Week 6 - Free Movement of Capital

LEGAL FRAMEWORK AND ORIGINS

Overview of Free Movement of Capital

  • Free movement of capital represents the most recent and broadest freedom within EU law.

  • Liberalization of capital flows has progressed gradually across different treaties.

  • Since the Maastricht Treaty, restrictions on capital movements and payments between Member States (MSs) have been prohibited.

Legal Basis

  • Articles 63-66 of the Treaty on the Functioning of the European Union (TFEU) explicitly govern the free movement of capital.

Objectives

  • The primary objective is to remove all restrictions on capital movements between Member States and between Member States and third countries, with certain exceptions allowed.

Historical Progression and Legal Background

  1. Pre-Maastricht Rules

    • Initial capital movement rules were limited and closely linked to maintaining economic and monetary stability among Member States.

    • Under the Treaty of Rome (1957), restrictions were allowed only to the extent necessary for the functioning of the common market (Art. 67(1) EEC).

  2. First Capital Directive (1960)

    • Restrictions were not completely abolished by the end of the transitional period; instead, the Council was tasked with adopting directives based on Art. 69 EEC.

    • The First Capital Directive began the gradual liberalization process.

  3. Case Law and Direct Effect

    • The Court of Justice of the European Union (CJEU) gave important interpretations through case law (e.g., Case 230/80 Casati).

    • The legal dynamics regarding capital liberalization differ from other economic freedoms, as Member States primarily control capital liberalization.

  4. Further Progress

    • In 1988, the Council Directive 88/361/EEC fully liberalized capital movements between member states and aimed to do so with third countries as well.

    • Directive 88/361/EEC marked a significant step towards monetary union and established a non-exhaustive nomenclature for facilitated application of the directive.

    • The Maastricht Treaty (1992) incorporated the free movement of capital as a core Treaty freedom and set the stage for monetary union in 1994.

  5. Stages of EMU

    • Stage 1 (1 July 1990): Introduction of free movement of capital under Directive 88/361.

    • Stage 2 (1 July 1994): All Member States had to comply with provisions on the free movement of capital as described in today's Article 63(1) TFEU.

    • Stage 3 (1 January 1999): Introduction of the euro as a virtual currency, with physical euro coins circulating from 1 January 2002.

SCOPE AND PROVISIONS ON CAPITAL

The Definition of 'Capital'

  • Article 63(1) TFEU states that all restrictions on the movement of capital and payments between Member States and between Member States and third countries are prohibited.

  • The term 'movements of capital' is not specifically defined in the TFEU but is interpreted through historical context and case law, often referring to the Annex of Directive 88/361 for examples.

Key Case Law Examples

  • C-222/97 Trummer and Mayer: Defined transactions constituting capital movements, such as mortgages and investments in real property.

  • C-98/01 Commission v UK: Further delineated capital movements and associated regulations.

  • C-367/98 Commission v Portugal: Investigated direct investments in companies as capital movements.

  • C-513/03 Heirs of M.E.A.: Addressed inheritance as a form of capital movement.

  • Specific examples include mortgages, investments, inheritances, and the granting of commercial credits.

Territorial Scope

  • Capital movements can occur intra-state (within the EU) and between EU MSs and third countries: a broad approach facilitated by the single currency and liberalization.

  • However, limitations are delineated in Article 65 TFEU, allowing for specific derogations.

Limitations on the Broad Approach

  1. Historic Restrictions

    • Article 64(1) TFEU allows MSs to maintain pre-existing restrictions related to direct investment as of 31 December 1993 (grandfather clause).

  2. Potential Exceptions

    • Legislative measures on direct investment and financial services may be adopted if justified.

    • The European Commission can assume restrictive tax measures in alignment with Union objectives (Art. 65(4) TFEU).

  3. Balance of Payments Measures

    • Short-term emergency measures can be enacted (Art. 66 TFEU).

  4. National Security

    • Emergency measures to combat terrorism can be legislated per Art. 75 TFEU.

Direct Effect

  • Article 63 TFEU has been ruled to possess direct effect (C-163, 165 and 250/94 Sanz de Lera) which means individuals can invoke it directly in Member State courts.

WHAT IS PROHIBITED UNDER ARTICLE 63(1) TFEU?

Analysis of Prohibitions
Discrimination Approach

  • Originally articulated in Art. 67 EEC, which prohibited discrimination based on nationality, place of residence or investment location.

  • Although the Maastricht amendments dropped the explicit mention of discrimination, the CJEU maintains this principle in its rulings.

  • The CJEU has ruled on both direct and indirect discrimination in various cases, including Case C-367/98 (Commission v. Portugal) and EFTA Surveillance Authority v. Norway.

Restrictions/Obstacles-Based Approach

  • More commonly applied due to the complex nature of capital movement regulations.

  • CJEU defined specific restrictions including denial of security purchases for residents, barriers to loan acquisition in other MSs, and creation of mortgage restrictions in foreign currencies.

EXPRESS DEROGATIONS AND JUSTIFICATIONS

Treaty Provisions for Derogations

  1. Article 64 TFEU: Grandfather clause on existing restrictions.

  2. Article 65(1) TFEU: Express derogations allowing MSs to maintain certain tax and public policy measures, provided they do not discriminate based on nationality.

  3. Proportionality Requirement: Any derogation must be necessary and proportionate to its objectives.

Interpretation and Legal Framework of Derogations

  • Derogations have to be interpreted strictly (Case 36/75 Rutili).

  • Parties affected by restrictions must have access to legal redress (Case 222/86 Unectef v Heylens).

Objective Justifications for Limitations

  • The CJEU recognizes non-exhaustive lists of objective justifications which include:

    • Public order

    • Environmental protection

    • Promotion and protection of state values

    • Proportionality principle must always apply.

  • No allowances for purely economic reasoning (Case 20/09 Commission v Portugal).

THE ECONOMIC AND MONETARY UNION

Overview of EMU

  • The Economic and Monetary Union (EMU) encompasses policies aimed at integrating Member States' economies.

  • The free movement of capital is a foundational element for the realization of the EMU, facilitating the coordination of economic policies and establishment of a common currency.

Historical Context of EMU

  1. Werner Plan (1969): Proposed the establishment of the EMU amidst the Bretton Woods collapse.

  2. 1978: Development of the European Monetary System (EMS) and Exchange Rate Mechanism.

  3. Single European Act (1986): Acknowledged the objective of a fully-fledged monetary union.

  4. Delors Report (1989): Proposed a three-stage structure for implementing the EMU.

Stages of EMU Implementation

  • Stage 1: Coordination of economic and monetary policies, free movement of capital.

  • Stage 2: Gradual transfer of monetary policy to the European Central Bank (ECB), establishment of narrower fluctuation bands.

  • Stage 3: Permanent monetary competence given to the Community, introduction of fixed exchange rates and the euro.

Implications of a Single Currency

  • Pros:

    • Increased market transparency, stability against fluctuations, streamlined operations for businesses, and attraction of foreign investments.

  • Cons:

    • Loss of monetary autonomy, increased economic disparities across differing economic cycles, and challenges in regions not meeting optimal currency area criteria.

MONETARY UNION

Stage Progression

  • Stage 1: Free movement of capital initiated on July 1, 1990, under Directive 88/361.

  • Stage 2: Established in 1994 with the ECB's precursors emerging and convergence criteria outlined including price stability, public finance soundness, exchange rate stability, and long-term interest rates.

  • Stage 3: The euro became the official currency on January 1, 1999; physical euro notes were introduced into circulation on January 1, 2002.

  • Member States have joined the euro over the years, with notable additions such as Greece (2001), Slovenia (2007), Cyprus and Malta (2008), Slovakia (2009), Estonia (2011), Latvia (2014), Lithuania (2015), and Croatia (2023).

Monetary Policy Structure

  • The European Central Bank governs monetary policy under Treaty articles 127-133 TFEU and acts independently to maintain price stability.

  • The ECB can recommend, issue opinions, and impose fines.

ECONOMIC UNION

Importance of Budgetary Discipline

  • Essential to achieving a high level of economic coordination among Member States involved in the EMU.

  • The Maastricht Treaty mandates rigorous economic convergence criteria to enter stage 3 of EMU.

Coordinating Economic Policy

  • Article 120(1) TFEU mandates that MSs treat their economic policies as common concerns and coordinate them with regard to the EU’s objectives.

  • The broad economic policy guidelines (BEPGs) ensure consistent economic policy monitoring through multilateral surveillance mechanisms (Art. 121 TFEU).

  • The Excessive Deficit Procedure under Art. 126 TFEU limits national debts to less than 60% of GDP and budget deficits to below 3% of GDP, with sanctions for failure to comply.

Stability and Growth Pact (SGP)

  • Established through consensus in 1997; it contains regulations for early warning signals regarding excessive deficits and obligates immediate corrective action upon breaches.

CONCLUSIONS

  • Recent crises (Eurozone, COVID-19 pandemic) have fundamentally reshaped EU dynamics.

  • The establishment of the EMU highlights the significance of the free movement of capital as a central EU principle.

  • There has been a notable increase in cases adjudicated under Article 63(1) TFEU, reflecting the CJEU's willingness to apply established principles from other freedoms regarding the movement of capital.

  • A critical question remains whether negative integration alone suffices to achieve desired outcomes.