November 27, 2019

Protecting the EU’s Central Pillar: The EU and the Rule of Law

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The European Court of Justice.
The European Court of Justice.

The functioning of the European Union rests upon its legal order and international treaties. Without them it would be impossible to operate the single market, guarantee trade access, ensure the operation of environmental and consumer rules, and permit the effective free flow of capital across EU markets.

It is these legal rules, backed up by EU and treaty enforcement mechanisms which provide the basis among all actors, states, citizens and businesses that everyone will play by the rules and agreements on legislation made in Brussels will be honoured. This understanding is underpinned by the reliance on the national courts and arbitration panels to apply rules that permit the single market to function. However, the twin forces of populism combined with the corrupt incentives of some elites are undermining the legal operating system of the Union. There have now been sustained attacks on the judicial independence of the national courts of several Member States. The capacity of those states to effectively and fairly apply Union law is in danger of being undermined. Furthermore, as populism gathers strength across the Union there is a further danger that these threats to judicial independence will spread further across the continent. The rule of law and the single market face an additional threat from a different direction. While technically EU law guarantees the free flow of capital across the Union it has been practically entrenched by the operation of investment treaties which guarantee the protection of investors. However, the recent judgment of the Court of Justice of the European Union (CJEU) in the Achmea case undermined bilateral investment treaties (BITS), at least between EU states. The effect of the undermining of judicial independence via populism and the incentives of corrupt elites and the then on top the removal of investor protection between EU states could significantly undermine the capacity of the Union to function and remove much of the benefit of the single market in many states. Dealing with This rule of law question is surely one of the most compelling and urgent priorities of the new Von Der Leyen Commission.

Law and the Integrity of the Single Market

At the core of the European Union lies its single market which generates economic growth, acts as an economic integrator, acts as a pole of attraction and permits the Commission to negotiate favourable trade deals with third states. The single market relies on a stable and uniformly applied legal order to operate. This is vital to ensure legislative deals agreed in Brussels in respect to trading standards, competition, consumer and environmental measures will be applied throughout the Union. Compliance is not expected to be precisely the same in all Member States. It is has been true almost since the establishment of the Union that some Member States had problematic legal systems. Notoriously the Italian legal system was very slow at reaching final judgment in both civil and criminal cases. However, it was understood that states would act broadly in good faith, that improvements were being made to legal systems and EU legislation would fundamentally be applied by all states.

The Union itself has always had very limited judicial enforcement mechanisms. The European Commission can bring a case against a Member State for infringement of Union law before the ECJ under Article 258 TFEU. However, most application of Union law depended upon the  courts of the Member States. The burden of Union law application and enforcement was and remains a Member State court responsibility, with the ECJ ready to assist via responding to requests for references to preliminary rulings. There is no equivalent to the US Federal District and US Circuit Court where US Federal judges can ensure the uniform application of Federal law in each and every state of the Union.

Despite the lack of a network of EU district and circuit courts, the reliance on national courts, with co-operation of the ECJ and supervision of the European Commission permitted the creation, functioning and development of the EU’s legal order.

A further often overlooked additional factor in the development of the single market was the impact of the free movement of capital rules. EU freedom of capital permitted investors to move capital easily across the single market, making investment in infrastructure and new production that much easier, integrating Europe’s market and raising productivity. This ease of investment was underpinned by the existence of a network of BITS that guaranteed that investment would be safe from discrimination and expropriation.  The free movement and bilateral investment treaty rules ensured the free flow of capital even in Member States with weaker legal systems and helped provide the capital to establish and develop the single market. The compound impact of the free movement of capital rules and the BITs have been particularly important in ensuring the CEE states as they acceded to the Union were able to maximise the opportunities of the single market and the free flows of capital that they brought.

The Rise of Populism and the Impact on the Rule of Law

 As populism has surged across the European Union in the last few years one of its major targets has been the judiciary and judicial independence. Even in the United Kingdom with its deeply ingrained rule of law culture Brexit has supported a hitherto unknown willingness to attack and undermine the judiciary. In the Miller case which merely saw the Supreme Court reaffirming the ancient principle that Parliament was sovereign and that for British withdrawal from the Union to take place would require an Act of Parliament, the judiciary were blasted by populist media and politicians. This culminated in the infamous Daily Mail headline that referred to the English judiciary involved in Miller as ‘the enemies of the people’. More recently when the UK Supreme Court struck out an unjustified and unprecedented five week suspension of Parliament close to the then exit (Brexit) day the judiciary were subject to another political and media attack. Equally in Italy, populist government ministers have attacked magistrates who have handed down ruling on migrants that the government opposed. Well respected magistrates have been attacked for being political with senior government officials arguing that they should step aside from cases involving migrants.

As populism spreads and the rule of law and particularly an independent judiciary become targets of populist movement. This is because they are seen as getting in the way of the will of the people, reflect the hold out of establishment elites or will restrict the scope for action of populist leaders. In some states populism can also be a cover for and mixed in with significant corrupt incentives. For example, there is evidence in Romania that attempts to dilute criminal statutes in relation to corruption and shorten time limits, as well as direct attacks on judicial independence aimed at imposing political discipline on the judiciary were aimed at protecting members of the political class from criminal charges. These measures were all usefully wrapped up in populist language to justify the ‘reforms’.

Perhaps the most stunning example of populist attacks on the judiciary in a EU Member State is in Bulgaria. In April 2019 the President of the Supreme Court of Cassation Lozan Panov gave a speech in Sofia in which he described the situation in Bulgaria.

‘At the moment, we are witnessing an extremely fierce fight to fully capture the courts because there are still magistrates in the justice system who defend the dignity and honour of our profession’.

Chief Justice Panov went to describe a catalogue of attacks and intimidation on the judiciary including those on himself to threats of harassment and removal from office. While Bulgaria’s justice system is under huge pressure, it is Hungary which has become the first state in Central and Eastern Europe since 1989 and the first EU state ever to be downgraded by Freedom House from being free to partly unfree. This was in light of Freedom House’s assessment of the attacks on country’s democratic institutions including the judiciary.

These populist attacks on judicial independence threaten the Union’s legal operating system. They threaten to undermining the capacity of EU states to operate the EU’s legal order and comply with their obligations to uniformly and fully apply Union law. Furthermore, as judicial independence is undermined the trust in judicial and legal integrity which is necessary for the Union to function is loss. This means that core single market concept of mutual recognition on which the single market comes under stress. Threats to judicial integrity also raise concerns as to the safety and integrity of other non-single market EU legal processes such as the European Arrest Warrant.

The Free Movement of Capital and Achmea

Despite the fact that BITS and other investment treaties such as the multilateral Energy Charter Treaty (ECT) played a valuable role in ensuring the free flow of capital these investment treaties faced growing hostility against them. A negative brew of opposition to independent investment arbitration panels which grew out of the proposed US-EU Trans-Atlantic Trade and Investment Partnership (TTIP) and the hostility of some Member States to the ECT, such as Spain, which had 43 pending ECT claims in respect of open ended renewal subsidies it had suddenly terminated began to see a shift against investment treaties. It was this hostile atmosphere that provided the context for the ruling in Achmea.

Achmea involved a Dutch firm entering the then open private health insurance market in Slovakia in 2004. In 2007 a Slovakian law sought to close off part of the insurance market to private operators. As a consequence Achmea sued for economic losses due to its sudden loss of access to that market. It brought an arbitration case against Slovakia under the relevant Dutch-Slovakian BIT. The arbitration tribunal awarded Achmea €22 million. The Slovak government resisted enforcement of the award saying it was incompatible with EU law.

The case ultimately ended up in Luxembourg where the CJEU agreed with the Slovak government. The Luxembourg judges  rooted their judgment on the principles of autonomy and supremacy of EU law. They argued in essence that the arbitration tribunal under the BIT threatened the autonomy of the legal order of the EU as it would not be possible for issues of EU law to be fully considered by national courts and ultimately the CJEU. This decision, which the CJEU’s own Advocate-General disagreed, appears to be a case where the CJEU went out of its way to disrupt the investment protection system. For instance, it is noticeable that the CJEU had previously held that commercial arbitration tribunals did not necessarily impinge upon the autonomy of the EU’s legal order. As a consequence, the CJEU had to develop an not entirely convincing distinction between commercial arbitration cases and BIT state-investor dispute arbitration cases. The CJEU argued that commercial arbitration cases were different because both parties had to consent to go to arbitration, while BITS were agreements between two states, where a third party, the investor could then make use of the BIT. Whilst this is true it is hard to discern an issue of legal principle to underpin the distinction the Luxembourg court is trying to make.

The Rule of Law Priority for the New Commission

Given that absolutely critical role that the law and national judicial systems have in the Union protecting the rule of law should be one of the highest priorities for the new Commission. Recently, there has been considerable discussion of new Treaty provisions, agencies and special mechanisms to protect the rule of law. However, given the seriousness of the situation there is a need first for the Commission to focus on a small number of measures to deal as far as possible with the immediate problems before embarking on the process of seeking support for a raft of new measures.

The Commission should consider first focussing in particular on making full use of its power to bring infringement proceedings under Article 258 TFEU. Where appropriate it should be willing to seek interim measures to bring a halt to immediately damaging acts undermining the operation of Union law. A second option for the Commission should be to seek from the Parliament and the Council agreement that there should be full budget conditionality in respect of the rule of law. This should include the capacity to take rapid measures to stop budget flows to Member States breaching Union law.

Outside the legislative and enforcement process the Commission should give consideration to engaging the smaller states and business on promoting the rule of law. As Alan Milward in his magisterial work The European Rescue of the Nation State explained, that while for larger Member States, the Union acted as a platform on which to enhance their capacity to act, for the smaller states, the EU’s legal order crucially protected their rights and interests. All disputes became legal and were settled under an independent arbiter, ultimately the CJEU in Luxembourg. Great power pressure was not eliminated, but reduced, codified and legalised. For smaller states, in particular, across the Union, the integrity of the Union’s legal order therefore is a vital national interest. Unfortunately over time political and constitutionality this has been overlooked. President Von Der Leyen can however put that reality to good use. The other major group who have been so far overlooked in the EU’s rule of law debate is business who are a major beneficiary of the single market. The Commission should consider calling on business support across the Union to back the rule of law and help challenge attacks on the independent judiciary.

On investment treaties the Commission needs to undertake a thorough review of its current policy and recognise that removal of investment protection will undermine the free flow of capital across the Union. In practice without investment protection, less capital will flow into CEE states where investor perceptions of rule of law problems are greatest. Less capital will undermine economic development, market integration and make it more difficult to provide the capital to undertake the energy transition. Given the ruling in Achmea one way forward would be to adapt an existing multilateral regime, such as the ECT. An alternative approach would be to seek to develop a parallel multilateral treaty regime for the Union itself. In any event, there needs to be a review of the current opposition to investment regimes in the context of their valuable role in underpinning free movement of capital.


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