Thursday, 20 August 2015

Putting the cart before the horse: a doomed constitutional strategy for negotiating the T-TIP

Emanuela Matei*

* Associate Researcher at the Centre of European Legal Studies, Bucharest. Juris Master in European Business Law (Lund University, June 2012), Magister legum (Lund University, June 2010), BSc in Economics & Business Administration (Lund University, June 2009).


On 18 June 2015 the European Commission requested the termination of the intra-EU bilateral investment treaties (BITs) concluded by Austria, Romania, Slovakia, Netherlands and Sweden. The Commission argued that due to their accession to the EU, Member States accepted that relations between them as to matters within the scope of conferred powers are, as the CJEU said in Opinion 2/13 (on EU accession to the ECHR) “governed by EU law to the exclusion, if EU law so requires, of any other law”.

A common feature of the European BITs and free trade agreements (FTAs) is the presence of a clause on investor-state dispute settlement (ISDS), which may involve concerns of inequality before the law in the context of a limited access of individuals to the judicial system of the EU. Moreover, issues of substantive discrimination are prompted by a frequently reaffirmed superior level of protection of investment under the BIT compared with EU law.

In 2003, the Commission, the U.S. government and the acceding states from Central and Eastern Europe – apart from Hungary and Slovenia – signed a memorandum of understanding, which aimed to eliminate the possibility that American investors would use the BITs in order to challenge regulatory or administrative measures adopted by the Member States with the aim of complying with EU law. By doing that the Commission has shown awareness concerning the imminent clash displayed by cases like Micula, Eureko or Eastern Sugar.

In Micula v Romania, ICSID Case No. ARB/05/20, the relevant law is the Romania-Sweden BIT ratified in 2003, four years before the accession of Romania to the EU. The award issued in this case ordered Romania to pay damages of approx. EUR 83 million (RON 367.4 million). The facts of the case depict the pre-accession situation and the promotion of investments in specific disfavoured regions. Together with several other cases – Electrabel, AES, and EDFMicula reflects a specific type of incompatibility: the clash between the state aid prohibition in EU law and the maintenance of a preferential regime ordered by the international investment law regime instituted by the BIT network. (For more on Electrabel, see the analysis of Matei and Ciurtin here).

The incompatibility with EU law of the fiscal advantages offered to investors was established first by the Romanian Competition Council and later by the Commission and the fiscal regime was abolished before the accession. This act of abolition triggered the dispute before ICSID (the International Centre for the Settlement of Investment Disputes).

The European Commission participated as amicus curiae in the ICSID-proceedings, though the arguments brought by it were not admitted. A different conceptual understanding of the principle of legitimate expectations is the main source of conflict. In EU law, a state aid measure must be notified and approved and only afterwards the beneficiary may enjoy the protection derived from the principle of legitimate expectations.

In the interpretation of the arbitral tribunal, on the other hand, no matter that a state measure is implemented in breach of EU law, the investor is entitled to protection. In March 2015 a Commission Decision ordered the recovery of state aid. Romania had already paid a part of the damages awarded by the arbitral tribunal. The payment constitutes illegal state aid and it must be recovered. By complying with the ICSID-award, Romania would fail to defer to the Commission Decision.

In Eastern Sugar Netherlands v CzechRepublic, SCC Case No. 088/2004, the relevant law was the Agreement on encouragement and reciprocal protection of investments between Kingdom of the Netherlands and the Czech and Slovak Federal Republic, which was ratified in 1992. This case presents a typical example of incompatibility: the clash between quotas imposed by EU on agriculture products and the requirement to maintain a preferential regime for the foreign investor.

The arbitral tribunal interpreted the Vienna Convention on the Law of Treaties (VCLT) finding that the subject matters treated by the BIT and the EU law were dissimilar, the parties did not mean to terminate the BIT and the BIT and the EU Treaties were compatible. It awarded damages of EUR 25.4 million for loss of sugar quota attributable to the Czech Third Sugar Decree of March 19, 2003.

The defendant argued inter alia that post-accession damages should not be made subject to arbitration, since they fell within the exclusive jurisdiction of the CJEU according to Article 344 TFEU. The tribunal noticed that the European Commission did not start infringement proceedings against the Netherlands and the Czech Republic for failing to terminate their BITs as it would have been expected, if the BIT had been incompatible with Article 344 TFEU. The argument of the defendant that the BIT had been implicitly superseded by the acquis communautaire when the Czech Republic acceded to the European Union was rejected. It must be retained that the inaction of the Commission and the parties has been interpreted by the arbitral tribunals as a tacit endorsement of compatibility.

In Eureko Netherlands v Slovak Republic, UNCITRAL, PCA Case No. 2008-13, the applicable law is the same as in Eastern Sugar. Achmea, previously Eureko, is a Dutch insurer and the facts of the case refer to the liberalisation of the Health Insurance Sector in 2004. In late 2006, the newly elected Slovak government sought to reverse the liberalisation of 2004. Slovakia claimed that the arbitration clause was incompatible with EU law, while the arbitral tribunal reasoned that no provision of EU law actually prohibited investor-state arbitration. The arbitral tribunal awarded EUR 22.1 million damages.

The arbitral tribunal found in its decision of 7 December 2012 that the BIT was valid and compatible with EU law and the dispute was arbitrable despite the relevance of EU law. Investors were granted more extensive rights under the BIT compared with EU law and the arbitral tribunal found that this inequality stayed in line with law. Hence, the unequal treatment of EU investors seems to be contingent to the special character of protection, which a foreign investor is habitually entitled to claim in conformity with the BIT definitions.

As to the interpretative monopoly of the CJEU, the Frankfurt Court of Appeals (Oberlandesgericht) ruling on the matter of validity of the ISDS-clause in the Netherlands-Slovakia BIT found that the exclusivity enshrined by Article 344 TFEU did not cover investor-to-state disputes (see also my comments here). The German court did not refer the question for a preliminary ruling, even if the interpretation of Article 344 TFEU should reasonably have been submitted to an examination under Article 267 TFEU.

Intra-EU BITs

Firstly, the intra-EU BITs came into existence mostly as the result of the EU accessions of 2004, 2007 and 2013, only two intra-EU BITs being concluded between old (pre-2004) Member States. Even if the incompatibility manifests itself later – at the level of litigation – thus the conflict becomes more dramatic after the accession, in substance, the incompatibility between the EU conceptual framework and the BIT philosophy precedes these accessions. Hence, it would be reasonable to ask the question why the legal status of the intra-EU BITs has not been discussed during the pre-accession period in a more transparent and well-founded manner.

Moreover, most BITs contain sunset clauses that instruct an undisrupted protection in relation to investments already in effect. The termination would only have force for the future investments, since the investors may rely on the provisions of a BIT for periods of usually 15-20 years from the date of termination (see further my comments on Romania's termination of its BITs). The accession of the post-2004 Member States was not an unprepared sudden decision, but a process with a duration of 9-12 years. The incompatibility with EU law has been hanging over the heads of the new Member States as a veritable Sword of Damocles. Thus, the intra-EU BIT disputes should not be depicted as anomalies. They could have been prevented by a more pre-emptive approach.

External BITs

The Acts of Accession – for all thirteen newer Member States – provide that “with effect from the date of accession, [the state] shall withdraw from any free trade agreements with third countries”. According to Article 6(9) and Article 6(10) of the corresponding protocols, if an agreement signed previously cannot be brought in line with EU law, the Member State in question shall withdraw from it (see the Protocol on Romanian and Bulgarian accession). The Acts  concerning the conditions and arrangements for admission from 2003, 2005, and 2012 speak a clear language. The acceding states had to denounce any trade agreement they might have concluded and become part of the free trade agreements concluded by the EU. Would it not have been more appropriate to provide a similar obligation with regard to the extra-EU BITs?

Having in mind the sunset clause, mentioned above, the effect of termination cannot be direct and immediate, so an earlier handling of the incompatibility issue would have reduced the time horizon for potential disputes. It must be reminded that the previous wave of accession, when Sweden, Finland and Austria joined the EU, also generated an obligation to align the BITs signed by these countries with the obligations imposed by Article 351 TFEU and Article 4(3) TEU[11] (see the judgments in Commissionv Austria, Commission v Sweden and Commission v Finland). The potential conflict is no novelty.

The general incompatibility of the BITs with Union law – discussed below – poses moreover the question whether Regulation 1219/2012, which concerns the investment treaties between EU Member States and non-Member States, actually did clarify their legal status. My criticism refers to the fact that instead of giving highest priority to the problem of general incompatibility, the Commission dealt first with specific examples of incompatibility. Such concrete examples relate for instance to the exclusive prerogatives of the Council to regulate capital movements under Article 64(2) TFEU or Article 75 TFEU. The Commission’s diplomatic strategy has placed the cart before the horse i.e. the specific prerogatives of EU institutions before the protection of the foundation of the EU law.

Moreover, the incompatibility can damage the effort of establishing a level playing field for the outbound investments. The investors from the Member States having no BITs with countries like Chile, Japan, Korea, Canada or most recently, the U.S.A. will not enjoy the same level of protection not being able to escape certain restrictions imposed by the relevant FTA. The general incompatibility entails a high level of complexity, therefore it cannot be surprising that such intricate consequences have occurred.

The reversed logic of the relation between intra- and extra EU BITs

Investment protection was the main tool for economic reconstruction during the post-WWII era, which constituted the dominant function of the Friendship, Commerce and Navigation treaties (see the Vandevelde paper in the notes). The next big event was the signing of the GATT in 1947, which marked the shift from bilateral to multilateral negotiations and an expanded scope of talks beyond tariffs. The GATT and the EEC (now-a-days, the EU) – founded in 1957 – contributed to deeper economic integration among Western countries, thus substituting and surpassing the Friendship, Commerce and Navigation treaties subsequently seen as less than ideal vehicles for trade promotion. The network of BITs emerged as means to ensure investment protection outside the ambit of the GATT and the EU. The overlapping between BIT protection and EU law has not been intentional.

As mentioned above, the Commission took the initiative of signing a MoU with the U.S. government being aware of the existence of incompatibilities between the European BITs and EU law. Areas of law, which have been specifically named in the MoU are: the economic freedoms, state aid rules and the obligations imposed by the EU treaties in relation to third countries.

Article 351 TFEU, which governs the relationship between EU law and the pre-existing treaties between Member States and non-EU States, gives expression to the obligation of the Member States to eliminate all incompatibilities with EU law resulting from extra-EU BITs. Then again, the Treaty of Lisbon does not overtly consider the status of the intra-EU BITs. Article 4(3) TEU may be nonetheless useful for this purpose. Some arbitral tribunals interpreted Article 351 TFEU as inferring paradoxically a more lenient regime for the intra-EU BITs.

By not opening earlier infringement proceedings or not explicitly placing the intra-EU network of BITs outside the law, the EU institutions did – according to the arbitral tribunals – tacitly endorse the intact validity of these BITs and the jurisdiction of the arbitral tribunals for that matter. The contrast between alter- and outer legality is of the essence, since the ISDS exists as an alternative to, not a substitute for, the domestic judicial system.

General incompatibility with EU law

From a purely legal perspective the situation of double standards covering areas of law defining the very foundation of the Union – the economic freedoms and the transjudicial dialogue based on sincere cooperation and mutual trust – are direct threats to its political integrity and the autonomy of the EU legal order. The risk of jeopardising the autonomy of the Union legal order is the consequence of an extant parallel international order that does not have to bring its rulings in line with the interpretation of EU law adopted by the CJEU.

It must be mentioned as well that usually the conceptual conflict between international law and EU law relates to the contradiction between reciprocity and the EU federal principles of autonomy, conferral and subsidiarity. However, the legal regime represented by the European BITs has been characterised by asymmetry being designed to protect the interests of investors from the capital exporting countries against the whims of the unstable governments in the capital importing countries. This is why, there are not many BITs signed between pre-2004 member states and the focus of the Commission has been initially set on the BITs signed by an acceding state with third countries.

The transition from the pure intergovernmental set of rules to a more federal agenda engendered legal discrepancies, negative interlegality and significant costs for the parties directly involved in these disputes. However, on the state-to-state level, it is obvious that the EU accession of the capital importing countries to the CEE provided a more substantial and comprehensive safeguard for the capital exporting countries in the North-western Europe than a BIT would ever be prone to afford. It is difficult to support the argument of practical significance of BITs in the constitutional framework of the European Union by using legal terms.

The only persuasive argument is the protection of legal certainty of the investment regime within the EU, though the strength of it has only been tested by the arbitral tribunals against the VCLT (Articles 59 and 30 of that Convention). The conflict of laws assessment has constantly reached the conclusion that each BIT has not been displaced by the EU treaties. The Vienna Convention does neither bind the Union nor all its Member States. It has relevance only as a reflection of the rules of customary international law, which are binding upon the Union institutions and form part of the Union legal order (see CJEU judgments in Racke, El-Yassini and Jany). From this point forward the matter becomes one of harmonious interpretation, a method which requires a deferential attitude towards the legal identity of the challenger. The ECtHR for instance follows the jurisprudence of the CJEU and the opposite is true, even if no binding agreement has been signed and no hierarchic structure has been crystallised between them.

In its Opinion 2/13, the CJEU did not agree to assign the power to interpret EU law provisions to the final adjudicator in matters of human rights – the ECtHR – affirming once again that the interpretation of EU law must remain the exclusive prerogative of the Union supranational judicial authority (see the discussions on this blog by Peers and Barnard). So, how could someone expect the CJEU to agree with a transfer of powers to a non-judicial and temporarily constituted entity, which is ineligible to refer to the CJEU for a preliminary ruling under EU law? (see the judgments in Pretore di Salo, Pardini and Corbiau) How could it be possible to do that without contradicting itself in the assessment of a fundamental matter?

As van Harten says: “The powers shifted to arbitrators are among the highest that any adjudicator can exercise. They involve the final determination of the legal boundaries of sovereign authority, as exercised by any legislative, executive, or judicial body, based on broad standards of foreign investor protection. They can lead to the assignment of potentially vast amounts of public funds to private actors, usually large companies. They are backed by an international enforcement system that is more powerful than that of domestic or international courts. They are subject to very limited judicial review or no judicial review at all, depending on the arbitration rules under which the foreign investor chooses to bring its claim”.

The possibility to obtain damages for state or supra-state non-contractual liability within the EU is narrowly defined, thus in a similar situation of (for example) expropriation without compensation, an investor under a BIT agreement would enjoy a higher degree of protection being able to obtain substantial damages as underlined by van Harten above. So should the same enhanced level of protection be granted to all investors no matter if their situation is covered by a BIT or not? In Eureko the claimant declared explicitly that it preferred to use the arbitration solution offered by the BIT instead of the judicial path offered by the EU system and the arbitral tribunal recognised that a higher level of protection is guaranteed under BIT-regime.

T-TIP: Will the cart be placed on the spot?

While the Council believes that the new legal framework should contain the pre-existing investor guarantees in BITs, and the Commission also supports ISDS, the EP has moved towards opposing it in its present form, asserting in 2013 that future EU investment agreements should include an ISDS-clause, only if it were justifiable in the light of a case-by-case assessment. At the most recent EP consultations, Bernd Lange – rapporteur on TTIP for the EP’s international trade committee (INTA) – affirmed exultantly: “We have placed the extrajudicial arbitration in the dustbin of history. It is clear that private tribunals have no future in trade agreements. And we will work on a new system, which corresponds to a public court”.

Kleinheisterkamp and Poulsen proposed in their turn three distinct patterns for investor protection in the T-TIP. The first choice – no greater rights – corresponds to the American trade policy adopted by the 2012 US Model BIT.

The second pattern – the Australian ISDS model – matches the proposal of most Committees of the European Parliament being characterised by default reliance on domestic courts supplemented by state-to-state dispute settlement and institutionalised consultations concerning the domestic regimes of investor protection.

The third pattern would be in tune with the European Union constitutional structure as to the choice to allow primarily the domestic courts to decide on the legality of public acts, then it reflects the American philosophy with regard to binding state interpretations and filter of frivolous and obviously unmeritorious claims (see Tietje and Baetens, in the notes; compare to the Bipartisan Congressional Trade Priorities and Accountability Act 2015, p 14). The possibility to review the legality of state measures at the level of domestic courts would enable them to refer for preliminary ruling, which is key for the constitutional autonomy of the EU.

In this sphere, flexibility and consistency must go hand in hand and perhaps the Europeans could extract some relevant knowledge from the developments accumulated by the United States during the past three centuries. A comparative historical study could be a beneficial groundwork for achieving an improved insight into the matter of trade agreements authority. As the EU-BITs array of contradictions perfectly shows, despite its apparent political cleverness, the strategic move of putting the cart before the horse would be an unfortunate decision as regards the T-TIP negotiations.

Barnard & Peers: chapter 24

Art credit:


Kenneth J. Vandevelde, ‘A Brief History of International Investment Agreements’ UC Davis Journal of International Law & Policy 12, no. 1 (2005): 157, 165-166.

Christian Tietje and Freya Baetens, ‘The Impact of Investor-State-Dispute Settlement (ISDS) in the Transatlantic Trade and Investment Partnership’, 26 June 2014, p. 127. Compare with the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (TPA-2015), p. 14.

Friday, 31 July 2015

The Calais crisis: which Member State is responsible?

Steve Peers

Several thousand migrants are living in poor conditions near Calais, many apparently intent on making it to the UK. Their attempts to find passage via the Eurotunnel are severely delaying travel on both sides of the border. Which country is responsible for them: the UK or France?

At the outset, we should note that this is in a way a clash between two different types of movement within the EU. On the one hand, we have the free movement that the EU specifically tries to encourage: the free movement of goods in the lorries, persons in the trains, and transport services in either context. On the other hand, we have what the EU calls ‘secondary’ movements of (potential) asylum-seekers, which it specifically tries to discourage. EU internal market law is adopted to facilitate the first type of movement, while EU asylum law is harmonised to reduce the incentive for the second type.

Of course, the migrants don’t actually want to shut EU free movement down, since that would defeat their whole purpose. They merely want the lorries to slow down long enough to stow away on board, then continue on their journey – in effect bringing the two types of movement together. It’s the government attempts to prevent this that leads to near-gridlock.

But which of those governments is responsible? Let’s examine the issue first from the migrants’ perspective, and then from the free movement perspective. (While some consider the word ‘migrant’ offensive, I will continue to use it. In my view, it simply refers to a category of people, like teachers or nurses. It would make sense to refer to them as ‘asylum-seekers’ or ‘refugees’ only if it were clearly the case that almost all of them had applied for asylum or qualify as refugees; the available information doesn’t indicate this clearly enough. The word ‘migrant’ doesn’t deny their humanity; it simply explains their situation.)

Immigration and asylum law

Some of the migrants have applied for asylum in France, and so their position is governed by EU asylum law. This includes the Dublin Regulation, which determines which Member State is responsible for their application. That may not be France, but rather the Member State which they first entered – if France can prove that they entered there. If France cannot prove that another Member State is responsible, then it must assume responsibility. The UK would only be responsible for their applications if they have close family members in the UK, living there as refugees or asylum-seekers.

In the meantime, while the asylum-seekers are on French territory, the EU’s Directive on reception conditions for asylum-seekers applies. The EU Court of Justice has specifically ruled, in a case involving France, that this Directive applies to the State where asylum-seekers are currently located, even if the Dublin rules say those asylum-seekers should be transferred to another Member State. It only applies to that other Member State once the asylum-seekers are actually transferred there. This ruling obviously applies a fortiori to asylum-seekers who simply want to travel to another Member State and apply there instead. The whole point of the Dublin Regulation is to deny asylum-seekers exactly that choice. Although the Regulation fails epically in practice to stop asylum-seekers trying to choose the State they would like to apply in, the Directive still applies to ensure minimum living standards for asylum-seekers in the State they are present in.

What does that mean in practice? The Directive requires the Member State where the asylum seekers are present to ensure basic standards as regards welfare and accommodation, among other things. It appears from press reports that these standards are not respected as regards the migrants near Calais.

Furthermore, the latest EU Directive on asylum procedures, which applied from last week, sets deadlines to deal with asylum claims. That part of the Directive doesn’t apply until 2018, but it could be argued in the meantime that the principle of effectiveness of EU law (which the CJEU has frequently applied in immigration law cases) requires asylum claims to be dealt with efficiently, not just ignored.  As for the substance of asylum law, some press reports suggest that France gives asylum to Eritreans much less often than the UK (and much of the rest of the EU). This may be due to a flawed application of the EU’s Qualification Directive. If this is not being fixed in the French courts by an asylum-seeker’s appeal or a judicial review by NGOs, then the Commission should identify the specific error in interpretation of the law and bring infringement proceedings against France.

But not all of those migrants have applied for asylum. For those people, since it seems unlikely that any of them are legal migrants, this must mean that they are irregular migrants. Their position in France is therefore governed by the EU’s Returns Directive, which specifies that the Member States must issue irregular migrants with a return order and try to enforce their expulsion to a country of origin or transit as soon as possible. The EU Court recently ruled that Member States could not simply issue irregular migrants with a fine and make no effort to remove them. It must equally follow that Member States cannot turn a blind eye to their existence, when (as in the Calais case) a large number of them are openly staying on Member States’ territory.

The Returns Directive does not create an absolute obligation to remove irregular migrants. First of all, a Member State can choose to regularise their position at any time. Secondly, if they apply for asylum, EU asylum law applies, until the end of the asylum process, when they are either recognised as needing protection or their application fails its final appeal. In the latter case, the Returns Directive then applies again. Thirdly, it may prove impossible in practice to remove them to their State of origin or transit, because there is not enough proof of where they come from.  In that case, they remain in a kind of limbo, unless the State chooses to regularise them. Irregular migrants are entitled to emergency health care and essential treatment of illness during their stay. As far as we can tell from press reports, it does not appear that the French authorities are making any active effort to return the irregular migrants in Calais to their countries of origin or transit pursuant to the Directive.  

Free movement law

The CJEU has ruled, in a case involving France, that Member States have a responsibility to prevent free movement of goods being disrupted by private individuals. While States have a margin of discretion exactly how to deal with that private behaviour, it is not unlimited. In that case, farmers’ groups had been vandalising lorries full of other Member States’ produce for years on a regular basis, and many of the perpetrators were known to the police. France was therefore liable for doing nothing very effective to stop this. It was compensating the victims, but this was not enough.

On the other hand, in the case of Schmidberger, Austria was not liable for allowing a disruption to trade by private protesters who briefly blocked a transit route. According to the CJEU, the protesters’ right to demonstrate overrode the free movement of goods, given that the disruption didn’t last very long.

What about industrial action? This is also a separate source of the current restrictions on movement between the UK and France. On this point, the CJEU has been quite critical of trade union action that restricts free movement: in the controversial cases of Viking Line and Laval, it ruled that while EU law recognized trade unions’ right to strike and take other collective action, these rights were easily overruled by EU free movement rules. But those cases concerned the freedom of establishment and free movement of services; the current strikes in France affect the free movement of goods. An EU Regulation adopted after the earlier French case states that while States have an obligation to deal with private disruptions to the movement of goods, this is without prejudice to the right to strike.

Applying these cases to the current problems at the UK/France border, it’s not clear whether the disruptions caused by strikes are an unjustifiable restriction on free movement.  The strikes seem only to concern pay and conditions, whereas in Laval and Viking Line, while the disputes were also indirectly about pay and conditions, they were mainly directed at shutting down free movement due to perceived ‘social dumping’.

What about the disruptions linked to the migrants’ attempts to travel to the UK?  While EU law does recognize a right to asylum, it’s possible to apply for that right in any Member State, and so it is not necessary to travel to the UK to that end. The number of migrants would surely be reduced if France applied its obligations to: process asylum applications; decide on Eritrean claims correctly; and remove irregular migrants who had not applied for asylum. France must also extend basic standards of welfare and housing to asylum-seekers, whether that acts as a 'pull' factor or not. 

Is the UK liable in any way? The UK does exercise border controls on French territory, pursuant to a treaty between the two countries on ‘juxtaposed controls’, agreed in the context of the Channel Tunnel. But the UK’s obligations under that treaty do not extend to admitting asylum-seekers or other irregular migrants who want to use the tunnel to travel to the UK. More broadly, the UK’s border checks in France don’t turn any part of France into British territory, just as the reciprocal French border checks in the UK don’t turn any bits of Kent French, or transfer St. Pancras station to the Paris metro system.

So France is responsible for the impact on free movement, due to its separate breaches of EU immigration and asylum law. This shouldn’t be seen as a selfish or parochial conclusion; after all, it’s not really radical to say that States are generally responsible for what happens on their territory. That’s the normal rule of public international law, and it’s linked to the basic principle of State sovereignty. The EU rules in this case reflect that principle.

Having said that, allocating responsibility does not as such solve the problem. It would be open to the French government to denounce the treaty on juxtaposed controls, with a negative impact on the UK. So it makes sense for the UK government to offer a contribution to solve the problem, even if it is not obliged to do so. The government has already accepted this principle, paying for the construction of a security fence. And it would equally make sense to make a contribution as regards immigration issues, for instance the costs of removal or basic support, linked to a requirement to move to other parts of France to receive that support.

Barnard & Peers: chapter 26
Photo credit: BBC  

Thursday, 30 July 2015

National parliaments and the “Five Presidents’ Report’: The long road towards the democratization of EMU

Ton van den Brink, Associate Professor, University of Utrecht

The recent ‘Five Presidents’ Report’ contains far-reaching proposals to deepen the EU’s Economic and Monetary Union (EMU), which have been analyzed here. These proposals also have far reaching consequences for national parliaments. The much needed democratization of the EMU requires national parliaments to be assigned with stronger rights than the proposed intensification of ‘dialogues’.

What is at stake for national parliaments? The report proposes to come to a ‘system of further sovereignty sharing within common institutions’ (p. 5). This system would include, inter alia, a further Europeanization of economic policy coordination, aimed at economic convergence of the Euro area. To that end, the European Semester would be restructured and national ‘Competitiveness Authorities’ would be set up in the Eurozone Member States. The proposals to establish a Fiscal Union include the creation of an advisory European Fiscal Board and a common macroeconomic stabilisation function to ‘better deal with shocks that cannot be managed at the national level alone’. This last element is similar to the tax authority proposed by German Minister Gabriel and French Minister Macron as part of their plea for a radical integration of the Eurozone. It is unclear, however, how the more long term perspective of creating a European treasury would relate to national treasuries.

There are more unclarities which make it difficult to assess how national parliaments would exactly be affected. The European Fiscal Board would, for instance, only have an advisory role. The general direction of the proposals is, however, clear. The proposals would increase control of EU institutions over national policies. Thus, a further Europeanization of economic policy making would be the result. Second, the technocratic nature of decision making would be strengthened. The further expansion of ‘rule-based cooperation’ and the mandates of the new bodies would significantly contribute thereto.

Europeanization and technocratization pose challenges for national parliaments. These are not addressed, even though the report underlines that democratic legitimacy and accountability should be the corner stones of the EMU. The proposals in this regard do not add much to the already existing ‘six-pack’ and ‘two-pack’ arrangements and in any case do not extend beyond ‘streamlining’ procedures and the strengthening of ‘dialogues’.

The answer to these challenges cannot be the European Parliament, at least not the European Parliament alone. It is true that the executive federalism that may be witnessed in the field of economic policies requires a better position for the European Parliament as well. But the European Parliament cannot substitute national parliaments in economic policy making. First, there is no real solution for the role of the European Parliament - representing citizens from 28 Member States - in decision making on measures that are limited to the Euro area. Second, a substantial part of economic policy making is country specific. This will remain so, even though the Five Presidents’ report contains proposals to strengthen the euro area wide dimension of economic policy making. National parliaments certainly qualify as the most obvious institutions to exercise democratic control over the country specific part of economic policy making in the EU. Thirdly, national parliaments’ constitutional rights are affected in a very concrete manner by the proposals. Thus, strengthening their role would also contribute to compensating that loss.

Taxation and budget rights are among the most concrete constitutional rights that are at stake for national parliaments. The right to decide on the national budget implies budget autonomy. The German constitutional court, in its decision on the constitutionality of the ESM-Treaty, ruled that: ‘Deciding on public revenue and public expenditure is a fundamental part of the ability of a constitutional state to democratically shape itself. In this context, the right to decide on the budget is a central element for shaping opinions in a democratic society’. 

Thus, the German constitution (as well as the constitutional systems of many other Member States) would not allow the national budget right to be relinquished altogether. Although the German constitutional courts accepted the possibility of – even significant – limitations to national budget autonomy, a suspension thereof for at least a considerable period of time, would be considered unconstitutional by the German constitutional court. The creation of a Macroeconomic Stability Function would need to pass this test before it could be created. What is more, the Court made it clear that it had formulated only minimum conditions and stressed the discretion of the German legislature ‘to weigh whether and to what extent, in order to preserve some discretion for democratic management and decision-making, one should enter into commitments regarding future spending behaviour and therefore – correspondingly – accept a restriction of one’s discretion for democratic management and decision-making in the present’.

Closely related (but in various constitutional systems recognized as a separate right) is the right to decide on taxation. The constitutional significance of this right, as well as its “sovereignty-sensitivity” have made it impossible thus far to come to supranational taxes. The feasibility of a Euro area wide treasury – whatever its exact form – is, thus, highly questionable.

The position of national parliaments is also at stake with regard to macroeconomic policies, which have redistributive effects. Specific national constitutional guarantees are generally lacking in this area, but a Europeanization of these policies is still particularly troublesome. This has to do with the lack of common substantive principles or rules. Unlike fiscal policies – which are ‘rule-based’, such as the 3% rule - macroeconomic policies are essentially political decisions, e.g on how labour markets and pension systems must be reformed and whether and how national investment climates must be improved.

In this light, the proposals from the Five Presidents’ report are too meagre for national parliaments to ensure effective democratic control. It has to be acknowledged that - should all of the plans indeed be realized - national parliaments would be limited in their national decision making capacities on fiscal and economic policies. This limitation of decision-making power should be compensated by adequate accountability rights. It would therefore be far from sufficient to organize plenary debates between the EP and the Commission and streamline the interaction between the Commission and national parliaments and between the European Parliament and national parliaments.

The relationship between the Commission and national parliaments should be the starting point for strengthening the position of the latter. It is one thing to get the EU Commissioner to the national parliament to discuss country-specific recommendations, but without the possibilities of sanctions this remains an empty shell. The rules that have been developed in the context of EU legislative procedures (most notably with regard to subsidiarity scrutiny) may offer inspiration here. The right to make the Commission reconsider a legislative proposal could, for instance, be applied in the context of economic and fiscal policies as well: the national parliament at issue could be empowered with the right to object to country-specific recommendations which would lead to obligation for the Commission to reconsider these. In case of the macroeconomic stabilisation function the existing mechanisms of cooperation between national parliaments in the context of subsidiarity scrutiny could offer inspiration. This could be linked to the right of assent for - a qualified majority of – national parliaments.

The exact shaping of national parliaments’ rights is, however, essentially a second order issue. To get to that issue, it first needs to be acknowledged that a genuinely democratic EMU requires national parliaments to have more at their disposal than the right to be informed and to take part in economic dialogues.

Barnard & Peers: chapter 19
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Friday, 24 July 2015

When all the people in a district are victims of race discrimination: CJEU ruling in CHEZ v Nikolova

Simon Cox, lawyer at the Open Society Justice Initiative* 

Last week’s CJEU judgment in C-83/14 CHEZ v Nikolova shows the important role of the CJEU to advance the struggle of Roma communities against systematic discrimination by businesses and Governments. Moreover, the Grand Chamber ruling on equal treatment establishes a powerful tool for districts marginalized by powerful actors.

The case is a great example of how the CJEU can empower lower national courts. The Bulgarian Anti-Discrimination Commission had repeatedly condemned as discriminatory the practice of electricity company CHEZ (aka CEZ) of placing meters out of reach of consumers only in Roma districts. But CHEZ – a powerful company in Bulgaria and Czech Republic - had persuaded the Supreme Court to reverse these rulings. To go over the head of the Supreme Court, the Anti-Discrimination Commission referred questions to the CJEU in Belov. But the CJEU ruled the Commission was not a court and rejected the reference as inadmissible. So the Sofia Administrative Court used the Nikolova case – an appeal by CHEZ already before it – to refer similar questions. This led to CHEZ judgment, in which the CJEU – though charged only with interpreting the law – helps the national court with a clear evidential and factual path to draft a judgment to survive further appeal.

Ms Nikolova is not Roma. Two arguments were made against her because of this. First, that a practice affecting a district could only be indirectly discriminatory on grounds of ethnic origin if everyone in the district had that ethnic origin. Second, that Ms Nikolova could not complain of discrimination. CHEZ accepted that the idea of ‘discrimination by association’ could extend the category of persons beyond those of Roma origin, but denied Ms Nikolova was sufficiently ‘associated’ with her Roma neighbours.

The Court rejected these arguments, ruling that the purpose of the Directive is to end discrimination on grounds of racial or ethnic origin, not only to protect individual members of groups who are targeted by discrimination (para 56). Accepting Ms Nikolova’s arguments, the CJEU repeated the passage from paragraph 50 of Coleman affirming that there is discrimination against any person who, on account of those grounds, suffers less favourable treatment or a particular disadvantage – regardless of the race or ethnic origin of that person. So, if a measure against a district is based on grounds of the Roma origin of the district’s majority, then the minority in that district are also victims of that discriminatory measure.

Through this approach, the CJEU affirms that the principle of equal treatment empowers every affected individual – and the courts - to end discrimination by all available means, urgently and effectively. Simplifying the law strengthens the ability of oppressed communities to combat discrimination. Challenges will surely continue to be made predominantly by people with the race or ethnicity on which the discrimination is based. But the court defeats CHEZ’s attempt to require that applicants ‘prove’ their own ethnicity and limits the enquiry to whether there is discrimination and if so whether this discrimination affects the claimant.

The Court ruled that CHEZ’s practice is direct discrimination, if the ethnicity of the majority is the reason for the practice, for example, if CHEZ selected the districts because of their Roma population (para 76).

The court made a fundamentally important ruling on indirect discrimination: this requires any measure disadvantaging a Roma majority district which is not applied to non-Roma majority districts to be objectively justified. CHEZ wanted a narrow interpretation of the comparator district, arguing that Ms Nikolova’s district could only be compared to districts with similar levels of interference with electricity meters. The Court rejected this, ruling that the appropriate comparators are other urban districts provided with electricity by CHEZ (para 90).

These rulings on ‘district discrimination’ are very powerful tools. Politically weak communities may be treated badly by government or business in areas like transport, power, schooling and other amenities. Where this differential treatment follows differences in ethnic make-up of districts, then groups or individuals in the district can use the ruling to bring discrimination claims. Courts can order disclosure of documents, to see if race was a factor in decision-making, as the CJEU affirmed at paragraph 78. Where it was not a factor, the CJEU ruling on comparators means authorities must show that the objective differences between the districts justify the differential treatment. They may struggle to justify denial of transport provision or electricity connection, or extortionate insurance or service charges.

The final important piece of the judgment is justification. The Court ruled that, even if race was no factor in CHEZ’s decisions, the practice was seen by others as effectively labelling a Roma community as electricity thieves, regardless of their payment history and behavior. In the context of anti-Roma stereotypes, the measure was seriously harmful. Agreeing with Ms Nikolova, the Court ruled that such a practice is incapable of justification. The community has a right under EU law to enjoy access to electricity “in conditions which are not of an offensive or stigmatising nature and which enable them to monitor their electricity consumption regularly”: para 128.

What happened to the notion of ‘discrimination by association’? The CJEU accepted Ms Nikolova’s argument that this is not part of EU law. It was the label attached by practitioners and academics to the Coleman judgment, but not one the Court had adopted. Like paragraph 50 of Coleman, which the court cites, the Nikolova judgment makes no mention of ‘by association’.  Dee Masters and Siȃn McKinley have argued that this approach makes indirect discrimination unworkable in certain situations. A coach reservation fee bears more heavily on people whose disability gives rise to a need to be accompanied. The concept of ‘association’ is needed, they argue, to limit the class of potential claimants to persons needed to accompany the disabled person. But this scenario is different from Nikolova, where the measure applied only to users in the majority-Roma districts, thereby putting all those users at a disadvantage when compared with users in a different district. In the coach scenario, the charging practice applies to all coach passengers. The differential disadvantage arises from the disability of the passenger, not their membership of the larger affected group. The passenger with a disability can complain about the negative impact of the fee for their seat and that for the companion. Indeed, the companion may also argue that the principle of equal treatment has been wronged as regards them. But a person who has neither a relevant disability nor is a companion of such a person is not affected by a differential impact on grounds of anyone’s disability. Ms Nikolova was – she had a disadvantage compared to users in non-Roma districts.

CHEZ has responded to the judgment by pointing to recent deaths by electrocution in other parts of Bulgaria of people attempting to make irregular connections: but it has not made meters inaccessible in these districts. EVN, a different Bulgarian electricity provider, contradicted CHEZ’s concerns about electricity theft. In the majority-Roma district in Stoliponovo – where EVN put the meters at a normal level some years ago - 95% of charges are paid. According to EVN, the real problem with electricity theft in Bulgaria is professionals and rich people running hotels, pubs and ski resorts.

The case now returns to the Sofia Administrative Court, where Ms Nikolova will seek an order that CHEZ restore the meters to their normal height for all users in her district.

*Simon Cox is a lawyer at the Open Society Justice Initiative and represented Ms Nikolova before the CJEU. The Open Society Justice Initiative works to make law a more effective tool against racial discrimination.

Barnard & Peers: chapter 20 
Photo: Bjorn Steinz, Open Society Foundation

Tuesday, 21 July 2015

Institutional balance and the negotiation of international agreements

Andrés Delgado Casteleiro, Lecturer at Durham Law School

In last Thursday’s judgment on the Case C-425/13, Commission v Council, the CJEU was asked to determine the scope of the Council’s powers to issue negotiating directives to the Commission and the role of the special committee overseeing the Commission during the negotiations with Australia concerning the linking of its emissions trading system with the EU.  The case concerns the division of powers between the Council and the Commission and the extent to which the former can exercise some kind of control over how the latter is conducting international negotiations.
Between 2012 and 2013, the Commission negotiated an agreement with Switzerland to link their emissions trading scheme to the EU’s. To be better informed of the how the negotiations were being conducted, the Council set up a special committee pursuant to Article 218 (4) TFEU (the Treaty clause setting out rules on how the EU negotiates and concludes international treaties). However, the Council was not completely satisfied on how the Commission consulted this committee during the negotiations of the agreement. Certain Member States argued that the information provided by the Commission was scant. In fact, the Commission referred the Council to a website of the Swiss Federal Office for the Environment when asked to provide an update on how negotiations were going.
In light of what the Council regarded as the Commission’s failure to effectively consult the special committee, when the Council adopted the negotiating directives for the conclusion of a similar agreement with Australia, it envisaged a greater involvement of the Council during the negotiations through the special committee. The Decision of the Council of the European Union of 13 May 2013 authorizing the opening of negotiations on linking the EU emissions trading scheme with an emissions trading system in Australia (Council Decision) establishes in the second sentence of Article 2 that “the Commission shall report in writing to the Council on the outcome of the negotiations after each negotiating session and, in any event, at least quarterly.” Moreover, Article 1(2) of the Decision states that the Commission shall conduct the negotiations in accordance with the very detailed negotiating directives and procedures set out in the Annex to the Council Decision. The annex provides, among other things, that detailed negotiating positions of the Union shall be established within the special committee.
Inasmuch as the Council Decision restricted the Commission’s scope of maneuver when negotiating with Australia, the Commission brought an action against it. The Commission’s plea boils down to two claims. First, the obligation to report in writing after each negotiation session or at least quarterly constitutes a breach of Article 13(2) TEU (role of the institutions), Article 218(2) to (4) TFEU (Treaty negotiation process), Article 295 TFEU (possibility to conclude interinstitutional arrangements) and the principle of institutional balance. Secondly, in so far as it provides that ‘detailed negotiating positions of the Union shall be established’ by the special committee or the Council, the Commission alleges a breach of Article 13(2) TEU, Article 218 TFEU and the principle of institutional balance.
The Judgment of the CJEU
In relation to the Commission’s first claim, the Court began by recalling the constitutional significance of Article 218 TFEU insofar as it confers specific powers on the EU institutions with a view to establishing a balance between those institutions during the treaty-making procedure. In practice, Article 218 TFEU gives different roles to each institution. Even though the Treaties have decided that the Commission is to act as the negotiator and to ensure the EU’s external representation (in all those areas not covered by the CFSP, see article 17 (1) TEU), the Council is nonetheless entrusted with the power to sign and conclude the agreement. According to the Court, in the context of those functions, the Council and the Commission are required to comply with the second sentence of Article 13(2) TEU, which states, “the institutions shall practice mutual sincere cooperation.” Moreover, that cooperation becomes of crucial importance for EU action at international level, as such action triggers a closely circumscribed process of concerted action and consultation between the EU institutions (para 64).
It is in this context of concerted action and consultation that article 13 (2) TEU triggers that article 218 (4) TFEU comes in, as the consultation and cooperation between the Council and the Commission will be channeled through the special committee. Consequently, what do the obligations of cooperation and consultation amount to? For the Court, those obligations mean that the Commission must provide the special committee with all the information necessary for it to monitor the progress of the negotiations, such as, in particular, the general aims announced and the positions taken by the other parties throughout the negotiations. It is only in this way that the special committee is in a position to formulate opinions and advice relating to the negotiations (para 66).
In any event, the Court also reminds the Commission that regardless of whether there is a special committee in place, it can be required to provide that information to the Council as well. Given the role of the Council in the treaty-making procedure, it should possess all the necessary information to have clear knowledge of the ongoing negotiations concerning the preparation of an agreement that will be submitted for its approval. Consequently, the Court concludes that an obligation such as the one enshrined in Article 2 of the Council decision which sets out the Commission’s obligation to report in writing to the Council on the outcome of the negotiations after each negotiating session and, in any event, at least quarterly’, is in conformity with Article 218(2) and (4) TFEU (para 68).
Furthermore, the Court considers that an obligation of information as the one recognized in Article 2 of the Council decision does not violate Article 13 (2) TFEU, insofar as the Council’s powers to lay down such an obligation of information have been exercised with due regard to the Commission’s power to negotiate international agreements (para 70).
Finally, in relation to Article 295 TFEU concerning the obligation to consult each other and by common agreement make arrangements for their cooperation, the Court understands that this obligation to conclude interinstitutional arrangements does not prevent the Council from being able to set out, in a decision authorizing negotiation, arrangements relating to the information that the Commission must provide to it periodically throughout the negotiating process (para 72). Hence, the Court dismissed the Commission’s first claim.
In relation to the second claim, concerning the powers of the special committee to establish detailed negotiating positions of the Union; the Court conducts its analysis in two stages. First, it examines whether the Council has the power to set up procedures pursuant to the first part of Article 218 (4) TFEU, like the one enshrined in the annex of the Council decision. Secondly, it focuses on the specific procedure set out in the annex to the Council decision and more specifically the powers that were conferred upon the special committee.
In the analysis of whether the Council has the power to set up a procedure like the one drawn up in the annex of the Council Decision, the Court examines the mandate of the special committee. In this regard, it considers that the special committee designated by the Council has the mandate to follow the conduct of the negotiations and guide the negotiator (para 76). In addition, the Court argues that since the Council is empowered to designate a special committee and the Commission is required to conduct the negotiations “in consultation with” that committee, the Commission must inform the committee of all aspects of the negotiations in order that it may be properly consulted (para 77). Therefore, Article 218(4) TFEU generally allows the Council to set out procedural arrangements governing the process for the provision of information, for communication and for consultation between the special committee and the Commission, as such rules meet the objective of ensuring proper cooperation at the internal level (para 78).
However, when analyzing the minutiae of the annex to the Council Decision, the CJEU considered that certain parts of that annex were not designed to enhance the transfer of information and the consultation between the special committee and the Commission. Instead, it argued that the possibility for the special committee to establish detailed negotiating positions as envisaged in the second sentence of the first paragraph of the Annex seek to bind the Commission in contravention of article 218 (4) TFEU, Article 13 (2) TEU and the principle of institutional balance. For the Court, the power to establish detailed negotiating procedures goes beyond the consultative function assigned to the special committee. The annex has the effect of imposing negotiating positions on the negotiator, i.e. the Commission (para 90). Therefore, the Court accepted the Commission’ second claim and partially annulled the Council Decision.
To a certain extent, the EU’s treaty-making procedure constitutes an example of the Principal – Agent problem. The Council (Principal) authorizes the Commission (Agent) to negotiate on its behalf, yet it does not completely trust the Commission. The Court understands that it is the information asymmetry that fuels the Council’s lack of trust on the Commission’s role as a negotiator. Consequently, anything in the Council decision that might exceed the obligation to inform and consult would be a breach of the principle of institutional balance, regardless of how badly the Commission had previously complied with that obligation.
In this regard, a parallelism with Case C-658/12 European Parliament v Council (Mauritius, AKA Somali Pirates) (discussed here) could be drawn. In that case the Court understood that by not informing the European Parliament (EP) immediately and fully informed concerning the conclusion of an extradition agreement with Mauritius, the Council had breached Article 218 (10) TFEU. Inasmuch as that provision aimed as ensuring that the EP could effectively exercise its powers in relation to the conclusion of international agreements, the Council had breached the principle of institutional balance. In the present case, the Court understands that an obligation to inform the Council on on-going negotiations is an expression of that principle. The Council also needs to be immediately and fully informed throughout the negotiations of an agreement it will end up concluding.
Finally, in the last couple of years we have witnessed an increase in the litigation between the different EU institutions concerning the exercise of their powers and the delicate balance between them in the field of EU External Relations. It appears that the EU institutions are still learning how to live with each other after the Lisbon Reform. Yet within this learning process, it appears, that the EU institutions seem to be moving away from cooperation arrangements and are pushing for a rigid interpretation of their respective powers. This is clearly seen in how the principle of institutional balance figures prominently in the present case or in other cases such as Mauritius Island, Case C-409/13 (Council v Commission) concerning the Commission’s right to withdraw proposals (discussed here), or Case C-28/12, Commission v Council, (US Air Transport Agreement). While in principle this is not per se a problem, it could signal that an increasing institutional divide on the way the to conduct the EU’s external representation after the Lisbon Treaty is emerging.

Barnard & Peers: chapter 24
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