Does the Court of Justice of the European Union Respect the Limits of EU Competence?

 

 

Vilija Vėlyvytė, British Academy Post-Doctoral Fellow, Somerville College, University of Oxford

 

Photo credit: civarmy, by wikipedia

 

My new book, ‘Judicial Authority in EU Internal Market Law: Implications for the Balance of Competences and Powers’ (Hart Publishing 2022), examines how the Court of Justice of the European Union expands EU competences through the interpretation of EU internal market law.

 

Much has been written about the EU’s so-called ‘competence creep’, describing the extension of EU competence (or power) to regulate the internal market into the areas in which the EU has not been granted explicit competence to act, such as public health, social security, and others. That discussion criticizes the EU legislature – Commission, Council and Parliament acting together – for failure to respect the limits of EU competence and the Court for failure to police those limits. Yet it largely overlooks a related, and equally important, question: does the Court itself observe the limits of EU competence in the interpretation of the rules of the internal market laid down in the Treaties? This question lies at the heart of my new book. The inquiry conducted in the book exposes the scale of the problem of the EU’s competence creep and demonstrates that the exercise by the Court of its interpretative authority is its major, and often dominant, cause.

 

The limits of EU competence are governed by the principles of conferral, subsidiarity and proportionality. Whilst the principle of conferral defines the scope of EU competence, the principles of subsidiarity and proportionality limit its exercise. The book examines to what extent the Court observes these principles in the interpretation of EU free movement rules. It argues that the Court’s observance of the three principles has been inconsistent, thereby creating constitutional tensions in the EU’s relationship with the Member States and upsetting the institutional balance of powers between the EU legislature and judiciary.

 

Observance of Conferral in Free Movement Case Law

 

According to the principle of conferral (Art 5(2) TEU), the EU can act only within the scope of the competences that Member States have conferred upon it in the Treaties. The Treaties contain a list of EU competences, dividing them into exclusive, shared and supplementary (see here). Notably, the EU does not have any real powers in the areas belonging to its supplementary competences, such as, for example, healthcare, education and, for the most part, social policy. Its action in these areas is limited to the adoption of measures of a recommendatory character.

 

The phrasing of the principle of conferral in the Treaties suggests that there is a clear line as to what the EU can and cannot do. But in reality this is far from true. In the way conferral is interpreted by the Court, it allows the EU to interfere into the areas that in principle fall outside the scope of its competences to the extent that such interference stems from the exercise of a competence that has been conferred upon the EU. For instance, the EU has not been granted competence to legislate in the area of public health. Yet it can enact such legislation as long as it contributes to the functioning of the internal market (see Tobacco Advertising II judgment, concerning the validity of EU directive on the advertising and sponsorship of tobacco products).

 

EU legislation aside, Member States must comply with the rules of the internal market laid down in the Treaties in all areas, regardless of whether these belong to EU or Member State scope of competence. So, for example, Member States retain the competence to regulate the exercise of collective labour rights, namely the right to collective bargaining and right to strike. However, they must regulate these rights in a way that does not violate the EU’s economic freedoms – freedom of establishment and of provision of services in particular (see Viking and Laval judgments).

 

The book argues that if conferral is to have a meaningful normative function in EU law, there needs to be a limit to how far EU internal market law can encroach into the areas of competence that should in principle be exempted from any binding interference on behalf of the EU. In the context of the judicial interpretation of free movement law, that limit lies in the conditions that trigger the application of free movement law. These are the conditions that have to be satisfied for the matter to fall within the scope of free movement. For instance, in order to benefit from the EU’s economic freedoms, the activities in question have to be of an economic, as opposed to social, nature and the challenged national law or practice has to constitute a restriction on those activities.

 

When interpreting the meaning of these conditions in a given case, the Court should adopt a systemic approach, contextualising them in the requirements of the principle of conferral. This presupposes a judicial interpretation of the concepts of ‘economic activity’ and ‘restriction’ that balances the objectives of the internal market inherent in these concepts with the concerns relating to the protection of national competence and regulatory autonomy. Such balancing exercise should be performed whenever free movement law collides with policy areas that are constitutionally sensitive from the EU law point of view. As a consequence, activities which have some economic features but are otherwise heavily regulated at the national level in the interests of social policy and solidarity, would fall outside the scope of the economic freedoms. A prominent example of such activities is the provision of public healthcare and education services.

 

Having conducted an inquiry into free movement case law involving three sensitive areas of national policy – healthcare, education and collective labour law, the book finds that the Court has systematically failed to engage in any meaningful reflection of competence concerns in the interpretation of the scope of free movement rules. This practice places the Court in tension with the principle of conferral.

 

The case law has also diminished the effectiveness of the legislative dimension of the principle of conferral. Specifically, it has opened up the possibility for matters that had been reserved to the regulatory prerogative of the Member States to be addressed at the EU’s legislative level through the functionally broad provisions of the Treaties (legal bases) dedicated to the regulation of the internal market. For instance, by holding that the provision of public healthcare is an economic activity, the Court sent a signal to the EU legislature that healthcare, as a service, could be legitimately legislated on under Art 59 or Art 114 TFEU. This enabled the adoption of EU Directive on Patients’ Rights, which governs access to cross-border healthcare, notwithstanding that EU-wide harmonisation in the area of public health is excluded by Art 168 TFEU.

 

Observance of Subsidiarity and Proportionality in Free Movement Case Law

 

The principles of subsidiarity (Art 5(3) TEU) and proportionality (Art 5(4) TEU) govern the exercise of EU competences. Subsidiarity applies to the areas of competence that are shared between the EU and Member States. It sets out the conditions under which the competence concerned should be exercised by the EU rather than Member States. Essentially, it stipulates that policy decisions should be taken at the level of the Member States unless action at the EU level could be more effective. Proportionality, on the other hand, controls the intensity of EU action. It limits intervention by the EU to what is necessary in light of the objectives pursued.

 

The book demonstrates that both principles are designed to protect national regulatory autonomy in politically sensitive areas of EU action, but they do so in slightly different ways. If subsidiarity is primarily concerned with the protection of the scope of national regulatory autonomy, proportionality ensures that EU regulatory intervention does not intrude excessively into the various values and interests protected via the exercise of national regulatory autonomy.

 

How do the principles of subsidiarity and proportionality manifest themselves in the judicial interpretation of the Treaties? They do at the stage of the judicial inquiry into the justification of national measures restrictive of free movement. The degree to which restrictive measures can be justified depends on the standard of judicial review employed by the Court. Accordingly, the standard of judicial review determines the space left for domestic regulatory action in the situation concerned. It thus affects both the scope of national regulatory autonomy (subsidiarity) and the interests protected within its exercise (proportionality). So, for example, when free movement law is construed to require that trade unions employ the ‘least restrictive’ means in negotiations with foreign businesses, this inhibits their autonomy to regulate the terms and conditions of employment as well as their ability to protect workers’ interests. This implicates both subsidiarity and proportionality.

 

The Court has been inconsistent in its observance of the principles of subsidiarity and proportionality across the policy areas studied in the book.

 

In three of the four areas – healthcare, education and collective labour law, the Court has employed a high standard of review of national measures, focused on the test of necessity. This approach is well illustrated by the Bressol judgment. The case concerned Belgian measures restricting foreign students’ access to some of the oversubscribed medical programmes. For context, in some of these programmes foreign students (mainly French) would make up more than 80% of the class. This situation raised concerns about the potential shortage of health specialists in Belgium and, more broadly, about the financial sustainability of the country’s higher education system, which was based on free and open access. The Court held that in order to be justified, government measures had to be appropriate and proportionate. Notably, the assessment of proportionality had to take into account the possibility that the government might have been able to achieve its regulatory goals with less restrictive means. Finally, the government was required to provide ‘an objective, detailed analysis, supported by figures, … capable of demonstrating, with solid and consistent data, that there [were] genuine risks to public health’ (para 71).

 

Essentially, the Court’s reasoning made clear that the Belgian higher education policy could only be pursued by employing measures that did not restrict the free movement of students in the EU.

 

This approach can be contrasted with the one employed by the Court in the gambling case law. Governments often limit access to their gambling markets for foreign operators, often by monopolising the operation of gambling. (This keeps the revenues derived from gambling within national borders.) The Court’s review of these types of measures is highly deferential. It is grounded in respect for national regulatory autonomy in the gambling sector. In that connection, the Court holds that Member States are entitled to a margin of appreciation, or discretion, when regulating gambling activities. Accordingly, ‘it is for those authorities to consider whether, in the context of the aim pursued, it is necessary to prohibit activities of that kind, totally or partially, or only to restrict them and to lay down more or less rigorous procedures for controlling them’ (see Zenatti judgment, para 33).

 

As a result, governments are allowed to bar foreign operators from entering their gambling markets as long as such restrictions are consistent with the regulatory objectives pursued.

 

The book ultimately argues that discrepancies in the standard of judicial review employed in relation to the areas under study – healthcare, education and collective labour law, on the one hand, and gambling, on the other – cannot be justified considering their comparable political and social sensitivity. Rather, these discrepancies indicate that the Court has been unfairly selective in its observance of the principles of subsidiarity and proportionality in the free movement case law.  

 

Judicial Reasoning Reform

 

In light of its findings, the book advances a proposition aimed at restoring the balance of competences within the EU and thus easing the tensions created by the case law. Specifically, it proposes that the principles of subsidiarity and proportionality should be reinforced into EU-level judicial practice concerning the areas of national policy which are in principle reserved to Member State competence. In practice, this would require the Court to employ, in relation to those areas, a set of techniques of judicial interpretation – already to be found in the Court’s wider case law – that are aimed at lowering the standard of judicial review. These techniques are the margin of appreciation, the ‘fair balance’ approach and exemption from the scope of EU law.

 

The proposed reform would ensure that the exercise by the Court of EU judicial authority through the interpretation of internal market law respects the limits of EU competences.

 

EU foreign policy sanctions: extending and using EU criminal law powers to enforce them

 

Professor Steve Peers, University of Essex

Photo credit: Pierre Blaché, via Wikicommons

*This blog post draws upon research for the forthcoming 5^th edition of EU Justice and Home Affairs Law (OUP, 2023)

On Monday this week, the EU Council adopted a decision to extend EU criminal law competence to cover EU foreign policy sanctions. Today, the EU Commission proposed a Directive that, if agreed, would use that competence to harmonize the criminal law of Member States on this issue. The following blog post analyses in turn the decision and the proposed Directive, in order to assess the potential impact.

The Decision extending competence

The legal context: criminal law

The context of the Decision is the Treaty framework on the EU’s power to harmonize substantive criminal law. That power is set out firstly in Article 83 of the Treaty on the Functioning of the European Union (TFEU), in particular Article 83(1), which reads as follows:

1. The European Parliament and the Council may, by means of directives adopted in accordance with the ordinary legislative procedure, establish minimum rules concerning the definition of criminal offences and sanctions in the areas of particularly serious crime with a cross-border dimension resulting from the nature or impact of such offences or from a special need to combat them on a common basis.

These areas of crime are the following: terrorism, trafficking in human beings and sexual exploitation of women and children, illicit drug trafficking, illicit arms trafficking, money laundering, corruption, counterfeiting of means of payment, computer crime and organised crime.

On the basis of developments in crime, the Council may adopt a decision identifying other areas of crime that meet the criteria specified in this paragraph. It shall act unanimously after obtaining the consent of the European Parliament.

As can be seen, the second sub-paragraph lists ten crimes (commonly referred to as ‘Eurocrimes’) which the EU has competence to harmonize. That competence involves not only the ‘definition of criminal offences’ but also ‘sanctions’, ie the length of jail terms and/or other sanctions that can be imposed as part of the criminal law. However, these are ‘minimum rules’ – meaning that Member States can add to them as part of their criminal law.

Since the Treaty of Lisbon entered into force in 2009, the EU has adopted Directives regarding most of the ten Eurocrimes, in most cases replacing older forms of EU law adopted before the Treaty of Lisbon entered into force. The exceptions are arms trafficking, corruption, and organized crime – although there are pre-Lisbon EU laws concerning the latter two crimes, and other EU legislation concerning firearms that falls short of adopting criminal sanctions for arms trafficking. In any event, as we shall see, some arms trafficking will fall within the scope of the new EU competence regarding criminal law and EU foreign policy sanctions.

Opt-outs apply to the new Decision: Denmark is entirely opted out of EU criminal law adopted after the Treaty of Lisbon, while Ireland chose to opt in. We can only speculate whether the UK would have chosen to opt in or not.

Since the Treaty of Lisbon, ordinary CJEU jurisdiction applies in this area – meaning that national courts can ask the CJEU questions about the validity and interpretation of EU Directives on substantive criminal law. (There have only been a few such references to the CJEU by national courts). The EU Commission can also bring infringement proceedings against Member States for late or inaccurate transposition of the Directives which the EU adopts.

Finally, the context of EU criminal law includes the other related competences of the EU. Article 83(2) provides for the EU to adopt criminal law harmonization Directives also in other areas of criminal law, where this ‘proves essential to ensure the effective implementation of a Union policy in an area which has been subject to harmonisation measures’. This has, for instance, been used to adopt a Directive on fraud against the EU’s financial interests. (It might be argued that foreign policy sanctions already fell within the scope of Article 83(2), so the recent decision extending the list of ‘Eurocrimes’ was unnecessary, but the EU thought otherwise)

Furthermore, Article 82(1) gives competence to adopt measures on mutual recognition in criminal matters, along with other forms of cooperation between criminal law authorities, while Article 82(2) gives competence to adopt harmonization measures on national criminal procedure – listing evidence, victims’ rights, and fair trials as areas where the EU can act. Article 84 gives limited powers regarding crime prevention; Article 85 gives powers relating to Eurojust, the EU agency on cooperation between prosecutors; and Article 86 provides for a European Public Prosecutor’s Office (EPPO) to be set up.

In practice regarding those other powers, since the Treaty of Lisbon, the EU has adopted a few mutual recognition measures, a law on victims’ rights, six Directives on fair trials, and Regulations on Eurojust and the EPPO. Most of these laws update pre-Lisbon legislation (except the fair trials Directives and the EPPO Regulation); and there is still an important batch of pre-Lisbon law on mutual recognition (most significantly, the European Arrest Warrant law). Some of this legislation generates CJEU case law – mostly regarding the European Arrest Warrant, but also there are judgments on most of the fair trials directives and most of the other mutual recognition measures.

The legal context: EU foreign policy sanctions

Unlike the other Eurocrimes listed in Article 83(1), there is a body of EU law already in this field. This has been built up on the basis of two related powers to act: first the EU’s powers to adopt Decisions on foreign policy sanctions (along with other foreign policy issues) on the basis of Article 29 of the Treaty of European Union (TEU). Secondly, Article 215 TFEU, which provides for most of those foreign policy sanctions to be paralleled in the form of ordinary EU law (in practice, Regulations):

1. Where a decision, adopted in accordance with Chapter 2 of Title V of the Treaty on European Union, provides for the interruption or reduction, in part or completely, of economic and financial relations with one or more third countries, the Council, acting by a qualified majority on a joint proposal from the High Representative of the Union for Foreign Affairs and Security Policy and the Commission, shall adopt the necessary measures. It shall inform the European Parliament thereof.

2. Where a decision adopted in accordance with Chapter 2 of Title V of the Treaty on European Union so provides, the Council may adopt restrictive measures under the procedure referred to in paragraph 1 against natural or legal persons and groups or non-State entities.

3. The acts referred to in this Article shall include necessary provisions on legal safeguards.

Although Article 215 provides for qualified majority voting of Member States in the Council, the effective rule is actually unanimity, for that is the rule which applies (with marginal exceptions) to the adoption of the EU foreign policy measures which the Article 215 legislation gives effect to.  The Commission proposed a few years ago to drop unanimity here, but Member States didn’t bite. (They would have to agree unanimously to change the voting rule).

Over the years, there have been a lot of EU foreign policy sanctions and a lot of litigation – mostly direct challenges to the validity of the sanctions measures by the persons or companies (or even the States) concerned by them in the EU General Court. That Court’s judgments can be appealed to the CJEU; and national courts have occasionally asked the CJEU about the interpretation or validity of sanctions decisions too. (Although in general the CJEU has no jurisdiction over EU foreign policy measures – an exception which the Court has been slowly nibbling away at for awhile – as an exception to the exception, the CJEU has its normal jurisdiction over foreign policy sanctions: see Article 275 TFEU).

Given that the new Eurocrime refers back to a body of EU law, it is thematically very similar to the areas covered by the EU’s separate powers to harmonize criminal law to give effect to EU policies, as set out in Article 83(2) TFEU – for instance, see the proposed new Directive on environmental crime, which refers back to specific EU legislation. 

The details of the Decision

The main text of the Decision simply adds the breach of EU foreign policy sanctions to the list of Eurocrimes. Note that this is a breach of EU sanctions: the Decision does not give the EU power to harmonize criminal law as regards the breach of purely national foreign policy sanctions. (How much power Member States have to adopt national sanctions is an interesting question, but need not concern us further here, because of this distinction).  

On the other hand, the new competence is not limited to breach of EU foreign policy sanctions relating to the Russian invasion of Ukraine. Even though that event is obviously what led the EU to extend its competence, as acknowledged in the preamble to the Decision, there is nothing in the wording of the Decision to say that it only applies to sanctions against Russia. Indeed, the Commission proposal for the Decision noted that the EU has forty sanctions regimes, applying not only to countries but also ‘targeting proliferation and use of chemical weapons, cyberattacks, human rights violations and terrorism’. (For more details, see the Council website, especially its sanctions map). The anti-terrorism sanctions have been around for awhile, attracting high profile litigation such as cases involving Mr Kadi or Hamas; the human rights sanctions are fairly new, but will sometimes cross over with other sanctions – see, for instance, the sanctions against Putin’s alleged allies, the Wagner Group, for human rights breaches (along with links to other EU sanction measures).

In terms of the type of sanctions covered, the preamble also makes clear that this is broad, applying not only to economic sanctions such as restrictions on trade or financial relations, but to bans on entry into the territory (which are also already given effect to by listing the sanctioned people in the Schengen Information System) and to arms embargoes. 

Much of the preamble to the Decision justifies this new extension of EU competence on the basis of the criteria set out in Article 83(1) TFEU, which any extension of competence has to satisfy: ‘particularly serious crime with a cross-border dimension resulting from the nature or impact of such offences or from a special need to combat them on a common basis’. For instance, the preamble refers to the threats to international peace and security dealt with by sanctions as being ‘particularly serious’, as well as the cross-border scale of the offences.

The proposed Directive

Content of the proposal

The proposed Directive has similarities to other Directives in this area – see, for instance, the Directive on harmonization of criminal law as regards terrorism. But there are also some new elements compared to other Directives; and in any event, it is the EU’s first foray into adopting criminal law relating to EU foreign policy sanctions.

It should be stressed that (as the preamble to the Decision confirms) the Directive would not make breaches of EU foreign policy sanctions criminal for the first time in most Member States. Just as with issues like terrorism and drug trafficking, these were already crimes in most national laws before EU law came along. But the details of the national laws probably differed more before the EU got involved; the point of the EU’s involvement is to harmonize the national laws somewhat.  

Today’s proposal would require Member States to criminalize nine types of breach of EU sanctions, such as trading in goods or services covered by EU sanctions, providing financial services despite an EU law sanction, or even enabling the entry or transit of a person covered by an entry ban deriving from EU sanctions (in effect, an immigration law offence that might overlap with the pre-existing EU law on facilitation of illegal entry and residence in general – although the EU criminal law in that area is less detailed than today’s proposal). In every case, an intentional breach would have to be criminalized; and in most cases, ‘serious negligence’ resulting in the breach would have to be criminalized too. As with the Decision on competence, the Directive would not be limited just to sanctions against Russia, but would apply to EU foreign policy sanctions across the board.

There is a novel clause on the position of lawyers advising those accused of sanctions breaches:

Nothing in paragraph 2 [the list of crimes] shall be understood as imposing an obligation on legal professionals to report information which is obtained in strict connection with judicial, administrative or arbitral proceedings, whether before, during or after judicial proceedings, or in the course of ascertaining the legal position of a client. Legal advice in those circumstances shall be protected by professional secrecy, except where the legal professional is taking part in the violation of Union restrictive measures, the legal advice is provided for the purposes of violating Union restrictive measures, or the legal professional knows that the client is seeking legal advice for the purposes of violating Union restrictive measures.

There is also a specific guarantee for the right to silence, and exemptions for goods or services provided for daily use, failure to report, or humanitarian aid for those in need. Inchoate offences of incitement and (in most cases) attempts are also criminalized, as is aiding and abetting. As for penalties, Member States must provide for a maximum possible penalty of at least five years for most offences, and one year for the rest – subject to a threshold of €100,000 being involved (which can be satisfied by a linked series of offences). Otherwise, Member States are obliged to provide at least for the possibility of some imprisonment (for instance for sanctions with a lower value, or breach of an entry ban), and in all cases to provide for additional penalties, such as fines.

Legal persons are subject to liability, too, and must be subject to penalties such as shutting down the business or withdrawal of its licences. This is a longer list than usually provided for in EU criminal law Directives. Criminal liability must be aggravated in certain cases (such as organized crime, or breach of duty by a public official or a professional), and mitigated in others (where the offender ‘flips’ on his or her criminal associates).

Criminal jurisdiction would apply more widely than under most EU criminal law Directives, where it usually applies to acts committed on the territory (sometimes with further elaboration) or by nationals. Here it would apply also to habitual residents, and the territory is further defined as including a Member State’s airspace or any aircraft or vessel under its jurisdiction.

Unusually, there would be rules on limitation periods, ie when Member States would be out of time to bring a prosecution or enforce a sentence. In most cases the limitation period would be five years, with a possibility for derogation. Previously Member States have only agreed to regulate this issue via EU law as regards fraud against the EU budget (although the pending proposals on environmental crime and violence against women would also address it).

Finally, there would be links to other EU law (besides, obviously, the sanctions laws themselves). The proposal would link up with EU law on money laundering and confiscation, plus there is a novel link to the EU legislation on whistleblowers: that law must also apply to protect those in a company or organization who tip off the authorities about breaches of sanctions. Conversely, there is no proposed amendment of the law on the European Arrest Warrant – even though breach of EU foreign policy sanctions is not on the list of crimes where the dual criminality condition for extradition must be waived. However, prosecution or sentences for sanctions breaches will sometimes fall within areas where dual criminality has to be waived (like terrorism or organized crime); and the dual criminality condition is more likely to be met as a result of the harmonization Directive anyway (it may even be met already, simply by virtue of the foreign policy sanctions measures themselves). 

The legislative process

Opt-outs will apply to the proposed Directive: again, Denmark is entirely opted out of EU criminal law adopted after the Treaty of Lisbon, while Ireland can choose to opt in or not. (Update, March 8 2023: Ireland has opted in). Again, we can only speculate whether the UK would have chosen to opt in or out.

Other Member States have a form of protection for their interests too. Although the ‘ordinary legislative procedure’ applies to the adoption of laws in this area (see the text of Article 83(1) above), which means only a qualified majority of Member States in the Council is necessary to adopt a law (along with agreement of the European Parliament), Article 83(3) TFEU provides that if a Member State believes that a Directive ‘would affect fundamental aspects of its criminal justice system’, it can effectively pull an ‘emergency brake’ and ask EU leaders to discuss the issue. If there’s no agreement at that level, if at least nine Member States still want to participate in the proposed law, they can trigger ‘enhanced cooperation’ to go ahead – without the objecting Member State(s) – on a fast-track basis. To date, Article 83(3) has not been used, although its mere existence may have meant that any concerns Member States have raised about their criminal justice systems received particular attention during negotiations.

Comments

It’s difficult to see what impact the extension of competence, in conjunction with the proposal to harmonize the law (if adopted), would have in practice, without more detail on what changes would be made to national law as a consequence of its adoption. One issue with criminal law – just as with non-criminal forms of regulation of conduct – is of course the resources and expertise necessary to investigate and bring prosecutions. On this point, the prospect of extending competence to the European Public Prosecutor’s Office to include breaches of EU foreign policy sanctions has been raised by the German and French justice ministers. This would certainly be a big development if it happens (extensions of EPPO competence need unanimous agreement of Member States, although some Member States have opted out of the EPPO; the Commission’s proposal to extend its competence to terrorism has not been agreed so far).

Is this extension of EU competence an example of the endless EU power-grabs so feared by the EU’s critics? On this, it’s notable that the extension came on the eve of the thirteenth anniversary of the Lisbon Treaty entering into force – and yet it’s the first such extension of competence in that whole time. By contrast, Member States have not yet agreed an earlier proposal to extend the list of Eurocrimes to cover hate speech and hate crimes. Nor, as noted above, have they agreed the proposal to drop unanimous voting for some foreign policy measures – or to drop unanimity in a number of other areas which the Commission proposed years ago.  

The extension of competence is better understood as part of the EU’s response to the Russian invasion of Ukraine – which has also prompted developments in the use of EU defence powers, and the first-ever use of the long-dormant temporary protection Directive. By itself, the extension of EU competence and the use of those new powers will not end the invasion – and, as noted already, it applies to other EU sanctions too. Nor does it address the criticism that that those sanctions are too little and too late. But it may make some contribution to the effective implementation of those sanctions which have been established to oppose the invasion, and in any event it sends a political message that the EU is stepping up their enforcement.

 

The Future of EU External Trade Policy - Opinion 2/15: Report from the Hearing

David Kleimann and Gesa Kübek*

On September 13 and 14, the Court of Justice of the European Union (CJEU) held its hearings for Opinion 2/15, which concerns the EU’s competence to conclude the recently negotiated EU-Singapore Free Trade Agreement (EUSFTA). The CJEU convened in a rare sitting of the Full Court of CJEU judges. It was presided by Judge Lenaerts and Vice-President Tizzano, with Judge Ilešič fulfilling the function of the Court’s Rapporteur. Mrs. Sharpston serves as Advocate General.

This note offers a first-hand report on the hearing and summarizes the exchange of arguments between the Commission, on the one side, and the Council and the member states, on the other side. The first section sets the stage by providing relevant contextual information to the proceeding and highlights the systemic importance of the coming judgment. Section II first outlines the main and general lines of reasoning that the parties presented during the hearing. Secondly, we highlight a selection of policy specific, novel, or even ‘curious’ legal arguments that were advanced by the representatives of the Council and the Commission on the one, and the members of the Court, on the other hand. Section III concludes this note with one of many still unanswered, yet systemically highly significant legal questions that surfaced in the course of the oral phase of the proceedings. There's some further background to the case in an earlier post on this blog.

I.                   The Crux of Opinion 2/15

“Does the European Union have the ‘requisite competence’ to conclude the EU – Singapore Free Trade Agreement [EUSFTA] alone?” More specifically, the Commission, in October 2014, had asked the Court to clarify whether and which areas of the EUSFTA fall under EU-exclusive, shared, or member states’ exclusive competences respectively.

The crux of the matter brought before the Court lies exactly in this precise delineation of EU external competences: If the content of the EUSFTA falls under EU exclusive powers in its entirety, its conclusion as ‘EU-only’ would be mandatory. If certain treaty provisions are regarded as exclusive national competences, the agreement ought to be concluded as a ‘mixed’ agreement, including all EU member states as independent contracting parties. If only EU exclusive as well as shared competences were touched upon by the FTA, the decision to propose the conclusion (on behalf of the Commission) and to conclude the agreement (on behalf of the Council) as either ‘EU only’ or ‘mixed’ is legally optional and referred to the political discretion of the EU institutions involved in the applicable procedures set out in Article 218 TFEU (the general rules on EU negotiation and conclusion of treaties) in conjunction with Article 207 TFEU (the provision on the EU’s Common Commercial Policy).

The importance of the Court’s judgment for the governance of EU commercial relations with third countries – in particular the controversial EU/US trade deal (‘TTIP’) and EU/UK trade relations after Brexit – can hardly be underestimated. Given the broad and deep material coverage of the EUSFTA, the judgment will serve as a precedent for the conclusion of the vast majority of future EU trade and investment agreements. As such, the Court judgment in Opinion 2/15 could possibly mark the beginning of the era of ‘EU-only’ trade and investment agreements and, conversely, the end of the EU member states lengthy parallel ratification procedures required by ‘mixity’. As mirrored by the inter-institutional political debate on the legal status of the EU Canada Comprehensive Economic Trade Agreement (CETA), the eventual outcome of Opinion 2/15 has important implications on both the efficiency, reliability and credibility of EU trade and investment policy formulation, on the one hand, and the de jure legitimacy of multi-level economic governance in the European Union, on the other.

II.                Commission vs. Council and the Member States: The Arguments

Throughout the course of the hearing, the arguments of the parties focused on four contentious policy areas covered by the EUSFTA, notably disciplines on transport, investment, intellectual property rights, as well as sustainable development (labor rights & environmental protection). In the following, we will first outline a number of general legal arguments advanced by the parties that recurred during the hearing in application to all or most issue areas and discernably built on established CJEU case law. Subsequently, we highlight a selection of specific legal constructions that the parties put forward in respect of EUSFTA transport and investment rules.

1.     General Arguments of the Parties

a.      The Commission

As a first and predominant line of defense, the Commission representatives articulated a number of general arguments that aim at fitting the content of the EUSFTA, in its entirety, within the scope of the EU’s exclusive Common Commercial Policy (CCP) competence – Article 207 TFEU – as well as within the ambit other exclusive EU competences that can be implied in accordance with Article 3 (2) TFEU.

As such, the Commission proposed the broadest possible conceptual interpretation of the ordinary terms of Article 207, seeking to attribute maximum meaning to the expansion of CCP powers by the Lisbon reform of 2009, which saw the addition of services, foreign direct investment, and trade related intellectual property rights to the scope of CCP exclusive external powers.

Secondly, the Commission relied on a broad application of the ‘centre of gravity’ theory, which the Court had developed in its case law. The theory’s ‘predominance-test’ requires the use of a single legal basis where one of the aims and components of a measure “is identifiable as the main [one], whereas the other is merely incidental” (COM representative in reference to Case C-377/12, concerning the legal base of the EU partnership agreement with the Philippines). In this way, the Commission defended EUSFTA rules as measures falling under Article 207 where they “specifically [relate] to international trade in that [they are] essentially intended to promote, facilitate or govern trade and [have] direct and immediate effects on trade” (COM representative in reference to Case C-414/11 - Daiichi Sankyo).

Third, the Commission representatives made frequent use of the provisions of Article 3 (2) to advocate for implied exclusivity of otherwise shared competences. In codification of settled ERTA case law, Article 3 (2) TFEU prescribes EU exclusivity in case “the scope of EU rules may be affected or altered by international [member state] commitments where such commitments are concerned with an area which is already covered to a large extent by such rules” (Opinion 1/13, on the Hague Convention on child abduction, in reference to Article 3 (2) TFEU, 3^rd situation). Otherwise, EU exclusive competence may be implied where the “attainment of the Community objective [is] inextricably linked to the conclusion of the international agreement” (Opinion 1/03 on the Lugano Convention on civil jurisdiction, codified in Article 3 (2) TFEU, 2^nd situation).

Building on these three main lines of argumentation, the Commission developed a number of specific arguments in support of EU exclusivity in regard of foreign direct investment (FDI) protection and intellectual property rights (first, second, and third argument), sustainable development disciplines (second argument), and areas otherwise covered by EU rules to a large extent, such as maritime transport (second and third argument).

Yet, the Commission found it necessary to draw a second line of defense: in the alternative to full EU exclusivity, it held that the EUSFTA concerned EU exclusive and shared competences only. As such, the conclusion of the EUSFTA as ‘EU-only’ or ‘mixed’ would remain optional – or facultative - in accordance with the procedural rules of Article 218 TFEU in conjunction with Article 207 TFEU.

b.     The Council and the Member States

Living up to observers’ expectations, the Council and the member states’ representatives attacked the Commission presumption of EU exclusivity on various general and issue specific grounds, with an ubiquitous reference to the principle of conferral, which is set out in Article 5 (2) TEU. The EUSFTA concerned, in addition to the EU exclusive competence under Article 207 TFEU, both shared as well as exclusive member states’ competences. In consequence, “mixity is a must” for both the Council and the member states.

In particular, the Council and the member states demanded a narrow text based interpretation of Article 207 TFEU. Secondly, both Council and member states advocated for a restrictive employment of the ‘center of gravity’ theory that, in its application, needed to rest upon “objective factors amenable to judicial review” (member states representatives in reference to Case C—411/06, Shipments of Waste). More than once, the representatives of various parties referred to Opinion 2/00, on the Cartagena Protocol, in which the Court decided that “[w]hatever their scale, the practical difficulties associated with the implementation of mixed agreements (..) cannot be accepted as relevant when selecting the legal basis for a [Union] measure”. Instead, the Council and the member states advocated on several occasions that the choice of the legal basis should take account of the Court’s reasoning in Case C-411/06, where it was held that “[e]xceptionally, if (…) it is established that the act simultaneously pursues a number of objectives or has several components that are indissociably linked, without one being secondary and indirect in relation to the other, such an act will have to be founded on the various corresponding legal bases”.

Third, the parties argued in favor of restrictive reading of implied exclusive competences under Article 3 (2), 3^rd situation, in that respective conclusions required a “comprehensive and detailed analysis of the relationship between the envisaged international agreement and the EU law in force” (Council and member states representatives in reference to Opinion 1/13).

Following these more restrictive of the possible realm of interpretative approaches, the Council and the member states concluded that member states remained exclusively competent for maritime transport, FDI protection, portfolio liberalization and protection and (alleged) non-commercial aspects of intellectual property rights protection. Moreover, the parties held that the EUSFTA’s disciplines on labor rights and environmental protection established various independent and non-incidental aims and objectives that required reference to multiple legal bases in the TFEU.

2.     Policy-specific Arguments of the Parties

Up to until this point, arguably, the Commission, on the one side, and the Council and the member states, on the other, walked on trodden paths of EU primary law interpretation and established case law, in application to an economic treaty of unprecedented scope and depth and a constantly evolving EU internal legislative status quo. In the following few paragraphs, we highlight a selection of rather unconventional and even curious policy-specific arguments in the areas of transport and investment that may yet move the needle on the evolution of EU external exclusive competences.

a.      Transport

In the area of transport, the Commission notably questioned the scope of the carve-out Article 207(5), which exempts “the negotiation and conclusion of international agreements in the field of transport” from the TFEU provisions of the CCP. In a remarkable construction, the Commission argued that the addition of foreign direct investment to the terms of Article 207(1) via the Lisbon Treaty reform of 2009 had moved mode 3 of transport services provision as defined by WTO law, i.e. establishment and FDI, back into the scope of the CCP. Mode 1, 2, and 4 (movement of the service itself, movement of service recipients and providers) remained outside of the CCP’s legal basis as regards transport. The EU, however, was now exclusively competent for the negotiation and conclusion of agreements liberalizing and protecting foreign direct investment in all sectors, including transport. The Council and member states cried foul in reference to Opinion 1/08, in which the CJEU ruled that transport was fully exempted from the CCP, and which remained “good law” even after the Lisbon reforms and protected the full integrity of the 207(5) transport carve-out from the CCP. The Commission, in view of the parties, was victim of its own faulty logic reasoning. Any exemptions from Article 207 (5) would deprive the provision of its effectiveness.

In the area of maritime transport services, the Commission advocated for implied ERTA exclusivity (Article 3 (2), 3^rd situation TFEU) based on Regulation 4055/86. The Regulation prescribes broad mode 1 liberalization between EU member state nationals established in EU member states and third countries but does evidently not afford any liberalization commitment to nationals of third countries. The Council and member states hence pointed at the missing pieces for a comprehensive EU internal legal framework for transport services that could otherwise confer implied Union exclusivity. The parties further argued that the wide-ranging EUSFTA disciplines and objectives in this field were not incidental or subordinate to the commercial treaty objectives. Maritime transport services, in the view of the parties, remained a shared competence in accordance with Article 4 (2) (g) TFEU. Moreover, member states remained exclusively competent in regard of the regulation of third country vessels operators.

Inspired by this exchange of arguments, Advocate General Sharpston addressed the Council with a question of systemic relevance: What is, at the end, the decisive criterion or the threshold for the conclusion of an EU agreement in a field that is internally only partly covered by common rules, such as maritime transport? How many “hoops”, Sharpston asked, does the Commission have to “jump through” to prove EU exclusivity to the Council? Mrs. Sharpston further questioned whether internal exclusivity was a necessary condition for external exclusivity of competences. The Council, in response, denied that internal exclusivity was a conditio sine qua non but insisted on “strict conditions” for the conferral of implied exclusivity that were set out in Article 3 (2) TFEU. Moreover, the Council advocated for an application of the gravity theory that advanced “clear dividing lines”.

b.     Portfolio Investment

In a genuinely novel line of reasoning, the Commission advanced a treaty interpretation that would justify the implied exclusivity of Union competence over portfolio investment (ie, the purchase of non-controlling shares in companies), which is not included in the ordinary meaning of the term ‘foreign direct investment’ in Article 207 (1) TFEU. In doing so, the Commission departed from the otherwise currently uncontested notion that existing secondary EU legislation is the only contingency that can trigger an ‘ERTA effect’. The ‘ERTA effect’ confers exclusive competence in areas where member states exercise of external competence would otherwise affect already existing or even prospective ‘common rules’ (Art. 3 (2) 3^rd situation TFEU). Such ‘common rules’, according to the Commission, however, could also take the shape of EU primary law. With reference to Article 63 (1) TFEU, the Commission representatives voiced the opinion that the treaty-prescribed freedom of capital movement between member states (as well as member states and third countries) sufficed to constitute ‘common rules’ within the meaning of Article 3 (2) TFEU. The possibility of member states concluding international agreements that affected the prohibition of restrictions on capital movements as codified in Article 63 (1) implied EU exclusive external powers in this area. The Union was therefore exclusively competent for the negotiation and conclusion of agreements covering rules on portfolio investment liberalization and the protection of such investments.

In the alternative, according to the Commission, portfolio investment liberalization falls under the Union’s shared competences.

The Council and the member states took pains to counter the Commission’s line of reasoning with a larger number of sometimes diverging arguments. First and foremost, the parties noted the fact that that Article 63 (1), by itself, only codifies a prohibition of restrictions, but falls short of conferring legislative powers upon the Union. Using Article 63 (1) TFEU as a legal basis for external action was merely a “legal fix” that constituted an instance of “legal imagination” on behalf of the Commission. To the Council, it appeared inconceivable that a provision, which did not suffice as a basis for internal legislation could imply an (exclusive) external competence. Only the exercise of an internal competence may  pre-empt external member state action. Belgium and Germany, secondly, took the stance that such a wide interpretation of Article 3 (2) 3^rd situation TFEU facilitated an undue circumvention of the deliberate choice of the treaty makers to exclude portfolio investment from the scope of Article 207 TFEU and Article 64 TFEU. The two parties insisted on exclusive member state competence for portfolio investment. The representatives of Finland and Slovenia, on the other hand, appeared to suggest that the member states may share external powers with the Union in this area.

Countering the Council’s attack, the Commission, in response to an oral question asked by the Court, held that there was a “simple but very good reason” for the fact that the treaties did not codify a legal basis for the internal liberalization of portfolio investment: Article 63 (1) TFEU itself prescribed a comprehensive prohibition of restrictions to that end.

In another unprecedented interpretation of the treaties, the Commission cited Article 216 (1) in conjunction with Article 63 (1) TFEU as the correct legal bases for external Union acts that covered portfolio investment liberalization. The Council and several member states, in contrast, insisted that Article 216 (1) TFEU only conferred general treaty-making powers upon the Union and was unsuitable to serve as a legal basis for the conclusion of international agreements by the EU.

Upon inquiry of Judge Rapporteur Ilešič, the Commission and Council representatives found themselves in a rare moment of agreement to the extent that Article 64 TFEU could not serve as a legal basis for the internal liberalization of portfolio investment. According to the Commission, the harmonization of EU internal rules on portfolio investment could, however,  “maybe” be based on Article 114 or 352 TFEU – a statement that inspired the Court’s President Lenaerts to remind the Commission of the fact that the choice of the correct legal basis for a Union act was not “à la carte”.

In light of the circumstance that the Commission partly relied on a legal basis for an external competence, which allegedly did not require its internal exercise ex ante, Advocate General Sharpston questioned the Commission on the precise difference between the third situation governed by Article 3 (2) TFEU (as referred to by the Commission) and the second situation provided for by the same rule. Mrs. Sharpston’s enquiry, however, remained unanswered.

Secondly, the Advocate General questioned the Commission’s perception of the risk that member state agreements could ‘alter the scope of common rules’, whereas the common rules that the Commission referred to were in fact EU treaty provisions. The only way to alter the scope of primary law, Sharpston stated, was a treaty reform via the applicable constitutional provisions. In response, the Commission, in reference to the terms of Article 3 (2) TFEU, clarified that its argument did not extend to the alteration of the scope of treaty rules, but to the probability that the primary legal norm of Article 63 (1) could be affected by independent international member state agreements.

c.      Termination of Member States’ Bilateral Investment Treaties

Another point of legal debate that prominently featured in the hearing concerned the supersession, suspension, and termination of existing member states’ bilateral investment treaties with Singapore once the investment protection provisions of the EUSFTA will be provisionally applied or enter into force when the treaty is concluded. Article 9.10 EUSFTA provides that member states bilateral investment treaties “shall cease to have effect and shall be replaced and superseded by this Agreement”. A footnote to this provision stipulates that “the agreements between Member States of the Union and Singapore […] shall be considered as terminated by this Agreement, within the meaning of subparagraph 1(a) of Article 59 of the Vienna Convention on the Law of Treaties.” Yet, article 59 (1) VCLT prescribes that “a treaty shall be considered as terminated if all the parties to it conclude a later treaty relating to the same subject matter and: (a) It appears from the later treaty or is otherwise established that the parties intended that the matter should be governed by that treaty”.

While the Commission argued that past EU practice entailed an array of precedents for the supersession of member state treaties by EU external agreements, Judge Rapporteur Ilešič and Advocate General Sharpston questioned the appropriateness of the chosen legal modality as well as the EU competence for the termination of member states’ bilateral investment treaties (BITs) with Singapore via Article 9.10 of the EUSFTA. Both the Judge Rapporteur and the Advocate General, advanced a, however, unanswered request for a clarification as to whether the Commission wanted to argue in favour of the termination of the BITs via the duty of sincere cooperation enshrined in Article 4 (3) of the TEU. Otherwise, how would the Commission argue that it can include a provision in an ‘EU-only’ agreement that effectuated not only the succession but also the termination of member state bilateral agreements with Singapore under international law, given that the EU is not a contracting party to these agreements?

III.             Concluding Remarks

Opinion 2/15 raises a vast amount of general as well as policy area specific legal issues that are – in aggregate and in some instances individually - of tremendous importance for the delineation of EU competences vis-à-vis the Union’s member states. The significance of the Court’s judgment very much transcends the question of whether the EUSFTA is characterized as an ‘EU-only’ or a ‘mixed’ agreement in its entirety. Rather, the Court’s much awaited clarifications will have both systemic horizontal as well as policy area specific vertical implications for the operation of the EU’s legal system and its external relations.  Moreover, the judgment will likely clarify and may redefine the role and reach of the member states’ presence in the Union’s external economic relations in adaptation to the primary law reforms of the Lisbon Treaty, constantly evolving EU internal secondary legislation, and the expanding scope and depth of 21^st century trade and investment agreements.

We conclude this note with a question posed by the British Advocate General Mrs. Sharpston, at the very end of the hearing, to all parties. The question, however, remained unanswered.

If the Court, in Opinion 2/15, held that the EU-Singapore FTA is a mixed agreement, what would be the consequence for the conclusion of the treaty? Given the extensive scope of EU exclusive powers under the CCP, could a single member state veto the entire agreement?

David Kleimann and Gesa Kübek

Passau, October 4^th, 2016

Barnard & Peers: chapter 24

Photo credit: www.cnaint.com

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* David Kleimann is a Researcher at the Law Department of the European University Institute (EUI) in Florence (david.kleimann@eui.eu). Gesa Kübek is a Research Assistant at the Law Faculty of the University of Passau (gesa.kuebek@uni-passau.de). This report is based on hand-written notes that the authors prepared during the hearing. All potential errors are attributable to the authors alone.

The European citizens’ initiative and EU competence over Greek debt ‘haircuts’

Professor Daniel Sarmiento, Professor of EU Law at the University Complutense of Madrid*

EU competence is a touchy area of EU law. It has become very complex, together with the also intricate case-law on legal bases, which, after several decades of case-law, is not always easy to follow. After the entry into force of the Lisbon Treaty, EU competence has become a major domain for EU constitutional lawyers and it deserves very careful attention. The fact that the Treaties now include a typology of EU competences and enumerate them is a sign that many future battles in EU law will be fought in this terrain.

Furthermore, cases like Pringle, Gauweiler (discussed here) or Vodafone prove that issues of competence and legal bases are not the exclusive domain of institutional litigation, but areas that can be brought to the courts by private parties too. The Court of Justice has always been sensitive to these cases and it has dealt with them with utmost care, mostly in Grand Chamber formation.

Last week a rather surprising route for EU competence litigation came under the radar. In the case of Anagnostakis (no English version available, I’m afraid), the General Court ruled on an action of annulment brought by a private party against the decision of the Commission to reject, on the grounds of lack of competence, a European citizens’ initiative (ECI). Mr. Anagnostakis, together with more than a million supporters, brought a proposal pursuant to Article 11.4 TEU (which provides for the existence of ECIs) and Regulation 211/2011 (which sets out the detail of the ECI process), demanding that the Commission introduce in EU legislation “the principle of state of necessity, according to which, when the financial and political subsistence of a State is at stake due to its duty to comply with an odious debt, the refusal of payment is necessary and justified”. According to the promoters, the legal base of the initiative was to be found in Articles 119 TFEU and 144 TFEU.

The Commission did not seem very impressed and, pursuant to Articles 4(2)(b) and (3) of Regulation 211/2011, it refused to register the proposal, based on a lack of competence.

Mr. Anagnostakis introduced an action of annulment before the General Court, attacking the Commission’s Decision for breach of Articles 122(1) and (2) TFEU, 136(1) TFEU and rules of international law.

The General Court dismissed the action, but it did not limit itself to scrutinizing the Commission’s duty to state reasons. Instead, the Court went into some detail in order to ascertain if haircuts in government debt are not only a competence of the EU, but also in conformity with EU Law. In a rather surprising format and procedural context, the General Court dealt quite openly with one of the Union’s hottest potatoes at the time: the unsustainable Greek public debt.

It is true that the judgment is quite laconic in its reasoning, but it relies several times on Pringle and Gauweiler when interpreting Articles 122 and 136 TFEU. But no matter how laconic it may be, the judgment makes an assertion that will probably not go unnoticed when the Greek public debt becomes politically toxic again. In paragraph 58 of the judgment, the General Court states that “the adoption of a legislative act authorizing a Member State to not reimburse its debt, far from being a part of the concept of economic policy guidelines in the sense of Article 136.1.(b) TFEU […] it would have the effect of substituting the free will of the contracting parties by a legislative instrument allowing for a unilateral abandonment of public debt, which is clearly not what the provision allows” (free translation).

The assertion might be formally correct in light of the limited scope of Article 136(1)(b) TFEU, but the language of the judgment is politically explosive. Even in legal terms, one wonders if Pringle was openly precluding any kind of haircut of government debt by any means. After reading the General Court’s decision in Anagnostakis, it seems that haircuts will be mission impossible in the future, despite the circumstances, the consensus among Member States (the IMF has been explicitly positive about a future Greek haircut) and, above all, the terms and scope of the haircut.

But of course, this judgment could be just a superficial decision undertaking a superficial degree of scrutiny due to the peculiar procedural context of the case. It could be argued that highly contested issues such as the EU’s competence in the area of EMU is something should be left to the Court of Justice, but not to the General Court in the circumstances of a case like Anagnostakis. The General Court might be aware of this and thus the brief and straight-forward reasoning of the decision. However, after reading the judgment several times, the more I read it the more explosive it sounds to me.

*Reblogged from the Despite our Differences blog

Barnard & Peers: chapter 5, chapter 19

Photo credit: www.thenation.com