A quote by Professor Petersmann - European University Institute

 

"The history of constitutionalism suggests that the needed “constitutionalization” of international economic law depends on “struggles for human rights” by citizens, civil society, parliaments and courts against the never-ending abuses of private and public power by self-interested rulers."

 

in EU Working Paper (Law No. 2006/45) entitled

"State Sovereignty, Popular Sovereignty and Individual Sovereignty: from
Constitutional Nationalism to Multilevel Constitutionalism in  International Economic Law? , see conclusion.
 

TOWARDS AN ENERGY AND NATURAL RESOURCES POLICY IN ICELAND BASED ON A STRONG SUSTAINABLE DEVELOPMENT APPROACH – A VIEW FROM EUROPEAN AND INTERNATIONAL LAW

(I still have to insert all graphics which I will do later) 

 

1. A NEW POLICY BASED ON A SUSTAINABLE APPROACH IS NEEDED

In the field of environmental law and due to the current economic situation that Iceland is going through, I will argue that we need to follow  the principle of precaution and adopt a policy in the field of energy and natural resources law based on a strong approach of sustainable development. In this sense, we should take into account the experience of South American and African countries in the last century  where following gigantic debt pressures, wrong policies were adopted concerning the exploitation of natural resources under the advice of the IMF. I refer here to the work of Nobel Prize J. Steiglitz (Globalization and its discontents) and Naomi Klein (The shock doctrine) which offer hard evidence of the mistakes done in the past which we should avoid. We should obviously look for countries which offer the opposite experience and Norway is the best example that I have found so far.

We need a energy policy based on the concept of strong sustainable development. And what do we mean by  “sustainable development“? All specialists in the field recognise the definition given by the  Brundtland Commission as the guiding light of their action:

 “Sustainable Development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs”. 

Brundtland Commission. “Our Common Future”  1987[i]

 

This definition implies the dual goal of securing intragenerational and intergenerational justice, that is to say, to exploit natural resources or natural capital in a way that social justice is achieved, both between different generations living at this moment and between us and future generations still unborn.

The definition of sustainable development also states the goal of necessary integrating environmental, social and economic policies within one approach. The approach was confirmed by the international conference called “Earth Summit” held under the auspices of the UN in 2002.

 This implies leaving behind the classical approach to economic activity and adopting a new approach based on the three pillars of sustainable development. Different models of sustainability exist and I argue that a strong sustainability model is the best suited for our purposes.

The neoclassical economic model (measured by GDP) 

 

 

 

 

Different approaches or models of sustainable development

 

 

 

 Weak sustainability

Strong sustainability

 

A sustainable approach to a new energy policy means that social, economic and environmental pillars must be connected, inter-related, because thay are interdependent. Within this approach, pillars are of equal importance (you can’t ignore or give a higher priority to any of them).

In the context of a new approach we should ask ourselves whether we need to measure progress not with GDP but with the Genuine Progress Indicator (alternative to Human Development Index).  A further example of an alternative index to measure progress is the national happiness index adopted by the Kingdom of Bhutan in its new Constitution currently under study of Nobel Prize Stieglitz and French President Sarkozy.

 

 

 

 

 

 

 

 

 

 

 

2. NEUTRALITY OF EU LAW REGARDING OWNERSHIP OF NATURAL RESOURCES AND PROPERTY RIGHTSEU/EEA

Member States have national sovereignty over their natural resources and are free to decide the system of public/private property ownership, rights and duties and rules of exploitation. European law does not have a direct impact on property rights. Public/private ownership is a matter for each State to decide in respect of current international and European law in force. In general, European law (EU and EEA law) requires the respect of non-discrimination principle between nationals/undertakings and other EEA citizens/companies. This is essential for the correct functioning of the European internal market of energy. But three precisions must be made that are essential in this regard:

1) Energy is a strategic industry that is strongly related to national sovereignty, public security and public order. Ensuring security and independence of energy supply for a country may constitute a public security concern and is therefore a legitimate aim capable of justifying a restriction on the free movement within the EU/EE.

2) The principle of non-discrimination does not obligatory extend to foreign companies, as EU/EEA law stands today. EU/EEA countries can adopt different policies regarding the rights of foreign companies outside the EU/EEA.

 3) Furthermore, EU energy policy allows for derogations in case of isolated markets or situation where a company has less than 100.000 connected users (ie. households) such as is the case in Iceland. Iceland could very well derogate from the general regime and, for reasons unknown to the author, it opted not to do so when incorporating the general EU energy package in to the EEA legal order (see Opinion of the European Commission on the application of Iceland to join the EU – 24 February 2010 and analytical Report where it is stated that Iceland did not use the derogations permitted under the current EEA Agreement and the Commission acknowledges that these derogations are still available for Iceland during negotiations).

Iceland can therefore adopt a new energy and natural resources policy adopting its independent regime of legal ownership with a sustainable development approach and negotiate with the European Union the derogations for which it duly qualifies as a small isolated market.More research is needed in comparative European energy law. Diversity exists within the EU and EEA countries and this is a new fresh area of European law still under the process of development (see webpage http://ec.europa.eu/environment/natres/titles1_2.htm).

 The leading country, to the best of my knowledge, in the field of hydro-power energy and exploitatin is Norway. We should therefore study their policy and legislative framework very thoroughly.

France has adopted a new law in July 2010 called “Grenelle 2” following the aims of the "Grenelle Environment Round Table" (as it might be called in English),  a process launched by the President of France in 2007 in order to define the key points of public policy on ecological and sustainable development issues for the coming years. What is specially interesting about this law is the legislative process that was open to the civil society. The new law adopted on the 13^th July 2010 and is available at the website http://www.legrenelle-environnement.fr/spip.php?article1388

 France – Loi Grenelle 2 – Legislative process with participation of civil society

 

 

 

3. PROPERTY RIGHTS AND NATURAL RESOURCES.  

There is abundant literature on the subject of property rights and natural resources that should be explored. For the international organization World Bank, which has the mission to fight against poverty and promote development, it seems that there is no perfect system of ownership as all systems presents pros and cons. In the book Property rights and the environment: social and ecological issues by Susan Hanna and Moahn Munasinghe, World Bank Publications, 1995, p. 15 and forward,  a description is done on classical systems of property rights, resource use and property rules. Their conclusion is that what matters most is the consistency of property rights with social goals, the adoption of a sustainable approach  to avoid the classic „tragedy of the commons“ (overexploitation of natural resources) and the enforcement of the use resource rules. Attention must be paid to the fact that this publication is from 1995 so that more research is needed on this point to  determine the current approach of international organisations such as the World Bank towards property rights and natural resources. 

4. PERMANENT SOVEREIGNTY AND PEOPLES´S OWNERSHIP OF NATURAL RESOURCES IN INTERNATIONAL LAW. THE WAY AHEAD

We must refer to international law because European law has not developed yet a theory/policy/model on the area of natural resources that Iceland has (hydropower resources).  In the article “Permanent Sovereignty And Peoples' Ownership Of Natural Resources In International Law“, by Duruigbo, Emeka, in The George Washington International Law Review , no1, 2006, (available at website http://www.allbusiness.com/legal/international-law/1086332-1.html), we find an exposition of the principle of permanent sovereignty over natural resources in international law.

This article explains its evolution and scope of application arguing that the right to sovereignty over natural resources resides in the people with a correlative duty on states to manage these resources for the people's benefit. The authors also examine recent proposals dealing with empowerment and ownership of natural resources which could be adopted by states as an expression of their recognition of peoples' ownership and reviews the experience of Norway, which – in view of the authors, has demonstrated that national leaders can be effective stewards of natural resources and public wealth.

The authors explain that the the most significant expression of the principle of permanent sovereignty over natural resources is contained in General Assembly Resolution 1803 (XVII) of 1962 which declares that both people and nations have a right to exercise sovereignty over natural resource. On the basis of the current development of international law, the authors argue that:

“First, the right to permanent sovereignty over natural resources is vested in peoples, not states, though states retain a pivotal role insomuch as government exercises the right to permanent sovereignty.

Second, the term "peoples" should be used to denote the owners of natural resources rather than faceless populations, which will help begin to construe governments in their proper role as temporary custodians or trustees of natural resources charged with managing them for the benefit of all the people in the country.“

I encourage all people interested in this topic to read very well this article in order to understand the legal basis of the principle of permanent sovereignty over natural resources and to design a policy and legislative framework in the light of international law.

 5. CITIZENS´ RIGTHS AND CIVIC DUTIES IN A DEMOCRATIC SYSTEM

I would like to end this article with on a personal note. I recently attended an international conference in Stanford University where we met all 150 lawyers and academics coming from all over the world to discuss Law and Ethics and the challenges we face in these times of economic turbulence.  It was really inspiring for me to see so many different qualified people discussing the right things to do when democracy, fundamental rights, social and economic rights are being restricted and even denied all over the world. Unjustice, corruption, kleptocracy, misgovernance, all these things challenge our democratic systems and our fundamental rights around the world to bigger or lesser degree. While in Africa and Asia the fight is still for fundamental rights, in Europe we are fighting for the preservation of a socio-economic system where the State guarantees our basic rights such as education, public health and justice and/or fighting for environmental causes or social justice in the aftermath of the financial crisis. While in normal circumstances academics usually prefer to be neutral and just concentrate on their research projects, it was argued by lawyers belonging to movements such as “street law” and some “legal ethics in action” that in exceptional circumstances lawyers, clients and in general civil society have to claim their rights with capital letters (and unfortunately some people are paying this fight with their lives too). It was impressive to see a map of “heroic lawyers” (heroic clients it was later redefined) mapping the conflicts all around the world presented by the American Bar Foundation. This is the legal map that corresponds to the global justice movement very linked to the movement for a proper globalization (ATTAC) which took the world stage in Seattle in 1999. And it was very sad to see what happened in the map when lawyers who had the knowledge needed to resist had sided with the illegitimate dictatorial regimes that we all know (Chile – Argentina).

Lets keep this in mind. We have to remember that rights and duties are linked together in our legal modern democracies. We do not deserve rights if we do not perform our obligations.  It is important to claim our rights but it is also essential to exercise our civic duties. If we request the participation of civil society in the design and drafting of a new energy and natural resources policy, we assume all the duty to learn as much as we can so that we can help our Parliament to draft and discuss the best legislative instrument we can ever imagine.  We assume the duty to research, educate ourselves and discuss all alternatives for our future in a professional and respectful way, searching for the general interest of the society.

Our rights are recognized in the United Nations Economic Commission for Europe (UNECE) Convention on Access to Information, Public Participation in Decision-Making and Access to Justice in Environmental Matters (see http://ec.europa.eu/environment/aarhus/)

As the European Commission summarises:

“The Aarhus Convention establishes a number of rights of the public (individuals and their associations) with regard to the environment. The Parties to the Convention are required to make the necessary provisions so that public authorities (at national, regional or local level) will contribute to these rights to become effective. The Convention provides for:

• the right of everyone to receive environmental information that is held by public authorities ("access to environmental information"). This can include information on the state of the environment, but also on policies or measures taken, or on the state of human health and safety where this can be affected by the state of the environment. Applicants are entitled to obtain this information within one month of the request and without having to say why they require it. In addition, public authorities are obliged, under the Convention, to actively disseminate environmental information in their possession;
• the right to participate in environmental decision-making. Arrangements are to be made by public authorities to enable the public affected and environmental non-governmental organisations to comment on, for example, proposals for projects affecting the environment, or plans and programmes relating to the environment, these comments to be taken into due account in decision-making, and information to be provided on the final decisions and the reasons for it ("public participation in environmental decision-making");
• the right to review procedures to challenge public decisions that have been made without respecting the two aforementioned rights or environmental law in general ("access to justice"). “

We live in a foundational moment; it is now that we have to design and create the society and world that our children will inherit. As Gro Brundtland put it, we have to think about our common future. Lets also assume our obligations.

    

[i] This information is non-scientific and comes  from the website wikipedia.org . This author confirms its accuracy.

“Our Common Future, also known as the Brundtland Report, from the United Nations World Commission on Environment and Development (WCED) was published in 1987. Its targets were multilateralism and interdependence of nations in the search for a sustainable development path. The report sought to recapture the spirit of the United Nations Conference on the Human Environment - the Stockholm Conference - which had introduced environmental concerns to the formal political development sphere. Our Common Future placed environmental issues firmly on the political agenda; it aimed to discuss the environment and development as one single issue. The publication of Our Common Future and the work of the World Commission on Environment and Development laid the groundwork for the convening of the 1992 Earth Summit and the adoption of Agenda 21, the Rio Declaration and to the establishment of the Commission on Sustainable Development. Our Common Future is also known as the Brundtland Report in recognition of former Norwegian Prime Minister Gro Harlem Brundtland's role as Chair of the World Commission on Environment and Development.”

The Brundtland Report is available at http://www.un-documents.net/wced-ocf.htm

  

ABUSE OF FREEDOM OF ESTABLISHMENT IN EUROPEAN LAW – MAGMA ENERGY CANADA/SWEDEN.

CONCLUSIONS OF MY LEGAL REPORT GIVEN TO THE COMMITTEE OF FOREIGN INVESTMENTS ON 19 MARCH 2009

Dr. M. Elvira Méndez Pinedo.* 

Under European law (EU/EEA law) States may prohibit abuse of freedom of establishment (when companies try to circumvent national rules through artificial arrangements). In the field of energy law,  States retain regulatory power in order to  secure supply, protect the environment or prevent abuse or fraudulent conduct within their territories.1. Based on the EU/EEA Treaties and on the case law from the Court of Justice of the European Union or ECJ (Factortame 1991, Cartesio 2008 and Societé Centrale de Gestion 2010 and EFTA Court (Norwegian falls 2007), I concluded that:It is possible for national authorities to stop purely artificial arrangements – devoid of economic reality, created with the aim of escaping or avoiding current national prohibitions (abuse of the right of establishment by foreign companies in order to escape national prohibition of tax law, energy law, etc).

 In other words, finally the ECJ has recognised that 1) the misuse of EU law cannot be regarded as promoting the internal market and 2) national authorities can prevent this abuse of freedom of establishment on the basis of the general public interest. 

1.A. Canadian companies operating in the energy field do not have rights in the EU internal market of energy.

Member States can decide wheter they want to open their markets or not.The pre-necessary condition for legal persons to enjoy rights related to the internal market is to be legally established in one Member State of the EU. Without this economic link to the EU, there are no rights to expand activities to other Member States under EU Law. The same is applicable to EEA law. Establishment is defined as “the actual pursuit of an economic activity through a fixed establishment in another Member State for an indefinite period” [emphasis added by author].Investments in energy companies in the EEA territory by foreign companies or undertakings established outside the EEA fall under national law. It is up for national legislators to decide upon this issue. EU law is neutral on this point.

1.B. National sovereignty over natural resources. Neutrality EU/EEA law over property rights (private, private, collective ownership or a mix).

Energy policy is a sector of strategic importance where certain restrictions could be justified due to public interest reasons. EU/EEA Member States have national sovereignty over natural resources and are free to decide the system of public/private property ownership, rights and duties and rules of exploitation. Public/private ownership is a matter for each State to decide in respect of current international and European law in force. Under EU/EEA energy and environmental law there is the possibility to restrict free movement and free establishment for non-economic and public policy reasons such as the security of supply, environmental concerns or any other public policy such as prevention of abuse or fraud.

 The EFTA Court has to follow the case-law of the ECJ in order to secure homogeneity between EU and EEA law (case Norwegian falls 2007).

* M. Elvira Méndez Pinedo is Doctor in European Law. She is married to Sigurður H. Sigurðsson

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I am aware that my legal opinion on the case Magma Energy is slightly different than the opinions drafted by other qualified specialists in general European law on which the Committee built its final opinion. This, in my view, is due to the following factors:

-          First of all, because I am only interpreting European law (EU/EEA law) while the other specialists are interpreting EEA law as incorporated into Icelandic law. We differ on the doctrine of the abuse of rights in European law but the problem is mostly located in the application and interpretation of Icelandic law. I plead, however, that Icelandic law has to be interpreted in the light of the most recent judgments of the ECJ. 

-          The case-law of European courts on the abuse of freedom of establishment used to lead in the direction of the primacy of the internal market and freedom of the companies but my conclusion is based on judgments from the ECJ and EFTA Court that were not taken into account in the other legal opinions and that are very recent (2007, 2008 and 2010). 

 -           EU law is dynamic, changes quickly, it  important to have themost recent legal sources, law, doctrine and case-law. I argue that  a change of jurisprudence has taken place on the issue of abuse of freedom of establishment where the regulatory powers of the States have been preserved (a similar turn of jurisprudence that happened with the ECJ Keck case concerning the free movement of goods in the 90s). The last judgment from the ECJ in 2010 confirms, in my view, a similar turn in the field of right of establishment for legal companies in the EU/EEA. The doctrine had expected a final approach to be taken on the issue by the ECJ as it was unclear until then. 

-          EEA law incorporates most of the EU law on the internal market (economic law)  but it has to be interpreted in the light and context of EU law (which has a much broader material scope and includes social law, environmental law, fundamental rights law, etc). Since the EEA Agreement was signed, EU law has developed very important policies that complement and correct the failures and imperfections of the internal market. These are the areas that I personally find mor einteresting and where I focus on my research. The new Lisbon Treaty takes the EU to a higher level of development in areas  that go much beyond the internal market. Those general principles developed in EU law cannot be discarded when interpreting current EEA law. In short, economic EEA law and the freedoms of the internal market must interplay with the context of other important principles such as protection of the environment (precautionary approach), sustainable development, protection of fundamental rights and social justice, all goals now recognised in the EU Treaties. To hold the opposite view, to interpret EEA law without its natural context inherited from EU law when EU law is applicable to the EEA legal problem, is to simply misunderstand the nature and trends of current European law. 

-         Weapons vs. Ice-cream. Are all  economic freedoms equal? Obviously not.  States need to regulate differently those sectors on the basis of different public interests and the vital interests of their nations.  The freedom  of establishment for legal persons must be connected to the field of activity where they operate. Because the EU presents an asymetric profile of competences or powers depending on the different policies at stake, the powers of States are also asymetric. EU law does not pre-empt national law in all circumstances and in all cases. It all depends on the issue at hand. EU competences can be exclusive, shared or supportive to the States. The EU has an energy policy for European economic actors but it does not have yet a natural resources  policy for hydrowater resources simply becuase no other European country, except for Norway, presents this prpofile. The EU has not opened its energy resources to Canada. When the EU is given no express competence, the powers remain at State level.  

 -          In this case a center of gravity test must be used to determine which is the main issue at stake: freedom of establishment vs. natural resources policy/energy. In my view the balance shifts towards natural resources because that is the main central issue of the deal. The freedom of establishment in this case (Magma Sweden) is subsidiary to the main purpose of the economic operation discussed which is the acquisition of HS Orka in order to exploit the economic hydropower resources in a specific area of Iceland. Services of general interest and of strategic importance such as energy justify a stronger role for the State in order to defend the public interest and the abuse of national/EEA law.  

-          Last but not least, I am aware of the difficulties to prove the intention to abuse the freedom of establishment at an initial stage. However, I think that the requisite of actual economic activity that the ECJ requires cannot be discarded so easily. To my best understanding, a year after Magma Sweden was created by Magma Canada, the Swedish company has no economic activity at all in Sweden, country where they claim their primary establishment to fall under the scope of the European internal market rules. In these circumstances, I do not find it disproportionate for the Icelandic State to research the legality of the operation under national/European law.

All these factors explain why I disagree with other specialists which gave their opinions in all respect for their positions. Disagreement is a natural part of the legal science and it is the main reason why courts do always have an uneven number of judges. During our legal educationn we are trained to agree and disagree with a professional attitude and without taking issues personally.  I encourage all actors to take a similar approach and to discuss issues at the highest intellectual level, whithout making personal arguments. At the end the right interpretation is subject to judicial review. Nevertheless it is also my opinion that while a proper research on the legality of the sale proceeds, we should look to the future and start thinking about the energy/natural resources policy that we need.

A tide of constitutional reform has arrived to our seashore - Interview with Egill Helgasson - TV Program Silfur Egils - 21 March 2010

"There is a tide in the affairs of men, which, taken at the flood, leads on to fortune; omitted, all the voyage of their life is bound in shallows and in miseries".

Shakespeare's  Julius Caesar, Act 4, Scene 3, lines 217-221.

The quote is spoken by Brutus, during the civil war which occurred after the assassination of Caesar.  Brutus is in effect arguing that the time is right, and their opportunity is now; if they do not take advantage of it, it will not come again. 

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I approach law and constitutional from a European perspective because, due to my education and background, I tend to have a different view on issues discussed by the Icelandic society. I also have to clarify that I work in the field of European law where constitutional reform is a dynamic never-ending process. The EU Treaties have been reformed 5 years since I started specializing in this field.

The way I approach law is certainly different to what you are used to. Some reasons explain this:

1) I believe that law and politics are not separated by an abyss but should work together. I believe that law should serve society and its citizens in their search for a better future.

Law subject events to the rational order of pre-settled rules and judges are charged with the task of administering and interpreting rules. Politics is the means by which new law is created. Politics is the vehicle for making changing of societies. Politics looks to the future while Law provides a continuity with the past. In my discipline law and politics are not separated by an abyss, there are always bridges between the two. Academics talk about Judicial Activism – where judges do not only interpret but also create European law (creating rights for citizens, for instance ) – and Legal Politics – where politicians which are the law-makers bring politics into law. I believe that law can and should be changed to serve society, not simply to preserve the status quo. I have been educated not only to describe and apply the European law that it is but also to advocate for change and build a European legal order for the next generations.

2) I am critical towards law and some schools of legal thought which are not universal.

Example: interpretation of the New Testament by catholics and protestants regarding the ordination of women priests....should we prohibit it just because Jesus did never choose a woman apostle? Should not we interpret the Bible according to the needs our present societies? I believe that the rule of law should be interpreted in a dynamic way in the best interest of society, not only applying rules to facts but also providing justice and equality. Romans used to say in some circumstances: Summa iuris summa injuria. The maximum application of law can lead to the greatest injustice. This is still a maxim that has to be remembered today.

3) I always look at the limits of the law. And that law needs to respect fundamental rights and democratic will of people, otherwise it is illegitimate and therefore cannot be called “law”. Unfortunately, I remember that -sometimes - law can be "unlawful".

After 40 years of a dictatorship following a civil war, legal education in Spain made compulsory 2 years of legal philosophy, one at the beginning of our studies and one at the end. In Spain law graduates learn the current law but we also take it as relative and not absolute. We learn what law can do and what law should not do. We learn very well the difference between legality, morality and legitimacy. We learn how law is used and misused and concepts such as civil disobedience when a regime acts beyond its powers. My teacher was nobody else but the Dean of the Faculty of Law of the University Complutense of Madrid: Prof. José Iturmendi Morales.

So there are fundamental things for me which are always on my mind when I think about law and a process of constitutional reform. Legality, Ethics and Legitimacy are the three pillars of the law and the "law of laws" which is the Constitution.

My message today is very simple: as many have argued before me, there are historic opportunities that arise for men and societies at certain moments of their existence which simply have to be followed as they cannot be ignored.

As, it is the case in Iceland today, we are living in a constitutional moment of reform that we may not realize in full because we are too busy focusing on the economic consequences of the crisis. But the truth is that a unique political and sociological context is before us and we should be honoured to follow and participate in the discussions of a new constitutional order. 

 The President of the Spanish Constitutional Court has recently declared: “Without Constitution there is no future” calling for reform. This is because a Constitution must necessarily reflect the values and principles which are fundamental for the society so that we do not become slaves of other values and legal institutions which are outdated.The world in 2010 is very different now than in other times such as the 1789 French Revolution which gave rise to the Declaration of Human Rights. And yet the same revolutionary beliefs for which Europeans have fought over thousand years are still at issue around the world -- the belief that the rights of man come not from the generosity of God, but from us, sovereign people in democratic system who are the ones giving the legitimacy to the State. In a democracy, we are the demos, the power, we the people.

One of my favourite moments of history is the call for democracy and human rights that occurred in the aftermath of the Second World War. European civic movement started there. Hundred of peaceful activists, a lot of women, requested European powers to create a new legal order so that the same mistakes would not happen again. And the European Council of Europe was created. And so the European Convention of Human Rights that we enjoy today.

As Helmut Khol, historian and Chancellor of Germany said “A people who does not know its history, cannot understand its present nor build a future”.  We should not forget today that we are the heirs of many European wars and revolutions where millions of people sacrificed their lives for us. And this torch of law, democracy and human rights that started in Greece and Rome has been passed to us by history. Is it the destiny as the Greeks would argue? I do knot know.

What I know for sure is that, after the publication of the investigations of the Truth Committee in Iceland, it is essential to convert negative thoughts and experiences into positive change. We have to leave behind this black page of our recent history. A wonderful way to start anew is to send the message to the world that we will assure the survival and the success of this country, that we are one of the oldest democracies of the world and that, no matter what, we are committed to liberty, peace, fundamental rights and democracy. This would be a new page for our history.

Let me remind you that citizenship has rights but also obligations. And history sometimes forces us to take obligations that are not easy. For this task we need to act all together and look beyond our political differences. Divided there is little we can do. Not always we will share common views but we shall always hope to find the compromise solutions that we can all live with dignity.  

To participate in a constitutional process we have to begin anew -- remembering on both sides that civility, courtesy and respect are not signs of weakness, and sincerity is the minimum we deserve towards each other. Lets not argue and negotiate out of fear, but lets not be afraid to discuss and negotiate. We can explore together the problems that unite us instead of fighting over those problems which divide us. Let all sides of our society, for the first time, formulate serious and precise proposals to build a better future. We should aim for excellence. We should  aim not only to have a new society contract between us with maybe a new balance of power, but also a new world of law and institutions – where social justice, peace, democracy, sustainable development for us and our children are guaranteed. 

It is an honour for me to join and participate in this historic effort. But, as the President would say, my fellow Icelanders, the final success or failure of this intellectual adventure is in your hands more than mine.  

Constitutional reform is often the result of violent confrontations. The revolution I have seen in Iceland is as soft as velvet. I think most of us want a new revolution similar to the light which was given to us by Yoko Ono in Videy island: a bright light for the future, a peaceful revolution of hope. In my view, this is the most beautiful one. 

In the long history of Europe, only a few generations have been granted the honour of going through a process of peaceful constitutional reform. We should not avoid this responsibility – we should welcome it. Like President John F. Kennedy requested to his fellow Americans in his famous speech beginning his term in 1961, ask not what your country can do for you; ask what you can do for your country. This letter is just a distant echo of his inspirational speech and I have taken the freedom to borrow many of his beautiful expressions in English language. 

Because as Shakespeare would say, this tide of history and constitutional reform has arrived to our seashore. It is a tide that will lead us to fortune but, if we miss it, it might lead us to misery. Lets work together for this land that we all love because this is the main reason why I chose to live in this country.  

Freedom of establishment for companies and abuse of rights in EU/EEA law - Energy policy

 

Magma Energy Canada/Sweden - Circumvention of the Icelandic national prohibition of foreign investments in the energy sector  - Some thoughts

Main question: can Iceland prohibit under EU/EEA law rules – in combination with Icelandic law - the establishment of a foreign company with a primary place of business in Canada which intends to use EEA law in order to circumvent the national prohibition of foreign investments in the energy sector?

Some thoughts by M. Elvira Méndez-Pinedo, Dósent í Evrópurétti við Háskóla Íslands

 

State of the energy policy in Europe and summary of legal arguments

 As the EU Commissioner has declared (Energy Commissioner. European response to energy challenges. Speech at the EU Energy and Environment Law and Policy Conference, Brussels 22 January 2009. Speech/09/18) the energy sector is a strategic industry requiring protection within the internal market both at national and European level.  

This commissioner declared that, while it is clear that we need a strong internal market wholly integrated and safe in the field of energy, we should produce jobs in Europe rather than exporting wealth to energy producers outside the EU.

1. Investments in energy companies in the EEA territory by EEA companies fall under EEA law. On the basis of the jurisprudence of the Court of Justice of the European Union (from now on ECJ) and EFTA Court and EU/EEA law, it must be said that freedom of establishment is the principle. However, both the EU Treaty and the case-law of the ECJ allow restrictions if they are justified under European law. In fact, the European Court of Justice has ruled that freedom of establishment for companies can be restricted in the following circumstances:

If restrictions are based on a general public interest, such as:

-       the prevention of abuse or fraudulent conduct,

-       the protection of the interests of creditors, minority shareholders, employees or the tax authorities.

This was explained by the Advocate General Maduro in the ECJ case Cartesio ruled in 2008 (Judgment of the Court of Justice in Case C-210/06 Cartesio Oktató és Szolgáltató bt.  Opinion of advocate general Maduro delivered on 22 May 2008 in Cartesio, C-210/06, not yet published (hereinafter,Cartesio.) See especially para. 32. of the opinion of Advocate General).

According to the latest judgment of the Court of Justice of the European Union (ECJ) of 21 January 2010 (Societé Centrale de Gestion) it is also possible to argue that European law does not affect the possibility of national legislation/measures prohibiting companies from invoking EU law when, in reality, there is a misuse of EU legal provisions to circumvent legitimate national law (abuse of the right of establishment by foreign companies through artificial arrangements in order to escape national prohibition).

The jurisprudence of the ECJ has finally given a doctrine on the abuse of rights in the field of free movement of establishment. Abuse of rights is not only limited to tax policy as this concept is already established as a consolidated principle in the field of free movement of persons ( EU Citizens Directive 2004/38/EC).

2. Furthermore, EU/EEA law allows especial derogations from the general regime of European energy law if they are justified for public reasons such as security of supply or the isolation or the size of small markets admitted under EU/EEA law. Iceland could very well derogate from the general regime and, for reasons unknown to the author, it opted not to do so when incorporating the general EU energy package in to the EEA legal order (see Opinion of the European Commission on the application of Iceland to join the EU – 24 February 2010 and analytical Report where it is stated that Iceland did not use the derogations permitted under the current EEA Agreement and the Commission acknowledges that these derogations are still available for Iceland during negotiations).

3. Investments in energy companies in the EEA territory by foreign companies or undertakings established outside the EEA fall under national law. It is up for national legislators to decide upon this issue. EU law is neutral on this point. A precedent has been created by the EU in the case Gazprom (Russia, 2007) where the EU decided that the principle of reciprocity could apply so that the EU could restrict foreign access to European energy assets.

4. Once more, it can be said that the strategic importance of the energy market is essential for Europe and can justify certain restrictions. The EU is currently negotiating energy agreements with third countries in a case by case basis. Access to the EU market is not automatically given to foreign companies outside the EU/EEA. Preference is naturally given to European neighbours and other important energy countries.

As far as this author knows, there are is no energy agreement to foster cooperation and investments with Canadian firms. There is, for the time being, no clear European external energy strategy with Canada.

5. The pre-necessary condition for legal persons to enjoy rights related to the internal market is to be legally established in one Member State of the EU. Without this economic link to the EU, there are no rights to expand activities to other Member States under EU Law. The same is applicable to EEA law. Establishment is defined as “the actual pursuit of an economic activity through a fixed establishment in another Member State for an indefinite period” (ECJ case Factortame C-221/89 ). According to Craig and De Burca (EU Law Oxford University Press, 2007, p. 806), a principal place of business must be conducted somewhere in the EU because otherwise it does not fall under the scope of EU law. It his highly questionable whether a company established and operating in Canada can, through the establishment of a subsidiary deprived of all real activity in Sweden, use EU/EEA law to circumvent an Icelandic national prohibition justified by a public policy legitimate under EU/EEA law.

6. The ECJ has established a clear line of jurisprudence concerning the limits of the freedom of establishment and the abuse of rights in the cases Cartesio (2008) and Société de Gestion (2010) commented below. The idea of an internal market based on neoliberalist approach where Member States have lost almost all regulatory power does not seem to be the standard anymore. The EU has entered a new phase where there is an internal market with a social face as President Barroso promised after the entry into force of the Treaty of Lisbon in 2009.

Conclusion:

The doctrine of abuse of rights has become clear in the jurisprudence of the ECJ from 2008. It is possible to argue that EU rights are first of all for companies having a real economic link to Europe, not for box-lettter companies created through artificial arrangements in order to circumvent national law. If a primary establishment is not located and connected to the economy of Europe, one could very well argue that there might be no rights under the internal market. 

There are derogations possible for Iceland under EU energy law that could be requested de lege ferenda. This is dynamic area law where the situation could change in the next year during accession negotiations with the EU.

 

 1. Freedom of establishment of companies under EU law. Latest jurisprudence of the European Court of Justice. EU Member States may prohibit abuse of EU law which tries to circumvent national rules through artificial arrangements.

According to the latest judgment of the Court of Justice of the European Union (ECJ) in the case Societé de Gestion of 21 January 2010 it is possible to argue that European law does not affect the possibility of national legislation/measures prohibiting companies from invoking EU law when, in reality, there is a misuse of EU legal provisions to circumvent legitimate national law (abuse of the right of establishment by foreign companies through artificial arrangements in order to escape national prohibition).

As the ECJ has declared in a case following a reference for a preliminary ruling requested by Tribunal de première instance de Mons – Belgium (Freedom of establishment -Combating tax avoidance - Prevention of abuse – Proportionality), according to established jurisprudence, a national measure restricting freedom of establishment may be justified where it specifically targets wholly artificial arrangements designed to circumvent the legislation of the Member State concerned. An EU Member State may adopt a legal measure which is liable to hinder the freedom of establishment and this is justifiable under European Law. However, the ECJ requests this restriction to pass a double test: the measure must pursue a legitimate objective compatible with the EU Treaty and if must is justified by overriding reasons in the public interest. If the measure passes this test, it is also necessary that its application be appropriate to ensuring the attainment of the objective thus pursued and does not go beyond what is necessary to attain it.

It is possible for national authorities to stop purely artificial arrangements – devoid of economic reality, created with the aim of escaping or avoiding current national prohibitions (tax law, energy law, etc). In other words, as some authors had requested, finally the ECJ has recognised that the misuse of EU law cannot be regarded as promoting the internal market and that national authorities can prevent this abuse of freedom of establishment.

The Court would require a previous analysis based on facts and evidence, not subjective intentions. The company invoking the right of establishment under EU law must also be given an opportunity to prove that there is a genuine establishment and integration into the economy of the economy of the guest State (A tax report proving taxes paid in that country, for instance, would prove genuine economic integration). EU law should not help companies to elude national legitimate legislation. The ECJ is shifting towards dealing with abuse at the level of justification by both the State and the companies. A national prohibition is not excluded but it requires a test of proportionality.

According to the ECJ in the case judged on 21 January 2010 on tax avoidance and prevention of abuse, national legislation which provides for a consideration of objective and verifiable elements in order to determine whether a transaction represents an artificial arrangement, entered into for tax reasons, is to be regarded as not going beyond what is necessary to attain the objectives relating to the need to maintain the balanced allocation of the power to tax between the Member States and to prevent tax avoidance where, first, on each occasion on which there is a suspicion that a transaction goes beyond what the companies concerned would have agreed under fully competitive conditions, the taxpayer is given an opportunity, without being subject to undue administrative constraints, to provide evidence of any commercial justification that there may have been for that transaction.

The Court states that:

“55. It follows that legislation of a Member State such as that at issue in the main proceedings constitutes a restriction on freedom of establishment within the meaning of Article 43 EC, read in conjunction with Article 48 EC.

Whether the legislation at issue in the main proceedings can be justified

56. According to established case‑law, a measure which is liable to hinder the freedom of establishment enshrined in Article 43 EC is permissible only if it pursues a legitimate objective compatible with the Treaty and is justified by overriding reasons in the public interest. It is also necessary, in such a case, that its application be appropriate to ensuring the attainment of the objective thus pursued and not go beyond what is necessary to attain it (see, inter alia, Case C‑250/95 Futura Participations and Singer [1997] ECR I‑2471, paragraph 26; Case C‑9/02 de Lasteyrie du Saillant [2004] ECR I‑2409, paragraph 49; Marks & Spencer , paragraph 35; and Lammers & Van Cleeff , paragraph 25).

60. First, as regards the balanced allocation between Member States of the power to tax, it should be recalled that such a justification may be accepted, in particular, where the system in question is designed to prevent conduct capable of jeopardising the right of a Member State to exercise its tax jurisdiction in relation to activities carried out in its territory (see, inter alia, Marks & Spencer , paragraph 46; Case C‑347/04 Rewe Zentralfinanz [2007] ECR I‑2647, paragraph 42; Oy AA , paragraph 54; and Aberdeen Property Fininvest Alpha , paragraph 66).

65. Second, as regards the prevention of tax avoidance, it should be recalled that a national measure restricting freedom of establishment may be justified where it specifically targets wholly artificial arrangements designed to circumvent the legislation of the Member State concerned (see, to that effect, ICI , paragraph 26; Marks & Spencer , paragraph 57; Cadbury Schweppes and Cadbury Schweppes Overseas , paragraph 51; and Test Claimants in the Thin Cap Group Litigation , paragraph 72).

66. In that context, national legislation which is not specifically designed to exclude from the tax advantage it confers such purely artificial arrangements – devoid of economic reality, created with the aim of escaping the tax normally due on the profits generated by activities carried out on national territory – may nevertheless be regarded as justified by the objective of preventing tax avoidance, taken together with that of preserving the balanced allocation of the power to impose taxes between the Member States (see, to that effect, Oy AA , paragraph 63).

71. National legislation which provides for a consideration of objective and verifiable elements in order to determine whether a transaction represents an artificial arrangement, entered into for tax reasons, is to be regarded as not going beyond what is necessary to attain the objectives relating to the need to maintain the balanced allocation of the power to tax between the Member States and to prevent tax avoidance where, first, on each occasion on which there is a suspicion that a transaction goes beyond what the companies concerned would have agreed under fully competitive conditions, the taxpayer is given an opportunity, without being subject to undue administrative constraints, to provide evidence of any commercial justification that there may have been for that transaction (see, to that effect, Test Claimants in the Thin Cap Group Litigation , paragraph 82, and order in Case C‑201/05 Test Claimants in the CFC and Dividend Group Litigation [2008] ECR I‑2875, paragraph 84).

75. In those circumstances, subject to verification to be carried out by the referring court as regards the last two points, which concern the interpretation and application of Belgian law, it must be concluded that, in the light of the foregoing, national legislation such as that at issue in the main proceedings is proportionate to the set of objectives pursued by it.

76. Accordingly, the answer to the questions referred is that Article 43 EC, read in conjunction with Article 48 EC, must be interpreted as not precluding, in principle, legislation of a Member State, such as that at issue in the main proceedings, under which a resident company is taxed in respect of an unusual or gratuitous advantage where the advantage has been granted to a company established in another Member State with which it has, directly or indirectly, a relationship of interdependence, whereas a resident company cannot be taxed on such an advantage where the advantage has been granted to another resident company with which it has such a relationship. However, it is for the national court to verify whether the legislation at issue in the main proceedings goes beyond what is necessary to attain the objectives pursued by the legislation, taken together. “

 

The case Cartesio is also extremely relevant as it defines the scope of the free establishment for companies in EU/EEA law and the regulatory powers of the States concerning the benefits of the EU rules (Judgment of the Court of Justice of the European Union in Case C-210/06 Cartesio Oktató és Szolgáltató bt. And Opinion of advocate general Maduro delivered on 22 May 2008 in Cartesio, C-210/06, nyr, (hereinafter,Cartesio.) See especially  para. 32.of the opinion of Advocate General).

 
As long as a national measure is considered a restriction incompatible with EU law, it can only be justified on limited grounds. But the ECJ offers case-law based justifications in order to allow derogations to the free movement of establishment in certain circumstances.

Restrictions to the free movement may be those based on a general public interest, such as the prevention of abuse or fraudulent conduct, or protection of the interests of creditors, minority shareholders, employees or the tax authorities as the Advocate General Maduro explains in the case Cartesio.

This ruling of the ECJ in the case Cartesio indicates furthermore the limits of the freedom of establishment in relation to companies. The ECJ held that under EU law, the Member State has the power to define two important elements, namely:

1) the connecting factor required of a company if it is to be regarded as incorporated under the law of that Member State (and, as such, capable of enjoying the right of establishment) and

2) the connecting factor required of a company if it is to be able subsequently to maintain that status.

Member States can decide the criteria under which they recognise the freedom of establishment for national companies. A company cannot rely on the EU freedom of establishment in order to have national law set aside.

By analogy, it can said that a company cannot rely on the freedom of establishment under EU/EEA law to circumvent national rules. The freedom of establishment has a natural limit because the concept of abuse of right has therefore finally developed in ECJ´s case law. EU law prohibits “wholly artificial agreements which do not reflect economic reality and which are aimed at circumventing national legislation”.

Advocate General Maduro explains the latest jurisprudence of the ECJ in his opinion on the case Cartesio:

“29. The problem, in my opinion, is that the statements cited above from Daily Mail and General Trust and Inspire Art do not represent the case‑law and its underlying logic accurately. On the one hand, despite what the rulings in Inspire Art and Centros suggest, it may not always be possible to rely successfully on the right of establishment in order to establish a company nominally in another Member State for the sole purpose of circumventing one’s own national company law. In its recent judgment in Cadbury Schweppes , the Court reiterated that ‘the fact that [a] company was established in a Member State for the purpose of benefiting from more favourable legislation does not in itself suffice to constitute abuse of [the freedom of establishment]’. However, it also emphasised that Member States may take measures to prevent ‘wholly artificial arrangements, which do not reflect economic reality’ and which are aimed at circumventing national legislation.  In particular, the right of establishment does not preclude Member States from being wary of ‘letter box’ or ‘front’ companies.  In my view, this represents a significant qualification of the rulings in Centros and Inspire Art , as well as a reaffirmation of established case‑law on the principle of abuse of Community law,  even though the Court continues to use the notion of abuse with considerable restraint – and rightly so.

30. On the other hand, despite what the ruling in Daily Mail and General Trust seems to suggest, the Court does not, a priori , exclude particular segments of the laws of the Member States from the scope of the right of establishment. Rather, the Court concentrates on the effects that national rules or practices may have on the freedom of establishment and assesses the conformity of those effects with the right of establishment as guaranteed by the Treaty. As regards national rules relating to the incorporation of companies, the Court’s approach is inspired by two concerns. First, in the present state of Community law, Member States are free to choose whether they want to have a system of rules grounded in the real seat theory or in the incorporation theory, and indeed, various Member States have opted for profoundly different rules of incorporation. Second, the effective exercise of the freedom of establishment requires at least some degree of mutual recognition and coordination of these various systems of rules. The result of this approach is that the case‑law typically respects national rules relating to companies regardless of whether they are based on the real seat theory or on the incorporation theory. However, at the same time, the effective exercise of the right of establishment implies that neither theory can be applied to its fullest logical extension – the best example to date perhaps being the case of Überseering .

31. In sum, it is impossible, in my view, to argue on the basis of the current state of Community law that Member States enjoy an absolute freedom to determine the ‘life and death’ of companies constituted under their domestic law, irrespective of the consequences for the freedom of establishment. Otherwise, Member States would have carte blanche to impose a ‘death sentence’ on a company constituted under its laws just because it had decided to exercise the freedom of establishment. Especially for small and medium‑sized companies, an intra‑Community transfer of operational headquarters may be a simple and effective form of taking up genuine economic activities in another Member State without having to face the costs and the administrative burdens inherent in first having to wind up the company in its country of origin and then having to resurrect it completely in the Member State of destination. Moreover, as the Commission rightly emphasised, the process of winding up a company in one Member State and then reconstituting it under the law of another Member State can take considerable time, during which the company at issue may be prevented from operating altogether.

32. Consequently, even though the restriction on the right to freedom of establishment at issue in the present case arises directly from national rules on the incorporation and functioning of companies, the question has to be asked whether they can be justified on grounds of general public interest, such as the prevention of abuse or fraudulent conduct,  or the protection of the interests of, for instance, creditors, minority shareholders, employees or the tax authorities. ”

 

The Court of Justice of the European Union follows the Opinion of Advocate General Maduro and states in the Cartesio ruling:

“104. In that regard, the Court observed in paragraph 19 of Daily Mail and General Trust that companies are creatures of national law and exist only by virtue of the national legislation which determines its incorporation and functioning.

105. In paragraph 20 of Daily Mail and General Trust , the Court stated that the legislation of the Member States varies widely in regard to both the factor providing a connection to the national territory required for the incorporation of a company and the question whether a company incorporated under the legislation of a Member State may subsequently modify that connecting factor. Certain States require that not merely the registered office but also the real seat ( siège réel ) – that is to say, the central administration of the company – should be situated in their territory, and the removal of the central administration from that territory thus presupposes the winding-up of the company with all the consequences that winding-up entails under company law. The legislation of other States permits companies to transfer their central administration to a foreign country but certain of them make that right subject to certain restrictions, and the legal consequences of a transfer vary from one Member State to another.

106. The Court added, in paragraph 21 of Daily Mail and General Trust , that the EEC Treaty had taken account of that variety in national legislation. In defining, in Article 58 of that Treaty (later Article 58 of the EC Treaty, now Article 48 EC), the companies which enjoy the right of establishment, the EEC Treaty placed on the same footing, as connecting factors, the registered office, central administration and principal place of business of a company.

108. It should be pointed out, moreover, that the Court also reached that conclusion on the basis of the wording of Article 58 of the EEC Treaty. In defining, in that article, the companies which enjoy the right of establishment, the EEC Treaty regarded the differences in the legislation of the various Member States both as regards the required connecting factor for companies subject to that legislation and as regards the question whether ─ and, if so, how ─ the registered office ( siège statutaire ) or real seat ( siège réel ) of a company incorporated under national law may be transferred from one Member State to another as problems which are not resolved by the rules concerning the right of establishment, but which must be dealt with by future legislation or conventions (see, to that effect, Daily Mail and General Trust , paragraphs 21 to 23, and Überseering , paragraph 69).

109. Consequently, in accordance with Article 48 EC, in the absence of a uniform Community law definition of the companies which may enjoy the right of establishment on the basis of a single connecting factor determining the national law applicable to a compan y, the question whether Article 43 EC applies to a company which seeks to rely on the fundamental freedom enshrined in that article – like the question whether a natural person is a national of a Member State, hence entitled to enjoy that freedom – is a preliminary matter which, as Community law now stands, can only be resolved by the applicable national law. In consequence, the question whether the company is faced with a restriction on the freedom of establishment, within the meaning of Article 43 EC, can arise only if it has been established, in the light of the conditions laid down in Article 48 EC, that the company actually has a right to that freedom.

110. Thus a Member State has the power to define both the connecting factor required of a company if it is to be regarded as incorporated under the law of that Member State and, as such, capable of enjoying the right of establishment, and that required if the company is to be able subsequently to maintain that status. That power includes the possibility for that Member State not to permit a company governed by its law to retain that status if the company intends to reorganise itself in another Member State by moving its seat to the territory of the latter, thereby breaking the connecting factor required under the national law of the Member State of incorporation.

114. It should also be noted that, following the judgments in Daily Mail and General Trust and Überseering , the developments in the field of company law envisaged in Articles 44(2)(g) EC and 293 EC, respectively, as pursued by means of legislation and agreements, have not as yet addressed the differences, referred to in those judgments, between the legislation of the various Member States and, accordingly, have not yet eradicated those differences.”

As a conclusion:

On the basis of the jurisprudence of the Court of Justice of the European Union and EFTA Court and EU/EEA law, it must be said that freedom of establishment is the principle in the internal market. However, both the EU Treaty and the case-law of the ECJ allow restrictions if they are justified under European law. In fact, the European Court of Justice has ruled that freedom of establishment for companies can be restricted in the following circumstances:

If restrictions are based on a general public interest, such as established in the case Cartesio:

-       the prevention of abuse or fraudulent conduct,

-       the protection of the interests of creditors, minority shareholders, employees or the tax authorities.

According to the latest judgment of the Court of Justice of the European Union (ECJ) of 21 January 2010 it is also possible to argue that European law does not affect the possibility of national legislation/measures prohibiting companies from invoking EU law when, in reality, there is a misuse of EU legal provisions to circumvent legitimate national law (abuse of the right of establishment by foreign companies through artificial arrangements in order to escape national prohibition).

The jurisprudence of the ECJ has finally given a doctrine on the abuse of rights in the field of free movement of establishment. Abuse of rights is not only limited to tax policy as this concept is already established as a consolidated principle in the field of free movement of persons (see for instance EU Citizens Directive 2004/38/EC).

2. Neutrality European law – Public/private ownership of natural resources – Energy as a strategic sector which justifies restrictions on the free establishments of foreign and even EEA companies.

Similar arguments would apply mutatis mutandis (by analogy) to EU and EEA internal market of energy law.

EU/EEA Member States have national sovereignty over natural resources and are free to decide the system of public/private property ownership and exploitation. Public/private ownership is a matter for each State to decide in respect of current international and European law in force.

In general, European law (EU and EEA law) requires the respect of non-discrimination principle between nationals/undertakings and other EEA citizens/companies. This is essential for the correct functioning of the European internal market of energy. But two precisions must be made that are essential in this regard:

1) Energy is a strategic industry that is related to national sovereignty and public order. Ensuring security and independence of energy supply for a country may constitute a public security concern and is therefore a legitimate aim capable of justifying a restriction on the free movement within the EU/EEA (EU energy policy allows for derogations in case of isolated markets or situation where a company has less than 100.000 connected users (ie. households) such as is the case in Iceland).

2) The principle of non-discrimination does not obligatory extend to foreign companies, as EU/EEA law stands today. EU/EEA countries can adopt different policies regarding foreign companies outside the EU/EEA.

According to the EFTA Court Judgment in the case E-2/06 Norwegian waterfalls (EFTA Court Judgment of 26 June 2007), the EFTA Court declared:

“72 The Court holds that Article 125 EEA is to be interpreted to the effect that an EEA State’s right to decide whether hydropower resources and related installations are in private or public ownership is, as such, not affected by the EEA Agreement. The corollary of this is that Norway may legitimately pursue the objective of establishing a system of public ownership over these properties, provided that the objective is pursued in a non-discriminatory and proportionate manner. [...]

77 For the reasons set out above, the contested rules [different conditions for concession for acquisition of hydropower resources different for EEA than Norwegian companies], as they exist today, cannot be said to aim at establishing a “system of property ownership” within the meaning of Article 125 EEA. Rather, the contested rules are aimed at achieving a certain level of public control of the relevant sector of the economy.

78 Acquiring public control does not, as such, qualify as a mandatory requirement. However, acquiring public control may be a means of attaining other goals which may qualify as legitimate aims, potentially justifying restrictions on free movement. The documents of the case show that environmental protection and security of energy supply, as well as effective collection of economic rent, are concerns which through the years have gained importance in relation to management and control of hydropower resources.

79 The Court notes first that environmental concerns are legitimate public interests under the EEA Agreement and therefore can serve as a justificatory ground in the case at hand (see for comparison Case C-2/90 Commission v Belgium [1992] ECR I-4431, at paragraphs 30-32). Moreover, ensuring security of energy supply may constitute a public security concern and therefore a legitimate aim capable of justifying a restriction on free movement (see for comparison Case 72/83 Campus Oil [1984] ECR 2727, at paragraphs 34 and 35 and Case C-503/99 Commission v Belgium [2002] ECR I-4809, at paragraph 46).

80 The aim of the collection of economic rent is of an economic nature and therefore cannot in itself serve as justificatory ground (see Case E-1/04 Fokus Bank [2004] EFTA Ct. Rep. 11, at paragraph 33). However, as stated above, the legislation at issue genuinely pursues several different objectives. Therefore, the presence of such an economic aim does not in itself invalidate other legitimate justificatory grounds.

81 In light of the above, the Court concludes that the contested rules are based on legitimate aims under EEA law in so far as the aims of ensuring security of energy supply and protection of the environment are concerned. It thus needs to be examined whether the rules satisfy the requirements of suitability and necessity under the principle of proportionality.

82 In order to be justified, the contested rules must be suitable for achieving the intended objectives, and they must not go beyond what is necessary in order to attain the legitimate objectives which they pursue (see Case E-10/04 Piazza v Schurte [2005] EFTA Ct. Rep. 76, at paragraph 39).“

 

It can be concluded that EEA law also allows derogations based on legitimate aims if they are suitable and proportional to achieve a public policy aim. Under EEA law there is the possibility to restrict free movement and free establishment for public policy reasons such as the security of supply, environmental concerns or any other public policy such as prevention of abuse or fraud. The EFTA Court has to follow the case-law of the ECJ in order to secure homogeneity between EU and EEA law.

Furthermore, EU/EEA law allows especial derogations from the general regime of European energy law if they are justified for public reasons such as security of supply or the isolation or the size of small markets admitted under EU/EEA law. Iceland could very well derogate from the general regime and, for reasons unknown to the author, it opted not to do so when incorporating the general EU energy package in to the EEA legal order (see Opinion of the European Commission on the application of Iceland to join the EU – 24 February 2010 and analytical Report where it is stated that Iceland did not use the derogations permitted under the current EEA Agreement and the Commission acknowledges that these derogations are still available for Iceland during negotiations).

 

Conclusions

The doctrine of abuse of rights has become clear in the jurisprudence of the ECJ from 2008. It is possible to argue that EU rights are first of all for companies having a real economic link to Europe, not for box-lettter companies created through artificial arrangements in order to circumvent national law. If a primary establishment is not located and connected to the economy of Europe, one could very well argue that there might be no rights under the internal market. 

There are derogations possible for Iceland under EU energy law that could be requested de lege ferenda. This is dynamic area law where the situation could change in the next year during accession negotiations with the EU.

 

  Most important references

Opinion of the European Commission on the application of Iceland to join the EU – 24 February 2010 and analytical Report.

V. Edwards and P. Farmer, „“The Concept of Abuse in the Freedom of Establishment of Companies: A Case of Double Standards?“ in A. Arnull and others (eds), Continuity and Change in EU Law, Essays in Honour of Sir Francis Jacobs, Oxford University Press, 2008, pp. 205-227 and especially conclusions on page 206-207.

M. Roggenkamp and others (eds), Energy Law in Europe. National, EU and International Regulation, 2nd. ed, Oxford University Press, 2007, pp. 40-51.

 EFTA Court Judgment of 26 June 2007 available at 
 http://www.eftacourt.int/images/uploads/E-2-06_Judgment.pdf

Judgment of the Court of Justice of the European Union in Case C-210/06 Cartesio Oktató és Szolgáltató bt. And Opinion of advocate general Maduro delivered on 22 May 2008 in Cartesio, C-210/06, nyr, (hereinafter,Cartesio.) See especially  para. 32.of the opinion of Advocate General.

Judgment of the Court of Justice of the European Union in the case Cadbury Schweppes plc and Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue, C- 196/04, [2006] ECR I-7995, especially in para. 55.

ECJ, Judgment of the Court (Third Chamber) of 21 January 2010. Case C-311/08.  Société de Gestion Industrielle (SGI) v Belgian State. European Court Reports [2010]  not yet published.

Commissioner Andris Piebalgs, Energy Commissioner. European Response to energy challenges. Speech at the EU Energy and Environment Law and Policy Conference, Brussels 22 January 2009. Speech/09/18. Available at  http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/09/18&format=HTML&aged=0&language=EN&guiLanguage=en"

 

 

Icesave - Iceland. The Icesave agreements and other national measures in response of the financial crisis: Revisiting the principles of State liability, State aid and non-discrimination in European law

 

M. Elvira Méndez-Pinedo. Associate Professor of European Law. University of Iceland

Report drafted 1st February 2010. Not published.

(Please contact me by mail at mep(at)hi.is for the report with the charts)

 

Abstract and executive summary

This study describes and analysis the Icesave dispute and Ice-save agreements between Iceland, the UK and Holland in the light of European law (EU and EEA law) focusing on two main issues relevant to the proper resolution of this dispute: 1) the State liability for breaches of EU/EEA law on the basis of Directive 94/19/EC following a systemic bank collapse in Iceland; and 2) the principle of non discrimination concerning the nationalisation of Icelandic banks (State aid) and the payment of the minimum guarantee of 20.889 € to depositors of Icesave accounts in the branches of Landsbanki in the UK and Holland. It will be argued how the European legal order has proved to be incomplete, fragmented and unable to cope with the legal problems arising from the Icesave dispute.

In the first place, the rules of State liability of EU/EEA law in this case are very unclear and uncertain. In the second place, it is questionable whether the Icelandic emergency measures violate EU/EEA law in the light of other national measures adopted by EU Member States during the crisis. In the third place, we will analyse how the real core of the dispute – the nationalisation of private debt left by the collapse of the Icelandic banking system in the UK and Holland and the measures adopted for the reconstruction of the financial sector in Iceland and based on the connection to Icelandic economy– might not fall under the scope of present EU/EEA law after all.

This study will argue that, while the Icesave dispute relates to a highly complicated problem created by the internal market of banking and financial services; the nationalisation of banking entities after a financial crisis is a new problem in EU law for which the EU Treaties and European jurisprudence have no legal answer so far. It will also explain how, from a legal point of view, this cross-border dispute is located at the outer limits of EU/EEA law, in grey areas that are very difficult to solve on a bilateral basis. If the EU has no competence over this new problem, the competence belongs to the Member States. The same applies in EEA law. In these circumstances, the principle of legality would mean that the application of the principles of State liability and non-discrimination in EU/EEA law do not come into play.

The Icesave dispute and agreements reflect a conflict between EU/EEA/International law which is very complicated because it is entangled with political, economic and sociology factors. This study is very critical of the political and legal methodology chosen to solve this dispute. Unfortunately for all parties involved, bilateral agreements have been negotiated between Iceland, the UK and Holland outside of the European legal order. These agreements are resented by an important part of the public opinion in Iceland because of the harness of the conditions. While there seems to be political compromise accepted by all political parties that Iceland should stand by its European obligations, the terms of the Icesave agreements are perceived by 70% of Icelanders as negotiated under duress and jeopardizing the economic future of the small country.

Furthermore, it is the opinion of the author that the Icesave dispute raises essential questions concerning fundamental rights, solidarity, democracy, economic sustainability and solidarity between nations, questions that should be clarified before the Court of Justice of the European Union or the EFTA Court.

From a legal point of view it is highly relevant to note that this dispute has been settled outside the legal order and by diplomatic negotiations. Whether Iceland, the UK and Holland accept to reconsider this point is a different political issue at this stage of events. For the time being, the situation is the following: unless the three countries agree, Iceland cannot take the case before the ECJ and the EFTA Court has no direct competence either. In this context, the author wonders whether the structure of the EEA Agreement between the EU and EFTA countries has proven defective to solve a cross-border dispute of this magnitude. By approaching this dispute at a bilateral level on a political basis, Icelandic and other European citizens residents in Iceland as well as the Icelandic State have been deprived of access to justice.   In spite of the importance of this dispute for the internal market and for all parties involved, the current methodology used means that there is no right for effective judicial remedy for Iceland nor Icelanders at European level, no judicial forum where all pleadings can take place and where the rule of law can prevail on the basis of legal arguments.  In the absence of a proper European litigation forum and judicial procedure, it seems to the author (on the basis of information made public) that a political decision to interpret EU law in the best interests of the UK and Holland has been adopted, a decision only justified by the macroeconomic need to secure the stability of the financial markets of Europe.

This study is highly critical of this political approach to solve a legal dispute that will define the legal history of Europe and Iceland and, by extension, European integration. European obligations and European rights are linked together. From the perspective of European law, it is highly questionable whether EU States can request the compliance of obligations from an EFTA/EEA State and its citizens without providing, at the same time, a proper system of judicial review with appropriate rights of defence.

1. Introduction and background of the Icesave dispute

An account of the different facts and background of the Icesave dispute is explained by the group Indefence in Iceland which collected 62.119 signatures requesting the President of Iceland to summit the second Icesave agreements to a national referendum in December 2009.1

“The autumn of 2008 will long be remembered in Iceland. During the first days of October it became apparent that the three largest Icelandic banks were in grave danger of collapsing due to insufficient liquidity. Collectively, these three privately owned companies accounted for about 85% of the Icelandic banking system. Among them was the Landsbanki bank, responsible for the high interest Icesave accounts that had become very successful in Holland and the United Kingdom. On Monday October 6th the government reacted urgently by passing legislation, enabling the Icelandic financial service authority (FSA) to effectively nationalize the banks if they were deemed to be on the brink of collapse. This was conceived as an emergency measure to guarantee national security and permit the government to maintain the financial infrastructure necessary to keep Icelandic society functioning through the impending crash.

On that same day, Icesave depositors in Holland and the United Kingdom were unable to gain access to their funds, allegedly because of technical problems, but more likely because of liquidity problems of Landsbanki. On Tuesday October 7th the Icelandic government seized control of Landsbanki, which it deemed had gone beyond the point of no return. The next day the British government invoked the Anti-terrorism, Crime and Security Act of 2001 to freeze the assets of Landsbanki, the Central Bank of Iceland and the Government of Iceland in the United Kingdom. The aim of this draconian and unprecedented action was apparently to protect the interests of British Icesave depositors. The Dutch government took similar, but less stigmatizing, steps to freeze the assets of Landsbanki in Holland. A few days later all three of the main Icelandic banks had collapsed. The terrorism stamp destroyed what little faith the outside world had in many Icelandic businesses and blocked off numerous economic lifelines, making it effectively impossible to transfer funds between Iceland and the outside world for several months.

A year later, the Icelandic economy is still in a state of deep freeze, with a weak currency and national debt and unemployment both soaring. Help is on the horizon from the International Monetary Fund (IMF) and associated loans from many of Iceland’s neighbours and allies. However, this help is currently being blocked by the British and Dutch governments, through their considerable influence in the IMF, until the Icelandic state agrees to reimburse them for compensating British and Dutch Icesave depositors.“

So far for the political background of the dispute. From a legal point, the negotiations between Iceland, Holland and the UK concerning the Icesave deposits in the last two countries refers to  different legal issues in European Union law that can be summarised on two essential points: 1) the interpretation of Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes (DGS) concerning the final responsibility/liability of the Icelandic Government as a last resort and 2) the application of the principle of non-discrimination in EU/EEA law with regards to the Icelandic legal measures of nationalisation of Icelandic banks adopted after the financial crisis (State aid).

In Europe, deposits of individuals in commercial banks are guaranteed by a private insurance fund under EU/EEA rules. When the crisis hit Iceland in September-October 2008, it became clear that the private Icelandic DGS (Tryggyngasjóður) could not meet all depositors´ claims as it was a serious case of systemic bank failure. In order to guarantee the functioning of the banking and financial services in Iceland, a series of measures was adopted, notably the Emergency Act 125/2008. The question arose whether a sovereign State was liable or immune under European rules in the case the Icelandic Fund which had to supply the guarantee of a minimum 20.887€ could not meet all depositor´s claims. It is important to remember that this was the first time in the history of the internal market that a cross-border bankruptcy/insolvency left a big number of victims in other European countries. In the autumn 2008 the UK and Holland governments announced that their respective fund and insurance schemes would refund the depositors in their respective countries. This was done in order to avoid further expansion of the financial crisis to the European internal market. The British and Dutch governments asserted immediately the liability of the Icelandic State without respecting the original legal arguments raised by Iceland, the country where the final bill would be sent to tax payers. The EU institutions seemed to support the UK and Dutch interpretation. Their arguments were based, on the first place, on their interpretation of the law of the European Economic Area (EEA), and around two positions in particular:

1) that the Icelandic Government was obliged to assume responsibility an provide as a last resort the minimum guarantee  at least €20,887 for Icesave depositors of Landsbanki in the UK/Holland; and

2) that Iceland's legal actions adopted after the financial crisis by the Icelandic Financial Services in order to re-structure, recapitalise and create the new Landsbanki and the other Icelandic banks were discriminatory under EU/EEA law against creditors non-resident in Iceland.

In the middle of the most serious financial crisis that Iceland has gone through in recent history, the Icelandic government took the political decision to accept the claims from the UK and Holland and promised to honour its European obligations. Events during 2009 have proven that this was a political decision based on financial and economic reasons, not on legal arguments.

2. Assessment of the legal claims in the context of European law (EU and EEA law)

2.1. Background of EU and EEA structure and procedures for cross-border disputes

In the first place, it must be noted that the European Court of Justice (ECJ) has the exclusive competence to interpret EU law. The interpretation of the different EU institutions or EU Member States cannot be taken as the ultimate one. It is obvious that this dispute touches one grey area of EU law. The interpretation of the Directive 94/19/EC on the responsibility/liability of EU/EEA Member States when a systematic failure of the banking system means that private fund responsible for the DGS does not have sufficient funds is certainly not an easy one.

The ECJ also has jurisdiction in EFTA and EEA matters in some cases. The interpretation of EEA law belongs, in the last resort, to the ECJ when it affects the legal order of the EU (ie. on issues relating to the internal market). Professor Stefán Már Stefánsson has summarised this competence in the following way:2

“a) If the dispute concerns any provisions of the EEA Agreement which are identical in substance to the corresponding rules of the EC Treaty or any acts adopted in the application of this Treaty, and provided the dispute has not been settled within three months from being brought before the EEA Joint Committee; the contracting parties which are parties to the dispute may agree to request the ECJ to give a ruling on the interpretation of the relevant rules. This possibility is recognized by Article 111 paragraph 3 of the EEA Agreement. This procedure has never been used in practice.

b) Protocol 34 of the EEA Agreement provides the possibility for courts and tribunals of the EFTA States to request the ECJ to decide on the interpretation of EEA rules which correspond to EC rules. According to the procedure, an EFTA State which intends to make use of the Protocol shall notify the depository and the ECJ to what extent and according to which modalities shall it apply to its courts and tribunals. The Protocol 34 envisages a binding decision. For Stefánsson, such a decision might be called a preliminary ruling. No EFTA State has however made use of this possibility and, consequently, it is not yet of practical significance.”

However, the competence of the EFTA Court cannot be excluded if all parties to the dispute agree to take the dispute before it on the basis of the EEA Agreement and the EFTA Court Agreements3.

It is important to remember that the current European legal order is based on one European integrated internal market with two legal orders, the EFTA/EEA, on one side, and the EU, on the other. Two courts of justice are competent, one for the EU pillar, the ECJ and another for the EEA pillar, the EFTA Court.4

Although there is a strong judicial dialogue between these two courts, the fact is that there is no judicial system designed to deal with cross-border legal issues happing in the inter-section of these two legal orders such as the ones raised by the Icesave dispute.

Under the EEA Agreement, resolution of these disputes between EU and EFTA/EEA Member States belong to the highest political organ of the EEA, the EEA Joint Committee. Unfortunately, none of the EEA institutions has been directly or indirectly involved within this dispute that has become a bilateral relation between Iceland and the UK, on one side, and Iceland and Holland, on the other.

Figure 1. EU_EEA institutions (to be inserted in the blog)

This figure illustrates the structure of the EEA Agreement. The left pillar shows the EFTA States and their institutions, while the right pillar shows the EU side. The joint EEA bodies are in the middle5. The role of the EEA Council is regulated primarily in Arts 89 to 91 of the EEA Agreement. According to Article 89, the EEA Council has two main tasks and meets twice a year. First of all, it provides political impetus for the development of the Agreement and guidelines for the EEA Joint Committee. Secondly, the Council may attend to matters which have proved impossible to solve by officials and seeks to solve them on a political basis6. This can happen when we refer to the “droit d´évocation” or raising a matter of concern7. Together with these main tasks, Article 91 provides that the EEA Council shall also meet whenever circumstances so require, in accordance with its rules of procedure.

For the author of this study, it is difficult to understand why the methodology applied to find a solution for this dispute has been always dealt at diplomatic level between the governments and administrations of three countries alone. In this sense, one may wonder whether the EU and the EAA Agreement and, by extension, the EU and EEA institutions have failed to their respective duties. Contrary to common misunderstanding in the public opinion, the Directive 94/19/EC does not establish the requirement of a bilateral treaty to solve this dispute. It seems to the author that a political decision has been taken to deal with this problem in this way.

This point raises deep concerns in the author about the competence of the EU and EEA institutions and the whole consistency of legal arguments sustained by the UK and Holland and, tacitly, by the EU. Are the EU and the EEA institutions competent or not? Because if the EU/EEA institutions do not have the competences to deal with this dispute, it could be because the real issue under discussion falls outside the scope of European law. This point will be developed  later in another section.

2.2. Icesave dispute: Claim 1. State liability under Directive 94/19/EC, EU/EEA law

The British and Dutch Governments claim, in the first place, the State liability of Iceland under the Directive 94/19/EC. As pointed out by the Court of Justice of the European Union (ECJ) in the case Peter Paul and Others, this ‘Directive 94/19/EC seeks to introduce cover for depositors, wherever deposits are located in the Community, in the event of the unavailability of deposits made with a credit institution which is a member of a deposit guarantee-scheme".8 In short, depositors held by consumers are guaranteed in Europe up to the amount of 20.889€. This guarantee is financed by obligatory contributions to a private fund existent in all EU/EEA countries. Member States must guarantee that a deposit guarantee system (DGS) is in place.

The Directive 94/19/EC was incorporated into the European Economic Area legal order by Decision 18/94 of the EEA Joint Committee No. 18/94 amending Annex IX (Financial Services) to the EEA Agreement and into Icelandic national law by Act No 98/1999 on Deposit Guarantees and Investor-Compensation Scheme. This law set up the Depositors' and Investors' Guarantee Fund (Tryggingarsjóður) funded by a contribution of 1% of insured deposits.

The main problem of the directive 94/19/EC is that does not specify the role of the State when the DGS fails to have sufficient funds in a case of a systemic failure of almost all banking institutions. All EU/EEA countries are obliged to adopt a law to make it obligatory for financial institutions to participate in a private fund to which credit institutions contribute. In principle, if the fund cannot meet depositors' claims in the event of a default by a member of the scheme, it is for the remaining credit institutions to make up the difference. In other words, the bankruptcy of a financial institution is covered –as in classic insurance systems – by the rest of the institutions active in the market. This has been obviously impossible in the case of the Icelandic Fund (Tryggingarsjóður) as the remaining Icelandic credit institutions who survived the crisis were far too small in relation to the claims of Icesave depositors in the UK and Holland, and a fortiori because Icelandic law states that "Member Companies shall not be liable for any commitments entered into by the Fund beyond their statutory contributions to the Fund."

According to unofficial sources released in the webpage www.island.is (as negotiations on the Icesave agreements have been kept secret to the public), the Icelandic government defended the immunity of the State at an early stage of conversations with the UK and Holland and other EU countries. It claimed that the Directive was never intended to cover the case of a systemic failure, and that it did not impose a sovereign guarantee on deposit insurance schemes. It might have repeatedly asked that the matter should be taken to the EFTA Court, pointing out to Recital 24 to the directive which says:

“Whereas this Directive may not result in the Member States' or their competent authorities' being made liable in respect of depositors if they have ensured that one or more schemes guaranteeing deposits or credit institutions themselves and ensuring the compensation or protection of depositors under the conditions prescribed in this Directive have been introduced and officially recognized;”

Also according to non-official sources, during those negotiations, all the EU Member States of the European Union would have contested the interpretation of the Icelandic government considering that a sovereign "guarantee of last resort", similar to the role of central banks as ‘lender of last resort‘, was the only way of "ensuring the compensation or protection of depositors". In their opinion, this was implicitly required by the Directive. Without this guarantee given by the State, it was argued against Iceland. European law would be deprived of its effectiveness, as depositors would loose in the banking institutions and the whole system would collapse.

A number of different legal opinions have been given on this point. After careful study by the author of the relevant legislation and jurisprudence, the conclusion seems to be that EU/EEA law is very unclear on this regard, this being one of the grey areas of European law. The ruling of the ECJ in the only case existing in this field, the Peter Paul and Others previously mentioned, is not sufficiently clear to this effect: While, on one hand, the ECJ requests that the minimum compensation is given to depositors (to the minimum set by the Directive), the Court adds that there is no State liability for the German authorities for alleged failings in banking supervision (as per Recital 24).

Under normal economic circumstances, one could argue that Iceland should acknowledge the right for all depositors to receive a compensation from the Investors Guarantee Fund for a minimum of 20.889€ as stated in the Directive. However, the Directive does not establish the State liability of a sovereign country when the private fund or DGS goes bankrupt. The interpretation of the provisions of Directive 94/19/EC in case of systemic failure of a banking system and in exceptional economic circumstances that put a country on the abyss of financial failure is a very serious and problematic issue which is neither contemplated by the European Directive nor by the Icelandic law. To make the problem short, this Directive had never anticipated the event of complete banking failure in one country leaving depositors unprotected in another country (cross-border bankruptcy and insolvency).

Advocate General Stix-Hackl delivered on 25 November 2003 on the Peter Paul case explained in recital 117:

“As far as Community law is concerned, Directive 94/19 contains an exhaustive set of special provisions regulating deposit-guarantee schemes. It does not, however, exhaustively regulate the unavailability of deposits under Community law, only requiring the Member States to provide for a harmonised minimum level of deposit protection.”9

The European Directive leaves us with no instructions on the discretion of the Member State when the private fund or DGS has no fund because of the total collapse of a national banking system. The UK and Holland request from Iceland a State guarantee of last resort, a sort of State liability without a necessary breach of the State of its obligations the obligations under the Directive. But the paradox is that EU/EEA States cannot provide guarantees to their banking systems because this would fall under the prohibitions of European competition and State aid rules.  If States did back up their private banking and financial institutions, all depositors in Europe would prefer banks from larger Member States such as Germany and banks from small countries such as Luxembourg would not have a chance to compete. EU/EEA rules on competition and State aid prohibit therefore State guarantees for private banks operating within their territories.

If the Directive 94/19/EC is silent on this point, it can be argued that the general doctrines of State liability for breaches of EU/EEA law applies with the necessary three conditions that are known to all specialists of European law. And, in this sense, State liability is not automatic in EU/EEA law. This is the jurisprudence Francovich, Brasserie/Factortame in the EU legal order10 and Erla María, Karlsson and C. Nguyen in the EEA legal order11.

State liability for breaches of EU/EEA law is a doctrine of European law that is not to be found in the EU/EEA Treaties but rather on the jurisprudence of the ECJ and the EFTA Court. In both legal orders, same conditions apply: 1) the rule of law infringed must be intended to confer rights on individuals; 2) the breach must be sufficiently serious; and 3) a direct causal link must be established between the breach of the obligation resting on the State and the damage sustained by the injured parties and noting that, on many occasions, the crucial element in this ‘multiple test’ will often be the clarity and precision of the rule breached.

It could be very well argued that Iceland has complied with its obligations under the Directive 94/19/EC because the State obligation ended when the Fund was put into place. Nothing in the Directive 94/19/EC states the responsibility of the State to supply funds through its general budget (nationalisation or bail-out financed by tax-payers) in case the DGS or Insurance Fund (Tryggingasjóður) has exhausted its funds. And this has been precisely the Icelandic problem.

While the Directive states that there must be a minimum guarantee for depositors in all the EU/EEA, there are no appropriate rules of European single supervision, instructions for the coordination at European level on emergency cross-border situations and a system to request assistance from other DGS schemes in case of extreme financial crisis. The case of a systemic bank failure in one EEA State exporting insolvency problems to other EEA States was never foreseen. As the Center for European Reform puts it, “the crisis has exposed the weakness in the EU regulatory system and has reinforced the case for a serious reform of the institutions of global economic governance”.12 These fundamental uncertainties on the most essential topic of European banking and financial law with regard to the consumers have been commented by the doctrine and acknowledged by the experts and, to a certain extent, by the EU institutions themselves. 13

It is also very interesting to note that the EU has reformed the Directive 2004/19/EC in May 2009 and a new Directive 2009/19/EC has been adopted.14 The issue of the State guarantees and State liability is still unclear in the new Directive. Nowhere in the text have we found the terms ‘immunity’ or ‘liability’. The so-called principle of the State liability when a systemic failure provokes the lack of funds in the private DGS to cover all depositors is, once more, not contemplated.

The only recital related to this issue is recital (13) which states that :

‘Member States should aim at ensuring the continuity of banking services and access to liquidity of banks, in particular in periods of financial turmoil. For this purpose, Member States are encouraged to make arrangements as soon as possible for ensuring emergency payouts of appropriate amounts upon the application of the affected depositor, within no more than three days of such application. Since the reduction of the current payout delay of three months will have a positive impact on depositor confidence and the proper functioning of the financial markets, Member States and their deposit-guarantee schemes should ensure that the payout delay is as short as possible.’

This paragraph and the new Directive 2009/19/EC still leave the issue of liability/immunity of the Member States as a last resort unclear. What does it mean emergency payouts? Are tax payers obliged to pay for the deposits when the funds of the private insurance scheme are insufficient? For the author, it seems a paradox to request under EEA law that Iceland follows this interpretation while the EU Member States are not able to agree on this principle for the EU pillar.

The European Parliament on its Report of 27 November 2006 which evaluated the proposed reform of the Directive 94/19/EC kept also silence on the fundamental issue of liability/immunity of the State in case of systemic failure of the banking system and the inability of the DGS to provide sufficient funds to depositors.15

Other writings and documents from scholars and other institutions have pointed out the weakness of the European rules on Deposit Guarantee Schemes and the insufficiencies of the rule of the home country control in case of systemic failure of the banking system in one country, due to the interdependence of the financial markets and the lack of a single super European supervisor or regulator and the lack of coordination between national authorities.16

In practice, the European legislator has left the issue unclear for competition and State-aid reasons and, sooner or later, the ECJ should rule upon the connection between the deposit guarantee schemes, the financial supervision and state guarantees in cases of financial crisis. While the principle of homogeneity requests comparable rights and obligations under EU and EEA law, it seems at least unfair that Iceland does not have a chance to challenge this interpretation before a European court.

To conclude this section the following can be said. It can be argued that the State liability for Iceland for breach of EEA law in the Icesave dispute is very unclear, a point that has been agreed upon by many legal experts in European law.17 It is possible to argue both in the affirmative and in the negative. Directive 94/19/EC does not require it. Directive 2009/19/EC keeps silence on this issue and the jurisprudence of the ECJ seems contradictory and unfit for the resolution of this case. While the ECJ states that a guarantee of 20.889€ must be given to depositors, the Court declares that defective supervision by financial authorities does not confer rights to individuals. Furthermore, the European Commission has recognised that EU Member States cannot offer in a permanent way State guarantees because this goes against EU competition and State aid rules.

As the issue of the liability/immunity of the State in the case of a systemic bank failure is imprecise, as the role of the host/home States involved in the dispute and financial supervisory authorities should be discussed much more in detail, as it is advisable to clarify the ECJ jurisprudence Peter Paul and others from the ECJ in 2004;18 this author concludes that it should be the role of the ECJ or the EFTA Court to provide an interpretation of the relevant EU/EEA law.

Furthermore, on a political level, the EEA Joint Committee could also be charged of finding a political or diplomatic solution. In this sense, if the dispute has not been taken to any of these institutions, it is a fact that the mechanisms of judicial and non-judicial redress given by EU and EEA law to Iceland have not been used properly, for whatever political reason that has not been properly explained to the public opinion.

2.3. Icesave dispute: Claim 2. Principle of non-discrimination in connection with the re-structuring of the Icelandic financial system (State aid)

The second claim of the British and Dutch governments is that Iceland is in breach of its obligations under Article 4 of the EEA Agreement which prohibits "any discrimination on grounds of nationality", echoing new Article 13 of the Treaty on the Functioning of the European Union (TFEU) (ex Article 7 EC Treaty). The UK and Holland argue that, by placing all deposits located in Iceland at new Icelandic banks, covering all Icelandic institutions but letting overseas branches go insolvent, the Icelandic government was unfairly (or "illegally") guaranteeing the deposits for Icelanders or residents in Iceland, individuals or corporations, and therefore discriminating depositors in the UK and Holland by reason of nationality.

Once more, according to unofficial sources from the website www.island.is, it seems that Iceland had tried to contend that its policy was "based on objective considerations independent of the nationality of the persons concerned" (the consideration being the location of the branches of the collapsed banks) and that it was "proportionate to the objective being legitimately pursued" (the legitimate objective being the survival of the whole banking system in Iceland in a situation of extreme financial distress and economic crisis).19 Even today, Iceland has not guaranteed deposits in Iceland by law as Professor Stefán Már Stefánsson has explained,20 the only guarantee is a political statement done by the Prime Minister in the autumn 2008. Even more, Iceland would have argued that there has been no discrimination based on nationality as both Icelanders/other Europeans benefit from the nationalisation measures adopted by the emergency measures (deposits in Iceland were continued)  and both Icelanders/other Europeans with deposits in overseas branches have been negatively affected by the controlled winding-up of the financial institutions.

As in the previous case, according to non-official sources, the UK, Holland and the rest of EU countries would have rejected the Icelandic arguments and would have argued for a case of indirect discrimination “de facto” based on nationality.

EU law and the jurisprudence of the ECJ are very strict on the principle of non-discrimination. This principle applies to all areas of EU law, including the free movement of capital and payments and competition and State aid. The relevant provisions of primary EU law are the following ones.

The consolidated version of the new Treaty on the Functioning of the European Union (TFEU) contains in Article 18  (ex Article 12 TEC) the principle of non-discrimination:

“Within the scope of application of the Treaties, and without prejudice to any special provisions contained therein, any discrimination on grounds of nationality shall be prohibited.“

The jurisprudence of the European Court of Justice on the concepts of direct and indirect discrimination prohibited by EU law is summarized in the García Avello case which confirms the jurisprudence Gebhard21. In the case García Avello, the ECJ states:

‘It is in this regard [Articles 12 EC and 17 EC] settled case-law that the principle of non-discrimination requires that comparable situations must not be treated differently and that different situations must not be treated in the same way. Such treatment may be justified only if it is based on objective considerations independent of the nationality of the persons concerned and is proportionate to the objective being legitimately pursued.’

As for the free movement of capital and payments in the EU, Article 63 (ex Article 56 TEC) abolishes all restrictions on the movement of capital and payments between Member States and between Member States and third countries and Article 65 TFEC reads:

“1. The provisions of Article 63 shall be without prejudice to the right of Member States:

(b) to take all requisite measures to prevent infringements of national law and regulations, in particular in the field of taxation and the prudential supervision of financial institutions, or to lay down procedures for the declaration of capital movements for purposes of administrative or statistical information, or to take measures which are justified on grounds of public policy or public security.

3. The measures and procedures referred to in paragraphs 1 and 2 shall not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments as defined in Article 63.“

With regards to State aid such as national rescue measures in response to the financial crisis, Article 107 (ex Article 87 TEC) reads the relevant clauses:

“1. Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.

2. The following shall be compatible with the internal market:

(a) aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned;

(b) aid to make good the damage caused by natural disasters or exceptional occurrences;“

In normal circumstances, in view of the relevant provisions, this author acknowledges that it would be very difficult for Iceland to justify a State policy supplying public funds necessary to supply in full all deposits in Iceland and not providing funds to cover the minimum deposit guarantees in the UK and Holland. But, as the Treaty on the Functioning of the European Union admits, Member States can justify State aid on the basis of “serious disturbances in their economies”. Exceptional circumstances would call for exceptional measures.

And this is precisely the argument used by the European Commissioner responsible for Competition and State Aid, Neelie Kroes, to justify general guarantees given by different EU States to deposits in their territory during the financial crisis 2008-2009. As the Commissioner explained, only because there were extraordinary circumstances in the context of systemic threat to the financial system, the backing up of the State could be accepted. 22

After careful consideration of the policy adopted by EU and EEA institutions, after careful study of other arguments developed by Professor Stefán Már and lawyer Larus Blöndal,23 together with new information provided by the Report from the European Central Bank in July 2009 on the national rescue measures in response to the current financial crisis;24 new doubts emerge concerning whether the principle of discrimination test developed by the ECJ is applicable to this dispute and whether other countries have respected the principle of non-discrimination by reason of nationality while adopting national rescue measures during or after the financial crisis.

As stated above, the principle of discrimination has been developed by the jurisprudence of the ECJ and the EFTA Court. The EU Treaty and the EEA Agreement allow exceptional derogations to the internal market rules, but they fall under close judicial scrutiny and must respect the non-discrimination principle.25 According to EU law, any national rule, discriminatory or non-discriminatory, which affect  the internal market and free movement of goods, persons, services or capital to another Member States market, falls under EU Law  and must be justified.

In this sense, national measures liable to hinder/affect the internal market must pass the following test:26

1) they must be non-discriminatory (direct or indirect discrimination)

2) they must be justified by public interest, imperative requirements, objective justifications.... or non-economic reasons in the light of  general interest (whatever the name used by the EU Treaty or the jurisprudence)

3) they must be suitable to attain objectives aimed  at

4) they must respect principle of proportionality

5) they must respect European fundamental rights (newest test introduced by the ECJ).

In the absence of a legal definition, the Court of Justice defines discrimination and inequality as arising through the application of different rules to comparable situations or the application of the same rule to different situations. 27

In order to make the appropriate assessment it is necessary to ascertain whether the provisions adopted by the Icelandic national legislator have had a more unfavourable impact on depositors situated outside Iceland. This could be a case of direct discrimination –explicit in the legal provision- or of indirect discrimination –through the adoption of a measure which, although couched in neutral terms, in fact harms a far greater number of members of a group than another.

When discrimination is on a gender basis, indirect discrimination would be also unacceptable unless justified by objective factors unrelated to any discrimination based on sex.28  But, on the other hand, measures which meet a legitimate aim of social policy, provided they are suitable and requisite for attaining that end, are not contrary per se to the principle of equal treatment.29 Budgetary considerations cannot in themselves justify such measures.30

The essential question that European law must answer is the following one: does the restructuring of the Icelandic banks by the State in an emergency situation creating new entities with all deposits within the Icelandic territory (held by Icelandic but also European citizens) and leaving behind the deposits of the branches of Icelandic banks in Holland and the UK violates the principle of discrimination of EU law?

Once more, this author finds that it would be possible to argue different things:

1) yes, it is a case of indirect discrimination based not on nationality criteria but on territory for which there is no justification in EU law (position maintained by the UK and Holland) ;

2) yes, it is a case of indirect discrimination based on territory (similar to 1) but it is justified (or pre-empted) by higher imperative reasons of public and economic and financial order  because there was a systemic failure of the whole Icelandic banking and financial sector and a situation of national emergency;

3) false yes/false no, results  look similar to a case of indirect discrimination based on nationality but the discrimination on the basis of territory it is a new problem in EU/EEA law for which nor the EU Treaties nor the ECJ´s jurisprudence have so far an answer in law.

4) false yes/false no, results  look similar to a case of indirect discrimination based on territory but it is a new problem in EU/EEA law (….similar to point 3) and, furthermore, the nationalisation of private debt and the restructuring of the national bank system on a territorial basis after a systemic financial crisis and emergency situation does not fall under the scope of EU /EEA law.

5) no, there is no discrimination as depositors in the UK and Holland are not connected to the Icelandic territory/economy and are not in comparable situation to depositors in Iceland. Discrimination on the basis of territory is not regulated by EU law (only sex, gender, nationality, sexual orientation, religion, race, age and disability are regulated so far). It does not follow either under EEA law.

6) no, there is no discrimination because, (together with point 5) if Icelandic State had to guarantee insolvent branches of one Icelandic bank in the UK and Holland and compensate for more than 300.000 depositors in those countries there would be no financial nor economic viability for Icelandic banks and no banks providing services today in Iceland, making impossible all economic life in Iceland.

It is a fact that the banking system in Iceland went through a situation of extreme financial distress and economic crisis. National measures were adopted and the banks were nationalised, recapitalised and are under a process of controlled winding-up and liquidation. From this point of view, it is totally legitimate to question whether EU and EEA law cover this tragic problem for depositors located in Europe and whether the principle of non-discrimination by reason of territory must prevail over the whole economic sustainability of a small country.

After revising the Opinion of the EFTA Surveillance Authority on the legality of the Icelandic Emergency Law under the EEA Agreement of 4 December 2009,31 the Report done by the European Central Bank (ECB) on the national rescue measures adopted by all different 27 EU countries published in July 2009,32 and the case of Ireland in October 2008; this author has revised the preliminary opinion given in her Report done in June 2009 to the Icelandic Parliament and concluding that Iceland could not justify discrimination under EU/EEA law.33

The reasons for the new scepticism of this author concerning the interplay of the principle of non-discrimination and the rules of State aid for nationalised banks under bankruptcy are the following ones:

In the first place, the EU has persistently maintained a position of supporting inter-governmental coordination during this crisis. Although there has been some common action plan and guidelines adopted at European level, the EU institutions, including the ECB, have no role in the adoption of national measures designed to nationalise (known as bail-out) domestic banks operating within the territories of the Member States.  Due to the exceptional circumstances, the EU Finance Ministers meeting on 7 October 2008 concluded that “public intervention had to be decided at national level in a coordinated framework” and the European Council on 15-16 October 2008 declared:

“The European Council reaffirms its commitment that in all circumstances the necessary measures will be taken to preserve the stability of the financial system, to support the major financial institutions, to avoid bankruptcies and to protect savers' deposits. Inter alia, such measures aim, in conjunction with the central banks and supervisory authorities, to ensure sufficient liquidity for financial institutions, to facilitate their funding, and to provide them with capital resources so that they can continue to finance the economy properly. The European Council considers that measures to support financial institutions in difficulty should go hand in hand with measures to protect taxpayers, to secure accountability on the part of executives and shareholders and to protect the legitimate interests of other market players.

The European Union must work with its international partners on a genuine, all-encompassing reform of the international financial system based on the principles of transparency, sound banking, responsibility, integrity and world governance. The aim is to take early decisions on transparency, global standards of regulation, cross-border supervision and crisis management, to avoid conflicts of interest and to create an early warning system, so as to engender confidence among savers and investors in every country. The Union will quickly take appropriate initiatives in consultation with its main partners and the relevant international financial institutions. These initiatives will be carefully prepared within the EU.

The European Council expresses its solidarity with the efforts made by Iceland, a country which is closely integrated into the EU Single Market through the EEA Agreement and which requires the support of the international community; it expects Iceland to honour its international commitments.“

In the second place, the EU has insisted that the Icesave dispute and agreements were to be dealt bilaterally between Iceland, the UK and Holland. It is a proven fact that there has been no coordinated European response to the most important European failure of the internal market of financial services: the Icesave case due to the insolvency of Icelandic banks and leaving victims in Holland and the UK. There is no single European treasury. There is now integrated approach to deal with bankruptcy and reorganization procedures for cross-border banks in the EU. There is no EU safety net.34

In the third place, it must be acknowledged that -although the European Commission has repeatedly said that all national measures adopted should have to take account on their effects in the other EU countries and that the principle of non-discrimination should be respected- 35 the truth is the following essential terms -“State liability” “discrimination” “equality”- appear nowhere in the Report published by the ECB in July 2009 which evaluates the legislation adopted in different 27 countries.

It is also very unclear from this Report whether nationalisations measures adopted/to be adopted by Austria, Germany, Ireland, Latvia, Lithuania, Netherlands, Poland, Portugal and the UK would pass the same non-discrimination test that Iceland has been imposed to accept by diplomatic means.

According to the publication of Commission Communication on State aid guidelines from 13 October 2008, Governments had to ensure that every bank active on their territory would gain access to the rescue measures, regardless of nationality. This was one of the main arguments raised by the Commission against Ireland´s rescue plan presented in the autumn 2008. The European Commission asked Ireland that all banks incorporated or operating in the country had to be covered by the national rescue measures.36 But, as the Commission explained, the non-discriminatory principle must guide the action of the Irish government towards all banks with systemic relevance to the Irish economy, regardless of origin. This principle of non-discrimination does not come into play when banks are not related to the economy of Ireland.

In the fourth place, it is questionable whether a country of 317.000 citizens such as Iceland can rescue the savings of more than 300.000 depositors abroad without going bankrupt. And, in the affirmative, if it is legitimate to request so in the light of the European integration and EU/EEA legal orders. As the European Commissioner Neelie Kroes stated in her speech, citizens and savers needed to be protected and Europe-wide problems needed Europe-wide solutions.

In view of the above considerations we conclude this section in the following way. Because the State liability derived from Directive 94/19/EC is unclear for the case of a systemic bank collapse, and because the national rescue measures adopted by some EU Member States need further research concerning the respect of the principle of non-discrimination; it is extremely important to clarify the competences of the EU regarding national rescue measures in response to the financial crisis and the nationalisation of banks and debt created by private entities.

Only in the case that competences would have been transferred to European level, the principle of discrimination should apply in EU law. And, even in this case, another question might rise in the framework of EEA law because it is not automatic that all EU law is incorporated into the EEA legal order.37 This study reaches the preliminary conclusion that it is possible to argue in European law that the bankruptcy and reorganisation procedures for cross-border banks in the EU do not fall, for the time being, under the scope of present EU law. For this reason, it could be argued that the principle of non-discrimination by reason of link to an economic territory can be justified in EU law and in EEA law.

2.4. On the competences of the EU regarding nationalisation of banks in emergency circumstances

It is important to remember that nothing in the new Treaty of the European Union nor in secondary law provides for a role or the competence of the EU to deal with national measures designed to nationalise, bail-out or restructure domestic banks in emergency situations such as the recent financial crisis requested during critical moments.38 Furthermore, tax and economic national policies are so related to national sovereignty that they are considered as extremely sensitive areas within the  European  integration project.

It could be therefore very well argued in European law that the nationalisation of private debt in emergency circumstances created by the collapse of practically the whole banking system of a country falls outside the scope of EEA law as Stefán Már Stefánsson and Larus Blöndal have argued recently.39

And it could also be argued that the nationalisation of private debt in emergency circumstances created by the collapse of practically the whole banking system of a country falls also outside the scope of EU law. Although we all should agree that it is a very unfortunate problem created by the internal market and, unfortunately, it has affected depositors in other EU countries; the truth is there is no explicit EU competence given by the EU Treaties to act.  If it falls outside the scope of the EU Treaty, the competence belongs to Member States and countries have the sovereign right to decide whether or not they will nationalise insolvent banks or branches operating in other territories. As the European Commission recognises, the link to the Icelandic economy would be the essential factor. A revision of the different legislations adopted by different EU countries as stated in the Report of the ECB which adopt nationalisation provisions confirms that the EU has no direct nor explicit competences when emergency circumstances are so extreme.

A reminder of the doctrine of the distribution of competences is necessary in the context of this study for a better understanding of the problems raised. The new Treaty of Functioning of the European Union has clarified the distribution of competences between the EU and Member States, listing all the competences that the EU has in the framework of the Treaties. The principles governing the exercise of its competences by the Union are set out in the general provisions of the TEU and the different types of competences are detailed in the TFEU, in its Title I dealing with ‘Categories and Areas of the Union’s Competences’.40

The new Treaty defines the Union's competences and divides them into three categories. Each category has a different legal status because it means a different degree of Union intervention: the Union's exclusive competences; the competences it shares with the Member States; and action to support or complement that taken by the Member States. By virtue of their specific nature, the common foreign and security policy and the coordination of economic and employment policies warrant specific provisions which fall outside the three categories (see chart below).

The basic principle governing the allocation of competences is the principle of legality. The Union enjoys only those competences which have been conferred on it by the Member States in the Treaties with a view to achieving the objectives laid down. It is very important to remember that all competences rest with the States, except in those cases where they have transferred them to the Union.

Chart on the competences of the European Union1 (to be included)

It is very important to note that internal taxation is a highly sensitive area that falls under the competence of EU Member States and where the EU has only indirect competence when there are cross-border and non-discrimination issues. Even after the entry into force of the Lisbon Treaty, national vetoes remain on taxation and social security issues. Fiscal sovereignty remains at national level41 while Member States must ensure that it complies with the main principles of EU law.

Tax policy is a symbol and an important element of national sovereignty because it forms part of a country’s overall economic policy. The EU has no power (competence) over direct taxation, only over indirect taxation - and then only if measures are approved unanimously at European level. In the new Irish Declaration annexed to the Lisbon Treaty it is stated that the EU will have no new competences on taxation. 42

Economic policies fall also under the competence of national governments. The financial and economic reconstruction of a country after a systemic bank collapse which is to be financed by public taxes is an area that belongs to the competence of national governments. For this reason, it could be argued that the liquidation and re-structuring of Icelandic banks after the crisis falls outside the scope of EU/EEA law, and that the principle of discrimination does not come into play.

The legal conclusions for this section point in the same direction as in the previous case of State liability. From a legal point of view it would be possible to argue different pleadings, reaching different conclusions. It is unclear whether the principle of non-discrimination by territory is a ground covered by EU law in extreme circumstances due to the extreme seriousness of a world financial crisis. The principle of non-discrimination could be trumped by other principles such as the lack of competence of EU law when a financial crisis and emergency circumstance jeopardise the financial sovereignty of a country. Discrimination could be justified in EU law for the economic/financial survival of a country. The truth is that this area is not regulated by EU law. We move in another grey area of EU/EEA law and this is once more a very serious issue so far unresolved.

For all the above reasons, this author concludes that the clarification of the applicability of the principle of non-discrimination to this dispute should be done, in last instance, by a European court. Combined with the lack of access to justice for Iceland, the solution adopted in the Icesave agreements signed on a bilateral basis with the UK and Holland seems to be based on political reasons rather than sound legal arguments of European law.

2.5. Comparison between infringements of EU law by EU Member States and infringements of EU/EEA law by an EFTA State in a cross-border dispute

Another important question is the difference in treatment between an infringement case against a EU State under EU law and the alleged infringement of Iceland of its obligations under EEA law. If we compare the different regimes in both legal orders, the current methodology for dealing with the Icesave dispute violates fundamental procedural principles of European law.

In EU law the administrative and judicial procedure is complex and highly regulated and offers due guarantees for complainants and defendants. In our case, there is simply no judicial procedure at all since the EEA Agreement contemplated a diplomatic solution (EEA Joint Committee) which has not been used so far to the best of the author´s knowledge. This means, in practice, that there is no equal treatment of Member States of the EEA and that the balance of rights and obligations of Member States under the EEA Agreement has been seriously called into question.

The ECJ has ruled very often that a EU Member State has failed to comply with Community law, either by infringing the provisions of the Treaties themselves or by not implementing or applying fully or correctly the Regulations, Directives or Decisions adopted by the European Parliament, the Council of Ministers and the Commission to implement EU policies such as single market.

As the EU is a Community governed by the rule of law, judgments of the ECJ must be fully complied with by the Member States. When Member States violate EU law a normal infringement procedure takes place before the ECJ. When Member States violate judgments from the ECJ, this is considered one of the worst infringements that EU Member States can possibly do. But, even in this case, even the most serious sanction contemplated by EU law for Member States breaching the EU legal order is adopted after an administrative and judicial procedure; there are procedural guarantees so that the final sanctions adopted under EU law adapt to the size, population and GDP of the violating country.

As it has been many times referred in this study, there is no judicial procedure nor judicial guarantees for Iceland in the resolution of this dispute. The EU procedure is nothing compared to the sanction that Iceland is requested to comply with (full payment of the minimum guarantee of 20.889€ per deposit) without a proper judicial procedure and without a guarantee that this result does not affect its economic future.

As stated above, the EU Treaty contemplates a special judicial procedure for the enforcement of EU law that provides for the imposition of penalty payments or lump sums by the ECJ on a Member State which fails to comply with an earlier judgment of the ECJ affirming a Member State is in breach of its obligations under Community law. We have to remember that the violation of a ECJ judgment is one of the most serious breaches of EU law since it strikes at the heart of the EU legal order. We describe now the maximum judicial/executive weapon that EU law can use against recalcitrant states.

Article 260 TFEU (former Article 228 of the EC Treaty) reads as follows:

“1. If the Court of Justice finds that a Member State has failed to fulfil an obligation under this Treaty, the State shall be required to take the necessary measures to comply with the judgment of the Court of Justice.

2. If the Commission considers that the Member State concerned has not taken such measures it shall, after giving that State the opportunity to submit its observations, issue a reasoned opinion specifying the points on which the Member State concerned has not complied with the judgment of the Court of Justice.

If the Member State concerned fails to take the necessary measures to comply with the Court's judgment within the time limit laid down by the Commission, the latter may bring the case before the Court of Justice. In so doing it shall specify the amount of the lump sum or penalty payment to be paid by the Member State concerned which it considers appropriate in the circumstances.

If the Court of Justice finds that the Member State concerned has not complied with its judgment it may impose a lump sum or penalty payment on it. […]”

The Commission presented a special Communication on 13 December 2005 to clarify that Member States which do not respect EU law, as established by the ECJ, could face serious financial sanctions.  The Commission, furthermore, explained how it would calculate periodic penalty payments. Both in the case of daily penalty payments and lump sum fines the penalty adapts to the capacity of the Member State to vote, its GPD and its number of inhabitants. It is clear, therefore, that a violation by a small State such as Malta and by a big State such as Germany would result in different fines for infringements of EU law.43

Case 1. Daily penalty payment (violation of ECJ´s judgments)

     The amount of the daily penalty payment is calculated as follows:

     - multiplication of a standard flat-rate amount of EUR 600 by a coefficient (from 1 to 20) for seriousness and a coefficient (from 1 to 3) for duration;

     - multiplication of the result obtained by an amount fixed by country (the “n” factor) taking into account the capacity of the Member State to pay and the number of votes it has in the Council (reaching from 0.36 for Malta to 25,40 for Germany).

     The resulting method of calculation can therefore be summed up by the following general formula:

     Dp = (Bfrap x Cs x Cd) x n,

where:

     Dp = daily penalty payment;

     Bfrap = basic flat-rate amount “penalty payment”;

     Cs = coefficient for seriousness;

     Cd= coefficient for duration;

     n = factor taking into account the capacity to pay of the Member State concerned, based on GDP and voting rights in the Council.

 
Case 2. Lump sum fine for infringement of EU law (violation of ECJ´s judgments)

The amount of the lump sum fines for non-compliant Member States is also calculated in a two-stage-method:

     - by the setting of a minimum fixed lump sum, and

     - a method of calculation based on a daily amount multiplied by the number of days the infringement persists; this method will apply when the result exceeds the minimum lump sum.

Every time the Commission refers a case to the ECJ, it will propose at least a fixed lump sum payment, determined for each Member State according to the “n” factor (reaching from 0.36 for Malta to 25,40 for Germany).

 
As it is obvious from the previous excerpts, Iceland has already been forced to accept the payment of the minimum guarantee of 20.889€ per depositor without any equity or “n” factor taking into account its size and population and the effect this payment will have on its economy. This breaches once more the equal treatment of EU/EFTA Member States under the EEA Agreement, the principle of reciprocity and the balance of rights and obligations of Member States under European law.

 
2.6. Other general principles of EU law

The dispute over Ice-save deposits has been treated with a perspective focusing narrowly on the meaning of the normative provisions of the Directive 94/19/EC. It is a principle established by the jurisprudence of the ECJ that EC law must always be interpreted taking into account all general principles of the EU legal order, it is a European law in context. 44

If the dispute of Ice-save is examined in a European wider context, in the light of other political, historical, philosophical and economical factors; one may even advance other essential arguments that should be taken into account when evaluating the final justice and fairness of the solutions discussed.

Many questions which arise from the Icesave dispute are very difficult to reply because they force us to choose between a legal positivist approach where a rule is interpreted in a vacuum without consideration to the final justice of the solution reached or, in the contrary, a legal realist approach based on the whole principles of the EU legal order where law is interpreted with a European perspective and general principles of law provide a connection with values and justice.

Should Iceland as an EFTA/EEA State and other EU Member States comply with a goal of the Directive 94/19/EC while putting the nation in a situation of great financial debt and economic stress? What should prevail: the specific goal of the EU Directive or the Preamble and the fundamental values of the EU Treaties? While the Directive 94/19/EC gives an individual right to depositors who have lost savings, does this right prevail over fundamental principles of Europe such as the rule of law, the fundamental rights, the solidarity and the social justice - all values that the EU proclaims?

The Preambles of the EU Treaties are reflected in the Charter of Fundamental Rights of the European Union which declares that:

“The peoples of Europe, in creating an ever closer union among them, are resolved to share a peaceful future based on common values.

Conscious of its spiritual and moral heritage, the Union is founded on the indivisible, universal values of human dignity, freedom, equality and solidarity; it is based on the principles of democracy and the rule of law. It places the individual at the heart of its activities, by establishing the citizenship of the Union and by creating an area of freedom, security and justice.

The Union contributes to the preservation and to the development of these common values while respecting the diversity of the cultures and traditions of the peoples of Europe as well as the national identities of the Member States and the organisation of their public authorities at national, regional and local levels; it seeks to promote balanced and sustainable development and ensures free movement of persons, services, goods and capital, and the freedom of establishment.

To this end, it is necessary to strengthen the protection of fundamental rights in the light of changes in society, social progress and scientific and technological developments by making those rights more visible in a Charter.

This Charter reaffirms, with due regard for the powers and tasks of the Union and for the principle of subsidiarity, the rights as they result, in particular, from the constitutional traditions and international obligations common to the Member States, the European Convention for the Protection of Human Rights and Fundamental Freedoms, the Social Charters adopted by the Union and by the Council of Europe and the case-law of the Court of Justice of the European Union and of the European Court of Human Rights. In this context the Charter will be interpreted by the courts of the Union and the Member States with due regard to the explanations prepared under the authority of the Praesidium of the Convention which drafted the Charter and updated under the responsibility of the Praesidium of the European Convention.

Enjoyment of these rights entails responsibilities and duties with regard to other persons, to the human community and to future generations.”

European integration is about solidarity between European countries. If European law is put into context, to declare that the effectiveness of European law and the rights for depositors prevail over the economic sustainability of a country is a task that only the ECJ or the EFTA Court could do without risking political, legal and ethical questions. It is a task that calls for the clarification of how to resolve this dispute while avoiding a miscarriage of justice driven by a strict interpretation of EU legal provisions.

As Petersmann has recently written, together with a ‘conservative function’ of judges to uphold ‘legality’ by applying existing rules of law, judges also have to possibility to review whether the particular circumstances of a dispute may require other kind of ‘equitable’ dispute settlements.45 This is the classical tension between law and justice, between the letter of a provision and the justice of the final result. And the result obviously depends on judicial interpretation. A dispute may need, for instance, certain judicial interpretation or ‘gap-filling’ in the existing rules of law justified by a need of clarification in existing law or by a new interpretations of customary rules and principles of law, or by identifying particular merits of legal arguments or needs of the parties to the dispute calling for ‘equitable’ interpretations of general or too rigid rules of law. In these cases, judges avoid what is ordinarily called a ‘miscarriage of justice’ which would be provoked by a narrow interpretation of legal provisions. As Petersmann explains, “By ‘giving reasons’, courts of justice contribute to the clarification of ‘public reason’ and to its continuous adaptation to changing public conceptions of justice.“

Justice and law should work together but this is not automatic in all circumstances and in all cases. Petersmann is one of the few specialists working in international law, EU law, EEA law and WTO law. He is one of the authors that is currently fighting for the establishment of a universally recognised international/European rule of law in transnational relations among States and individual relations. A transnational rule of law based on the principles of justice and respect for freedom, equality, and fundamental human rights. In this system that he envisions, the role of the courts is essential to guarantee good cooperation between different constitutional jurisdictions. As Petersmann puts it:46

“The ‘globalization’ of international economic, environmental, ,political and legal relations, and its ever larger impact on the legal regulation and social stability of societies, have transformed national constitutions into ‘partial constitutions’ that can no longer effectively protect general citizen interests in ever more areas of social life without international law and international organizations as essential instruments for ‘multilevel governance’ for the collective supply of ‘international public goods’ (like international rule of law, a mutually beneficial division of labour, transnational protection of human rights and ‘sustainable development’). Yet, conceptions of ‘international justice’ in transnational relations among individuals as well as among states tend to be even more controversial than inside countries.

The changing functions of law and justice (e.g. compared with the Westphalian system of ‘international law among states’ from 1648 to 1945) are explicitly recognized in modern international law, for example in the Vienna Convention on the Law of Treaties’ codification of the customary law requirement of settling ‘disputes concerning treaties, like other international disputes, […] in conformity with the principles of justice and international law’, including ‘universal respect for, and observance of, human rights and fundamental freedoms for all’ (Preamble VCLT). The universal recognition of human rights by all 192 UN member states, notwithstanding their often diverse conceptions of the legal protection of civil, political, economic, social and cultural rights (e.g. by liberty rights and social ‘claim rights’) and of the underlying normative premises of ‘inalienable’ human rights (e.g. their derivation from respect for ‘human dignity’), calls for citizen-oriented conceptions of international law focusing on protection of human rights and democratic governance in the collective supply of national and ‘international public goods’. In European and worldwide international economic law, national and international courts (like the EC Court, the EFTA Court, WTO dispute settlement bodies, investor-state arbitration) have taken the lead in interpreting intergovernmental guarantees of freedom, equality, human rights and ‘rule of law’ for the benefit of citizens and their individual rights. […]

As governments often conclude international treaties that leave the meaning of human rights and of other international law rules and their underlying ‘principles of justice’ indeterminate and contested, ‘international rule of law’ depends on judicial dialogues, ‘judicial comity’, judicial clarification of contested rules and on conditional, judicial cooperation among national and international courts in the protection of ‘rule of law’, based on ‘judicial comity’ and reciprocal respect for their respective jurisdictions and constitutional foundations. “

 
As stated before, the Icesave dispute takes place in a wider European context, in the light of other political, historical, philosophical and economical factors. The methodology which is currently used to solve this dispute raises fundamental questions about law and justice in the European legal order that cannot be simply ignored.

The present study does not ignore that the Icelandic Administration and Government do share some substantial responsibility for the present situation. The sustainability and the risk management of the Icelandic banks in cases of emergency situations should have been better assessed. However, the failure of the Icelandic legal order is to be properly analysed and oversimplification should be avoided.

As it can be seen from above, if we consider the uncertainties of the State liability doctrine, if we refer to the national rescue measures adopted by 27 EU countries, if we explore the national rescue measures of nationalisation adopted by other EU countries (specially Ireland), if we leave behind a positivist approach to the Ice-save dispute and we put it in the framework of the values that lie behind the whole process, dynamics and principles of the European integration; if we remind ourselves about the dangers of justice being miscarried by the rule of law…. it is then very difficult to assert that the negotiation agreements between Iceland, the UK and Holland have resulted in a fair settlement for the Icelandic nation.

While Iceland has already agreed to reimburse the debt towards the UK and Holland insurance funds who anticipated the guarantees to the depositors, the current Ice-save agreements do not seem fair to a number of Icelanders because they jeopardise its economic future and recovery. Iceland is a member of the EE Agreement since 1994. Icelandic voters are wondering whether the European Union Member States live to their standards when dealing with a EEA country in need of financial assistance. Icelandic voters are questioning whether it is acceptable that political pressure from voters, depositors and public opinion in two EU countries lead to a situation where another EEA country is convinced or pressured not to exercise legal actions in defence of its rights under EU/EEA law. Because the main point is the resistance is the following: citizens, lawyers and institutions ignore whether the State of Iceland has been negligent by comparison to other EU countries in the implementation of the Directive 94/19/EC during the financial collapse of its banking system.47 European citizens still ignore whether the alleged discrimination on the basis of territory is acceptable or not in case of emergency financial circumstances. These uncertainties make the current Icesave agreements very difficult to accept for the Icelandic society.

As a lawyer, a suggestion to solve this paradox could be based on a pragmatic approach. Iceland could accept the reimbursement of the debt incurred towards the UK and Holland who took the political decision to reimburse depositors to prevent further financial chaos in their countries in the autumn 2008, while all legal issues relating to State liability and non-discrimination could be discussed before the relevant courts. This is precisely the goal of European law.

2.7. Other supporting arguments

European rules on financial supervision and regulation of DGS seem unfit in the light of the events of 2008/2009. Financial supervision rules were not appropriate to cover the risks for consumers deriving from the broad expansion of banking firms within the EU/EEA. The EU regulators, and by extension, the national regulators did not follow properly the needs of the internal market. Banking activities crossed frontiers and established branches in other guest countries under the passport rules while regulatory and financial supervision followed the rule of the home country and remained naturally fragmented. Supervision in guest states receiving branches from other home EEA States has proven to be ineffective. There was no role assigned in cross-border cases for the different European central banks, the European Central Bank nor explicit rules for guarantees of last resort. Rules, for instance, never seemed to contemplate the cases of small countries outside the euro area expanding banking activities to other EU/EEA countries for a value of ten times their GPD.

From a legal perspective, it seems that there is an unbalance of rights and obligations under European law in this dispute. Being approached on a bilateral basis at political level, the main problem for Iceland is the lack of access to justice in a dispute that lives at the intersection of the EU Treaty and the EEA Agreement. In cross-border disputes between the EU and EEA countries, there is no direct competence for the ECJ nor the EFTA Court if States do not agree. If it is true as the press sometimes states in Iceland that the UK and Holland do not accept to take this dispute to the ECJ, this has meant in practice that Iceland has been deprived of its right for effective judicial remedy in European law. It could also be due to Icelandic Government deciding on its free will that political and economic arguments should prevail over law in this dispute.

Whatever the reason or the economic or political arguments, it can be observed now that this lacuna or gap in the EEA Agreement, together with the legal uncertainties of EU banking and financial law, has been extremely prejudicial for Iceland. Icelandic citizens do not have access to justice to the ECJ either. In EU law, any country could start an infringement case or simply take the issue of the interpretation of the State liability deriving from Directive 94/19/EC and the principle of non-discrimination before the ECJ. Iceland, on the other hand, seems to have accepted the principle of State liability and nationalisation of private debt of banking entities abroad without being entitled in the subsequent Icesave agreements to proper judicial and independent review of its legal arguments.

The core of the dispute being EU/EEA law, it is the opinion of the author that we should be consistent and keep a balance of rights and obligations under European law:

- or we decide that EU/EEA law does not relate to the hard core of this dispute and therefore both State liability and discrimination claims are trumped by emergency reasons of extreme gravity, touching the economic independence of a country, falling outside the EU/EEA Treaties.

- or we decide that EU/EEA law relate to the hard core of this dispute and give States and individuals a proper system of judicial remedies.

A political approach of solving this dispute at diplomatic level based on bilateral negotiations which impose a certain interpretation of EU law to Iceland without providing a proper redress mechanism by an independent judge on a fair trial seems at least a strange conclusion in the field of European integration. The nationalisation of private debt created by the collapse of the banking system endangering the economic future of a small nation, without the possibility for this nation to expose its legal arguments before a court of justice, does not appear legitimate when seen in the light of the European Treaties, the EU Charter of Fundamental Rights and the European Convention of Human Rights (ECHR). However is to blame for the methodology is irrelevant but the EU Treaties impose the EU institutions with the duty to respect fundamental rights, the rule of law and to promote the European integration. And the ECHR imposes obligations on European countries to respect fundamental rights for citizens.

In view of all the previous arguments, it seems reasonable to conclude this section with the following suggestion. While – for political and economical reasons - it is important to sign an agreement and reimburse the UK and Holland for the minimum guarantee given to depositors and therefore comply in principle with the claims under EU/EEA law, it can never be recommended nor accepted from a legal point of view that Iceland renounces its right to take the issue of the immunity/liability of the Icelandic State and the use of the terrorist legislation by the UK against Iceland before the ECJ or the EFTA Court. Unfortunately, the three countries must agree in order for any of these courts to take the issue -which does not seem to be the case for the time being.

 
3. Conclusions

From a European law perspective the dispute and settlement of Ice-save dispute is highly complex and it presents difficult choices derived from diverse legal, economic and political factors.

1. The State liability of Iceland resulting from the Deposit Guarantee Fund (Tryggingasjóður) not having sufficient funds to cover all depositors is very unclear and EU law does not provide yet a definite answer. It has to be noted that it is a private fund that must respond in the framework of the DGS. The role of the State as a guarantee of last resort is not stated in the Directive. It can be argued that Iceland has complied with its duty of implementation of the EU provisions. No EU institution, no EU Member State ever considered necessary to legislate on the cases of systemic failure. For reasons of competition and state aid, EU States cannot guarantee their private banking institutions. In view of the above, the issue of liability/indemnity of the State is very much unclear.

2. From a strictly legal point of view, it is incomprehensible that this dispute is not taken before a European court as too many uncertainties have to be clarified.  The European Court of Justice or the EFTA Court should rule on the interpretation of Directive 94/19/EC and the liability/immunity from the State in case of systemic failure. EU legislation keeps silence on the issue so it is questionable whether the general conditions for State liability in EC/EEA law apply. The case Peter Paul and others from the ECJ in 2004 and, in particular, the arguments that several Governments pleaded during the proceedings as well as the opinion of the Advocate General are essential in this regard. . The EEA Joint Committee could also be charged of finding a political solution at European level.

3. The doctrine and the European institutions knew that the EU legislation would not be enough to cover a case of systemic bank failure. They also knew that the risks inherent to the cross-border application of the rules were not protected well enough and that the financial supervision was decentralized. It seems to be an accepted fact that Iceland failed in the supervision of Icesave branches of Landsbanki as a home state but questions arise whether the UK and Holland have also failed as guest states.

4. However, since Iceland created new banking entities bringing as assets all deposits in Iceland without any limit, the question arises whether Iceland was obliged to cover other depositors in the EU who were not connected to the territory. The principle of non-discrimination is essential in EU/EEA law and it is very difficult to derogate from it. Although the maximum liability under the Directive is 20.889€ according to the ECJ (case Peter Paul), depositors in the UK and Holland could also claim the whole amounts under the principle of equality and non-discrimination before national/European courts. It is very unclear what would be a judgment in that case under European/national laws.

5. If the EU has no competence on the issue the principle of discrimination does not come into play.  It is important to remember that nothing in the new Treaty of the European Union nor in secondary law provides for a role or the competence of the EU to deal with national measures designed to nationalise, bail-out or restructure domestic banks in emergency situations such as the recent financial crisis requested. It could be therefore very well argued in European law that the nationalisation of private debt in emergency circumstances created by the collapse of practically the whole banking system of Iceland falls outside the scope of EU and, by extension, EEA law.

6. The Ice dispute has dramatically unveiled a grey area of EU law. There was no EU safety net and a fragmented European legal order unfit to cope with a case of cross-border insolvency/bankruptcy and the subsequent reorganisation/nationalisation of debts. While we all recognise that it is very regrettable, the fact is that EU law did not provide a legal framework to manage/stop the Icelandic crisis.

7. It could also be argued that the solution of problems derived from the internal market is the main competence and the main responsibility of the European Union. If this is so, consistency is required. In this case, the EU institutions cannot pretend that this dispute has to be solved on a bilateral basis. If EU/EEA law has created the problem (lack of harmonisation on the essential question of liability/immunity of the State in case of systemic failure), the EU/EEA institutions must be there to solve it. Otherwise they are failing to their duties and obligations under the EU/EEA Treaties and the whole internal market becomes a fallacy for citizens, economic operators and States.

8. In all circumstances, the legal dispute should not be limited to discuss the normative provisions of Directive 94/19/EC in isolation. The whole EU and EEA legal orders must be taken into account for the resolution of this problem In this regard the main question is whether the gigantic debt that Iceland would have to borrow  will affect the whole economic life for the next 15 years threatening the economic stability of the country. Is this fair for an EEA member and European partner in the lights of the principles of the European legal order?

9. The Icesave agreements signed by Iceland with the UK and Holland for the repayment of the dept are international business law contracts strongly biased towards the lenders which reflect a fundamental mistrust against Iceland: its legislative, executive and judicial powers. From a EU/EEA law point of view they could be strongly discussed. The current Icesave agreements do not allow Iceland to take this dispute before the ECJ under EU/EEA law and deprive Iceland and Icelanders of access to justice. We refer to the Report done by the UK legal firm Mischon de Reya in December 2009.

10. At a political level, European Commissioner Joaquín Almunia has confirmed that the EU will not give financial assistance to Iceland until the International Monetary Fund has signed an agreement with the Icelandic Government. The IMF is not going to approve the agreement unless Iceland approves by national referendum the current Icesave agreements which are strongly criticised by an important part of the population. Iceland seems to be trapped in a impossible situation.

 

REFERENCES

1.       ^[1] See the website www.indefence.is.

2.       ^[1] Stefán Már Stefánsson, The EEA Agreement and its Adoption into Icelandic Law, Centre for European Law, University of Oslo, 1997, on  p. 17.

3.       ^[1] Agreement on the European Economic Area. Official Journal No L 1, 3.1.1994, p. 3; and EFTA States’ official gazettes available at  http://www.efta.int/content/legal-texts/eea and EFTA Court and EFTA Surveillance Authority Agreement available at http://www.efta.int/content/legal-texts/esa-eftacourt.

4.       ^[1] M. Elvira Méndez-Pinedo, EC and EEA law: a comparative study of the effectiveness of European law, Europa Law Publishing, Groningen, 2009.

5.       ^[1] Source: EFTA Secretariat at http://www.efta.int/content/eea/institutions

6.       ^[1] See also article 5 of the EEA Agreement which specifies that each Contracting Party may at any time raise ”a matter of concern“ at the level of the EEA Council. This possibility applies also to the EEA Joint Committee. Stefán Már Stefansson refers to this possibility with the term “right of discussion“ which in French terminology is usually known as ”droit d´évocation“. See from this author, The EEA Agreement...., op. cit., 1997, on p. 7. The fact that this right is referred to in Article 5 EEA with the expression “raise a matter of concern“ and in Article 89 as “any issue giving rise to a difficulty“ is not intended to imply any difference in practice.

7.       ^[1] S. Norberg, K. Hökborg, and others, The European Economic Area. EEA Law. A  Commentary on the EEA Agreement,  Fritzes, Sweden, 1993, see especially pages 119-121 on the EEA Council.

8.       ^[1] ECJ, judgment of 12 October 2004 in the case C-222/02 Peter Paul, v Bundesrepublik Deutschland [2004] ECR Page I-09425. See also the Opinion of Advocate General Stix-Hackle delivered on 25 November 2003 on the same case.

9.       ^[1] Opinion given by Advocate General in the case Peter Paul C-222/02, ECR [2004] Page I-09425. The Opinion of Advocate General Six-Hackl also points in the direction that, even if the State liability was a necessary conclusion of the Directive 94/19/EC, the maximum responsibility for the State would be to compensate the depositors up to the minimum guarantee of 20.889 €.

10.   ^[1] See the jurisprudence of the ECJ on the State liability for breaches of EU law, notably the Joined Cases C-6/90 and C-9/90 Francovich,  ECR [1991]  p. I- 5357; the case C-334/92 Wagner Miret v Fondo de Garantia Salarial ECR [1993] p. I-6911; Joined Cases C-46/93 & C-48/93 Brasserie du Pêcheur and Factortame III , ECR [1996] p.  I­- 1029 which prove that the principle of State liability in EC law can apply whenever Member States or their institutions are in breach of their Community obligations causing loss or damage to individuals or economic operators and which establish three conditions for the State liability to arise.

11.   ^[1] State liability for breaches of EEA law is a doctrine created by the EFTA Court when the Contracting Parties infringe primary or secondary EEA law and thereby cause damage to individuals or economic operators. See jurisprudence established in the cases Erla Case E-7/97 Erla María Sveinbjörnsdóttir 1998 EFTA Court Report, 95; Case E-4/01 Karl K. Karlsson hf. v The Icelandic State, 2002 EFTA Court Report, 240; Case E-1/07 Criminal proceedings against A, 2007 EFTA Court Report, 245; and Case E-8/07 between Celina Nguyen and The Norwegian State, judgment of 20 June 2008, not yet published in EFTA Court Reports, see OJ C 33, 7.2.2008, p. 10.

12.   ^[1] Center for European Reform. “Beyond banking: What the financial crisis means for the EU“. Policy brief, October 2008, available at www.cer.org.uk

13.   ^[1] Different documents  have been produced by or under the supervision of the European Commission on the necessary reform of the Directive 94/19/EC where the liability of the State for the sufficient provision of funds under the DGS home country national scheme is never stated: - the Working Paper from 14 July 2005 (Ref DGS 001/2005); -  the initial Communication from 28 November 2006 (Press release IP/06/1637);  - the Report on DGS efficiency done by the Joint Research Centre in Ispra  from May 2008;  - the Memorandum with an Overview of national rescue measures and DGS compiled by the Commission and offered as a MEMO/08/619 on 14 October 2008; - the Consultation Document on the Review of the Directive 94/19/EC  - Doc COM (2009) 114 of 4 March 2009;  - the Draft Minutes of the Informal Experts Roundtable on DGS on 31 March 2009 in Brussels. All these documents referring to the necessary amendment of the DGS are available at the website of the European Commission: http://ec.europa.eu/internal_market/bank/guarantee/index_en.htm

14.   ^[1] New Directive 2009/14/EC of the European Parliament and of the Council of 11 March 2009 amending Directive 94/19/EC on deposit-guarantee schemes as regards the coverage level and the payout delay (Text with EEA relevance) OJ  L 68, 13.3.2009.

15.   ^[1] European Parliament, Report of 27 November 2006 (Doc. INI/2007/2199).

16.   ^[1] Andenas, M., Financial Markets in Europe: Towards a Single Regulator, Kluwer Law International, 2003; International Monetary Fund, Fonteyne, W., EU: From Monetary to Financial Union. Overcoming the remaining hurdles to financial integration in Europe, June 2006; Garcia G. and Nieto, M., Bankcrupcy and reorganisation procedures for cross-borders banks in the EU: Towards an integrated approach to the reform of the EU safety net, working paper 16 December 2008 and also in the Journal of Financial Regulation and Compliance  (in press) .

17.   ^[1] Articles published by Professor Stefán Már Stefánsson in the Icelandic newspaper Morgunblaðið on the 12th, 13th, 14th and 15th January 2010. See also Report by law firm Mishcon de Reya to the Icelandic Parliament 19 December 2009, not published, on the second Icesave agreements negotiated between Iceland, the UK and Holland. Report available at the website www.island.is.  See also interview with MEPs Eva Joly and Alain Liepitz on Icelandic TV, programme Silfur Egils, 10 January 2009.

18.   ^[1] ECJ 12 October 2004 in the case C-222/02 Peter Paul, v Bundesrepublik Deutschland ECR [2004] Page I-09425.

19.   ^[1] The situation is complicated by the position of the different treatment of the so-called "wholesale" depositors in Iceland by comparison to the UK and the Netherlands. This means that Icelandic local authorities and corporations had their deposits (not including bonds) guaranteed at 100% by the Icelandic government, while British and Dutch organizations in the same situation had no cover whatsoever.

20.   ^[1] Articles published by Professor Stefán Már Stefánsson in the Icelandic newspaper Morgunblaðið on the 12th, 13th, 14th and 15th January 2010. 

21.   ^[1] ECJ, case C-148/02 García Avello, ECR  2003, p I-11613 as well as case C- and C-55/94 Gebhard, ECR 1995, p. I -04165.

22.   ^[1] Speech by the European Commissioner Neelie Kroes , Brussels 6 October 2008.

23.   ^[1] Articles published in the Icelandic newspaper Morgunblaðið on the 12th, 13th, 14th and 15th January 2010.

24.   ^[1] Petrovic, A. And Tutsch R., National Rescue Measures In Response To The Current Financial Crisis, European Central Bank. Legal Working Paper Series no. 8 /July 2009. Available at the website http://www.ecb.int/pub/pdf/scplps/ecblwp8.pdf.

25.   ^[1] Craig, P. And De Búrca, G., EU Law. Text, cases and materials. Oxford University Press, 2007.

26.   ^[1] Craig, P. and De Búrca, G., op. cit.

27.   ^[1] See Opinion of Mr Advocate General Ruiz-Jarabo Colomer delivered on 12 May 2005 in Case C-207/04 Paolo Vergani v Agenzia delle Entrate, Ufficio di Arona. ECR [2005] p. I-07453. 28.   ^[1] ECJ, Case C-189/01 Jippes [2001] ECR I-5689, paragraph 129.

29.   ^[1] ECJ, Case C-226/91 Molenbroek [1992] ECR I-5943, paragraph 13.

30.   ^[1] Judgments in Case C-343/92 Roks and Others [1994] ECR I-571, paragraph 35; Jørgensen, Case C-226/98 [2000] ECR I-2447 paragraph 42; and C-5/02 Schönheit and Becker [2003] ECR I-12575 , paragraph 85.

31.   ^[1] From the website: http://eng.forsaetisraduneyti.is/news-and-articles/nr/4072

“The EFTA Surveillance Authority (ESA) presented its preliminary findings in a letter dated 4 December 2009 on a complaint raised by a group of general creditors of the Icelandic banks Glitnir bank, Kaupthing bank, Landsbanki Islands, SPRON and Sparisjodabanki Islands. The complaint concerned actions by Icelandic authorities on the basis of the so-called “Emergency Act” (Act No 125/2008). The preliminary findings of ESA concluded that the provisions of the Emergency Act, in particular as regards provisions giving depositors priority over other unsecured creditors and various decisions of Icelandic authorities on the basis of the Act, are compatible with the provisions of the EEA-Agreement. ESA specifically states that its preliminary findings do not deal with compatibility issues under EEA law regarding the difference in treatment between domestic deposits and deposits held in branches of Icelandic banks in other EEA States. The following is a brief summary of the main considerations regarding the compatibility of the Emergency Act and measures thereunder with EEA law:

 

a.       Discrimination under Article 40 EEA: It is the preliminary finding of ESA that the Emergency Act does not constitute direct discrimination on the grounds of nationality, residence or the place where capital is invested, as the measures were not expressly based on such grounds. As regards the claim that the measures amount to indirect discrimination of other unsecured creditors and guarantee holders by giving claims by depositors a higher ranking order than claims by other unsecured creditors or guarantee holders, ESA argues that depositors on the one hand and other unsecured creditors and guarantee holders on the other hand were not in comparable situations with regard to the emergency measures. Consequently, the equal treatment requirements of Article 40 EEA are fulfilled as regards the Icelandic emergency measures.

 

b.      Non-discriminatory restrictions: ESA examines whether actions taken by Icelandic authorities adversely affected the flow of capital. The letter examines whether the changes introduced to the ranking order of unsecured credit claims against financial institutions in insolvency proceedings might dissuade the provision of unsecured credit by financial institutions to other financial institutions and consequently be considered to be restrictive of the free movement of capital. In short, ESA takes the view that, in principle, the coverage of the complaining banks was not affected by the transfers of assets and, therefore, the measures do not constitute restrictions to the free movement of capital under Article 40 EEA.

 

c.       Justification: Although having reached the above conclusion, ESA examined, for the sake of completeness, whether a hypothetical restriction on the free movement of capital in the EEA would be justified. On this question, ESA concludes that on the assumption that the measures were a restriction under Article 40 EEA they would have been justified as safeguarding the functioning of the Icelandic banking system. Moreover, that the emergency measures were proportionate to the objective to remedy a genuine and sufficiently serious threat to the domestic banking system, the functioning of which constitutes one of the fundamental interests of society.”

32.   ^[1] Petrovic, A. And Tutsch R., National Rescue Measures In Response To The Current Financial Crisis, European Central Bank. Legal Working Paper Series no. 8 /July 2009. Available at http://www.ecb.int/pub/pdf/scplps/ecblwp8.pdf.

33.   ^[1] In the previous report, however, the author concluded that there was a case of indirect discrimination de facto but pointed out that it was necessary to examine the national measures adopted by all countries to follow up. A  closer analysis of how other states of the other 29 EEA Member States would have reacted to a similar systemic and global banking failure was needed. 34.   ^[1] Garcia, G.G.H., Lastra, R.M. And Nieto, M.J., “Bankrupcy and reorganization procedures for cross-border banks in the EU: Towards an integrated approach to the reform of the EU safety net“, research paper 16 December 2008, available at http://fmg.lse.ac.uk/upload_file/1161_Nieto.pdf

35.   ^[1] Speech by the European Commissioner Neelie Kroes , Brussels 6 October 2008.

36.   ^[1]European Commission, State aid Commission approves revised Irish support scheme for financial institutions. Press release. Doc. IP/08/1495 , 13th October 2008 . Document available at http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/1495&format=HTML&aged=0&language=EN&guiLanguage=en

37.   ^[1] Méndez-Pinedo, M.E, EC and EEA law, op.cit.

38.   ^[1] All these legal uncertainties were known to the UK financial authorities. See Report of the Financial Markets Law Committee April 2008 (UK) on banking reform and depositor protection available at http://www.fmlc.org/papers/Issue133depprot.pdf  http://www.citysolicitors.org.uk/FileServer.aspx?oID=353&lID=0

39.   ^[1] Articles published in the Icelandic newspaper Morgunblaðið on the 12th, 13th, 14th and 15th January 2010.

40.   ^[1] European Parliament, Report on the Treaty of Lisbon 20.2.2208 available at http://europa.eu/lisbon_treaty/library/index_en.htm

41.   ^[1] “ … direct taxation falls within the competence of the Member States … “ . See ECJ, C-345/04, Centro Equestre, para 19)

42.   ^[1] Although tax policy is national, discriminatory taxation is forbidden by EU law. This rule has used by the EU Court to put pressure on Member States, for example, in judgments by the EU Court on the taxation of pensions. Making taxation consistent across the EU (harmonisation) requires unanimity among the EU states.

43.   ^[1] See European Commission, Communication 14 December 2005, Doc MEMO/05/482 and also

http://europa.eu.int/comm/secretariat_general/sgb/droit_com/index_fr.htm#infractions

44.   ^[1] Bengoetxea, J., The Legal Reasoning of the European Court of Justice, Clarendon Press Oxford, 1993.

45.   ^[1] Petersmann, E-U., Shaping  Rule of Law Through Dialogue, Europa Law Publishing, Groningen, 2009, foreword.

46.   ^[1] Petersmann, E-U, Shaping Rule of Law through Dialogue, op.cit.

47.   ^[1] We refer to an excellent article from Professor Herdís Þorgeirsdóttir in Fréttablaðið (2009), entitled “Ógn við öryggi og sjálstæði þjóðar – og framtið evrópsks samstarfs” where she points that the Ice-save dispute is fundamental to decide the future of the whole European integration process.

 

Gegn hagsmunum Íslands

An interesting judgment from the Court of Justice for the European Union

 

An interesting judgment from the ECJ where the Netherlands argues that obligations arising from the EEA Agreement are not equivalent to the ones arising from the EU Treaty in order to justify discrimination against companies established in Iceland and Norway for tax purposes

....does the Kingdom of Netherlands has a double standard now in EU/EEA law?

 

Please note paragraphs 25, 29, 41, 42, 50 and 52 of the judgment

25. The Kingdom of the Netherlands argues that the obligations which flow from the free movement of capital between Member States of the Community cannot be purely and simply transposed to the relations between the latter and the EFTA Member States of Iceland and Norway.

29. The Kingdom of the Netherlands therefore considers that the absence of a Community legal instrument in its relations with the Republic of Iceland and the Kingdom of Norway justifies the differences in the conditions for granting exemption from the deduction at source of tax on dividends in respect of the stakes held by companies established in those two States.

41. The Kingdom of the Netherlands considers that beneficiary companies established in Iceland and Norway are in one of the various situations referred to in Article 58(1)(a) EC, pursuant to which Article 56 EC is without prejudice to the right which Member States have to apply the relevant provisions of their tax legislation which establish a distinction between taxable persons who are not in the same situation as far as their residence is concerned.

42. According to consistent case-law, for a national tax provision to be capable of being regarded as compatible with the provisions of the Treaty on the free movement of capital, the resulting difference in treatment must concern situations which are not objectively comparable or be justified by overriding reasons in the public interest ( Amurta , paragraph 32 and case-law cited).

50. Therefore, the Court cannot accept the argument of the Kingdom of the Netherlands based on the different situations of, on the one hand, companies having their seat in Member States of the Community and, on the other hand, Icelandic and Norwegian companies in order to justify the requirement that the latter companies hold a higher stake in the capital of the Netherlands companies distributing the dividends in order for them to benefit, like the former companies, from exemption from the deduction of tax at source on the dividends which they receive from Netherlands companies.

52. It follows from the above that, by not exempting dividends paid by Netherlands companies to companies established in Iceland or Norway from deduction at source of the tax on dividends under the same conditions as dividends paid to Netherlands companies or companies of other Member States of the Community, the Kingdom of the Netherlands has failed to fulfil its obligations under Article 40 of the EEA Agreement.

Judgment of the Court of Justice of the European Union(Second Chamber) of 11 June 2009.

Commission of the European Communities v Kingdom of the Netherlands.

Failure of a Member State to fulfil obligations - Agreement on the European Economic Area - Article 40 - Free movement of capital - Discrimination in the treatment of dividends paid by Netherlands companies - Deduction at source - Exemption - Beneficiary companies established in Member States of the Community - Beneficiary companies established in Iceland or Norway.

Case C-521/07.

 European Court reports 2009 Page 00000

International agreements – European Economic Area Agreement – Free movement of capital – Restrictions – Tax legislation – Corporation tax – Taxation of dividends (EEA Agreement, Art. 40) Summary 

A Member State fails to fulfil its obligations under Article 40 of the European Economic Area (EEA) Agreement where it does not exempt dividends paid by resident companies to companies established in the EEA States from the deduction at source of tax on dividends under the same conditions as dividends paid to resident companies or to companies established in other Member States, by requiring that, in order to benefit from the exemption, companies established in the two EEA States in question hold at least, respectively, 10% or 25% of the shares of the distributing resident company and companies having their seat in the Member State concerned or in another Member State hold shares representing at least 5% of the paid-up nominal capital of the resident distributing company.

Such a difference in treatment as regards the method of taxing dividends paid to beneficiary companies established in the EEA States in question, compared with those paid to beneficiary companies established in the Member States is likely to deter companies established in the former two States from making investments in the Member State concerned. Moreover, it makes it more difficult for a resident company to raise capital from the two EEA States in question than from the Member State concerned or another Member State of the Community. It thus constitutes a restriction on the free movement of capital which is, in principle, prohibited by Article 40 of the EEA Agreement. The argument based on the different situations of, on the one hand, companies having their seat in Member States of the Community and, on the other hand, companies established in the two EEA States in question cannot justify the requirement that the latter companies hold a higher stake in the capital of the resident companies distributing the dividends in order for them to benefit, like the former companies, from exemption from the deduction of tax at source on the dividends which they receive from resident companies. In that regard, although a difference in the system of legal obligations of the EEA States in question in the tax area, in comparison with those of the Member States of the Community, is capable of justifying a State in making the benefit of exemption from deduction at source of the tax on dividends subject, for companies established in the two EEA States in question, to proof that those companies do in fact fulfil the conditions laid down by its national legislation, it does not justify that legislation in making the benefit of that exemption subject to the holding of a higher stake in the capital of the distributing company. Such a requirement bears no relation to the conditions otherwise required from all companies in order to be entitled to that exemption, namely that companies take a certain legal form, that they be subject to tax on profits and that they be the final beneficiary of the dividends paid, those being conditions with which the national tax authorities must indeed be able to verify compliance.(see paras 37, 39, 47-48, 50, 52, operative part)Parties 

In Case C‑521/07,

ACTION under Article 226 EC for failure to fulfil obligations, brought on 23 November 2007,

Commission of the European Communities, represented by P. van Nuffel and R. Lyal, acting as Agents, with an address for service in Luxembourg,

applicant,

v

Kingdom of the Netherlands, represented by C.M. Wissels and D.J.M. de Grave, acting as Agents,

defendant,

THE COURT (Second Chamber),

composed of C.W.A. Timmermans, President of the Chamber, J.-C. Bonichot (Rapporteur), K. Schiemann, L. Bay Larsen and C. Toader, Judges,

Advocate General: D. Ruiz-Jarabo Colomer,

Registrar: R. Grass,

having regard to the written procedure,

having decided, after hearing the Advocate General, to proceed to judgment without an Opinion,

gives the following

Judgment

Grounds 

1. By its application, the Commission of the European Communities seeks a declaration of the Court that, by not exempting dividends paid to companies established in Iceland or Norway from the deduction at source of tax on dividends under the same conditions as dividends paid to Netherlands companies, the Kingdom of the Netherlands has failed to fulfil its obligations under Article 40 of the Agreement on the European Economic Area of 2 May 1992 (OJ 1994 L 1, p. 3; ‘the EEA Agreement’).

Legal context

The EEA Agreement and Community law

2. According to Article 40 of the EEA Agreement:

‘Within the framework of the provisions of this Agreement, there shall be no restrictions between the Contracting Parties on the movement of capital belonging to persons resident in [European Community] Member States or [European Free Trade Association (EFTA)] States and no discrimination based on the nationality or on the place of residence of the parties or on the place where such capital is invested. Annex XII contains the provisions necessary to implement this Article.’

3. The said Annex XII, entitled ‘Free movement of capital’, refers to Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty (OJ 1988 L 178, p. 5).

4. Article 1(1) of that directive provides:

‘Without prejudice to the following provisions, Member States shall abolish restrictions on movements of capital taking place between persons resident in Member States. …’

5. According to Article 4 of the same directive:

‘This Directive shall be without prejudice to the right of Member States to take all requisite measures to prevent infringements of their laws and regulations, inter alia in the field of taxation ...

Application of those measures and procedures may not have the effect of impeding capital movements carried out in accordance with Community law.’

National legislation

6. Article 1(1) of the Law on the Taxation of Dividends (Wet op de Dividendbelasting) of 23 December 1965 (‘the Wet DB’), provides:

‘Under the name of “tax on dividends” a direct tax shall be charged on persons who – directly or by means of certificates – enjoy income from shares in, participation certificates of and loans such as referred to in Article 10(1)(d) of the Corporation Tax Law of 1969 [Wet op de Vennootschapsbelasting 1969 (“the Wet Vpb”) of private limited liability companies, limited partnerships and other companies established in the Netherlands whose capital is wholly or partially divided into shares.’

7. According to Article 4 of the Wet DB:

‘1. The tax on income from shares, participation certificates and loans such as referred to in Article 10(1)(d) of the Wet Vpb may be not deducted at source if:

a. the holding exemption provided for in Article 13 of the [Wet Vpb] or the holding compensation provided for in Article 13aa of that law applies to the advantages which the beneficiary derives from those shares, participation certificates and loans, and the holding forms part of the assets of its undertaking operated in the Netherlands;

b. ...

2. Tax is not deducted at source on income from shares, participation certificates and loans such as referred to in Article 10(1)(d) of the [Wet Vpb] if the beneficiary of the income is a body established in another Member State of the European Union and the following conditions are satisfied:

1. the beneficiary of the income and the taxable person take one of the legal forms set out in the Annex to Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (OJ 1990 L 225, p. 6), or a legal form indicated by ministerial decree;

2. at the date on which the income is distributed, the beneficiary is the holder of at least 5 per cent of the paid-up nominal capital of the taxable person, or, at that date, holds a stake in the taxable person to which Article 13(5) or (14) of the [Wet Vpb] would apply if it were established in the Netherlands;

3. the beneficiary of the income and the taxable person are subject, in the Member State of establishment, without the possibility of an option or of being exempt, to the tax which is there levied on profits, as referred to in Article 2(c) of that directive;

4. in the Member State of establishment, the beneficiary of the income and the taxable person are not deemed to be established outside the Member States of the European Union pursuant to an agreement for the avoidance of double taxation concluded with a non-member State;

...’

8. According to Article 13 of the Wet Vpb:

‘1. For the purposes of determining profits, no account shall be taken of the advantages by virtue of a holding or the costs linked to the acquisition or sale of that holding (holding exemption).

2. There is a holding if the taxpaying company:

a. is, as to at least 5% of the paid-up nominal capital, a shareholder of a company whose capital it wholly or partially divided into shares;

b. ...’

9. As regards companies established in Iceland or Norway, the Netherlands legislation contains no specific provision taking account of the fact that they may rely on Article 40 of the EEA Agreement. It is on the basis of bilateral agreements for the avoidance of double taxation concluded with those States parties to the EEA Agreement that the tax on dividends is not levied in the case of a holding in a Netherlands company of at least 10% (Article 10 of the agreement concerning taxes on income and capital between the Netherlands and Iceland, signed on 25 September 1997) or at least 25% (Article 10 of the agreement concerning taxes on income and capital between the Netherlands and Norway, signed on 12 January 1990) .

The pre-litigation procedure

10. Taking the view that dividends paid to companies established in the Netherlands were receiving more favourable treatment than dividends paid to companies of other Member States and States of the European Economic Area (‘the EEA’), and that the Kingdom of the Netherlands was not therefore complying with its obligations under Article 56 EC and Article 40 of the EEA Agreement, the Commission sent a letter of formal notice to the Netherlands dated 18 October 2005, requesting explanations.

11. The Kingdom of the Netherlands having given only holding replies, without any comment on the substance, the Commission issued a reasoned opinion on 6 July 2006, setting out the same complaints and calling upon the Netherlands to take the necessary compliance measures within a time-limit of two months from receipt of that opinion.

12. The Netherlands replied by letter of 7 September 2006 that the Wet DB would be adapted as from 1 January 2007, as regards dividends paid to companies established in one of the other Member States of the Community. That amendment, which took place before the present application was brought, led to the adoption of Article 4(2) of the Wet DB as reproduced in paragraph 7 of this judgment.

13. By contrast, the Kingdom of the Netherlands maintained, as regards the alleged infringement of Article 40 of the EEA Agreement, that the Netherlands legislation concerned did not constitute an obstacle to the free movement of capital, and that, even if it did, this was a justified obstacle.

14. Whilst acknowledging that the amendment of Article 4 of the Wet DB had ensured the compatibility of Netherlands legislation with the Treaty as regards companies established in other Member States, the Commission decided to pursue the procedure for failure to fulfil obligations and to bring the present action as regards the complaint of failure to fulfil obligations under Article 40 of the EEA Agreement.

The action

Arguments of the parties

15. The Commission argues that the Court has held, in its judgment in Case C-452/01 Ospelt en Schlössle Weissenberg [2003] ECR I-9743, paragraphs 28, 29 and 32, that Article 40 of the EEA Agreement and Annex XII to that Agreement have the same legal scope as the substantially identical provisions of Article 56 EC. It further indicates that the EFTA Court held the same in its judgments of 23 November 2004, Fokus Bank (E‑1/04, EFTA Court Report p. 22, paragraph 23), and 1 July 2005, Paolo Piazza (E‑10/04, EFTA Court Report p. 100, paragraph 33).

16. It considers that the Netherlands legislation creates discrimination between the tax treatment of dividends paid to a company established in the Netherlands, or, henceforth, in another Member State of the Community, and that of dividends paid to a company established in Iceland or Norway.

17. It points out that the dividends of a Netherlands company paid to another Netherlands company or to a company of another Member State are exempted from deduction at source of tax on the first company’s dividends if the second company holds at least 5% of the capital of the first, whereas the dividends of a Netherlands company paid to a company established in Iceland or Norway are exempted only if the latter holds at least 10% (in the case of Icelandic companies) or 25% (in the case of Norwegian companies) of the capital of the Netherlands company concerned.

18. That discrimination, it argues, infringes the principle of the free movement of capital because it has the effect of making investment in Netherlands companies less advantageous for companies established in Iceland or Norway than for companies established in the Netherlands or other Member States of the Community. It also makes it more difficult for a Netherlands company to attract capital from Iceland and Norway than from the Netherlands or another Member State of the Community.

19. The Commission emphasises that the Court has already held such discrimination to be contrary to Article 56 EC in Case C‑379/05 Amurta [2007] ECR I‑9569, paragraph 28, concerning dividends paid to companies of other Member States which, at the time of the facts in that case, were not exempted in the same way as those paid to Netherlands companies.

20. As in that case, the Commission submits, the tax legislation at issue here cannot be regarded as compatible with Community law, and thus with the EEA Agreement, unless the difference in treatment which it involves concerns situations which are not objectively comparable or is justified by an overriding reason in the public interest.

21. The Commission maintains, but the Kingdom of the Netherlands denies, that the situation of Icelandic and Norwegian companies is objectively comparable to that of Netherlands companies with regard to the risks of double taxation on the profits of Netherlands companies of which they hold part of the capital.

22. The case-law of the Court shows that measures seeking, in such a situation, to prevent double taxation must be extended to all foreign companies which may benefit from the provisions on the free movement of capital. The Commission refers in that respect to Case C‑170/05 Denkavit Internationaal and Denkavit France [2006] ECR I‑11949, paragraph 37.

23. The Commission acknowledges that the national legislature may adopt measures to combat abuses of the freedoms of the internal market, particularly, as regards the free movement of capital, by virtue of Article 58 EC and, in this case, by virtue of Article 4 of Directive 88/361, mentioned in Annex XII to the EEA Agreement, whereby Member States have the right ‘to take all requisite measures to prevent infringements of their laws and regulations, inter alia in the field of taxation’.

24. However, such measures must be proportionate to the objective pursued. In this case, the Kingdom of the Netherlands has not indicated what abuses were to be combated by the refusal to exempt the payment of dividends to companies established in Iceland or Norway from the deduction at source of the tax on dividends.

25. The Kingdom of the Netherlands argues that the obligations which flow from the free movement of capital between Member States of the Community cannot be purely and simply transposed to the relations between the latter and the EFTA Member States of Iceland and Norway. That, it argues, follows from the fact that, in those two latter States, Council Directive 77/799/EEC of 19 December 1977 concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation (OJ 1977 L 336, p. 15; ‘Directive 77/799’) does not apply.

26. The Kingdom of the Netherlands argues that the fight against the risks of tax evasion and abuse does not constitute the only justification set out in its legislation for the difference in treatment of dividends paid to companies established in Member States of the Community and those paid to companies established in Iceland or Norway.

27. In accordance with that legislation, in addition to the condition requiring the holding to account for at least 5% of capital, the beneficiary of the dividends itself must also satisfy two conditions in order to be entitled to the exemption in question, conditions which apply also to purely national situations and which are not discriminatory, being that the beneficiary must, first, be subject to a tax on profits and, second, be the final beneficiary of the dividends.

28. Compliance with those conditions can easily be monitored between Member States, thanks to the binding nature of Directive 77/799, whereas the bilateral conventions concluded with Iceland and Norway, not being Community legal instruments, do not allow a Member State or the Commission to demand before the Court of Justice that the resulting obligations be performed.

29. The Kingdom of the Netherlands therefore considers that the absence of a Community leg al instrument in its relations with the Republic of Iceland and the Kingdom of Norway justifies the differences in the conditions for granting exemption from the deduction at source of tax on dividends in respect of the stakes held by companies established in those two States.

30. On that point, the Commission insists on the contrary that the bilateral conventions concerned are legally binding for those States. Even if it were more difficult to obtain compliance with obligations of international law than compliance, within the Community framework, with obligations arising under Community law, that does not mean that those conventions are irrelevant when answering the question whether the discrimination practised against Icelandic and Norwegian companies is proportionate to the objective pursued, namely the recovery of the tax on dividends.

31. Moreover, the Kingdom of the Netherlands has not demonstrated or even argued that the Republic of Iceland or the Kingdom of Norway have not complied with the obligations arising under those conventions, or that difficulties or unjustified delays have been encountered in applying them.

Findings of the Court

32. One of the principal aims of the EEA Agreement is to provide for the fullest possible realisation of the free movement of goods, persons, services and capital within the whole European Economic Area, so that the internal market established within the European Union is extended to the EFTA States. From that angle, several provisions of the abovementioned Agreement are intended to ensure as uniform an interpretation as possible thereof throughout the EEA (see Opinion 1/92 [1992] ECR I-2821). It is for the Court, in that context, to ensure that the rules of the EEA Agreement which are identical in substance to those of the Treaty are interpreted uniformly within the Member States ( Ospelt en Schlössle Weissenberg , paragraph 29).

33. It follows that, if restrictions on the free movement of capital between nationals of States party to the EEA Agreement must be assessed in the light of Article 40 of and Annex XII to that Agreement, those stipulations have the same legal scope as those of the substantially identical provisions of Article 56 EC (see, to that effect, Ospelt en Schlössle Weissenberg , paragraph 32).

34. Moreover, in the absence of any unifying or harmonising Community measures, Member States retain the power to define, by treaty or unilaterally, the criteria for allocating their powers of taxation, particularly with a view to eliminating double taxation (see, to that effect, Amurta , paragraphs 16 and 17).

35. That power does not permit them to apply measures contrary to the freedoms of movement guaranteed by the Treaty or similar provisions of the EEA Agreement (see, to that effect, Amurta , paragraph 24).

36. In this case, Articles 4 and 4a of the Wet DB, combined with Article 13 of the Wet Vpb provide for exemption from deduction at source of the tax on dividends for beneficiary companies having their seat in a Member State. In accordance with Article 4(2)2 of the Wet DB, that exemption applies to dividends distributed to companies having their seat in another Member State which hold shares representing at least 5% of the paid-up nominal capital of the resident distributing company.

37. By contrast, on the basis of the agreements for the avoidance of double taxation which the Kingdom of the Netherlands has concluded with the Republic of Iceland and the Kingdom of Norway, which are Member States of the EEA, exemption from deduction at source of the tax on dividends cannot be applied to dividends distributed to Icelandic or Norwegian companies unless the latter hold at least, respectively, 10% or 25% of the shares of the distributing Netherlands company. Thus, unlike companies having their seat in a Member State, those companies are not protected against the risk of double taxation when they hold more than 5%, but less than 10% or 25% respectively, of the shares of the distributing Netherlands company.

38. That difference between the tax rules applicable, on the one hand, to companies of Member States and, on the other hand, to those of the two EEA States in question, which benefit from Article 40 of the EEA Agreement in the same way as the former benefit from Article 56 EC, disadvantages, as regards the taxation of dividends, Icelandic companies which hold between 5 and 10% of the capital of a Netherlands company and Norwegian companies which hold between 5 and 25% thereof.

39. Such a difference in treatment as regards the method of taxing dividends paid to beneficiary companies established in Iceland and Norway, compared with those paid to beneficiary companies established in the Member States is likely to deter companies established in the former two States from making investments in the Netherlands. Moreover, it makes it more difficult for a Netherlands company to raise capital from Iceland and Norway than from the Netherlands or another Member State of the Community. It thus constitutes a restriction on the free movement of capital which is, in principle, prohibited by Article 40 of the EEA Agreement.

40. It needs to be examined, however, whether that restriction on the free movement of capital can be justified having regard to the provisions of the Treaty which are repeated in substance in the EEA Agreement.

41. The Kingdom of the Netherlands considers that beneficiary companies established in Iceland and Norway are in one of the various situations referred to in Article 58(1)(a) EC, pursuant to which Article 56 EC is without prejudice to the right which Member States have to apply the relevant provisions of their tax legislation which establish a distinction between taxable persons who are not in the same situation as far as their residence is concerned.

42. According to consistent case-law, for a national tax provision to be capable of being regarded as compatible with the provisions of the Treaty on the free movement of capital, the resulting difference in treatment must concern situations which are not objectively comparable or be justified by overriding reasons in the public interest ( Amurta , paragraph 32 and case-law cited).

43. It therefore needs to be verified whether, with regard to exemption from the deduction at source of the tax on dividends, beneficiary companies established in a Member State and beneficiary companies established in Iceland and Norway are in comparable situations.

44. The Kingdom of the Netherlands maintains that the difference in situation on which it rests its argument resides in the fact that it is not possible, by virtue of the bilateral conventions concluded with the two EEA States in question, to be certain that the beneficiary companies concerned do in fact fulfil the conditions imposed on companies of Member States by Article 4(2) of the Wet DB: namely to take one of the legal forms set out in the Annex to Directive 90/435 or a legal form indicated by ministerial decree, and, secondly, to be subject, in their State of establishment, without the possibility of an option or of being exempt, to tax on profits.

45. The Kingdom of the Netherlands bases its reasoning on the provisions of Directive 77/799. In accordance with that directive, designed to combat international tax evasion and avoidance, the competent authorities of the Member States must exchange any information that may enable them to effect a correct assessment of taxes on, in particular, income.

46. Since that directive does not apply to the Republic of Iceland and the Kingdom of Norway, the Kingdom of the Netherlands maintains that there is no binding rule enabling it to obtain information to verify whether the conditions laid down by Article 4(2) of the Wet DB are fulfilled.

47. It should, however, be noted that, even if such a difference in the system of legal obligations of the States in question in the tax area, in comparison with those of the Member States of the Community, is capable of justifying the Kingdom of the Netherlands in making the benefit of exemption from deduction at source of the tax on dividends subject, for Icelandic and Norwegian companies, to proof that those companies do in fact fulfil the conditions laid down by Netherlands legislation, it does not justify that legislation in making the benefit of that exemption subject to the holding of a higher stake in the capital of the distributing company.

48. That latter requirement bears no relation to the conditions otherwise required from all companies in order to be entitled to that exemption, namely that the company take a certain legal form, that they be subject to tax on profits and that they be the final beneficiary of the dividends paid, those being conditions with which the Netherlands tax authorities must indeed be able to verify compliance.

49. On that latter point, there is no evidence on the Court’s file, and the Kingdom of the Netherlands has not demonstrated, that the requirement that a stake of less than 10% or 25% in a company’s capital be held has any impact on the risk that the competent administration might be given erroneous information, particularly as regards the tax treatment of companies established in the two States in question, and that, therefore, the requirement for stakes of that size is justified, whereas there is no such requirement for companies established in Member States of the Community.

50. Therefore, the Court cannot accept the argument of the Kingdom of the Netherlands based on the different situations of, on the one hand, companies having their seat in Member States of the Community and, on the other hand, Icelandic and Norwegian companies in order to justify the requirement that the latter companies hold a higher stake in the capital of the Netherlands companies distributing the dividends in order for them to benefit, like the former companies, from exemption from the deduction of tax at source on the dividends which they receive from Netherlands companies.

51. That conclusion is implicitly confirmed by the fact that the bilateral conventions concluded by the Kingdom of the Netherlands with the Republic of Iceland and the Kingdom of Norway make exemption from deduction at source of tax on the dividends paid to Icelandic and Norwegian companies subject only to the condition that a stake of a certain amount exists in the capital of the distributing Netherlands company, without requiring that they also satisfy the other conditions laid down by Article 4(2) of the Wet DB.

52. It follows from the above that, by not exempting dividends paid by Netherlands companies to companies established in Iceland or Norway from deduction at source of the tax on dividends under the same conditions as dividends paid to Netherlands companies or companies of other Member States of the Community, the Kingdom of the Netherlands has failed to fulfil its obligations under Article 40 of the EEA Agreement.

Costs

53. Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs if they have been applied for in the successful party’s pleadings. As the Commission has applied for costs against the Kingdom of the Netherlands and the latter has been unsuccessful, the Kingdom of the Netherlands must be ordered to pay the costs.

Operative part 

On those grounds, the Court (Second Chamber) hereby rules:

1. By not exempting dividends paid by Netherlands companies to companies established in Iceland or Norway from deduction at source of the tax on dividends under the same conditions as dividends paid to Netherlands companies or companies of other Member States of the Community, the Kingdom of the Netherlands has failed to fulfil its obligations under Article 40 of the Agreement on the European Economic Area.

2. The Kingdom of the Netherlands is ordered to pay the costs.

 

Social justice, fundamental rights in the aftermath of the financial crisis: from Iceland with sorrow

Article by M. Elvira Méndez-Pinedo, Associate Professor of European Law. University of Iceland. 

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For everybody´s knowledge. This article was sent to the editors of 40 newspapers of Europe, including Financial Times, on the 8th January 2010. None of them published it but some thanked me for the input and background information. I had an interview of 2 hours with a journalist from EL PAÍS who came to Iceland. I am happy to see that the editorial of this Spanish newspaper changed its perspective on the issue after the visit of the special economic reporter. See El País of 17th January on Iceland. 

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The bank collapse in Iceland has been the first case of a systemic bank failure in Western Europe since the Great Depression. Iceland is also the first case of cross-border insolvency and failure in the internal market of financial services leaving victims in other EU countries. Presumably because the whole financial stability of Europe was at risk, Iceland is unfortunately the first case where, in order to comply with a Directive and EU law, a country is forced to assume sole responsibility in the nationalisation of the debt created by private companies, risking national bankruptcy, forcing tax payers to pay for the bill and threatening the economic sustainability of the country.

As the situation stands now, the financial and banking crisis and the Ice-save dispute and subsequent agreements have resulted in diplomatic rows between the UK, Holland and Iceland, the overthrow of the Icelandic government in January 2009, a fierce debate over compensation to the depositors of Ice-save bank, an agency of the Landsbankinn in the UK and Holland and a constitutional crisis without precedents in Iceland.

Fundamental and ethical issues  that Ms. Eva Jolie and J. Stieglitz have pointed out in their visits to Iceland still remain unresolved and prove that justice and fundamental rights in the European market is a challenging, never-ending and sometimes elusive task.  Only now the deficiencies of the European financial system are painfully visible. The internal market of financial services created in Europe lacked a European regulator and a lender of last resort. The EU achieved the first part of the internal market in this sector but the rules were not complete from a cross-border perspective when the financial sector of one country could exports problems to the other EU/EEA depositors creating insolvency. In practice we had a “federal” internal market for free movement of capital but without the “federal” back up, collaboration and security procedures when things risked to go wrong. No security rules, no obligations to coordinate and help, no lender of last resort (think about the euro and the regulations of the Economic and Monetary Union as a comparison). This second part necessary for the financial services was never created because of the reluctance of some EU States to go into a federal/centralised direction (principle of subsidiarity defended by countries such Germany). EU institutions and Central Banks of Europe have acknowledged this fact. It is a classic methodology to compare EC law with the USA federal system. The EU chose to trust national regulators in a decentralised system but the cross-border aspects were left as gaps and lacunæ of this internal market plan. When the unthinkable crisis hit Iceland .... the EU could or did not want to help as procedures had not been planned for this kind of emergency situations. The result is sad and bitter: tax-payers left to pay the bill while the EU pretends to have nothing to comment on this and issue of the determination of the part of responsibility at all levels is left unresolved (public/private institutions– European/national supervision authorities).

At the same time, it is almost a paradox that the EU has announced that the protection of fundamental rights is a strong and renovated duty in the construction and regulation of the internal market, especially after the entry into force of the Lisbon Treaty which makes the EU Charter of Fundamental Rights legally binding for all EU institutions and EU Member States when applying EU law. Fundamental rights are also part of the general principles of EU law, as the European Court of Justice has declared on a rich jurisprudence dating from the 70s.

While the protection of fundamental rights is strengthened in the new EU Treaty, reality is far more complicated when national agendas and financial interest collide as the recent Icelandic example of reconstruction after bank collapse proves. As Icelanders bitterly have experienced, economic freedoms within the internal market, combined with a lack of proper financial supervision and defective rules, can even lead to the violation of fundamental rights of citizens and small nations. The bitter lessons from the Icelandic crisis show that the rules on the internal market on financial services, based on a neo-liberalist approach of weak decentralised supervision, just freed capitalism from its social responsibilities leaving the financial consequences of the collapse for the citizens. As Stieglitz has pointed out in his recent book “Making globalization work”, markets are not at all efficient when evaluating social justice and fundamental rights. Markets respond to numbers and economic data, not to justice, discrimination, fundamental rights, nor to the economic sustainability of a country. Economic freedoms and efficient markets do not carry per se justice.

The result that a sovereign national government like Iceland can be directly or indirectly forced by the European Union and two EU countries to assume the sole responsibility for debts incurred by private Icelandic companies without taking the matter to a European court represents the worst of the diplomacy of the late 19th century as some authors have argued. (Tarple, 2009). Furthermore, I agree with Tarple that Gordon Brown’s use of the British anti-terror legislation against Iceland in the autumn 2008 could be qualified as an act of economic warfare, an act which is shocking when examined in the framework of the European integration and EU legal order based on the notions of solidarity between European nations.

It is probably for some of these reasons that 60.000 Icelandic citizens requested their President to submit the new law approving the Ice-save agreements to a national referendum. Taking into account the punitive actions, threats, and intimidation coming from London and The Hague, taking into account the lack of access to justice for Iceland and Icelanders before the European Court of Justice and the strong debates within the society; the Icelandic President refused to sign the new agreements and let the nation have the final word on the entry into force of the law to the citizens. Whether the new law is to remain in force is to be decided in a national referendum. In this sense, one may look at this constitutional decision as the result from a direct call from the citizens asking for direct democracy. A call requesting that social justice and human rights are taken into account in the present and future construction of the European internal market.

What is interesting to note is that these events are strongly connected to the global justice movement that is surging around the world. A number of Icelanders is requesting a new agenda for social justice and fundamental rights for the EU in the aftermath of the financial crisis. This crisis  has disrupted the functioning of the internal market in Iceland, a member of the European Economic Area and candidate country to the EU. This crisis is also proving that Europe is missing an historic opportunity to show leadership in the reconstruction of the international financial system. Will the EU continue with its “business as usual” forgetting to help citizens? Critical voices are requesting social justice in the aftermath of the financial crisis. European economic freedoms should not lead to unjustice. The solidarity of European nations in the resolution of this dispute between Iceland, UK and Holland should not be forgotten. European integration, lets not forget about the fundamentals, should work first of all in the benefit of its citizens.

2010 - A year for social unrest in Europe - The economist

A very interesting article on the reasons why 2010 could be a year for upheaval.

Latvia, Iceland, Britain and France at high risk. A map of the world showing states of combustibility....

http://www.economist.com/theworldin/displaystory.cfm?story_id=14742556

Report from the European Central Bank - Failures of the European system of financial services

As I promised to do more research on the national rescue measures adopted in 2008/2009 and the rules of deposit guarantee schemess and the principle of non-discrimination in EU law....

I would like to share with you this interesting document from the European Central Bank. It is entitled:

NATIONAL RESCUE MEASURES IN RESPONSE TO THE CURRENT FINANCIALCRISIS

http://www.ecb.int/pub/pdf/scplps/ecblwp8.pdf

Not only it explains the European context, it confirms that national authorities adopted measures aiming to protect the survival of their financial systems, exactly what Iceland had to do.

For all of you, some homework too. Read very well all countries that adopted nationalisation measures and try to make legislation pass the test of non-discrimination. 

Sentences like, for instance, the State can nationalise solvent institutions.....

Nationalisation of banks and institutions operating in the national territory..... etc

I am reaching interesting conclusions concerning this point but I will think about them a couple of days more, just to be sure.

Meanwhile, I encourage you to learn about the gaps and lacunæ of the financial system the EU created for all of us (remember I am never saying that Iceland is free from responsibility but rather that this issue is to be examined very carefully in the light of all factors involved) 

------------------------- Enjoy this reading

The report says very clearly in page 8:

 [.....]

The current financial crisis is unprecedented and has dramatically shown the weaknesses of global interconnected financial markets, especially concerning the underestimation and underpricing of risk. These weaknesses have been and remain to be addressed by European legislators, both in the short term and in the long term.

With regard to long-term measures to counter the crisis, a review of the regulatory and supervisory framework for the financial sector is vital. It has become obvious that better coordination of supervision at a European level is required. Here, both macro- and microprudential supervision must be addressed.

With regard to macro-prudential supervision, i.e. supervision of the financial system as a whole, the report of the de Larosière group envisages that the ECB will play a central role.

Indeed, the ECB is at the heart of the ESCB, collecting, pooling and analysing all the information crucial for the assessment of the banking sector, which is an essential element for decision-making in the supply of liquidity to the euro markets. Becoming macro-supervisor is, therefore, a natural development of its monetary functions, which requires an enhancement of its means and tools, and a clear and legally sound stability mandate.

As a macro-supervisor, the ECB will need to interact in a cooperative way and in both directions with the micro-supervisors, whose EU-wide dimension needs an important overhaul of existing structures.

This paper deals with the short-term measures taken by EU Member States to counter the immediate effects of the crisis, as adopted from October 2008 onwards. The intention is to provide a detailed overview of such rescue measures.

With regard to the measures adopted in response to the crisis, the ECB has played a guiding role, for example, through the adoption of its Recommendations on guarantee and recapitalisation schemes and the Guiding principles on bank asset support schemes. The ECB’s Directorate-General Legal Services has also provided guidance in assessing the legal implications of the crisis measures, in particular, by taking the lead role in preparing the ECB’s opinions issued in response to consultation requests from the Member States.

With regard to the challenges identified above, reform of worldwide financial sector legislation has only yet started. This paper is intended to serve as a useful tool for prospective legislative activities in this field.

On page 6

By way of background, there are a number of factors considered to be inherently responsible for the current financial crisis. These include: (i) macroeconomic issues such as low interest rates in the United States that helped create a widespread housing bubble filled by insufficiently regulated mortgage lending and securitisation financing techniques; (ii) poor risk management by issuers of structured financial products; (iii) the underestimation by credit rating agencies of the credit default risks of instruments collateralised by subprime mortgages; (iv) corporate governance failures in financial firms, where the complex nature of financial products was not understood properly; and (v) regulatory, supervisory and crisis management failures3.

One of the main reasons for the crisis has been the rapid deterioration of the US financial sector and its subsequent effects in Europe. This crisis has led to the significant weakening of the financial situation of a number of financial institutions and is being felt throughout the world as a result of the increasingly interconnected global economy. Financial institutions have faced a crisis of confidence that has led to strong disturbances on the interbank market and a severe drop in stock and commodity markets. The crisis of confidence dramatically worsened in September 2008 on account of the insolvency of Lehman Brothers, as a result of which banks practically ceased lending to each other. In October 2008, even fundamentally sound financial institutions were facing serious difficulties in accessing liquidity. The sheer depth of the crisis reached by this event required unprecedented intervention on the European and national level.

European measures to combat the crisis

The Member States reacted to this crisis by introducing a number of emergency measures ranging from State guarantee schemes to nationalisation provisions. The guarantee schemes are aimed at ensuring the supply of liquidity to the financial system and increasing the level of guarantees for bank deposits (or temporarily providing guarantees for all deposits) in order to prevent ‘bank runs’. The recapitalisation measures were introduced to strengthen the capital base of fundamentally sound financial institutions, improve the functioning and stability of the banking system as a whole and ensure proper financing to the wider economy.

In addition, liquidity positions of these financial institutions have been enhanced through the provision of loans. A number of Member States have introduced measures aimed at relieving financial institutions of impaired assets, whereby the State directly takes over the risks inherent in the assets or transfers them to ‘bad banks’. Finally, a number of Member States have resorted to nationalisation of distressed financial institutions, with a view to restructuring and re-entry into the market.

On page 7

It is estimated that the EU governments have committed more than EUR 3 trillion to bail out credit institutions with guarantees or cash injections in the wake of the global financial crisis.

The role of the EU

The measures taken by the Member States to support the financial sector and to ensure financial stability were subject to close coordination on the European level. Here, the Council of the European Union, the European Commission and the ECB played a prominent role.

At the Economic and Financial Affairs Council (Ecofin) meeting on 7 October 2008, common principles to guide governmental actions were adopted. According to these principles:

– interventions should be timely and the support should in principle be temporary;

– the interests of taxpayers should be protected;

– existing shareholders should bear the due consequences of the intervention;

– governments should be in a position to bring about a change of management;

– management should not retain undue benefits;

– governments may have, inter alia, the power to intervene in remuneration;

– legitimate interests of competitors must be protected, in particular through the State aid rules;

– negative spillover effects should be avoided.

[PLEASE ALL OF YOU NOTE HOW THE PRINCIPLE OF NON-DISCRIMINATION IS ABSENT FROM THIS LIST OF CONDITIONS]

On 12 October 2008, the Heads of State of the euro area issued a ‘Declaration on a concerted European action plan of the euro area countries’4 (hereinafter the ‘Declaration’), in which they agreed on common principles to be followed by the EU and euro area governments, central banks and supervisors to avoid national measures adversely affecting the functioning of the single market and other Member States. This coordinated approach includes initiatives aimed at ensuring appropriate liquidity, facilitating the funding of banks by various means, providing additional capital resources to financial institutions and recapitalising distressed banks. The European Council endorsed these principles for all Member States on 16 October 2008.

The Commission, in the absence of a comprehensive pan-European supervisory, regulatory and legal framework for the financial sector, provided for coordinating principles by issuing guidance on compliance by financial sector support schemes with State aid rules, the subsequent Commission Communications specifically targeting recapitalisation measures5 and the treatment of impaired assets6, and support to the real economy7. Further, the Commission examined, under State aid rules, the national rescue packages introduced by the Member States, as well as national rescue measures with regard to specific financial sector entities and issued individual decisions.

It continues on page 8.....

The Member States

The individual Member States were affected by the crisis in different ways, depending on their banking system structure and economic situation. Therefore, apart from reforming their deposit-guarantee schemes11, not all of the Member States put in place measures countering the crisis, and remarkable differences exist among the Member States that introduced such measures, both with regard to the instruments made available, the amounts released and whether any of the measures have actually been used. Most Member States reacted already in October 2008 with a set of measures; other Member States responded only thereafter.

However, there are also some common points; by far the majority of the Member States introduced a guarantee scheme in order to enhance confidence in the lending sector. Also, recapitalisation measures were introduced by a large number of Member States in order to help credit institutions overcome the crisis. As regards the acquisition of impaired assets, a number of the Member States have put in place measures to relieve credit institutions of such assets.

Conclusion and way forward in page 8

"The crisis also revealed regulatory shortcomings on the European and national level with regard to the financial sector. The de Larosière report presents ways to overcome the crisis. These ways forward include a new regulatory agenda, stronger coordinated supervision and effective risk management procedures."

Conclusion:

You can all read that the problems of the internal market of financial services are European problems. The Ice-save dispute relates to the failure of the internal market.

Challenge:

While I research all the 27 sets of national measures adopted in the crisis and submit them to the non-discrimination test in EU law, I have a question for all of you: why does the EU still pretends that EU institutions are unrelated to the Ice-save dispute? Would not that be that all efforts are directed against us questioning the (extra-contractual) liability of the EU in the Ice-save negotiations like Professor Stefán Már has held? I leave this for you to think. In other words, the EU might be responsible as well.