Free movement of capital in a historical overview
Free movement of capital in a historical overview
The movement of capital has been gradually liberalized since the 1960s as part of the single market program until monetary union through the European Common Market. In March 1986, the commission presented the “Program for the Liberalization of the Capital Movement in the Community,” which plans to create a single European financial area. This would be achieved through the unification of financial markets and the free circulation of capital and currencies.
The full liberalization of capital movement was decided on July 1, 1990, both between member states and third countries, taking on an erga omnes character. Liberalization as a process ended on January 1, 1993. As of January 1, 1994, all restrictions on the movement of capital between member states and between member states and third world countries were banned.
Article 56 of the Treaty provided for the liberalization of payments between member states and third-world countries. Any obstruction to the rewards given for the goods or services provided made it impossible to realize the freedoms associated with them. In these conditions, it was decided to accept and allow the payment in the country’s currency where the person the price was addressed resided.
The EU Court of Justice has ruled that a member state may impose an income tax, even though another member state has previously taxed it. The consequence is that double taxation is not against the free movement of capital. However, Member States have the right to take measures to prevent breaches of the law, in particular in the field of taxation and supervision of financial institutions, to establish procedures for declaring the circulation of capital for administrative and statistical information, or to take action justified by public policy or public safety.
The economic and monetary union was more than an objective. His achievement would present Europe as an accomplished leader of the world economy. The realization of this union was conceived in three steps:
1. The first stage began on July 1, 1990, which coincided with the liberalization of the elimination of capital and currency and aimed at coordinating economic policies.
2. The second stage began on January 1, 1994, during which the European Monetary Institute was established to oversee the European monetary system’s functioning.
3. The third stage started on January 1, 1997, and is the EU’s culmination. The introduction of the common currency would go through two transitional steps:
• Coexistence with national currencies (until January 1, 2002)
• Replacement of national currencies with the single currency Euro.
The transition to the third phase meant the fulfillment of 4 main criteria by the states:
• Achieving a high degree of price stability
• Stability of the government’s financial position (annual budget deficit less than 3% of Gross Domestic Product and public debt not more than 60% of GDP)
• Monitoring the normal fluctuation limits provided by the MNSH for two years, without tension and the devaluation of a member state’s currency.
• Convergence duration achieved by the Member State reflected in long-term interest rates.
During this phase, the European Central Bank and the Economic and Financial Committee were established.
The success of the Euro would guarantee a healthier, more sustainable, and developed Europe.
Capital had moved from one country to another long before sophisticated financial and capital markets existed. However, the movement of money has been subject to varying degrees of control, the size and purpose of which went from one political and economic era to another.
The fixed exchange rate regime – the gold standard – was considered by many countries to be relatively stable and reliable. Short-term capital helped finance plenty of new economic activities in many countries. The golden age was followed by the war period, which included the two world wars and the interwar period. The Great Depression (1914. 1945). This period was characterized by a growing nationalist sentiment and policies that went against interstate cooperation.
Confidence in the gold standard was eroded after World War I, and monetary policy focused on resolving domestic problems and financing war-related deficits. Capital controls were imposed in various countries worldwide to protect lands from impairment—I of money and that will t. I helped them keep gold under their possession. Within a few decades, the world economy shifted from a developed stage of globalization and interaction to almost entire states’ independence.
The movement of capital was virtually non-existent, international investment was viewed with suspicion, and international prices and interest rates no longer moved in parallel. Global capital and international investment were also considered the leading cause of the economic downturn of the 1930s. The third period. that of Bretton Woods (1945. 1971). it was an attempt to rebuild the world economy. Despite the tremendous increase, concerns about capital movements were not extinguished.
Initially, the International Monetary Fund sanctioned controls on capital movements as a means of averting money crises. These controls gave governments some independence in implementing active monetary policy. The philosophy that advocated capital controls was not abandoned until the late 1960s, when it became apparent that global capital could not be restrained. Capital markets regenerated during the rules, while the fixed exchange rate regime was standard in many developed economies.
In the fourth and final period. In the period after Bretton Woods or the period of floating exchange rates, the trends were different.
Although some countries were reluctant to replace the fixed exchange rate with the floating one in the 1970s. 1990 capital movement has been extraordinary. Developed country governments no longer considered capital controls necessary, as fixed exchange rates were no longer a priority. Since the floating exchange rate could accommodate developments in the capital market, rules could be removed without causing problems.
Capital Movement in Albania
There are several countries, including Albania, in which the capital account has not yet been liberalized. While Albania does not apply restrictions or controls on capital inflows, it uses rules on most outflows. The reasons behind the need to open a capital account are related to the benefits arising from this process, such as more significant economic growth, diversification of investment opportunities, financial development, meeting the requirements set by the Albanian authorities in cooperation with the World Trade Organization and the European Union, the reduction of the informal economy, the achievement of low and stable inflation, etc.
Capital account liberalization requires fulfilling certain conditions such as a sound macroeconomic framework; a robust institutional and regulatory infrastructure, especially in the financial sector; and an appropriate exchange rate regime. Consequently, we emphasize the importance of maintaining and improving current macroeconomic indicators, such as GDP growth and inflation, the reputation of careful monitoring of total debt levels, and especially external debt, and the urgent need to develop a strategy. For currency generation, which will allow Albania to maintain a healthy balance of payments.
Regarding the steps of liberalization, by the theory and practice so far, we suggest that the opening of the capital account in Albania should be treated with caution. Phasing or sequencing the steps of liberalization is very important. It presupposes the order and gradual combination of structural and macroeconomic reforms to enable the free movement of capital.
Capital Account Liberalization means completely removing controls and restrictions on capital movements inside and outside a country. Word .restriction. is used not only in the sense of a categorical legal prohibition, that is, in cases where the law completely prohibits the performance of a particular transaction, but also in the sense of a quantitative restriction, as well as in cases where a given transaction requires the approval of an individual, such as the Central Bank.
At this point, it is necessary to emphasize the difference between the obligation to obtain approval (authorization, permit) and the declaration required at the end of entry or exit of capital. Some countries implement a system for declaring the amount of money that leaves the country, only for statistical or tax-related reasons.
Classical theory suggests that the international movement of capital allows countries with limited savings to attract financing for investment projects, will enable investors to diversify their portfolios, distributes investment risk, and promote international commodity trade today for commodities in the future. Several economists worldwide present some arguments against full liberalization or the way it is implemented in some countries.
Some of these arguments are as follows:
First, it isn’t easy to measure the net benefits a country would reap from capital account liberalization. Under normal circumstances, it is impossible to predict the losses that a country may incur in the event of a capital account crisis. Through an appropriate analysis, a country must assess both the probability of a problem and the potential losses caused by it.