The logic of the tax is dubious, but that won’t stop it from spreading across a Europe suffering from energy shortages
Spain decides to punish an old scapegoat. The euro zone’s fourth-largest economy has announced a €1.5bn tax on the country’s banks as its government battles spiraling energy costs that are inflating the cost of living. Its logic is dubious, but that won’t stop similar levies from spreading across Europe, which suffers from power shortages.
Following the 2008 financial crisis, banks were blamed for destabilizing the world economy. That made them an easy target when Britain introduced a tax on banks like Barclays and HSBC, raising billions of pounds each year. That tax had at least a sound basis: It initially incentivized banks to reduce their riskier wholesale liabilities.
The assault on Spanish banks is something else. Its mechanism is yet to be determined, but it seems to be based on the assumption that entities such as Banco Santander and CaixaBank will enjoy an increase in profits when interest rates rise. Indeed, European inflation has spiked to an all-time high of almost 9% in June, increasing pressure on the European Central Bank to raise interest rates. But it is still a tax on a possible future gain rather than an apparent gain right now. There is also the danger that a recession will force banks to make more provisions for loan losses, thus offsetting any benefit they might get from higher rates.
Lenders also have less worthy goals. Net interest margins in Spain are now a meager 1%, less than half what they were five years ago. Investors in the region also have to contend with a paltry 7% return on equity, below banks’ cost of capital.
Spanish banks could threaten to withdraw investment from the region, but these threats are largely hollow. For this reason, the idea may catch on in other European countries. In Poland, the government has already asked banks to offer moratoriums to mortgage customers to help them manage rising inflation. Last month, Hungary introduced an unexpected tax on the airline sector to plug holes in its budget. The more widespread these policies become, the easier it will be for governments not only to follow them, but to make them semi-permanent fixtures.
