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  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  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  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  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  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— OJ C28/1. For judicial discussion of the monetary and exchange rate consequences of this resolution, see Case 9/73 Schlüter v HZA Lörrach  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.
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— 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  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  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  JO C20/1, a Directive on economic stability, growth and full employment (74/121  JO L63/19) and a Resolution on short-term monetary support ( 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  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.
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,  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.
42  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.
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 ( 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  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.
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  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  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  ECR I-1661; Case C-464/98 Westdeutsche Landesbank Girozentrale v Stefan  ECR I-173; Case C-452/01 Ospelt v Schlossle Weissenberg Familienstiftung  ECR-I 9743; Case C-446/04, Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue  ECR-I 11753.
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 ( 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  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  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  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  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  ECR I-4821.
95 For a decision to similar effect, see Joined Cases C-358/93 and C-416/93 Criminal Proceedings against Bordessa  ECR I-361.
96 Case C-222/97 Trummer and Mayer  ECR I-1661, followed (on very similar facts) in Case C-464/98 Westdeutsche Landesbank Girozentrale v Stefan  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  2 CMLR 453.
98 Case C-478/98 Commission v Belgium  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  ECR I-929.
100 Case C-412/97 ED Srl v Italo Fennochio  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  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  ECR I-4071; Case C-478/98, Commission v Belgium  ECR I-7587; Case C-439/97 Sandoz GmbH v Finanzlandesdirektion für Wien  ECR I-7041; Case C-35/98 Staatssecretaris van Financiere v Verkoojen  ECR I-4071; Case 319/02 In the Matter of Manninen.  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  ECR I-4933; Case C-152/03, Blanckaert v Inspecteur van de Belastingsdienst  ECR I-7685, Case C-265/04, Bouanich v Statteverke  ECR-I 923. Much of the other relevant case law is discussed in Case C-292/04, Meilicke v Finanzamt Bonn—Innenstadt  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).