INVESTMENT CLIMATE - EUROPEAN UNION

Edited by Prof. G. Mentz, Esq.

The European Union and its Member States provide one of the most open climates for U.S. direct investment in the world, with well-established traditions concerning the rule of law and private property rights, transparent regulatory systems, freedom of capital movements and the like. The treatment of U.S. investment is largely the responsibility of the individual Member States, and prospective investors should refer to specific Country Commercial Guides for details concerning the economic, political and social systems of the country or countries in which they are interested.

The European Union traditionally has had no role in determining the conditions under which third-country investors could establish investments; as such, its main role was to ensure that firms (including those owned or controlled by non-EU nationals) already established in one Member State were not discriminated against by others. In 1993, the EU acquired responsibilities over capital movements and the treatment of new third-country investors. There is thus a possibility that discriminatory measures may arise in specific areas, as the EU proceeds to "harmonize" Member State approaches to third country investors. However, the climate for U.S. investment is expected to remain excellent for the foreseeable future. End Summary.

EU Treaty Provisions Governing Investment, Historical Background: The European Union has perhaps one of the most hospitable climates for U.S. investment in the world. This reflects, in part, the process of European integration. One of the most remarkable, if least noted, aspects of the 1957 Treaty of Rome (now known as the EU Treaty) which established the European Community (now Union) is that it created a near-perfect investment treaty among the countries which form the EU. Under EU Treaty Article 43, EU Member States must permit investors from other Member States to establish and conduct business on a national treatment basis. Investors have the right to transfer capital and earnings freely, and are guaranteed national treatment on expropriation. Finally, 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. This was a remarkable achievement, given that the six original signatories to the treaty had been at war with one another a decade previously.

The 1986 Single European Act further reduced barriers to intra-EU investment, and even created opportunities for companies from one Member State to receive better than national treatment in another. This is most obviously the case in the financial services sector, where, for example, German universal banks can conduct securities business freely in other Member States, even if local banks are not allowed by their licensing authority to do so.

Prior to the 1992 Treaty on European Union, the Community itself had virtually no role in determining the conditions which would affect the entry of investors from third countries into the territories of the Member States. While the Member States were compelled by the Treaty to grant national treatment to investors from other EU countries, they could erect and maintain barriers to investors from non-EU countries, consistent with their international obligations. (Note: the latter include the Treaties of Friendship, Commerce and Navigation (FCNs) 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, as mandated under Article 43 of the EU Treaty.

The EU's ability to regulate Member State treatment of incoming foreign investment increased considerably in 1993 when an EU Treaty revision abolished all restrictions on the movement of capital (including direct investment operations), both between EU Member States and between Member States and third countries (Article 56). However, EU Member State measures in force on December 31, 1993 denying national treatment to third-country investors were grandfathered. The treaty (Article 57) now expressly provides 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 and from third countries." (Once the recently adopted European Constitution will enter into force, the European Parliament will obtain co-decision rights as regards these measures.) There is, therefore, a possibility that discriminatory measures may arise in specific areas as the EU proceeds to "harmonize" Member State approaches to third country investors, but the climate for U.S. investment is expected to remain excellent for the foreseeable future.

In June 1997, the European Commission issued an interpretative Communication clarifying the scope of EU Treaty provisions on capital movements and the right of establishment. It took this initiative because certain Member States had imposed limits on the number of voting shares that investors from other Member States could acquire in privatization operations. The Communication stresses that free movement of capital and freedom of establishment constitute fundamental and directly applicable freedoms established by the EU Treaty. Nationals 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 in a Member State for its own nationals. In April 2001, the Commission reaffirmed the validity of its interpretative Communication on investment.

EU Treaty Articles 43 (establishment) and 56/57 (capital movements) have helped the EU to achieve one of the most hospitable climates for U.S. investment in the world. However, restrictions on foreign direct investment do exist and others have been proposed. 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. However, U.S. firms' right to national treatment in this area was reinforced by the EU's GATS commitments.

After years of discussion, in March 2004, the Council of Ministers finally agreed on a directive on takeover bids, which should enter into force on May 20, 2006. The original proposal intended to ban all national legislation allowing companies to prevent hostile takeovers through the use of defensive measures (i.e. "poison pills" or multiple voting rights). The final compromise makes it optional for Member States and companies to apply a regime that rules out these defensive measures or to opt out of such rules. Parliament debated whether to limit the benefits of the new directive to companies that apply the same provisions, e.g. limited the right of the board to take defensive measures or to mitigate the role of restrictions on share transfers or voting, in a takeover bid. Article 12.3 of the final text is ambiguous as to whether the limitation would apply to non-EU firms, although the preamble of the legislation states that the application of the optional measures is without prejudice to international agreements to which the EC is a party.

Under the 1994 hydrocarbons directive (Directive 94/22/EC), the notion of reciprocity may have been taken further to require "mirror-image" reciprocal treatment, under which an investor may be denied a license to explore for and exploit hydrocarbon resources if its home country does not permit EU investors to engage in activities under circumstances "comparable" to those in the EU. It should be noted, however, that thus far, no U.S.-owned firms have been affected by these reciprocity provisions.

The U.S. and the EU continue to discuss the EU's evolving role with respect to foreign investment and the developments noted above in the OECD, the WTO and elsewhere.

Europe's single currency, the euro, and remaining national EU Member State currencies are freely convertible; and the EU, like the United States, places virtually no restrictions on capital movements. Indeed, 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 12 of the 25 EU Member States (Denmark, Sweden the United Kingdom and the ten new Member States continue to use their national currencies) has shifted currency management to the European Central Bank (ECB) and the EU Council of Ministers. As a result of this move, the Treaty provides for adoption of EU-wide exchange controls, on approval by a qualified majority of the Council.

The European Union does not have the right 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.

With implementation of Economic and Monetary Union on January 1, 1999, political interest in a coordinated tax policy has grown, and tax incentives as a means of competing for investment are under increasing scrutiny. European Union grant and subsidy programs are generally available only for nationals and companies in the EU, but usually on a national treatment basis. Preference may be given to those applicants showing benefits to the local economy. See individual Country Commercial Guides for Member State practices.

The right to private ownership is firmly established in EU law, as well as in the law of the individual Member States. See above concerning regulations with respect to establishment.

Property rights are respected and protected in the EU and its Member States. 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.

Enforcement of Intellectual and Industrial Property Rights: In April 2004, the EU adopted the Directive on the enforcement of intellectual and industrial property rights, such as copyright and related rights, trademarks, designs or patents. The directive requires all Member States to apply effective, dissuasive and proportionate remedies and penalties against those engaged in counterfeiting and piracy and so creates a level playing field for right holders in the EU. There is a right of information allowing judges to order certain persons to reveal the names and addresses of those involved in distributing illegal goods or services, along with details of the quantities and prices involved. Under the Directive, Member States will have to appoint national correspondents to cooperate and exchange information with other Member States and with the Commission. Member states have until April 2006 to implement the directive.

Copyright: In April 2001, the EU adopted a Directive establishing pan-EU rules on copyright and related rights in the information society. 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. The 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. July 2004 the European Commission published a working paper on the EC's legal framework in the field of copyright and related rights. This working paper will frame the debate for possible amendments to European copyright law during 2005.

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. On October 1, 2004 the EC acceded to the World Intellectual Property Organization (WIPO) Madrid Protocol. The accession of the EC to the Madrid Protocol establishes a link between the Madrid Protocol system, administered by WIPO, and the Community Trademark system, administered by OHIM. As of 1 October 2004, Community Trademark applicants and holders are 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 will be entitled to apply for protection of their trademarks under the Community trademark system.

Designs: The EU adopted 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 and the unregistered Community design. Under the registered Community design system, holders of eligible designs can use an inexpensive procedure to register them with the EU's Office for Harmonization in the Internal Market (OHIM), based in Alicante, Spain. They 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 the 10 new EU member states on May 1, 2004.

Patents: It is not yet possible to file for a single EU-wide patent that would be administered and enforced in all EU member states. The most effective way to secure a patent across a range of EU national markets is to use the services of the European Patent Office (EPO). EPO offers a one-stop-shop that enables rights 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.

Geographical Indications: The EU's system for the protection of geographical indications, apparently reflected in Community Regulation 1493/99 for wines and spirits and Regulation 2081/92 for certain agricultural products and foodstuffs, appears to fall short of what is required under the TRIPS Agreement; notably, that system does not appear to be available to other WTO Members on a national treatment or MFN basis. Under the TRIPS Agreement, the EU is obligated to make such protection available to nationals of all WTO Members. In addition, both regulations appear to deprive trademark owners of TRIPS-level ownership rights. U.S. industry has been vocal in raising concerns about the impact of these EU regulations on U.S.-owned trademarks.

For these reasons, in 1999 the United States initiated formal WTO consultations with the EU on Regulation 2081/92. Bilateral discussions continued in 2000 and 2001 and intensified in 2002, following the European Commission's release of a number of proposed amendments to the regulation. While some of the proposed amendments to 2081/92 are intended to address the WTO concerns expressed by the United States, they do not address all of these concerns and, in some instances, raise new concerns. In August 2003, the United States requested the establishment of a WTO dispute settlement panel to consider the WTO-consistency of the EU's geographic indications regime. A final panel report is expected to be released in early 2005.

EU International Efforts to expand GI protection: The EU continues to press forward with its campaign to have geographical indications internationally recognized and to expand the registry of geographical indications beyond wines and spirits to other foodstuffs. This has developed as a major EU priority in the context of the Doha Development Agenda negotiations in the WTO, in which a decision is still pending regarding whether to negotiate rules to extend GI protections beyond wine and spirits. The U.S. and other WTO members continue to oppose the EU's proposals to extend GI protection, noting that the objective of effective protection of such names can be accomplished through existing trademark rules.

The EU regulatory system can be considered generally transparent in that all laws and regulations are published in the Official Journal of the European Communities. However, the process by which regulations (and related technical standards) are developed is not as operationally transparent as U.S. firms are generally accustomed to (such as the U.S. Administrative Procedures Act). The problems for U.S. stakeholders have revolved around access, accountability and redress. In 2002, the Commission released two sets of documents that comprise a "Better Regulation Action Plan." The most important components of the plan include commitments to: more comprehensive consultations with interested stakeholders, including a minimum eight week period for public comments; full impact assessments of proposed legislation/regulation; and consideration of alternatives to traditional regulation. The Better Regulation Action Plan represents a significant step toward increased transparency and potentially more efficient EU-wide regulation.

In December 2003, all three EU legislative bodies (Council, Commission and Parliament) signed an "Inter-Institutional agreement on better lawmaking," which aims to improve coordination between the institutions during a legislative process, and which provides clarification on the use of alternative methods of lawmaking such as co-regulation (by EU and Member States) and self-regulation. The agreement also states that the transposition by Member States of EU laws should never take more than two years. There are still areas, however, where Member State implementation of EU directives is either not consistent or fully effective.

On January 26, 2004, Ireland, The Netherlands, Luxembourg and the U.K issued the Joint Initiative on Regulatory Reform, highlighting the need to improve the EU regulatory framework. The aim is to focus on how best to minimize administrative burdens and costs for Industry due to current and especially upcoming legislation. The European Commission submitted written comments on the initiative, supporting better monitoring of implementation of regulation, incorporation of impact assessments in law-making, simplification of legislation, greater use of review clauses, and the importance of a pro-active competition policy to foster competitiveness of EU's industry. The Commission also underscored the crucial importance of improving better regulation at the national level. The four countries have stressed that this is a long-term project, which "needs to be sustained by all future EU presidencies".

The EU Treaty specifically prohibits restrictions on capital movements and payments between the Member States and between the Member States and third countries. Per Article 59 of the EU Treaty, where movements of capital to or from third countries cause or threaten to cause serious difficulties for the operation of Economic and Monetary Union, the Council may, by qualified majority, impose appropriate limitations on such flows for a period not to exceed six months. The single market project has spurred efforts to establish EU-wide capital markets. In 1999, the EU launched the Financial Services Action Plan (FSAP) to establish legal frameworks for integrated financial services (banking, equity, bond and insurance) markets within the EU. The FSAP aims to increase both market and regulatory efficiency and lead to greater growth and more coordination among Member State supervisory and regulatory authorities. The original target date of adoption of the entire plan was January 1, 2005 and most legislative measures included in the FSAP have been adopted. Examples of legislative measures recently adopted include the Directives on Prospectuses (permitting one approved prospectus to be used throughout the EU), on Transparency (detailing reporting requirements for listed firms), on Market in Financial Instruments (providing framework rules for securities exchanges and investment firms) and on Takeover Bids (to facilitate cross-border takeovers mentioned above), and the EC regulation requiring EU firms listed on EU exchanges to prepare accounts according to International Accounting Standards beginning in financial year 2005.

Other key measures to be adopted include the Directive on Capital Adequacy that implements the revised Basle Accord that sets out revised capital requirements for banks and investment firms (CAD III), a new Legal Framework for Cross-Border Payments in the EU, and a Framework Directive on the solvency system in the insurance sector (Insurance Solvency II).

Currently bank supervision remains with Member State authorities. The Committee of European Bank Supervisors (CEBS), composed of member state supervisors, has been established to ensure consistent implementation of CAD III throughout the EU. Monetary union gives the European Central Bank authority over the European banking system in certain areas, including the issuance of euro currency, banking statistics, a smooth payments system, and advising on banking supervision. In July 1998, the European Central Bank set substantial reserve requirements for banks in EU Member States,

Additional information is available at: http://europa.eu.int/comm/internal_market/en/finances/actionplan/index.htm

Political violence is not unknown in the European Union, but it is, in general, extremely rare. Such incidents are almost always regional in nature, and individual Country Commercial Guides should be consulted for more details on problems in specific regions.

Per EU Treaty Article 280 (5), the EU and the Member States are jointly responsible for the fight against fraud and corruption affecting the EU's financial interests. A detailed overview of EU and Member State achievements in this regard (e.g., legislation protecting the euro against counterfeiting; public procurement legislation introducing a compulsory mechanism for excluding tenderers convicted of fraud/corruption) is provided in the EU's Anti-Fraud Office (OLAF) most recent annual report (year 2003) on the fight against fraud. This report, presented in August 2004, is available online at the EU's Anti-Fraud Office website: http://europa.eu.int/comm/anti_fraud/index_en.html.

The report broadly outlines the developments that the Community has taken in terms of protecting its financial interests and addressing fraud. An overview is given of the major developments in 2003, with emphasis on the structural measures and recovery in the field of direct expenditure.

As of March 10, 2004, all but five EU Member States (Cyprus, Estonia, Latvia, Lithuania and Malta) had ratified the OECD Convention on combating bribery of foreign public officials in international business transactions. The implementing legislation of some countries, however, appears to fall short of the Convention's requirements.

During 2002, the European Commission conveyed to the United States its concern that certain provisions of Bilateral Investment Treaties (BITs) between the United States and Central and Eastern European countries could conflict with EU law following the entry of these countries into an enlarged EU. The United States and EU have engaged in consultations on this issue. The United States has stressed the importance of preserving the treaties and the protections they afford to U.S. investors, but has expressed a willingness to explore ways to meet EU concerns regarding legal consistency. On September 2, 2003, the European Commission endorsed a political Understanding preserving U.S. bilateral investment treaties with eight of the acceding states (Czech Republic, Estonia, Latvia, Lithuania, Poland, the Slovak Republic, Bulgaria and Romania). The Understanding provides for continuing consultations on the issue of EU authority to restrict capital movements in extraordinary circumstances and its relationship to obligations in U.S. agreements with acceding states to permit investment-related funds to be made freely.

The EU does not yet have any bilateral investment treaties in the traditional sense, although virtually all the Member States have extensive networks of such treaties with third countries. However, the EU's "Europe," "Association" and other such agreements with preferential trading partners often contain provisions directly related to the treatment of investment, generally providing at least for establishment, and capital and profit repatriation. In the context of the EU's enlargement negotiations, the U.S. Government has conveyed to the EU its concern that U.S. bilateral investment treaties with accession countries not be adversely affected.

Other regional or multilateral agreements addressing the admission 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; and,

c) the GATS, which contains an MFN obligation on all measures affecting the supply of services, including in relation to the mode of commercial presence.

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 the 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, (www.europa.eu.int/comm/dgs/employment_social/index_en.htm) and on the Eurostat website (www.europa.eu.int/comm/eurostat).

In general, the labor force in EU countries is highly skilled and offers virtually any specialty required. The Member States regulate labor-management relations, and employees enjoy strong protection. The 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 unionism in most Member States. In many cases, the tradition is stronger than the modern reality. While the Nordic Member States (Denmark, Finland, and Sweden) still have high levels of membership in labor unions, many other large Member States, most notably Germany, and the United Kingdom, have seen their levels of organization drop nearly to U.S. levels (about 20-30 percent). French labor union membership, at under 10 percent of the workforce, remains lower than that of the U.S.

European Union 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 from Member State to Member State. 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 was published in the EU's Official Journal No. C345 of December 2, 1999.

According to U.S. statistics (U.S. Bureau of Economic Analysis), the value of U.S. investment in the 15 member stats of the European Union on a historical-cost basis, as of end-2003, was just over USD $844 billion. The United Kingdom was the major EU host to U.S. foreign direct investment, with $272 billion, followed by the Netherlands ($178 billion), Germany ($80 billion), Luxembourg ($66 billion) and Ireland ($55 billion).