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What are capital movements?

Capital movements mean any one of the following when carried out on a cross-border basis (i.e. between an investor in one Member State and a financial institution in another):

  • Foreign direct investment (FDI), including investments which establish or maintain lasting links between a provider of capital (investor) and an enterprise (in effect setting up, taking-over, or acquiring an important stake in a company or institution);
  • Real estate investments or purchases;
  • Securities investments (e.g. in shares, bonds, bills, unit trusts);
  • Granting of loans and credits; and
  • Other operations with financial institutions, including personal capital operations such as dowries, legacies, endowments, etc.

In the absence of a definition in the Treaty of 'movement of capital' the CJEU has recognised the nomenclaturepdf Choose translations of the previous link  annexed to the Council Directive 88/361/EEC as having indicative value pdf Choose translations of the previous link .

When were capital movements liberalised?

The Treaty of Rome provided for the free movement of capital, but the abolition of capital restrictions between Member States was to be "to the extent necessary to ensure the proper functioning of the common market".

Despite initial progress in the 1960's, there was a lot of later backtracking as many Member States introduced safeguard measures. Many financial operations with other Member States were subject to prior authorisation requirements known as 'exchange controls'.  This situation persisted until the early 1990s.

Recognising the damage that this was doing to the delivery of a Single Market, the Council adopted a capital liberalisation directive, in 1988, providing for the removal of all remaining exchange controls by mid-1990 for most of those countries maintaining this mechanism.  (There were though transition periods provided for Spain, Ireland, Portugal and Greece.)

As part of the drive towards Economic and Monetary Union, the freedom of capital movements gained the same status as the other Internal Market freedoms with the entry into force of the Maastricht Treaty. From 1 January 1994 not only were all restrictions on capital movements and payments between EU Member States prohibited, but so were restrictions between EU Member States and third countries.

In subsequent EU accession rounds, exchange controls have been progressively eliminated in the period before EU membership. In general all capital movements have now been fully liberalised across the EU, although some transitional periods have been granted to some newer Member States for capital operations involving the purchase of real estate (second homes or agricultural land). Read more

Why were capital movements liberalised?

This liberalisation process has taken place for a very simple reason: it is in the direct interest of the EU's citizens, companies and governments.

Economic theory suggests that the free movement of capital will lead to an optimal allocation of resources and the integration of open, competitive and efficient European financial markets and services. It will also help maintain "responsible" macro-economic policy and can foster growth through finance and knowledge transfers (direct investment).

  • For Europe's citizens, the freedom means the ability to conduct many operations abroad, from opening bank accounts to buying shares in non-domestic companies, investing where the best return is, and buying real estate;
  • For Europe's big, small and medium-sized companies, it means being able to invest in, and own, other European companies and take an active part in their management as well as raising money where it is cheapest, and, with it, to create jobs that in turn benefit Europe's citizens.
  • And for Europe's governments, it means lower borrowing rates than previously, making it easier to finance spending on schools, hospitals and other forms of public spending.