CHAPTER 13 FREE MOVEMENT OF CAPITAL AND MONETARY UNION

Important Developments  creation of a European Central Bank (ECB) (replaced the European Monetary Institute (EMI), January 1,1999)  Responsibility: - managing the Euro - maintaining economic stabiity (together with the ESCB)  European System of Central Banks (ESCB) - assists the ECB - comprises the ECB and the central banks of member states - under Art. 105(2): ~ defines and implements the monetary policy of the Union; ~ defines and implements the monetary policy of the Union; ~ conducts foreign exchange operations; ~ conducts foreign exchange operations; ~ holds and manages the official foreign reserves of the member states; ~ holds and manages the official foreign reserves of the member states; ~ promotes the smooth operation of payment systems. ~ promotes the smooth operation of payment systems.

Free Movement of Capital  Suppression  Suppression of exchange controls preventing the transfer of money between member states (originally, Art of the EEC Treaty provided “free movement of capital necessary for the functioning of the common market”; and and the ECJ held that “the free movement of capital constitutes, alongside that of persons and services, one of the fundamental freedoms of the Union”)

 However, ECJ also stated that: since the movement of capital is closely connected with the economic and monetary policies of individual member states, since the movement of capital is closely connected with the economic and monetary policies of individual member states,  Free movement of capital was achieved in 1988 by the adoption of the Single European Act and the  But there are still some (limited) restrictions on the free movement of capital : - member stales may introduce new taxation laws restricting the free movement of capital: a) for non-residents seeking to invest their capital in that state, or b) for residents who seek to invest their capital in another member state Directive 88/361. they are to be treated differently than the other fundamental freedoms

!!!! There is a potentially great risk that such regulations could have highly restrictive effects on the freedom to provide financial services on a cross-border basis. TTTTo avoid these risks, Article 58, following the principles of proportionality and non-discriminatory treatment, prevents member states from adopting tax laws which … “constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments”.

Monetary Union  One of the ambitions of the EU since the early 1960’s.  Purpose: - providing currency stability - allowing greater integration of financial services  Goal : - greater monetary co-operation  Problems: - lack of economic convergence - weak political commitment by some members - disagreement over economic priorities  Result: - some member st. have retained monetary sovereignty and remain outside the monetary union

Monetary Committee aaaassists the ECB tttthe ECB must report annually: to the Council of the EU to the Parliament of the EU BBBBut! The ECB retains the final word in the management of the Euro!