The Tobin Tax: a solution to the problems of globalization?1. IntroductionThere has recently been a heated academic and political debate on the possibilities and risks of globalisation. Above all, the globalization of financial markets not only improves capital allocation and supports the trade of goods and services through lower transaction costs and greater liquidity. Furthermore, international asset diversification and hedging opportunities reduce risks, while free international financial markets make it easier to raise foreign capital, especially for emerging economies. Therefore, international financial markets increase efficiency and profits due to the international division of labor. Economic growth in emerging countries is not only strengthened by the availability of foreign capital, but also by the development of local financial centers that pave the way for international business. On the other hand, low transaction costs encourage speculation, which is said to destabilize markets, especially exchange rate speculation. High fluctuations in asset prices and exchange rates are a source of uncertainty for the real sector and cause misallocation. Covering such risks is expensive and in some cases not possible or only partially possible. Another crucial point against the free financial market is the loss of independence of economic policy. Under conditions of free convertibility of money and free capital markets, an autonomous economic policy is possible only with freely floating exchange rates, but not with fixed exchange rates. Therefore, if a country's goal is monetary stability, it will have to give up the independence of its economic policy. Therefore, governments lose their sovereignty over financial markets. The globalization of financial markets has increased global foreign currency transactions much faster than the growth of official reserves. In the 1980s, daily turnover amounted to around 600 billion US dollars and exceeded 1.5 trillion US dollars before the creation of the euro. Today, daily transactions in the foreign exchange market amount to approximately US$1.2 trillion (BIS (2001)). Speculative runs may now crowd out the financial resources that central banks can mobilize to counter such runs. The question arises whether it is not better to regulate or limit international financial markets. In December 1999 the German Parliament established a commission with the task of examining the possibilities and risks of globalization. It requires regulation of international financial markets, as these markets bear some systematic risks due to the huge volume of transactions and high capital mobility. The suggestion is to introduce a transaction tax on all foreign currency transactions – the so-called Tobin tax.