This is a bold and timely book. After several decades of an increasingly laissez-faire regulatory approach to foreign investment, neo-protectionism is again on the rise. In recent years, Member States of the European Union have become major capital importers, in addition to their traditional roles as capital exporters. Such two-way capital flows exposed the fissure between the often professed ideal of unrestricted investment flows and the real-world anxiety over inward investment. The interests of investors and the European Union could increasingly diverge, putting pressure on the Union's commitment to unfettered investment flows. Additionally, the aftershocks of the financial crisis that started in 2008, including high exchange rate volatility and unsustainable levels of public debt, are likely to strain free capital mobility more broadly.
It is against this background that author Steffen Hindelang offers a principled and passionate defence of unfettered foreign investment flows. He pulls few punches, and challenges the sometimes ‘irrational blunt hostility’ (p vii) against cross-border investment. Yet this is not the only merit of the book; just as valuable is the careful doctrinal exposition of European Union law on free capital movements. Hindelang mines the jurisprudence of the three other freedoms for insight on the free movement of capital. He provides a unified framework for analysing the jurisprudence on the four freedoms, including their exceptions. Hindelang is also an excellent guide through the complex case law on taxation and free movement of capital. He eschews an insular perspective on the European Union in favour of an outward-looking treatment examining cross-border investment from within the single market and from third countries.
For decades, capital, the latecomer among the four freedoms, led a ‘shadowy existence’ (p 117). Casati was responsible for the freedom's congenital defect—the lack of direct effect (p 37). Concerns that free movement of capital would undermine economic policy or lead to trade imbalances relegated free movement of capital to the backstage. The struggle to liberalize capital movements lasted over 50 years (p 18). Hindelang's historical account of the liberalization of capital movements in the EC (pp 31–41) blends an exposition of central liberalizing steps with the concurrent evolution of European Court of Justice case law. It also underscores how critical the French change of heart on the liberalization of capital movements was for the political decision to liberalize capital movements in the Maastricht treaty (p 39).Footnote 1
The Court of Justice served as the trail blazer of the other three freedoms, with liberal recourse to teleological interpretation. Yet the court hesitated when it came to capital movements, even after the Maastricht treaty had transformed this freedom into a binding, directly effective obligation, partly in support of European Monetary Union (p 21). The court was swayed by calls of governments and legal academics for a differentiated approach to the liberalization of capital movements. Hindelang urges a reconsideration of this position as regards the ‘the strictest, most comprehensive, and most effectively enforceable multinational agreement governing capital movements’ (p 39).
The focus of the book is on capital movements erga omnes—between Member States and third countries. Hindelang deplores the tendency in the Court of Justice's case law for article 63 TFEU to take a subsidiary role to other freedoms, especially the freedom of establishment. Chapter III examines how the freedom of establishment and the free capital movements interact. As foreign investment is a ‘classical cross-sectional activity’ (p 81), both freedoms invariably overlap—a matter of critical importance in the third country context. Hindelang focuses on private market participants seeking to invest in the European Union. If the freedom of establishment were to apply exclusively, there would in many cases be no treaty protection for third country investors. Deploring the Court of Justice's ‘half-hearted parallelism’ (p 89), he advocates the parallel application of the two freedoms as a general rule. He is particularly critical of the court's centre of gravity approach in Cadbury Schweppes and Fidium Finanz AG which regard investment as primarily concerning the freedom of establishment, and only tangentially free capital movements. The implication is that third country investors cannot rely on free capital movements. The purpose of the regulatory measure is an arbitrary basis for the test to decide which freedom applies, open to manipulation by member states. Instead, Hindelang prefers to focus on the characteristics of the economic activity.
Hindelang sees tangible benefits in the unilateral, unconditional opening up of the European Union to cross-border investment. Such openness is vital for maintaining trust in the European Union investment area, and to enable the Euro to become one of the world's leading currencies. Regulatory barriers would undermine European growth and prosperity. The treaty drafters sought to guarantee a level playing field for investors, regardless of their origin, fostering greater competition in the European Union. He takes free capital movement seriously as an object-related freedom. Only the source and the destination of capital movements matter. The place of residence of the participants to the transaction is immaterial.
The Court of Justice and the literature regard economic policy harmonization, or at least coordination, as a prerequisite for free capital movements to and from third countries. Hindelang, by contrast, regards distinctions depending on whether intra-Community or third country capital movements are involved as generally suspect. The European Union opened itself up, irrespective of whether a level playing field with third countries is in place. The Union is said to be capable of absorbing economic shocks that may result from the lack of harmonization. He advocates a broad role for mutual recognition in relation to the regulatory and fiscal regimes of third countries.
He also rejects any role for reciprocity: ‘by making free capital movement erga omnes dependent on the precondition of reciprocity, little would remain of the freedom’ (p 270). He dismisses concerns that the European Union is ill-equipped to deal with potential abuse of its unilateral market opening. No Eu country is able to restrict capital movements on its own, because capital could simply enter the single market through the conduit of another member state. The first best is therefore a liberal, common European Union regime for the admission of foreign investment. A community competence for investment appears as the logical step in the wake of free movement of capital erga omnes.
Somewhat misleadingly, the title of the book refers both to the ‘free movement of capital’ and of ‘investment’. In reality, it is predominantly about foreign investment. As the author says, the focus is exclusively on ‘cross-border direct investment’ (p 15), a subcategory of capital. Hindelang analyzes the provisions dealing with free movement of capital through the lens of foreign investment, yet he draws general conclusions about their proper interpretation for all capital movements. The risk in ignoring other capital flows is a partial perspective. The optimal treatment may differ between types of capital flows. As a result, he may have underplayed other rationales behind the ECJ's case law, such as capital flight and securing a national tax base.
The author develops a sophisticated conceptual framework and emphasizes the need for doctrinal consistency. There is plenty of deductive reasoning. It is a thoroughly German book, in terms of the reasoning and the way the arguments are framed. In doctrinal terms, the book is a tour de force. On occasion, however, it yearns for more background—the policy and economics of capital movements—and, especially, empirical insights on their costs and benefits (even if such studies were ultimately found to be inconclusive). Hindelang takes the economic rationales for liberalizing capital movements largely for granted. He paints at times too optimistic and too broad-brush a picture. Empirical insights could have served as a cross-check.
He leaves little room for capital movements explained by factors other than economic fundamentals—such as herding or self-fulfilling crises—which may be an outgrowth of his focus on investment flows. Free capital movements, even if ex ante policymakers believe that a sound macroeconomic policy framework is in place, may give rise to sustained macroeconomic imbalances and rapid shifts in sentiments. Consider the present imbalances between surplus and debtor countries in the European Union—one among several factors behind the sovereign debt crisis in the Euro area.
Financial markets did not allocate capital optimally, either within the European Union or globally, which contrasts with the following statement in the book: ‘It can be assumed that [the critical institutional preconditions for free capital movements] [ie a stable banking and supervision system, free competition, and a functioning tax and legal system] are present within the Community’ (p 19, fn 14; p 31). These assumptions, especially of course of a stable banking system, were all too common, both as regards the European Union and the global economy. The debate on the contribution played by the failure of financial markets to exercise discipline and the failure of regulators to supervise risk-taking by financial institutions will continue for some time. Yet it is already clear that both financial market discipline and regulation failed in important respects.
Hindelang's book is a very thorough study, with ample references to primary and secondary material, especially the abundant literature in German which he makes accessible to English readers for the first time. It will be the first port of call for free movement of capital in general and cross-border investment protection in particular under European Union law. Its scholarly influence will also radiate beyond the free movement of capital to the other freedoms, especially the freedom of establishment. Finally, the book is also warmly recommended as a guide to the uncharted waters that lie ahead—both as regards the implications of the Lisbon Treaty and the fallout of the financial crisis.
