1. Free Movement of Capital 1. Late-comer of liberalization Compared to the other basic freedoms the liberalization of international capital flows within the European Community was completed only at the end of the 1980s. (Directive 88/361/EEC) Reason for late liberalization: Member states needed an instrument to avoid balance of payment problems. New Articles 56 – 60 EC copy more or less the content of the directive and include provisions on the free movement of payments.

2. 2. Welfare and distributional effects of free movement of capital For the basic model compare – with some modifications - free movement of workers. In general, free movement of capital will not necessarily lead to welfare gains when private and social returns on capital differ (because of differences in taxation or because of differences in environmental and safety standards if they do not reflect differences in preferences). Distinguish: Portfolioinvestments, i.e. investor is only interested in returns on investment (see basic model), and foreign direct investments, i.e. the investor is interested in monitoring the use of certain assets.

3. Differences between free movement of workers and free movement of capital: Cultural and language problems do not play the same role as with free movement of workers since the owners of capital are not required to move. Supply of and demand for capital is typically mediated by banks, insurance companies and organized capital markets (Principal-Agent-Problems, Regulation). For this reason: Differences in bank law, capital market law, company law and so on may constitute restrictions on the free movement of capital.

4. 3. Permissible and non-permissible restrictions on the free movement of capital According to Art. 56 (2) EC all restrictions on the free movement of capital among the member states as well as among member states and third countries are prohibited. However: Many justifications for restrictions on free movement of capital among member states and third countries; only a few justifications for restrictions on free movement of capital among member states. (Arts. 57 ff EC). Justifications for restrictions on free movement of capital that also holds among member states provided no arbitrary discrimination takes place (Art. 58 EC): Different treatment of taxpayers with residence different from location of capital investment. Public order and security, effective monitoring of taxation. Enforcement of reporting for administrative and statistical reasons.

5. 4. Important ECJ judgements concerning restrictions on the free movement of capital Whereas previously the restrictions on free movement of capital typically resulted from restrictions on the possession and use of foreign currency or from direct controls of international capital flows, the focus today is on government measures related to other basic freedoms that put additional cost on international capital flows. Example 1: Investment in real estate Konle judgement (1999): Requirement of government permit for purchase of a piece of land in Austria by a German national. Albore judgement (2000): Requirement of government permit for purchase of a piece of land of military importance in Italy (Ischia) by German nationals.

6. Example 2: Portfolio investment Verkooijen judgement (2000): Investor with residence in the Netherlands owns shares of Belgian company and is treated differently by the Dutch tax authorities from investors who own shares of Dutch companies. Judgement Commission/Belgium (Eurobonds)(2000): Belgian Minister of Finance issued Eurobonds and freed all purchasers except those with residence in Belgium from paying the source tax on interest revenues.

7. Example 3: Foreign Direct Investments Several golden shares judgements in 2002. Special case: Volkswagengesetz

8. 5. Secondary law aiming at establishing a European Financial Area Since the end of the 1960s and the beginning of the 1970s the EC enacted many directives on harmonizing bank-, capital market-, company- and tax-law in order to foster free movement of capital in Europe.