Chapter

V Multilateral and Regional Frameworks for Liberalization of Capital Movements

Author(s):
Owen Evens, and Peter Quirk
Published Date:
October 1995
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Multilateral and regional frameworks have contributed to progress in the liberalization of capital movements. In particular, the OECD Code of Liberalization of Capital Movements and the EU directives have been important because their objectives have been fully attained and because their rules apply to the industrial countries, among which the bulk of capital flows take place today. In the group of developing countries, a limited degree of international capital mobility has existed in the context of the regional monetary arrangement of the CFA franc zone. A new impetus for the liberalization of certain capital movements is likely to come from the World Trade Organization through agreements on the liberalization of international trade in financial services and the associated capital movements.

The goals defined within these alternative frameworks for the liberalization of capital movements have broadened considerably over time, but important differences remain between them. Initially, the liberalization effort centered on the removal of restrictions on direct investment and capital flows linked to trade in goods and services, largely in the form of exchange controls. With time, more attention was given to other obstacles to free capital movements, and the scope of liberalization efforts was expanded to include all capital transactions, both short and long term. A principal remaining difference concerns interpretation of the liberalization objective. The OECD embraces an approach based on the “uniformity of treatment” under different national rules, while the EU has for some time devoted effort to harmonizing and standardizing national rules and regulations for various transactions. A further significant difference is that the directives of the EU embody forms of compulsion and compliance dates, while the OECD code does not. In addition to these approaches adopted by the OECD and the EU, which included the liberalization of financial services as a way to enhance the freedom of capital movements, efforts in the context of the WTO are aimed at liberalizing trade in services, including financial services and the associated capital flows.

OECD Codes

The OECD code stemmed from a primary objective of the organization. The convention establishing the organization in 1961 states that, in order to pursue the aims of the OECD, member countries agree “to pursue their efforts to reduce or abolish obstacles to the exchange of goods and services and current payments and maintain and extend the liberalization of capital movements.” Detailed undertakings in this regard were set out in the Codes of Liberalization of Capital Movements,76 first adopted in December 1961.77 Article 1 (a) of the code states the general aim that “members shall progressively abolish between one another, in accordance with Article 2, restrictions on movements of capital to the extent necessary for effective economic co-operation.” The Committee on Capital Movements and Invisible Transactions is mandated under Articles 18 and 19 to consider all questions concerning the interpretation and implementation of the provisions of the code.

Article 2 (b) mentions the transactions to be liberalized.78 These are contained in Annex A to the code, consisting of two lists. List A contains priority operations that, once liberalized, cannot be restricted without reference to the organization. The items on List B are subject to more flexible treatment because, under Article 2(b)(iv), members have the option of lodging a reservation on a List B item even after the item has been liberalized. The operations on List B are those for which it was thought that there might be a more frequent need for restrictions, such as the access of foreign bond issues and inward and outward credit operations of domestic financial institutions.

Under Article 2(a), each member “shall grant any authorization required for the conclusion or execution of transactions and for transfers on Lists A and B,” unless the member maintains a reservation on an item in Annex B to the code (as under the IMF’s Article XIV), or has invoked an Article 7 derogation clause that provides temporary dispensation (as under the IMF’s Article VIII) from its obligation to preserve the freedom of operations not covered by reservations.79

The OECD codes have a legal status equal to OECD decisions and are binding on all members. Under the Code of Capital Movements and Invisible Transactions, members agree to adopt and apply laws, regulations, and policies that treat all residents of the OECD area on an equal footing. However, the obligation to liberalize does not imply the need to harmonize national laws or to deregulate according to some international standards. The practice has been for other countries seeking to join the OECD to be required to comply with the obligations of the codes prior to formal membership.

Forms of Controls Covered

List A includes direct investments, most portfolio operations in quoted securities, commercial credits and personal capital movements, issues of securities, operations in quoted securities, real estate operations and financial credits, and loans. List B, a subset of List A, covers operations on money markets, real estate operations, financial credits and loans, other operations in negotiated instruments, operations of deposit accounts, operations in foreign exchange, and personal capital movements.

Liberalization refers in the code to the abolition of official restrictions on the conclusion or execution of both transactions and transfers. The obligation to liberalize goes beyond restrictions imposed directly on foreign exchange transactions, in the sense that the underlying transactions themselves should not be frustrated by legal or administrative regulations. It applies to cross-border operations between residents of OECD countries and is not applicable to residents of non-OECD countries or to operations between residents of the same country. For instance, in the area of direct investment, members are not permitted to keep or introduce regulations or practices that raise special barriers or limitations with respect to nonresident investors from OECD countries and that are intended to prevent or significantly impede direct investments by such nonresidents or that have that effect. Restrictions in the form of reservations by member countries are common in this area, particularly with regard to direct investments in broadcasting and in air and sea transport. Real estate is often considered of second-order importance in the liberalization process. However, the code covers purchases of buildings and land, and construction of buildings for gain or personal use, and includes rights that would be accorded to residents, such as transfer of ownership.

The code has been amended to widen its coverage several times (1964, 1973, 1984, and 1989). It was first amended to include measures that could indirectly restrain capital movements and were not originally considered as violating the obligations under the code. The revisions in the 1980s reflected both the broad liberalization of capital movements that had already taken place in the OECD area and a growing awareness that the progressive integration and sophistication of financial markets rendered limits on various capital flows increasingly unenforceable. The amendments in 1989 were to include provisions for operations in money markets, including operations in securities and interbank markets; short-term financial credits and loans to both private individual and financial institutions; foreign exchange operations, including spot and forward transactions; long-term commercial credits; swaps, options, futures, and other innovative instruments; and securities issued simultaneously in more than one market. As a result of the last revision, the liberalization recommendations adopted by the OECD Council now cover all capital movements and the right of establishment under the Code of Liberalization of Capital Movements, and the freedom to provide banking and financial services under the Code of Liberalization of Current Invisible Transactions.

Some aspects of the code are similar in transactions coverage and treatment to Article VIII of the IMF Articles of Agreement. For example, when transfers are made at rates of exchange other than those prevailing in the official market, it is considered restrictive if exchange rate differentials exceed 2 percent for several months. Administrative procedures such as compulsory deposit requirements, tax or interest rate penalties, and queuing arrangements that impede transactions covered by the code are treated as restrictions. Repatriation and surrender requirements for foreign exchange receipts, restrictions on the terms of trade financing contracted by private parties (maturity, interest rate, etc.), and limits on the periods for acquiring foreign exchange for imports can be regarded as restrictions under both the IMF’s Article VIII and the OECD code. However, certain measures that raise the cost of international transactions, such as taxes, levies, and deposit requirements are not within the purview of the code. This is because they are viewed as not necessarily preventing the transactions and are therefore considered to be less harmful than discretionary authorizations.

Transitional Arrangements for Retaining Controls

The OECD approach emphasizes the continuity of progress in liberalizing capital transactions, rather than the achievement of change that could be subsequently reversed. Consistent with this approach, Article 7 provides the following reasons for which a member may elect to defer, or not to take, the measures under Article 2(a) as follows:

  • If a member’s economic and financial situation does not justify complete liberalization;

  • If previous liberalization measures result in economic and financial disturbance, the member can withdraw those measures; and

  • If a member’s overall balance of payments develops adversely at a rate and in circumstances that the member considers serious, the member may temporarily suspend the measures of liberalization taken or maintained.

A reservation on List A items may be lodged only during the time a member adheres to the code, whenever specific obligations begin to apply or obligations relating to an item are extended, or when new obligations are added to the code. Once withdrawn, a reservation cannot be relodged, and, unlike derogations, there is no time limit for their removal although the member must submit to a periodic examination. Derogations may be invoked at any time, but only if the member can demonstrate that it needs to reintroduce restrictions because of the problems listed in (i) to (iii) above. Derogations can be maintained for a limited time only. For instance, under item (iii) above, the member would be obligated to ensure that 12 months after the reintroduction of restrictions, it liberalizes (to a reasonable extent) transactions and transfers subject to Article 2(a) and those that were suspended. Moreover, within 18 months the member should revert to compliance with the obligations under Article 2(a). In this respect, the member is required to report to the OECD, within 10 months of suspending liberalization (under derogations), actions taken or proposed to comply with obligations under Article 7(d)(i) (within 16 months in case of compliance with Article 7(d)(ii)). If the member finds, however, that it is unable to meet the objectives, it must indicate the reasons in a report that also states steps it has taken, and proposes to take, to restore economic equilibrium. The report would also include the results of actions taken and specifies any further time that the member considers that it will need to attain the objectives.

In addition to these arrangements, Article 2(b)(iv) of the OECD code states that, without unnecessary damage to the financial or economic interest of another member and with the avoidance of discrimination between other members, “a member may lodge reservations relating to the obligations … at any time, in respect of an item in List B.”

The value of these “safety valve” provisions lies in enabling member countries in difficulty to remain party to the code and not lose sight of the ultimate goal of liberalization. It encourages members to withdraw precautionary reservations by enabling them to restore their reservations later in the form of derogation, if need be. It also enables OECD member countries to benefit from liberalization measures taken by other member countries.

Annex E of the code deals with the decision of the Council in 1960 on measures and practices of reciprocity and discrimination. The decision recognizes that in a number of respects reciprocity has operated to broaden the effective sphere of liberalization, although a more extensive use of reciprocity and discriminatory practices in the area of inward direct investment and the right of establishment could reduce the effective sphere of liberalization among member countries. The decision made a record of all measures and practices concerning reciprocity and discrimination by member countries as of the date of the decision and states that80 “measures and practices … shall be progressively abolished without, in so doing, extending the scope of restrictions to inward direct investment or establishment.”

A periodic examination is required of the measures and practices of each member along with the reservations it maintains, if any. Periodic reviews and consultations with members are key instruments for implementing the code, while the code itself constitutes a yardstick against which progress can be measured. In the course of consultations with individual members, the nature and purpose of remaining restrictions are examined and discussed by the Committee on Capital Movements and Invisible Transactions. This process also provides a forum in which peer pressure for further progress is applied. Reports from such consultations are confidential and are submitted to the OECD Council, which either takes a decision recognizing the modification of restrictions applied by a member under the code or makes an appropriate recommendation.81 However, unlike the EU provisions discussed below, no time frame is set within which the original reservations must be removed.

The reservations lodged by member countries are contained in Annex B of the code. As of June 30, 1993, Luxembourg had no controls, while the Netherlands and the United Kingdom maintained certain limited controls on direct investment. The controls in the two countries related to ownership of airlines and vessels (the United Kingdom also had reservations on investment in certain broadcasting licenses). In addition to partial reservations on direct investment, Austria and Denmark maintained partial reservations on operations in real estate. In Denmark, the reservations on direct investment related to ownership of Danish flag vessels, while, in addition to a similar reservation, Austria also maintained restrictions on direct investment in banking (conformity to local needs or national economic interest), auditing, legal services, energy, and transport. Countries with the most reservations were, in ascending order, Iceland, Greece, Ireland, and Portugal.82

A comparison of the various reservations shows that most countries have progressively removed restrictions, particularly since the early 1980s. Denmark’s three reservations at the end of June 1981 on List A and four on List B were reduced to one on List A and three on List B by the end of December 1989 and to one each on Lists A and B by the end of June 1993. At the same time, the Netherlands had two and four reservations, respectively, on Lists A and B and only one by December 1, 1989. The maintenance or removal of controls can be put in two groups—EU members and other countries. Australia and New Zealand removed most controls in 1983 and 1984, respectively, although they still maintain partial reservations on a number of items.83 Turkey began dismantling its controls late in 1989–90, while the Nordic countries and Iceland have done so in the context of EFTA. Denmark and France had, by 1988 and 1989, respectively, removed almost all restrictions, while Austria, Italy, and Ireland took measures in 1988–90 in compliance with EU directives.

Almost all members have at one time or another taken advantage of Article 7 of the code to introduce restrictions temporarily in response to balance of payments difficulties, exchange rate crises, or unde-sired monetary developments. A number of countries invoked these derogation clauses to support measures to stem capital outflows (United Kingdom, United States, Denmark, France, Italy, and Sweden), while others did so to limit undesired inflows of capital (Austria, Australia, Finland, Germany, Japan, and Switzerland). The United Kingdom, which had no reservations as of the end of June 1981, had by December 1, 1989 made a partial reservation on direct investment regarding investment in air transport, broadcasting, and acquisition of U.K. flag vessels. The United States, which as of December 1, 1989 had only one reservation on List A (involving direct investment in atomic energy, broadcasting, air transport, domestic and coastal shipping, and thermal and hydroelectric power and geothermal steam), had by June 30, 1993 introduced two more reservations on List A (operations in securities markets and operations in collective investment securities) and one on List B involving operations in money markets. Finland, France, Norway, and Spain have also within the last 15 years temporarily put restrictions on operations not covered by reservations.84

The areas with the most reservations are the issuance of foreign securities on domestic markets and credits and loans unrelated to the international trade of the member country. In contrast, commercial credits and loans, personal capital movements, life insurance, and the physical movement of capital assets are almost unrestricted.

EU Directives

The treaty establishing the EU assigned lower priority to the liberalization of capital movements than to the elimination of restrictions on trade and the creation of a customs union. Impediments to capital move ments were to be eliminated progressively and “only to the extent necessary to ensure the proper functioning of the common market.”85 In contrast to the specific timetable laid down for the liberalization of trade, the treaty left it to the Council to decide the pace of progress in the liberalization of capital movements.

Until the adoption of the Single European Act in 1987, progress in liberalizing capital movements within the EU was based largely on two directives (issued in 1960 and in 1962) on capital transactions. These related directly to the exercise of the other basic freedoms, which called for a complete liberalization of foreign direct investment, commercial credits and guarantees, personal capital movements, and the acquisition of foreign securities quoted on a stock exchange. Countries that had already liberalized broader categories of financial transactions agreed to maintain such liberalization. Under these directives, there was no commitment to liberalize short-term capital movements unrelated to trade. Overall, relatively little progress was achieved, and toward the end of that period several countries introduced exceptional measures affecting previously liberalized transactions. By the early 1980s, only five of the ten member countries (Belgium, Germany, Luxembourg, Netherlands, and United Kingdom) had abolished all exchange controls on capital movements.86

Progress in liberalizing capital movements resumed in 1983 in the context of discussions of financial integration within the EU area. In the following year, the authorization process for exceptional arrangements applied to capital movements was tightened. These efforts culminated in the ratification of the Single European Act in 1987, and a target date of December 31, 1992 was established for creating a common area free from restrictions on the movement of goods, persons, services, and capital. The act specifically required that all restrictions on capital movements still in force be removed and that all forms of discrimination affecting the provision of financial services across all member states be eliminated. The act explicitly recognized that full liberalization of capital movements is a necessary condition for the creation and the proper functioning of the common market.87

The adoption of the Single European Act reflected broad agreement that full liberalization of capital movements, integration of financial services, and reinforcement of the European Monetary System (EMS) were preconditions for completing the single market. To achieve that goal, the EU strengthened monetary cooperation and convergence efforts and adopted measures to harmonize national rules and regulations with regard to the provision of banking and financial services and certain aspects of taxation (minimum value-added tax (VAT) and certain excises). In parallel, policy coordination and the implementation of safeguard arrangements were viewed as preferable to relaxing exchange rate discipline. Nonetheless, progress in this area was not considered a precondition for further liberalization of capital movements.

Forms of Controls Covered

When preparing the final directives for liberalizing capital movements within the EU, the Commission identified three broad categories of capital movement: (1) capital operations including commercial credits, direct investment, and various capital movements, all considered directly linked to fundamental freedoms of the common market; (2) operations in financial market securities, essential for the creation of a single European financial market; and (3) financial credits and operations in money market instruments, necessary for the establishment of a unified financial system of the European Union.

Unlike the OECD code, the treaty did not define what was meant by “movements of capital.” The practical application of the obligation to liberalize and the safeguard clauses that allowed exceptions were drawn up as directives by the Commission. The nomenclature of movements of capital was first annexed to the 1960 directive and was based on earlier work by the Organization for European Economic Cooporation. The directive ranked all movements of capital on four lists, each of which was subject to a different degree of liberalization; List A contained operations to be unconditionally liberalized at exchange rates as close as possible to the official rate; List B operations were also to be unconditionally liberalized but not necessarily at the official exchange rate; List C contained operations to be liberalized conditionally, in that restrictions could be reintroduced if such capital movements could disrupt the economic policy objectives of the member state; and List D contained operations in which member states made no undertaking regarding their liberalization except that they were obliged to notify the Commission of the rules governing them.

Lists A and B covered direct investments, investments in real estate, commercial credits and guarantees, personal capital movements, acquisition of foreign securities quoted on stock exchanges, transfers in performance of insurance contracts, and authors’ royalties, all of which were unconditionally liberalized.

Further liberalization of capital movements proceeded in two stages. The first stage was to complete the liberalization under the EU Law of the Capital Operations most directly necessary for the proper functioning of the common market and for the linkage of financial markets within the common market. This was enforced under the Council Directive of November 17, 1986, which set February 28, 1987 as the latest date for compliance. The key element of the second directive, adopted in June 1988, was the goal of full liberalization of short-term capital movements, regardless of whether they were linked to current account transactions, including monetary movements, shifts in leads and lags, and speculative positions.88 All the remaining restrictions were to be eliminated by the end of 1992. The EU directives on capital account liberalization therefore differ in an important respect from those of the OECD, because they embody forms of compulsion and compliance dates.

The second directive also sought to end the possibility of dual foreign exchange markets as well as the maintenance in the domestic regulations of member states of discriminatory forms of treatment relating to capital operations based on nationality, place of residence of the parties, or location of the capital invested. Moreover, EU residents were to be treated equally. Nonetheless, restrictions could still be imposed on nonresidents. The second directive reclassified the obligations within the rules of unconditional liberalization by merging Lists A and B, repealed the first directive of May 11, 1960, and set July 1, 1990 as the latest date for compliance.

Transitional Arrangements

To make it less difficult to bring all the authorized restrictions to an end at once, the directive ensured partial liberalization for countries with exceptional circumstances, such as time of accession to the EU, balance of payments difficulties, high external debt, or an underdeveloped national financial system. In this regard, under Article 5 of the June 1988 directive, transitional periods for compliance were given to Greece (1992),89 Ireland (1990), Portugal (1992), and Spain (1990), for a variety of reasons, including precarious balance of payments position, high external indebtedness, and less developed financial system. Article 3 provides a safeguard clause that permits the reintroduction of controls on short-term capital movements if they seriously endanger a member state’s monetary or exchange rate policy as follows: “where short-term capital movements of exceptional magnitude impose severe strains on foreign-exchange markets and lead to serious disturbances in the conduct of a Member State’s monetary and exchange rate policies, being reflected in particular in substantial variations in domestic liquidity----” The introduction of such measures does not require advance approval by the Commission and other countries. However, mutual consultations about adequate measures are required when dealing with disruptive capital movements to or from third countries. The member state may take protective measures as a matter of urgency or consult with the Commission to authorize these measures. In the former case, the Commission, after consulting with the member state, decides whether the measures should be continued, amended, or abolished. The protective measures can be applied for up to six months.

Protective measures can be taken on operations in securities and other instruments normally dealt in the money market; operations in current and deposit accounts with financial institutions; operations in units of collective investment undertakings; short-term financial loans and credits, and personal capital movements (loans); and physical import and export of financial assets.

The provisions of capital liberalization directives were incorporated in the Maastricht Treaty.90 Under the treaty, all restrictions on capital movements and payments within the EU and between the EU and third countries are prohibited, except for restrictions that were in place as of the end of 1993, which could be maintained until the end of 1995.91 In exceptional circumstances, when movements of capital to and from third countries can disrupt or threaten to disrupt the operation of the Economic and Monetary Union, the Council may adopt measures restricting the movement of capital to and from third countries, involving direct investments (including in real estate), establishment of operations, the provision of financial services, or the admission of securities to capital markets.

A progressive phasing of capital liberalization measures is envisaged for countries seeking EU membership. The association agreements signed between the EU and six Eastern European countries provide a framework for ongoing economic integration with the EU, including in the areas of trade in goods and services and the movement of capital and labor.92 During the transition period, the contracting parties agree to remove all restrictions on foreign direct investment, including on profit remittances, and on the repatriation and liquidation of these investments. In addition, in the first stage of that period, measures should be taken to create the necessary conditions for the increased application of EU rules on the free movement of capital, and no new restrictions could be introduced. During the second stage, the efforts will be intensified to enable full application of the EU rules on capital movements.

The association agreements include safeguard provisions that can be applied in case of serious balance of payments difficulties. Under such circumstances, countries can adopt restrictive measures on imports or capital movements for a minimum period absolutely necessary to remedy the balance of payments situation. However, no restrictive measures can be applied to foreign investment, in particular to the repatriation of invested amounts or associated revenues. Furthermore, the agreements allow for the introduction of restrictions on the granting or contracting of short- and medium-term credits by the associated countries as long as their currencies do not have convertibility according to Article VIII of the IMF, and to the extent that the restrictions are permitted according to their status in the IMF.

The full benefits of the liberalization of capital movements cannot be realized if investment decisions, regarding both direct and portfolio investment, are distorted by significant differences between member states in corporate and personal taxation of capital or taxation of income from capital. The positions of governments on the harmonization of taxation of income from capital differ widely. There is no agreement on how disparities in tax treatment will distort capital flows, while other countries are concerned about the loss of revenue that they would incur if their tax rates were aligned with those of the low-tax countries.

World Trade Organization

The WTO was established in 1995 to provide a common institutional framework for the conduct of trade relations among its members as contained in the associated agreements dealing with trade in goods and services and intellectual property.93 Membership in the WTO involves acceptance of several agreements, including the Multilateral Agreements on Trade in Goods (of which the General Agreement on Tariffs and Trade (GATT), 1994, is the best known), the General Agreement on Trade in Services (GATS), and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).94 The GATS includes provisions proscribing members from imposing restrictions on capital transactions related to the provision of services identified in such agreements.

Although the primary objective of these agreements is the freedom to provide services and not the related capital movements, the GATS is the first agreement of universal (as opposed to regional) application that proscribes certain restrictions on capital transactions. The GATS obligation on capital movements extends to particular capital transactions that are associated with “specific commitments” intended to liberalize trade in services.95

CFA Franc Zone

Countries adhering to the franc zone have maintained limited capital convertibility. The CFA franc zone was established at the end of 1945, although the current monetary arrangements with France date from 1973. Under these arrangements, the convertibility of the CFA franc is supported by an operations account maintained by each of the zone’s two central banks with the French treasury. Capital transactions between member countries, including France and Monaco, have been free of exchange controls, although capital transfers outside the zone are restricted and require approval. Inward capital transfers are free of restrictions except for foreign direct investment and borrowing transactions, which are subject to registration and authorization. Direct investment abroad and lending require the prior approval of the ministry of finance of a member country.

Article 2(d) of the OECD Convention, The OECD (Paris, 1963), p. 2.

A companion Code of Liberalization of Current Invisible Operations was adopted at the same time. In addition to covering a wide range of current payments relating to foreign trade, production, and business, and income from labor and capital, the code for invisibles also covers a broad range of service operations, including detailed treatment of the sectors of insurance, transport, tourism, audiovisual works, and now banking and financial services.

This is further enforced by Article 16, which allows a member to refer to the OECD if it considers that another member has taken discriminatory measures.

Because the goal of full liberalization is to be achieved progressively, members not in a position to comply immediately can lodge a reservation on the items. This can be done when a member joins the organization or when new obligations are added to the code.

The reservations here are mainly related to the establishment of subsidiaries or branches of foreign banks.

OECD council decisions have a legal effect, while recommendations do not formally oblige a member to act in a prescribed manner.

The reservations by Mexico are not contained in the 1993 OECD list because the country joined the OECD in 1994. Mexico’s reservations include inward direct investment, acquisition of real estate for residential purposes, purchases by nonresidents of domestic shares and other securities of a participating nature, operations in domestic currency, financial operations in foreign currency abroad by resident banks, and purchases of foreign instruments abroad by resident securities firms for their own account.

Australia: direct investment (including banking, real estate, and mass circulation), operations in real estate, operations in securities, operations on money markets, other operations in negotiable securities and nonsecuritized claims, and financial credit and loans. New Zealand: direct investment (including acquisition of 25 percent or more of any class of shares in a New Zealand com pany), operations in real estate, and operations in securities on capital markets.

Some of these reservations were made at the time of the 1989 amendment to the code.

See Commission of the European Communities, European Economy (1988), No. 36, p. 7.

However, Belgium and Luxembourg continued to operate a two-tier foreign exchange market.

Various aspects of the creation of a single European financial market are discussed in International Monetary Fund, International Capital Markets, Part II, Systemic Issues in International Finance, World Economic and Financial Surveys (Washington, 1993).

In a 1988 discussion of the related issues and the text of the directive, the IMF staff expressed the view that the directive is consistent with the IMF’s functions and its member obligations under Articles IV, VI, and VIII of the Articles of Agreement.

The transitional period for Greece was subsequently extended to June 1994, and Greece liberalized short-term capital in May 1994.

See Council of the European Communities, Commission of the European Communities, Treaty on European Union (Brussels, 1992), especially Article 73a-h, and Article 109h—i under Title II, including provisions amending the treaty establishing the EEC, with a view to establishing the EU.

Article 73b of the treaty explicitly states that all restrictions on payments and on capital movements between member states and between member states and third countries shall be prohibited.

In December 1991, the EU signed association agreements with the governments of Czechoslovakia, Hungary, and Poland. The agreement with Czechoslovakia was replaced by separate agreements with the Czech Republic and the Slovak Republic in October 1993, and similar agreements were concluded with Ro-mania and Bulgaria in February and March 1993. Association agreements with the Baltic countries were signed recently, but have not yet been ratified, while negotiations are under way on an agreement with Slovenia.

See Agreement Establishing the World Trade Organization, Article II, paragraph 1.

The Agreement Establishing the World Trade Organization, and associated agreements, was adopted as part of the Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, April 15, 1994.

Under the GATS, countries undertake commitments according to a positive list approach whereby they offer market access and treatment only for the service industries listed in their schedules.

Note: This section was prepared by Arto Kovanen and Dmitri Menchikov.

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