A concerted effort to establish a European financial area
The original 1957 version of the Treaty establishing the European Communities did not include a formal obligation to secure the free movement of capital. According to Article 67, this was to occur only "to the extent necessary to ensure the proper functioning of the common market". This communication is the first drive towards establishing a European financial area.
Communication from the Commission to the Council of 23 May 1986 on the programme for the liberalisation of capital movements in the Community [COM(1986) 292 final - not published in the Official Journal].
The purpose of this Communication is to present the major phases in the Commission's proposed approach, so as to arrive at as liberal as possible a Community system of capital movements. It looks at the implications for the effective integration of financial markets and for the coordination of Member States' monetary and financial policies since in 1986 the euro did not yet exist.
Liberalisation of capital movements
In the Commission's view, there are three categories of operation concerned by the progressive liberalisation of capital movements:
- capital operations: operations such as commercial credits or direct investments are linked to the exercise of the other fundamental freedoms of the common market (free movement of goods and services, free movement of persons and freedom of establishment);
- operations in financial market securities: the liberalisation of financial securities such as bonds or shares requires a single financial market at European level;
- operations involving financial credits: the liberalisation of operations involving financial credits and operations relating to money market instruments is necessary for the establishment of a unified financial system.
The Commission notes that, as each threshold is crossed, growing constraints are imposed on the Member States, whose situation changes in terms of their policy choices. The room for manoeuvre which Member States have in settling potential conflicts between the internal and external objectives of their monetary policy actually depends on a number of factors, such as the level of development of their domestic financial system, the structural characteristics of their balance of payments, the importance of the national currency as a reserve or exchange instrument, etc.
Main phases in the liberalisation process
The Commission proposes two main phases for achieving the liberalisation of capital movements:
- liberalisation of capital operations;
- total freedom of capital movements.
The liberalisation of capital operations, which is needed for the common market to function smoothly, involves both ending exceptional arrangements and extending Community obligations as regards liberalization. Ending exceptional arrangements includes, for example, the safeguard clauses that certain Member States (France, Ireland, Italy and Greece) have secured with a view to maintaining certain restrictions on capital movements. The Commission wants to extend the Union's competences concerning the free movement of capital and highlights the need for the total freedom of capital movements. This should apply to operations that are still excluded under Community law, such as financial loans, money market operations, deposits and balances on current accounts, etc. so that competition can function normally.
The Commission poses the question whether all the Member States are capable of moving towards this objective at the same speed. Any differentiation to be made between the Member States in the liberalization process should not be introduced below a uniform level of Community obligations. However, through its instruments for supporting balances of payments, the Community must be able to offer Member States which are faced with special constraints the means of overcoming them. In the long term, the Commission is working on a system of unconditional liberalisation under which recourse to safeguard clauses such as those provided for in the Treaty (Articles 108, 109 and 73) will still be possible. It considers that it is important for liberalisation to be paralleled by provisions designed to ensure the cohesion and identity of the financial area, e.g. regarding the conduct of monetary policy:
- cohesion of the European financial area: A Community-wide integrated financial system is instrumental in commercial integration and in the convergence of economic and monetary policies. The parallel progress made by these two forms of integration requires cohesion between policies and Community provisions, such as protection for users of financial services.
- conduct of monetary policies: The full convertibility of the European currencies, while respecting the exchange criteria of the European Monetary System (EMS), will create new conditions for the management of the financial system. Similarly, the reinforcement of internal coordination will raise questions with regard to the Community's external monetary relations.
Lastly, the Commission sets out a timetable for the forthcoming initiatives which it plans to take, including presenting legislative proposals on the European financial area and initiating a forward study on the implications of financial integration for monetary cooperation and the liberalisation of financial services, etc.