At this stage in 1993, well into the first year of the "completed" internal market, it is appropriate to reflect both back to the past and forward to the future. Looking back reminds one that the concept of the internal market was not invented in 1985 at the time of the Commission's landmark White Paper: "Completing the Internal Market".
Indeed, in the case of financial services, the foundations
were already being laid from 1973 with the first banking and insurance
directives; the first phase of liberalisation of capital movements was
earlier still. Nevertheless, 1985 was a very important milestone because
the White Paper of that year, and its list of the specific measures required
to complete the market with its matching timetable of actions needed by
the EC institutions and national governments up to the end of 1992, acted
as a major catalyst for accelerated progress. Accelerated procedures, introduced
to make this possible under the Single European Act of 1986 and the extended
use of majority voting, have resulted in a great leap forward in both the
quantity and quality of financial services legislation. Indeed, so far
as the "1992 Programme" (i.e. the programme set out in the 1985 White Paper)
is concerned, this has now been completed in respect of financial services
with the formal adoption by the Council in May 1993 of the Investment Services
Essentially the main objective has been to give practical
effect to three of the fundamental freedoms of the 1957 Rome Treaty, namely
freedom of capital movement, freedom of establishment and freedom to provide
services across borders. It is worth noting that the 1957 Treaty established
a close link between these by providing that "The liberalisation of banking
and insurance services connected with movements of capital shall be effected
in step with the progressive liberalisation of movements of capital".
It will therefore be clear that progress had to be made on both the capital movements and the financial services fronts more or less simultaneously and this was indeed achieved. Capital movements were further liberalised by a 1986 directive and then completely liberalised by the 1988 directive, now implemented by 11 Member States and due to be implemented by Greece from 1994. As for financial services the technique used has been based on the concept of "home country control" which recognises that the supervision of the overall financial soundness of a financial institution can best be carried out by the competent authorities of the country which is home to the head office. In order to ensure high standards of supervisory rules and a "level playing field" for the market this is accompanied by minimum harmonized standards of a prudential nature, as embodied for example in the directives on the solvency ratio for banks and the capital adequacy rules for investment services.
These two elements - home country control and minimum
harmonized standards - are the foundations of the technique known as mutual
recognition on which the completed internal market in financial services
now rests. What this means, in effect, is that Member States recognise
the licences (to carry on regulated financial services activities) issued
by other Member States as being valid within their own territories, thus
leading to the "single E.C. licence" for banking already in effect from
1st January 1993. The same technique has been used for investment
services and insurance although the single licences for these will come
into existence at a later date.
4. Main effects of the reform (1) - Freedom of establishment
Freedom of establishment is a Treaty right flowing from Article 52 EEC Treaty. This was indeed available before the recent reforms but only on the basis of non-discriminatory treatment of branches of other EC banks as compared with banks in the host country. Branches of EC banks in host countries were obliged to conform with all host country supervisory regulations, as though they were themselves locally incorporated banks.
This approach was economically inefficient in at least two respects. First the branch in the host country could be (and in most Member States was) obliged to provide and maintain locally an amount of so called "endowment capital" related to its local business activity (a costly technique). Second the host country rules relating to the scope of permitted banking activity were paramount, thus frustrating to a large extent the potential for innovation by new entrants in the markets of host countries.
Following the reforms of the 1992 programme both of these
major restrictions are swept away; endowment capital is now a historical
footnote and the minimum scope of permitted banking activity throughout
the E.C. has been agreed and defined. A Member State may choose to be more
restrictive than this minimum towards some or all of its own banks but
must recognise the licences issued by other Member States for any or all
of the "core banking activities"; thus the significance of the "EC single
5. Main effects of the reform (2) - Freedom to provide cross-border services
"Freedom of services" is also a Treaty right under Article
59 EEC Treaty, but as already noted it was linked to freedom of capital
movements. Until the reforms of the 1992 programme there was no EC secondary
legislation dealing with it. The position achieved now for cross-border
banking, from 1st January 1993, is essentially the same as for freedom
of establishment (without the requirement for a local establishment). Banking
services forming part of the list of core banking activities may be provided
across the border without a host country establishment by a bank whose
home country "single licence" covers those activities. The position of
investment services firms and insurance companies will essentially be the
same when the relevant directives (already adopted) are implemented.
6. Potential limitation on the two freedoms
The main potential limitation on the full practical exercise
of these internal market freedoms, is the need for the financial institution
concerned to respect applicable local (host country) laws which are justified
by reference to "the general good". Thus, for example, if in the interests
of consumer protection, local financial institutions in a given Member
State are not permitted to grant floating rate loans to individuals for
house purchase it could be argued that the rule should also restrict financial
institutions from other Member States who wish to offer their own types
of mortgage facilities on this local market. I make no specific prediction
here about the outcome of this particular hypothetical case. Inevitably
however the delicately balanced mechanism of the directives will be a catalyst
for change, as the burden of challenging a financial product which is lawful
on the producer's home market will fall on the host state.
7. Significance of the internal market programme
There is no doubt that over the years 1985-1992 a major change has occurred in the financial services market in the E.C. Elements of de-regulation and re-regulation have been undertaken simultaneously at a very intense pace. The regulatory structure in all 3 sectors is now fully up to date and is generally considered far more modern than that of our main competition, especially the USA. It is impossible to assess the macro-economic benefits at this stage and it is unfortunate that the completion of the programme has been overtaken by recession.
However, two personal observations could be made. How
much worse might the present recession have been without the undoubted
boost which the 1992 programme has had over recent years? How much slower
the recovery might be without the completed internal market structure on
which to build it?
8. The European Economic Area, Enlargement and Eastern Europe
The internal market was of course by no means the only major change in Europe in the years leading up to 1993. Talks with the EFTA countries have resulted in agreement on the extension of the main benefits of the internal market to these countries within the European Economic Area. The withdrawal of Switzerland has somewhat delayed entry into force of the agreement. Meanwhile four of the EFTA countries have applied for membership and negotiations are already under way for their entry around 1995.
Finally and perhaps least predictable back in 1985, the
Community is currently negotiating extensive co-operation agreements with
a number of East European States which did not even exist as sovereign
states at that time. Technical assistance is being provided in the financial
area, including the basic functions of central banking and payment systems.
9. Maastricht, monetary union and the future
A high priority will continue to be given to the internal
market in the financial area and in particular to improving its functioning.
The work currently being done by various E.C. institutions on payment systems
is an example of this. In addition much remains to be done to prepare for
stages 2 and 3 of EMU. Stage 2 of EMU begins on 1st January 1994 and central
bankers are devoting considerable resources to the preparation for the
tasks assigned under the new treaty to the European Monetary Institute.
In the banking field it seems likely that the subject of payment systems
will assume increasing importance. The internal market for investment services
and insurance will increasingly develop as the implementation dates for
the corresponding internal market measures fall due. While awaiting such
time as the conditions are right for monetary union the most promising
strategy for economic progress would appear to be the full exploitation
of the possibilities offered by the internal market, a process which is
still only just beginning.