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

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.

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.

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:

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.

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.

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

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.

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.