Prof Kenneth Armstrong, University of Cambridge
Ever tried. Ever failed. No matter. Try again. Fail again. Fail better.
Just over a year since the United Kingdom (UK) commenced legal proceedings against the Council of the EU challenging its decision to authorise the use of enhanced cooperation for the adoption of the proposed Financial Transaction Tax (FTT), the Court of Justice has, as anticipated, dismissed the UK’s application (Case C-209/13, United Kingdom v Council). This is another defeat for the UK following on from its unsuccessful challenge to the powers of the European Securities and Markets Authority to control ‘short-selling’. Whether the UK will have more success in the third of its triptych of legal challenges to measures adopted in the wake of the financial crisis – the cap of ‘bankers’ bonuses’ – is yet to be determined. However, in the lead up to the European Parliament elections, with the United Kingdom Independence Party riding high in the polls and the UK prime minister declaring that he will not act as prime minister following the 2015 general election unless there will be a referendum on the UK’s continuing membership of the EU, it is clear that these defeats before the Luxembourg court have both political and legal saliency.
In September 2011, the European Commission adopted a proposal for an EU-wide FTT. It became clear after negotiations 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) and in the February 2013 the Commission adopted a further proposal setting out the basis for the tax. Of particular controversy – and the focus for the UK’s legal action – was the potential capacity for such a tax to be triggered by circumstances that apparently extended beyond the territorial boundaries of the participating states. In particular Article 3(1) of the proposed directive brought within the scope of the tax entities that were counterparties to financial institutions established in a participating Member State, while Article 4(1) and 4(2) brought within its scope parties to financial transactions in respect of financial instruments issued in a participating Member State.
From the perspective of the UK, the consequence of the counterparty and issuance principles would be to give rise to an extraterritorial effect contrary to Article 327 TFEU and contrary to customary international law. The UK also claimed that contrary to Article 332 TFEU, the costs involved in implementing the measure could not be confined to the participating Member States insofar as the UK was bound by other EU measures relating to mutual assistance and administrative cooperation in the recovery of taxes. Thus, the UK claimed that the adoption of the tax was contrary to the rules governing the use of enhanced cooperation.
Notwithstanding the adoption of the authorizing decision, the legislative proposal has not itself been adopted by the Council. Negotiated through the consultation process, the EP has given its first reading and proposed amendments but the Council has not yet adopted a text. Indeed, the Council’s own legal service was consulted on the alleged potential extraterritorial effects and in a September 2013 opinion leaked to the Financial Times the legal service took issue with the territorial connection and justifications advanced to defend the scope of application of the proposed directive: the issues which are central to the UK’s legal challenge. The ECOFIN meeting on 6 May 2014 is to be updated on the state of negotiations on the proposal.
The treaty provisions relating to enhanced cooperation are to be found in Article 20 TEU, and further elaborated upon in Articles 326-334 TFEU. The distribution of these norms across the two treaties is a little messy not least because the division is not based on a distinction between the requirements as they apply to the adoption of the authorizing decision and the requirement as they apply to the subsequently adopted legislation. It has been left to litigation – including the FTT case – to define both the scope of judicial review and the relevance of particular norms at different points in time.
Article 20 TEU sets out the general requirement that enhanced cooperation must ‘further the objectives of the Union, protect its interests and reinforce its integration process’. This is a very open-ended and highly evaluative requirement that is unlikely to be a basis for the Court of Justice to second-guess a Council authorizing decision. Article 20 TEU also states that enhanced cooperation ‘shall be open at any time to all Member States’; a requirement repeated and reinforced in Article 328 TFEU. This norm envisages a benign multi-speed model of European integration rather than the more politically uncomfortable reality of profound disagreement as to the desirability of particular measures creating more fixed insiders and outsiders. It is this reality of enhanced cooperation which is likely to see its exercise giving rise to legal challenges, hence the need for particular clarity as to the scope of judicial review and applicable legal norms.
Where Article 20 TEU is more specific is in demanding that the authorization decision can only be adopted:
– as a ‘last resort’ after it is established that the objective of the cooperation cannot be attained within a reasonable period by the Union as a whole; and
– provided at least nine Member States participate.
The ‘last resort’ requirement had been discussed by the Court in last year’s judgment arising out of Spain and Italy’s challenge to the Council decision authorizing enhanced cooperation to facilitate agreement on the language requirements to support the EU unitary patent. However, this was not at stake in the UK’s legal challenge. Indeed the UK did not allege a breach of the particular procedural requirements surrounding the adoption of the authorizing decision. Rather the focus of the challenge was directed towards the anticipated effects of the proposed FTT itself.
Following on from the Spain and Italy judgment, it seemed almost inevitable that the UK’s challenge would be unlikely to succeed. From that judgment it had emerged that challenges to authorizing decisions would be limited to whether there was a breach of the treaty requirements laying down the substantive and procedural requirements for the adoption of an authorizing decision. Substantive challenges to the legislation to be adopted following the authorization would need to await the final agreement of the EU legislature on the content of the measures. The pleas in law relied upon by the UK were found not to be addressed to the authorizing decision but rather to the substantive of what had not yet been adopted, namely a directive creating a financial transaction tax. Thus claims of extraterritorial effects or of costs for non-participating states could not be examined in the absence of a definitive legal text.
In its intervention the German government had raised the issue of the admissibility of the UK’s legal challenge arguing that as the UK’s pleas in law did not bear on the authorizing decision being contested the challenge was inadmissible. For the Court, provided the pleas in law had the requisite clarity and precision the challenge would not be thrown out as inadmissible. It seems clear that the Court is unwilling to seek to filter such cases through a strict admissibility hurdle even if ultimately such challenges end up being dismissed largely because they have been launched prematurely in the sense of raising issues that can only be addressed in respect of the adopted legislation and not the authorizing decision. This might be thought to be somewhat burdensome on court resources but it is noteworthy that the Court (a five judge second chamber) ruled without requiring an opinion from the Advocate General and gave judgment a year after proceedings commenced. In this regard, the Court seems to have adopted a sensitive approach to what – in light of its earlier judgment – might have been thought of as a rather hopeless case. In delivering a judgment rather than an order dismissing the case, the Court has taken seriously the challenge albeit that the outcome was never really in much doubt.
Enhanced cooperation has been a feature of the EU constitutional landscape for a number of years with the Amsterdam Treaty specifically creating a general capacity for groups of Member States to utilise the institutions and exercise the legislative competences created by the EU treaties. While this capacity lay dormant, new life was breathed into the enhanced cooperation mechanism with the Lisbon Treaty which streamlined the relevant treaty provisions. The revised provisions were first used for the adoption of a regulation concerning the law applicable to divorce and separation and then later applied for the more controversial language regime applicable to the unitary patent. The FTT proposal was the third use of the provisions and given that two out of the three applications have given rise to litigation it seems evident that enhanced cooperation remains controversial. Yet the paradox, is that demands for enhanced cooperation may be on the increase not least as Eurozone states seeks to deepen their level of mutual commitment and economic integration. One response may be to push cooperation outside of the EU legislative process back into the arena of international agreements such as the ‘Fiscal Compact’ and the ‘ESM’ treaties. But whether inside or outside the EU, the issue remains the same, namely how can EU law manage the relationship between participating and non-participating states in areas where it may be very difficult if not impossible to hermetically seal off one from the other. The issue of the territorial scope of application of law is, therefore, set to be an important and continuing test of the EU legal order’s capacity to live with its internal diversity. Returning to the issue of European elections, while the UK’s litigation may on this, and other occasions, have failed, as a Member State of the EU it can at least resort to the institutions and mechanisms of the EU to seek to defend and pursue its interests. If the UK contemplates withdrawal, it will need to think carefully about what alternative and credible mechanisms it may have at its disposal. The UK may have failed this time, but it may at least hope to have failed better.