EU Law - Free Movement of Capital and the Economic and Monetary Union

Under Art. 63 TFEU “all restrictions on the movement of capital…shall be prohibited”. This free movement of capital has vertical and horizontal direct effect as per Sanz de Lera [1995]. The freedom also includes the movement of capital between EU and third countries.

Movement of capital is defined in a non-exhaustive list in Directive 88/361. The definition is broad and can include:
Loans/ Investments; Heirs of the van Hiltern-van der Heijden [2006]
Mortgages; Westdeutsche Landesbank v Stefan [2001]
Shares; Test claimants in the FII Group [2006].

There are exceptions to the free movement of capital, the most clear of which is that state’s retain the mandate when it comes to direct taxation as per Art. 65. However under Art. 65(3) this cannot be used to justify discrimination based on nationality (Verkooijen [2000]). The further exceptions under Art. 65(1)(b) are that action can be taken to prevent infringement of national law and, in a general sense, this allows for the effective administration of the tax system. Art. 65(3) applies again and there must be a direct link between the action taken the reason identified (ELISA [2007]). There is also a narrow exception in cases of public policy/security and here the measures must be proportional (Scientology International [2000]).

The Economic and Monetary Union (EMU) attempted to get started in 1969 but faced trouble in the form of floating exchange rates. Another attempt called the Economic Monetary System was attempted in 1978 but with limited success.

The EMU itself had three stages:
1) Completion of the internal market
2) A European System of Central Banks
3) The locking of exchange rates and a single currency

There are a number of advantages that theoretically apply to the EMU such as growth and investment but this has to be balanced against the difficulties of the 2008 financial crisis that was arguable exacerbated by the EMU. Nevertheless the EU is keen to double down on integration as seen in the Five President’s Report that outlines a plan from 2015-2025. This will have to face the realities of the EMU in a global economy.

The ECB has a great degree of independence (Art. 130) and is responsible for monetary policy. It can issue recommendations/opinions and even fines. The ESCB is the collection of national central banks alongside the ECB and seeks to control price stability.

Finally the economic health of one Member State can have a knock-on effect on other Member States so attempts are made to co-ordinate economic policy. Multilateral surveillance under Art. 121 as well as the Stability and Growth Pact allows for concerns to be raised at Council level so that warnings and guidelines can be drawn up. There is also an excessive deficit procedure but the effectiveness of both of these mechanisms is questionable.