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) 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 (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, 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,


     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.



1.       [1] See the website

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 and EFTA Court and EFTA Surveillance Authority Agreement available at

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

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

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:

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  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

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:

“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

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

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

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

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

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

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
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1 Smámynd: Júlíus Björnsson

As the directive 94 proposes I have read the EU constitution in French. Legalized word for word also the English version without this advantage.  I also possess capabilties of extracting the reduction for the global text included in the directive.

En résumé, its main objective is to to transform the compensation responsibilities from the Member States to theirs private sectors. To insure that no private guarantee system will fail. By preventing one branch in same market form being closed to late, resulting in that other branches in the same market will have to liquidate the mutal guarantee funds.   Weakening them in their competion or resulting in higer intrest rates.

That objective depends on the markets Supervision especially its surveillance aspect. To watch over the branches insolvency. [EU competion laws in general]. As soon as the lasting inability is established the branch in question shall be closed by the same authority. [EU system of Central banks and third parties by contract apply neccesary imformation].

Also for more support an exclusion list is included in directive. Points out the parties possible to delay the banches closing or makes some of them more prudent.

This directive is perfect in its simplicity deriving from EU itself. It is not at all turbulent against the entity of the EU single markets.

It can only fail if human persons to not respect it or the EU constitution.

To question its integrity is corrupt.

My personal view is that The British authority in their territory have dishonored the EU constitution and directive by disrespect. See those British parties on the exclusion list that were deprived.

EU banking system stopped temporarily[is questionable] refinancing the Icelandic branches but not demanding them, so they seeked cash on the consumer markets [temporarily].

Why Icelandic insular authorities avoided Justice is maybe because they trusted the British ones. Very few of them understand English law terms.

Júlíus Björnsson, 3.2.2010 kl. 04:37

2 Smámynd: Júlíus Björnsson

By preventing one branch in same market from being closed to late, resulting in that other branches in the same market will have to liquidate the mutal guarantee funds.  

Júlíus Björnsson, 3.2.2010 kl. 04:41

3 Smámynd: Loftur Altice Þorsteinsson

Elvira, I have not read through your complete article, but it seems to me that you have not taken notice of my writing. I would like you to read my translated newspaper article:

Alain Lipietz has confirmed my understanding, as can be heard here:

11.01.2010: Alain Lipietz - TV interview

10.01.2010: Alain Lipietz og Eva Joly - TV interview

The main thing is, that responsibility for supervision of branches is shifted from home state to host state, depending on location of the head offices of the bank being inside or outside of EU.

Kind regards.

Loftur Altice Þorsteinsson, 3.2.2010 kl. 22:58

4 Smámynd: Maria Elvira Méndez Pinedo

Dear Loftur,

 Thank you very much for your comments.  I read your article and I liked it very much. I agree this topic is indeed confusing.

Usually in EU/EEA law and for the internal market purposes EEA countries are assimilated to EU countries. We have to see how the Directive 94/19/EC was incorporated into the EEA legal order (Decision of the EEA Joint Committee).

 I would like to double check, for security reasons, that Landsbanki would be considered as a bank outside the EU in the EEA version. As you say, that would increase radically the supervision obligations and consumer protection due by UK/Netherlands.

I will do that tonight. I have teaching obligations today and tomorrow.

Best regards and thank you once more for your input.


Maria Elvira Méndez Pinedo, 4.2.2010 kl. 16:21

5 identicon

If we incorporate laws, that originally are meant as a contract binding Member States of EU, the term ´Member State´ must after the incorporation apply to the (non-European Union Member) states that have made this law their own - right?
A 100% assimilation.

Otherwise there is no difference between a legal status of a state that has incorporated the laws into its own law - and that which hasn´t. A third country before, and a third country after.

Or is the assimilation not 100%

gerdur (IP-tala skráð) 5.2.2010 kl. 14:48

6 Smámynd: Loftur Altice Þorsteinsson

Gerdur, in several EU directives there are references to banks with head offices inside and outside EU. The branches of these banks are clearly treated differently. Nobody in Iceland seems to have noticed this before my article in Morgunblaðið on 12th December 2009. I was therefore very pleased when Alain Lipietz confirmed my finding.


This new knowledge has enormous legal consequences for responsibilities in the Icesave quarrel. Not everyone is equal in the European Economic Area. We can now be thankful that this difference exists, because it makes Iceland free from all obligations in Britain and the Netherlands concerning the branches of Landsbanki. The central bank in the Netherlands and the Financial Services Authority in Britain can be blamed for the Icesave branches, if anyone outside the banks themselves can be blamed.



Loftur Altice Þorsteinsson, 6.2.2010 kl. 00:44

7 Smámynd: Júlíus Björnsson

What is the principal relation amongst ownership, responsibilty of territory. Basics explain things more often better than regulations based on them.

In the kindergarten, who is responsible for the children?

Júlíus Björnsson, 6.2.2010 kl. 03:44

8 identicon

When a Directive is originally made for EU Member States, ´within the Community´ means ´within EU´.
But if countries outside EU make this Directive their own law - then they have become part of ´the Community´, as far as that particular Directive is concerned.

The text of the Directive will not be rewritten to fit new members of the contract, as, lets say: ´Member States [and any other States that make this Directive their own law]´ and ´within the Community [Community here referring, as well as to all EU States, to all states outside EU that have incorporated this law into their own]´?


How can we be a third country, in a relation to a Directive, and at the same time not be a third country?
Or is there something like a two-and-af half country? (Not a 100% assimilation)

I wish you were right though, Loftur, because that would make our case stronger - but it just doesn´t seem logical.

gerdur (IP-tala skráð) 6.2.2010 kl. 11:58

9 Smámynd: Loftur Altice Þorsteinsson

Gerdur, the European Economic Area was established on 1st January 1994. Directive 94/19/EC was issued on 30th May the same year. So how can it have been made only for EU and later adopted for EEA ? Even later directives make the distinction that we are talking about !


These directives are quite logical, in the manner that I have understood and explained them. It does not make any difference what state puts them into law, be it Britain or Iceland. The legal content does not change. The fact is that bank branches within the EU are regulated by different authorities, depending on whether the bank involved has head offices inside or outside the EU.


Eva Joly sensed how illogical it was that Icelandic authorities should control operations of branches in Britain. She said:


Could anyone realistically think that a handful of people in Reykjavik could effectively control the activities of a bank in the heart of the City? European directives concerning financial conglomerates suggest that EU member states allowing foreign banking subsidiaries into their territories must ensure they are subject to the same control abroad as they would be domestically.



Loftur Altice Þorsteinsson, 6.2.2010 kl. 13:07

10 Smámynd: Júlíus Björnsson

Third parties [Country] are those not Members of Union according to the EU constitution. That does not affect the surveillance responsibility of territory to establish in time that a branch in competition on one of its markets is heading into permanent insolvency, that is to prevent and protect with out any discrimation other rivals with in the same territory for false competition and financial charge due to the not prudent closing.

Regulation does conform with genaral constitutional law of the Union. Third party is foreign: reasonable to be extra cautious.

Cause inside territory.

Júlíus Björnsson, 6.2.2010 kl. 13:24

11 identicon

Loftur, I hope you are right.

Júlíus, I thought ´third party´ is someone who is not a part of a contract. If EU makes a deal with non-EU countries, then those non-EU countries would not be a ´third country´?

gerdur (IP-tala skráð) 10.2.2010 kl. 15:04

12 Smámynd: Loftur Altice Þorsteinsson

I would like to point out that Eva Joly did not know about the legal facts, when she wrote her article on 1st August 2009. Notice that in the quotation above she uses the words “suggest” and she does speak of subsidiaries, not branches. The actual fact is that because of the regulations as they are, there is no difference between branches and subsidiaries in Britain and the Netherlands, provided that the banks involved have their head offices outside EU.


I have previously referred to Directive 94/19/EC and I would now like to show some text from following directive.


Directive 2001/24/EC of 4 April 2001 on the reorganisation and winding up of credit institutions.


Article 19 - Branches of third-country credit institutions:


1.      The administrative or judicial authorities of the host Member State of the branch of a credit institution the head office of which is outside the Community shall without delay inform, by any available means, the competent authorities of the other host Member States in which the credit institution has set up branches on the list referred to in Article 11 of Directive 2000/12/EC and published each year in the Official Journal of the European Communities, of their decision to open winding-up proceedings, including the practical effects which these proceedings may have, if possible before they open or otherwise immediately thereafter. Information shall be communicated by the competent authorities of the first abovementioned host Member State.


2.      Administrative or judicial authorities which decide to open proceedings to wind up a branch of a credit institution the head office of which is outside the Community shall inform the competent authorities of the other host Member States that winding-up proceedings have been opened and authorisation withdrawn. Information shall be communicated by the competent authorities in the host Member State which has decided to open the proceedings.


3.      The administrative or judicial authorities referred to in paragraph 1 shall endeavour to coordinate their actions. Any liquidators shall likewise endeavour to coordinate their actions.


It could not be more obvious, that the authorities which should handle supervision of branches depends on where the head offices are located. If the head office is outside the Community (EU), the host Member State (of the EU) should handle supervision of the branch. It is worth noticing that the home state of the bank is not even mentioned in the above text. All responsibilities are with the host Member States. We should also remember, that the FSA in Britain and the central bank in the Netherlands took over the Icesave branches in these countries and thus proved their supervision responsibilities.



Loftur Altice Þorsteinsson, 10.2.2010 kl. 17:12

13 Smámynd: Júlíus Björnsson

 Here see Loft's comment is refered to a third party in a directive based up on conventional contracts as  now is referred to as EU constitution.

head office of which is outside the Community

Lot of Britis parties where excluded from any compensation. Something that is disrespect for EU laws in general.

I reckon that is way UK want to avoid mature discusion on those matter.  The blue hand is strong master in UK's history. No British law firm will harm her Majesty and  they know what solidarity stands for.  

Third party in contract is often indirect party. EU constitution refers to States other than Member-States as third party.

Júlíus Björnsson, 11.2.2010 kl. 05:14

14 Smámynd: Maria Elvira Méndez Pinedo

Dear all,

 Thank you very much for your contributions to this article. I am studying in the evenings some good issues that you have raised and other comment I got in several e-mails sent to my work mail.  I will update this page clarifying these issues as soon as I can.

Best regards


Maria Elvira Méndez Pinedo, 11.2.2010 kl. 13:02

Bæta við athugasemd

Ekki er lengur hægt að skrifa athugasemdir við færsluna, þar sem tímamörk á athugasemdir eru liðin.


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