Economic and legal observations on capital controls

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Economic and legal observations on capital controls

While the exact decision of the Greek government is not yet to my knowledge clearly communicated, it appears that besides a bank holiday, the governme

Publishing date: 29 June 2015
Authors: Guntram B. Wolff

While the exact decision of the Greek government is not yet to my knowledge clearly communicated, it appears that besides a bank holiday, the government intends to impose capital controls. The reports that for capital control measures to take effect, the Greek cabinet must approve the recommendations of the Greek financial stability council and a presidential decree is needed.

Legally, capital controls are relatively difficult to justify in EU law. However Article 65(1b) TFEU provides a loophole in the EU treaties. The free movement of capital in the European Union is a fundamental principle codified in the (TFEU); see Article 63(1). While the TFEU allows countries outside the euro area to “take the necessary protective measures” when a sudden balance of payments crisis occurs (Article 144(1)), euro-area countries do not have such a right. Article 65(1b) acknowledges the right of all EU Member States to “take measures which are justified on grounds of public policy or public security”. In addition, Article 65(3) states that such measures “shall not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments as defined in Article 63.”

Economically, as I have argued in the case of Cyprus, capital controls are a contradiction in terms to monetary union. A euro is a euro only if it can circulate freely in the entire monetary union. With capital controls, the Greek euro will be worth less than the French or German euro and therefore ceases to be a euro.

The statement by Greek PM Tsipras that Greek deposits are safe is therefore wrong. Their value is already now significantly lower than their face value.

The good news, however, is that capital controls can be reversed. For capital controls to be reversed and Greece to remain in the euro, a necessary condition is that the ECB is ready to provide abundant liquidity to all solvent banks. This is unlikely to happen without prior political agreement in euro group. Like it or not: The limits of monetary union are the limits of political union.

About the authors

Guntram B. Wolff

Guntram Wolff is a Senior fellow at Bruegel. He is also a Professor of Economics at the Université libre de Bruxelles (ULB).

From 2022-2024, he was the Director and CEO of the German Council on Foreign Relations (DGAP) and from 2013-22 the director of Bruegel. Over his career, he has contributed to research on European political economy, climate policy, geoeconomics, macroeconomics and foreign affairs. His work was published in academic journals such as Nature, Science, Research Policy, Energy Policy, Climate Policy, Journal of European Public Policy, Journal of Banking and Finance. His co-authored book “The macroeconomics of decarbonization” is published in Cambridge University Press.

An experienced public adviser, he has been testifying twice a year since 2013 to the informal European finance ministers’ and central bank governors’ ECOFIN Council meeting on a large variety of topics. He also regularly testifies to the European Parliament, the Bundestag and speaks to corporate boards. In 2020, ranked him one of the 28 most influential “power players” in Europe. From 2012-16, he was a member of the French prime minister’s Conseil d’Analyse Economique. In 2018, then IMF managing director Christine Lagarde appointed him to the external advisory group on surveillance to review the Fund’s priorities. In 2021, he was appointed member and co-director to the G20 High level independent panel on pandemic prevention, preparedness and response under the co-chairs Tharman Shanmugaratnam, Lawrence H. Summers and Ngozi Okonjo-Iweala. From 2013-22, he was an advisor to the Mastercard Centre for Inclusive Growth. He is a member of the Bulgarian Council of Economic Analysis, the European Council on Foreign Affairs and advisory board of Elcano. He is also a fellow at the Kiel Institute for the World Economy.

Guntram joined Bruegel from the European Commission, where he worked on the macroeconomics of the euro area and the reform of euro area governance. Prior to joining the Commission, he worked in the research department at the Bundesbank, which he joined after completing his PhD in economics at the University of Bonn. He also worked as an external adviser to the International Monetary Fund. He is fluent in German, English, and French. His work is regularly published and cited in leading media.