Free movement of capital is an essential condition for the proper functioning of the European Union Single Market. It enables a better allocation of resources within the EU, facilitates trade across borders, favours workers mobility, and makes it easier for businesses to raise the money they need to start and grow.
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Free movement of capital is at the heart of the Single Market and is one of its ‘four freedoms’. It enables integrated, open, competitive and efficient European financial markets and services – which bring many advantages to us all.
For citizens it means the ability to do many operations abroad, as diverse as opening bank accounts, buying shares in non-domestic companies, investing where the best return is, and purchasing real estate. For companies it principally means being able to invest in and own other European companies and take an active part in their management.
It is easy to forget that until the mid-1990s free movement of capital did not exist in practice in a number of Member States. Even if possible in theory, many financial operations with other Member States were subject to prior authorisation requirements by national authorities, known as ‘exchange controls’. These controls enabled national authorities to prevent operations a citizen or a company might want to carry out in another Member State and meant that financial integration in the Single Market was not yet in place.
The full liberalisation of capital movements in the EU was agreed in 1988 (Directive 88/361/EEC) and came into effect in 1990 for most Member States, while for the rest specific transitional periods were agreed.
The liberalisation of capital movements accompanied the development of Economic and Monetary Union and was eventually enshrined in the Maastricht Treaty, which came into force in November 1993. The Treaty provides that all restrictions on capital movements and payments, both between Member States and between Member States and third countries, are prohibited. This principle is directly effective, i.e. it requires no further legislation at either EU or national level.
Since the coming into force of the Maastricht Treaty, many more countries have joined the EU. Before joining, these countries progressively removed barriers to free the movement of capital. However, transitional periods exist for certain Member States with regard to the right to purchase second homes or agricultural land.
Free movement of capital in the EU has also stimulated a more general process of economic policy co-operation in the area of capital and payments at international level.
There are some exceptions to the free movement of capital both within the EU and with third countries. These are primarily linked to taxation, prudential supervision, public policy considerations, money laundering, and financial sanctions agreed under the Common Foreign and Security Policy.
Of course, dialogue with national authorities and monitoring is needed to ensure that these exceptions are applied correctly. Where the EU feels this was not the case, the European Court of Justice can be asked to interprete the relevant EU law.
More generally, these monitoring activities are also essential in identifying any remaining barriers and restrictions to free movement of capital in the EU.
Although these web pages can sometimes focus on problem areas, this should not detract from the numerous areas where free movement of capital is working smoothly and efficiently for the benefit of everyone in the EU.
Source: European Commission
