Free movement of capital

The free movement of capital is not only the youngest of all Treaty freedoms, but — because of its unique third-country dimension — also the broadest. Initially, the Treaties did not prescribe full liberalisation of capital movements; Member States only had to remove restrictions to the extent necessary for the functioning of the common market. However, economic and political circumstances globally and in Europe changed, and thus the European Council confirmed the progressive realisation of the Economic and Monetary Union (EMU) in 1988. This included more coordination of national economic and monetary policies. Consequently, stage one of EMU introduced complete freedom for capital transactions, introduced first through a Council directive and later on enshrined in the Maastricht Treaty. Since then, the Treaty prohibits any restriction on capital movements and payments, both between Member States and between Member States and third countries. The principle was directly effective, i.e. it required no further legislation at either EU or Member States’ level.

Legal basis

Articles 63 to 66 of the Treaty on the Functioning of the European Union (TFEU), supplemented by Articles 75 and 215 TFEU for sanctions.


All restrictions on capital movements between Member States as well as between Member States and third countries should be removed. However, for capital movements between Member States and third countries, Member States also have: (1) the option of safeguard measures in exceptional circumstances; (2) the possibility to apply restrictions that existed before a certain date to third countries and certain categories of capital movements; and (3) a basis for the introduction of such restrictions — but only under very specific circumstances. This liberalisation should help to establish the single market by supplementing other freedoms (in particular the movement of persons, goods and services). It should also encourage economic progress by enabling capital to be invested efficiently and promoting the use of the euro as an international currency, thus contributing to the EU’s role as a global player. It was also indispensable for the development of Economic and Monetary Union (EMU) and the introduction of the euro.


a.First endeavours (before the single market)

The first Community measures were limited in scope. A ‘First Directive’ dating from 11 May 1960 and amended in 1962 unconditionally liberalised direct investment, short- or medium-term lending for commercial transactions, and purchases of securities traded on the stock exchange. Some Member States decided not to wait for Community decisions and introduced unilateral national measures, thereby abolishing virtually all restrictions on capital movements (Germany in 1961; United Kingdom in 1979; and the Benelux countries (between themselves) in 1980). Another Directive (72/156/EEC) on international capital flows followed.

b.Further progress and general liberalisation in view of the single market

It was not until the single market was launched, almost 20 years later, that the progress which had started in 1960-1962 was resumed. Two directives, dating from 1985 and 1986, extended unconditional liberalisation to long-term lending for commercial transactions and purchases of securities not dealt in on the stock exchange. In view of the aim of completing the single market (by 1993), moving from the European Monetary System to EMU and the envisaged introduction of the euro, capital movements were fully liberalised in a first step by Council Directive 88/361/EEC of 24 June 1988, which scrapped all remaining restrictions on capital movements between residents of the Member States as of 1 July 1990. As a result, liberalisation was extended to monetary or quasi-monetary transactions, which were likely to have the greatest impact on national monetary policies, such as loans, foreign currency deposits or security transactions. The directive did include a so-called safeguard clause enabling Member States to take protective measures when short-term capital movements of exceptional size seriously disrupted the conduct of monetary policy. Such measures could, however, only apply in a limited number of duly substantiated cases and could not last for more than six months (no Member State made use of this possibility). It also allowed for some countries to maintain temporary restrictions, mainly on short-term movements, but only for a specific period: this applied to Ireland, Portugal and Spain until 31 December 1992, and Greece until 30 June 1994. However, Protocol 32 to the Treaty on European Union (TEU), for instance, allows Denmark to maintain existing legislation which restricts the acquisition of second homes by non-residents.

c.The definitive system


In a second step, the Maastricht Treaty of European Union (TEU) introduced free movement of capital as a Treaty freedom. Today, Article 63 TFEU prohibits all restrictions on the movement of capital and payments between Member States, as well as between Member States and third countries. This constitutes a unique third-country dimension of this particular Treaty freedom. It prohibits all obstacles, not just discriminatory ones. It lays down a general prohibition which goes beyond the mere elimination of unequal treatment on grounds of nationality (see Case C-367/98, Commission v Portugal, paragraph 44). Article 65(1) TFEU allows for different tax treatment of non-residents and foreign investment, but this shall not constitute a means of arbitrary discrimination or a disguised restriction, Article 65(3) TFEU. Even in relation to third countries, the principle of free movement of capital prevails over reciprocity and maintaining Member States’ negotiating leverage vis-à-vis third countries (see Case C-101/05, Skatteverket v A).

The right of free movement of capital is not affected by notification obligations, i.e. the reporting of cross-border transactions (e.g. for electronic payments, cash and securities movements above certain thresholds) for the purpose of external sector statistics, which are used for compiling the balance of payments for Member States and the European Monetary Union.

2.Exceptions and justified restrictions

Nevertheless, exceptions are largely confined to capital movements related to third countries (Article 64 TFEU). In addition to the option of maintaining national or Community measures concerning direct investment and certain other transactions that were in force as of 31 December 1993 (31 December 1999 for Bulgaria, Estonia and Hungary), the Council may also, after consulting the European Parliament, unanimously adopt measures which constitute a step backwards in the liberalisation of capital movements with third countries. The Council and the European Parliament may adopt legislative measures with regard to third-country capital movement involving direct investment establishment, provision of financial services or the admission of securities to capital markets (an example of this being the proposal for a regulation establishing transitional arrangements for bilateral investment agreements between Member States and third countries (COM(2010) 344; European Parliament legislative Resolution of 10 May 2011 (TA(2011)0206)). Article 66 TFEU covers emergency measures vis-à-vis third countries; however, these are limited to a period of six months.

The only justified restrictions on capital movements in general, including movements within the Union, which Member States may decide to apply, are laid down in Article 65 TFEU and include: (i) measures to prevent infringements of national law (namely in view of taxation and prudential supervision of financial services); (ii) procedures for the declaration of capital movements for administrative or statistical purposes; and (iii) measures justified on the grounds of public policy or public security. This is supplemented by Article 75 TFEU providing for the possibility of financial sanctions against individuals, groups or non-state entities to prevent and combat terrorism. Pursuant to Article 215 TFEU, financial sanctions may be taken against third countries, or individuals, groups or non-state entities, based on decisions adopted within the framework of the common foreign and security policy.

3.Consequences of Economic and Monetary Union (EMU): Abolition of the safeguard clause

Today’s safeguard clause is Article 144 TFEU (together with Article 143 TFEU). It allows for taking protective balance of payments measures where difficulties jeopardise the functioning of the internal market or where a sudden crisis occurs. Since 1 January 1999, the beginning of the third phase of EMU, the safeguard clause to remedy crises in the balance of payments is only applicable to those Member States which have not (yet) introduced the euro.

d.Treatment of violations and Court decisions

In cases where Member States restrict the freedom of capital movement in an unjustified way, the usual infringement procedure according to Article 258-260 TFEU applies.

Important infringement cases concerned, inter alia, special rights of public authorities in private companies/sectors (e.g. Commission v Germany (Case C-112/05 Volkswagen); in a case brought against Portugal (Case C-171/08) in 2010, the Court confirmed earlier jurisprudence on special rights and highlighted that the free movement of capital includes both ‘direct’ investments and ‘portfolio’ investments; and a third-country case (Case C-452/04 Fidium Finanz).


On payments, Article 63(2) TFEU stipulates that ‘Within the framework of the provisions set out in this Chapter, all restrictions on payments between Member States and between Member States and third countries shall be prohibited.’

1.Harmonisation of the cost of domestic and cross-border payments within the euro area

Regulation (EC) No 2560/2001 of 19 December 2001 harmonised the costs of domestic and cross-border payments within the euro area. In the meantime, it has been repealed and replaced by Regulation (EC) No 924/2009 of the European Parliament and of the Council of 16 September 2009 on cross-border payments in the Community. Regulation (EU) No 260/2012 of the European Parliament and of the Council of 14 March 2012 establishing technical and business requirements for credit transfers and direct debits in euro improved the framework.

2.New legal framework for payments

The Directive on Payment Services (PSD) 2007/64/EC provides the legal foundation for the creation of an EU-wide single market for payments by 2010. It aims to establish a comprehensive set of rules applicable to all payment services in the EU to make cross-border payments as easy, efficient and secure as ‘national’ payments within a Member State and to foster efficiency and cost-reduction through more competition by opening up payment markets to new entrants. The PSD provides the necessary legal framework for an initiative of the European banking industry, called the ‘Single Euro Payments Area’ (SEPA). SEPA instruments were available, but not much in use by the end of 2010. Consequently, in December 2010, the European Commission proposed a regulation (COM(2010) 775) setting EU-wide end-dates for the migration of the old national credit transfers and direct debits to SEPA instruments; thus phasing out national credit transfers and direct debits, respectively 12 and 24 months after the entry into force of the regulation. This proposal was adopted in 2012 (Regulation (EU) No 260/2012 of the European Parliament and of the Council of 14 March 2012 establishing technical and business requirements for credit transfers and direct debits in euro and amending Regulation (EC) No 924/2009).

Role of the European Parliament

The EP has strongly supported the Commission’s efforts to encourage the liberalisation of capital movements. However, it has always taken the view that such liberalisation should be more advanced within the EU than between the EU and the rest of the world, to ensure that European savings feed European investment as a priority. It has also pointed out that capital liberalisation should be backed up by full liberalisation of financial services and the harmonisation of tax law in order to create a unified European financial market. It was thanks to the EP’s political pressure that the Commission was able to launch legislation on harmonisation of domestic and cross-border payments (resolution of 17 June 1988).

In a closely related area, the EP supported the goal of an efficient, integrated and safe market for clearing and settlement of securities in the EU in its non-legislative resolution ‘Clearing and settlement in the EU’ of 7 July 2005 (2004/2185(INI)) and held a workshop on securities law issues (see document PE 464.428 for the workshop and the related note PE 464.416). The EP is currently expecting further legislative proposals in the area of clearing and settlement to be discussed in the ordinary legislative procedure.

Doris Kolassa