Multi-Speed Europe: Enhanced Cooperation or Increased Litigation?

Background

The idea of a ‘multi-speed Europe’ finds its concrete expression in a range of European Union (EU) policy fields from the single currency to EU criminal law. As the product of specific treaty authorizations, these examples of ‘enhanced cooperation’ have become a familiar means by which European integration has deepened while allowing individual states to avoid being bound by measures adopted in a new field of cooperation. With the Amsterdam Treaty, a new capacity was created to deploy enhanced cooperation on a more ad hoc policy issue basis, particularly where legislative negotiations had failed to resolve disagreements between Member States.

Yet the new capacity remained unused until after the entry into force of the Lisbon Treaty, which amended the provisions on enhanced cooperation (now Article 20 TEU and Articles 326-334 TFEU). The new provisions were deployed for the first time to permit a group of states to adopt a regulation on the law applicable to divorce and legal separation. However, it was the second authorization of enhanced cooperation in the area of the EU unitary patent which was more controversial and which gave rise to legal actions by Spain and Italy seeking an annulment of the authorizing decision. Both states had objected to the proposal to restrict the languages used for submission of patent applications to English, French and German. In the absence of the unanimity required for the establishment of the language regime (Article 118 TFEU), legislative negotiations had reached a stalemate and so the decision was taken by the Member States – with the exception of Spain and Italy – to authorize enhanced cooperation. The two countries then brought legal proceedings seeking the annulment of the authorizing decision.

This post considers the implications of this litigation for the use of enhanced cooperation with a particular eye towards the legal action which has been launched by the United Kingdom challenging the use of enhanced cooperation for the adoption of the controversial Financial Transactions Tax (FTT).

Cases C-274/11 and C-295/11
The Spanish government (case C-274/11) attacked the authorizing decision on two fronts. First, it suggested that enhanced cooperation was impermissible in that it constituted a misuse of powers – in effect imposing an opt-out on the non-participating countries – and that an alternative strategy – adopting a special agreement under the European Patent Convention – was open to the Member States. It also suggested that the regime did not respect the judicial system of the EU. Secondly, even if enhanced cooperation was permissible, it argued that the authorizing decision violated the treaty requirements for its use viz: the authorization was not a ‘last resort’ and was in an area of exclusive EU competence (Article 20 TEU); the authorization violated the principle of non-discrimination and undermined the single market by creating discrimination in trade and distortions to competition within the single market (Article 326 TFEU); and, did not respect the rights of the non-participating states (Article 327 TFEU).

The tenor of the arguments made by the Italian government (case C-295/11) was broadly similar but in addition it was argued that the authorization was contrary to the spirit of Article 118 TFEU which makes provision for the creation of the unitary patent. The two cases were joined and on 16 April the Court of Justice of the EU – composed as a Grand Chamber – delivered its judgment dismissing the applications. This was not wholly surprising given that Advocate General Bot in an earlier Opinion had also invited the Court to reject the applications. The aim here is to focus on the wider implications of the judgment for the use of enhanced cooperation and so it does not deal with those grounds of challenge that are specific to the patent regime.

Voting Rules, Enhanced Cooperation and Litigation
It might be thought that where the treaty demands unanimity in the Council, it envisages that an area is of such sensitivity that coordinated action demands complete consensus. It would then follow that enhanced cooperation would only apply to areas where majority voting is already permitted but the majority falls short of a qualified majority vote (QMV). That position is rejected by the Court. The mechanism of enhanced cooperation applies in any circumstance where agreement cannot be reached within a reasonable time within the Council including, and perhaps especially, in areas where unanimity is required. Thus, where enhanced cooperation is both possible and credible, this weakens the threat of the veto and avoids the watering down of proposals to a lowest common denominator. At the same time it is preferable to the use of QMV as a means of managing diverse interests in that the solution is only binding on participating states. Nonetheless, the ‘take-it-or-leave-it’ nature of enhanced cooperation means that non-participating states have to assure themselves that non-participation will not affect their interests now or in the future.

The Last Resort and Standards of Review
Under Article 20 TEU, authorization for enhanced cooperation is predicated on it being a last resort where it is established that the objective of the cooperation cannot be attained within a reasonable period by the Union as a whole. The interpretation of this provision is, therefore, of great legal significance in determining how high the bar is set for the Council to resort to enhanced cooperation. This is also politically significant in determining the strength and credibility of any threat to use enhanced cooperation as a means of breaking deadlock.

For Advocate General Bot, the new wording of Article 20 TEU highlighted that resort to enhanced cooperation was not limited to circumstances where the legislative process had been concluded but resulted in failure. Rather, it referred to a situation of deadlock in the negotiating process. The treaty does not specify the period which has to elapse before such deadlock can be determined. For AG Bot, this meant that the Council had a wide margin of discretion to determine when such a point had been reached. In turn, this meant that judicial review was confined to determining whether the Council had made a manifest error or manifestly exceeded the limits on its discretion by authorizing the use of enhanced cooperation. Indeed, more generally for AG Bot, the standard of judicial review in determining the legality of a ‘legislative’ act was that of determining whether there was a manifest error (a theme which also underpins AG Bot’s Opinion in Kadi II).

The Court’s approach arrives at a similar result to that proposed by AG Bot, namely that the Court’s duty is to review whether the Council carefully and impartially assessed the relevant factors leading to its decision and gave adequate reasons for its conclusions. The Court, however, avoids both a characterisation of the authorization decision as a ‘legislative’ act and does not use the language of review for ‘manifest error’. It found no reason to challenge the Council’s conclusion that negotiations were not likely to resolve the conflict with Spain and Italy.

Substantive Illegality and Challenges to Authorizing Decisions
It is useful to recall that enhanced cooperation entails the adoption of two acts: the authorizing decision and the substantive legislative act binding the participating parties. This creates a potential problem for litigating states challenging the use of enhanced cooperation in situations where the authorization decision has been adopted but the legislative act is still under negotiation. While issues of procedural illegality are likely to be addressed to the authorizing decision, issues as to whether the measure creates discrimination within the internal market or distorts competition or impinges on the rights and obligations of non-participating states are more properly addressed to the substantive legislative act. Accordingly, challenges to the compliance of an act with the substantive limitations on resort to enhanced cooperation may be premature and inadmissible when the act under challenge is the authorizing decision and not the resultant legislative act.

Thus, the position of AG Bot and the Court was that any allegations that the substantive measure on language requirements conflicted with the treaty was both premature and inadmissible as the legislative negotiations had not been concluded. That is to say, the focus of the litigation was on the authorizing decision and not the resulting legislation and so judicial review was confined in its scope to an analysis of the legality of the authorizing decision. This suggests that Member States may end up having to raise two distinct legal actions: a more procedurally-oriented action challenging the authorizing act and a more substantive challenge to the legality of the resulting legislative measure.

Respecting the Competences, Rights and Obligations of Non-Participating States
What differentiates QMV from enhanced cooperation as strategies for managing diverse interests in the legislative process is that the latter ought not to impinge upon the non-participating state. States which decide not to participate in the resulting measure should not be detrimentally affected by that choice. The ‘neutral’ nature of enhanced cooperation is also important for the ethos of the mechanism in that non-participating states should have the future capacity to opt-in to the measures adopted. For the Court, while it might be the case that non-participating states would then be faced with opting-in to measures with which they did not agree, of itself this did not render the enhanced cooperation incompatible with the competences, rights and obligations of non-participating states.

This was perhaps not the test case with which to flesh out the ‘extra-territorial’ effects of an enhanced cooperation measure. It will, however, be highly relevant to the litigation which the UK has announced it will commence, challenging the use of enhanced cooperation for the adoption of the Financial Transaction Tax.

Lessons for the Fate of the FTT
In September 2011, the European Commission adopted a proposal for an EU-wide financial transaction tax (FTT). After much negotiation it became clear that the unanimity required under Article 113 TFEU was absent. Accordingly, eleven Member States requested the use of enhanced cooperation. The authorization was duly given in January 2013 (Council Decision 2013/52/EU) with the Commission producing on 14th February a substantive legislative proposal based on its original proposal. Against the background of reports that the participating states were growing uneasy about the proposal, the United Kingdom announced on 19th April its intention to bring proceedings before the CJEU (Case C-209/13). The CJEU’s ruling in the EU patent case is, therefore, of some interest to this litigation.

The likely thrust of the UK challenge lies in the alleged extra-territorial effects of the proposed FTT. The tax would be imposed on financial transactions that are linked to the territory of one of the participating states: e.g. if one of the parties to the transaction is based in a participating state; if the issuer of the security is established in that state; if the financial institution is a branch of an institution based in a participating state. In a briefing note published in January 2013, law firm Clifford Chance suggested that UK financial institutions would experience extra-territorial effects of the FTT. Yet unless and until the legislation is adopted, these effects are speculative. Any legal proceedings challenging the authorizing decision on the grounds that a legislative measure still being negotiated impacts on the competences, rights and obligations of a state – presumably the right to exclude entities on its territory from the effects of such a tax – would be premature and inadmissible. The same would go for any argument that the legislative measure would distort competition in the internal market (a potential effect of the movement of financial activities to avoid payment of the tax). If nothing else, this litigation will afford the Court the opportunity to further clarify the timing and scope of litigation challenging the use of enhanced cooperation, and in particular, the scope of challenges to authorizing decisions.

2 comments

  1. Gabriele Giambrone

    As always your blog gives informative and researched documents which are an asset for law commentators. Thank you

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