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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
28 June 2015

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 Guardian 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 Treaty on the Functioning of the European Union (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 the Director of Bruegel. Over his career, he has contributed to research on European political economy and governance, fiscal, monetary and financial policy, climate change and geoeconomics. Under his leadership, Bruegel has been regularly ranked among the top global think tanks and has grown in influence and impact with a team of now almost 40 recognized scholars and around 65 total staff. Bruegel is also recognized for its outstanding transparency.

    A recognized thought leader and academic, he regularly testifies at the European Finance Ministers' ECOFIN meeting, the European Parliament, the German Parliament (Bundestag) and the French Parliament (Assemblée Nationale). 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 to the G20 high level independent panel on pandemic prevention, preparedness and response. He is also a professor (part-time) at the Solvay Brussels School of Université Libre de Bruxelles, where he teaches economics of European integration.

    He 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 was coordinating the research team on fiscal policy at Deutsche Bundesbank. He also worked as an external adviser to the International Monetary Fund.

    He holds a PhD in economics from the University of Bonn and studied in Bonn, Toulouse, Pittsburgh and Passau. He taught economics at the University of Pittsburgh and at Université libre de Bruxelles. He has published numerous papers in leading academic journals. His columns and policy work are published and cited in leading international media and policy outlets. Guntram is fluent in German, English, French and has good notions of Bulgarian and Spanish.

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