January 25, 2015

EU Parliament EPP group in favour of ISDS

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The European People’s Party (EPP), the biggest group in the European Parliament, is in favour of investor-to-state dispute settlement (ISDS). I will discuss their position and conclude it creates three risks.

First, it risks subjecting the EU to a corrupt adjudicative system. Second, it risks undermining the EU court’s exclusive jurisdiction over the definitive interpretation of EU law. Third, it risks crashing upcoming EU trade agreements.

Investor-to-state dispute settlement is a highly controversial arbitration mechanism. The EU commission wants to include it in trade agreements. Last year they launched a public consultation; on 13 January 2015 they published the results.

The Parliament Magazine collected statements from European Parliament spokespersons on the results of the ISDS consultation. I will discuss the EPP statement on ISDS; to avoid cherry picking, I will quote the whole statement. (INTA: international trade committee)

European People’s Party

“The chairperson of the EPP working group on the TTIP Godelieve Quisthoudt-Rowohl and the EPP group’s spokesperson in parliament’s INTA committee, Daniel Caspary made the following joint statement:

We welcome the final report and congratulate the European commission on the successful accomplishment of this huge logistical effort on the biggest public consultation ever. We call now for rapid and sound action by the commission to convert the results into concrete measures for the ongoing negotiations and standard EU-bilateral investment treaties texts. Our goal must be to find the right balance between protecting investors and safeguarding the EU’s right and ability to regulate.

The EPP group is in favour of an effective ISDS system that will protect our European investors by implementing a well-balanced approach to TTIP, providing for better transparency and clearer definitions/wording on the basis of the CETA text.”

ISDS does not respect the separation of powers, lacks institutional safeguards for independence and creates perverse incentives. This is true for the old style investment agreements, the EU – Canada (CETA) text, the consultation text (based on CETA) and the EU – Singapore text.

Better transparency and clearer definitions/wording on the basis of the CETA text do not fundamentally change the system: they do not separate powers, do not create institutional safeguards for independence, and do not take away perverse incentives. The EPP approach would fail to sufficiently reform the system.

Last summer over 110 scientists published their submission to the ISDS consultation, the Statement of Concern about Planned Provisions on Investment Protection and Investor-State Dispute Settlement (ISDS) in the Transatlantic Trade and Investment Partnership (TTIP). The statement shows the commission failed to solve a long list of serious issues. The commission’s reforms failed.

“We therefore await the commission’s conclusions and want to discuss them instead of refusing them outright as the S&D group and the Greens do. Their reaction is a false ideological one that leads to impasse and fear, and produces no alternative to meet the need to regulate global investment.”

Adjudicative processes have to be free of reasonably perceived bias.

As we saw above, the commission’s reforms failed and the EPP approach would fail. The commission never acknowledged the institutional issues: we can not expect the commission to solve them. No ISDS is the right approach now.

“One cannot reject a clause without checking all the consequences of such a decision. For example, there are no clear indications on how to ensure the non-discrimination of EU investors in the US market. We have studied this issue with the commission and do not have any indication that this can be achieved without ISDS.”

The commission and EPP must have overlooked the Statement of Concern published by over 110 scientists: “The consultation document comes up with one additional argument: that the rights each party grants to its own citizens and companies ‘are not always guaranteed to foreigners and foreign investors.’ The claim is unsubstantiated. Even if it is accepted, there is no obvious reason why the incorporation in TTIP of a simple norm of non discriminatory legal protection and equal access to domestic courts could not address the problem perfectly adequately.”

Framing

“Therefore, what we need to work on is whether there is a valid alternative to ISDS as a legal mechanism. If not, we should work for a reformed ISDS mechanism that can serve as a reference for the next investment agreements.”

This frames the issue in a wrong way. With this approach the EPP positions itself to reject alternatives. After that only reform of ISDS would be an option. We already saw that the EPP proposed reforms that would be insufficient. The end result would be a corrupt ISDS system.

The correct question is: how do we design adjudicative systems that are free of reasonably perceived bias. Never settle for less.

With the euro the EU settled for a broken system. We see the results. Broken systems lead to severe problems in the future.

“It is irresponsible to deny and oppose globalisation and the consequences it has on global trade and investment. Europe’s success in a multipolar world – that we would like to be competitive and fair – depends on clear, efficient, predictable legal mechanisms. Europe needs to attract investors and investment and European economic actors need legal certainty to operate globally.”

I make three remarks. First, broken systems harm our future. Second, the EU has a good legal system, more than sufficient to attract investors. Third, Europeans investing globally can choose which county to invest in, and local courts, state-to-state arbitration, insurance and contracts are alternatives to ISDS.

EU Treaties

The 18 December 2015 EU Court of Justice Opinion 2/13 suggests that ISDS is not compatible with the EU treaties. The EU court has exclusive jurisdiction over the definitive interpretation of European Union law. ISDS tribunals do not only interpret and apply provisions of investment agreements, but also interpret local laws. Nothing would stop them from interpreting and applying EU law. This would undermine the EU court’s exclusive jurisdiction.

Vrijschrift proposed that the Commission ascertain that adjudicative systems in trade agreements are compatible with the Treaties.

Three risks

The EPP approach on ISDS creates three risks. First, it risks subjecting the EU to a corrupt ISDS system. Second, it risks undermining the EU court’s exclusive jurisdiction over the definitive interpretation of EU law. Third, it risks crashing upcoming EU agreements by holding on to ISDS.

See also: EU liberals seem ready to sacrifice our democracy