Economic significance of free capital movements

A sound understanding of some key economic considerations, as well as of the concept of the four basic economic freedoms in the Treaty of Amsterdam and its predecessor treaties are indispensable in order to appreciate fully the freedom of capital movement in Europe and beyond.

The free movement of capital allows for the most efficient allocation of the rare resource of capital in the economic process. It enables capital to circulate freely within an economic area and beyond. In an efficient capital market, capital flows to destinations and into investments where its use is most productive and thus yields the highest rate of return. Such process is referred to in economics as efficient allocation of resources. This need not necessarily be so.

An important consequence of this use of the principal economic freedom of free movement of capital is a significantly heightened competition among market participants seeking capital and attractive funding within an economic area. Such competition, however, does not stop at the door of the individual investor nor a public company seeking to raise capital. National and regional economic systems are being put into global competition for the most attractive funding source. Such competition can be fierce and may in some cases lead to a reduction or even complete loss of macroeconomic sovereignty of entire states.