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Free movement of capital. Formation of a monetary union and a banking
1.
TOPIC 11. FREE MOVEMENT OF CAPITAL. FORMATIONOF A MONETARY UNION AND A BANKING UNION
1. The concept of «capital», «free movement of
capital». Legal exceptions to the freedom of
movement of capital.
2. The concept of a monetary union. The legal
regime of the single currency, the euro area.
3. The EU banking system: structure, sources of
legal regulation
2.
1. The concept of «capital», «free movement of capital». Legalexceptions to the freedom of movement of capital
Free movement of capital is at the heart of the
Single Market and is one of its four freedoms.
Together with free movement of goods, persons and
services it enables integrated, open, competitive and
efficient European financial markets and services
Legal basis
Articles 63 to 66 of the Treaty on the Functioning of the
European Union (TFEU).
3.
Free movement of capitalFree movement of capital is enshrined in the Treaty of Maastricht.
With the entry into force of this treaty in 1994 all restrictions on
capital movements and payments across borders were prohibited.
The aim of liberalisation is to enable integrated, open, and
efficient European financial markets.
For European citizens, free movement of capital means the
ability to carry out many transactions, such as
opening bank accounts abroad
buying shares in non-domestic companies
investing where the best return is
purchasing real estate in another country
For companies, it means being able to
invest in, and own, other European companies
raise money where it is cheapest
4.
DefinitionThe treaty on the functioning of the EU does not define the
term «movements of capital». In the absence of a definition, the
Court of Justice of the European Union has held that the definitions
in the nomenclature annexed to Directive 88/361/EEC can be used
to define that term.
According to these definitions, cross-border capital
movements include:
foreign direct investments (FDI)
real estate investments or purchases
securities investments (e.g. in shares, bonds, bills, unit trusts)
granting of loans and credit
other operations with financial institutions, including personal
capital operations such as dowries, legacies, endowments, etc.
5.
Legal frameworkAmongst the fundamental freedoms that underpin the EU single market (free
movement of people, goods, services and capital), the free movement of capital is
the most recent. It became a directly applicable treaty freedom only with the
Maastricht treaty.
The legal framework for the free movement of capital includes
treaty provisions
protocols and declarations
transitional measures granted by the acts of accession to new member countries
Article 63 of the Treaty on the functioning of the EU prohibits all
restrictions on capital movements and payments not only within the EU, but
also between EU countries and countries outside the EU.
However, further provisions in the treaty stipulate a number of exceptions to the
principle of free movement of capital, in particular to prevent problems related to
taxation, prudential supervision of financial institutions, public policy and security.
The Court of Justice of the European Union (CJEU) has the final say in
interpreting treaty provisions, and there is extensive case law in this area.
6.
Exceptions and justified restrictionsExceptions are largely confined to capital movements related to
third countries (Article 64 of the TFEU).
In addition to the option for Member States of maintaining
restrictions on direct investment and other transactions which existed
on a given date, the Council may also, after consulting the European
Parliament, unanimously adopt measures which constitute a step
backwards in the liberalisation of capital movements with third
countries.
In addition, the Council and the European Parliament may adopt
legislative measures involving direct investment, establishment,
provision of financial services or the admission of securities to
capital markets.
Article 66 of the TFEU covers emergency measures vis-à-vis
third countries, limited to a period of six months.
7.
Exceptions and justified restrictionsThe only justified restrictions on capital movements in general,
including movements within the EU, are laid down in Article 65
of the TFEU.
These include:
(i) measures to prevent infringements of national law (namely for
taxation and prudential supervision of financial services);
(ii) procedures for the declaration of capital movements for
administrative or statistical purposes; and
(iii) measures justified on the grounds of public policy or public
security.
The latter was invoked during the European sovereign debt crisis,
when Cyprus (2013) and Greece (2015) were forced to introduce
capital controls in order to prevent an excessive outflow of capital.
Cyprus removed all of the remaining restrictions in 2015 and
Greece did so in 2019.
8.
Exceptions and justified restrictionsArticle 144 of the TFEU allows, within the framework of the
balance of payments assistance programmes, for protective
balance of payments measures where difficulties jeopardise the
functioning of the internal market or where a sudden crisis
occurs. This safeguard clause is only available to Member
States outside of the euro area.
Finally, Articles 75 and 215 of the TFEU provide for the
possibility of financial sanctions either to prevent and combat
terrorism or based on decisions adopted within the framework
of the common foreign and security policy.
9.
2. The concept of a monetary union. The legalregime of the single currency, the euro area
The Economic and Monetary Union (EMU)
is an umbrella term for the group of policies
aimed at converging the economies of member
states of the European Union at three stages.
The policies cover the 19 eurozone states, as
well as non-euro European Union states.
10.
The Economic and Monetary UnionThe Economic and Monetary
Union
(EMU) Members of the
Eurozone
ERM II member
ERM II member with opt-out
(Denmark)
Other EU members
11.
Three stages for the implementation of theEMU
12.
The three stages for the implementation of theEMU were the following:
Stage One: 1 July 1990 - 31 December 1993
On 1 July 1990, exchange controls are abolished, thus capital
movements are completely liberalised in the European Economic
Community.
The Treaty of Maastricht in 1992 establishes the completion of
the EMU as a formal objective and sets a number of economic
convergence criteria, concerning the inflation rate, public
finances, interest rates and exchange rate stability.
The treaty enters into force on 1 November 1993.
13.
Stages for the implementation of the EMUStage Two: 1 January 1994 - 31 December 1998
• The European Monetary Institute is established as the forerunner of the
European Central Bank, with the task of strengthening monetary cooperation
between the member states and their national banks, as well as supervising ECU
banknotes.
• On 16 December 1995, details such as the name of the new currency (the euro)
as well as the duration of the transition periods are decided.
• On 16–17 June 1997, the European Council decides at Amsterdam to adopt the
Stability and Growth Pact, designed to ensure budgetary discipline after creation
of the euro, and a new exchange rate mechanism (ERM II) is set up to provide
stability above the euro and the national currencies of countries that haven't yet
entered the eurozone.
• On 3 May 1998, at the European Council in Brussels, the 11 initial countries
that will participate in the third stage from 1 January 1999 are selected.
• On 1 June 1998, the European Central Bank (ECB) is created, and on 31
December 1998, the conversion rates between the 11 participating national
currencies and the euro are established.
14.
Stages for the implementation of the EMU• From the start of 1999, the euro is now a real currency, and a
single monetary policy is introduced under the authority of the ECB.
A three-year transition period begins before the introduction of actual
euro notes and coins, but legally the national currencies have already
ceased to exist.
• On 1 January 2001, Greece joins the third stage of the EMU.
• On 1 January 2002, the euro notes and coins are introduced.
• On 1 January 2007, Slovenia joins the third stage of the EMU.
• On 1 January 2008, Cyprus and Malta join the third stage of the
EMU.
• On 1 January 2009, Slovakia joins the third stage of the EMU.
• On 1 January 2011, Estonia joins the third stage of the EMU.
• On 1 January 2014, Latvia joins the third stage of the EMU.
• On 1 January 2015, Lithuania joins the third stage of the EMU.