Financial Services and Eastern Europe

Jens Viberg *

I. Introduction

Agreements have been concluded between the European Community and its Member States on the one hand, and Poland, Hungary, the Czech and Slovak Federal Republics, Bulgaria and Romania on the other. These agreements, which are referred to as EUROPE AGREEMENTS, are mixed agreements covering sectors of both Community and national competence. They are applicable for an unlimited period of time and seek to establish a free trade area between the Community and its Member States and each one of the above-mentioned countries. In the preambles to the agreements, the Parties recognise that the final objective for these countries is to become members of the European Community and that these agreements will help them achieve this objective.

The agreement with the Czech and Slovak Federal Republics has subsequently been split into two separate agreements which have just been initialled; this has not yet happened with Bulgaria. For the other countries, the ratification process is underway and at various stages of completion. Thus the Europe Agreements will come into force at different times.

The agreements have an identical structure and provide for a ten-year transitional period, split into two five-year stages.

II. Financial Services

Many provisions of the agreements relate to financial services, be it on establishment, operation, supply of cross-border services or other. They do not all impose immediate legal constraints on the Parties and some of them amount only to best endeavours clauses. None of the agreements contain obligations to eliminate non-discriminatory conditions - roll-back, for example - of an economic needs test. To each agreement is annexed a definition of financial services covered by the agreements. The definition corresponds to what the Community is offering in the current Uruguay Round negotiations on GATS (General Agreement on Trade in Services).


The transitional period of ten years mentioned above comes into play where the establishment of Community financial companies is concerned. The agreements foresee national treatment for the establishment of financial institutions "at the latest by the end of the transitional period". The only exception is found in the agreement with Romania, which provides for the granting of national treatment for the establishment of banks "at the latest by the end of the fifth year following the entry into force of this agreement".

On the other hand, from the entry into force of the agreements, each Member State shall grant national treatment for the establishment of financial institutions to the countries concerned.

There is thus a considerable asymmetry in the rights and obligations between the Parties in this respect. It is considered justified because of the overall objective of the agreements of eventual integration into the Community of the countries in question.

Establishment is defined "as regards companies, the right to take up and pursue economic activities by means of setting up and management of subsidiaries, branches and agencies".

National treatment is defined as "a treatment no less favourable than that accorded to its own nationals and companies".

These definitions are usual in international law and presuppose that an adequate legal structure is or will be in place. Community law does not distinguish between branches and agencies as opposed to the laws of some of the other Parties.

An Association Council, which consists of members of the EC Council and Commission on the one hand, and of members of the governments of the other Parties on the other, may either accelerate the granting of national treatment for the establishment of financial companies or delay it beyond the transitional period, as necessary.

The ten-year transitional period was accepted by the Community at the request of the other Parties, who felt that they needed time to reorganise their financial services sector and to become competitive before EEC financial institutions are allowed in. Developments may well show that the whole of the transitional period is not needed, either because they become competitive before on their own, or because it may be realised that a foreign stimulus might help achieve this.

Companies established in the territory of the other Parties, with the exception of Bulgaria, have the right to acquire, use, rent and sell real property. Since the Bulgarian constitution does not allow foreigners to own land, Bulgaria made a unilateral declaration to the Agreement stating that ownership can be obtained to a building erected on land and that ownership can be transferred separately from the land. Thus premises are not an obstacle to setting up business. They are also allowed to employ key personnel who are nationals of Community Member States.

The above, as well as that which follows on operation, standstill and supply of cross border services, also applies to joint ventures.


As regards the operation of companies already established on their territories, each Party grants national treatment from the entry into force of the agreements. Discriminatory treatment between national companies and foreign companies on the conditions for carrying out activities is therefore not allowed.

If the existing laws and regulations in Hungary, Poland and Romania do not grant national treatment for operation from entry into force of the agreements, these countries shall amend such laws and regulations to ensure national treatment at the latest at the end of the first stage of the transitional period (five years). A similar provision is not included in the agreements with Bulgaria and the Czech and Slovak Federal Republics. Thus the obligation to grant national treatment for the carrying-out of activities for already established companies will include new companies as they are granted right of establishment.


Most of the above would be negated if the countries concerned did not undertake a standstill commitment. Therefore, each agreement contains a provision stipulating that the adoption of new regulations or measures which introduce discrimination as regards the establishment and operation of Community companies in comparison to own companies in prohibited. However, this obligation only takes effect at the entry into force of the agreements and does not cover the period between the conclusion of the agreements and their ratification. It would, though, probably be contrary to the spirit of the standstill provision if discriminatory measures were to be adopted during that period.

As mentioned earlier, there is no obligation in any of the agreements to go beyond standstill and to eliminate non-discriminatory conditions - roll back, for example of an economic needs test.

Prudential rule

Each agreement contains the following specific rule on regulation for national treatment relating to prudential requirements or monetary policy:

"In respect of financial services, described in Annex ...., this Agreement does not prejudice the right of the Parties to adopt measures necessary for the conduct of the Party's monetary policy, or for prudential grounds in order to ensure the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed, or to ensure the integrity and stability of the financial system. These measures shall not discriminate against companies and nationals of the other Party in comparison to its own companies and nationals".

Supply of cross-border services

The provision relating to the supply of cross-border services is a best endeavours clause without any legal constraints. It stipulates that "The Parties take the necessary steps to allow progressively the supply of services by Companies or national who are established in a Party other than that of the person for whom the services are intended , taking into account the development of the services sectors in the Parties".

No time limit is set for achieving free supply of cross-border services. The agreements say that the Association Council shall take the measures necessary to implement progressively the above-mentioned provision.


It is foreseen that the Association Council in light of GATS shall ensure the Parties grant each other a treatment no less favourable than that accorded under a future GATS.

Movement of capital

Rules on establishment, operation and supply of cross-border services would be deprived of their substance if they were not accompanied by rules guaranteeing the movement of capital and current payments. Therefore each agreement contains an undertaking by the Parties to authorise, in freely convertible currency, any payments to the extent that the transactions underlying the payments concern, among other things, services.

An asymmetry is also in place in this area in that the Member States will allow the free movement of capital relating to direct investments made in companies formed according to the agreements, the liquidation or repatriation of these investments and of any profit stemming from them, as from the entry into force of the agreements. The Member States also undertake a standstill not to introduce new foreign exchange restrictions and not to make the existing arrangements more restrictive. On the latter issue, the countries concerned benefit from a transitional period of five years. On the first issue Poland, Hungary and the Czech and Slovak Federal Republics benefit from a five-year transitional period.

Approximation of laws

Each agreement recognises that the major precondition for the economic integration into the Community of the countries in question is the approximation of the countries' existing and future legislation to that of the Community. Special mention is made of banking law and financial services.

Money laundering

The Parties also agree to co-operate on money laundering with the purpose of establishing suitable standards equivalent to those adopted by the Community and international fora in this field.

Dispute settlement

Each of the Parties may refer any dispute relating to the application or interpretation of the agreements to the Association Council. In case of non-settlement a binding arbitration procedure is foreseen.

III. Co-operation

All Europe Agreements have special provisions on Economic Co-operation, including for the area of financial services. Amongst other the co-operation shall focus on the harmonisation of the accounting systems with European standards and the harmonisation of the supervision and regulation system for banking and financial services. Technical assistance and training will be provided for.

PHARE is the financial instrument set up to provide for the technical assistance. Since the start of the PHARE programme in 1990 the total sum allocated to the financial services sector in the five countries amounts to about 80 million ecus. An annual amount is allocated on the Community's budget.

The money is spent on programmes requested by the countries. The demands have concerned notably the banking sector and covered the areas foreseen by the Agreements. Special emphasis has been put on legislative assistance and assistance to the supervisory authorities with special training programmes in each country.

Each programme includes provisions relating to the supervision of its carrying out. Due to problems in the countries concerned of a structural and administrative character as well as to the internal Community decision making process only about 30% of the above mentioned sum has so far been effectively disbursed.


* Commission of the European Communities, Directorate General Internal Market and Financial Services - General Matters and co-ordination - External dimension of the internal market and financial services. (DG XV A-4). Rue de la Loi, 200 - B-1049 Brussels. Views expressed in this article are those of the author and do not necessarily correspond with those of the Commission of the European Communities.