4. 7. 88 Official Journal of the European Communities No C 175/1 
II 
(Preparatory Acts) 
ECONOMIC AND SOCIAL COMMITTEE 
Opinion on the creation of a European Financial Area 
(88/C 175/01) 
On 22 December 1987 the Commission decided to consult the Economic and Social Commit­
tee, under Article 198 of the Treaty establishing the European Economic Community, on the 
creation of a European Financial Area. 
The Section for Economic, Financial and Monetary Questions, which was responsible for 
preparing the Committee's work on the subject, adopted its Opinion on 12 April 1988. The 
rapporteur was Mr Delhomenie. 
At its 255th plenary session (meeting of 27 April 1988), the Economic and Social Committee 
adopted the following Opinion with no dissenting votes but with one abstention. 
1. Introduction 
1.1. We welcome the fact that the Commission has 
decided to ask us for an Opinion on its Communication 
of 4 November 1987 on the creation of a European 
Financial Area, particularly as this is an essential step 
towards the establishment of the single internal market. 
1.2. The liberalization of capital movements, the 
principle of which was established by the Treaty of 
Rome (Art. 67 et seq.) but which was not put into effect 
at the time, has already been the subject of several 
Directives, most recently that of November 1986 
(86/566/EEC) amending the Directive of 11 May 1960. 
This 1986 Directive requires the Member States to 
refrain from introducing new autorization procedures 
more stringent than those prevailing on the date of 
entry into force of the Directive, to simplify as far as 
possible the authorization and supervisory formalities 
applicable to the conclusion and execution of trans­
actions and transfers, and, if necessary, to discuss 
among themselves the process of simplification. 
1.3. The new Commission proposals comprise two 
Directives and a Regulation. 
1.3.1. The first proposal is for a Directive imple­
menting Article 67 of the Treaty. It requires the Member 
States to eliminate all remaining restrictions on capital 
movements, lays down the conditions under which national monetary regulatory measures will be permit­
ted, provides a safeguard clause in case of monetary 
disturbances and establishes a timetable for implemen­
tation. 
1.3.2. In the Commission's view, the liberalization 
of capital markets is an essential precondition, though 
not sufficient in itself, for completing the internal mar­
ket. Prudential rules to counteract any risks and disequi-
libria, and the harmonization of tax regimes, are essen­
tial accompaniments to, although not preconditions for, 
this process. Liberalization will require the mainten­
ance, or strengthening of exchange rate discipline and 
thus the participation of all the currencies in the mech­
anism of the European Monetary System (EMS). The 
Commission also points out the need for increased 
cooperation on monetary policy, and economic policy 
convergence. Finally, it stresses the need for real free­
dom to provide services in the banking and insurance 
sectors. 
1.3.3. The second proposal for a Directive amends 
Directive 72/156/EEC, which is about regulating inter­
national capital flows and neutralizing their undesirable 
effects on domestic liquidity. 
1.3.4. The proposals include measures limiting liber­
alized capital movements; these may be invoked after 
consultation with all the Member States in the event of 
external monetary shocks. The Commission argues that 
No C 175/2 Official Journal of the European Communities 4. 7. 88 
these amendments are made necessary by the change in 
circumstances since 1972, a period which saw a large 
influx of capital into the Community, and the current 
liberalization of the markets. 
1.3.5. The proposal for a Regulation provides for 
the establishment of a single medium-term financial 
support mechanism for the Member States' balance of 
payments. Its aim is threefold: 
— to establish a single financial support mechanism 
by combining the medium-term financial assistance 
systems and the Community loan, 
— to offer the possibility of temporary assistance to 
countries with balance-of-payments difficulties, 
— to provide a back-up for the liberalization of capital 
movements by a Member State. 
1.4. For the sake of completeness the Commission 
would like these three documents to be adopted 
together; it has fixed on 1 January 1989 as the target 
date for liberalization. A transitional period is provided 
for some Member States. 
1.5. The Study Group of the Section for Economic, 
Financial and Monetary Questions heard the views 
on various aspects of the theme put into discussion 
expressed by the chairman of the committee of the 
governors of the Member States' central banks and of 
the representatives' committee of the central banks of 
Member States where the process of liberalization is 
most advanced, i.e. Germany, the United Kingdom 
and the countries of the Belgo-Luxembourg Economic 
Union. 
The contributions showed that there is a consensus 
on the objective of liberalization. Reservations were 
expressed, however, about the prudential rules and 
safeguard clauses. As for the Commission proposals, 
there was agreement on the need for greater conver­
gence of economic policy, strengthening of the EMS 
and very extensive use of the ECU. As regards the 
creation of a European central bank, which forms a 
longer-term objective, the central bank representatives 
intend to study in detail the plans put forward by 
several Member States. 
2. General comments 
2.1. We endorse the Commission's decision to intro­
duce the legal instruments for a complete liberalization 
of capital movements. This, just as much as the free 
movement of goods and persons, is essential to the completion of the internal market and also necessary 
for the improved economic competitiveness of the Com­
munity. 
The very short deadline and the questions raised by the 
Commission itself do indeed make caution advisable 
but must not call the objective into question. 
2.2. With these three texts the Commission proposes 
to bring about the complete liberalization of capital 
movements, without any preliminaries. While support­
ing the Commission's aims, we feel that liberalization 
ought to be accompanied by efforts in such important 
fields as harmonizing the operating rules for financial 
services and stock markets, the rules governing the 
solvency and stability of financial institutions, and tax 
harmonization. Liberalization cannot be achieved with­
out stabilization of exchange rates. Efforts have already 
been made in this direction via the decisions taken at 
Basle and Nyborg. 
2.2.1. But liberalization presupposes even more rad­
ical action. Unstable exchange rates and sudden fluctu­
ations pose a considerable danger for the economies of 
the various Member States. The resulting unpredicta­
bility of costs and threat to competitiveness cause firms, 
especially SMEs, to abandon domestic and international 
investment plans. 
2.2.2. It is becoming more and more difficult to 
conduct a coordinated Community policy with floating 
exchange rate and fixed parity currencies co-existing 
side by side. The EMS, after all, is founded on the twin 
principles of stabilization of exchange rates (inflation, 
balance of payments, public sector finances and pro­
ductivity) on the one hand, and on the other conver­
gence of economic and monetary policy, the two nat­
urally complementing each other. 
2.2.3. The EMS, then, needs to be completed and 
strengthened. It is, after all, logical that economies of 
a comparable degree of development should be sub­
jected to the same disciplines. We feel that at the same 
time as capital flows are liberalized the remaining non-
EMS currencies should be brought into the system, 
subject to the commonly agreed margins of fluctuation. 
Entry into the system would, of course, only take place 
at the end of the transitional period in the case of those 
Member States covered by the provisions of Article 6 
4. 7. 88 Official Journal of the European Communities No C 175/3 
of the first proposal for a Directive (1990 for Ireland 
and Spain and 1992 for Greece and Portugal). 
As proposed in Article 3 of the same document, pro­
vision should also be made for any necessary adjust­
ments or adaptations. 
2.2.4. Liberalization also presupposes greater econ­
omic cohesion at the earliest possible stage through 
greater coordination of the Member States' economic 
policies. Economic policy autonomy would be com­
pletely at odds with coordinated exchange rate disci­
pline. In this way the country practising the most 
'sound' policy would not be obliged to serve as a model 
for the economic and monetary policy of all twelve 
Member States. The concerted interest rate movements 
which have occurred since the Nyborg agreement are 
the first step towards this necessary coordination. 
2.2.5. It will also be necessary to develop the role of 
the ECU. The Community needs a common reference 
and reserve currency and a common means of payment. 
If the ECU is to fit the bill, its role needs to be strength­
ened in two areas: 
— as a unit of account and medium of exchange which 
will help bring about greater stability in inter­
national trade; 
— the ECU would probably also be more suitable than 
other currencies for intervening in external foreign 
exchange markets without accentuating the strains 
within the EMS. 
2.2.6. Finally, there is the question of a Community 
institution to manage this policy. The role of this insti­
tution and its relations with national and Community 
bodies, and with the central banks of the Member 
States, need to be defined. The need to resolve these 
and other questions will probably mean that the setting-
up of a European Central Bank is a long-term project. 
But steps in this direction can be envisaged in the 
shorter term, e.g. a different system for issuing ECUs 
and the setting-up of a European Monetary Fund. 
2.3. We have also been consulted on the draft second 
Directive on the coordination of banking and the free­
dom to provide services. This proposal is closely linked 
with the texts currently under consideration. This 
aspect should be underlined in welcoming this further 
stage in the progress towards a European financial area. 
3. Specific comments 
Whilst expressing our general approval, we feel it 
appropriate, as indeed the Commission has done, to look at certain aspects in more detail and make a few 
suggestions. 
3.1. Coordination with other institutions 
The proposal for a Directive should include a complete 
nomenclature of liberalized capital movements; this 
would make it possible to define each category, gain a 
clear overview of the transitional regimes and safeguard 
clauses, and facilitate liaison with other bodies which 
are considering similar inventories, mainly the Organis­
ation for Economic Co-operation and Development 
(OECD). 
3.2. Prudential rules 
3.2.1. The Commission has not failed to tackle the 
issue of prudential rules, which are a necessary 
accompaniment to liberalization. But the coordination 
of prudential rules, which should if possible be achieved 
simultaneously, is largely a matter for the second Direc­
tive coordinating the supervisory arrangements for the 
credit sector, and in particular the list of banking activi­
ties in respect of which credit institutions are to have 
freedom to provide transnational financial services. 
3.3. Taxation 
3.3.1. In parallel with the process of liberalization 
which is essential to the creation of the internal market, 
it must be ensured that liberalization does not provoke 
a flight of certain types of business to more flexible tax 
systems or tax havens outside the Community. 
3.3.2. The Commission has not neglected this prob­
lem. Furthermore, this draining away of savings to third 
countries would have a detrimental effect in terms of 
the cost of financing the Community's policies, as the 
Community would have to borrow on external markets 
at high interest rates. 
3.3.3. Measures are under consideration by the Com­
mission to prevent the migration of capital within the 
Community. The first is the taxation of interest income 
through a withholding tax levied at a uniform rate by 
all the Member States. The second, more stringent, 
solution would be for credit institutions to be required 
to disclose to their tax authorities information on 
interest earned by Community residents. This would 
mean the abandonment of banking secrecy by the Mem­
ber States. 
3.3.4. We feel that tax harmonization should not be 
tackled piecemeal but should be seen in a broader 
perspective, bringing in the question of savings. Har­
monization must also take into account the economic, 
No C 175/4 Official Journal of the European Communities 4. 7. 88 
social and budgetary variables influencing tax legis­
lation and the redistributive function of tax. 
3.3.5. Pending the eventual completion of the process 
of overall tax harmonization, the Section feels that the 
introduction of a generalized withholding tax on all 
types of investment income accruing to residents and 
non-residents alike, levied at a uniform rate in all the 
Member States, could be a way of allaying the concerns 
of the country with the most stringent tax rules, about 
the liberalization of capital movements. 
3.3.6. And finally, there is agreement with the Com­
mission's view that the discriminatory provisions of 
certain countries' taxation systems, encouraging indi­
viduals to invest in domestic securities, and restrictions 
imposed on investments by pension funds, should disap­
pear. The same applies to the tax concessions and 
discriminatory provisions applied to the various forms 
of investment fund existing in some Member States. 
But the beneficiaries of these provisions are usually 
persons with average or low incomes, and so measures 
should be discussed with the Member States which, 
whilst not impeding the liberalization of capital move­
ments, will safeguard such investments. 
3.3.7. Convergence on tax matters should at all 
events be sought with the European Free Trade Associ­
ation (EFTA) and the OECD-countries. 
3.4. Safeguard clauses 
3.4.1. The Commission has made provision for a 
safeguard clause enabling the Member States to reintro­
duce controls on short-term capital movements if these 
threaten seriously to undermine the Member State's 
monetary and exchange rate policy. Such measures may 
be imposed only by means of an agreed Community 
procedure and for a period not exceeding six months. 
3.4.2. This safeguard clause should be used only to 
counter speculation and at all events for as short a 
period as possible. 
3.4.3 We are aware that there are major disparities 
between the Member States determined by structural 
factors and variables such as the role of the two sides of industry, the skills of the workforce, productivity, 
the role of the central banks and even climate and 
geography, etc. Reducing these inequalities is largely a 
matter for other policies and procedures already applied 
or to be applied by the Community bodies. 
3.5. Protection of savers and consumers 
3.5.1. Complete liberalization of capital movements 
will for the first time offer small savers the opportunity 
to invest their savings in other Member-States, includ­
ing those with strong currencies. Savers should not be 
misled by this new-found freedom into thinking that 
such investments carry minimal risk and that the same 
provisions for the protection of savers exist in all the 
Member States. 
3.5.2. There is no reason why the increased avail­
ability of financial services arising from the liberaliza­
tion of capital movements and the freedom to provide 
banking services should give the consumer any cause 
for concern, provided that any disputes are dealt with, 
as stipulated by international civil law, by the courts of 
the consumer's country of residence, and in accordance 
with that country's laws. 
3.5.3. The creation of a European financial area 
should neither override these rules nor restrict their 
application. The laws of the individual Member States 
should continue to apply and be administered by the 
country's own courts, or by other courts in accordance 
with the Brussels Convention on jurisdiction or the 
rules of international civil law protecting contracting 
parties. 
3.5.4. In the longer term the Commission should 
consider harmonizing legal protection, which would 
considerably reduce risks and simplify the consumer's 
task in the event of litigation. Tripartite discussions 
with providers of services and consumers' representa­
tives would be appropriate. 
3.6. Economic and social consequences 
3.6.1. As has already been pointed out in the general 
comments, liberalization of capital movements requires 
close coordination of the Member States' economic 
policies, but also coordination of economic and monet­
ary policy. The aim of this economic coordination 
and liberalization should be to promote job-creating 
growth. This purpose can be served by helping to 
facilitate business investment, particularly by prevent-
4. 7. 88 Official Journal of the European Communities No C 175/5 
ing, as far as possible, any draining away of financial 
resources. This will require international monetary and 
fiscal policy initiatives. 
3.6.2. But will employment really benefit from the 
proposed measures and the reduction in financial costs 
which will probably result? This does not follow auto­
matically, and experience shows that it depends on the 
way decisions are made—on a purely financial basis or 
also taking into account economic and social factors. 
The latter course would require involvement and con­
sultation of the two sides of industry enabling them to 
have their say in determining the solutions adopted. 
3.6.3. Liberalization of capital movements should 
also help put small businesses, craft industries and the 
cooperative sector, which are the main sources of new 
jobs, on a more equal footing with big business as 
regards access to capital. Improved provision of infor­
mation is vital. This can be achieved via Community 
information centres, but also via information networks 
set up by the various professional organizations. It 
would also be a good idea to harmonize the rules of 
the co-operative, mutual and non-profit sector. (Econ­
omic aid must at all events be the subject of negotiation 
Done at Brussels, 27 April 1988. with a view to radically improving the situation of the 
countries concerned.) 
3.7. Comments on the amendment of the 1972 Direc­
tive and the Regulation 
3.7.1. One cannot but agree with the Commission's 
statement in the explanatory memorandum of the pro­
posal amending the 1972 Directive that the Member 
States must have available a set of protective instru­
ments for the purpose of discouraging untimely capital 
flows. Here the Commission is responding to certain 
problems affecting relations with third countries. This 
justifies the Commission's decision to publish this 
amendment at the same time as the Directive on the 
liberalization of capital movements. 
3.7.2. The draft Regulation establishing a single sup­
port facility contains a new feature, compared with 
previous systems, viz. a support mechanism to deal 
with difficulties arising from liberalization. 
3.7.2.1. Only one country ever had recourse to the 
previous system. Is it therefore really necessary to set 
up a new system which, for the same reasons, may be 
little used? There ought in any case to be guarantees 
attached to the decision-making procedure. More 
specifically, balance-of-payments assistance should be 
the subject of negotiation to permit a radical improve­
ment in the situation of the countries concerned. 
The Chairman 
of the Economic and Social Committee 
Alfons MARGOT