Friday, September 14, 2012

Banking union fallacies 5 - DG MARKT complicit in capital controls?

According to the FT, Mari Draghi claims that, in response to the sovereign debt crisis, national supervisors have been imposing capital controls on the banks in their jurisdictions. Daniel Gros from CEPS—'who developed original plans for EMU—warned against a similar scenario to underscore 'national bias' in financial regulation.

This type of argument is supposed to promote the banking union in general, and ECB supervision of banks in particular (ECB-Watch).

Questioned on Draghi's allegation, DG Jonathan Faull was kind enough to refer us to a DG MARKT document dated February 2012 on capital controls monitoring. However, there is nothing in this document corroborating Draghi's claim, and no indication, therefore, that the infringement is being dealt with.

DG Michel Barnier's silence on this Single Market violation is strange. So strange, in fact, some would be well inspired to bring the matter to the EU Ombudsman if DG MARKT persists in ignoring Draghi's allegation national supervisors breach Treaty rules [1].

[1] Remember, it's the same body Corporate Europe Observatory complained to in July 2012, about Draghi's G30 membership (Source), after the matter had come across the desk of board of the ECB since February 2012 (CEO).

By default, quoted text below are from the DG MARKT document cited above.

Law & enforcement
The general principle of the free movement of capital as set out under Articles 63-66 of the TFEU is at the heart of the Internal Market and is one of its 'four freedoms'. Article
63 stipulates that
"…all restrictions on the movement of capital between Member States and between
Member States and third countries shall be prohibited."
While trying to pre-emptively address situations which could develop into infringements, the Commission will bring cases before the CJEU when necessary.
The Commission does not hesitate to act should infringements be suspected. Over the years, the Commission has initiated many infringement procedures with a view to enforcing the freedom of capital movements as an important element of the Internal Market.
The infringement

Daniel Gros presents the case "a bank headquartered in Italy, but with an important subsidiary in Germany" (NakedCap). He assumes that if "the German operations generate a surplus of funds since Germany saves more than it invests at home.", this may happen: "The German supervisory authorities consider Italy at risk and thus oppose any transfer of funds from the German subsidiary to the Italian headquarters.".

Draghi tells us a scenario similar to Gros' is in fact happening (FT-07/2012):
National supervisors have asked their banks to [keep] activities within [borders].  The second point is in a sense a collective action problem: because national supervisors, looking at the crisis, have asked their banks, the banks under their supervision, to withdraw their activities within national boundaries. And they ring fenced liquidity positions so liquidity can’t flow, even across the same holding group because the financial sector supervisors are saying “no”.

So even though each one of them may be right, collectively they have been wrong. And this situation will have to be overcome of course.
DG MARKT monitoring as of 02/2012

3.1. Monitoring, enforcement and infringement proceedings within the EU
There were fourteen ongoing formal infringement cases at the end of November 2011.
One infringement case was opened and five closed during the reporting period. The most common types of cases are those relating to privatisation and special rights of the state in privatised companies and amount to over a third of the total number. The other types of (ongoing) cases concerned bilateral investment [treaties (BITs)], strategic foreign investment control, real estate law, collective investment, and regulatory restrictions. At the same date (November 2011), there were thirteen other cases where the Commission services were requesting and assessing information through EU Pilot.
Except for the vague mention of 'regulatory restriction', there is nothing to corroborate the Draghi/Gros contention, which is in relation to 'crisis response' which could be anytime since around 2009.

The chapter and the next one are continued as follows (only section titles are shown)
3.2. Extension of transitional periods for the acquisition of agricultural land
3.3. Financial transaction tax
4.1. Intra-EU Bilateral Investment Treaties
4.2. Sovereign Wealth Funds
4.3. Multilateral relations
Also see:


  1. UPDATE:

    EU Commission admits capital controls exist and wants to deal with it.

    WSJ - Feb 3, 2013 - EU aims to free flow of funds across borders


    The policies of concern generally are aimed at preventing European banks based in Europe's financially distressed south from dragging down operations these groups own in the more-stable north.


    [The Commission] wants to resolve the issue at the European Banking Authority [...]. Only if that doesn't work would the commission take more-drastic action [namely bringing the case to the European Court of Justice], the official said.

    1. Twitter - Sep 14, 2012 - Conversation between @ECB_Watch and FaullJonathan


      @ECB_Watch: DG MARKT complicit in capital controls?
      @FaullJonathan: Not in the slightest.

  2. On Cyprus.

    Spiegel - March 22, 2013 - Troika Reportedly Rejects 'Plan B' in Cyprus


    "Germany's respected business daily Handelsblatt is reporting that the European Central Bank (ECB) is preparing to take steps to prevent a run on the banks in Cyprus and a massive capital flight from the country. According to the report, the ECB is considering placing limits on the amount of money residents can withdraw from ATM machines. The rules would also entail freezing deposits on accounts and requiring that any wiring of money be pre-approved by the national central bank. Handelsblatt said the ECB had not determined how long such a freeze on accounts would be put in place."

    What does Jonathan Faulhave to say about " Commission applies Treaty rules firmly when evidence shows breach." this time? (rhetorical)

    1. Mar25, 2013 - Eurogroup decision for Cyprus deposit tax violated EU directives, says IIF

      Here's why: the IIF is the bailout lobby. A good bailout is a stealthy one, that is, one that is borne by a large taxpayer without the sort of bad publicity provoked by the punishment tax in Cyprus.