The head of the German central bank or Bundesbank warned Wednesday that a planned European financial transactions tax could have unexpected negative implications for monetary policy.
"From a monetary policy point of view, the financial transactions tax in its current form is to be viewed very critically," Bundesbank president Jens Weidmann told a banking congress in Dresden.
The EU has drawn up plans for a Financial Transactions Tax (FTT), a levy of 0.1 percent on a trade in shares and bonds and of 0.01 percent for derivative instruments in a move that could raise 30-35 billion euros each year ($40-45 billion).
The FTT is being pushed forward by 11 EU states led by Germany and France under enhanced cooperation procedures, and no deadline has yet been set for it to come into effect.
"Regulation is not an end in itself, and the costs and usefulness of any planned measure must be weighed against each other," the German central bank chief said.
"Some effects cannot be seen immediately but can turn out to be explosive. An example of this is the planned financial transactions tax," Weidmann said.
The tax had been fundamentally agreed "but the unforeseen side effects can be substantial," Weidmann warned.
In its current form, the FTT would cover asset-backed money market transactions or so-called repurchase or repo agreements.
The repo market plays a central role in equalisation of liquidity between commercial banks, Weidmann said.
"If it doesn't function properly, the transactions are deflected onto the Eurosystem (European system of central banks), and central banks will continue to be heavily involved in liquidity equalisation between banks well after the crisis," Weidmann argued.
"This shows how important it is to examine a regulatory measure before it is implemented. And this takes time," he said.
Separately, Weidmann called upon France to set an example to other eurozone countries in matters of budget policy.
Countries should not be "too flexible" in interpreting Europe's tighter budget rules and "here France has an important role to play with regard to the credibility of the rules and confidence in the sustainability of public budgets," Weidmann said.
Contrary to its initial targets, Paris will not be able to bring its public deficit back below the 3.0 percent of GDP ceiling agreed by the EU, but run up a deficit ratio of 3.7 percent instead.
France is negotiating with the EU Commission for a possible postponement of its budget targets.