The Return of Capital Controls as Emergency Tools to Counter Financial Crises - Iceland’s Crisis and the Constraints Imposed by the EEA Agreement

Iceland is a member of the IMF and of the WTO, a party to the European Economic Area Agreement, and a signatory of the OECD Code of Liberalisation of Capital Movements. Iceland is bound by Art. VIII IMF not to impose restrictions on current payments. Furthermore, under the GATS, Iceland cannot introduce restrictions on current and capital transactions in the sectors listed in its schedule of commitments. Moreover, being an EEA Member State, Iceland is obliged to guarantee the free movement of payments and capital among EFTA States and between those States and the European Union. Its commitment to cross-border capital mobility also comes from the OECD Code of Liberalisation of Capital Movements. As a result of this network of international economic law obligations, Iceland has to guarantee both current and capital account convertibility. However, when Iceland’s banking system and currency collapsed in 2008, the Central Bank of Iceland adopted a set of Rules on Foreign Exchange introducing restrictions on capital outflows and inflows. Capital controls became a key component of the emergency package, and lately of the programme supported by the IMF Stand-By Arrangement. The main purpose of the paper is to analyse the compatibility of said measures with international economic law rules which are binding on Iceland, and in particular with EEA rules on the free movement of capital. Does an integrated regional legal framework limit the number of emergency tools available at international level for countering an economic crisis? The research highlights that some provisions of the Icelandic Rules on Foreign Exchange not only amount to a forbidden exchange restriction under the IMF Articles, but also to a violation of EEA law. Even if in principle States are free to introduce capital controls under the IMF Agreement, the obligations arising from their parallel participation to a regional legal framework can limit the types of capital controls at their disposal. Presented at the SIEL 2010 Conference in Barcelona