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):
In the absence of a definition in the Treaty of 'movement of capital' the CJEU has recognised the nomenclature annexed to the Council Directive 88/361/EEC as having indicative value .
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
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).