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Part VI Monetary Unions and other Forms of Monetary Organization, 25 Historical Background to EMU

Charles Proctor, Dr Caroline Kleiner, Dr Florian Mohs

From: Mann on the Legal Aspect of Money (7th Edition)

Charles Proctor

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 07 June 2023

Monetary union — Monetary system

(p. 681) 25  Historical Background to EMU

  1. A. Introduction 25.01

  2. B. Origins of Monetary Union 25.02

  3. C. The Werner Report 25.04

  4. D. The European Monetary System 25.11

  5. E. The Single European Act 25.24

  6. F. Council Directive 88/361 25.27

  7. G. The Delors Report 25.29

  8. H. The Treaty on European Union 25.32

A. Introduction

25.01  As will be recalled, the creation of the euro was not a short-term project; many years of preparation were necessary before the single currency could come into being. As is almost invariably the case, a complete understanding of the present situation can only be achieved if the historical background is explained. Consequently, it is necessary to explain—it is hoped, not in excessive detail—some of the milestones on the road to European Monetary Union (EMU), and to examine some of its foundations.1

B. Origins of Monetary Union

25.02  For these purposes, it is necessary to return to the very origins of the European Community. The Treaty establishing the European Economic Community was signed by the six original Member States on 25 March 1957. Under Article 2 of the Treaty, the objective of the Community was ‘to promote throughout the Community a harmonious development of economic activities, a continuous and balanced expansion, an increase in stability, an accelerated raising of the standard of living and closer relations between the States belonging to it’. This objective was (p. 682) to be achieved ‘by establishing a common market and progressively approximating the economic polices of Member States’. With these objectives in mind, the activities of the Community included:

  1. (a)  ‘the abolition, as between Member States, of obstacles to freedom of movement for persons, services and capital’;2

  2. (b)  ‘the abolition of rules which restricted the right to establish branches, agencies, or subsidiaries in other Member States’;3 and

  3. (c)  ‘the application of procedures by which the economic policies of Member States can be co-ordinated and disequilibria in their balances of payments remedied’.4

25.03  In terms of a purely legal analysis, and against the background of the Treaty framework, it is apparent that monetary union is principally concerned with the free movement of capital and payments5 and the conduct of economic policy throughout the Member States. In this context, the key provisions of the 1957 Treaty, and Directives issued pursuant to it, included the following requirements:

  1. (a)  Member States were required progressively to abolish as between themselves all restrictions on the movement of capital belonging to persons resident in Member States and any discrimination based on the nationality or on the place of residence of the parties or on the place where such capital was invested; however, this requirement only applied ‘to the extent necessary to ensure the proper functioning of the common market’.6 Current payments (for example, (p. 683) payments of interest) in connection with a movement of capital were to be freed from national restrictions7 and—to the extent to which national systems of exchange control remained in force—Member States were required to be ‘as liberal as possible’ in granting any authorizations required in relation to capital movements and the connected current payments which fell within the scope of the Treaty.8 Finally, Member States had to ‘endeavour to avoid’ the introduction of any new or more restrictive rules against the movement of capital or associated current payments.9 The language of these provisions was deliberately equivocal; they allowed some scope for discretion and value judgment as to the manner and precise extent of their implementation. Indeed, in purely legal terms, provisions of this kind hardly impose definite obligations of any kind. As a result, these Treaty rules were found not to create rights which were directly enforceable by individuals in the context of domestic legal proceedings within a Member State.10

  2. (b)  Articles 104 to 109 of the Treaty contained various rules on the balance of payments of Member States in the context of overall economic policy. At a general level (and, to some extent, foreshadowing the more detailed provisions which would later be inserted by the Treaty on European Union), each Member State was required to ‘pursue the economic policy needed to ensure the equilibrium of its overall balance of payments and to maintain confidence in its currency’ and to ‘treat its policy with regard to rates of exchange as a matter of common concern’.11 Provisions of this kind create obligations of an inter-governmental nature, and are thus incapable of creating rights directly enforceable by individuals.12 More substantively, however, each Member State undertook to authorize payments to creditors in other Member States (in the currency of the creditor's home country), where such payments were connected with the movement of goods, services, or capital or any transfers connected therewith, to the extent to which these movements had been liberalized pursuant to the terms of the Treaty.13 Of course, until the free movement of capital was fully liberalized, it necessarily followed that these treaty provisions could not have direct effect in Member States.14 By way of derogation from these provisions, (p. 684) Member States were allowed to restrict the free movement of capital when faced with serious balance of payment difficulties.15

  3. (c)  The early 1960s saw the issue of a series of Council Directives which gradually gave substance to the principle of free movement of capital; for example, Member States were required to provide authorization for payments to residents of other Member States for services rendered, and for the investment of capital as between the Member States.16 These directives demonstrate a recognition that the core freedoms for the movement of goods and services, and of establishment, can only be fully achieved if money, likewise, can flow freely across national borders.

C. The Werner Report

25.04  Matters virtually rested here until 1970 when, at a meeting at the Hague, the Member States determined to establish an Economic and Monetary Union, and commissioned the Prime Minster of Luxembourg, Pierre Werner to produce a report on the subject. Very briefly, the Report17 noted the following key points:

  1. (a)  Economic and monetary union would allow the Community to create a geographical area in which goods, services, persons, and capital could circulate freely, without competitive distortions and without giving rise to structural or regional imbalances.18

  2. (b)  The creation of a monetary union would necessarily involve the complete liberalization of capital movements, the final abolition of exchange control regimes, the elimination of margins of fluctuation in exchange rates, and the consequent fixing of parity rates. It will be apparent from the final part of this statement that the Werner Report did not necessarily contemplate the establishment of a monetary union in the strict sense of the working definition (p. 685) formulated earlier.19 Nevertheless, the Report did assert that the ultimate creation of a single Community currency would be ‘preferable’.

  3. (c)  Economic and monetary union would involve the transfer of national sovereign powers to new, supra-national institutions which would be established within the framework of the Community. In particular, these institutions would become responsible for monetary policy; policies affecting the capital markets; and public budgets (including the available methods of financing those budgets).

  4. (d)  The coordination and approximation of economic policies were necessary prerequisites to the achievement of a monetary union. The Report also notes (perhaps a little optimistically) that the convergence of economic and monetary policies would have the practical effect of fixing exchange rates at appropriate levels, without the need for national Governments themselves to adjust exchange rate parities.

25.05  A review of the Werner Report serves to emphasize that a monetary union—whether or not within the strict definition of that term—will not normally be an end in itself. It will usually play a supporting role (albeit a crucial one) in attempts to create a geographical area in which economic and monetary policies are to converge and to be harmonized.20 This can be a difficult point for the lawyer to grasp, yet it is vital that he should do so, for the Treaty provisions dealing with monetary union must be interpreted in the light of Community objectives.21

25.06  Unfortunately, the Werner Report was published when the world was on the brink of a period of serious monetary instability. Stable exchange rates were supported by the Bretton Woods system of parities and perhaps represented one of the main assumptions upon which the Report had been based, but that system was to break down barely a few months after the publication of the Report.22 Difficult economic conditions and inflationary problems plagued the 1970s, with the result that it would have been extremely difficult to progress the necessary harmonization of national economic policies—even had the political will to do so existed. It must also be accepted that the Werner Report suffered from various deficiencies, which perhaps undermined its value as a guide to possible future developments. For example, the ultimate structures put in place for the euro are heavily dependent (p. 686) upon the institutional arrangements; the working definition of a monetary union23 demonstrates a similar such dependence. Unfortunately, the Werner Report—with its emphasis on economic policies, exchange rates, and like matters—was too superficial in its consideration of the establishment and the role of the required institutions. In a foretaste of later debates it was acknowledged that monetary union would involve a significant transfer of sovereignty to new institutions, but the Report did not go into depth on the structures required in order to create and sustain such a union.24

25.07  The Werner Report was thus in part a victim of changing macro-economic circumstances, and in part a victim of certain inadequacies within the Report itself. But it would be quite wrong to dismiss the Report out of hand, for it was in many respects the first major step towards monetary union, and it may also have influenced some of the further progress which was made in later years. Perhaps the Report's most important lasting achievement was to highlight both the objectives and value of a monetary union;25 such a union would enable the Community to create ‘an area within which persons, goods, services and capital may move freely and without distortion of competition’. Once again, this serves to emphasize that monetary union—whilst a very important development in itself—is intended to play a supporting, rather than a leading, role in the achievement of overarching EU objectives.

25.08  The Werner Report also made it clear that a stable exchange rate environment or a single currency would help to drive economic growth. Despite the adverse conditions of the 1970s, various steps were thus taken both in the monetary field and in the context of the convergence of economic policies. Since these developments may be said to have their origins in the Werner Report,26 it is appropriate to describe them briefly.

25.09  First of all, a European Monetary Cooperation Fund (EMCF) began to operate in 1973.27 The stated purpose of the Fund was to facilitate the creation of an economic and monetary union between Member States, whether on the basis of a single currency or through the use of fixed exchange rate parities. Bilateral central rates (p. 687) applied as between each of the currencies within the system, and the Fund was to promote intervention in the foreign exchange markets in an effort to control the margins of fluctuation between the currencies of the respective Member States.28 The system of controlling margins of fluctuation was referred to as the ‘currency snake’ or simply, ‘the snake’.29 The snake provided for currency fluctuations within a band of 2.25 per cent. As will be seen, this figure acquired a remarkable durability in the European monetary context. The fortunes of the snake itself were less marked; continuing tensions in the foreign exchange markets precipitated a number of departures from the system and only five Member States remained within it by 1977; by that time, the system effectively functioned as a mini-Deutsche mark zone.30 Perhaps foreshadowing later events, the pound only remained within the snake for a matter of weeks, and the membership of the French franc had to be terminated and renewed on two occasions.

25.10  Secondly, Community institutions adopted various measures on the convergence of economic policies, economic stability, and short-term monetary support.31 Whilst the original aspiration of achieving monetary union by 1980 was not destined to be achieved,32 it is nevertheless possible to discern from these early developments the outline of the institutional and economic arrangements which were later to be put in place to underpin the euro.

D. The European Monetary System

25.11  Although the ‘snake’ ultimately came to grief, the Community did not abandon the quest for a more stable exchange rate environment. As a consequence, the European Monetary System (EMS) was established on 1 January 1979, and commenced operation on 13 March 1979.33 As Dr Mann noted in the fifth edition of (p. 688) this book, the EMS was not established by a single and comprehensive document and some of the obligations apparently created by the documentation are not readily understood by a lawyer.34 Nevertheless, it is important to attempt an analysis, partly because the EMS arrangements were an important forerunner of monetary union itself, and partly because they provide a valuable illustration of interstate cooperation in the field of monetary affairs.

25.12  The primary documentation establishing the EMS consisted of:

  1. (a)  a Resolution of the European Council made on 5 December 1978;35 and

  2. (b)  an agreement amongst the central banks of the Member States.36

Consistently with the earlier initiatives which have already been discussed, these arrangements were intended to create a durable and effective scheme for closer monetary cooperation between Member States with a view to creating a greater measure of monetary stability and economic convergence within the Community; although the point was perhaps not much noted at the time, the creation of the EMS was also intended to provide ‘fresh impetus to the process of European Union’.37

25.13  The EMS was operated under the supervision of the EMCF. The new system involved38 the creation of (a) the Exchange Rate Mechanism (ERM), and (b) the European Currency Unit (ECU).

25.14  The ECU formed the cornerstone of the ERM itself. This unit was originally defined by reference to stated amounts of the national currencies of the Member States, and (p. 689) provision was made for the ‘basket’ composition to be adjusted at five-yearly intervals, if necessary.39 In 1989, the system was changed so that the composition of the ECU was determined by reference to percentages or ‘weights’, ie as opposed to fixed amounts of the currencies within the basket.40 The final readjustment of these weightings was effected by Council Regulation 1971/8941 as subsequently restated by Council Regulation 3320/94.42 Thus, with effect from the 1989 realignment, the respective weights attributed to the ECU were as follows:

German mark


Spanish peseta


French franc


Danish krone


Pound sterling


Irish punt


Italian lira


Greek drachma


Dutch guilder


Portuguese escudo


Belgian franc


Luxembourg franc


25.15  What, then, was the purpose of this artificial unit, or ‘basket’ of currencies? Its functions are outlined in the European Council Resolution already noted. The ECU was to lie ‘at the centre of the EMS’; it was to serve as the denominator for the ERM, as the basis for a divergence indicator, as the denominator for intervention and credit mechanisms, and as a means of settlement between monetary authorities within the EC.43 Each currency within the ECU basket was to have an ECU-related central rate, which was used to establish a ‘grid’ of bilateral exchange rates. (p. 690) Currencies were allowed a fluctuation margin of plus/minus 2.25 per cent (or 6 per cent in the case of floating currencies). The intention was to reduce the permitted bands of fluctuation when economic conditions so permitted,44 but in fact this never proved to be practicable. Indeed, circumstances compelled a widening of the bands on certain occasions.45 It may be added that an ‘early warning mechanism’ was also built into this aspect of the System. If a currency crossed its ‘threshold of divergence’ (stated to be 75 per cent of the maximum permitted divergence), then this created a ‘presumption’ that the national authorities would take ‘adequate measures’ to correct the situation—for example, by way of diversified intervention or adjustments to monetary or economic policy.46

25.16  In order to preserve the System, intervention47 was stated to be ‘compulsory’ when the limit of the fluctuation margins had been reached.48 Crucially, it is not stated precisely who was responsible for such intervention. It must necessarily have included the central bank of the Member State whose currency had reached the limits of the permitted margins, but it is not explicitly stated that other central banks were under an obligation to support these operations and (if so) to what extent.49 It would seem to follow that each individual central bank was primarily responsible for the market operations which might prove necessary to ensure that its national currency observed the upper and lower fluctuation margins prescribed by the System.50 The central bank responsible for the weaker currency thus had to sell its reserves of the stronger currency, in an effort to ensure that its own currency would appreciate. If that central bank had insufficient reserves in the stronger currency, then it could borrow them from the central bank which issued that currency on a short-term basis. Furthermore, the central bank of the stronger currency (p. 691) was expected to sell its own currency against the weaker currency, thus depreciating its own national currency as against the weaker unit. Finally, the System included provisions for financial support from the EMCF to a Member State which was attempting to ward off speculation against its currency. The most frequently used facility was the Very Short Term Financing Facility.51 There were various practical difficulties with these arrangements. First of all, the Very Short Term Financing Facility was originally available for a maximum period of 45 days, which was found to afford insufficient flexibility during a period when Community law required the progressive dismantling of restrictions on the movement of capital and payments and thus rendered currencies more vulnerable to attack by market speculators. This problem was partly addressed by the Basle/Nyborg Agreement on the Reinforcement of the European Monetary System, which was endorsed by Community Finance Ministers on 12 November 1987.52 More fundamentally, once the final margin of fluctuation was reached, intervention was in theory obligatory and without limit. As has been shown, however, this position was not always respected in practice; it was, in any event, plainly unsustainable in the context of a serious monetary crisis. It would also be unpalatable for the central bank of the stronger currency to support the weaker currency on an open-ended basis, and this tends to reinforce a point made earlier, ie that the responsibility to intervene in the markets fell mainly upon the central bank of the currency under attack. Thus, when sterling came under pressure in the days leading up to ‘Black Wednesday’, 16 September 1992,53 the agreement apparently did not impose upon other central banks within the system an effective or enforceable duty to purchase sterling in order to assist the Bank of England in its (ultimately fruitless) attempt to remain in the System.54

(p. 692) 25.17  Although the history of ‘Black Wednesday’ is well known, it is appropriate to provide a brief account, because the episode illustrates the limitations of exchange rate systems of this kind.55 Towards the end of August 1992, sterling went into decline on the foreign exchange markets, and the Bank of England began purchasing the currency in order to prevent it from falling through the ERM ‘floor’. The Italian lira was suffering a similar fate. Perhaps unwisely, the Community Finance Ministers decided to announce that a realignment of the central rates within the EMS would not be considered as a solution to the evident strains within the system. The markets then placed sterling and the lira under further pressure, and vast sums were expended by the two central banks in attempting to defend their currencies at the required rate. When it became apparent that intervention in the foreign exchange market would not prevent sterling falling below its ERM ‘floor’, the Government increased sterling interest rates from the then current rate of 10 per cent to 15 per cent within the space of a single day. Leaving aside political considerations, this may have represented an attempt to comply with the United Kingdom's duty to bring sterling back within the permitted threshold of divergence by means of ‘measures of domestic monetary policy [and] other means of economic policy’.56 When even this measure failed to stem the tide, the Government (in a move mirrored by Italy) announced that it was suspending this country's membership of the ERM. This may have constituted a breach of the terms of the documents establishing the System,57 but other Member States accepted the position. In spite of the announcement previously made by the Community Finance Ministers, other countries found it necessary to devalue their currencies so that they could remain within the ERM. Subsequently, the French franc came under market pressure, but the Banque de France was able to prevent the French franc from falling through its ERM ‘floor’, in part because the Bundesbank itself intervened significantly to support the franc. In view of the points made in the previous paragraph, the decision of the Bundesbank to support the efforts of the Banque de France must have been a matter of policy, rather than of legal obligation.

25.18  Pressure on the system resumed in mid-1993 when, in order to remain within their permitted margins of fluctuation, several countries had been forced to raise their interest rates even though the state of their economies suggested that rates should be moving in the opposite direction. Despite central bank intervention, the French franc tested its ‘floor’ ERM rate and other currencies began to fall. It was apparent that the fluctuation margins could no longer be sustained in the face of market pressure and on 2 August 1993, it was announced that the margins of fluctuation would be extended (p. 693) to 15 per cent (although, by way of minor exception, the permitted margin as between the German mark and the Dutch guilder remained at 2.25 per cent). Such wide margins amounted to an effective suspension of the system, although it was essential to retain the system in some form; by this time the Treaty on European Union had been signed and membership of the ERM was one of the entry criteria for the euro.58

25.19  As noted earlier, amongst other functions, the ECU was to serve as a means of settlement of obligations within the Community. For this purpose, central banks of Member States within the system were required to deposit 20 per cent of their gold reserves, and 20 per cent of their dollar reserves in return for a credit expressed in ECUs.59 Despite its role as a means of settlement, it should be appreciated that the ECU was not ‘money’ in a legal sense because (apart from other considerations) it was never intended to serve as the general means of exchange in any country,60 nor was the unit subject to institutional control by a monetary authority. Despite these difficulties, it may be noted that the US Securities and Exchange Commission (SEC) accepted that the ECU was a ‘foreign currency’, and that the SEC thus had jurisdiction to allow the trading of options on the ECU.61 Rather, it was a measure of value which was denominated by reference to (and served as) a unit of account. Payments in ECUs could only be made in the form of a bank or similar credit, for no ECU notes/coins were ever issued with the intention that they should be exclusive legal tender throughout the Community.62

25.20  So far as English law is concerned, the ECU may not have constituted ‘money’ in a legal sense,63 but it did in fact enjoy the status of a de facto currency, and other systems of law might have adopted a more positive approach in its formal status. In particular, the position in the United States was likely to be different, at least in some contexts, for ‘money’ is there defined as ‘a medium of exchange authorized or adopted by a domestic or foreign Government and includes a monetary unit of account established by an international organization or by an agreement between two or more nations’.64

(p. 694) 25.21  It may be noted in passing that, in 1990, the British Government proposed the introduction of the so-called ‘hard ECU’. The unit would have enjoyed the status of legal tender throughout the Community and would have circulated as a ‘parallel’ currency, to the intent that it would have gradually replaced national currencies as a result of market and consumer acceptance. Plainly, this would have significantly enhanced the status of the ECU; however, the proposal did not find sufficient support and is now a matter of history.65

25.22  It will be apparent that the EMS in some respects circumscribed the monetary sovereignty66 of Member States. A Member State was required to ensure that the external value of its currency remained within the fluctuation margins prescribed by the System; it would thus have to pursue monetary, fiscal, and economic policies which were designed to secure that end.67 To that extent, the measure of discretion available to individual Member States in the exercise of their monetary sovereignty was inevitably reduced by the constraints of the System.68 In addition, the discretion to intervene in the markets to support the national currency could be converted into an obligation to do so, where the intervention margins were reached. Factors of this nature may have deterred the United Kingdom from joining the EMS until 8 October 1990, and may help to explain its reluctance to rejoin the System following sterling's ignominious departure from the System on 16 September 1992.69

25.23  Thus far, it may be said that developments in the field of monetary cooperation had been of considerable importance—especially for the United Kingdom—and yet they were of a somewhat technical nature. However, this was to change, for monetary union was to become more clearly associated with objectives of a more overtly political character, including the movement towards a closer union between Member States.

(p. 695) E. The Single European Act

25.24  The process of European integration gained considerable impetus following the signature of the Single European Act in 1986.70 Under the terms of Article 7(a) of that Act,71 the Community was to:

adopt measures with the aim of progressively establishing the internal market over a period expiring on 31 December 1992 … The internal market shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of this Treaty.

Whilst this provision was declared72 to express the ‘firm political will’ of the Member States—as opposed to a legally binding commitment—the Single European Act clearly contemplated that the free movement of capital was to become a priority area.

25.25  Moving from policy matters to questions of implementation, the Single European Act allowed the Council (after following the applicable co-decision procedures laid down by the Treaty) to adopt measures which were intended to:

  1. (a)  approximate or harmonize the laws, regulations or administrative practices of Member States; and

  2. (b)  facilitate the establishment and functioning of the single market, in accordance with the objectives outlined in the preceding paragraph.73

25.26  After many years of relatively slow progress, the Single European Act 1986 demonstrated that further European integration was possible, and provided the momentum which was necessary for that purpose.74 The Single European Act contains only limited references to monetary union, but the progression of the single market initiative perhaps inevitably gave some further momentum to the notion of a single currency area.

(p. 696) F. Council Directive 88/361

25.27  Council Directive 88/36175 was introduced with a view to the progressive abolition of national restrictions on capital movements. The Directive required Member States to abolish restrictions on the free movement of capital between persons resident in Member States, and to achieve this objective by 1 July 1990.76 Member States were also required to ensure that transfers in respect of capital movements and current payments were made on the basis of the same exchange rates.77 The Directive thus originally enshrined the principle of free movement of capital as an effective and enforceable part of Community law. Although the Directive has now been superseded by the provisions of the EC Treaty (as amended by the Treaty on European Union), the terms of the Directive remain useful because they seek to provide a non-exhaustive classification or definition of capital movements for present purposes.78 These included:

  1. (a)  direct investments in branches/subsidiaries in other Member States;

  2. (b)  investments in real estate;

  3. (c)  investments in bonds, shares, and other securities;

  4. (d)  loans and other credits granted by or to residents of other Member States;

  5. (e)  guarantees and security interests granted by or to residents of other Member States; and

  6. (f)  the deposit of funds with financial institutions in other Member States.

25.28  As a general rule, it follows that Member States could not impose rules which would inhibit or impede capital flows of the kind just described. The general principle was inevitably subject to exceptions, but these were in many respects similar to the provisions subsequently introduced into the EC Treaty by the Treaty on European Union. These issues—and the other consequences of the liberalization of capital movements—will therefore be discussed at a later stage.79

(p. 697) G. The Delors Report

25.29  It has been shown that the Single European Act 1986 indirectly provided the basis for further work in the field of monetary union. The subject was picked up by the European Council at its Hanover Meeting in June 1988. It appointed a committee under the chairmanship of Jacques Delors—then President of the European Commission—to prepare a report on the subject which would be considered at the European Council meeting in Madrid the following year.

25.30  The Delors Report80 adopted the broad definition of a monetary union which had formerly appeared in the Werner Report. The Delors Report noted81 that a monetary union ‘constitutes a currency area in which policies are managed jointly with a view to adopting common macroeconomic objectives’; sadly, the lawyer must content himself with the working definition proposed earlier and which, by comparison, can only be described as mundane. The Report further observed that a monetary union would involve:

  1. (a)  the assurance of total and irreversible convertibility of currencies, coupled with the elimination of margins of fluctuation and (as a consequence) the irrevocable locking of exchange rate parities;

  2. (b)  the complete liberalization of capital transactions;

  3. (c)  the full integration of the financial markets, such that loans, deposits, and investments could be made on a Community-wide basis, free of any restrictions of a purely national character;82 and

  4. (d)  the creation of an institutional structure which would be charged with the formulation of a common monetary policy for the eurozone.83

Whilst the Delors Report did not assert that a single currency was a necessary feature of a monetary union,84 it was nevertheless, seen to be a desirable feature.

25.31  The Delors Report suggested that the ECU could be transformed from a currency basket into the Community's common currency.85 The Report further made the point that monetary union would not be durable unless it were sustained by a sufficient harmonization of economic policies of the individual Member States,86 and (p. 698) noted that fiscal policy (government taxation and spending) would have to be subject to some degree of coordination or control at the Community level;87 clearly, inflationary policies adopted in one participating Member State could have an adverse impact on the single monetary area as a whole. These points have, of course, been made on a number of occasions, but the present work will consider these aspects from a purely legal perspective.88 But the difficulties inherent in economic convergence, and the time required to achieve it, led the Delors Committee to propose a ‘three-stage’ approach to the achievement of monetary union. These proposals were broadly implemented by the Treaty on European Union, and they will thus be considered when the monetary provisions of that Treaty are reviewed in depth.

H. The Treaty on European Union

25.32  The various steps and events described in this chapter ultimately led to the Treaty on European Union, which was signed at Maastricht on 7 February 1992;89 this may be regarded as the key political event on the road to monetary union. The Treaty came into force on 1 November 1993, following the delivery of the final ratification by Germany. Ratification had been delayed as a result of a challenge on constitutional grounds.90

25.33  For reasons given earlier, the creation of a monetary union necessarily involves the elimination of exchange control and the abolition of restrictions on the free movement of capital and payments.91 As a result, Article 63 of the TFEU now provides that ‘all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited’ and ‘all restrictions on payments between Member States and third countries shall be prohibited’.92 The (p. 699) terms ‘capital’ and ‘payments’ are not defined. However, as noted previously, the European Court of Justice will pray in aid the detailed categories set out in Council Directive 88/361 in identifying those transactions which involve a movement of capital. In addition, the Court has noted that a movement of ‘capital’ involves a transfer of funds for investment purposes, whilst ‘payments’ connote transfers of a current nature, such as payments of interest or payments for goods and services.93

25.34  Although they are stated to be subject to various exceptions, the rules contained in the revised Article 64 are clear and unambiguous, and are mandatory in their terms. As a result, the European Court of Justice decided in the Sanz de Lera case94 that the predecessor of Article 64 had direct effect in Member States and was thus capable of creating individual rights. It followed that a Spanish law which (in the absence of official approval) prohibited the export of peseta notes could not stand, because it was inconsistent with the obligation of Member States to ensure the free movement of capital.95 Likewise, an Austrian requirement that mortgages over land could only be registered in the Austrian Schilling was found to be inconsistent with Article 56, because it would deter non-Austrian lenders from providing loans secured on real estate in Austria.96 At a fairly obvious level, a Member State could not impose a general restriction on the transfer of funds outside the country,97 nor could a Member State prohibit its own nationals from subscribing for eurobonds issued by its own Government.98 Indeed, where a central bank withheld approvals for the transfer of funds that ought to have been permitted in order to comply with (p. 700) the free movement of capital regime, it appears that it could be rendered liable for any resultant losses suffered by the investor.99 The European Court of Justice has, however, decided that matters should not be taken too far—a domestic rule will only be taken to infringe Article 56 if there is a serious likelihood (as opposed to a remote possibility) that the rule will impede inflows or outflows of capital.100

25.35  It is true that Member States are allowed various derogations in this context—for example, in the context of the administration of their system of taxation,101 in order to ensure enforcement of certain national laws, and on grounds of public policy or public security. However, any such national rules must not be used as a means of arbitrary discrimination or as a disguised restriction on the free movement of capital and payments.102 Furthermore, the relevant national measures must be of a reasonable scope, bearing in mind the principle of proportionality.103 It is apparent that Member States will encounter considerable difficulty in relying upon these exemptions, which will be narrowly construed.104

25.36  At this point, the discussion moves away from a purely historical analysis, for the Treaty on European Union and the measures adopted under it continue to govern the eurozone to this day. A review of those provisions which directly address monetary union is thus reserved to the next chapter.


1  For other discussions, see Usher, The Law of Money and Financial Services in the European Community (Oxford University Press, 2nd edn, 2000) chs 2 and 8; Craig and De Búrca, ch 20; Sideek Mohammed, European Community Law on the Free Movement of Capital and the EMU (Kluwer Law International, 1999); Lowenfeld, ch 22.

2  Art 3(c) of the EC Treaty (in its original form).

3  The freedom of establishment was created by Arts 52–58 of the EC Treaty (in its original form).

4  Art 3(g) of the EC Treaty (in its original form).

5  The rules on free movement of capital and payments are a necessary adjunct to the other freedoms established by the Treaty. It would be pointless to provide for the free movement of goods and services, and the right of establishment, if the means of paying for those goods and services or the investment of the necessary capital could be restricted by national regulations. But it is equally apparent that treaty provisions requiring that monetary or capital flows should be unimpeded do not deal with the entire problem. For example, investment in another Member State necessarily involved the expense of purchasing the currency of the investee State, and in terms of the investor's ‘home’ currency, the possible returns on the investment could be significantly affected by exchange rate fluctuations. Factors of this kind would, in practice, tend to make investors more reluctant to exercise the treaty freedoms in the first place. Despite the controversy which surrounded monetary union, some may argue that the introduction of the single currency was not an end in itself; rather it was a means to achieving broader Community objectives and to support the freedoms created by the Treaty. Indeed, no exchange rate system can of itself deliver or guarantee economic growth; it is merely one part of a broader set of economic policies. However, it is now generally accepted that the creation of the single currency was an essentially political project which had its roots in the reunification of Germany, and a bargain struck between France and Germany at that time. For a discussion of the nexus between the two episodes, see Sarotte, ‘Eurozone Crisis as Historical Legacy—The Enduring Impact of German Reunification, 20 Years On’ (September 2010) 90(5) Foreign Affairs.

6  Art 67(1) of the EC Treaty (in its original form).

7  Art 67(2) of the EC Treaty (in its original form). Subject to various conditions, a Member State could restrict the movement of capital if this was leading to disturbances in the functioning of the domestic capital markets within that Member State. The details are set out in Art 73 of the EC Treaty (in its original form).

8  Art 68(1) of the EC Treaty (in its original form).

9  Art 71 of the EC Treaty (in its original form).

10  Case 203/80 Re Casati [1981] ECR 2595.

11  On these points, see Arts 104 and 107 of the EC Treaty (in its original form).

12  On this point, see Case 9/73 Schlüter v HZA Lörrach [1973] ECR 1135.

13  Art 106(1) of the EC Treaty (in its original form).

14  Cases 286/82 and 26/83 Luisi and Carbone v Ministero del Tresore [1984] ECR 377. On this case, see Smits, ‘The End of Claustrophobia: European Court Requires Free Travel for Payments’ (1984) 9(3) ELR 192. See also Case 157/85 Brugnoni and Ruffinengo v Casa di Risparmio di Genova e Imperia [1986] ECR 625, discussed by Smits, ‘Free Movement of Capital and Payments: A Further Step on the Road to Liberalisation?’ (1986) 11(5) ELR 456.

15  For the details, see Arts 108 and 109 of the EC Treaty (in its original form).

16  A detailed analysis of these Directives is beyond the scope of this book. For a clear and concise description of the progress which was made, see Usher, The Law of Money and Financial Services in the European Community (Oxford University Press, 2nd edn, 2000) 13–22.

17  For the text of the Werner Report, see EC Bull, Supplement 11, 1970.

18  It has been pointed out by at least one writer that the very concept of a common market implies a single internal market and the abolition of restrictions on the free movement of money. Since the very existence of different currencies creates practical restrictions against the free flow of capital, a single currency is a necessary prerequisite to the existence and functioning of a common market in its fullest sense. See van Themaat, ‘Some Preliminary Observations on the Intergovernmental Conferences: The Relations between the Concepts of a Common Market, a Monetary Union, an Economic Union, a Political Union and Sovereignty’ (1984) 28 CML Rev 291, noting Case 15/81 Gaston Schul [1982] ECR 1409, para 33.

19  See para 24.03. As noted there, the Delors Report likewise argued that a single currency was not a necessary prerequisite for monetary union.

20  A point recognized by the Council and the Representatives of Member States in their resolution accepting the Report—[1971] OJ C28/1. For judicial discussion of the monetary and exchange rate consequences of this resolution, see Case 9/73 Schlüter v HZA Lörrach [1973] ECR 1135.

21  This important point was occasionally overlooked in technical discussions in the City of London during the pre-euro period—see the discussion of monetary union and its consequences for monetary obligations in Ch 30.

22  On the breakdown of this system, see para 2.10.

23  See para 24.03.

24  On these and other factors which limited the influence of the Report, see Baer and Padoa-Schioppa, ‘The Werner Report Revisited’. This Paper is attached to the Delors Report, which is discussed at para 25.29.

25  A point recognized by the Council and representatives of Member States in their resolution on the Report—[1971] OJ C28/21. The theoretical argument in the text is, however, to an extent undermined by the essentially political (rather than economic) roots of the single currency: see n 5.

26  It should also be said that the essential conclusions of the Werner Report—namely that immutable fixed rates, or preferably a single currency, should be achieved within the Community—were also mirrored in the Delors Report some 19 years later.

27  Regulation 907/73 [1973] JO L189/2. The decision to establish the EMCF had been announced following a Conference of the Heads of State (Paris, 21 October 1972).

28  See Arts 2 and 3 of Reg 907/73 [1973] JO L189/2. For a discussion of these early developments, see Jacques-Rey, ‘The European Monetary System’ (1980) 17 CML Rev 7 and van Ypersele, The European Monetary System: Origins, Operation and Outlook (EC, 1984).

29  It may be noted in passing that this type of monetary structure constitutes ‘cooperative monetary arrangements by which members maintain the value of their currencies in relation to the currency or currencies of other members’ for the purposes of Art IV(2)(b) of the Articles of Agreement of the International Monetary Fund, and must accordingly be notified to the Fund in accordance with Art IV(2)(a) of that Agreement.

30  On this point, see Usher, The Law of Money and Financial Services in the European Community (Oxford University Press, 2nd edn, 2000) 172.

31  For the details, see the Council Decision on the convergence of economic policies (74/120 [1974] JO C20/1, a Directive on economic stability, growth and full employment (74/121 [1974] JO L63/19) and a Resolution on short-term monetary support ([1974] JO C20/1). Short-term monetary support was intended to assist Member States encountering balance of payment problems.

32  On this aspiration, see the Paris Final Communiqué mentioned in n 27.

33  For helpful discussions of the EMS and a number of the other matters about to be discussed, see Jean-Jacques Rey, ‘The European Monetary System’ (1980) 17 CMR 7; Lowenfeld, 772, and Mehnert, User's Guide to the ECU (Graham & Trotman, 1992). It should be noted that the UK—along with all of the other Member States—was a founder member of the EMS itself. However, this had no material consequences for the UK until it elected to join the ERM on 8 October 1990. The position of the UK in this respect is discussed at para 25.16. The terms of the European Council Resolution specifically contemplated that some of the Member States might not join the ERM at the outset, but allowed them to do so at a later date—see Art 3.1 of the agreement amongst central banks of the Member States. It may thus be said that in the context of European monetary affairs, the UK has something of a history of ‘opt-outs’, hesitation, and deferred membership—on the UK's opt out from monetary union itself, see para 31.31.

34  See Dr Mann's comments on this subject in the fifth edition of this work, 503. For a discussion of the slightly uncertain legal basis of the EMS within the framework of the EC Treaty, see Usher, The Law of Money and Financial Services in the European Community (Oxford University Press, 2nd edn, 2000) 173–6. Indeed, the precise status of these arrangements seems to have caused some confusion at the Community level—see the decision of the ECJ (an appeal against a judgment of the Court of First Instance) in Case C-193/01 P Pitsiloras v Council and the ECB [2003] ECR I-4837. The case concerned access to the Basle/Nyborg Agreement on the Reinforcement of the Monetary System, to which further reference is made at para 25.16.

35  EC Bull 12, 1978.

36  A copy of the agreement is annexed to the Resolution of the European Council just noted. The texts are set out in a 1979 EC publication entitled Texts concerning the European Monetary System (Cmnd 7419); they are also reproduced in Appendix A to Mehnert, User's Guide to the ECU (Graham & Trotman, 1992).

37  See the introduction to the Conclusions of the Presidency of the European Council, Brussels, 4 and 5 December 1978.

38  In addition to the matters about to be mentioned in the text, the EMS involved certain credit and other financing measures, and arrangements to assist the less advanced economies within the system. However, these aspects fall outside the scope of the present work.

39  At its inception, the ECU was substituted for the European Unit of Account (EUA) by reference to the same value and currency composition—see Council Regulation 3180/80, [1978] OJ L379/1 and para 2.1 of the Resolution of the European Council on the establishment of the EMS (Brussels, 5 December 1978). For present purposes, it is not necessary to trace the history of the EUA but for a discussion, see Usher, The Law of Money, 160–2.

40  It may be noted that the currencies of all Member States were included in the ECU basket, even though some of them—such as the United Kingdom—did not participate in ERM from the outset.

41  [1989] OJ L189/1.

42  [1994] OJ L350/27. This proved to be the final adjustment because further variations in the ECU basket were prohibited under Art 118 of the EC Treaty (as inserted by the Treaty on European Union).

43  On these points, see para 2.2 of the European Council Resolution. It should be said that the ECU never gained the credibility required for it to fulfil its intended function as a denominator for the ERM and, in practical terms, the Deutsche mark assumed that mantle. It was thus the inability of sterling to ‘shadow’ the mark which led to its departure from the system on ‘Black Wednesday’—see para 25.16.

44  On these points, see para 3.1 of the European Council Resolution.

45  Thus, when sterling entered the ERM on 8 October 1990, it did so at a rate equivalent to DM2.95 and a fluctuation ‘band’ of 6 per cent was agreed. Even this, however, proved to be insufficient to maintain sterling's membership of the system—see para 25.17. It has been pointed out that the realignments within the EMS were inevitably necessary from time to time, and that the stability of the System thus depended in many respects upon the management of such realignments consistently with market expectations—see Chen and Giovannini, The Determinants of Realignment Expectations under the EMS—Some Empirical Regularities (1993) CEPR Discussion Paper No 79, London Centre for Economic Policy Research.

46  See paras 3.4 and 3.5 of the European Council Resolution.

47  ie, the sale or purchase of the currency concerned with a view to maintaining its value within the prescribed margins of fluctuation.

48  See para 3.4 of the European Council Resolution. It may be added that, in financial terms, the obligation to intervene in the markets was unlimited once the compulsory intervention rates had been reached—see Art 2.2 of the agreement amongst the central banks of the Member States. In practice, this intervention proved to be beyond the resources of both the Bank of England and the Banca d'Italia in the circumstances which confronted them on ‘Black Wednesday’.

49  The point is only partially clarified by Art 2 of the Agreement of the Central Banks referred to in n 48.

50  This view is reinforced by the fact that a central bank that was compelled to defend its currency could borrow from the European Monetary Cooperation Fund on a short-term basis for that purpose.

51  The other available options were Short Term Monetary Support and Medium Term Financial Assistance.

52  On this Agreement, see the Pitsiloras decision mentioned in n 34. The agreement provided for a new approach to the preservation of central rates, including joint monitoring of economic conditions and the use of interest rate adjustments to prevent speculative attacks on currencies.

53  The United Kingdom had joined the ERM only in October 1990.

54  For discussion of ‘Black Wednesday’ and its consequences, and for a general view of the problems encountered within the EMS, see Johnson and Collignon, The Monetary Economics of Europe: Causes of the EMS Crisis (Associated University Press, 1994) and Collignon, Monetary Stability in Europe: From Bretton Woods to Sustainable EMU (Routledge, 2002). On the decision of the Bundesbank to support the French franc (but not sterling or the Italian lira) during this period, see the paper by Bini-Smaghi and Fern, Was the Provision of Liquidity Support Assymetric in the ERM? New Light on an Old Issue. The slightly ambiguous position of the Bundesbank in relation to its intervention obligations in respect of the EMS is discussed by Collignon, Bofinger, Johnson, and de Maigret in Europe's Monetary Future (Thompson, 1994) 23. It may be that the system had been intended to function differently—see Mehnert, User's Guide to the ECU (Graham & Trotman, 1992) 28, where it is suggested that the central banks of other States within the system may be obliged to cooperate in any necessary corrective action. It is, however, perhaps more realistic to assume that each central bank was individually and solely responsible for any intervention which became necessary—see Lowenfeld, 772–8.

55  Of course, some of the weaknesses inherent in such systems had already been demonstrated by the collapse of the Bretton Woods system of fixed parities—see para 22.15.

56  See para 3.6(b) and (d) of the European Council Resolution. An attempt to comply with this requirement by raising interest rates to such an extent on a single day must be described as either heroic of foolhardy, depending on one's point of view.

57  Neither the European Council Resolution nor the agreement amongst central banks of Member States contained any reference to a right of suspension or withdrawal.

58  On this point, see para 26.12.

59  See para 3.8 of the European Council Resolution. During the period leading up to monetary union, the European Monetary Institute was responsible for the administration of this system—see Art 6.2 of the Statute of the European Monetary Institute, as set out in the Fourth Protocol to the EC Treaty. On the Institute itself, see para 27.06

60  See the definition of ‘money’, at para 1.35. For further discussion, see Brown, L'ECU devant les juges: monnaie ou unité de compte? (Europargnes, 1985).

61  SEC Release No 22853. The episode is discussed by Gold, Legal Effects of Fluctuating Currencies (IMF, 1990) 394.

62  For completeness, it should be noted that certain Member States did issue ECU coins, but these became collectors’ items, rather than a form of money, and their formal status as legal tender was confined to the issuing State. For further discussion of this point, see the consideration of the ‘private ECU’ in Ch 30 and Mehnert, User's Guide to the ECU (Graham & Trotman, 1992) 133–4.

63  See the discussion in the preceding paragraph.

64  Uniform Commercial Code, s 1–201(24).

65  On this subject, see Positive Hard ECU Proposals, British Treasury Release, 12 November 1990.

66  On the incidents of monetary sovereignty in a general sense (including the right to issue a currency and to control interest rates), see Ch 19. On the subject of monetary sovereignty in a Community context, see Ch 31.

67  The obligations of intervention and the requirement to adopt other measures of monetary and economic policy in order to support ERM membership have already been noted.

68  The exercise of that discretion is inevitably constrained by domestic and international economic conditions, but that is an entirely different matter.

69  It should be added that a revised exchange rate mechanism (ERM II) was created by means of an agreement amongst the ECB, the eurozone central banks, and the non-eurozone central banks, dated 1 September 1998 ([1998] OJ C345/6). The euro naturally constitutes the reference currency for the system, and the agreement provides for a fluctuation margin of plus or minus 15 per cent. As was formerly the case, intervention at the margins is, in principle, both unlimited and automatic. Significantly, however, Art 3.1 of the Agreement allows for the suspension of intervention if its continuation could conflict with the overriding requirement of price stability. In this sense, the ERM II agreement departs from the terms of the predecessor agreement. The UK has not yet elected to participate in the new exchange rate mechanism. It may be added that the agreement was revised in order to accommodate the accession of new Member States on 1 May 2004. The agreement of 29 April 2004 is reproduced at [2004] OJ C135/3. For a general consideration of ERM II and its consequences for acceding Member States, see The Acceding Countries’ Strategies Towards ERM II and the Adoption of the Euro: An Analytical Review (ECB Occasional Paper 10 February 2004).

70  HMSO Cmnd 9578. The Single European Act was signed on 17 February 1986 and (following ratification by Member States) came into force on 1 July 1987.

71  See now Art 28, TFEU.

72  See the Declaration relating to Art 7(a), annexed to the Single European Act.

73  This provision is now to be found in Art 114, TFEU. It should be noted that there are several areas of procedural and other difficulty surrounding the ‘single market’ provisions contained in Art 114, TFEU, but these fall outside the scope of the present work. For a discussion, see Craig & De Búrca, 589–94.

74  For a discussion of the limited scope of integration prior to 1986, see Craig & De Búrca, 590–1.

75  [1988] OJ L178/5. This directive was found to have direct effect in Member States—see Cases C-358/93 and C-416/93 Bordessa and Mellado [1995] ECR I-361, and the discussion in Usher, The Law of Money and Financial Services in the European Community (Oxford University Press, 2nd edn, 2000) 23–7.

76  See Art 1(1) of the Directive, read together with Art 6.

77  See Art 1(2) of the Directive.

78  See Annex I to the Directive. The terms of the Directive have been used for guidance purposes even in cases decided after the Treaty on European Union came into force—see Case C-222/97 Trummer and Mayer [1999] ECR I-1661; Case C-464/98 Westdeutsche Landesbank Girozentrale v Stefan [2001] ECR I-173; Case C-452/01 Ospelt v Schlossle Weissenberg Familienstiftung [2003] ECR-I 9743; Case C-446/04, Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue [2006] ECR-I 11753.

79  See para 25.33.

80  Luxembourg, Office for Official Publications of the European Communities, 1989.

81  On the points about to be made, see para 22 of the Report.

82  In part, conditions of this nature were already being met by measures such as the Second Banking Directive ([1989] OJ L386), which allowed banks authorized in one Member State to provide services in other Member States without further approval.

83  See para 32 of the Report.

84  See para 23 of the Report. Based on the working definition noted at para 24.03, the lawyer would have to take a different view.

85  See paras 46 and 58 of the Report.

86  See ch II and para 42 of the Report.

87  See para 30 of the Report.

88  On the regulation of economic policy, see para 26.15.

89  It was at this point that the organization adopted the title ‘European Union’ in place of ‘European Communities’.

90  See Brunner v European Union Treaty [1994] 1 CMLR 57. The German Federal Constitutional Court dismissed two further complaints against euro entry in 1998: in the first case, it rejected the complaint on the basis that it was evidently unfounded; in the second case, the court merely referred to and followed its two earlier judgments: 31 March 1998, NJW 1998, 1934; 22 June 1998, NJW 1998, 3187. For another challenge to the Treaty on domestic and constitutional grounds, see R v Secretary of State for Foreign and Commonwealth Affairs, ex p Rees-Mogg [1994] QB 552 (UK), although the arguments in this case were not in any sense founded upon questions touching the single currency or monetary sovereignty.

91  See the working definition of a monetary union at para 24.03.

92  Emphasis added. It may be inferred from this language that capital and payments are now subject to identical provisions, such that the distinction between them is no longer of importance. But, in fact, this is not the case; Art 64(1), TFEU ‘grandfathers’ certain restrictions on capital movements which were in existence on 31 December 1993 (or, for Bulgaria, Estonia, and Hungary, 31 December 1999), whilst Art 64(3) allows the Council to adopt various measures in relation to the flow of capital between Member States and third countries. Furthermore, Art 64 allows the Council to take certain safeguard measures with regard to third countries if exceptional transfers of capital threaten the stability of economic and monetary union. There are no corresponding provisions which apply to payments. For a discussion of these provisions, see Peers, ‘Free Movement of Capital: Learning Lessons or Slipping on Split Milk?’ in Barnard and Scott (eds), The Law of the Single European Market (Hart, 2002). It appears that a ‘third country’ for these purposes means a country which is neither an EU nor an EEA member State, since the EEA countries accept similar obligations in relation to the free movement of capital: see the decision relating to Liechtenstein (an EEA State) in Case C-452/01, Ospelt v Schlossle Weissenberg Familienstiftung [2003] ECR I-9743.

93  The point was made by the ECJ in Joined Cases 26/83 and 286/83 Luisi and Carbone v Ministero del Tresoro [1984] ECR 377. It has already been shown that a similar distinction is of significant importance in relation to the Articles of Agreement of the IMF which contains detailed restrictions on exchange control regimes affecting current payments but does not deal with controls on capital transfers—see para 22.29. It may be thought that the principle of free movement of capital and payments would embrace virtually any kind of monetary transfer. Yet, from the language employed in the text, it is clear that this is not so. It would, eg, remain open to Member States to restrict transfers by way of gift or upon inheritance, although in practice the point does not arise.

94  Case 250/94 Criminal Proceedings against Sanz de Lera [1994] ECR I-4821.

95  For a decision to similar effect, see Joined Cases C-358/93 and C-416/93 Criminal Proceedings against Bordessa [1995] ECR I-361.

96  Case C-222/97 Trummer and Mayer [1999] ECR I-1661, followed (on very similar facts) in Case C-464/98 Westdeutsche Landesbank Girozentrale v Stefan [2001] ECR I-173. On the decision in Trummer and Mayer see Sideek Mohammed, ‘A Critical Assessment of the ECJ Judgment in Trummer and Mayer’ (1999) JIBFL 396.

97  Case 194/84 Commission v Greece, Re Blocked Accounts [1989] 2 CMLR 453.

98  Case C-478/98 Commission v Belgium [2000] ECR I-7857. For a more recent decision to similar effect, see Case C-242/03, Ministre des Finances v Weidert (15 July 2004).

99  Case C-329/03, Trapeza tis Ellados AE v Bank Artesia [2005] ECR I-929.

100  Case C-412/97 ED Srl v Italo Fennochio [1999] ECR I-3845.

101  Accordingly, the fact that a Member State may impose a second layer of taxation on income that has already been taxed in another Member State does not of itself constitute a restriction on the free movement of capital: Case 374/04, I Test Claimants in Class IV of the ACT Group Litigation v Commissioners of Inland Revenue [2006] ECR-11673; Case C-487/08 Commission v Spain, 3 June 2010. On the subject generally, see Snell, ‘Non-Discriminatory Tax Obstacles in Community Law’ (2007) ICLQ 339.

102  On these aspects, see Art 65, TFEU.

103  On the principle of proportionality, see Protocol No 2 annexed to the TFEU, and the discussion on this topic in Craig & De Búrca, 526–7.

104  For illustrations of this general comment, see Case C-35/98, Verkooijen [2000] ECR I-4071; Case C-478/98, Commission v Belgium [2000] ECR I-7587; Case C-439/97 Sandoz GmbH v Finanzlandesdirektion für Wien [1999] ECR I-7041; Case C-35/98 Staatssecretaris van Financiere v Verkoojen [2000] ECR I-4071; Case 319/02 In the Matter of Manninen. [2004] ECR I-7498. A number of more recent cases have also emphasized the importance of the free movement of capital and, hence, the restrictive approach to be adopted in the application of the available exceptions: see, eg, Case C-174/04, Commission v Italy [2005] ECR I-4933; Case C-152/03, Blanckaert v Inspecteur van de Belastingsdienst [2005] ECR I-7685, Case C-265/04, Bouanich v Statteverke [2006] ECR-I 923. Much of the other relevant case law is discussed in Case C-292/04, Meilicke v Finanzamt Bonn—Innenstadt [2007] ECR I-1835. Virtually all of the case law relates to corporation taxes or other levies which might provide a disincentive to the free movement or investment of capital across the EU. For a situation in which a Member State successfully relied on the ‘tax system’ exemption, see Joined Cases C-155/08 and C-157/08, Passenheim-van Schoot v Staatssecretaris van Financien (11 June 2009).