1. FREE MOVEMENT OF CAPITAL & ECONOMIC AND MONETARY UNION
Dr Janja Hojnik
Paris, 28 October 2014

2. When is capital free? Preconditions for FMC
When entrepreneurs can satisfy their need for capital and
investors can offer their disposable capital in the country where conditions are most favourable to them (Molle, 2006).
Preconditions for FMC
A stable banking & supervision system
Free competition
Functioning tax & legal system & insolvency regime.

3. FMC contributes to Increased investment opportunities
Greater freedom of choice for investors & capital recipients
Price stability
Equalization of the balance of payments
Economic growth
Optimal allocation of capital furthers prosperity;
Capital can be directed to the places where it can be used most efficiently;
Funds can be transferred from countries with high savings quotas to countries with low ones;
CB investment increases production base, creates employment, has multiplier effects (intensify competition, improve efficiency&product quality)
Reduced regional differences between states

4. Starting with a clean sheet
Rome Treaty 1957: Art 67 EEC – committment for progressive abolishment of all restrictions on the movement of capital – „to the extent necessary“;
FMC was of low priority; cautious approach towards liberalization of capital;
Several escape clauses preserved of autonomy by MSs;
Equaly cautious approach by the ECJ (Casati, 203/80);
In 1960s the Commission pushes through 2 Capital Movement Directives, but by mid 1970s the Commission turned to a supporter of capital controls (response to inflow of speculative capital + first oil price shock).
European capital market was less integrated in the 1970s than in the 1960s.

5. 1980s: a new twist in policy at EU level
Between Germany & UK abolished all their restrictions on capital movement;
In the early 1980s the European Parliament & ECJ (Mabanaft, 36/83) called the Commission to reconsider its attitude towards FMC;
White Paper (1985) defined full liberalisation of capital movement as the essential part of the completing the internal market;
SEA (1987): QMV also for FMC;
1988: a new Directive on capital movements: supported by the liberal alliance of Ger/UK/Neth/France;
ECJ ruled the directive‘s provisions were directly effective (Bordessa, C-358/93).

6. FMC lifted to the level of the other freedoms
In 1992 & 93 several MSs re-introduced temporary capital restrictions due to the crisis of the Eur. Monetary System & even Delors demanded capital controls;
After 50 years of struggle for capital market integration EU has nowadays one of the strictest regimes on capital movement;
Two decades of dramatic liberalisation;
Economies that are among the most open worldwide;
BUT: critical voices are increasingly noticed – particularly towards third countries.

7. FMC and global financial crisis 2009-2012
International flows of capital were one of the factors underpinning the global financial crisis;
Several MSs have experienced sudden stops on capital inflows, which further aggravated the banking and sovereign debt crises by draining financial resources from the countries that most needed them;
In 2012 intra-EU cross-border investment fell by 55% from 2011;
Capital diverted from high risk MSs to low risk ones (opposite to the before-crisis period).

8. Free movement of capital within the EU
Part of the internal market
Part of market order based on competition
Part of economic & monetary union

9. FMC as a fundamental freedom of the EU internal market
Contributes to making the EU an attractive place for investment;
The most recent freedom: it became a directly applicable Treaty freedom only with the entry into force of the Maastricht Treaty – „poor cousin“ of the other freedoms for many years.
A complete liberalization of capital movements is a precondition of the implementation of the other 3 freedoms.
It has the broadest scope of all Treaty freedoms - the only freedom going beyond the boundaries of the Internal Market, as it also covers the movement of capital between Member States and third countries.

10. Legal framework Provisions of the TFEU
General principle of the FMC (Art 63);
Exceptions (Arts 64, 65, 66, 75… TFEU);
Protocols (on Malta, Denmark, Finnland etc.) and declarations (Declaration No. 7 to the TEU (1992))
Secondary legislation:
Directive 88/361/EEC for the implementation of Article 67 of the Treaty;
Council Regulation (EC) n° 332/2002 on medium-term financial assistance for MS' balance of payments up to a maximum of EUR 12 billion. 
Regulation (EC) n° 1889/2005 – on controls of cash entering or leaving the EU.
Case law of the EU Court of Justice
Commission‘s Interpretative Communications

11. GENERAL PRINCIPLE Article 63 TFEU (ex Article 56 TEC)
Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited.
Frees movement of capital in a cross-border context;
Object-related freedom (the person, who takes part therein is less important);
Capital itself is not protected, but only its movement (der Verkehr, les mouvements)

12. Direct effect of Art 63 TFEU
TRADITIONAL APPROACH: FMC is one of the fundamental freedoms, but does not have direct effect – due to many escape clauses in the Treaty (Casati, 203/80);
MODERN APPROACH: the Treaty principle of free movement of capital has direct effect, i.e. it directly confers rights on individuals which they can rely on before national courts (Sanz de Lera, C-163/94; Skatteverket, C-101/05).
EQUALLY FOR NON-MEMBER STATES: as regards the movement of capital between Member and non-member States, Article 63(1) TFEU, in conjunction with Articles 64 TFEU and 65 TFEU, may be relied on before national courts and may render national rules that are inconsistent with it inapplicable, irrespective of the category of capital movement in question (A, C-101/05).

13. What constitutes a movement of capital?
Broad definition (effet utile);
Not defined in the Treaty;
Nomenclature annexed to Directive 88/361 reveals the term by way of example (no exhaustive list – ECJ in Trummer, C-222/97);
Movement of capital according to the Directive includes financial operations between MSs or a MS and a third country essentially concerned with investment of the funds (rather than remuneration for services and goods).

14. Meaning of capital Economic meaning: real & financial capital;
Annex I to the 1988 Directive - NOMENCLATURE OF THE CAPITAL MOVEMENTS:
DIRECT INVESTMENTS: Establishment of branches or new undertakingsl, and the acquisition in full of existing undertakings; Long-term loans with a view to establishing or maintaining lasting economic links;
INVESTMENTS IN REAL ESTATE;
TRANSACTIONS IN SECURITIES ON THE CAPITAL MARKET (shares, bonds);
CREDITS granted by non-residents to residents and by residents to non-residents;
PERSONAL CAPITAL MOVEMENTS: loans, gifts and endowments, dowries, inheritances and legacies; settlement of debts…
PHYSICAL IMPORT AND EXPORT OF FINANCIAL ASSETS;
OTHER CAPITAL MOVEMENTS: damages, refunds in the case of cancellation of contracts, authors' royalties (patents, designs, trade marks and inventions) etc.

15. Elements of movement Financial transfer
Investment character: hope of getting a return from it;
but also transfers with a personal character, where investment character fades into background (inheritances, gifts…) – Barbier, C-361/01; Van Hilten, C-513/03;
Cross-border context
FMC between MSs AND between MS and 3rd countries
Even a remote linkage to another national economy suffices (Comm v Belgium, C-478/98);
Capital often does not have a physical location –the location of capital depends on its type:
Real property: where it is situated;
Intangible capital: located where its holder resides – looking at habitual residence of the old & new holder.

16. Object-related freedom
No limitation as to WHO has the right to invoke this freedom;
No CB element if a national of MS A residing in MS B purchases real estate in MS B;
CB element: resident of MS A purchases shares in a company situated in MS B from a resident of MS B. 16

17. Ratione loci of FMC
Worldwide, except overseas countries and territories (OCTs)
OCTs are not third countries, but part of EU MSs;
case Prunus, C-384/09: Art 63 TFEU also applied to the OCCTs as if they were third countries
cases X and TBG, C-24&27/12: Art. 63 TFEU does not apply to the OCTs, but a special capital movement provision which is contained in the OCT Association Decision applies – less liberalisation than Art. 63 TFEU, since it only applies to direct investments in companies.

18. Prohibition of all restrictions on FMC between EU MSs:
Prohibition of discrimination – on grounds of nationality, place of residence of the parties and place where capital was invested:
DIRECT: e.g. prohibition precluding investors from another MS from acquiring more than a given number of shares in certain domestic undertakings; limitations on acquisition of agricultural land and secondary homes;
INDIRECT: tax rules which have a disparate impact on non-residence („ for the sale of the same immovable property situated in Portugal non-residents are subject to a tax which is higher than that applied to residents and are consequently in a less favourable position than the latter.“ - Hollman, C-443/06). 18

19. Prohibition of all restrictions on FMC between EU MSs:
Prohibition of non-discriminatory measures – which hinder access to the market:
E.g. special rights of British Airways Authority in BA (Comm v UK, C-98/01)
Art 63 contains a general prohibition, which goes beyond the mere elimination of unequal treatment on grounds of nationality (Comm v Portugal, C-367/98)
DISCRIMINATION V. RESTRICTION BASE APPROACH
Dicrimination model difficult to apply to capital movement, especially since the introduction of the single currency. 19

20. Prohibition of restrictions on FMC between EU MSs and third countries:
Unilateral liberalisation of capital movements with EU – 3rd countries relations;
Editorial mistake of the Treaty drafters or creation of a liberalized capital market on a world scale?
The extension of the rights of FMC to third countries not only goes beyond the other fundamental freedoms in the Treaty but also goes beyond any comparable foreign investment law or constitutional provision in any other jurisdiction in the world.
BUT the Treaty contains a number of limited exceptions allowing MSs to protect themselves from proposed foreign investments posing a legitimate public security concern.
The Court (case A, C-101/05) established that it may be "that a MS will be able to demonstrate that a restriction on FMC to or from third countries is justified for a particular reason in circumstances where that reason would not constitute a valid justification for a restriction on capital movements between MS„.
Prohibition of restrictions on FMC between
EU MSs and third countries: 20

21. Exceptions to the FMC Exceptions stipulated in the Treaty:
SPECIFIC EXCEPTIONS
GENERAL EXCEPTIONS
Exceptions established by the case law of the CJEU

22. SPECIFIC EXCEPTIONS OF THE TREATY
Measures on ground of public policy or security
Prior administrative approval of transfers of agricultural land:
Ospelt, C-452/01: „there is no doubt that the national legislation pursues public-interest objectives which are such as to justify restrictions on the FMC… preserving agricultural communities, maintaining a distribution of land ownership which allows the development of viable farms and sympathetic management of green spaces and the countryside… are social objectives.“
In those circumstances, system of prior authorisation cannot be disputed.
BUT supervision measures aimed at preventing construction of secondary residences may be subsequent to the transaction without detracting from that objective (Reisch, C-540/99).
Transitional periods for acquisition of agricultural real estate: Poland until 1 May 2016, Croatia until 1 July 2020 (+3y) – after the end of transitional periods FMC fully applies (Konle v Austria, C-302/97).

23. Measures on ground of public policy or public security
Capital controls: Cypriot authorities adopted emergency measures in form of administrative capital controls (limiting outflow of deposits) in March 2013 following a serious banking crisis, when there was risk that mass capital flight would lead to the collapse of the banking system – the Commission concluded the controls were justified, under the condition of gradual relaxation.
Removed in May 2014
It is still not possible to freely transfer money abroad without at least some central bank vetting.
The Bank of Cyprus posted profit of 31 million euros in the first quarter of 2014, after 2 years of losses. 23

24. SPECIFIC EXCEPTIONS OF THE TREATY
Tax differentiation: Art. 65(1) TFEU allows for different tax treatment of non-residents and foreign investment;
this must not represent a means of arbitrary discrimination or a distinguished restriction;
CJEU: certain distinctions based on the residence of taxpayers could be compatible with EU law provided that they applied to situations which were not objectively comparable or could be justified by overriding reasons in the general interest, in particular in relation to the cohesion of the tax system (Bachmann, C-204/90; Verkooijen, C-35/98; Schumacker, C-279/93).
Héritiers de M. H. Barbier, C-364/01: tax due on the inheritance of immovable property must be assesed in line with FMC principles.

25. OTHER SPECIFIC EXCEPTIONS
Grandfathered restrictions: Art. 64(1) TFEU allows MSs to continue to apply restrictions which existed with regard to third countries in respect of direct investment on 31 December 1993 (or in the case of Bulgaria, Estonia and Hungary, 31 Dec 1999).
Prudential measures: e.g. supervision of financial institutions (harmonisation at EU level!);
Declaration procedures for purposes of administrative or statistical information.
Cash controls: to combat money laundering and financing of terrorism MSs may have cash control measures eur treshold for declaration when leaving or entering the EU.

26. GENERAL EXCEPTIONS OF THE TREATY
Restrictions on property ownership - Art 345 TFEU: "The Treaties shall in no way prejudice the rules in MSs governing the system of property ownership.„
EXPROPRIATION (MSs competence, but needs to be non-discriminatory – Annibaldi, C-309/96);
PRIVATISATION AND SPECIAL RIGHTS: MSs need to operate within the freedoms in the post-privatisation phase (Volkswagen, C-112/05; Fidium Finanz, C-452/04);
CJEU: a long list of case law starting in 2000; most recently: a ban on privatisation of property restricts the free movement of capital (Essent, C-105/12) The Court also outlawed two control mechanisms on investment in strategic companies (Comm v Greece, C-244/11): ex ante authorisation of investment exceeding 20% treshold and ex-post approval of important company decisions.

27. GENERAL EXCEPTIONS OF THE TREATY
National security and defence: discrimination in defence procurement (Art 346 TFEU).
Financial sanctions against individuals and third countries to combat terrorism and implement decisions under CFSP: Arts 75 and 215 TFEU.
Under Art. 64(3) TFEU, the EU can take a step backwards on the liberalisation of capital movements to and from third countries, but only provided that there is unanimity among MSs and that the EP has been consulted.
Protection of EMU: under Art. 66 TFEU, the EU can act to take temporary safeguard measures in exceptional circumstances where movements of capital to or from third countries cause or threaten to cause serious difficulties for EMU.

28. EXCEPTIONS ESTABLISHED BY THE CJEU
Less expensive case law than in respect of the other freedoms;
FMC may be restricted also by overriding requirements of the general interest if the national legislation is suitable for securing the objective which it pursues and must not go beyond what is necessary in order to attain it, so as to accord with the principle of proportionality (C-463/00, Commission v Spain, §68 and C-174/04, Commission v Italy) – e.g.
Services of general interest: universal postal service (Comm v Netherlands, C-282/04);
Petroleum, telecommunications and electricity sectors (Comm v Spain, C-463/00);
BITs between EU MSs before the accession – maintenance after the accession breaches FMC
EU has exclusive competence for FDI under the CCP (Article 207 TFEU): it has hence sought to insert investment provisions in trade agreements (e.g. FTAs with Canada and Japan; the Transatlantic Trade and Investment Partnership (TTIP); and pursued stand alone investment negotiations.

29. Exceptions to FMC
Source : 'Capital movements in the legal framework of the Community' - European Economy  Nr. 6, 2003, p. 322.

30. Free movement of payments
Article 63 TFEU
2. Within the framework of the provisions set out in this Chapter, all restrictions on payments between Member States and between Member States and third countries shall be prohibited.
Delineation between capital and payments:
ECJ: everything that does not qualify as payment constitutes capital movement (Sanz de Lera, C-163/94);
Delineation has gradually lost significance due to full liberalization of capital;
Still important in relation to dividend payment – additional restrictions applicable in third country transactions.

31. Single Euro Payments Area (SEPA)
a payment-integration initiative of the EU for simplification of bank transfers denominated in euro.
turn the fragmented national markets for euro payments into a single domestic one. SEPA enables customers to make cashless euro payments to anyone located anywhere in the area, using a single bank account and a single set of payment instruments.
supported by the Commission and ECB.

32. Single Euro Payments Area (SEPA)
Directive on Payment Services (PSD) 2007/64/EC to make cross-border payments as easy, efficient and secure as 'national' payments within a MS.
SEPA Regulation (EC 260/2012) on technical aspects;
Fully operational since 1 August 2014;
SEPA consists of the 28 EU MSs, the four members of the EFTA, Monaco and San Marino.

33. EU citizen: „a bank refused to open a current account for me because I‘m not resident in that country. Is that legal under EU law?“ What do you think?

34. Liberalisation of financial services
Linked to FMC;
Gl staff doc 2014, str. 10
Obsežna harmonizacijska zakonodaja EU – bančništvo, zavarovalništvo, TVP…
Following the outbreak of the financial crisis in 2008, the stabilization of financial markets became a priority and financial sector reform a crucial instrument to achieve it.
Since then, the European Commission has proposed more than 40 legislative and non-legislative measures to
build new rules for the global financial system;
to establish a safe, responsible and growth enhancing financial sector in Europe; and
to create a banking union to strengthen the euro.

35. New architecture for financial supervision in EU

36. FMC and social market economy

37. FMC & EMU
Market forces delivered due to the free flow of capital act as important indicators for the stability of the common currency – much better than any Stability and Growth Pact
FMC enables the markets to judge the stability of monetary union in the most efficient way: money is simply withdrawn from an unstable currency area

38. EMU – prva monetarna unija neodvisnih držav…
Investicijski rating evropskih držav, maj 2012

39. Reforma za zagotovitev stabilnosti evra
Evropski mehanizem stabilnosti
Evro-plus pakt
Reforma Pakta za stabilnost in rast
Fiskalna pogodba

40. On the way to fiscal union?
Aug 13 (Reuters) - The euro zone needs to move towards some sort of greater fiscal union to deal with a crisis which has undermined the single currencyarea, UK finance minister George Osborne said on Saturday.
Europe slithers towards fiscal union
… What is happening is not very democratic and it will take years for politicians to explain and justify the process by which fiscal union came about. (A. Duff, MEP)

41. „Ich will Europa!“
„Europa ist nicht nur eine Sache des Verstandes, Europa ist und bleibt vor allem auch eine Sache des Herzens.“
Razum (nadzor) v. solidarnost;
Glavna težava je zaupanje, ki ga je evrska kriza spodkopala. 41

42. At the precipice of unbridled challenges, the Euro will soldier on. Why?
…Because it must!
M. Davies