The Impact of Legislation and Regulation on the Freedom of Movement of Capital in Estonia, Poland and Latvia

Article 56 of the EC Treaty requires Member States to remove restrictions on the free movement of capital between States and between States and third countries, with few exceptions. This research investigates to what extent Estonia, Poland and Latvia have complied with the European legislation, and whether any restrictions on the free movement of capital that these Member States have maintained affect capital flows to and from these countries. A functional comparative law method is used to inspect the national legislation and regulations for compliance with EU Law on the free movement of capital. National laws are compared for the degree to which they restrict such free movement, also using a functional method. A legal index is constructed from these differences in national laws, and is subdivided by direction and location of capital flows and by business sector. A graphical method is used to compare these indices with the corresponding cross-border capital flows to and from the three States. A questionnaire is sent to companies in the relevant sectors to test the research results. Estonia and Poland limit cross-border capital flows to a similar extent, but less than Latvia. National law restricts flows between these States and third countries more than within the EEA, but some laws concerning the provision of services to and from third countries are absent. The level of national legal restriction to the movement of capital is inversely related to the volume of cross-border capital flows. The validation study results tend to support these findings. The research affords evidence of originality both by discovering new facts in the compliance of national law with EU law and by the exercise of independent critical power in the reasoning applied both to such compliance and to the analysis of the effect of the capital restrictions on capital flows.