Abstract
Over time there has been a major shift in the assessment of the pros and cons of free capital flows. In the Treaty of Rome, a safeguard clause confined the obligation to liberalize capital movements “to the extent necessary to ensure the proper functioning of the Common Market.” Up till the early 1980s, the stabilizing role attributed to capital controls outweighed the textbook economic costs of controls. The establishment of the European Monetary System marked a new beginning as freedom of capital movements was seen as forcing economic discipline and promoting economic reforms and the convergence of policies. Most motives for controlling capital movements no longer apply as the incompatible trinity of having free capital flows, stable exchange rates and autonomous monetary policy at the same time is resolved by the transition to the euro. At the same time, national security and critical infrastructure concerns have gained prominence. The EU framework for investment screening that was agreed to address these concerns should not infringe upon the acquis of free capital flows. Economic interests should not be mixed with national security concerns, and investment screening should not become an extension of industrial policy. Alternative approaches are proposed that would address concerns of intellectual property and reciprocity. Lessons are drawn from an earlier episode when similar concerns were raised with respect to Japan. The negotiation of a bilateral investment treaty between the EU and China, including mutual access rules, would further the view that Europe profits from remaining open to the outside world while European corporations operate on a level playing field.
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Notes
- 1.
France switched to a positive system in 1966 under which all cross-border transactions are allowed unless explicitly prohibited. However, the positive system decree was suspended after the political unrest in May 1968, only to be reintroduced in 1985. The Netherlands switched to a positive system in 1977 and Italy in 1988.
- 2.
The carnet de change, introduced in 1983 after three consecutive devaluations of the French franc in 18 months, restricted foreign expenditure to 2.000 francs (approximately 300 euro) for the whole year and resulted in a decrease in tourist expenditures abroad by 13%, see Bakker (1996), p. 170.
- 3.
EEC Council 11 May 1960: First Directive for the implementation of Article 67 of the Treaty, OJ 43, 12.7.1960, p. 921. A second much less substantive directive was adopted on 18 December 1962 (Directive 63/21/EEC).
- 4.
France which had only in January 1967 substantially relaxed exchange controls and introduced a positive system of exchange regulation reintroduced a negative exchange control system. Again all cross-border capital transactions were prohibited unless explicitly permitted.
- 5.
Council Directive 72/156/EEC of 21 March 1972 on regulating international capital flows and neutralizing their undesirable effects on domestic liquidity, OJ L 91, 18.4.1972, pp. 13–14.
- 6.
For direct investment abroad, British industry needed to seek foreign financing or acquire foreign currency at a premium through the so-called investment currency market, which had been in operation since 1947.
- 7.
The First Capital Directive of 1960 had prescribed annual examinations of the use of capital restrictions by member states. Against the rules the practice had developed that derogations from the liberalization obligations had been granted for an unlimited duration. See Bakker (1996), pp. 150–151.
- 8.
The Fourth Directive on capital movements (Directive 888/361/EEC) was adopted by the Council on 24 June 1988.
- 9.
The impossible trinity concept, also in macroeconomic theory referred to as the trilemma, was developed by economists John M. Fleming and Robert A. Mundell in the 1960s.
- 10.
Bakker (1996), pp. 171–173; Deutsche Bundesbank (1987), Annual Report 1986, pp. 75–76.
- 11.
Jacques Delors was Minister in the Mitterrand administration from 1981 to 1984 and President of the European Commission from January 1985 to January 1995.
- 12.
Fourth Directive on capital movements (Directive 888/361/EEC).
- 13.
The German position was supported by a number of other countries which are highly dependent on external trade, including the Netherlands. The French position, on the other hand, was strongly supported by Italy which favored the development of a common European capital market.
- 14.
Report to the Council and the Commission on the realization of economic and monetary union in the Community (1970).
- 15.
The Commission likewise favored that Europe manifested itself as a bloc. When tensions emerged in the Bretton Woods system in the early 1970s the Commission proposed that the Community harmonized their capital controls vis-à-vis third countries, while simultaneously liberalizing intra-EEC flows, see Bakker (1996), pp. 116–118.
- 16.
In the 1988 Directive the erga omnes principle was accepted, but Germany stood alone in wishing to have this included as a binding obligation in the Directive.
- 17.
See Hindelang (2009).
- 18.
Dreyfuss (21 December 1987).
- 19.
The Plaza Accord, named after the Plaza Hotel in New York in which it was signed on 22 October 1985, aims at a controlled appreciation of the Japanese yen vis-á-vis the US dollar by interventions in the foreign exchange markets by the central banks.
- 20.
Agriculture, forestry and fishing, mining and petroleum, and leather industries.
- 21.
Between September 1985 and December 1987, the exchange rate of the Japanese yen vis-á-vis the US dollar appreciated from 240 to 130.
- 22.
According to World Bank data China’s gross domestic savings rate amounted to 46% of GDP in 2017.
- 23.
Whereas Japanese private companies made inroads in foreign industrial markets, the Chinese Silk Road is a government-led initiative to build ports, railroads and other trade-enhancing infrastructure in foreign countries. Concerns have arisen that in economically weaker countries infrastructure investments have led to a problematic increase in debt.
- 24.
European Commission (15 April 2013), On the free movement of capital in the EU, Brussels, Commission Staff Working Document SWD (2013) 146 final, pp. 14–15.
- 25.
European Commission Press Release (20 November 2018).
- 26.
Currently 14 member states have investment screening mechanisms in place. Some countries perform generic screening for all incoming investments, other countries confine themselves to strategic sectors.
- 27.
Regulation (EU) 2019/452 of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union, OJ L 79I, 21.3.2019, pp. 1–14, which entered into force on 10 April 2019.
- 28.
Reuters (11 October 2018), China constricts capital outflows with eye on yuan stability.
- 29.
OECD Foreign Direct Investment Statistics (2019), CPB World Trade Monitor (25 April 2019).
- 30.
Alphabet (Google), Amazon, Apple, Facebook, and Microsoft.
- 31.
In November 2018, UBS became the first foreign bank to gain control in a joint Chinese securities firm. ING is set to become the first foreign bank to acquire a majority holding in Chinese joint venture with Bank of Beijing setting up a fully digitalized bank. Other banks are still awaiting approval to take a majority interest in a Chinese partnership.
- 32.
A bilateral international investment agreement between the EU and China could replace the different bilateral investment treaties that individual EU member states have negotiated with China.
- 33.
At the 21st EU-China summit in April 2019 further joint work on improved market access, industrial subsidies, technology transfers and intellectual property protection was scheduled.
- 34.
The WTO published its first ruling on national security in April 2019 in a dispute between Russia and Ukraine. In the ruling the right of countries to impose trade restrictions on national-security grounds is affirmed as is the WTO’s authority to determine whether a security threat warrants such restrictive measures.
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Bakker, A. (2020). The Political Economy of Capital Controls and Liberalization in the European Union. In: Hindelang, S., Moberg, A. (eds) YSEC Yearbook of Socio-Economic Constitutions 2020. YSEC Yearbook of Socio-Economic Constitutions, vol 2020. Springer, Cham. https://doi.org/10.1007/16495_2020_14
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