pp 1-18 | Cite as

The Political Economy of Capital Controls and Liberalization in the European Union

  • Age Bakker
Part of the YSEC Yearbook of Socio-Economic Constitutions book series


Over time there has been a major shift in the assessment of the pros and cons of free capital flows. In the Treaty of Rome, a safeguard clause confined the obligation to liberalize capital movements “to the extent necessary to ensure the proper functioning of the Common Market.” Up till the early 1980s, the stabilizing role attributed to capital controls outweighed the textbook economic costs of controls. The establishment of the European Monetary System marked a new beginning as freedom of capital movements was seen as forcing economic discipline and promoting economic reforms and the convergence of policies. Most motives for controlling capital movements no longer apply as the incompatible trinity of having free capital flows, stable exchange rates and autonomous monetary policy at the same time is resolved by the transition to the euro. At the same time, national security and critical infrastructure concerns have gained prominence. The EU framework for investment screening that was agreed to address these concerns should not infringe upon the acquis of free capital flows. Economic interests should not be mixed with national security concerns, and investment screening should not become an extension of industrial policy. Alternative approaches are proposed that would address concerns of intellectual property and reciprocity. Lessons are drawn from an earlier episode when similar concerns were raised with respect to Japan. The negotiation of a bilateral investment treaty between the EU and China, including mutual access rules, would further the view that Europe profits from remaining open to the outside world while European corporations operate on a level playing field.


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Authors and Affiliations

  • Age Bakker
    • 1
  1. 1.Vrije University AmsterdamAmsterdamThe Netherlands

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