Free Movement of Capital: Regulations and Exceptions
Free Movement of Capital in the EU
The legislation aims to eliminate all obstacles and restrictions to the free movement of capital and payments, unless there is a justification, similar to other freedoms. Cross-border capital transactions—such as purchasing currency, buying real estate, company shares, loans, operating accounts, financial assets, or foreign direct investment—cannot be limited.
This freedom is considered a supplementary element to the other three freedoms. The main principles of these chapters were stated precisely and clearly, having direct effects. Initially, the free movement of capital did not have direct effect, but now it is as clear as the others and has direct effects too. The free movement of capital was introduced in the Maastricht Treaty (1992/1993) and was fully constitutionalized by 1993.
Secondary Legislation and Liberalization
To move towards the freedom of capital, secondary legislation and liberalization of different capital movements were necessary. The adoption of directives started in the 1960s, but the Maastricht Treaty made the difference, eliminating different treatments.
All restrictions on the movement of capital and the movement of payments between member states, and between member states and third countries, are prohibited (Art. 63). This is where the liberalization principle is stated, referring to capital movement and means of payments.
Capital vs. Payments
Difference between capital and payments:
- Capital: Investment or moving money without a primary transaction. No underlying transaction, e.g., buying real estate in another country.
- Payments: Related to primary transactions, such as goods or services. Requires an underlying reason or ground, related to another transaction and complements it.
Payments were legalized sooner than capital due to the legalization of the free movement of goods and services. It was an essential tool for the development of the other freedoms. Payments were liberalized in parallel with primary transactions.
The distinction between capital and payments was essential at the time and remains relevant today because we may have to apply the exceptions differently for these types of movements (to payments, we would apply the same exceptions as the primary transaction, linked to goods and services). Additionally, agreements with a third country may contain just certain freedoms (e.g., if the EU agrees to a convention on the free movement of goods with a third country, means of payments will be liberalized too).
Today, there is full liberalization for both intra and extra EU movements (Art. 63 TFEU). Since 1994 at the primary level, like other freedoms, BUT there are different exceptions for both types of movements, more for extra EU (Art. 64-66 TFEU) than for intra EU (Art. 65 TFEU).
Forbidden Restrictions (Art. 63)
All restrictions are prohibited unless an exception or justification can be applied:
- Direct discrimination
- Indirect discrimination
- Non-discriminatory restrictions
Art. 65 contains an open list of exceptions, BUT because it’s an open list, member states can invoke exceptions on general interest. Regarding direct investments, the EU allows member states to maintain some exceptions. If the EU wants to introduce a new restriction (or a member state wants to), the possibilities would be very limited because the general rule is that, to introduce a durable restriction, they would need unanimity from all member states (unanimity = all member states agree).
In the case of transitory restrictions, a qualified majority is sufficient. For eliminating restrictions, a qualified majority is requested.