Slovakia v. Achmea is among the most damaging judgments handed down by the European Union’s supreme court, the European Court of Justice (ECJ), since it opened its doors in 1952. In one fell swoop the Luxembourg-based ECJ has impeded its member states’ access to capital markets, undermined the functioning of the single market, and created a significant security threat to the European Union. It has also potentially, and no doubt inadvertently, reduced the cost of Brexit to the United Kingdom.
On March 6, in Case C-284/16 Slovakia v. Achmea, the ECJ handed down a ruling that effectively rendered all intra-EU bilateral investment treaties unlawful. The case involved the Dutch-Slovakia Bilateral Investment Treaty (BIT).1 Achmea, the Dutch financial services company, had entered the Slovakian health insurance market when it had been liberalized. Subsequently a new Slovakian government reversed the liberalization; as a result Achmea suffered losses from its forced market exit. It then sued Slovakia under the Dutch-Slovakian BIT and obtained an award of $27 million in damages from a Frankfurt-located arbitration tribunal. The award was challenged in the German courts by Slovakia, which resulted in a referral to the ECJ.2
The Luxembourg court took the view that rulings made under bilateral investment treaties undermined the autonomy of the European Union’s legal order. The member states, it said, are required to apply EU law and ensure that uniform application of that law can be maintained by the national courts. All courts and tribunals applying EU law must be able to request a ruling on points of EU law. However, the nature of investment arbitration tribunals meant that they could not be viewed as a court or tribunal of a member state. Consequently, no request could be received from such tribunals, and therefore the application of EU law by BIT investment tribunals threatened the autonomy and integrity of the Union’s legal order.
This “autonomy” argument is much more devastating than it first appears. First of all, it is difficult to limit the application of the ruling to this particular case, as it is an argument of principle and a claim of jurisdiction by the European Union’s highest court. Secondly, it also would appear to apply to not just intra-EU BITs but also to BITs that EU member states have with third states.
Ten member states intervened in support of Slovakia in the Achmea case. These were the Czech Republic, Estonia, Greece, Spain, Italy, Cyprus, Latvia, Hungary, Poland, and Romania. Several of these states have well-known problems with their judicial systems and the rule of law, from concerns around procedural delays, to an obsession with legal formalism over substance, to the increased politicization of their courts. The irony of the situation is that the loss of BIT cover due to Achmea is likely to hit many of these states, and Slovakia itself, particularly hard, as foreign investors rethink their commitments and FDI flows shrink. Without BIT protection, FDI flows will likely be concentrated increasingly in the strongest rule-of-law states in Western Europe.
But the fallout from the ruling may touch Western Europe too, as foreign investors reconsider the reliability of their investments there. Berlin, after all, fought all the way up its judicial hierarchy before it would accept that, if firms had heavily invested in nuclear power on the basis of government promises to keep the power stations open, and Berlin subsequently turned around and announced an early closure date, then they had a right to compensation. Similarly, the Spanish government has approximately 30 pending cases before international arbitration tribunals over the way it summarily terminated renewable subsidy programs. The Dutch government recently pulled the plug on three new coal-fired power stations it had induced industry to build, and is now denying the need for compensation. As a result of this Western European reluctance to fully support the legitimate concerns of foreign investors, Achmea may in fact damage capital flows across the entire continent, east and west.
The consequences of this judgment therefore are likely to be profound. First, given the weaknesses of the rule of law culture in some member states, bilateral investment treaties provided an effective means of protecting property rights. The ECJ, without any consideration of the inconsistent application of the rule of law across the Union, and the varied quality of national judicial procedures, summarily removed a long-standing means of protecting property rights which had been put in place by express agreement between the states. This is despite the fact that the Union’s own executive arm, the European Commission, has raised concerns over the quality of judicial processes in a number of member states, and is actively considering means to punish those states financially if they fail to maintain high rule of law standards.
Second, there was no recognition on the EU bench, nor apparently amongst the ten member state interveners, of the value of bilateral investment treaties. Over the past three decades a substantial amount of empirical evidence has been gathered as to the beneficial impact of BITs. They provide a guarantee that encourages cross-border capital flows that would not otherwise occur. BITs act as a silent discipline on capital-receiving states, ensuring that capital holders’ rights are protected and investment flows are sustained. By removing BITs, the Luxembourg judges are threatening capital flows and the economic development of many member states. Achmea is a particular threat to the Central and Eastern Europe (CEE) states, who still need substantial capital flows to rebuild their economies due to the impact of more than 40 years of Soviet occupation.
The impact on CEE states brings us to the third consequence, the effect on the single market. There is now a real prospect that many states across the European Union with weak judicial systems will find it much more difficult to ensure that they obtain the capital flows they need. Within Europe, international capital will increasingly retreat to the member states with the most developed judicial systems, largely concentrated in northwestern Europe. Such a “capital retreat” is likely to have significant consequences for the effective functioning of the Union’s single market. In essence, the EU single market will be split into capital haves and have-nots, undermining EU integration and stalling economic development in a large part of the Union.
The fourth consequence is the knock-on security impact. If Western commercial international capital is increasingly not available, then member state governments will be looking around for new sources of capital. This opens up a potential geopolitical opportunity for Russia and particularly for China, which is likely to step into the breach. Already China has sought to use its 16-Plus-1 initiative with 16 CEE states to divide the European Union along west-east lines. In the wake of Achmea, Beijing will now see a new investment leverage opportunity, using its near-unlimited access to capital via its party-state controlled banking system to obtain greater leverage amongst capital-starved EU states.
More positively from a UK perspective, Achmea provides an opportunity for Britain to retain much of the capital flows that it would otherwise face losing as a result of Brexit. Part of the original single market deal between Britain, France, and Germany was that the United Kingdom would become the European Union’s FDI hub. In the years that followed the creation of the single market, UK FDI boomed, and it became, after the United States and China, the country with the third-largest stock of FDI in the world. The United Kingdom was the European Union’s investment aircraft carrier: the jumping-off point for foreign capital entering the Union.
This huge boon to the United Kingdom was endangered by the vote to leave the European Union. The prospect of limited access to the single market would see significant investment flows shifting into other EU member states. However, if the United Kingdom, as now is likely, remains in the single market and the customs union but not in the European Union itself, then London will gain a significant investment advantage over the Union. London will have both single market access and all the benefits of its range of bilateral investment treaties. As a consequence, international investors will seek to invest in Great Britain and then trade from there into the European Union. The ECJ via Achmea will have therefore created the rather stunning result of giving the Brits the capacity to maintain their European FDI crown and making the UK actually more attractive as a place for foreign investment post-Brexit than before it voted to leave the European Union.
The question remains as to why Luxembourg would hand down such a damaging ruling and inadvertently help the Brits. It remains perplexing why the ECJ judges are so fixated on the existence of bilateral investment treaties. The “autonomy” justification appears to be a very weak argument. Most national courts across OECD countries accept the validity of assorted informal court settings, including arbitration tribunals applying their domestic law. The courts do not see any need to insist on controlling that process, nor do they further insist that all cases on appeal must come directly to their courts or otherwise the authority of those panels will be struck down. No supreme court of any EU member state makes the sort of expanded claim for the application of its law in the way that the ECJ does. Judges of superior courts across the European Union appear on the whole rather relaxed as to the application of their law in arbitration tribunals or applied in foreign courts.
It is true that in the debates about the U.S.-EU Transatlantic Trade and Investment Partnership (TTIP) deal there was a huge populist debate about “private courts” operating behind closed doors. There are legitimate questions here around transparency. In principle, all arbitration rulings should be published; the process of appointment of arbitrators should be open and systems of redress robust. These can be addressed by international agreement or ultimately within the European Union by EU directive, for those hearings that take place or awards that bind on EU territory.
It is also the case, however, that BITs and their arbitration processes have provided a valuable means to ensure capital flows and economic growth to parts of the world that would otherwise have difficulty in obtaining capital. And it is also a true but overlooked point that commercial investment capital is largely the product of pensions and investment by citizens that deserve robust protection, including via bilateral investment treaties.
As the impact of the Achmea case becomes apparent, and the wave of critique of the ruling laps at the doors of the ECJ, let us hope that the Luxembourg judges decide that a tactical retreat is in order.
1Under the EU Treaties, specifically Article 267 TFEU, courts of member states can make a reference for a preliminary ruling to the ECJ to rule on a point of EU law. Unlike the U.S. Supreme Court where the Court decides whether to hear a case, the ECJ is required to rule on almost every application that is made to it.
2Under the terms of the Dutch-Slovakian BIT one of the available arbitration panels was located in Frankfurt, which is why the reference to the ECJ was ultimately made via appeal from the arbitration panel to the German courts and thence from the German courts to the ECJ.