2011 Investment Climate Statement - European Union
OPENNESS TO, AND RESTRICTIONS UPON, FOREIGN INVESTMENT
EU Treaty Provisions Governing Investment/Historical Background
The European Union has one of the most hospitable climates for U.S. investment in the world, with the historical book value of U.S. investment in the 27 EU member states at nearly $2 trillion. This is a result, in part, of the process of European integration. The 1957 Treaty of Rome (now renamed, with the December 2009 entry into force of the Lisbon Treaty, the “Treaty on the Function of the European Union” - TFEU) established the European Community among six European countries (Belgium, France, Germany, Italy, the Netherlands and Luxembourg; this has now grown into a European Union of 27 countries covering virtually all the territory of Europe. TFEU Article 43 requires all of the EU “Member States” to provide national treatment to investors from other Member States regarding the establishment and conduct of business.
The TFEU also continues and deepens the Treaty of Rome’s “four freedoms” (free movement of capital, labor, goods and persons) within the European Union. The free movement of capital requirement in particular benefits all potential investors, whether they originate from an EU Member State or not. Any violation of these rights can be adjudicated by the European Court of Justice, which may hear cases related to violations of Treaty rights directly, or overturn national court decisions found inconsistent with the Treaty.
The 1986 Single European Act further reduced barriers to intra-EU investment, and legislation adopted subsequently even created opportunities for companies from one Member State to receive better than national treatment in another Member State. For example, in the financial services sector, German universal banks can conduct securities business freely in other Member States, even if local banks in that other state are not allowed to offer these services domestically by their local licensing authority.
Prior to the 1992 Treaty on the European Union (TEU, often known as the “Maastricht” Treaty), the Community had virtually no role in determining conditions that would affect the entry of investors from third countries into the territories of the Member States. Member States were compelled by the Treaty to grant national treatment to investors from other EU countries (including subsidiaries owned by third countries), but could erect and maintain barriers to investors coming directly from non-EU countries, consistent with their international obligations. These obligations include the Treaties of Friendship, Commerce and Navigation (FCNs) and Bilateral Investment Treaties (BITs) which the United States has with most EU countries, as well as obligations under the OECD codes on capital movements and invisible transactions. The only role Community law played was to ensure that a foreign-owned company that was established in one Member State received non-discriminatory treatment in other Member States.
EU power to regulate Member State treatment of incoming foreign investment increased considerably in 1993. A Treaty revision that year abolished all restrictions on the movement of capital, both between EU Member States and between Member States and third countries (Article 56). However, Member State measures in force on December 31, 1992 denying national treatment to third-country investors were grandfathered. The Treaty (then Article 57) expressly provided for the adoption of common regimes in these areas: "The Council may, acting by a qualified majority on a proposal from the Commission, adopt measures on the movement of capital to or from third countries involving direct investment establishment, the provision of financial services or the admission of securities to capital markets. Unanimity shall be required for measures under this paragraph which constitute a step back in Community law as regards the liberalization of the movement of capital to or from third countries.” The generally accepted interpretation of this provision was that EU law governed the treatment of incoming investments (excepted where grandfathered provisions existed) and their treatment after establishment, while the Member States were responsible for ensuring the treatment of their investors outside the territory of the EU.
In June 1997, the European Commission issued a Communication clarifying the scope of EU Treaty provisions on capital movements and the right of establishment. The Commission was reacting to limits that some Member States had imposed on the number of voting shares investors from other Member States could acquire during privatization. The Commission stressed that free movement of capital and freedom of establishment constitute fundamental and directly applicable freedoms established by the Treaty. Nationals and companies of other Member States should, therefore, be free to acquire controlling stakes, exercise the voting rights attached to these stakes and manage domestic companies under the same conditions laid down by a Member State for its own nationals. The European Court of Justice ruled in three precedent-setting cases in 2002 against golden shares in France, Belgium and Portugal, triggering several infringement actions by the Commission. The Court subsequently ruled against golden share cases in other Member States.
In June 2007, a new EU Directive to strengthen investor cross-border voting rights came into force. The Directive bolsters cross-border investment by abolishing shareholder voting impediments then prevalent in several Member States, such as the inability to vote electronically or by proxy. It is not yet clear how the Directive is being implemented by the affected Member States and whether the Commission will need to take legal action to compel implementation.
Lisbon Treaty Impacts
The entry into force in December 2009 of the Lisbon Treaty changes EU jurisdiction over direct investment issues in major respects. Article 207 of the Lisbon Treaty now brings “Foreign Direct Investment” under the umbrella of the EU common commercial policy, making it an exclusive EU competence. The EU gains the ability to negotiate Bilateral Investment Treaties (BITs) or investment chapters of Free Trade Agreements. Also, the Lisbon Treaty requires the consent of the European Parliament for new EU investment agreements.
On July 7, 2010, the Commission issued a Communication setting out its thoughts on what the EU’s future investment policy framework should be, and a draft regulation meant as a “transitional mechanism” that stipulates that the existing Bilateral Investment Treaties Members States have with third countries will remain in force. Both documents can be found here: http://ec.europa.eu/trade/creating-opportunities/trade-topics/investment/. In addition to providing an “explicit guarantee of legal certainty” regarding current agreements, it proposes that Member States could still negotiate new BITs with third countries where an EU agreement is not contemplated in the foreseeable future.
The legislative process is likely to be lengthy as many Member States object to certain aspects of the proposed regulation. While it affirms the validity of existing agreements, it recognizes that Member States may “be required” to amend or modify investment agreements to “bring them into compliance with Treaty obligations.” More controversially, it calls for a review within five years, at which time, according to the proposal, the Commission could “deauthorize” BITs or parts of them, something Member States are reluctant to concede.
U.S.-EU Efforts to Promote Open Investment
In November 2007, the United States and the European Commission under the umbrella of the Transatlantic Economic Council (TEC) launched a “U.S.–EU Investment Dialogue” to reduce barriers to transatlantic investment and promote open investment regimes globally. The Dialogue has met numerous times, most recently in 2010. The Dialogue prepared for the TEC an Open Investment Statement, which was adopted at the June 2008 U.S.-EU Summit. The U.S. and the EU plan to hold further Investment Dialogue meetings in 2011, and continue to discuss the evolving EU role with respect to foreign investment in other fora.
Ownership Restrictions and Reciprocity Provisions
EU Treaty Articles 43 (establishment) and 56/57 (capital movements) helped the EU to create one of the most hospitable legal frameworks for U.S. and other foreign investment in the world. However, restrictions on foreign direct investment do exist. Under EU law, the right to provide aviation transport services within the EU is reserved to firms majority-owned and controlled by EU nationals. The right to provide maritime transport services within certain EU Member States is also restricted. Currently, EU banking, insurance and investment services directives include "reciprocal" national treatment clauses, under which financial services firms from a third country may be denied the right to establish a new business in the EU if the EU determines that the investor's home country denies national treatment to EU service providers. In addition, as with the United States, a number of regulatory measures, particularly in the financial sector, are also subject to “prudential exceptions” and thus are not guaranteed national and most favored nation treatment under the EU’s GATS and other international commitments.
In March 2004 the Council of Ministers approved a Directive on takeover bids (“Takeover Directive”), which sought to create favorable regulatory conditions for takeovers and to boost corporate restructuring within the EU. The Directive authorizes Member States and companies to ban corporate defensive measures (e.g. “poison pills” or multiple voting rights) against hostile takeovers. It includes a “reciprocity” provision to allow companies that otherwise prohibit defensive measures to sue if the potential suitor operates in a jurisdiction that permits takeover defenses. Article 12.3 of the text is ambiguous as to whether the reciprocity principle applies to non-EU firms. However, the preamble states that application of the optional measures is without prejudice to international agreements to which the Community is a party. For example, French companies may suspend implementation of a takeover if they are targeted by a foreign company that does not apply reciprocal rules. Some other Member States appear to be leaning in the same direction.
Energy Sector Liberalization
In September 2007 the European Commission introduced legislation intended to increase competition and investment in the gas and electricity sectors, featuring controversial plans to separate the production and distribution arms of large integrated energy firms. After a year of negotiation over competing proposals, the French Presidency of the EU forged a political compromise during the EU Energy Ministers meeting of October 10, 2008. On June 25, 2009, after passage by the European Parliament, the European Union officially adopted the Third Energy Package, legislation consisting of two directives and three regulations designed to promote internal energy market integration and to enhance EU energy security.
Specifically, the legislation mandates the separation of energy production and supply from transmission through the unbundling of European energy firms. The objective is to create a level playing field by preventing companies engaged in the generation and distribution of gas and electricity from using their privileged position to prevent access to transmission systems or limit connectivity of transmission networks. The original concept, which mandated full ownership unbundling, has been broadened and permits energy firms that operate within the European market three options: 1) full ownership unbundling; 2) an Independent System Operator (ISO); and 3) an Independent Transmission Operator (ITO).
Additionally, the package includes a "Third Country Clause" that requires all non-EU countries to comply with the same unbundling requirements as EU companies before they are certified to own and/or operate transmission networks in the Common Market. Moreover, the clause permits Member States to refuse a foreign company certification/permission to acquire or operate a transmission network – even if it meets other requirements – if it is deemed to have a potential negative impact on the security of energy supply of an individual Member State or the EU as a whole.
Member States are required to seek the opinion of the Commission with regards to the unbundling requirement and “security of supply” issue. The Commission’s opinion is not binding, but Member States must take it into consideration. Member States have up to 18 months to put most of the package into effect; however, implementation of the Third Country Clause can take up to three-and-a-half years. Member states are required to implement the 3rd Energy Package legislation this year, and the Commission has offered technical assistance. The Commission has also set up a working group to provide technical assistance to the Russian government and state-owned Gazprom, both of which have extensively criticized the unbundling provisions.
CONVERSION AND TRANSFER POLICIES
Europe's single currency, the Euro, and the eleven remaining national EU Member State currencies are freely convertible. The EU, like the U.S., places virtually no restrictions on capital movements. Article 56 of the EU Treaty specifically prohibits restrictions on the movement of capital and payments between Member States and between Member States and third countries, with the grandfathered exceptions noted above. The adoption of the Euro in 17 of the 27 EU Member States has shifted currency management and control of monetary policy to the European Central Bank (ECB) and the EU Council of Ministers.
Remaining new EU Member States must join the Euro upon meeting specific economic convergence criteria although no time limit is placed for the application process to be completed. The global financial crisis initially led some countries outside of the euro area, including Denmark, to consider accelerating entry into the zone. More recently, however, high deficits and debt crises in Greece and Ireland, and, for the time being, to a lesser degree in Portugal and Spain, have raised questions over the stability of the euro area.
In May 2010, in response to the Greek debt crisis (which required an EC/IMF program worth €110bn - €80bn from Euro area Member States and €30bn from the IMF – in exchange for a fiscal consolidation effort of 11% of GDP until 2013), the EU agreed to set up a temporary financial backstop to provide assistance to other Euro area Member States facing difficulties accessing the capital markets. Two mechanisms were created, to be active until 2013:
The European Financial Stability Mechanism (EFSM), which could leverage €60bn of EU own-funds from its budget that can be released on the basis of art 122 of the Lisbon Treaty, which allows the Council to grant the Union's assistance to a Member State facing exceptional difficulties for reasons beyond its control. This amount is first in line and can be activated rapidly upon request. Strict conditionality – in coordination with the IMF - would be attached to the loans; and,
- The European Financial Stability Facility (EFSF), which is a Special Purpose Vehicle (SPV) that can borrow in the markets against a €440bn guarantee from Euro area Member States. As with the EFSM, any loan granted under the EFSF would carry strict conditionality.
In September 2010, the EU modified the way it implements the Stability and Growth Pact (SGP) introducing a "European semester." Starting in January 2011, the following yearly monitoring cycle will be in effect:
March - On the basis of a report from the EC, the EU Council identifies the main economic challenges and gives strategic advice on policies MS should take in response.
April - Taking this advice into account, Member States will review their medium-term budgetary strategies and draw up their national structural reform programs.
- June/July - The EU Council and ECOFIN will provide policy advice on MS’s budgetary and reform plans before MS finalize their budgets for the following year.
In September 2010 the EC published six proposals to make the preventive arm of the SGP more comprehensive and the corrective arm more enforceable. The EC’s proposals cover four main areas:
Strengthening the Stability and Growth Pact: Monitoring of national fiscal policy will be based on “prudent fiscal policy-making” (PFPM). Those MS that have not attained their Medium-Term Objective (MTO) should set their annual expenditure growth below their GDP growth trend. To enforce the debt-to-GDP Maastricht criterion of 60%, future decisions to open Excessive Deficit Procedures (EDP) will also take into account debt reduction measures.
Preventing and correcting macroeconomic imbalances: Macroeconomic surveillance will be broadened to include regular assessments and an alert mechanism to avoid large macroeconomic imbalances and persistent divergences in competitiveness. The EC could issue warnings and recommend placing a MS in an “Excessive Imbalance Procedure (EIP)”.
Establishing national fiscal frameworks of quality: National fiscal frameworks will be strengthened and better aligned with the new economic governance rules. The EC proposes minimum fiscal governance requirements to ensure the new SGP objectives are reflected in the national budgetary frameworks (accounting systems, statistics, forecasting practices, fiscal rules, budgetary procedures and fiscal relations with other entities such as local or regional authorities).
- Stronger enforcement: Graduated sanctions for non-compliant Euro area MS will be introduced, including non-interest bearing deposits which could be converted to fines in the event of repeated non-compliance. A new “reverse voting mechanism” is proposed for imposing sanctions according to which an EC proposal will be considered adopted unless the Council overturns it by Qualified Majority Voting. EIP enforcement procedures would also apply reverse voting.
Outlook: For four of the six proposals, agreement between the Council and the European parliament is essential. The remaining two need only to receive the backing of the Council. The EU aims at adopting the whole package in the first semester of 2011.
In November 2010, following the Irish debt crisis, both the EFSM and the EFSF were activated to provide the Irish Republic with an €85 billion Commission/IMF loan (to which the UK, Sweden and Denmark also contributed bilaterally). At the same time, the EU decided to amend Art. 136 of the Treaty on the Functioning of the EU (TFEU) to provide a legal basis for the creation of a permanent crisis resolution mechanism for the Euro area. The European Stability Mechanism (ESM) will be based on the new Art. 136, whose wording has been modified as follows: "The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any financial assistance under the mechanism will be made subject to strict conditionality.” This new Treaty revision will require ratification by all European Union Member States.
EXPROPRIATION AND COMPENSATION
The European Union does not have the authority to expropriate property; this remains the exclusive competence of the Member States.
Foreign investors can, and do, take disputes against Member State governments directly to local courts. In addition, any violation of a right guaranteed under the EU law - which has been ruled supreme to Member State law, including constitutional law - can be heard in local courts or addressed directly by a foreign investor with a presence in a Member State to the European Court of Justice. Further, all EU Member States are members of the World Bank's International Center for the Settlement of Investment Disputes (ICSID), and most have consented to ICSID arbitration of investment disputes in the context of individual bilateral investment treaties. While the EU is not itself a party to ICSID or other such arbitration conventions, it has stated its willingness to have investment disputes subject to international arbitration. The Commission’s proposed regulation issued July 7, 2010 has language requiring Member States to seek permission from the Commission before activating any dispute settlement mechanisms. The proposed language also stipulates that the Commission could compel Member States to activate dispute settlement and foresees Commission participation in such processes. This proposed language is also controversial for Member States and the final form of the legislation will be difficult to predict.
PERFORMANCE REQUIREMENTS AND INCENTIVES
Though ideas for coordinated, pan-EU tax policy are sometimes raised, Member States and key Commissioners have rejected proposals to move toward tax harmonization or create a “common consolidated tax basis” across Member States. European Union grant and subsidy programs are generally available only for nationals and companies based in the EU, but usually on a national treatment basis. For more information, see Chapter 7 “Trade and Project Financing” in the EU Country Commercial Guide as well as individual Country Commercial Guides for Member State practices.
RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT
The right to private ownership is firmly established in EU law, as well as in the law of the individual Member States. See individual country commercial guides for EU Member State practices.
PROTECTION OF PROPERTY RIGHTS
The EU and its Member States support strong protection for intellectual property rights (IPR) and other property rights. The EU and/or its Member States adhere to all major intellectual property rights agreements and offer strong IPR protection, including implementation of the WTO TRIPS provisions. Together, the U.S. and the EU have committed to enforcing IPR in third countries and at our borders in the EU-U.S. Action Strategy endorsed at the June 2006 U.S.-EU Summit.
Despite overall strong support for property rights enforcement, several EU Member States have been identified in the U.S. Special 301 process due to concerns with protection of certain intellectual property rights. The United States continues to be engaged with the EU and individual Member States on these matters.
Enforcement of Intellectual and Industrial Property Rights
In April 2004, the EU adopted the Intellectual Property Enforcement Directive (IPRED) (http://ec.europa.eu/internal_market/iprenforcement/directives_en.htm). This Directive requires Member States to apply effective and proportionate remedies and penalties to form a deterrent against counterfeiting and piracy and harmonizes measures, procedures, and remedies for right holders to defend their IPR within Member States. Remedies available to right holders under IPRED include the destruction, recall, or permanent removal from the market of illegal goods, as well as financial compensation, injunctions, and damages. Although Member States were to have transposed the Directive into national legislation by April 2006, the process was only completed in May 2009.
In January 2008 the European Court of Justice (ECJ) issued a decision confirming that EU rules do not require countries to disclose names of Internet file sharers in civil cases. Spanish firm Promusicae and other European rights holders had hoped that the ECJ would rule that Telefonica (a Spanish Internet service provider) had to provide the proper data to protect its property rights. The Court, however, ruled that Member States could – but do not have to - require communication of personal data to ensure effective copyright protection in the context of civil proceedings as long as such national laws are not in conflict with the fundamental EU rights of respect for private life and protection of personal data.
At the 2nd High Level Conference on Counterfeiting and Piracy April 2, 2009, the Commission launched the European Observatory on Counterfeiting and Piracy. The role of the Observatory, which is composed of private industry representatives and designees chosen by Member States, is to serve as the central resource for gathering, monitoring and reporting information related to IPR infringement in the EU. The first meeting of the Observatory took place September 4, 2009. Two initial subgroups were created to look at issues surrounding data gathering and existing legal frameworks.
Specific Enforcement Measures
Copyright: In 2001, the EU adopted Directive 2001/29 establishing pan-EU rules on copyright and related rights in the information society. In December 2006, the Council and Parliament passed an updated version of the 2001 Copyright Directive modified to clarify terms of copyright protection. This new Directive entered into force in January 2007. The Directive is meant to provide a secure environment for cross-border trade in copyright-protected goods and services, and to facilitate the development of electronic commerce in the field of new and multimedia products and services. Authors’ exclusive reproduction rights are guaranteed with a single mandatory exception for technical copies, and an exhaustive list of exceptions to copyright which are optional for Member States in terms of including them in national law. The Commission released a comprehensive anti-counterfeiting plan, including criminal enforcement of IPR, which was supported by the Council in September 2008.
In April 2009 the Parliament approved a Commission proposal to extend term of copyright protection for performers and record producers from 50 to 70 years. The proposal also contains a new claim for session players amounting to 20 percent of record labels' offline and online sales revenue, a 'use-it-or-lose-it' provision that allows performers to recover their rights after 50 years, should the producer fail to market the sound recording, a so-called 'clean slate' which prevents record producers from making deductions to the royalties they pay to featured performers. The text also invites the Commission to conduct a separate impact assessment on audiovisual performers and to come forward with appropriate proposals in the course of 2010.
The Commission launched a public consultation on a reflection paper on the challenge of creating a European Digital Single Market for creative content like books, music, films or video games. The focus on the consultation, open from October 22, 2009 to January 5, 2010, was to solicit views from right holders, consumers, and commercial users regarding the digital availability of content in Europe. The consultation will be used to inform the Commission’s crafting of consumer- and competition-friendly rules needed to create a genuine Single Market for creative content on the internet.
On December 14, 2009, the European Union and Member States ratified the World Intellectual Property Organization (WIPO) Copyright Treaty and the WIPO Performances and Phonograms Treaty.
In October 2007, the U.S. and key trading partners announced their intention to negotiate an Anti-Counterfeiting Trade Agreement (ACTA) in order to bolster efforts to combat counterfeiting and piracy by identifying a new, higher benchmark for enforcement that countries can join on a voluntary basis. Talks continued through 2010, with the final round occurring in October 2010 in Tokyo. In November 2010, after resolving the few issues that remained outstanding after the final round in Tokyo, participants in the negotiations announced that they had finalized the text of the Agreement. On the EU side the remaining steps are: adoption by the Commission College, then approval and signature of ACTA by Council. Finally, the European Parliament will be asked to give its consent to the text.
Trademarks: Registration of trademarks with the European Union’s Office for Harmonization in the Internal Market (OHIM) began in 1996. OHIM issues a single Community Trademark (CTM) that is valid in all EU Member States. In October 2004 the European Community acceded to the World Intellectual Property Organization (WIPO) Madrid Protocol. The accession of the Community to the Madrid Protocol established a link between the Madrid Protocol system, administered by WIPO, and the Community Trademark system, administered by OHIM. Since October 2004 Community Trademark applicants and holders have been allowed to apply for international protection of their trademarks through the filing of an international application under the Madrid Protocol. Conversely, holders of international registrations under the Madrid Protocol are entitled to apply for trademark protection under the Community trademark system. The link between the OHIM and the WIPO registration systems allows firms to profit from the advantages of each while reducing costs and simplifying administrative requirements.
On March 31, 2009, the Commission announced new, lower fees and simplified procedures for EU-wide trademark rights, eliminating registration fees and reducing application fees by 40 percent. The new rates entered into force May 1, 2009, and applications for trademarks can be done online. In October 2009 the Commission awarded a contract for a study on the trade mark system in Europe to the Max Planck Institute for Intellectual Property, Competition and Tax Law. The aim of the study is to assess the current state of play of the Community trade mark system and the potential for improvement and future development.
Designs: The EU adopted the Community Designs Regulation, a Regulation introducing a single Community system for the protection of designs, in December 2001. The Regulation provides for two types of design protection, directly applicable in each EU Member State: the Registered Community Design (RCD) and the unregistered Community design. Under the Registered Community Design system, holders of eligible designs can use an inexpensive procedure to register them with OHIM, and will then be granted exclusive rights to use the designs anywhere in the EU for up to twenty-five years. Unregistered Community designs that meet the Regulation’s requirements are automatically protected for three years from the date of disclosure of the design to the public. Protection for any registered Community design was automatically extended to Romania and Bulgaria when those countries acceded to the European Union on January 1, 2007.
In September 2007 the EU acceded to the Geneva Act of the Hague Agreement concerning international registration of industrial designs. This allows EU companies to obtain protection for designs in any country that belongs to the Geneva Act, reducing costs for international protection. The system became operational for businesses in January 2008. In April 2008 OHIM updated the guidelines for renewal of Registered Community Designs. In February 2009 OHIM announced it would accept priority documents that do not include views of designs, such as German registration certificates. The change will help accelerate the registration process, and is in line with the practice in most EU member states.
Patents: After failing to reach agreement during 2010 on a single EU patent, 12 Member States decided at the Competitiveness Council meeting in December 2010 to pursue “enhanced cooperation,” which will allow those Member States to pursue a common patent process that will apply in those countries. The participating states are: Denmark, Estonia, Finland, France, Germany, Lithuania, Luxembourg, The Netherlands, Poland, Slovenia, Sweden and the United Kingdom. EU ministers had been trying to reach a political agreement on setting up a single EU patent to replace the multitude of national patents in force across 27 member states, but several Member States, especially Spain and Italy, remained opposed. The enhanced cooperation process allows nine or more countries to move forward on in a particular area as a last resort if no agreement can be reached by the EU as a whole within a reasonable period. Other Member States can opt to join at any stage before or after enhanced cooperation has been launched. Several steps remain before the plan is adopted, including approval by the European Parliament.
At present, the most effective way to secure a patent across EU national markets is to use the services of the European Patent Office (EPO). EPO offers a one-stop-shop enabling right holders to obtain various national patents using a single application. However, these national patents have to be validated, maintained and litigated separately in each Member State. In September 2008 the EPO and the U.S. Patent and Trademark Office (USPTO) launched the Patent Prosecution Highway, a joint trial initiative leveraging fast-track patent examination procedures already available in both offices to allow applicants to obtain corresponding patents faster and more efficiently. This will permit each office to exploit work already done by the other office and reduce duplication. In addition, the two offices, along with the patent offices of Japan, Korea, and China, announced a joint agreement (IP5) in November 2008 to undertake projects to harmonize the environment for work sharing and eliminate unnecessary work duplication.
Geographical Indications: The United States continues to have concerns about the EU’s system for the protection of Geographical Indications (GIs). In a WTO dispute launched by the United States, a WTO panel found that the EU regulation on food-related GIs was inconsistent with EU obligations under the TRIPS Agreement and the General Agreement on Tariffs and Trade of 1994. In its report, the panel determined that the EU regulation impermissibly discriminated against non-EU products and persons, and agreed with the United States that the EU could not create broad exceptions to trademark rights guaranteed by the TRIPS Agreement. The panel’s report was adopted by the WTO Dispute Settlement Body (DSB) in April 2005. In response to the DSB’s recommendations and rulings, the EU published an amended GI regulation, Council Regulation (EC) 510/06, in March 2006 (amended by Council Regulation (EC) 179/2006 and Commission Regulation 417/2008). The United States continues to have some concerns about this amended regulation, about Council Regulation (EC) 479/08, which relates to wines, and about Commission Regulation (EC) 607/09, which relates inter alia, to GIs and traditional terms of wine sector products.
The EU adopted on 10 December 2010 a “Quality Package Regulation” which includes a proposal for a new 'Agricultural Product Quality Schemes Regulation' which reinforces the scheme for protected designations of origin and geographical indications (PDOs and PGIs); overhauling the traditional specialties guaranteed scheme (TSGs), and lays down a new framework for the development of Optional Quality Terms to provide consumers with information such as 'free range' and 'first cold pressing.' It also includes a proposal to streamline adoption of marketing standards by the Commission, including the power to extend place of farming labeling in accordance with the specificity of each agricultural sector and new guidelines on best practices for voluntary certification schemes and on the labeling of products using geographical indications as ingredients. This legislative proposal was sent to the Council and European Parliament for review and possible amendments and should be adopted by 2012. The United States is carefully monitoring the application of these regulations.
EU International Efforts to expand GI protection: The EU continues to campaign to have its geographical indications protected throughout the world without regard to consumer expectation in individual markets, and to expand the negotiations for a registry of geographical indications beyond wines and spirits to other foodstuffs. This has developed into a major EU priority in the context of the Doha Development Agenda negotiations in the WTO, in which a discussion is ongoing concerning the extension of so-called “additional” GI protection to products in addition to wine and spirits. The U.S. and other WTO members continue to oppose the EU’s proposals to extend “additional” GI protection, noting that the objective of effective protection of such indications can be accomplished through existing GI obligations.
U.S.-EU coordination on IP counterfeiting and piracy: Since the U.S.-EU summit of June 2005, where leaders agreed to more closely cooperate on IPR enforcement, the U.S. and the EU have intensified customs cooperation and border enforcement, strengthened cooperation with and in third countries, and built public-private partnerships and awareness raising activities together. The U.S.-EU action strategy for the enforcement of intellectual property was launched at the US-EU Summit in June 2006. Since then, U.S. and EU officials have regularly met with stakeholders to identify new areas for cooperation including capacity building, joint messaging and coordinated border actions as well as continued U.S.-EU multilateral cooperation toward successful conclusion of the Anti-Counterfeiting Trade Agreement.
On February 22, 2008, the United States and European Union announced the results of Operation Infrastructure, the first joint IPR operation undertaken by the U.S. Customs and Border Protection and the EU. The operation resulted in the seizure of over 360,000 counterfeit integrated circuits and computer network components bearing more than 40 different trademarks. At the September 2009 session of the U.S.-EU IPR Working Group, U.S. and EU Customs officials rolled out a new brochure titled “Protecting Intellectual Property at Our Borders,” and a web kit providing information to rights holders on how to work with Customs officials to obtain enforcement of intellectual property rights in both markets.
TRANSPARENCY OF REGULATORY SYSTEM
The EU is widely recognized as having a generally transparent regulatory regime. The Commission, which has the sole authority to propose EU-level laws and regulations, generally announces an interest in legislating in a certain area, issuing a “green paper” for broad discussion, followed by a “White Paper” with more detail on the proposed measure, and eventually a formal legislative proposal. The Member State Ministers and experts examine and amend these proposals in Council in tandem with European Parliament consideration of them; Council decisions and EP amendments are publically available. Informal working documents are not published, but interested parties usually can get fairly detailed information as these processes unfold. All adopted measures are published in 22 languages in the EU’s Official Journal, which is available on line.
The EU continues to improve transparency and simplify its regulatory system. The EU's Better Regulation policy, adopted in 2005, aims at simplifying and improving existing regulation, to better design new regulation and to reinforce the respect for and the effectiveness of the rules, while respecting the EU proportionality principle. In 2007, the Commission announced its intention to cut administrative burdens of existing EU legislation by 25 percent by 2012, hoping to increase annual GDP by about 1.5 percent, or around €150 billion.
In its 2009 Third Strategic Review of its regulatory simplification process, the Commission noted savings of €30 billion from the program and committed to present 33 new regulation simplification initiatives for the year. In October, 2010, the Commission shifted its focus from Better Regulation to Smart Regulation, a program that preserves the commitment to regulatory simplification, calls for the publishing of roadmaps for all legislative proposals likely to have significant impacts, and calls for Parliament to do more impact assessments on substantive amendments to legislation.
U.S.-EU Regulatory Cooperation
Unnecessary regulatory divergences between the United States and EU are the primary non-tariff barriers to trade. As such, regulatory cooperation to avoid such divergence has intensified significantly since the December 1997 U.S.-EU Summit Agreement on Regulatory Cooperation Principles. We agreed on joint Regulatory Cooperation Guidelines in 2002, and intensified regulatory cooperation in six sectors in the first “Roadmap” in 2002; by 2010 such sectoral regulatory cooperation covered 27 sectors. Much of this work is now subsumed under the High Level Regulatory Cooperation Forum (HLRCF), established in 2005 as a place for regulators to exchange best practices and now co-chaired on the U.S. side by the Administrator of OMB’s Office of Information and Regulatory Affairs (OIRA). The HLRCF has now met eleven times (most recently in December 2010) and reports regularly to the cabinet-level Transatlantic Economic Council (TEC).
Recent key highlights of our bilateral regulatory cooperation include:
At the December, 2010 HLRCF, the U.S. and EU agreed on five principles for regulation and regulatory cooperation: (1) transparency and openness, allowing participation by stakeholders and the public; (2) consideration of costs and benefits; (3) careful analysis of alternatives, including less stringent and more stringent; (4) selection of the least burdensome approach; and (5) use of flexible tools, promoting freedom of choice and free markets.
A decision to explore potential areas of cooperation on labeling of food and tobacco products, including common principles (such as simplicity, clarity, and meaningfulness) and sharing of empirical evidence about costs and benefits and to make substantial progress, including movement toward common test methods on regulations or standards governing product energy efficiency.
Contacts between OIRA and the U.S. Office of Science and Technology Policy (OSTP) with the Commission’s Directorate of Health and Consumer Affairs (DG SANCO) to facilitate an international dialogue on risk analysis led to on-going risk analysis discussions that include representatives from the United States, EU, and Canada. The U.S. and the EU will jointly facilitate the 2nd International Conference on Risk Assessment.
The Consumer Product Safety Commission (CPSC) and DG SANCO continue to deepen cooperation on the safety of toys and children’s products. CPSC and DG SANCO supported a third trilateral with China on public safety in Shanghai in 2010.
At the request of stakeholders, U.S. and EU officials are looking to ways to make our standards on Smart-Grids and electric vehicles more compatible to promote transatlantic growth in these markets.
EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT
The EU Treaty specifically prohibits restrictions on capital movements and payments between the Member States and between the Member States and third countries.
The single market project has spurred efforts to establish EU-wide capital markets. The EU has acted to implement the 1999 Financial Services Action Plan (FSAP) to establish legal frameworks for integrated financial services (banking, equity, bond and insurance) markets within the EU. By the end of 2008, the EU had adopted and almost fully implemented 43 of the 45 measures to increase market and regulatory efficiency and increase coordination among Member State supervisory and regulatory authorities, and has acted to implement the remaining two measures.
FSAP measures include Directives on: Prospectuses (permitting one approved prospectus to be used throughout the EU), Transparency (detailing reporting requirements for listed firms, including adoption of International Accounting Standards), Markets in Financial Instruments (MiFID - providing framework rules for securities exchanges and investment firms), Takeover Bids (to facilitate cross-border takeovers), and Capital Requirements (implementing the rules developed by the Basel Committee of Banking Supervisors (BCBS) - see EU responses to financial crisis).
Markets in Financial Instruments Directive: In November 2007, the EU’s Markets in Financial Instruments Directive (MiFID) came into force. This law seeks to eliminate many barriers to cross-border stock trading by establishing a common framework for European securities markets, increasing competition between market exchanges, raising investor protection and providing investors a broader range of trading venues. It gives EU securities exchanges, multilateral trading facilities and investment firms a “single passport” to operate throughout the EU on the basis of authorization in their home Member States. MiFID is broadly considered a success.
In December 2010, the Commission launched a public consultation on its plans to review MiFID as the Directive itself requires, by end of 2011. According to the current consultation, the review is likely to focus on:
(1) Developments in market structures and practices – How to provide a robust regulatory framework appropriately covering all investment services and activities.
(2) Trade transparency in equity and non-equity markets – How to limit derogations from the current framework and to extend pre- and post-trade transparency requirements to bonds and derivatives.
(3) Consolidation of market data – How to ensure data quality and consistency, to reduce the costs of data and to set up a consolidated tape.
(4) Transparency and oversight in commodity derivative markets – How to improve the transparency and oversight of the commodities markets (position reporting obligations, power for regulators to set position limits).
(5) Investor protection – How to extend MiFID’s investor protection requirements to structured products and to investment service providers.
(6) Reinforcement and convergence of supervisory powers – How to broaden the scope of transaction reporting, and what role to give the European Securities and Markets Authority (ESMA) to ensure appropriate supervision.
Outlook: Actual draft legislation is expected to be proposed around May 2011.
Market Abuse Directive: Connected to the review of MiFID is the revision of the Market Abuse Directive (MAD). The aim of the review (to be carried out in 2011) is to increase market integrity and investor protection. It is likely to extend the scope currently covered by MAD and to strengthen supervisors’ competence to investigate and sanction market abuse. It will also clarify and reinforce the level and the nature of sanctions for market abuse.
A consultation was carried out in June 2010 to seek stakeholders input on how to:
Increase market integrity and investor protection;
Strengthen effective enforcement against market abuse;
Introduce more harmonized standards;
Improve the transparency, supervisory oversight, safety and integrity of derivatives;
- Increase coordination of action among national regulators and reduce the risk of regulatory arbitrage, with ESMA playing a key role in fostering a common approach by regulators as well as in ensuring greater cooperation with other important jurisdictions outside the EU.
Outlook: Draft legislation expected by May 2011.
Accounting equivalence: On December 12, 2008, the European Commission granted equivalence to the Generally Accepted Accounting Principles (GAAPs) of certain third countries (including the U.S.) as from January 2009. As a result, foreign companies listed on EU markets are able to file their financial statements prepared in accordance with those GAAPs. The equivalence decision is due for review at the end of 2011.
Review of the Prospectus and Transparency Directives: In September 2009 the Commission proposed legislation reviewing the Prospectus Directive, in order to increase efficiency and legal clarity in the prospectus regime, to reduce administrative burdens for issuers and intermediaries, and to enhance investor protection. The Prospectus Directive lays down rules governing information that must be available to the public in case a public offer or admission to trading of transferable securities in a regulated market takes place in the EU.
The review was adopted by the European Parliament and the Council in June 2010. It exempts:
Securities offered to fewer than 150 natural or legal persons per Member State, other than qualified investors; and/or
Securities offered to investors acquiring a total consideration of at least €100,000 per investor, for each separate offer; and/or
Security offers whose denomination per unit amounts to at least €100,000; and/or
- Security offers with a total consideration in the EU of less than €100,000, over a period of 12 months.
Outlook: The new rules will be applicable as of 2013.
Solvency II: Solvency II is the new risk-based solvency regime for the EU insurance sector, approved in 2009 and due to come into force in January 2012. It introduces the concepts of group solvency and group supervision. Third-country insurers will be allowed to operate in the EU if their home country regulatory framework is found to be equivalent to the EU’s by a formal Commission decision. Third-country insurers whose home jurisdictions are not found equivalent will likely have to establish a holding company in the EU.
In October 2010, the European Commission (EC) announced that it will include in the first wave of equivalence assessments under Solvency II, the regulatory systems of Bermuda and Switzerland (for Reinsurance, Group solvency and Group supervision), and of Japan (for Reinsurance only). To account for the exclusion of the United States from the first wave of assessments, and even though the Solvency II Directive does not foresee a transitional regime for equivalence, the EC suggested that time-limited transitional measures be developed as secondary legislation, to allow eligible third-countries (including the U.S.) to enjoy the full benefits of equivalence. The eligibility criteria will be specified by the EC in the implementing measures, but will likely require a commitment to converge towards a regime capable of meeting the equivalence criteria at the end of the transitional period.
Outlook: In January 2011, the EC is expected to publish a draft Omnibus II Directive, which will introduce the necessary legal basis to set up the transitional regime for eligible third-countries. The Directive will need to receive approval from the European Parliament and the Council.
Reform of mutual funds: In January 2009 the European Parliament adopted legislation to achieve a less fragmented and more efficient investment fund market in the EU. UCITS IV -- Undertakings for Collective Investment in Transferable Securities -- are investment funds sold under a common set of EU rules for investor protection and cost transparency, and that meet basic requirements on organization, management and oversight of funds. UCITS funds manage approximately €6.4 trillion and account for 11.5% of EU household financial assets. The legislation includes a provision for a management “passport,” which will make it easier and less expensive for investment funds to operate outside their state of origin. Member States are required to implement the legislation by 2011.
In 2011 the EC intends to amend the UCITS IV. The amendment (UCITS V) aims to increase the level of investor protection and to ensure a level playing field for UCITS across Europe. In particular, the Directive is expected to address the issue of depositaries’ responsibilities.
To this end, a consultation has been launched in December 2010 seeking comments, in particular, on the role of depositaries (how to clarify the duties of depositaries, including eligibility and liability) and how they can be effectively supervised in the EU. Other questions seek input on possible new rules on remuneration policies for UCITS managers to limit excessive risk-taking and to ensure that remuneration policies are applied consistently.
Outlook: A Draft directive reviewing the UCITS regime (UCITS V Directive) is expected by Q1/2011.
Sovereign wealth funds: The Commission outlined its approach to Sovereign Wealth Funds (SWFs) in a February 2008 Communication. The EU intends to keep markets open for foreign capital, support multilateral efforts (such as those which have been conducted by the IMF and the OECD), rely on existing laws, respect the EU Treaty, and ensure proportionality and transparency. The EU supported the IMF work stream that produced the Santiago Principles for SWFs in October 2008, and the OECD parallel work stream that adopted, also in October 2008, a framework and guidelines for recipient countries of SWF investment.
Retail Services: The EU has also focused on deepening integration of retail financial services markets, although this has become less immediate as a result of the financial crisis. In May 2007 the Commission issued a Green Paper laying out goals and launching a debate on future EU policy on retail financial services. In November 2007 the Commission released a package of initiatives to modernize the EU single market, including steps to increase consumer choice of banking services, facilitate switching of banking accounts, complete the development of the Single Euro Payments Area (SEPA), and improve transparency of retail investment products. Work on the initiatives, which enjoy broad support from the industry, continues. In November 2009 the SEPA Direct Debit scheme took effect, which allowed consumers to make cross-border direct debits in Euro at the same cost as national direct debits. This had already been the case with credit transfers, ATM cash withdrawals and card payments.
The retail investment market is largely dominated by Packaged Retail Investment Products (PRIP). While they provide retail investors with easy access to financial markets, they can also be complex for investors to understand. Sellers can also face conflicts of interest since they are often remunerated by the product manufacturers rather than directly by the retail investors. To address these issues, the EC launched in November 2010 a consultation seeking feedback on possible legislative changes in product transparency (pre-contractual disclosures) and sales rules.
Outlook: Draft legislation may be published during H1/2011.
In December 2008 the banking industry took up the Commission’s invitation and adopted a set of ‘Common Principles for Bank Account Switching’. According to the Principles, if a consumer wishes to change banks, within the same Member State, the new bank will act as the primary contact point and offer its assistance throughout the switching process. The Principles were applied in each Member State as of November 1, 2009.
Regulatory Responses to the Financial Crisis
In response to the growing impact of the global financial crisis in Europe during Fall 2008, the EC put forward several legislative proposals that go beyond the measures envisaged by the 1999 FSAP, to address what was increasingly perceived as an unacceptable degree of deregulation in the financial sector, particularly in the wake of massive injections of public money to rescue weak financial institutions.
Credit Rating Agencies (CRAs): In November 2009 the Regulation on Credit Rating Agencies entered into force. The Regulation introduces a legally binding authorization and supervision regime, and stipulates that only ratings issued by EU-registered CRAs can be used by EU financial institutions for regulatory purposes. It also addresses conflict of interest issues and introduces certain governance requirements.
For third-country CRAs, the Regulation introduces two mechanisms:
a) Equivalence determination: For systemically relevant CRAs, the ratings of entities established, or financial instruments issued, outside of the EU can be eligible for use in the EU if the CRA’s home jurisdiction is found equivalent to the EU. The Committee of European Securities Regulators (CESR) was tasked with recommending to the Commission which jurisdictions are equivalent. Note: The CESR has been replaced by the European Securities and Markets Authority (ESMA) as of January 1, 2011.
b) Endorsement: An EU-registered CRA may endorse ratings developed by an unregistered affiliate located outside of the EU on entities established, or financial instruments issued, outside of the EU so that they can be eligible for use in the EU. The endorsing CRA must demonstrate to its regulator that the endorsed ratings have been developed following internal standards “at least as stringent as those” required in the EU, that the affiliate is registered and supervised and that there exist supervisory and cooperation agreements between the home and the EU supervisor.
79. In May 2010, CESR completed its assessment of the U.S. regulatory system for CRAs, finding it “broadly equivalent to that of the EU”, but noted several areas where CESR believes the U.S. system does not achieve EU objectives (e.g., disclosure of whether a rating is unsolicited, the types of information included in press releases, how the limitations and attributes of a rating are disclosed, and rating-by-rating disclosure of the “due diligence” carried out by a structured product arranger).
In December 2010, the European Parliament adopted an amendment to the CRA regulation, which had earlier received the backing of EU Member States, to give the new European Securities and Markets Authority (ESMA) direct supervisory power over credit rating agencies operating inside the EU by July 2011. The decision also gives ESMA the power to carry out on-site inspections, impose fines (of up to 20% of an agency's turnover for breaches of the regulation) and requires them to carry out comparisons with hindsight (comparing performance forecasts with a product's actual performance). Increased transparency requirements for structured products, originally proposed by the Commission, were removed from the adopted amendment, but are part of an on-going consultation with which the Commission seeks stakeholder input on the following possible future legislative proposals:
Overreliance: How to indentify measures to reduce overreliance on CRAs, stemming from specific references to credit ratings included in European and national legislation. The Commission is also looking at ways to increase disclosure by issuers of structured finance instruments.
Transparency: Increased transparency requirements for structured products.
Improving sovereign debt ratings: How to improve transparency, monitoring, and methodology in the process of sovereign debt ratings, respecting “the principle that supervisory authorities and any other public authority should not interfere with the content of credit ratings and methodologies”.
Competition: How to increase diversity in the rating sector, where barriers to entry are high. For the Commission, lack of competition could negatively impact ratings quality.
Liability: The need to introduce a civil liability regime for CRAs, to avoid the regulatory arbitrage that could arise from the currently divergent national rules regulating under which conditions civil liability claims by investors against credit rating agencies are possible.
- Conflicts of interest: Possible alternative business models to the "issuer-pays" model, which raises questions of conflict of interest.
Outlook: A Commission decision on U.S. equivalency is likely in 2011. Based on the outcome of the Consultation, the Commission may decide to re-examine certain aspects of the current CRA regulatory framework, and publish draft legislation accordingly.
Deposit Guarantees: In December 2008 the Council and Parliament approved a Commission proposal to raise the minimum threshold for deposit insurance to €100,000 in two steps, and to harmonize the time period for repayment of deposits. As a result, minimum deposit guarantees were raised to €50,000 on June 30, 2009, and the payout period shortened from the current three months to 20 days. Coverage applies to all depositors in all Member States, regardless of whether the member state is a member of the euro area. The threshold was raised to €100,000 on January 1, 2010.
In June 2010, the Commission published draft legislation amending the Directive on Deposit Guarantee Schemes. It proposes that:
Deposit guarantees in all Member States be set to €100,000 for all deposit-taking institutions, even though some Member States currently offer higher levels;
Deposit Guarantee Schemes (DGS) must hold “1.5% of eligible deposits at hand after a transition period of 10 years”;
Borrowing from other DGS in the EU be allowed if necessary;
- Shorten from 20 to seven days the time-lag for receiving funds after the activation of the guarantees.
Outlook: Work in the Council (Hungarian presidency) and in the EP (MEP Peter Skinner, UK – S&D rapporteur) will begin in Q1/2011. Adoption is planned for 2011.
Alternative Investment Fund Managers Directive (AIFMD): In 2008, the European Parliament asked the Commission to enhance regulation of hedge funds and private equity funds. In April 2009 the Commission issued a draft AIFM Directive instituting a legally-binding authorization and supervision regime for all fund managers managing funds with portfolios in excess of €100 million, or €500 million if unleveraged and with no redemption for a five-year period. The Commission proposed a passport approach that would permit all authorized EU AIFM and equivalent third-country AIFMs to market their funds to professional investors anywhere in the EU. It would impose leverage caps and capital requirements on managers and would mandate that only EU-domiciled credit institutions would be eligible to serve as depositories.
In November 2010, the European Parliament and the Council adopted a Directive that will be applicable starting in 2013, and that:
Institutes a legally binding authorization and supervision regime for fund managers, and imposes leverage caps, capital and disclosure requirements on fund managers, who will also have to abide by rules governing depositary liability, valuation and pay;
Introduces a passport for EU AIFMs in 2013;
Introduces a passport for non-EU AIFMs in 2015, subject to a positive recommendation by ESMA based on its review of the functioning of the passport for EU AIFM during 2013-2015. The process can only be blocked by Member States voting by QMV or an absolute majority of the EP. Non-EU AIFMs will have to appoint a legal representative in the EU (choosing a Member State of reference, whose supervisor will authorize the non-EU AIFM to operate in the EU). A cooperation agreement between the third-country supervisor and the supervisor of the MS of reference is required for a passport. The Commission will provide a framework for the cooperation agreements and ESMA will produce implementing guidance.
- Allows national private placement regimes to remain in place until 2018, when ESMA will recommend whether they should be phased out.
Outlook: In 2011 ESMA will carry out technical work to develop the many implementing measures required by AIFMD, as well as a framework for the cooperation agreements between ESMA and third-country jurisdictions.
Legal Certainty in Securities Law Directive: In October 2010 the Commission launched a consultation to prepare the publication of a draft Directive on Securities Law. The aim of the Directive is to simplify the legal environment for book-entry securities. It seeks to harmonize national laws in order to improve the EU-wide legal framework for cross-border transfers of securities.
Outlook: Draft legislation expected by Q1 2011.
Investor Compensation Schemes Directive: In July 2010, the Commission published a review of the Investor Compensation Schemes Directive (ICSD). The review aims to extend the scope of compensation under the Investor-Compensation Schemes (ICSD), and to reduce gaps in the regulatory system and disparities between the protection of clients of investment firms and of bank depositors. The proposal introduces:
Common rules to harmonize the funding of the schemes and their day-to-day operation; and
- A provision for a borrowing mechanism among national schemes (subject to an assessment by ESMA and to the obligation to repay any loan within five years).
Outlook: Member of the European Parliament (MEP) Olle Schmidt (SWE, ALDE) was nominated EP rapporteur. The Hungarian Presidency is expected to begin work in Q1/2011 with the goal of formal adoption in 2011.
Capital Requirements Directives: In July 2010, the European Parliament and the Council adopted the third amendment to the Capital Requirements Directives (CRD III). CRD III introduces the latest technical changes to the capital requirements developed by the Basel Committee on Banking Supervision (BCBS), with an implementation date for the capital requirement for re-securitization and the trading book of July 1, 2011. It also introduces detailed provisions for numerical limits on remuneration.
Outlook: The Committee of European Banking Supervisors (CEBS) is currently working on developing CRDIII implementing measures. The European Banking Authority(EBA) took over the work as of January 1, 2011. A Commission decision will be necessary for the implementing measures to be applicable.
Derivatives: In September 2010 the EC published a draft Directive on OTC derivatives, central counterparties and trade repositories. To increase the safety of derivatives markets through increased transparency and decreased counterparty risk, the proposed legislation requires that:
All trades in the EU be reported to central trade repositories that will have to disclose aggregate positions by asset class.
ESMA oversee trade repositories, and grant/withdraw their registration.
- OTC derivatives be standardized as much as possible. All eligible contracts will have to be cleared through central counterparties (CCPs), subject to stringent conduct of business rules and harmonized organizational and prudential requirements (e.g. internal governance, capital requirements). Ineligible contracts will be subject to higher capital charges.
Outlook: Work by the European Parliament and the Council is at the preliminary stages. The Hungarian Presidency will seek to build consensus amongst Member States during H1/2011. The EP rapporteur, MEP Werner Langen (DE, EPP), plans for adoption by May 2011.
Short-selling/Credit Default Swaps Regulation: In September 2010, the Commission proposed draft legislation to set common EU standards on short selling activities and Credit Default Swaps (CDS) trading, including:
All short sales will have to be identified as such.
Investors must follow a “locate” requirement. In order to make a sale, a short seller must have an arrangement with a third party in which the third party has confirmed that the instrument has been located and reserved.
Investors must disclose to regulators short positions above 0.2% of issued share capital of the company concerned, and must disclose positions publicly when over 0.5%. Reporting requirements to regulators also are proposed for significant net short positions in sovereign bonds.
- ESMA will coordinate actions by national regulators to temporarily restrict or ban short selling, in exceptional circumstances.
Outlook: The EP is discussing a draft report by French Green MEP Pascal Canfin, the adoption of which is expected in February 2011. A Council common position is also expected in Q1/2011, and formal adoption could be achieved in Q3/2011.
Bank capital: Leaders at the October 2009 Pittsburgh G-20 Summit called on regulatory authorities to require improved quantity and quality capital by end-2012 as financial conditions improve. These proposals are in line with U.S. proposals on capital. In September 2010, the BCBS agreed to the Basel III requirements to raise the quality and level of the capital base, to enhance risk capture, to contain excessive leverage and to introduce new liquidity standards for the global banking system. The BCBS Basel III agreement was finally endorsed by G-20 leaders at the November Seoul Summit.
Outlook: During Q1/2011, the Commission is expected to publish the fourth amendment to the Capital Requirements Directive (CRD), the so-called CRDIV. It is expected to implement the principles of the Basel III accord in areas such as: leverage ratio, dynamic provisioning, liquidity, pro-cyclicality/capital buffers, definition of capital, systemically important financial institutions and counterparty credit risks.
Financial Conglomerates Directive: On August 2010, the Commission published draft legislation amending the current Financial Conglomerates Directive (FCD). The revision of the FCD seeks to give national supervisors new powers to better oversee the conglomerates' parent entities. Supervisors would be able to apply banking supervision, insurance supervision and supplementary supervision at the same time and to receive better information at an earlier stage. The main objective of the revision is to correct the unintended consequences of the current rules, and its proposed changes are the following:
- Supervision: Supervisors could apply banking and insurance supervision and supplementary supervision to the conglomerate's parent entity, including if it concerns a holding company. Under the current rules, supervisors have to choose which type of supervision to apply.
- Group risk: Supervisors would be allowed to identify a group as a financial conglomerate and apply supplementary supervision, using risk-based assessments in addition to the current rules by which the balance sheet is determinant.
Waiver of supplementary supervision: Supervisors would be allowed to waive supplementary supervision for a group if it is small (<60bn total assets) and if the supervisor finds the group risks to be negligible.
Outlook: EP rapporteur Stolojan Theodor Dumitru (RO, EPP) plans to have his report adopted by March 2011. The Council agreed to a general approach in November. Negotiations with the EP may start in early 2011with final adoption slated for May 2011.
New Financial Supervisory Architecture
Supervisory authority and enforcement in the fields of banking, securities and insurance remains a Member State competence. However, three EU-wide committees of sectoral financial supervisors were created some years ago to facilitate efficient and comparable rule making throughout the EU. They were composed of Member State supervisors: the Committee of European Bank Supervisors (CEBS); the Committee of European Securities Regulators (CESR); and the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS). Financial market turmoil in the second half of 2008 increased discussion among EU institutions of ways to strengthen mechanisms to coordinate financial supervision across the EU.
In late 2008, the European Commission asked former IMF Director General Jacques de Larosière to review the EU’s financial supervisory architecture and make recommendations for improvement. The “de Larosière” report, published on February 25, 2009, recommended the creation of a European System of Financial Supervisors (ESFS) and a European Systemic Risk Board (ESRB) and served as the basis for legislative proposals by the Commission seeking to reform the European system of financial supervision at macro and micro prudential levels. Legislation adopted in September 2010 created as of January 1, 2011 three new European Supervisory Authorities (ESAs) - the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA), and the European Securities and Markets Authority (ESMA) – as well as the European Systemic Risk Board (ESRB).
European System of Financial Supervisors (ESFS)
The new European Supervisory Authorities replaced the EU “Level 3” Committees (CESR, CEBS, and CEIOPS). While the Level 3 Committees were only consultative bodies, the ESAs will gain limited but real powers to carry out their four primary tasks:
Develop technical standards to establish a single EU rule book. The ESAs will be empowered to develop rules and technical standards. (However, Commission approval will be necessary to make them legally binding.) The ESAs will continue to provide the Commission with expert technical advice, as the Level 3 Committees did. However, while previously the Commission could modify on its own the advice it received from the Level 3 Committees, the new procedure will require Council and EP approval to modify the ESA’s advice. No scrutiny is needed to affirm the ESA’s advice.
Ensure the consistent application of Community rules. In cases of breach of EU law, the ESAs can require national authorities to intervene. In case of refusal of the national supervisor to intervene, the ESAs can directly address individual firms, but only if the breach relates to legislation targeted to firms.
Act in emergency situations. Once the Council declares a banking emergency (after consulting the Commission and the ESRB), the ESAs can take binding decisions to coordinate national supervisory responses, and to require national supervisors to jointly take specific actions to remedy an emergency situation. However, the ESAs’ actions cannot “impinge” on a Member State’s fiscal responsibility. If a Member State believes that is the case, it has three days to notify the ESA that it is challenging its decision, suspending its enforceability. The Council has ten days to decide by simple majority whether to uphold the ESAs' decision. If the Council allows the ten day deadline to lapse without taking action, the ESA's decision is terminated.
- Binding mediation powers: The ESAs will have the power to settle disagreements between national supervisors, arbitrating between them in the areas (to be specified in separate legislation) where national supervisors will be required to cooperate with one another (such as on bank capital, model approval, home/host information sharing, joint inspections). However, ESA decisions as part of binding mediation can be challenged. To do so, a Member State has one month to notify the ESA of its intention, which suspends its enforceability. After notification, the ESA will have one month to amend or maintain its decision. If the ESA maintains its decision, the Council has two months to vote to uphold it, acting by qualified majority voting (QMV). If the Council allows the two month deadline to lapse without taking action, the ESA's decision is terminated.
In addition, the ESAs will have a role (soft powers) in the identification and measurement of systemic risk (in coordination with the ESRB) posed by market participants, and in the protection of consumers. The ESAs will be able to adopt non-binding guidelines and recommendations to which the “comply or explain” principle would apply.
The main decision-making body of the ESAs will be the Board of Supervisors. It will decide by simple majority of its members, and will be composed of: the Chairperson, the head of each national supervisor, and representatives of the Commission, the ESRB, and of each of the other two ESAs (all non-voting, except national supervisors). The Board of Supervisors will name the Chairperson on the basis of a short-list of eligible candidates drawn up by the Commission. The EP will confirm the appointment.
Day-to-day supervision will remain national. The EU may expand the ESAs pan-European reach by including a role for them in future sectoral legislation. The recent proposals to regulate CRAs, OTC derivatives and short-selling do in fact include a role for ESMA in overseeing and authorizing credit rating agencies, trade repositories, and in coordinating national temporary bans of short-selling practices. ESAs will also promote the efficient functioning of Colleges of Supervisors, assess market developments and interface with the ESRB through the collection of information from national authorities and firms.
The main function of the ESRB will be to monitor and collect information relevant to potential threats and risks to financial stability arising from macro-economic developments and the EU financial system. Its tasks will be the following:
Identify and prioritize systemic risks;
Issue warnings where such systemic risks are deemed to be significant;
Issue recommendations for remedial action in response to the risks identified including, where appropriate, for legislative initiatives;
Monitor the follow-up to warnings and recommendations;
- Coordinate with international institutions, as well as the relevant bodies in third countries on matters related to macro-prudential oversight;
Warnings or recommendations may be either of a general or specific nature and can be addressed to the whole EU, to one or more Member States, to one or more of the ESAs, or to one or more national supervisory authorities. They will not cover monetary policy, fiscal policy, or specific financial institutions. Warnings and recommendations may or may not be made public, at the discretion of the ESRB. Its recommendations will not have legal force, but the addressees will have to communicate the actions undertaken in response to them to the Council and the ESRB and provide adequate justification in case of inaction (“comply or explain”). The ESRB will report every six months to the Council and the EP.
Political violence is not unknown in the European Union, but is rare. Such incidents are generally regional in nature, and individual Country Commercial Guides should be consulted for details on problems in specific areas.
The Commission acquired a new competence for corruption policy through the Lisbon Treaty, and is still formulating its strategy for using its new authority. The Commission now has the ability to harmonize criminal law relating to corruption and trafficking in drugs, persons, and weapons across member states. EU Commissioner Cecilia Malmstrom has said that in 2011 she plans to propose an anti-corruption package will include an update of the EU anti-corruption policy, with a follow-up on how Member States use the existing regulations on a national level, and a European reporting mechanism to target and tackle the blind spots in the work already done by Member States. The EU’s Anti-Fraud Office (OLAF) publishes an annual report on its activities which can be found online at the EU’s Anti-Fraud Office website: http://ec.europa.eu/anti_fraud/reports/olaf/2009/en.pdf The report broadly outlines the steps that the EU has taken in terms of protecting its financial interests and addressing fraud and reviews major developments in 2009.
BILATERAL INVESTMENT AGREEMENTS
The EU as a whole does not yet have any traditional bilateral investment treaties (BITs), although virtually all the Member States have extensive networks of such treaties with third countries. The EU "Europe," "Association" and other agreements with preferential trading partners have contained provisions directly addressing treatment of investment, generally providing national treatment after establishment and repatriation of capital and profits.
The adoption in December 2009 of the Lisbon Treaty may change in major respects how the EU treats investment (see Openness to Foreign Investment, above). Since Lisbon makes Foreign Direct Investment an exclusive EU competence, a broad definition of FDI may extend EU authority over much of the subject matter hitherto addressed under member state BITs. This would allow the EU to negotiate BITs, potentially involving the development of an EU model agreement to be applied to future BITs or investment chapters of FTAs. The Commission has further proposed to examine the content of existing bilateral agreements, to determine their consistency with EU law and common commercial policy. Commission officials and several European leaders have, however, stressed that Member State bilateral agreements will remain valid under Lisbon, and that existing BITs will be “grandfathered” until and unless an EU-level agreement is concluded with a country in question. EU leaders also have indicated the EU will move only gradually toward negotiation of BITs, given the time it will take to clarify and define the complex issues involved.
Other regional or multilateral agreements addressing the admission and treatment of investors to which the Community and/or its Member States have adhered include:
a) The OECD codes of liberalization, which provide for non-discrimination and standstill for establishment and capital movements, including foreign direct investment;
b) The Energy Charter Treaty (ECT), which contains a "best efforts" national treatment clause for the making of investments in the energy sector but full protections thereafter; and
c) The GATS, which contains national treatment, market access, and MFN obligations on measures affecting the supply of services, including in relation to the mode of commercial presence.
Since November 2007 the U.S. and the European Commission have held numerous meetings of a formal bilateral investment dialogue to reduce barriers to transatlantic investment and promote open investment regimes globally (see Openness to Foreign Investment above).
OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS
OPIC programs are not available in the EU as a whole, although individual Member States have benefited from such coverage.
Issues such as employment, worker training, and social benefits remain primarily the responsibility of EU Member States. However, the Member States are coordinating ever more closely their efforts to increase employment through macroeconomic policy cooperation, guidelines for action, the exchange of best practices, and programmatic support from various EU programs. The best information regarding conditions in individual countries is available through the labor and social ministries of the Member States.
Helpful information from the EU can be found on the websites for the European Commission’s Directorate-General for Employment and Social Affairs, http://ec.europa.eu/social/home.jsp?langId=en,
and on the Eurostat website
In general, the labor force in EU countries is highly skilled and offers virtually any specialty required. Member States regulate labor-management relations, and employees enjoy strong protection. EU Member States have among the highest rates of ratification and implementation of ILO conventions in the world.
There is a strong tradition of labor unions in most Member States. In many cases, the tradition is stronger than the modern reality. While Nordic Member States (Denmark, Finland, and Sweden) still have high levels of labor union membership, many other large Member States, notably Germany and the United Kingdom, have seen their levels of organization drop significantly to levels around 20-30 percent. French labor union membership, at less than 10 percent of the workforce, is lower than that of the U.S. (where it was 12.3 percent in 2009 according to the Bureau of Labor Statistics).
FOREIGN-TRADE ZONES / FREE TRADE ZONES
EU law provides that Member States may designate parts of the Customs Territory of the Community as free trade zones and free warehouses. Information on free trade zones and free warehouses is contained in Title IV, Chapter Three, of Council Regulation (EEC) no. 2913/92 establishing the Community Customs Code, titled, "Free Zones and Free Warehouses" (Articles 166 through 182).
Article 166 states that free zones and free warehouses are part of the Customs Territory of the Community or premises situated in that territory and separated from the rest of it in which:
a) Community goods are considered, for the purposes of import duties and commercial policy import measures, as not being on Community customs territory, provided they are not released for free circulation or placed under another customs procedure or used or consumed under conditions other than those provided for in customs regulations;
b) Community goods for which such provision is made under Community legislation governing specific fields qualify, by virtue of being placed in a free zone or free warehouse, for measures normally attaching to the export of goods.
Articles 167-182 detail the customs control procedures, how goods are placed in or removed from free zones and free warehouses and their operation.
The use of free trade zones varies across Member States. For example, Germany maintains a number of free ports or free zones within a port that are roughly equivalent to U.S. foreign-trade zones, whereas Belgium has none. A full list of EU free trade zones last updated June 2008 is available at: http://ec.europa.eu/taxation_customs/resources/documents/customs/procedural_aspects/imports/free_zones/list_freezones.pdf.
FOREIGN DIRECT INVESTMENT STATISTICS
According to U.S. statistics (the U.S. Bureau of Economic Analysis), the value of U.S. investment in the Member States of the European Union, on a historical-cost basis as of the end of 2009, was $1.98 trillion, up from $1.63 trillion at the end of 2008. The Netherlands was the largest EU host to U.S. foreign direct investment, with $472 billion, followed by the United Kingdom ($471 billion), Luxembourg ($174 billion), and Ireland ($166 billion).
For virtually all EU Member States, the largest "foreign" investors are in fact other Member States. More statistics on U.S. investment abroad are available at: http://www.bea.gov/international/di1usdbal.htm.
According to the European Commission’s statistics, FDI flows accounted for 2.3% of European GDP in 2009, which is less than 3% witnessed in 2008. The biggest investors in the United States include the United Kingdom at 454 Billion, The Netherlands ($238 Billion), Germany ($218 Billion) then Switzerland and France at $189 Billion each.
DG Internal Market and Services
DG Economic and Financial Affairs
DG Employment and Social Affairs
Office for Harmonization in the Internal Market
EU Anti-Fraud Office
Eurostat – EU Statistical Office
U.S. Bureau of Economic Analysis – Department of Commerce
European Patent Office