FS Bulletin - EU capital flows
1 September 2012

The article below first appeared in Financial Adviser on 30 August 2012.

You may have seen recent press reports concerning the European Commission reviewing certain direct capital controls in specific Member States. Such capital controls include limits on cash-machine withdrawals. In this article I will take a look at what we mean by capital controls and whether Member States can directly impose them.

Generally speaking capital controls are explicit government measures that restrain capital flows across borders by imposing taxes, quantitative restrictions or other measures that directly target capital account transactions.

Member States are restricted as to when they can implement a capital control by virtue of article 63 of the EU Treaty on the Functioning of the European Union (TFEU). This article prohibits “all restrictions” on the movement of capital and on payments between Member States and between Member States and third countries.

However, Member States are given some room to manoeuvre in that Article 65 of the TFEU provides that Article 63 is without prejudice to the right of Member States to “take measures which are justified on grounds of public policy or public security.” This, however, sets a very high hurdle and is reinforced by Article 65(3) of the TFEU which provides that measures under Article 65 “shall not constitute… a disguised restriction on the free movement of capital and payments as defined in Article 63.”

It appears that if a Member State wanted to withdraw from the euro but remain in the EU it would in principle be prohibited by the TFEU from introducing capital controls or a moratorium on movement of capital out of the country. There would be certain exceptions to this for measures justified on grounds of public policy or security, but the European Court of Justice has tended to interpret these restrictions restrictively and therefore it is doubtful whether EU law would be of any assistance.

However, if a Member State were to withdraw from both the euro and the EU, it would be difficult for the EU, to prevent the imposition of capital controls or a moratorium as that country would no longer be bound by the provisions of the TFEU. Any measures introduced by that State would be subject to international law. However, given the turmoil that would accompany any Member State’s departure from the euro, it is questionable whether compliance with EU law or international law would be top of that country’s agenda.

Simon Lovegrove is a lawyer with the financial services team at Norton Rose LLP