Introduction
The European Union’s single market is founded upon four fundamental freedoms: the free movement of goods, services, persons, and capital. Historically, capital was treated with more caution than the other freedoms, leading to the perception that it was underdeveloped. This essay will critically discuss the statement that this remains the case. It will argue that while the free movement of capital was indeed the last of the four freedoms to be fully liberalised, significant developments in the EU Treaties and expansive case law from the Court of Justice of the European Union (CJEU) mean that it is no longer accurate to describe it as the 'least developed'. The legal framework is now robust, although its broad application continues to generate friction with Member State interests.
The Cautious Beginnings of Capital Freedom
The original Treaty of Rome gave the free movement of capital a more limited status compared to the other freedoms. Article 67 of the EEC Treaty merely required Member States to abolish restrictions on capital movements 'to the extent necessary to ensure the proper functioning of the common market'. This conditional wording contrasted sharply with the more direct prohibitions relating to goods and workers. The subordinate nature of this freedom was confirmed by the European Court of Justice in Casati (Case 203/80), where it held that Article 67 did not have direct effect. This meant that individuals could not rely on the article directly in national courts to challenge restrictive domestic laws. This lack of direct effect, a key tool in the development of other freedoms, cemented capital’s position as the laggard of the internal market for many decades (Barnard, 2019). Member States retained significant control, and progress toward liberalisation was slow and piecemeal, relying on secondary legislation in the form of Directives.
The Maastricht Treaty and Subsequent Judicial Expansion
The turning point for the free movement of capital came with the Treaty of Maastricht. The current rules, now found in Article 63(1) of the Treaty on the Functioning of the European Union (TFEU), are fundamentally different. It establishes a clear and unconditional prohibition: 'all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited'. This provision has been confirmed by the CJEU to have direct effect (Sanz de Lera, Joined Cases C-163/94, C-165/94 and C-250/94). This fundamentally elevated the status of the freedom, placing it on a par with the others.
The CJEU has interpreted both 'movement of capital' and 'restriction' very broadly. The court refers to a non-exhaustive list in the annex to a previous Directive (88/361/EEC), which includes a wide range of financial transactions such as direct investments, real estate purchases, and the acquisition of shares. Furthermore, a 'restriction' includes not only discriminatory measures but also non-discriminatory measures which are liable to prohibit, impede, or make less attractive the exercise of the freedom (Sanz de Lera). This expansive interpretation demonstrates how far the law has developed from its cautious origins, creating a powerful legal instrument against national protectionism.
Continuing Tensions and Justifications
Despite its development, the claim that the freedom is 'less developed' may find some limited support in the persistent tension between the broad prohibition in Article 63 TFEU and the desire of Member States to regulate their economies. Article 65 TFEU provides express justifications, allowing Member States to maintain restrictions for reasons of public policy, public security, or on grounds related to taxation. The CJEU has consistently held that these derogations must be interpreted strictly and must be proportionate. This is evident in the 'golden shares' litigation, where Member States sought to retain special powers in privatised companies to prevent foreign takeovers. In cases like Commission v Portugal (Case C-367/98), the Court found that such powers, while potentially justifiable on public policy grounds, were often disproportionate and therefore constituted an illegal restriction on capital movement. The frequent recourse to these justifications and the ensuing litigation could be perceived as a sign of an unsettled or contested area of law, lending superficial credence to the idea that it is 'underdeveloped'.
Conclusion
In conclusion, the assertion that the free movement of capital is 'still the least developed' EU freedom is no longer sustainable. While it was true during the early stages of European integration, the introduction of a directly effective and broadly interpreted prohibition in Article 63 TFEU revolutionised its status. The case law of the CJEU has created a strong and comprehensive legal framework, arguably making it one of the most far-reaching freedoms, notably because it also applies to third countries. The ongoing legal challenges based on the Article 65 justifications do not signify an undeveloped legal status; rather, they reflect the significant impact this freedom has on sensitive areas of national sovereignty, such as economic and tax policy. Therefore, far from being underdeveloped, the free movement of capital is now a mature and powerful principle of the EU internal market.
References
- Barnard, C. (2019) The Substantive Law of the EU: The Four Freedoms. 6th edn. Oxford: Oxford University Press.
- Commission v Portugal (Case C-367/98) [2002] ECR I-4731.
- Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty. [1988] OJ L178/5.
- Criminal proceedings against Guerrino Casati (Case 203/80) [1981] ECR 2595.
- Sanz de Lera and others (Joined Cases C-163/94, C-165/94 and C-250/94) [1995] ECR I-4821.
- Treaty on the Functioning of the European Union (TFEU) ([2012] OJ C326/47).
