×

Will Europe Impose Capital Controls?


With concern growing about the future of the euro zone, analysts are now debating ideas that, until recently, were considered unthinkable.

european-union-hourglass-200.jpg
LdF | Vetta | Getty Images

One topic being bandied about is the viability of capital controls.

Capital controls are used by governments to regulate the flow of money in and out of a country. They can prevent a mass exodus of capital and reduce the risk of financial crises.

Malaysia recovered from the Asian financial crisis quickly after its controversial decision to implement capital controls in September 1998.

David Mann, Regional Head of Research for the Americas at Standard Chartered Bank told CNBC he thinks euro zone capital controls are a possibility if things deteriorate further.

“There is no point in anyone claiming they know what’s coming next. It’s gone from something hardly mentioned a week ago to something that is being taken absolutely seriously enough to be running into a real scenario,” said Mann.

Mann said such a move would have to be implemented swiftly. “It has to be instant. Bank runs can literally be electronic — they happen at a touch of the button.”

Other analysts feel the need for speed is why formal capital controls are not on the cards for the euro zone. “All European Union members who signed the Maastricht Treaty would have to unanimously agree on the measures. Some would have to hold a referendum on the issue,” UBS Head of Global Economics Paul Donovan told CNBC.

In addition to a cumbersome approval process, Donovan feels such restrictions would not be effective. "If you impose capital controls, effectively, the monetary union is dead. Imagine if you couldn't move money from California to New York? It’s not gonna happen,” he said.

For now, the possibility of a sudden clampdown on fund flows is low on the list of concerns of professional investors. “I wouldn’t discount it totally but it is an unlikely event,” a London-based Global Credit trader who wished to remain anonymous told CNBC.

“Ultimately, they will muddle through, Greece won’t leave the euro zone and they will put deposit guarantees in place to stop capital flight," he said.

- CNBC's Lisa Oake