Openness to, and Restrictions upon, Foreign Investment
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 stock in the EU member states at just over $2 trillion. This is a result, in part, of the ongoing process of European integration. The European Union now consists of 27 countries covering virtually all the territory of Europe, soon to be 28 with the entry of Croatia in 2013. It is governed by the Treaty on European Union (TEU) and the Treaty on the Functioning of the European Union (TFEU), which collectively constitute the Treaty of Lisbon.
On February 13, 2013 the United States and EU announced their intention to pursue negotiations for a comprehensive Transatlantic Trade and Investment Partnership. Given that the transatlantic economic relationship is already the world’s largest, accounting for half of global economic output, nearly one trillion dollars in goods and services trade, and supporting millions of jobs on both sides of the Atlantic, the goal of such an agreement is to expand further the transatlantic trade and investment partnership, promoting greater growth and supporting more jobs, as well as contributing to the development of global rules that can strengthen the multilateral trading system.
The EU is founded on the “four freedoms” (free movement of capital, labor, goods and persons) within the European Union. Free movement of capital is required by Article 49 TFEU, which requires EU “Member States” to provide national treatment to investors from other Member States regarding the establishment and conduct of business. Any violation of EU law ultimately can be adjudicated by the European Court of Justice (ECJ) in Luxembourg.
Prior to the 1992 Treaty on the European Union (popularly 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 of Liberalization 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 generally accepted interpretation of the revision 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 fair treatment of their own 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 movement 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 of state-owned enterprises. 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 ECJ ruled in three precedent-setting cases in 2002 against so-called “golden shares” – shares that can out-vote other shareholders in certain circumstances – in France, Belgium, and Portugal, triggering several infringement actions by the Commission. The Court subsequently ruled against golden share cases in other Member States.
Lisbon Treaty Impact
The entry into force in December 2009 of the Lisbon Treaty changed EU jurisdiction over direct investment issues in major respects. Article 207 of the Lisbon Treaty now brings foreign direct investment within the scope 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.
In July 2010, the Commission issued a communication aimed at defining a comprehensive EU international investment policy as well as a legislative proposal establishing transitional arrangements for investment agreements between Member States and third countries. The Council and the Parliament reached an agreement in late 2012 on the legislation and the final text with amendments will become law in early 2013 (see: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:351:0040:0046:En:PDF ). Under the new rules, the more than 1,200 BITs concluded by Member States, including some with the United States, are presumed to remain valid under EU law unless subsequently found to be incompatible with the EU’s common commercial policy. One prior example of incompatibility was a 2006 ECJ ruling against several EU member state BITs with the United States on grounds that their free capital transfers provisions were inconsistent with the balance of payments exception in EU law. The United States will monitor the impact of the new legislation on U.S. BITs with the Member States.
U.S.-EU Efforts to Promote Open Investment
In August 2011, the Transatlantic Economic Council (TEC), a U.S.-EU body coordinating economic cooperation, established a High-Level Working Group on Investment, affirming the importance of open investment policies as drivers of global economic growth, both in our bilateral relationship and in our economic engagement with third countries. In April 2012, the United States and the EU, under the auspices of the TEC, announced an agreement on Shared Principles for International Investment, which reaffirmed a commitment to open, transparent, and non-discriminatory international investment policies. (See: http://www.ustr.gov/webfm_send/3337.) The U.S.-EU Investment Working Group continues to meet annually to discuss bilateral investment issues and cooperation with third countries.
Ownership Restrictions and Reciprocity Provisions
TFEU Article 49 (establishment) and 63/64 (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, some 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 Commission determines that the investor's home country denies national treatment to EU service providers. An increasing number of revised EU financial services legislation include equivalency provisions, aimed at assessing if and to what extent the home country legal framework provides comparable safeguards to the EU’s. Equivalency findings generally provide for more liberalized access to European markets, although it varies by sector. In addition, as with the United States, the non-discrimination obligations of international trade agreements (e.g., those in the WTO General Agreement on Trade in Services) do not apply to prudential measures.
In March 2004 the EU adopted a Directive on takeover bids (“Takeover Directive”), which sought to protect shareholders, improve transparency, and create favorable regulatory conditions for takeovers in order to boost corporate restructuring within the EU. The Takeover Directive authorizes Member States to ban corporate defensive measures (e.g., “poison pills” or multiple voting rights) against hostile takeovers. However, a reciprocity provision allows Member States to exempt companies from those restrictions 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 EU 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. In June 2012 the Commission issued a report based on an external study that reviewed the application of the Takeover Directive. The report concluded that most stakeholders were satisfied with the Directive and that it was functioning satisfactorily, although it listed several rules that could use clarification in order to improve legal certainty for the parties concerned and the effective exercise of minority shareholder rights. The June 2012 report can be found here: http://ec.europa.eu/internal_market/company/docs/takeoverbids/COM2012_347_en.pdf.
Energy Sector Liberalization
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. Energy firms that operate within the European market have 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 companies to comply with the same unbundling requirements as EU companies before they are certified to own and/or operate transmission networks in the EU. 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 inform the Commission of their choice of unbundling model and certification has to be carried out with the involvement of the Commission. The Third Package entered into force in March 2011, while the "Third Country Clause" is only applicable from March 2013 onwards. The Commission has also set up a Gas Advisory Council to work with the Russian government and state-owned Gazprom, both of which have extensively criticized the unbundling provisions. In September 2012, the European Commission opened an antitrust investigation into three alleged anti-competitive practices by Gazprom in Central and Eastern European gas markets. First, Gazprom may have divided gas markets by hindering the free flow of gas across Member States. Second, Gazprom may have prevented the diversification of supply of gas. Finally, Gazprom may have imposed unfair prices on its customers by linking the price of gas to oil prices.
Conversion and Transfer Policies
Europe's single currency, the euro, and the remaining national EU Member State currencies are freely convertible. The EU, like the United States, places virtually no restrictions on capital movements. Article 63 TFEU specifically prohibits restrictions on the movement of capital and payments between Member States and between Member States and third countries, although article 64 allows for exceptions in certain circumstances, a fact which formed the basis of the ECJ case referenced in paragraph 8. The adoption of the euro by 17 of the EU Member States has shifted currency management and control of monetary policy in those countries to the European Central Bank (ECB) in Frankfurt, Germany.
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 EU law - which has supremacy over Member State law, can be heard in local courts or addressed directly to the ECJ by a foreign investor with a presence in a Member State. 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 arising under individual bilateral investment treaties (BITs). While the EU is not itself a party to ICSID or other similar arbitration conventions, it has stated its willingness to have investment disputes subject to international arbitration. Regulation No 1219/2012 of the European Parliament and the Council adopted 12 December 2012 (see link in paragraph eight) foresees that if aBIT falls within the scope of that Regulation, the Member State is, under Art 13(c), obliged to "seek the agreement of the Commission before activating any relevant mechanisms for dispute settlement against a third country included in the bilateral investment agreement and shall, where requested by the Commission, activate such mechanisms." The article further states that "those mechanisms shall include consultations with the other party to a bilateral investment agreement and dispute settlement where provided for in the agreement," and that "the Member State and the Commission shall fully cooperate in the conduct of procedures within the relevant mechanisms, which may include, where appropriate, the participation in the relevant procedures by the Commission."
Performance Requirements and Incentives
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 IPR agreements and offer strong IPR protection, including implementation of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (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. Commission studies have shown that the Directive has provided a solid basis for the enforcement of IPR but also led to “very diverging interpretations by Member States and their courts.” As a result, the European Commission has been consulting stakeholders since 2010 in order to evaluate the overall functioning of the civil enforcement system for intellectual property rights and ways in which to improve the legal framework in the EU. The current consultation closes in March 2013.
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. In March 2012 a regulation entrusting the Office for Harmonisation in the Internal Market (OHIM) with the tasks and activities relating to the management of the European Observatory on Counterfeiting and Piracy was adopted. See: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:129:0001:0006:EN:PDF
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 (2006/116/EC) entered into force in January 2007. Despite these directives aimed at harmonizing certain aspects of copyright and related rights in the information society, there currently isn’t a legal instrument specifically addressing the clearing of copyright and related rights for cross-border on-line audiovisual media services. The Commission therefore presented proposals in 2012 to improve the collective management of copyright including by increased transparency and better governance of collecting societies, with the aim of ensuring that collective management evolves and responds to the needs of multi-territorial licensing. See: http://ec.europa.eu/internal_market/copyright/docs/management/com-2012-3722_en.pdf
In September 2011 the EU amended Directive 2006/116/EC regarding the term of protection of copyright and certain related rights. The agreed text will extend the term of copyright protection for performers and record producers from 50 to 70 years and introduce 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, and a so-called 'clean slate' which prevents record producers from making deductions to the royalties they pay to featured performers. The proposal also creates a new claim for session players amounting to 20 percent of record labels' offline and online sales revenue.
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. The United States, Australia, Canada, Korea, Japan, New Zealand, Morocco, and Singapore signed ACTA at a ceremony on October 1, 2011, in Tokyo. The EU and 22 EU Member States signed ACTA on 26 January 2012, also in Tokyo, but the European Parliament did not give its consent and therefore the EU will not be a member of the Agreement for the time being.
Trademarks: Registration of trademarks with the EU 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 Commission acceded to the World Intellectual Property Organization (WIPO) Madrid Protocol. This established a link between the Madrid Protocol system, administered by WIPO, and the CTM system, administered by OHIM. Since October 2004 CTM 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 CTM 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 now be done online. In 2011 more than 105,900 trade mark applications were filed; over 99,000 were filed in 2012. In recognition that stakeholders increasingly demand faster, higher quality, and more streamlined trade mark registration systems which are technologically up-to-date, the European Commission is expected to present proposals to revise both the CTM Regulation and the Trade Mark Directive in the near future.
Designs: The EU adopted the Community Designs Regulation, a Regulation introducing a single EU-wide 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 RCD 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 RCD 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 RCDs. In February 2009 OHIM announced it would accept priority documents that do not include views of designs, such as German registration certificates. The change has helped accelerate the registration process, and is in line with the practice in most EU member states.
Patents: In 2012, the EU formally approved the creation of a first unitary patent covering all EU member states except Spain and Italy. The current system requires patents to be registered separately in individual EU Member States making it a lengthy and costly procedure. Under the new system, companies will need to submit applications to the European Patent Office in Munich. EU Patents will be made available in three languages (English, French, and German) but applications can be made in any EU language and free automated translations are available in 28 European languages for information purposes. There will also be a new the Unified Patent Court replacing the need to defend patents in several Member State courts. The historic decision follows more than four decades of negotiations and deadlocks, and legal objections from Spain and Italy. The two countries have chosen not to join the system but are welcome to join at a later stage. The Unitary Patent should enter into force by January 2014 and the first unitary patents are expected to be granted by April 2014. The European Commission estimates that when fully in place, a unitary patent will cost around 5,000 euros, compared to the current 36,000 euros for coverage in all 27 Member States. Links to new regulations: http://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=OJ:L:2012:361:0001:0008:EN:PDF
Until the implementation of the new Community Patent System, 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 permits each office to reference 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 (GATT) 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, as well as Council Regulation (EC) 479/08, which relates to wines, and 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 GIs (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, new guidelines on best practices for voluntary certification schemes, and labeling of products using GIs as ingredients. This legislative proposal was sent to the Council and European Parliament for review and possible amendments and was adopted on November 21, 2012, and published in the Official Journal L343 on December 14, 2012 as Regulation 1151 of 2012. With this regulation, all different quality schemes were combined into one legal instrument; the approval time for GIs was shortened; and, the comment period on applications was also shortened. 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 GIs protected throughout the world without regard to consumer expectation in individual markets, and to expand the negotiations for a registry of GIs beyond wines and spirits to other foodstuffs. This has developed into a major EU priority in the context of the WTO Doha Development Agenda negotiations, 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: A U.S.-EU Action Strategy for the Enforcement of Intellectual Property was launched at the U.S.-EU Summit of June 2005, where leaders agreed to intensify cooperation on IPR enforcement, customs cooperation, border enforcement; strengthen cooperation with and in third countries; and build public-private partnerships and awareness raising activities together. 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.
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. 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 publicly 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 online.
The EU's Better Regulation policy, adopted in 2005, aims at simplifying and improving existing regulation and at better designing new regulation. In October, 2010, the Commission expanded this through Smart Regulation, which emphasizes three points: the continued importance of evaluating existing legislation and conducting impact assessments for proposed legislation in order to provide evidence and transparency on the benefits and costs of regulatory policy choices; shared responsibility and commitment between the Commission, European Parliament, the Council and Member States for making legislation clearer and more accessible; and facilitating the ability of citizens and stakeholders to engage policy makers on the impact of existing and proposed regulations. See: http://ec.europa.eu/governance/better_regulation/index_en.htm
U.S.-EU Regulatory Cooperation
The U.S and EU have worked together to minimize the impact of unnecessary regulatory divergences since the December 1997 Agreement on Regulatory Cooperation Principles. Much of this work was subsumed under the High Level Regulatory Cooperation Forum (HLRCF), established in 2005 as a place for regulators to exchange best practices. The HLRCF is co-chaired on the U.S. side by the Administrator of OMB’s Office of Information and Regulatory Affairs (OIRA) and on the EU side by the Director General of Enterprise and Industry. The HLRCF reports to the cabinet-level Transatlantic Economic Council (TEC). http://www.state.gov/p/eur/rt/eu/tec/index.htm While the HLRCF is the principal formal tool for broad regulatory cooperation, significant contacts also exist between individual regulators in the U.S. and in EU.
At the November 28, 2011 meeting of the HLRCF, U.S. and EU officials emphasized a continued shared commitment to streamlining regulation, and a joint recognition that improving the compatibility of U.S. and European regulation would lead to economic growth and jobs. Both sides celebrated an agreement to “build bridges” between the different systems for setting standards in the U.S. and EU and expressed optimism that this agreement will result in comparable standards emerging from the different systems. Both sides agreed in principle on the importance of notifying one another of proposed legislation that might impact trade, and committed to formalizing an understanding to provide such notice, notwithstanding fundamental differences in the way regulations and legislation are formulated in the EU and United States.
On February 13, 2013 the United States and EU announced their intention to pursue negotiations for a comprehensive Transatlantic Trade and Investment Partnership. One objective of this effort will be to make substantial progress on reducing unnecessary regulatory costs and non-tariff barriers, which is likely to have a significant impact on U.S.-EU regulatory cooperation efforts.
Efficient Capital Markets and Portfolio Investment
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. 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)).
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 but came under the Commission’s normal review process in 2011.
On October 20, 2011, the Commission issued its proposal for modifying the Markets in Financial Instruments Directive and Regulation (MiFID/MiFIR), which the European Parliament and Council discussed throughout 2012. This proposal implements the G-20 commitment to promote trading of standardized derivatives on exchanges on electronic trading platforms, where appropriate, as well as revised market structure rules, including new rules for trading platforms and high frequency trading. In particular, the MiFID proposal seeks to introduce “organized trading platforms” and central clearing of derivatives trades, end vertical silos between clearing and trading, and establish equivalence findings for jurisdictions outside the EU. Adoption is expected in 2013, possibly in the first half of the year.
Market Abuse Directive: Connected to the review of MiFID is the revision of the Market Abuse Directive (MAD). In October 2011, the Commission presented its legislative proposals reviewing the Market Abuse Regulation (MAR) and the Market Abuse Directive (MAD). The proposals aim to increase market integrity and investor protection. The new MAR seeks to create a single, directly applicable EU-wide rulebook for market abuse enforced by national administrative sanctions. MAD would require all Member States to introduce criminal sanctions for intentional insider dealing and market manipulation. Following the LIBOR scandal in June 2012, the European Commission amended its MAD/R proposal to make the manipulation of benchmarks a criminal offence. Adoption is expected in 2013.
Solvency II: Solvency II is the new risk-based solvency regime for the EU insurance sector, approved in 2009. It was originally due to come into force in January 2013 but has been pushed back one year. 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 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. The Omnibus II Directive, which will introduce the necessary legal basis to set up the transitional regime for eligible third-countries, could be approved by the middle of 2013. Meanwhile, its entry into force has been extended to January 2014, to account for the delay in adoption.
Mutual Fund Reforms: 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 that also meet basic requirements for 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 were required to implement the legislation by 2011.
In July 2012, the EC proposed to amend the UCITS IV. The amendment (UCITS V) aims to bring UCITS in line with the Alternative Investment Fund Managers Directive (AIFMD) as regards depositary functions, remuneration policies and sanctions. Adoption is expected in 2013, ahead of a fully-fledged revision of the UCITS framework (so-called UCITS VI) that could be published in the second half of 2013.
Retail Financial Services: The EU has also focused on deepening integration of retail financial services markets, although this has become less of a priority as a result of the financial crisis. The retail investment market is largely dominated by Packaged Retail Investment Products (PRIP). While these 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 Commission has proposed legislation to introduce changes in product transparency (pre-contractual disclosures) and sales rules. Legislation was proposed in July 2012, and aims to raise standards for advice and to tighten rules on investment funds to enhance their safety. While this does not seem to be a high priority, adoption could still be achieved by end 2013.
Regulatory Responses to the Financial Crisis
In response to the growing impact of the European financial crisis, the Commission put forward several legislative proposals that go beyond the measures envisaged by the 1999 Financial Services Action Plan (FSAP) in order 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. Concerns about the stability of the eurozone also prompted several far-reaching proposals in 2012.
Banking Union: In December 2012, Member States agreed on legislation to create a Single Supervisory Mechanism (SSM) at the European Central Bank. The existence of a single supervisor is the necessary (though not sufficient) prerequisite to allow euro area financial backstops (e.g., the European Stability Mechanism) to be used to directly recapitalize eurozone banks in need. The SSM is part of a wider plan to create a Banking Union that includes a proposal to amend the remit and the powers of the European Banking Authority (EBA) and a roadmap towards future proposals for a European-wide deposit guarantee system and bank resolution authority.
According to the December agreement, the SSM would be operational on March 1, 2014 at the earliest. Banks with more than €30bn in assets or representing 20 percent of the host Member State’s GDP will qualify for direct ECB supervision. Banks with subsidiaries in more than two member states may also be required to fall under ECB supervision (a list of all the banks that will be supervised by the ECB is being prepared). The ECB will be empowered to apply higher capital buffers than required by national authorities (including countercyclical buffers), and apply more stringent measures aimed at addressing systemic or macro-prudential risks at the level of credit institutions.
As of early 2013, work was still ongoing on the proposal to amend the EBA regulation, where the European Parliament as well as the Council must find agreement. Agreement is expected by March 2013.
Crisis management and resolution: In June 2012, the EC unveiled its proposal for a framework for “bank recovery and resolution” that would aim for consistency among member state regimes. The Directive proposes setting up tools for "prevention," "early intervention" and "resolution," with intervention by the authorities becoming more intrusive as the situation deteriorates. Adoption of this directive would provide the EU with a coherent framework for resolving bank crises (which some Member States still lack), and would fulfill the EU’s G-20 commitments in this area.
Under the proposal, national authorities will be required to create resolution funds, which will raise contributions from banks proportionate to their liabilities and risk profiles. National resolution funds will be required to interact and borrow from each other. Existing national deposit guarantee schemes can provide funding for the protection of retail customers, and even be merged with the resolution funds, as long as they are able to repay depositors in case of failure.
Banks would have to draw up recovery plans for individual firms and at group level and resolution authorities would be required to prepare resolution plans for individual firms and at group level. Authorities could require a bank to modify its legal or operational structures to ensure that it can be resolved with the available tools. The Directive requires the adoption of reforms, at national level, to enable the use of tools such as sale of business, bridge bank and asset separation. The most controversial provision is the ability to use bail-out capital to recapitalize a going concern institution.
In the first half of 2013, the EC is expected to unveil a proposal for a common resolution framework covering euro area banks. While initial proposals by the EC envisioned a banking union that would ultimately entail common euro area deposit insurance and resolution and recovery backstops, common deposit insurance no longer appears to be under discussion, with the near-term focus on harmonizing existing national frameworks. Adoption is not expected in 2013.
Credit Rating Agencies: The current Regulation on Credit Rating Agencies (CRAs) entered into force in 2009 and introduced an authorization and supervision regime. For ratings issued by third-country CRAs to be used in the EU for regulatory purposes, the Regulation introduced two mechanisms:
Equivalence: Ratings by non-systemically relevant CRAs established outside of the EU can be used in the EU if the CRA’s home jurisdiction is deemed equivalent and the home jurisdiction supervisor (e.g. SEC) has concluded a cooperation agreement with ESMA. In May 2010, CESR (now ESMA) found the U.S. regulatory system “broadly equivalent to that of the EU.” After entry into force of the U.S. Dodd-Frank Act, the Commission asked ESMA for an additional analysis of the changes it introduced.
Endorsement: An EU-registered CRA may endorse ratings issued by an unregistered affiliate located outside of the EU. The endorsing CRA must demonstrate that the ratings have been developed following internal standards “at least as stringent as” the EU’s, that the affiliate is registered and supervised and that a cooperation agreement between supervisors is in place.
In October 2011, ESMA successfully completed the registration process for DBRS, Fitch Ratings, Moody’s Investors Service, and Standard & Poor’s (S&P) as Credit Rating Agencies. A year later, the Commission found the U.S. regulatory framework for CRAs equivalent to the EU’s. As a consequence, under the second Credit Rating Agencies Regulation (CRA II), U.S.-headquartered CRAs no longer need to have the ratings they produce endorsed by an EU-based affiliate in order for them to be used in Europe.
In December 2012, the European Parliament and the Council agreed on an amendment to the regulation on credit rating agencies (CRA) known as CRA III. The new regulation will enter into force later in 2013, following its publication in the Official Journal, and introduces limitations on the number of sovereign ratings a rating agency can provide in a year as well as a stricter regime for the rating of structured finance products that requires issuers to rotate rating agencies according to a defined calendar. The regulation also introduces a liability regime and seeks to resolve conflicts of interest by establishing rules on ownership of rating agencies and rated entities.
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 (2013 adoption is unlikely). It proposes that:
Alternative Investment Fund Managers Directive (AIFMD): AIFMD will enter into force mid-2013. EU managers will be allowed EU-wide market access on the basis of a passport. Third-country managers will be eligible for this passport in 2015 at the earliest. National private placement regimes will remain in place at least until 2018. ESMA and third-country competent authorities are currently negotiating the required Memoranda of Understanding on supervisory co-operation agreements.
Capital Requirements Directives: On July 20, 2011 the Commission issued its proposal to implement the Basel III framework in a two-document package that includes the fourth amendment to the Capital Requirements Directives (CRD IV) and the first Capital Requirements Regulation (CRR I). The European Parliament’s Economic and Monetary Affairs Committee (ECON) is now reviewing the proposals.
The EU proposal is largely consistent with Basel III with a few notable exceptions, including:
The EC has delayed its planned implementation of the law by January 2013, in keeping with G-20 commitments. Several issues, including a controversial proposal by the European Parliament on remuneration that would cap bonuses at 100 percent of the fixed pay (violating the FSB’s principles for sound remuneration), have prevented the two co-legislators from reaching agreement. Adoption is expected in 2013.
Short-selling/Credit Default Swaps Regulation: On November 1, 2012 the regulation on “Short Selling and certain aspects of credit default swaps (CDS)” entered into force. The law bans “naked sales” of sovereign CDS, as well as naked bond and share sales, unless used to hedge exposures. Investors may continue to buy CDS on sovereign debt only if they own the bond or other assets whose price is correlated to that of the bond, as defined by ESMA and the Commission. National authorities can opt out of protecting the functioning of their sovereign debt markets under certain conditions.
Financial Conglomerates Directive: A recent revision of the Financial Conglomerates Directive (FCD) gives national supervisors new powers to better oversee the conglomerates' parent entities. Supervisors are able to apply banking supervision, insurance supervision and supplementary supervision at the same time and to receive better information at an earlier stage.
New Financial Supervisory Architecture
Supervisory authority and enforcement in the fields of banking, securities and insurance remains a Member State competence. However, 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 gained limited but real powers to carry out their four primary tasks:
In addition, the ESAs 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 are able to adopt non-binding guidelines and recommendations to which the “comply or explain” principle applies.
The main decision-making body of the ESAs is the Board of Supervisors. Decisions are made by a simple majority of its members, which comprise: 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 names the Chairperson on the basis of a short-list of eligible candidates drawn up by the Commission. The European Parliament confirms the appointment.
Day-to-day supervision remains 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 also promote the efficient functioning of the 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 is 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 include the following:
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. The ESRB does 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 do not have legal force, but the addressees are required to communicate the actions undertaken in response to them to the Council and the ESRB and to provide adequate justification in case of inaction (“comply or explain”). The ESRB reports every six months to the Council and the European Parliament.
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 has gained the ability through the Lisbon Treaty to propose EU legislation harmonizing criminal law relating to corruption and trafficking in drugs, persons, and weapons across Member States. The Commission recognized in a 2011 paper that, although the nature and extent of corruption vary, it harms all EU Member States and the EU as a whole. In order to support the implementation of a comprehensive anti-corruption policy across the EU, the Commission has managed since 2011 a reporting mechanism for the periodic assessment of anti-corruption efforts (referred to as the 'EU Anti-Corruption Report') that is used to identify trends and best practices, to make general and tailor-made recommendations for adjusting EU policy on preventing and fighting corruption, to help Member States, civil society or other stakeholders identify shortcomings, and to raise awareness and provide training on anti-corruption. Regarding the protection of EU finances, 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/index_en.htm.
Bilateral Investment Agreements
The EU has not concluded any bilateral investment treaties (BITs) since the Commission gained competence for investment policy with the 2009 adoption of the Lisbon Treaty, 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.
Implementation of the Lisbon Treaty competence will 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 extends EU authority over much of the subject matter hitherto addressed under Member State BITs. The Council has so far granted the Commission authority to negotiate investment chapters in the free trade agreements under negotiation with Canada, India, and Singapore. The Commission has indicated that it does not currently plan to develop a model investment treaty, preferring instead to establish general objectives and principles.
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.
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 EC Directorate-General for Employment and Social Affairs, http://ec.europa.eu/social/home.jsp?langId=en, and on the Eurostat website http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/.
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 generally enjoy strong protection. EU Member States have among the highest rates of ratification and implementation of ILO conventions in the world. Numerous provisions in the Treaty on the Functioning of the European Union (TFEU), EU labor law and policy guidelines aim to strengthen social dialogue and the role of the “social partners” (labor and management organizations) at EU, national, sectoral, local and company levels.
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 these levels drop significantly to around 20-30 percent. French labor union membership, at less than 10 percent of the workforce, is lower than that of the United States.
Foreign-Trade Zones / Free Trade Zones
EU law provides that Member States may designate parts of the “Customs Territory of the Community” (reflecting a pre-EC structure) as “free zones” and free warehouses. The EU considers the free zones to be mainly a service for traders to facilitate trading procedures by allowing fewer customs formalities. 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 August 2012 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 the U.S. investment stock in EU Member States , on a historical-cost basis as of the end of 2011, was $2.1 trillion. The Netherlands was the largest EU host to U.S. foreign direct investment, with $595 billion, followed by the United Kingdom ($549 billion), Luxembourg ($335 billion), and Ireland ($188 billion). More statistics on U.S. investment abroad are available at: http://www.bea.gov/international/di1usdbal.htm. For virtually all EU Member States, the largest "foreign" investors are in fact other Member States.
According to the European Commission’s statistics, FDI flows accounted for 2.3% of European GDP in 2010. The biggest investors in the United States include the United Kingdom at $454 Billion, The Netherlands ($238 Billion), and Germany ($218 Billion). http://epp.eurostat.ec.europa.eu/portal/page/portal/product_details/dataset?p_product_code=TEC00046
DG Internal Market and Services
DG Economic and Financial Affairs
DG Employment and Social Affairs
Office for Harmonization in the Internal Market (trademarks and designs)
EU Anti-Fraud Office
Eurostat – EU Statistical Office
U.S. Bureau of Economic Analysis – Department of Commerce
European Patent Office