The free movement of capital was introduced as a Treaty freedom by the Maastricht Treaty in 1994. It removed restrictions on capital movements and payments both between EU member states and with third countries.
The aim of free movement of capital is to encourage economic growth by enabling capital to be invested efficiently and promote the use of the euro as an international currency. It underpins the single market and complements the other three freedoms. These are:
Free Movement of Capital and the Internal Market
Articles 56 – 60 EC Treaty
Articles 56 to 60 of the EC Treaty guarantee the fundamental freedom of the EU in relation to free movement of capital. In particular Article 56 states:
‘All restrictions on the movement of capital between Member States shall be prohibited.’
For the EU Internal Market to be guaranteed it is essential that capital is able to be moved freely between EU member states. Free movement of capital is one of the key ingredients of the Internal Market (or Single Market) as it enables integrated, open, competitive and efficient European financial markets and services.
Benefits of free movement of capital
The free movement of capital has benefits for all of us both in an individual capacity but also for business – which then has a knock-on benefit for consumers.
It enables citizens to do many operations abroad, such as opening bank accounts, buying shares in non-domestic companies, investing where the best return is and purchasing property.
European companies are able to invest in and own other European companies and take an active part in their management.
The free movement of goods and services and the internal market is also promoted by enabling companies from other member states to receive investment from companies and individuals from a member state in which they may try wish to break into the market but previously did not have the financial capabilities or the awareness of that market.
Exceptions to the free movement of capital
There are certain exceptions to the free movement of capital within the EU member states and also within those countries having trade agreements with the EU. These are mostly in relation to taxation, prudential supervision, public policy considerations and financial sanctions agreed under the Common Foreign and Security Policy.
Specifically, sanctions and strict controls have been put in place to monitor suspicious transactions which may involve the movement of criminal funds through money laundering. If such transactions are found by financial institutions they are required to notify the requisite authorities of any such transactions.
More recently with the increasing fears concerned with terrorist activity, additional controls have been put in place to try and track funds being used to prepare or to support terrorist attacks.