European treaty may revive debate over power to conclude investment agreements
Investment Treaty News (IISD) | 31 October 2007
European treaty may revive debate over power to conclude investment agreements
By Damon Vis-Dunbar
The debate over who in the European Union (EU) holds the legal authority to conclude international investment agreements (IIAs) with non-European countries - the European Community or individual Member States — is set to intensify as the EU Reform Treaty throws dust into an already hazy situation.
Foreign direct investment (FDI) does not currently fall squarely under the EU’s Common Commercial Policy, and the European Commission — the Executive Branch of the EU — and Member States have been divided as to who holds responsibility to conclude IIAs. When asked to rule on this question in the past, the European Court of Justice (ECJ) has emphasized that investment agreements with third countries are primarily the responsibility of Member States.
In line with this view, the balance of power over FDI has historically fallen to Member States, with the European Community’s legal authority over FDI severely circumscribed. While the Community has so-called non-exclusive competency over investment — both on movements of capital and matters related to establishment (i.e. Foreign Direct Investment), this competence has not been fully exercised. In other words, even where the Commission has spearheaded negotiations of economic agreements containing investment provisions, the member-states have still signed off on the final version of those pacts.
In contrast, Member States have a long standing practice of using their powers in this area. Hundreds of bilateral investment treaties have been entered into between Member States and non-European countries. Moreover, under agreement between the European Commission and Members States, all EU governments must sign off on any investment agreements negotiated by the Commission (for example, investment chapters in EU free trade agreements.)
As ITN has earlier reported, the Commission says that the quality of the EU investment agreements it negotiates should be more ambitious. In an internal note to Member States in 2006, the Commission observed: "In comparison to NAFTA countries’ agreements, EC agreements and achievements in the area of investment lag behind because of their narrow content. As a result, European investors are discriminated against vis-à-vis their foreign competitors and the EC is losing market shares."
Yet the EU’s 27 Member States are divided on the types of international investment agreements they would like to see the Commission negotiate. Some Members have fought to retain the right to negotiate their own bilateral investment treaties that offer legal protections to foreign investors (for e.g. protection from expropriation without compensation), while relegating the EC to focus on liberalization and market access. Other member-states have called for NAFTA-like investment agreements, which liberalize investment flows and provide extensive protections to foreign investors.
DRAFT EU CONSTITUTION AND NEW REFORM TREATY MUDDY THE WATER
It was in this divisive context that the draft Treaty Establishing a Constitution in Europe (aka the EU Constitution) emerged as a means to strengthen the European Union’s ability to conclude IIAs.
While the Constitution was abandoned in 2005 following rejection in public referenda in France and the Netherlands, it would have brought FDI under the roof of the EU’s Common Commercial Policy. In effect, this would have given the European Union the authority to conclude IIAs which could enter into force if a qualified majority of Member States gave their assent; heretofore, all EU Member States would have had to sign off on any agreement negotiated by the EU’s executive branch. However, the draft EU Constitution created uncertainty by going on to state that the delimitation of competences between the EU and Member States on FDI would not be affected.
The EU Constitution’s successor, the so-called Reform Treaty which Member States approved earlier this month in Lisbon, contains similar language: the Treaty brings FDI under the EU’s Common Commercial Policy, before adding that legal competencies over FDI are unaffected.
One expert appointed by ITN says that the implications of the treaty are unclear.
"The drafting (of this article) is very controversial, and we can’t predict how it is going to be interpreted," said Ramón Torrent, Professor of Political Economy at the University of Barcelona and a former director of external economic relations of the Legal Service of the Council of the European Union. "Including FDI under the scope of commercial policy, but also saying that this doesn’t change competency, creates confusion," he said.
Given that the Reform Treaty may add more uncertainty to the question of who holds the power to conclude IIAs, it could fall to the European Court of Justice to provide some clarity.
The Reform Treaty must be ratified by all 27 Member States before it enters into force; a process that is unlikely to be completed before 2009.
To date, there has been little public discussion amongst experts or elected officials as to the potential implications of the Reform Treaty with respect to competence over FDI.
Sources:
ITN interviews
“EU members review intra-European BITs in light of potential overlap with EU Law”, By Damon Vis-Dunbar, Investment Treaty News, June 30, 2007
“New European Constitution would bring FDI under European competence”, By Luke Eric Peterson and Jan Ceyssens, INVEST-SD, October 20, 2003
