Week 6 Lecture - Me.pptx

Week 6 – Internal Market FREE MOVEMENT OF CAPITAL Dr. Calum Alasdair Young  Learning objectives: The legal framework and its origins Scope of the capital rules Restrictions, Express derogations...

Week 6 – Internal Market FREE MOVEMENT OF CAPITAL Dr. Calum Alasdair Young  Learning objectives: The legal framework and its origins Scope of the capital rules Restrictions, Express derogations and Justifications Economic and Monetary Union 2 Free Movement of Capital & EMU  LEGAL FRAMEWORK AND ORIGINS Overview – The Free Movement of Capital Most recent and the broadest freedom Liberalization of capital flows progressed gradually Restrictions on capital movements and payments prohibited since the Maastricht Treaty 3 Free Movement of Capital & EMU  LEGAL FRAMEWORK AND ORIGINS Legal basis Articles 63-66 of the Treaty on the Functioning of the European Union (TFEU) 4 Free Movement of Capital & EMU  LEGAL FRAMEWORK AND ORIGINS Objectives All restrictions on capital movements between Member States as well as between Member States and third countries should be removed, with exceptions in certain circumstances. 5 Free Movement of Capital & EMU  LEGAL FRAMEWORK AND ORIGINS First endeavors - Pre-Maastricht rules on capital: limited Capital movements closely linked to the stability of economic and monetary policy of MSs -> liberalization of capital took longer: Treaty of Rome (1957) restrictions to be removed only to the extent necessary for the functioning of the common market.(Art. 67(1) EEC) 6 Free Movement of Capital & EMU  LEGAL FRAMEWORK AND ORIGINS Art. 67(1) EEC didn’t abolish restrictions on the FMC by the end of the transitional period -> abolition was left to Council adopting directives based on Art. 69 EEC. - ‘First Capital Directive’ from 1960, second in 1963 -> some degree of liberalization 7 Free Movement of Capital & EMU  LEGAL FRAMEWORK AND ORIGINS Against this backdrop: Casati (Case 230/80): Art 67(1) EEC was different from other freedoms in that it did not have direct effect Different dynamic than with other freedoms: MSs very much in driving seat of capital liberalization 8 Free Movement of Capital & EMU  LEGAL FRAMEWORK AND ORIGINS Further progress Capital movements fully liberalized by Council Directive 88/361/EEC in 1988 which scrapped all remaining restrictions on capital movements between Member State residents as of 1 July 1990. It also aimed to liberalize capital movements involving third countries in a similar way. 9 Free Movement of Capital & EMU  LEGAL FRAMEWORK AND ORIGINS Further progress Directive 88/361/EEC - Art. 1(1) Member States shall abolish restrictions on movements of capital taking place between persons resident in Member States - Contained a non-exhaustive nomenclature of capital movements in the annex to facilitate application of directive - Coming into force of Directive on 1 July 1990 marked first stage of monetary union - The directive is now replaced by the new Treaty rules on the FMC but is still used for the purposes of defining the notion of capital movements. 10 Free Movement of Capital & EMU  LEGAL FRAMEWORK AND ORIGINS Further progress The Maastricht Treaty introduced the free movement of capital as a Treaty freedom and provided that the second stage of monetary union is to begin in 1994. 11 Free Movement of Capital & EMU  LEGAL FRAMEWORK AND ORIGINS Further progress By 1 July 1994 – beginning of second stage: - All MSs had to comply with, inter alia, the provisions on free movement of capital (today’s Art.63(1) TFEU) - And put in place multiannual programs to ensure the lasting convergence necessary to achieve the EMU - Beginning of second stage: establishment of European Monetary Institute (predecessor of European Central Bank) 12 Free Movement of Capital & EMU  LEGAL FRAMEWORK AND ORIGINS Further progress Third stage began on 1 January 1999 when for the Eurozone states the national currencies were replaced by the single currency From 1 January 2002 euro coins and notes were put into circulation 13 Free Movement of Capital & EMU  THE SCOPE AND PROVISIONS ON CAPITAL 14 Free Movement of Capital & EMU  DOES ART. 63(1) TFEU APPLY? 15 Free Movement of Capital & EMU  SCOPE AND PROVISIONS The definition of ‘capital’ Free movement of capital - Article 63 - 66 TFEU Article 63 “All restrictions on the movement of capital” and “all restrictions on payments” “between Member States and between Member States and third countries shall be prohibited.” 16 Free Movement of Capital & EMU  SCOPE AND PROVISIONS The definition of ‘capital’ - The Treaty does not define the term ‘movements of capital’ (or indeed ‘payments’ under Art. 63(2) TFEU) - The CJEU often looks to the annex of Directive 88/361 for guidance as to what constitutes capital - Lengthy list with explanatory notes - See C-222/97 Trummer and Mayer (from para. 20) 17 Free Movement of Capital & EMU  SCOPE AND PROVISIONS The definition of ‘capital’ If transaction is not listed in Annex 1, it can still fall within the scope of Art. 63(1) TFEU (receipt of dividends from a foreign country – Verkooijen) 18 Free Movement of Capital & EMU  SCOPE AND PROVISIONS The definition of ‘capital’ Per CJEU the following constitute the free movement of capital: - Mortgages (C-222/97 Trummer and Mayer) - Investments in real property (C-98/01 Commission v UK) - Its administration (C-386/04 Centro di Musicologia Walter Stauffer); - Its sale (C-443/06 Hollmann v Fazenda Publica); 19 Free Movement of Capital & EMU  SCOPE AND PROVISIONS The definition of ‘capital’ - Direct investment in a company by means of shareholding with the view of effectively participating in the management and control of the company (Case C-367/98 Commission v Portugal) - Portfolio investments (Joined Cases C-282 and 283/04 Commission v Netherlands) - Resale of shares to the issuing company (Case C-265/04 Bouanich v Skatteverket) 20 Free Movement of Capital & EMU  SCOPE AND PROVISIONS The definition of ‘capital’ - Inheritances (C-513/03 Heirs of M.E.A.) - Banknotes and coins (Joined cases C-358 and 416/93 Criminal Proceedings against Aldo Bordessa) - Gifts in money and in kind (C-318/07 Hein Persche v Finanzamt Ludenscheid) - Granting credits on a commercial basis (C-452/04 Fidium Finanz AG v Bundesanstalt fur Finanzdienstleistungsaufsicht) 21 Free Movement of Capital & EMU  SCOPE AND PROVISIONS The definition of ‘capital’ - Unlike free movement of persons: the Court rarely adds the requirement that the free movement of capital be an ‘economic activity’ - Focus is on capital, not the person ((natural or legal) holding or owning the capital). There is no specifications in terms of the nationality of the holder. 22 Free Movement of Capital & EMU  SCOPE AND PROVISIONS Territorial scope Intra-State Movement - Within the EU, between Member States Between EU MSs and Third Countries - Broad approach Reasons for broad approach -> Single currency bolstered by liberalization -> Extension contributes to the principle of an open market economy expressed in Art. 119TFEU 23 Free Movement of Capital & EMU  SCOPE AND PROVISIONS Territorial scope Limitations on the broad approach Derogations laid down in Art. 65 TFEU + 4 further potential exceptions 24 Free Movement of Capital & EMU  SCOPE AND PROVISIONS Territorial scope Limitations on the broad approach The 4 further potential restrictions: 1) Historic: MS may maintain restrictions on direct investment and other transactions which existed on 31 December 1993 (Art. 64(1) TFEU ‘grandfather clause’), 2) Potential: a) COU may also, after consulting the EP, unanimously adopt measures which constitute a step backwards in the liberalization of capital movements with third countries. (Art. 64(2) TFEU) b) COU and EP may adopt legislative measures involving direct investment, establishment, provision of financial services or the admission of securities to capital markets. (Art. 64(3) TFEU) c) COM or COU, on application from a MS, can adopt a decision ‘stating that restrictive tax measures adopted by a Member State concerning one or more third countries are to be considered compatible with the Treaties in so far as they are justified by one of the objectives of the Union and compatible with the proper functioning of the internal market.’ (Art. 65(4) TFEU) 3) Balance of payments: Art. 66 TFEU covers emergency measures vis-à-vis third countries, limited to a period of six months. 4) Political: Art. 75 TFEU EP+COU administrative measures to combat terrorism 25 Free Movement of Capital & EMU  SCOPE AND PROVISIONS The direct effect of Art. 63TFEU - In Sanz de Lera (Joined cases C-163, 165 and 250/94) the Court ruled that Art.73b(1)EC, now Art.63(1)TFEU, was directly effective - Vertical direct effect – quintessentially vertical subject matter 26 Free Movement of Capital & EMU  WHAT IS PROHIBITED UNDER ART. 63(1) TFEU? 27 Free Movement of Capital & EMU  WHAT IS PROHIBITED UNDER ART. 63(1) TFEU? Having established whether Art. 63 TFEU applies, We consider what national measures are prohibited under Art. 63(1) TFEU: - The discrimination approach - The restrictions/obstacles-based approach 28 Free Movement of Capital & EMU  WHAT IS PROHIBITED UNDER ART. 63(1) TFEU? The discrimination approach Original provision: Art. 67 EEC talked of abolition of ‘all restrictions on the free movement of capital’ and ‘any discrimination based on the nationality or on the place of residence of the parties or on the place where such capital is invested’ Maastricht amendments dropped ‘discrimination’ but CJEU has used both models to eliminate measures that interfere with the free movement of capital 29 Free Movement of Capital & EMU  WHAT IS PROHIBITED UNDER ART. 63(1) TFEU? The discrimination approach Art. 67 EEC prohibited discrimination based on 3 grounds: nationality or on the place of residence of the parties or on the place where such capital is invested 30 Free Movement of Capital & EMU  WHAT IS PROHIBITED UNDER ART. 63(1) TFEU? The discrimination approach - Direct/Indirect discrimination - Most case law concerns direct discrimination (Case C-367/98 Commission v. Portugal) - Indirect discrimination: harder to find (Case E-2/06 EFTA Surveillance Authority v. Norway) - Non-Discriminatory National Rules Golden Share cases of 2003 CJEU followed Alpine Investments –non- discriminatory measures that hindered access to the market breached Art.63(1) TFEU unless they could be objectively justified. (Case C-98/01 Commission v. UK) 31 Free Movement of Capital & EMU  WHAT IS PROHIBITED UNDER ART. 63(1) TFEU? The restrictions/obstacles-based approach Discrimination-based approach mostly difficult to apply to capital movement: Restrictions-based approach more used: − desire for convergence with other freedoms Change in direction clearly signalled in Golden Share cases (2002) 32 Free Movement of Capital & EMU  WHAT IS PROHIBITED UNDER ART. 63(1) TFEU? The restrictions/obstacles-based approach Examples of measures constituting a restriction per the CJEU: - A measure taken by a MS to prevent its residents from obtaining loans in other MSs. - A national restriction on the acquisition and disposal of property (eg requirement of prior administrative authorisation) - A national prohibition on the creation of a mortgage in a foreign currency - Obligations posed by the ‘golden share’ holder (usually the state acting as regulator in the guise of a market participant) 33 Free Movement of Capital & EMU  EXPRESS DEROGATIONS AND JUSTIFICATIONS 34 Free Movement of Capital & EMU  EXPRESS DEROGATIONS Treaty provisions: − Art. 64 TFEU: ‘grandfather’ clause − Art. 65(1) TFEU: express derogations: − Art. 65(1)(a) TFEU - direct taxation remains in the remit of MSs so long as no discrimination based on nationality − Art. 65(1)(b) TFEU: − measures justified on the grounds of public policy or public security – must be proportional − measures intended to ensure the effectiveness of fiscal supervision and to combat illegal activities such as tax evasion 35 Free Movement of Capital & EMU  EXPRESS DEROGATIONS Treaty provisions – no arbitrary discrimination Art. 65(3) TFEU: the restriction cannot constitute a means of arbitrary discrimination 36 Free Movement of Capital & EMU  EXPRESS DEROGATIONS Interpretation of derogations - Derogations to be interpreted strictly (Case 36/75 Rutili) - Derogations may not be misapplied to serve purely economic purposes (Case 36/75 Rutili) - Anyone affected must have access to legal redress (Case 222/86 Unectef v Heylens) - Derogations subject to principle of proportionality - Derogations subject to principle of legal certainty (Case C-54/99 Eglise de Scientologie) 37 Free Movement of Capital & EMU  FURTHER JUSTIFICATIONS Public interest requirements + Proportionality - CJEU has also added non-exhaustive list – ‘objective justifications’ – (always present but most clarified in Reisch) Public order (eg. minimum supply of energy resources (Case C- 326/07 Commission v Italy) - Protection of the values of the state (eg. promotion of R&D in Case C-10/10 Commission v. Austria) - Protection of interests of third parties (eg. Guarantee the safety and security of assets administered by an undertaking for collective investment by adoption of prudential rules (Case-C 39/11 VBV) - Requirement of proportionality 38 Free Movement of Capital & EMU  BREAK 39 Free Movement of Capital & EMU  II. THE ECONOMIC AND MONETARY UNION 40 Free Movement of Capital & EMU  THE EMU AND ITS GOALS Introduction Umbrella term for all the policies of the Member States implemented with a view to bringing their economies closer together The free movement of capital is a key pillar in the realization of the EMU. 41 Free Movement of Capital & EMU  THE EMU AND ITS GOALS Introduction The EMU brings together States with different levels of economic integration.  coordination of economic policies  a common monetary policy - ECB  a common currency: the euro 42 Free Movement of Capital & EMU  THE EMU AND ITS GOALS Historic progression - 1969 Werner Plan – to create EMU against the backdrop of the collapse of the Bretton Woods system - 1978: Economic Monetary System (ECU + Exchange Rate Mechanism) - SEA in 1986 - MSs confirmed their objective to establish a fully- fledged monetary union and recognized the European Monetary System as an element of monetary cooperation – fixed but adjustable exchange rate system 43 Free Movement of Capital & EMU  THE EMU AND ITS GOALS Historic progression Building on the conditions identified by the Werner Report, in 1989, a committee led by COMM president Delors proposes the implementation of the European Economic and Monetary Union. 44 Free Movement of Capital & EMU  THE EMU AND ITS GOALS Historic progression Delors proposes the implementation of the European Economic and Monetary Union in 3 stages: - Stage 1: Closer coordination of economic and monetary policies, free movement of capital - Stage 2: Monetary policy gradually transferred to EC, European System of Central Banks, Narrower Fluctuation bands - Stage 3: Full handover of monetary matters to the Community: Monetary competence transferred to the EC, Fixed exchange rates between national currencies, European currency (Maastricht Treaty contained modifications necessary to attain Stages 2+3) 45 Free Movement of Capital & EMU  THE EMU AND ITS GOALS Historic progression Single currency – the general public had to be convinced: Pros: - Transparency in the market, consumers can compare prices - Traders may set prices without having to hedge risks in case of exchange rate fluctuations - Larger companies do not have to scatter their plants across the EU to reduce the risk of ER fluctuation, optimize size and production costs - Strong monetary union attracts foreign investment (stable currency: low inflation, low interest rates) 46 Free Movement of Capital & EMU  THE EMU AND ITS GOALS Historic progression Single currency – the general public had to be convinced: Cons: - Allowing the exchange rates to fluctuate acts as a shock absorber for disturbances that impact on partner economies - Loss of monetary autonomy for Mss -> states lose the chance to regulate interest rates to promote or resrict growth - With countries being in different economic cycles, a single currency would serve to accentuate differences 47 Free Movement of Capital & EMU  MONETARY UNION 48 Free Movement of Capital & EMU  MONETARY UNION Stages to Monetary Union Stage 1 Starting on 1 July 1990 – free movement of capital realized under Directive 88/361 -> closer cooperation of economic and monetary policies, closer cooperation between central banks and the free movement of capital 49 Free Movement of Capital & EMU  MONETARY UNION Stages to Monetary Union Stage 2 began in 1994: European Monetary Institution set up (as a precursor to the ECB) Convergence Criteria defined: Price stability Sound public finances, to ensure they are sustainable Exchange-rate stability Long-term interest rates, to assess the durability of the convergence 50 Free Movement of Capital & EMU  MONETARY UNION Stages to Monetary Union Stage 3: 1 January 1999: EUR is formally introduced as the virtual single currency + exchange rates between national currencies are fixed irrevocably 1 January 2002: EUR banknotes and coins officially start to circulate Since then, new countries have joined: 2001: Greece, 2007: Slovenia, 2008: Cyprus and Malta, 2009: Slovakia, 2011: Estonia, 2014: Latvia, 2015: Lithuania, 2023: Croatia 51 Free Movement of Capital & EMU  MONETARY UNION Monetary Policy - Details of the monetary policy: Art. 127-33TFEU - European Central Bank responsible for monetary policy 52 Free Movement of Capital & EMU  MONETARY UNION Monetary Policy European Central Bank Has legal personality and is independent (Art.130) The independence of the ECB is conducive to maintaining price stability. Responsible for monetary policy Can issue recommendations/opinions (non-binding) and can impose fines European System of Central Banks maintains price stability 53 Free Movement of Capital & EMU  ECONOMIC UNION 54 Free Movement of Capital & EMU  ECONOMIC UNION Budgetary discipline essential component of economic union Certain states considered that a highly integrated monetary policy necessitated a high degree of coordination of economic policy, especially in respect of budgetary matters -> Maastricht Treaty required a high degree of economic convergence to enter stage 3 of EMU 55 Free Movement of Capital & EMU  ECONOMIC UNION Coordinating Economic Policy Treaty based provisions: Art 120(1)TFEU: MSs have to regard their economic policies as a matter of common concern and must coordinate them in the COU Art 120 TFEU requires MSs to conduct their economic policies with a view to contributing to the achievement of the EU’s objectives as defined in Art. 3 TFEU, as well as in the broad economic policy guidelines (BEPGs) laid down by the COU under Art. 121(2) TFEU. 56 Free Movement of Capital & EMU  ECONOMIC UNION The broad economic policy guidelines (BEPGs) are drafted by the COMM + there is a multilateral surveillance procedure (Art. 121 TFEU) in place to monitor that MSs’ economic policies are in line with BEPGs; Excessive Deficit Procedure: Art. 126 TFEU requires MSs to avoid excessive levels of national debts (should be less than 60% GDP) and excessive budget deficits (should be less than 3% GDP) + sets up a monitoring mechanism that can result in sanctions (eg. levies) 57 Free Movement of Capital & EMU  ECONOMIC UNION Treaty-based provisions supplemented by Stability and Growth Pact (SGP): - Agreed on in 1997 Amsterdam European Council - SGP contained in 2 regulations (Council Reg. 1466/97 and 1467/97) + a Council resolution (Res. 97/C 236/01) 58 Free Movement of Capital & EMU  ECONOMIC UNION These measures have complementary functions. Reg. 1466/97 has a preventive function: it sets up an early warning system to alert the COU to the possibility that a MS participating in the third stage of the EMU may be running up an excessive deficit Reg. 1467/97 serves a corrective function: in case of excessive deficit (3% reference value breach), MSs must take immediate corrective action and may be sanctioned as well. Questions as to how rigidly these are enforced against Member States. Many further elements of coordination and supervision following the Eurozone crisis. 59 Free Movement of Capital & EMU  CONCLUSIONS The crises (Euro-zone, pandemic) are profoundly reshaping the EU Advent of EMU – free movement of capital no longer the poor relation Since 1992, the number of cases decided under Art. 63(1) TFEU has risen significantly Striking feature of case law: CJEU’s willingness to apply principles developed in respect to other freedoms (freedom to provide services) Is negative integration enough however? 60 Free Movement of Capital & EMU  Workshop Please read: - Case C-367/98 Commission v. Portugal; - Case C-98/01 Commission v. UK (BAA); - Case C-543/08 Commission v. Portugal (Portugal Telecom SGPS SA) 61 Free Movement of Capital & EMU  QUESTIONS? 62 Free Movement of Capital & EMU