Original Sin: the EU tampering with the right to property in Cyprus is an unprecedented departure from EU norms and shared constitutional rights

Anastasios A. Antoniou

The facts are well-settled by now and the majority of us know that on the evening of 15/3/13, Eurozone finance ministers agreed on an extraordinary course of action in response to Cyprus’ request for a bail-out of the State and its banking sector, both on the brink of apparent collapse. The political agreement reached at the ministers’ Eurogroup configuration, seeks to impose a levy on deposits with Cypriot banks, catching both Cypriot and foreign depositors (hereinafter referred to as ‘the Decision’).

Developments are of course constantly unfolding. Following fierce reactions to the Decision, the Eurogroup held an urgent teleconference on 18/3/13, resulting in a statement by its president, Jeroen Dijsselbloem. The statement sought to assure that deposits under EUR100.000 would be fully guaranteed in what is presented as an upholding of the Eurogroup’s ‘view’ that ‘small depositors should be treated differently from large depositors’. The issue is that the Eurogroup never expressed such a view in the first place. Nor did it bother itself with revisiting the various legal anomalies emanating from what it wants to present as a political decision enjoying the consensus of all Eurozone member states, but has in fact been a catastrophic step, irrespective of whether it is eventually passed into law by the Cypriot Parliament.

Reactions from economists, politicians, the media and analysts, but most importantly the outrage of the Cypriot people against the levy, could likely ostracize the intended levy from Cyprus’ bailout package. This note will not concern itself with the legal aspects of how the levy is being presented as a tax so as to evade the EU’s own deposit guarantee rules (Professor Lindseth’s post accurately illustrates such issues).

Nor does this note discuss any of the political aspects of the situation, despite the fact that being based in Cyprus I have been distressed to watch an utterly incompetent former government allowing public debt to grow even more and a failing nationalized bank turn into a ‘zombie’ over the past year. That Cyprus needs a bail-out today is not just due to public debt spiraling out of control, but also due to the fact that, according to a recent confession of the former Government’s own finance minister, it adhered to the Greek PSI without requesting a recapitalization of Cypriot banks. Cypriot banks, heavily exposed to Greek bonds, suffered immense losses from the Greek ‘haircut’ and it has been admitted by the former Cypriot government that they did not ‘comprehend’ what they were agreeing to at the time.

Deplorable as political incompetence of Cypriot’s former Government may be and distressing as the incumbent Government’s lack of political initiative may be, it is the legal rationale – or the lack of it to be precise – employed in the Eurogroup Decision that should be of concern. The Eurogroup Decision is widely understood as having been imposed on the Cypriot Government. But the Decision itself has no legal effect, Protocol 14 to the Lisbon Treaty may have formalized the Eurorgoup but this body remains devoid of any power to issue binding decisions having legal effects.

For a decision to facilitate the levy on bank deposits to be binding at an EU level, it should have been taken by the Council under its ECOFIN configuration. In such a case, namely where an ECOFIN decision had been in place as to how the Cyprus bailout would have materialized, the Cypriot Parliament would in fact be implementing EU law when legislating the levy on deposits.

What this note argues is that the Eurogroup, whether intentionally or not, in fact rolled over to Cyprus the responsibility for the legislative manifestation of the levy. In this manner, Cyprus remained hostage to the Eurogroup’s political Decision as a condition to its bailout by the ECB/EC/IMF troika. The ransom in this ‘hostage’ crisis was for Cyprus to burden itself with the responsibility of legislating contrary to one of the most fundamental rights protected under its own and the EU’s legal order: the right to property.

The right to property is a fundamental right common to all national constitutions. As far as the Cypriot legal order is concerned, the right to property is protected under the Constitution of Cyprus (Article 23). Despite its omission in the original European Convention of Human Rights (‘ECHR’) the right to property is enshrined as ‘the right to peaceful enjoyment of possession’ in Article 1 of Protocol I to the ECHR.

On an EU level, even prior to the enactment of the EU’s Charter of Fundamental Rights (‘Charter’), the right has been recognised on numerous occasions by the case-law of the Court of Justice of the European Union (then ECJ) starting with the Hauer Judgment. Article 17(1) of the EU’s Charter of Fundamental Rights, essentially based on Article 1 of Protocol I to the ECHR, reads:

“Everyone has the right to own, use, dispose of and bequeath his or her lawfully acquired possessions. No one may be deprived of his or her possessions, except in the public interest and in the cases and under the conditions provided for by law, subject to fair compensation being paid in good time for their loss. The use of property may be regulated by law insofar as is necessary for the general interest.”

In accordance with Article 52(3) of the Charter the scope of the right is the same as that of the right guaranteed under the ECHR.

It is therefore the case that Cyprus legislation enforcing the levy emanates from a purely political decision that enjoys no legal basis. The Eurogroup has in the way achieved the apparent ‘inapplicability’ of the Charter as Cyprus could not be held to be implementing EU law in imposing the levy on its depositors. The astonishing result is that Cyprus is in fact called upon to transpose into its legal order the Eurogroup Decision, but as this Decision enjoys no legal force Cyprus ends up absorbing all liability for any infringement of the right to property under its own Constitution by enforcing a levy on its ‘own’ initiative.

Therefore, where the levy becomes law, a judicial battle as to whether the levy infringes the right to property or not (on the basis of the ‘public interest’ exception), would be confined to Cyprus law and the Charter’s provisions would not be invoked. Moreover, the only recourse would be before Cyprus courts, in an effort to offend purely national statutory provisions that do not transpose any EU legal instrument.

There can be little doubt that had an ECOFIN decision been in place as preceding any national legislation on behalf of Cyprus, such national legislation would in fact fall within the scope of Article 51 of the Charter and the situation would have been quite different. Regarding the field of application of rights protected under the Charter, it is most useful to visit the CJEU’s very recent Judgment of 26/2/2013 in C-617/10 Åkerberg Fransson:

 “20      That definition of the field of application of the fundamental rights of the European Union is borne out by the explanations relating to Article 51 of the Charter, which, in accordance with the third subparagraph of Article 6(1) TEU and Article 52(7) of the Charter, have to be taken into consideration for the purpose of interpreting it (see, to this effect, Case C-279/09 DEB [2010] ECR I‑13849, paragraph 32). According to those explanations, ‘the requirement to respect fundamental rights defined in the context of the Union is only binding on the Member States when they act in the scope of Union law’.

21      Since the fundamental rights guaranteed by the Charter must therefore be complied with where national legislation falls within the scope of European Union law, situations cannot exist which are covered in that way by European Union law without those fundamental rights being applicable. The applicability of European Union law entails applicability of the fundamental rights guaranteed by the Charter.”

 For yet another time, law has fallen foul of politics. The Eurogroup ministers have committed an unprecedented departure from the protection of an inviolable right and they are asking Cyprus to carry the burden of legislating to that effect.

Anastasios A. Antoniou is an Advocate of the Supreme Court of Cyprus practicing competition law, energy law and EU law. He acts as Cyprus Counsel for a plethora of multinational corporations and global law firms on competition law, oil and gas law, merger control and international law matters. He also appears before all Courts of Cyprus representing clients in high-profile cases involving corporate, energy, competition, constitutional and human rights litigation. He is the Managing Advocate at Anastasios Antoniou LLC, a Cyprus Law Firm ranked by the Legal 500 as a leading firm, advising and litigating in competition law, oil and gas law, maritime security law, intellectual property and international law matters. The Legal 500 have highlighted Anastasios’ ‘expertise’ as being the reason behind Anastasios Antoniou LLC’s ‘solid reputation’. Anastasios is a Member of the Cyprus Bar Association and the International Bar Association (IBA) while he is honoured with membership in the European Competition Lawyers Forum, amongst other international associations and institutes he participates in. He is a frequent author of articles in international and European legal journals and the national press of Cyprus.

11 thoughts on “Original Sin: the EU tampering with the right to property in Cyprus is an unprecedented departure from EU norms and shared constitutional rights

  1. I see the argument that the Charter would be triggered if there was an EU act which was being implemented. But in the absence of that act and if it falls to the Cypriot Parliament to legislate for the levy, then the relevant provision of the Constitution will be invoked and the matter will fall to be determined by the judicial authorities in Cyprus. Might one argue that this a is a better safeguard for the Cypriot people – their own courts and constitution protecting their rights against alleged unconstitutional behaviour by their legislature – rather than hoping that the European Courts would act as their defender?

  2. Kenneth,

    It would seem in light of recent case law that the Charter is much broader than that. As Anastasios points out in C‑617/10 the Court says that “the fundamental rights guaranteed in the legal order of the European Union are applicable in all situations governed by European Union law.” The Courts in Cyprus must take this into account, as well as the ECHR. To what extent they will actually do this if such a situation comes before them is of course another question entirely.

    I must confess however that I am prima facie somewhat skeptical about the extent to which either of these legal regimes would offer much protection against a tax scheme such as that proposed here.

    Cyprus has in fact signed a number of Bilateral Investment Treaties which offer broader property protection, but even under these the result is far from certain.

  3. I understand the significance of the ruling in terms of the breadth of the Charter but I understood Anastasios as lamenting the absence of a Council Decision as that would then clearly bring the issue within the implementation of EU law. I am less clear that a Troika bailout is clearly within the ‘scope’ of EU law. My point was that to the extent that one has faith in fundamental rights as a safeguard – and here I probably also have some doubts – I wouldn’t necessarily exclude the national dimension or have more faith in EU instruments and EU courts.

    • I don’t think there’s any doubt that there is a sufficient connection to Union law to have the Charter apply. I do fear that it is not so obvious here that there would be a problem with the right to property, though. In recent cases, such as this one ( http://hudoc.echr.coe.int/sites/eng/pages/search.aspx?i=001-108354 – Mihaies v. Romania; 6 december 2011, appl nr 44232/11) the ECtHR went out of its way – even obiter, as of par. 17 – to stress the very wide margin of appreciation states enjoy in limiting property rights in the context of addressing the consequences of the economic crisis (the case was about a 25% salary cut for civil servants, which the ECtHR did not block).

  4. I don’t see how the right to property is affected when you loan money to someone and then end up having difficulty recovering it all because your debtor almost goes bankrupt. That sounds like normal business risk to me, no HR issue.

  5. Kenneth noted ‘ I understood Anastasios as lamenting the absence of a Council Decision as that would then clearly bring the issue within the implementation of EU law’

    Hasn’t the CJEU stated in Case C‑370/12 [Thomas Pringle v Ireland, referral for a preliminary ruling, Judgment of the full court of 27 November 2012, para. 105] that the EU lacks the competence to establish and operate a bail-out mechanism — such as the ESM — and that therefore States are entitled to create one, external to the EU (even if using organs of the EU to manage such a mechanism)? Didn’t the same judgement state, at paras 178 and following, that the adoption of the ESM treaty (outside the EU) would not violate the principle of effective judicial protection of the EU Charter of Fundamental Rights because the treaty is not an act of the EU, and that the Charter was not applicable to it?

    It would seem that a decision of the Council under the excessive deficit procedure, addressed to Cyprus, wouldn’t change the question much: the Eurogroup member states conditioning loans (external to the EU) to conditions of a ‘political agreement’ does not make the act an act of the Union, subject to judicial review (this seems to have been the case with the Greek bail-out, in any case). After all a MoU, and the corresponding Decision by the lender (in this case the Eurogroup or the ESM) are unilateral acts conditioned to the respect of certain conditions, and not legal ‘agreements’, much less binding decisions of the EU…

    As to the preferable nature of deciding the matter of the constitutionality of the measure before Cyprus’ own courts, it would seem that, although politically preferable for the locals, such a decision would probably be meaningless. The Court might defend the interests of depositors and deny the possibility of a deal with the Eurogoup, or it might accept the necessity of the tax/levy, and be just one more political actor to alienate the domestic constituencies. Would that be a net positive for Cyprus? Not sure. So far I am not aware of judicial decisions in Greece challenging the implementation of the two economic adjustment programmes for Greece, for instance. But what would be the usefulness of a Council of State decision there declaring that, say a new law reducing pensions, is null? It certainly wouldn’t mean that the Troika would suddenly ‘reconsider’ the conditions it imposes…

  6. My point about the role of national constitutional protection was a simple one. Politicians going into a negotiation can argue that while they might wish to act in a particular way to meet the demands of others they are inhibited from so doing because any domestic act in implementation would be challenged before its national courts. Doesn’t Germany use the power of its Constitutional Court precisely to enhance its negotiating stance? The threat needs to be credible to be sure. I was simply reacting against the assumption that we should look to European courts rather than national courts to protect certain interests.

    As to the scope of the Charter, the point I would make about the financial support arrangements is that they have in the past mixed together certain elements of EU law (Regulations, Decisions and Recommendations) with contractual MoU’s and the loan arrangements themselves. In this messy legal environment, the application of the Charter depends on precisely what it is that is being attacked. If the thing that impacts on the legal position of the affected party is not an EU act but arises from something else then as Matthias notes, the Charter would not be applicable. Hence my point that whether something was within the scope of EU law would itself have to be determined and could not simply be assumed.

    • “Doesn’t Germany use the power of its Constitutional Court precisely to enhance its negotiating stance? The threat needs to be credible to be sure.”

      And herein lies the problem, indeed. How credible would the Cypriot courts striking out adjustment implementation measures be to the eyes of northern EU partners? I suspect that politically the response would be to dismiss it by saying that such a decision is anti-European, parochial, short-sighted, etc. Reliance on CJEU or ECtHR involvement is premised on this very same idea: that the same political actors that would dismiss Cypriot courts as parochial would have a harder time arguing the same thing about a regional court. Or at least, I think, that is the hope of those hoping for international courts to get involved.

  7. Delighted to have read everyone’s comments, yet slightly delayed in posting my own (not an easy task being a Cyprus lawyer these days it would seem).
    Kenneth, perhaps both Cypriot courts and EU courts could be relieved of being seized on any such matter if Cyprus constitutionally declares a state of emergency. This could be a way to see fundamental rights such as the right to property being suspended for a period of time or under certain circumstances, assisting both the legal and economic processes of bailing out the country and particularly addressing the feared ‘bank run’.
    By making reference to the state of emergency, I am also addressing Erlend’s comment to a certain extent. Where foreign investors are concerned, it is practically a one-way solution to declare emergency, so that a defence can become available in potential investment arbitration later on (if the deposis tax, now back on the table, is eventually imposed).
    Matthias, my point – which is of course open to discussion – is exactly that we are not discussing a full-fledged bailout package yet (which would involve the ESM) and only have the Eurogroup decision to consider at the moment. No EU legal cloak covers the situation in Cyprus, the tax is not part of a fomalized rescue package, it is virtually imposed by the Eurogroup on Cyprus (politically, not legally), the latter having the task of making into law. As far as everyone’s comments on the scope of the Charter go, my humble view is that expressed in the main piece, the Franksson ruling being particularly enlightening towards forming that view.

    • Declaring a ‘state of necessity’ might authorize limitations to the ECHR and investment treaties. On the first instrument, and as noted by John Morjin, the ECtHR has accommodated limitations to the right to property because of financial crises (although the question at stake in the Romanian inadmissibility decisions was whether public sector salaries were ‘property’ at all… see para. 17 of Mihaies et al. v Romania). As to investment agreements, the successful invocation of a plea of necessity is definitely not an easy thing to pull off, as evidenced by the inchoate state of the annulment case-law with respect to Argentina.

      As to the absence of a full-fledged bail-out, I agree. But even where full fledged bail-outs have been put in place — whether out of the EFSM/ESM, such as for Greece, or in the EFSM/ESM, such as for Ireland, Portugal and now Spain — there is considerable doubt that the acts underpinning said bail-out would be acts of the EU subject to judicial review. With respect to the EMS bail-outs, the CJEU was quite clear (in the Pringle v Ireland referral) that member-state cooperation in bail-outs is outside EU competence and that therefore acts of implementation are not, in principle, subject to judicial review with respect to the EUCFR…

      Don’t get me wrong, I find it to be a scandal that Euro member states might impose these kinds of conditions and not have their acts challenged before the CJEU. On the bright side, it is about time that someone argue before the ECHR that these adjustment programmes — if not attributable to the EU as per Pringle v. Ireland — must be attributable to Euro member-states acting jointly, and therefore reviewable before the ECtHR in line with the Bosphorus v Ireland criteria.

  8. A very quick followup on the ECHR and BIT track:

    It seems to me that the ostensibly clearly discriminatory levy that is being discussed as most probable right now (25% on EUR 100.000+ accounts) could quite possibly violate either ECHR protocol 1 article 1 or expropriation clauses in BITs. The international law standard being discussed would probably be pretty much similar, essentially on the distinction between a permissible taxation and an illegal one (For a recent primer, see Burlington Resources Inc. v Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Liability). The necessity test(s) seems hard to pass, because there have been different options on the table all the time. The only viable defense that springs to mind is that the deposit guarantee directive provided legitimate expectations of protection up to EUR 100.000, but that comes across as not very persuasive because deposit guarantee schemes does not offer ex ante protection.

    But the political economy aspects of this seems to be just as interesting, and it could perhaps serve as a useful reminder to academic lawyers (at least to me) on the utility of investment protection. Assuming that the levy takes place and assuming that investors a couple of years from now get a finding from the European Court of Human Rights or an Arbitral Tribunal that the measure was illegal, what are the consequences? Questions of compliance aside, complainants would most likely be awarded damages and presumably interest, but most likely no compound interest.

    The utility for the government is that they get an emergency loan at somewhat below market rate with a maturity date they can probably influence and maybe negotiate a great deal, actual or threat of capital flight being the other factor.

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