E.U. Commission Wants the Financial Sector to Pay

By: T. Christina Colosimo, Associate, The Global Business Law Review

After the global economic crisis, the European Union’s (EU) economy has suffered one of the worst recessions since the 1930s.  The financial sector played a major role in the EU’s economic crisis starting in 2007 with a steady increase of failing banks.[1]  EU governments and citizens committed 4.6 billion euros in an effort to support and rescue the financial sector with taxpayer funded bailouts.[2]

The European Commission’s (Commission) response to the recession has been swift and proactive.  On September 28, 2011, the Commission announced a proposal for a financial transaction tax (FTT) for the 27 Member States as a resource for the EU’s budget.[3]  The Commission’s proposal for the FTT is available at http://ec.europa.eu/taxation_customs/resources/documents/taxation/other_taxes/financial_sector/com(2011)594_en.pdf. The proposal requires unanimous support from the 27 Member States, and if approved by all, it would levy a tax on transactions involving financial instruments between institutions if at least one party is located in the EU.[4]  The tax rate for the exchange of shares and bonds is set at 0.1% and a rate of 0.01% on derivative contracts.[5]

The Commission has considered a financial transaction tax since the bailouts.  The financial sector’s contributing role in the financial crisis has piloted the proposal and will ensure that the financial sector contributes at a time of fiscal need. The proposed FTT will raise revenue of €57 billion ($78 billion) in one year, and the tax will strengthen the EU single market.[6]  The FTT is also designed to create a disincentive for transactions that do not enhance the efficiency of the financial markets and will prevent a future crisis.

European governments are split over the merits of the proposed financial transaction tax.  Some fear that the tax may drive business away from the EU, increase the cost of raising capital and damage member states’ economies.[7]  The UK believes that the Commission needs to realign its focus on growth during the recession, rather then implementing a tax that will push the financial sector abroad to New York and Singapore.[8]  Financial Times Newspaper also reported that the proposal could shrink EU’s gross domestic product by 1.76 percent over time.[9]

For the Opening Act: A Greek Tragedy

By: Erik Dickinson, Associate, The Global Business Law Review

On October 27, 2011, after months of uncertainty and growing fears, European leaders reached a three-pronged agreement[1] designed to lower Greece’s debt burden and prevent the crisis from escalating by spreading to other Eurozone states[2] and potentially crippling the European Union and others on the global market. In the few weeks that have followed, many, including the Greeks, have questioned Greece’s place in Europe, a prime minister has resigned, and questions remain.

First, private investors agreed to take a 50% loss on their Greek bonds.[3]  As a result, Greece’s debt will be reduced from the current rate of 160% of its GDP to 120% by 2020.[4]  Second, banks will be required to raise around 106 billion euros in new capital by June 2012.[5]  The goal is that the new capital will protect the banks, as well as larger economies, from any government defaults.[6]  Finally, the Eurozone member states agreed to increase the lending capacity of the European Financial Stability Facility (EFSF)[7] from 440 billion euros to over 1 trillion euros.[8]

The EFSF bailout fund could be leveraged in a handful of ways.  Insurance could be offered to debt purchasers[9] thereby making the bonds more attractive to investors.[10]  Another proposal with support is to create special investment vehicles to allow big investors, including countries like China, to contribute.[11]  Most likely, these and other options would be used simultaneously.

Moving forward from this agreement, EU leaders continued their calls for more stringent financial reform and now square their focus on Italy, the Eurozone’s third largest economy.[12]  Recently, German Chancellor Merkel and French President Sarkozy criticized former Italian Prime Minister Berlusconi for his reluctance to follow through with promised budget cuts and other economic reforms.[13]  EU President Van Rompuy specifically noted that the main concern for Italy is implementation of Berlusconi’s proposals.[14]   Even as this crisis may be averted for now,  the looming question of Italy tempers enthusiasm for this agreement and highlights the balancing act for Europe’s leading economies as they continue charting a path to a more robust unity, continued cooperation, or disappointing abandonment of the EU.

Russia and China Lead the Way in Paying Bribes; U.S. 10th Least Corrupt

In the lead up to our March 30, 2012, Symposium on Anti-Bribery, we will occasionally highlight news focused on the global efforts to combat corruption.  A recent study , as reported by the BBC, conducted by the anti-corruption group Transparency international ranked companies from Russia and China as the most likely to pay bribes to ensure their business dealings go through. “Given the increasing global presence of businesses from the countries, bribery and corruption are likely to have a substantial impact on societies in which they operate and on the ability of companies to compete fairly in these markets.” You may access the BBC’s article and the complete rankings at http://www.bbc.co.uk/news/business-15544841.

Unlike in Iraq and Afghanistan, the U.S. Appears to be Taking a Hands-Off Approach to Libya

By Paul Shugar, Associate, The Global Business Law Review

Since a 27-year-old Muammar Qaddafi seized control in 1969, Libya has known no other leader.[1]  While his relationship with the United States could best be described as neutral in the 1970s, it soured in the 1980s when terrorist attacks in Europe were linked to the dictator.[2]  After U.S. President Ronald Reagan deemed Qaddafi “the mad dog of the Middle East,” U.S. warplanes struck Benghazi and Tripoli in 1986.[3]  Further Qaddafi-sponsored terrorist acts led to Great Britain and France joining the U.S. in imposing United Nations sanctions on Libya.[4]  The U.S.-Libya relationship remained tense until 2003, when Libya renounced its weapons of  mass destruction program after the U.S. invasion of Iraq.[5]  The two countries rekindled diplomatic relations in 2006,[6] but that relationship ended when the U.S. joined the NATO-led operation to overthrow Qaddafi in March of 2011.[7]  Now, the U.S. is left to forge a new relationship with Libya after Qaddafi’s death.

While the U.S. congratulated Libya on its freedom, the U.S. has not clearly defined what its role will be in rebuilding the war-torn country.[8]  After watching Iraq spiral out of control following the ouster of Saddam Hussein, the U.S. appears more than willing to take a back seat to NATO.[9]  Billions of U.S. dollars have been spent rebuilding Iraq and Afghanistan, but the U.S. has sent only $135 million in aid to Libya.[10]  The State Department also announced that it has sought no new congressional funding for aid to Libya.[11]

Whether U.S. companies end up investing in Libya likely will depend on how quickly the country becomes secure again.[12]  Firms that construct or maintain oil fields are currently the only American companies doing business in Libya.[13]  But whom will seize control of Libya’s lucrative oil fields remains to be seen as the country continues to form its new government.[14]  A process that should take time with Libya lacking numerous government organizations,[15] but – unlike in Iraq and Afghanistan – the U.S. appears disinterested in attempting to expedite this process.