When José Manuel Barroso, the European Commission president, proposed introducing a tax on financial transactions in Europe, it was clear whom he had in his sights.
"It's a question of fairness," he said as he unveiled the proposal in Strasbourg last week. "It is time for the financial sector to make a contribution back to society".
But bankers, analysts and investors point out that, instead of banks, such a tax would be likely to hit pension funds and other "long-only" savings vehicles and middle-sized companies which use derivatives to hedge against swings in commodity prices and currencies, because they would be the least able to avoid it.
According to bankers and corporate executives, Mr. Barroso's stated target, the banks, will likely be able to pass much of the cost on to their customers and shift their internal hedging transactions out of Europe. Multinational corporates may also be able to shift their transactions to off-shore subsidiaries to avoid the tax.
High-frequency traders, one of the main targets of the proposed legislation, would be likely to move off-shore and shift more of their transactions from equities and bonds, which would be taxed at 0.1 per cent, to contracts for difference and derivatives, which would be taxed at 0.01 per cent.
"The FTT will hit hard pensioners and savers throughout Europe -- not just the wealthy -- because it applies to all financial transactions including those on behalf of pension and investment funds," says Joanna Cound, of investment manager BlackRock. It estimates that a tax would cut 0.06 percentage points off returns for a bond tracker fund.
Corporate leaders cautioned that the financial transaction tax, which is also known as a Tobin tax after one of the economists who proposed it, could harm retailers and manufacturers, who use derivatives to hedge against currency and other price swings across their far-flung supply chains.
"Even low rates would lead to significant burdens and higher hedging costs for enterprises," he said. "During times of high currency volatility and high raw material prices that would mean an additional burden on the economy," says Martin Wansleben, head of Germany's DIHK chambers of commerce.
Shoppers may also feel the effect through higher or more volatile prices because corporates will either have to pay more to hedge currency movements or pass price swings on to customers.
"Hedging...means that flights can be paid for well in advance, that fuel bills, coffee or chocolate bars won't suddenly become unaffordable overnight if markets take fright," says Kevin Grant, chief executive at IT2 Treasury Solutions.
Even if the costs are not passed on, some corporate leaders also question the wisdom of taxing the EU's already stretched banking system.
"What we need now is to strengthen the banks, to ensure they have solid balance sheets. That's far more important than to impose further costs on them," says Hans Wijers, chief executive of Akzo Nobel, the Dutch paint company.
Within the financial sector, the tax would also hit high-frequency traders, who account for about half of all share trading in Europe, according to some estimates.
Daniel Garrod, analyst at Barclays Capital, suggests in a report that an FTT could reduce trading volumes in Europe by 30 per cent. While the tax would not take effect until at least 2014, last year, more than $10-trillion in equities alone changed hands on European markets, according to the World Federation of Exchanges.
"Undoubtedly volumes will go down and spreads will increase, but liquidity providers will still be necessary in the market place. We don't see that it's going to make [high frequency trading]disappear, far from it," says a senior executive at one large market-making firm.
Manfred Bergmann, a European Commission official, says that the risks of avoidance were overstated. "We think now we have a design which leads to the closure of loopholes," he says. But the commission's own impact study suggests that between 70 and 90 per cent of derivatives trading would be wiped out or displaced outside the 27-nation bloc.
"If the transaction tax is applied as it is now envisioned, the U.K. as a financial centre dies," says a top London-based executive at a global bank.
Not surprisingly, the U.K. is bitterly opposed to the tax unless other Group of 20 nations agree to impose similar levies. The U.S. spoke out against the imposition of an FTT at the 2009 G20 summit, but two Democratic members of Congress say they will try to move a proposal through anyway.
"Unless the EU can attain its rather ambitious objective of a level global playing field for taxation of these transactions, it is also likely to push a lot of trading with an international element out of the EU entirely," warns David Blair, partner at the UK-headquarted law firm Osborne Clarke.
If the U.K. vetos a pan-EU tax, the French and German-backed levy could nonetheless go ahead in roughly two-thirds of the member countries under "enhanced co-operation". That could reinforce London's status as the top global centre for trading but would wipe out some of its business because of reduced trading by European companies hit by the tax, analysts said
Exchanges on which much trading takes place have spoken out against the levy, with one executive calling it a "present to unregulated markets" - a reference to how activity could shift to over-the-counter markets. But they have so far been coy about quantifying any hit to their volumes. Some have suggested that they could offer to collect the tax, and "make a turn" providing that service, according to one U.S. exchange insider.
Still, some investors believe a Tobin tax could help corporates by cutting volatility and making it easier for companies to sell bonds and equity.
"Derivatives have become a shadow market that has very little to do with financing corporate plcs. This side of the market should be brought under control and the best way to do that is with a Tobin tax," says Adam Steiner, chief executive of the asset manager SVG.
Additional reporting by Vanessa Houlder in Oxford, Matt Steinglass in Amsterdam, Hugh Carnegy in Paris, Alex Barker in Brussels and Kate Burgess in London