2912.86 COfficial]ournal of the European Communities l ^ o C ^ ^ 9
Opinion on financial integration in the Community
(86^C^^11^
C^ n 19 December 1985,the Economic and SocialCommittee decided, in accordance with
Article 20 (paragraph^of the Rules of Procedure, to draw up an own-initiative opinion on
financial integration in the Community.
The Section for Economic and Financial Questions,which was responsible for preparing the
Committee'sworloon the subject, adopted its opinion on !5 ]u ly 1986, in the light of the
report by ^virlOrago.
At its 241st plenary session (meeting of 25 November 1986 ,^ the Economic and Social
Committee adopted the following opinion by an overwhelming majority, with no votes
against and with four abstentions.
1. General comments ^ Legal and institutional reference framework
1BL The Committee thought it advisable to draw
up an opinion on financial integration to spur the
Commission and the Council into continuing the meas-
ures to liberalise capital movements in the Community
by adopting the directives needed for implementing
Article6BoftheEECTreaty.
In this connection, the Committee points out with regret
that, since it was not consulted on this question, it
reserves the right to give its views in an own-initiative
opinion.
1.2. The Committee feels that financial integration
in the Community should allow the financial sector
to offer direct assistance to industry, by furthering
homogeneous financial instruments which make it easi-
er to fund investments which stimulate demand.
In this connection, measures to promote integration
should be phased in gradually, build up momentum
witht imeandkeeppace withthegeneralprocessof
harmonization.
1.^. As an area open to world trade, the EEC must
view financial integration as necessary to this role, and
anintegralpartof themonetary integrationprocess.
fOeclaration of freedom of establishment will not in
itself provide sufficient headway towards practical
achievements.
The network of monetary and financial relations
betweenthe world's majoreconomicblocksmust be
improved inorder to makefor moreeffectivedistri
bution and social and economic growth. In this content,
the Aiember States should encourage, as part of the
coordination of monetary policies,agrowing role for
the Commission in the dialogue between the major
international monetary authorities.
2.1. The Committee would point out that ifaEuro-
pean financial ^one is not brought into existence by
means of directly applicable regulations, use will have
to be made of implementing instruments which are
likely to remove the obstacles to genuine liberalization.
2.2. obstacles to the freedom to supply services and
to the free movement ofcapital act i n t u r n a s a c o n
straint on the free movement of goods and persons.
Liberalizing measures,which have been announced but
are only part-way tobecomingreality,areheldback
by the political aims and measures which are hampering
the completion of the Community integration process.
2.^. TheaimssetoutinArticle2oftheEECTreaty
(to be achieved by the means specified in Article ^(c^
and the objectives set out in Article 6^should be pur-
sued by Council action on the lines of that taken under
Article 69 in 1960 and 1962 to liberalise capital trans
fers.
2.4. This type of liberalization — ultimately based
onTreatyArticles^,108 and 109 (which are general
in scopes andthestandstillclause of Articled! — is
not absolute. But this should no longer be used to
justify theindefiniteuseofsafeguardclauses which,
originally introduced asaprecaution for specific contin-
gencies,have becomeincompatible with institutional
developments in the Community.
2.5. The Community bodies should ensure that
monitoring and harmonization of economic policies do
more to bring about macroeconomic convergence and
promote growth. This means restricting the use of
safeguard clauses to exceptional and temporary circum-
stances, and allowing the Community financing
No G 333/40 Official Journal of the European Communities 29. 12. 86
machinery to contribute to adjusting the imbalances in
national conditions and the disparities between regions.
2.6. Creation of a financially integrated area in Euro-
pe must be accompanied by progressive coordination
of the Member States' policies on the exchange rates
applicable to capital flows between the Community and
third countries.
2.7. 'Integration' here should not be taken to mean
that certain national responsibilities will have to be
ceded to supranational authorities, but rather that
Member States will be able to proceed more efficiently
by using common instruments, instead of acting in
isolation. Unresolved institutional problems which per-
sist in the monetary sector should not be allowed to
delay the introduction of joint — not necessarily insti-
tutional — solutions, however imperfect they may be
at the present stage.
2.8. The continuing legal obstacles provide a further
problem area. Taking as their basis the principles on
freedom of establishment and services contained in the
Treaty, the Community bodies will have to ensure that
any remaining restrictions are lifted.
Furthermore, on the basis of Article 57(2) — the scope
of which was extended by the European Council
decisions of December 1985 — coordinated action
should be taken by these bodies to make it easier to
exercise these freedoms.
3. Macroeconomic compatibility and completion of
the internal market
3.1. The Committee believes that the factors which,
in the second half of the Sixties, led to the reversal in
the trend towards liberalization and gave rise to the
partitioning of markets (with some markets open to all
products and others only to selected products), have
been transcended by the subsequent changes in the
world economy and by certain positive results achieved
by the Community economy.
3.2. In the Eighties, the common area of relative
monetary stability, and the more effective coordination
between Member States' economic and monetary poli-
cies (despite institutional problems),have contributed
to a significant rapprochement of the Community's
economies.
3.3. The experience of the Seventies has exposed the
limitations of currency restrictions imposed in some
Member States and shown that it is futile to attempt
to find a lasting solution to external constraints if
individual Member States are not prepared to forego
their domestic economic policy objectives.
3.4. In the past three years, greater economic conver-
gence has improved coherence in work on economic
integration through the free movement of goods and
services. As a result, the time is now ripe for financial
integration to go hand-in-hand with the process of
monetary, economic and commercial integration in the
Community.
3.5. The Committee points out that uneven financial
flows amongst the interdependent member economies
will, if allowed to persist, hamper the whole European
economy and justify the search for higher returns in
areas where economic and financial resistance is weak-
est. This was apparent in the early 1980s when there
was a massive flow of European capital to the United
States; while earning a higher financial return, this
capital helped the United States in its industrial restruc-
turing.
3.6. Moreover, the factors which are at present help-
ing to reduce external pressures on the Member States
(weaker commodity and dollar prices) should, as well
as improving the balance of payments, encourage those
countries facing the greatest constraints to make the
changes needed in order to set about the (swift or
phased) dismantling of safeguard clauses.
3.7. The Committee would draw attention here to
the importance of measures designed to gradually sta-
bilize the internal market in the period up to
31 December 1992. The Luxemburg Agreement states
that their purpose is to create an area without internal
frontiers, in which the free movement of goods, persons,
services and capital is guaranteed.
The Commission White Paper provides a useful blue-
print here, and as the Committee noted in its opinion
CES 1019/85, qualified-majority decision-taking should
be seen as a political choice which should also be
applied to fiscal decisions.
4. Financial innovation, monetary policy and market
stability
4.1. The Council has adopted a series of directives
which have a bearing on financial integration within
the Community (e.g. easing freedom of establishment
29. 12. 86 Official Journal of the European Communities No C 333/41
and freedom to provide services, coordinating access to
and activities of credit institutes, conditions for stock-
exchange listing), but no measures have been taken in
response to the widespread financial innovation which,
on the basis of the Euromarkets, has given birth to
a transnational capital market which is unregulated,
mobile and global.
4.2. These structural changes, arising from an under-
standing of the effects of inflation on financial flows,
were the fruit of interaction of market forces and official
policies.
This period was characterized by a combination of
unstable exchange rates, volatile interest rates and soar-
ing public deficits, together with inflexible regulations
governing national monetary and financial markets,
which have led to a search for more profitable and
more diversified investments.
4.3. The concurrent internationalization of inter-
bank markets and creation of increasingly sophisticated
financial instruments may well have a direct impact
on Member States monetary policies, on job-creating
investments and on international economic and trade
developments.
4.4. The Committee notes that it is becoming
increasingly difficult to draw a clear dividing line
between money and other financial assets, and between
banks' functions as intermediaries and direct loans. It
recognizes that other factors can affect control of the
monetary aggregates in the Member States. The Com-
mittee therefore invites the Community institutions to
press ahead with financial integration but draws atten-
tion to the possible effects of innovation on the national
authorities' management of the money markets and on
market stability.
4.5. The risk of losing in terms of stability what is
gained in terms of efficiency in the financial sector
should be kept at bay by coordinated monitoring of
management standards and of the conduct of monetary
policy, both adapted to the new context in their objec-
tives and the means employed.
5. Liberalization of capital movements in the Com-
munity
5.1. The lack of progress in integrating national capi-
tal markets contrasts with the large-scale development
of international financial relations, due in particular to
the expansion of Euromarkets.
This lack of progress is due in particular to national
authorities' desire to keep control of national monetary
policies. These policies, which are often dictated by
balance-of-payment considerations, are based in some
countries on the control of international capital move-
ments.
5.2. This has meant that the liberalization of capital
transactions has been blocked in certain countries —
and has sometimes even regressed when countries have
invoked safeguard clauses of the Treaty of Rome in
order to take restrictive measures waiving provisions
of Directives laying down obligations to liberalize. The
Committee considers that this development, even if
taken in agreement with the Commission, goes beyond
the real needs of protecting the balance of payments of
countries which have experienced difficulties in balanc-
ing their external accounts.
5.3. In order to promote greater understanding and
improve links between the main monetary areas as
regards the course to be taken by exchange rate and
interest rate policy, and to enable economic and finan-
cial integration to strengthen each other, the Com-
munity has rightly resumed efforts to achieve gradual
but complete liberalization of capital movements.
5.4. In order to achieve this objective, the Committee
would recommend that the Community law-making
process be rapidly completed and the necessary direc-
tives adopted on a time-scale compatible with the stages
in which the internal market will be completed.
The first signs of liberalization, in the form of the
Directive adopted by the Council (*) on long-term com-
mercial credits, the acquisition of shares whether quot-
ed on the stock market or not, and the admission of
shares to the capital market, should go hand in hand
with:
— steps to ensure equal investment and savings free-
dom for nationals of those Member States where
restrictions exist, and for public and private oper-
ators;
— the Commission ensuring abolition of currency
restrictions for current transactions, e.g. those appli-
cable to tourist, research and study journeys, medi-
cal treatment and trade;
— enabling companies to operate their foreign cur-
rency accounts so as to reduce open currency pos-
itions and costs of forward cover;
0) Draft Council Directive on the third amendment ot the first
Directive implementing Article 67 of the EEC Treaty (liberal-
ization of capital movements), adopted by the Council on
17 November 1986.
No C 333/42 Official Journal of the European Communities 29. 12. 86
— expanding the asset portfolios of resident operators
and reviewing the investment restrictions imposed
on institutional investors;
— greater circulation of financial assets at the Euro-
pean level.
5.5. At a time when they are aided by an economic
upturn, solutions such as these would enable the Com-
munity as a whole to:
— remove internal monetary and financial—and
consequently commercial—barriers within the EEC;
— encourage the formation of risk capital and (where
possible) the channelling of savings into business
investments which are more likely to prove profit-
able;
— remove artificial barriers in the Member States'
markets and their sub-sections;
— increase competitiveness between financial inter-
mediaries, thus offering more freedom of choice to
savers and investors;
— revive small and medium-sized firms by giving them
easier access to risk capital, thereby removing some
of their difficulties in competing with large com-
panies which are better placed to control their finan-
cial, regulatory and fiscal environment.
5.6. The Committee also feels that in order to soften
the impact on monetary aggregates and exchange rates,
the Community should allow wider use to be made of
all the available financing instruments to offset out-
flows of speculative funds and portfolio adjustments.
In conclusion, the liberalization of capital flows should
help the entire Community's economy, by helping to
remedy its internal structural and regional imbalances,
and by assisting countries to acquire capital or partici-
pate in international financial intervention operations.
6. Measures in the financial services sector
6.1. If satisfactory financial integration is to be
achieved, it is essential to create the right conditions
for effective competition in the field of financial ser-
vices: i.e. banks, stock exchanges, insurance companies
and collective investment funds. If we are to reach an
appropriate level of harmonization it is vital to take
priority measures in these sectors, giving special atten-
tion to the administrative and fiscal context.
6.2. In the Committee's view, closer alignment of the
various legislative provisions will be required if links
between the banking markets are to be improved. In
this respect, the principle of mutual recognition may
certainly make it easier to achieve the Treaty of Rome's
objectives under certain circumstances and if certain
conditions are fulfilled. Take, for example, the free
movement of goods. The same principle may also be
applied to the supervision of economic operators as
regards the right of establishment and the freedom to
provide services. If need be, there should be sufficient
harmonization in order to prevent the distortion of
competition between economic operators.
"With respect to banking regulations, the Committee
would stress the importance of the 1977 and 1983
Directives on coordination of banking legislation and
of initiatives on the structure of banks' annual reports
on accounts, own assets, the control of major risks, etc.
6.3. The Committee also feels that it would be
appropriate to promote the integrated use of electronic
systems for the transfer of funds. Here a distinction
must be made between the technical infrastructure
where standardization is both feasible and desirable,
and the service itself, which must remain open to free
competition.
6.4. In the securities sector, the process of harmoniz-
ing legislation still has a long way to go before shares
can be moved freely and are subject to the same tax
treatment throughout the Community.
Alongside measures to liberalize capital flows, the pro-
cess of financial integration requires such initiatives as:
— the progressive reduction of the compartmentaliza-
tion of stock exchanges in the Community;
— easier access for securities which meet the conditions
for listing on a Member State's stock exchange.
6.5. While noting that the IDIS system should
guarantee the interconnection of data, the Committee
stresses that the main goal should be the interconnection
of transactions in securities.
Lastly, turning to the primary market, the Committee
urges that the shares issued by Member-State-based
companies also be made eligible for issue on the capital
markets of the other States.
6.6. In the field of insurance, the right to supply
services freely, primarily in non-life sectors, should be
established. The Committee therefore considers that
the proposals already formulated by the Commission
should be acted upon.
29. 12. 86 Official Journal of the European Communities No C 333/43
6.7. The Committee supports adoption of the two
draft Directives on unit trusts and on the liberalization
of share operations.
The Committee believes that these Directives could
make an important contribution towards a Com-
munity-wide market, as they would establish common
rules on the authorization, policing, structure and
investment policy of unit trusts (1).
6.8. In wiew of the tendency towards the internation-
alization of financial markets, entailing innovatory fea-
tures (both internal and external to the process) which
link up banking systems and financial services, the
persistence of inflexibility, privileges and compartmen-
talization in the Community is just as damaging for the
services sector as it is for industry.
7. European Monetary System and the role of the ECU
7.1. The European monetary area will be able to
discharge its full role if the necessary financial arrange-
ments are made to secure equal access to capital mar-
kets.
7.2. The European Monetary System has, in over
seven years of existence, created a zone of relative
monetary stability which has reduced the uncertainty
caused by fluctuating exchange rates.
Moves towards financial integration should seek to
consolidate and improve the EMS, thereby making for
a better equilibrium in international trade in goods and
financial and other services.
7.3. Increased convergence of Member States' econ-
omies and well-coordinated monetary policies will not,
however, avert the danger of the EMS being transfor-
med into a system of sliding parities, in the absence
of a sufficient degree of liberalization of European
productive capital to have an impact on development
potential.
7.4. The Committee would therefore urge the Com-
mission and the Council to make a more determined
effort to carry out the tasks assigned to them by the
Decision of 18 February 1974 on the convergence of
Member States' macroeconomic objectives and, at the
same time, to tighten coordination of credit mechan-
isms.
7.5. The Committee would refer to the information
report discussed at the plenary session of 28 February
1985 as regards suggestions for strengthening the EMS
and to the ESC opinion on the use of ECU by 'other
holders' (2). It will limit itself to the following sugges-
tions here.
7.6. Greater use of the ECU would be more in tune
with monetary and financial integration and, at the
same time, would act as a stimulus to diversification of
the dominant poles in the international monetary sys-
tem. With this in mind, the Committee would re-
commend the following course of action to institutions
and private operators:
— allow the private use of the ECU in commercial
transactions and transfrontier company manage-
ment in the Community;
— encourage invoicing in ECUs for trade between
industrialized countries and commodity payments;
— facilitate the use of the ECU in the internal accounts
and invoicing of European multinationals;
— increase the use of the ECU in invoicing for services,
especially in the tourism sector;
— encourage the use of ECUs for financing, commer-
cial loans and on loan markets.
In line with arrangements for issues of loan stock by
Community institutions, some Member States should
amend their provisions so that transactions in ECUs
can benefit from the possible uses mentioned above.
8. Financial integration and tax harmonization
8.1. The Committee feels that the process of monet-
ary and financial integration must be accompanied by
a parallel process of fiscal harmonization with a view
to the gradual alignment of conditions within a single
European market. On this subject, the Committee
draws attention to the relevant part of the opinion on
the White Paper on the internal market.
8.2. This harmonization must be structured to
include generous transitional phases, and where necess-
ary compensatory measures; its aim must be a gradual
alignment of those aspects of taxes connected with
financial integration.
8.3. Tax structures and even concepts of taxation
vary enormously; nonetheless, action must aim to achie-
ve the maximum fiscal neutrality, to allow capital
movements to be guided by economic decisions rather
than by tax considerations.
(J) Directive of 20 November 1985. (2) OJ No C 218, 29. 8. 1985, p. 14.
No C 333/44 Official Journal of the European Communities 29. 12. 86
To encourage productive investment, support should
thus be given to all measures which will (a) even out
competition conditions between companies, and (b)
eliminate certain cases of double taxation, differing tax
treatment for mergers of companies based in two or
more Member States and differing systems for deduc-
tion at source on dividends of companies or on interest.
8.4. Turning to direct taxation, the Committee
stresses the advisability of aligning the incidence of tax
burdens so that production costs, siting of investment
Done at Brussels, 27 November 1986.
and capital return are not significantly influenced by
the tax systems of the Member States.
8.5. In the area of tax problems, the Committee
would draw the attention of the Commission and the
Council to the problems of international tax fraud and
tax havens.
Analysis is needed of the legal and political problems,
and of the difficulties involved in the practical
implementation of provisions designed to weaken exist-
ing agreements with certain tax haven countries; this
should be based on a Commission document updating
and expanding the communication of 28 November
1984.
The Chairman
of the Economic and Social Committee
Alfons MARGOT
Full & Egal Universal Law Academy