CHAPTER 13CHAPTER 13

FREE MOVEMENT OF CAPITAL FREE MOVEMENT OF CAPITAL

AND AND

MONETARY UNIONMONETARY UNION

Important DevelopmentsImportant Developments creation of a creation of a European Central Bank (ECB)European Central Bank (ECB)

(replaced the European Monetary Institute ((replaced the European Monetary Institute (EMIEMI), January 1,1999)), January 1,1999)

ResponsibilityResponsibility: :

- managing the - managing the EuroEuro

- maintaining economic stabiity (together with the ESCB)- maintaining economic stabiity (together with the ESCB)

European System of Central Banks (ESCB)European System of Central Banks (ESCB)

- - assists the ECBassists the ECB

- - comprises the ECB and the central banks of member statescomprises the ECB and the central banks of member states

- - under Art. 105(2):under Art. 105(2):

~ ~ definedefiness and implement and implementss the monetary policy of the Union; the monetary policy of the Union;

~ ~ conductconductss foreign exchange operations; foreign exchange operations;

~ ~ holdholdss and manage and managess the official foreign reserves of the official foreign reserves of the the member states; member states;

~ ~ promotepromotess the smooth operation of payment systems. the smooth operation of payment systems.

Free Movement of CapitalFree Movement of Capital Suppression of exchange controls preventing the Suppression of exchange controls preventing the

transfer of money between member states transfer of money between member states

(originally, Art.67-73 of the EEC Treaty provided (originally, Art.67-73 of the EEC Treaty provided “free “free movement of capital necessary for the functioning of movement of capital necessary for the functioning of the common market”; the common market”;

andand the ECJ held that the ECJ held that “the free movement of capital “the free movement of capital constitutes, alongside that of persons and services, constitutes, alongside that of persons and services, one of the fundamental freedoms of the Union”one of the fundamental freedoms of the Union”))

However, ECJ also stated that:However, ECJ also stated that:

since the movement of capital is closely connected with the since the movement of capital is closely connected with the economic and monetary policies of individual member states, economic and monetary policies of individual member states,

Free movement of capital was achieved in 1988 by the Free movement of capital was achieved in 1988 by the adoption of the adoption of the Single European ActSingle European Act and the and the

But there are still some (limited) restrictions on the free But there are still some (limited) restrictions on the free

movement of capital :movement of capital :

- - member stales may introduce new taxation laws restricting the free member stales may introduce new taxation laws restricting the free movement of capitalmovement of capital: :

a)a) for non-residents seeking to invest their capital in that statefor non-residents seeking to invest their capital in that state, , oror

b)b) for residents who seek to invest their capital in another member statefor residents who seek to invest their capital in another member state

Directive Directive 88/361.88/361.

they are to be they are to be treatedtreated differently than the other fundamental differently than the other fundamental freedomsfreedoms

!! There is a potentially great risk that such regulations There is a potentially great risk that such regulations could have highly restrictive effects could have highly restrictive effects on the freedom to on the freedom to provide financial services on a cross-border basisprovide financial services on a cross-border basis. .

To avoid these risks, ATo avoid these risks, Article 58rticle 58, following , following the principles of the principles of proportionality and non-discriminatory treatmentproportionality and non-discriminatory treatment,, prevent preventss member states from adopting tax laws which member states from adopting tax laws which ……

““constitute a means of arbitrary discrimination or a constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and disguised restriction on the free movement of capital and payments”.payments”.

Monetary UnionMonetary Union One of the ambitions of the EU since the early 1960’s.One of the ambitions of the EU since the early 1960’s. PurposePurpose::

- providing - providing currency stabilitycurrency stability

- - allowingallowing greater integration of financial services greater integration of financial services

Goal Goal ::

- greater monetary co-operation- greater monetary co-operation

ProblemsProblems::

- - lack of economic convergencelack of economic convergence

- - weak political commitment by some memberweak political commitment by some memberss

- disagreement - disagreement over economic prioritiesover economic priorities

ResultResult: :

- - some membersome member st. have st. have retain retaineded monetary monetary sovereignty sovereignty and remain outside and remain outside the the monetary unionmonetary union

Monetary CommitteeMonetary Committee

assists the ECBassists the ECB the ECB must report annually:the ECB must report annually:

to the Council of the EUto the Council of the EU to the Parliament of the EUto the Parliament of the EU

But! The ECB retains the final word in the But! The ECB retains the final word in the management of the Euro!management of the Euro!