Democrats sacrificing it in order to push through new regulations for the financial sector.

A different path has been chosen by the new British prime minister, David Cameron who believes that banks should contribute to rescuing the public finances of a country whose deficit has turned out to be comparable to Greece’s. The recently amended British budget introduces a new tax calculated on the basis of the bank’s balance sheet total. It is to yield some £1 billion this year and £2-2.5 billion annually from 2011. The revenue will go directly to the budget and is to show to the public how fairly extra burdens are distributed in Britain.

Swedes, champions of a new banking tax

Germany would like a similar tax to yield some €1.2 billion annually. Rather than spending the funds, the Merkel cabinet has proposed collecting them in a special “stabilisation fund” that would serve as a sort of insurance policy in the case of another banking crisis. Then the funds for rescuing troubled financial institutions would come from this source rather than the taxpayers’ pockets. The fund would be protected from political interference and could not be used for any other purpose. In fact, the idea is not German but a copy of a similar solution introduced in 2009 in Sweden.

It is precisely the Swedes who are the champions of a new banking tax. They want their stabilisation fund to be worth some 2.5 percent of GDP within 15 years. Every year, the largest Swedish banks pay several hundred million crows each towards the purpose. Swedish politicians have been promoting the model internationally. They argue that the new tax is so small it doesn’t weaken banks and yet large enough to accrue into a sizeable sum with time. Critics however point out the system’s major weakness: the duty is calculated on the basis of the bank’s turnover in Sweden, excluding its overseas operations. The effect is that institutions geared mostly towards Sweden, where high-risk operations are traditionally avoided, pay more than their rivals who have invested a lot in the Baltics and suffered major losses as a result.

Stabilisation funds largely symbolic

Despite that, the European Commission has clearly become fond of the Swedish solution. Brussels is trying to coordinate the measures undertaken by member states and avoid a situation where each country has a different banking tax. The Commission would like all member states to create stabilisation funds that together would receive up to 50 billion EUR annually. As a result, all EU member states would have insurance policies in the case of another banking crunch while, at the same time, financial institutions operating in the EU would be equally treated.

Unfortunately, those who believe that forcing banks to save money for a rainy day can protect us from paying for another crisis may be in for a big disappointment. That is because the taxes that have actually been passed into law so far are largely symbolic. Germany, for instance, plans to collect slightly over €1 billion annually while rescuing Germany’s Hypo Real Estate alone has cost over €100 billion so far. The stabilisation funds would have to be in place for at least several decades to gain a size proportional to the threat.

Banks aren't easily replaceable

“For now, the whole thing has been little more than a populist gesture. Governments want to convince the public that also banks are paying for the crisis but with the small sums we are talking about this has largely been a symbolic move rather than an actual duty levied on the financial sector,” says Piotr Kuczyński, analyst at Xelion, a Warsaw-based financial advisory firm. This is because banks have a powerful weapon: they are threatening to simply offload any extra costs onto their clients.

That is why countries that have decided to introduce a new banking tax are keeping it low, at a level virtually imperceptible for the sector. And banks have the advantage of not being easily replaceable. A global recovery, and in Poland a return to fast-growth, will not happen if the financial sector refuses to play ball. That is why banks have been letting governments know that it is better not to pick up a fight with them. And, for now at least, they have been successful in getting the message through.