The European Crisis and the Transformation of Transnational Governance: Authoritarian Managerialism versus Democratic Governance 9781474201117

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Preface The Agenda and the Contents of this Volume and an Acknowledgement I.

This book concludes—and proceeds with—more than a decade of interdisciplinary research on the legitimacy problématique of European and transnational governance. The project was organised in the larger context of the Collaborative Research Centre ‘Transformations of the State’ at the University of Bremen,1 and directed there by Josef Falke and Christian Joerges. Very close co-operation was established with the European University Institute in Florence where Christian Joerges held the chair for European Economic law until 2007 and also with the Oslo-based RECON project on ‘Reconstituting Democracy in Europe’.2 The focus of the project as it was originally designed was on the tensions between trade liberalisation and social regulation. These tensions were explored both within the European Union and at international level. European regulatory strategies, problems and accomplishments were contrasted with functional equivalents in the trade order of the WTO, the SPS and the TBT Agreements. The volume on Constitutionalism, Multilevel Trade Governance and Social Regulation, edited by Christian Joerges and Ernst-Ulrich Petersmann,3 was the first milestone of these activities. Thereafter, we expanded our research beyond the focus on health, safety and environmental protection into the development of standards of social protection, an expansion that was accompanied by the discovery of economic sociology as pioneered by Karl Polanyi and its integration into our analyses of the dynamics and the political dimensions of transnational markets and their institutional frameworks. The volume on Karl Polanyi: Globalisation and the Potential of Law in Transnational Markets, edited by Christian Joerges and Josef Falke,4 documented this phase of the research. The ambitions of our work extend far beyond the technicalities of trade liberalisation and its context into legal and constitutional theory. Ever since our first 1

Details at: www.sfb597.uni-bremen.de/?SPRACHE=en. Details at: www.reconproject.eu. 3 C Joerges and E-U Petersmann (eds), Constitutionalism, Multilevel Trade Governance and Social Regulation (Oxford-Portland OR, Hart Publishing, 2006), 2nd edn, with modified title: Constitutionalism, Multilevel Trade Governance and International Economic Law (Oxford-Portland OR, Hart Publishing, 2011); see, also, previously C Joerges, I-J Sand and G Teubner, Transnational Governance and Constitutionalism (Oxford-Portland OR, Hart Publishing, 2004). 4 C Joerges and J Falke (eds), Karl Polanyi: Globalisation and the Potential of Law in Transnational Markets (Oxford-Portland OR, Hart Publishing, 2011). 2

vi Preface presentation of the project,5 we have continued in our search for an alternative to the conventional juxtaposition of democratic governance within constitutional states, on the one hand, and the not-so-democratic transnational governance, on the other, with the EU figuring as the superior and ever more legitimate model of governance beyond the state. We first sought to re-conceptualise the precarious legitimacy of European law; rather than understanding the EU as an unfinished democratic project on its way to perfection, we argued that European law could, and, indeed, should, derive its legitimacy from its potential to constrain the parochial and selfish legacy of the sovereign nation state. In particular, constitutional democracies had to become, and, indeed, have become increasingly aware that democratic governance is only conceivable co-operatively. In line with the fundamental democratic principle that those who are affected by public rule should have a say in its formation, we argued that supranational and transnational law should and could derive its legitimacy from the provision of legally-structured fora designed to cope with the external impact of one-sided national policies through the fair resolution of conflicts which the diversity of states and societies is bound to generate. In this conflict-resolving and mediating potential, we argued, lies the inherent democratic vocation of transnational law, which is categorically different from that of nation states. This basic intuition was gradually developed further in two steps. One was an internal (‘three dimensional’) differentiation. With this step, our approach responded to the very general developments of legal systems, namely, the emergence of legal frameworks for regulatory politics and for governance arrangements. The second step concerned the international system. Co-operative problem-solving and fair conflict resolution are certainly more difficult to accomplish outside the well-developed frameworks of EU law in global arenas, but these difficulties in no way militate against its more extensive use. In particular, WTO law lends itself to re-constructions in such perspectives.

II.

When we were preparing the application for the final stage of our project, we assumed that we could dedicate the concluding phase to the further elaboration of our concept of conflicts-law constitutionalism and eventually its comparison with, and defence against, competing projects such as societal constitutionalism and global pluralism. Such academic endeavours, however, seemed no longer particularly attractive after we became aware of the impact of the financial crisis. To be sure, the crisis has, by now, been already with us for half a decade. The proceedings of the 2009 conference on the ‘social embeddedness of transnational

5 C Joerges and C Godt, ‘Free Trade: The Erosion of National and the Birth of Transnational Governance’ in Stephan Leibfried and Michael Zürn (eds), Transformation of the State (Cambridge, Cambridge University Press, 2005) 93–117.

Preface vii markets’, which were published in the above-mentioned volume,6 were sensitive to the sudden topicality and renewed explanatory force of Polanyi’s ‘fictitious commodities’—land, labour and money—as a framework for the analyses of institutional responses to transnational institutional conflict constellations. Since then, the financial crisis has gained such momentum that a conclusion of our project by mainly consolidating our initial ambitions was no longer possible. The contents and structure of the present volume mirror this impact, which is, however, by no means uniform or comprehensive. We observe transformations of paradigmatic dimensions in the character of European rule, the institutionalisation of unprecedented regulatory activities which address Europe’s crisis management directly, and significant, albeit less dramatic, changes in the longestablished regulatory machinery and in European governance practices. Another essential objective of our project, namely, the comparative evaluation of European developments in which we used to assume an avant-garde function of European developments needs to be re-thought. Last, but not least, we have to re-consider self-critically the premises, the ambitions and accomplishments of our conflictslaw approach. This book seeks to respond to all of these challenges.

III.

Sabine Frerichs opens the volume with a prologue on money that responds to the overwhelming, albeit unwelcome, topicality of Polanyi’s third fictitious commodity, and re-constructs the links and tensions between Polanyian perspectives and the general theoretical bases of conflicts-law constitutionalism. The first part of the book pursues the three-fold objective of critique, selfcritique, and re-orientation. Both Christian Joerges and David Schneiderman (in Chapters one and two respectively) re-visit the ‘argument from external effects’, a core premise of both ‘conflicts-law constitutionalism’ and ‘deliberative supranationalism’, its precursor. Can this argument justify the obligations of developing countries to respect the interests of investors in the success of their investments? Does it justify the ‘strict conditionality’ of the rescue(s) measure in the ‘Memoranda of Understanding’ which countries of the eurozone have to sign when they ask for financial support under the European Stability Mechanism? If this were so, the entire machinery of the authoritarian crisis management which Europe has established would seem defensible. We disagree: the ‘argument from external effects’ must not be (ab-)used to justify undemocratic intrusions either into the countries of the European periphery or countries which need foreign investment for their economic and social development. Both authors add, however, that this clarification does not offer positive yardsticks for either Europe’s crisis management or the fairness of co-operative arrangement between developing countries and investors. 6

Note 4 above.

viii Preface Joerges argues in his defence of the premises of the conflicts-law approach as an alternative to supranational constitutionalism that effects of democraticallylegitimated policies beyond nation borders are neither avoidable nor illegitimate per se. But those affected may have good reason to insist that their concerns should be taken into account. Conflict mediation, however, must occur in frameworks which are in line with democratic requirements. External effects of national policies must not be compensated for with the authoritarian methods of executive federalism.7 This defence of the normative premises of the conflicts-law approach notwithstanding, Joerges underlines the need for its re-conceptualisation. The crisis has not only profoundly damaged the legitimacy of European rule, it has also generated new conflict configurations, to which the conflicts-approach should seek answers which foster the return of ‘emergency Europe’ into a constitutional condition. International investment law constitutes an illustrative example for Alexander Somek’s argument that a ‘transnationally corrected representation’ of economic interests ‘infuses into democracy an oligarchic element’.8 David Schneiderman analyses how international investment law reduces the political space of host states ‘on behalf of a global oligarchy of investors’,9 and finds that the argument of transnational effects—that investment law aims at compensating for the lack of representation of foreign investors in host-state political processes—is misused in order to justify a highly asymmetrical outcome, as investors are neither vulnerable nor unaccounted for in political processes. This is even more so in cases of economic crisis. Instead of relying on third-party arbitration marked by secrecy and closure, investment disputes should be settled through deliberative processes based upon the principle of audi alteram partem (‘the right to be heard’) accessible to independent media and therefore in the public sphere. This would enable the investor to be heard but would also recognise national political processes.10 Students of European integration tend to treat international asymmetries and injustices with benign neglect. The parallels with the new intra-Union asymmetries seemed all the more shocking and came unexpectedly as the experience of a dramatic Schmittian moment rather than a new constitutional moment. The two comments by Christian Kreuder-Sonnen and Ming-Sung Kuo focus on the political and legal challenges of the apparent European emergency; Kreuder-Sonnen in primarily analytical and political theory perspectives, Kuo against the background of the post-9/11 debates in the US, and the affinities between the American emergency power regime and the legalisation of European responses to the crisis.

7

C Joerges, Chapter one in this volume (Section III.2). A Somek, ‘The Argument form Transnational Effects I: Representing Outsiders through Freedom of Movements’ (2010)16 European Law Journal 315 et seq, at 342. 9 D Schneiderman, Chapter two in this volume. 10 Ibid. 8

Preface ix IV.

Social Europe is something like the poor relative of the integration project. Historical, but also systematic, accounts deal first with the ‘market’, then with its regulation and governance, and only thereafter with the gradual emergence of a social dimension. We have reversed this order in view of the fact that the impact of the crisis is nowhere more drastic and depressing than in the turn to ‘austerity’ and ‘competitiveness’; the deliberate subordination of social protection and social rights to the exigencies of the ‘financial stability of the euro area as a whole’.11 It is also with respect to the social that the former avant-garde function of the Union has given way to an asocial rigour which can be more effectively exercised in the Union than at international level. The turn to austerity in the present crisis was drastic but, as Florian Rödl and Raphaël Callsen point out (in Chapter three), neither surprising nor without precursors. The roots of social austerity are to be found in the social deficit of the integration project, its asymmetry, and the neo-liberal tilt which the cautious moves towards a ‘more social Europe’ could never reverse. The jurisprudence of the ECJ in Viking, Laval and Rüffert added the weakening of national core institutions of industrial relations. The Maastricht EMU and the Stability Pact deprived the Member States of macro-economic steering potential. Thereafter, the only conceivable response to imbalances in their trade-relations was the devaluing of wages and social entitlements. The present turn to austerity follows these patterns. It seems only logical that the prime targets for an improvement of competitiveness are labour costs and the reduction of social entitlements. Free collectivebargaining systems are directly threatened in all the pertinent Memoranda of Understanding. There is hence not much left of ‘social Europe’ with institutions such as the ‘social dialogue’. However, as Rödl and Callsen argue, it does not seem to be impossible to erect an ultimate legal limit against the de-stabilisation of national systems of collective bargaining by invoking Article 28 EU Charter of Fundamental Rights, even if this remains fraught with considerable difficulties. Kerry Rittich (in Chapter four) highlights parallels with precarious labour conditions in many sectors in the global North and South, which are characterised by the weakening of the bargaining power of trade unions and further worsened by a transfer of economic risks and costs to workers as a response to transnational competition. However, the perception (and defence!) of these developments as functional necessities and dictates of market logics is unwarranted. In her view, the management of the crisis is clearly technocratic, albeit guided by political orientations which are dominated by, and dedicated to, neo-liberal beliefs. This holds true with regard to fiscal and monetary policy and also to labour law reforms. The fiscal policy maxim that ‘debts must be serviced rather than re-structured’ is a political maxim which implies that residual taxpayers have to ‘pay the bill’; the decision 11 Case C-370/12 Pringle v Government of Ireland, Ireland and the Attorney General, eg, para 65 (CJEU).

x Preface to base debt services on ‘expenditure cuts rather than tax increases’ is a further political favour to the wealthy. What seems particularly troublesome in her view is the one-size-fits-all monetary policy under the Maastricht EMU, which prioritises price stability and cannot take the varieties of European capitalism into account, and which, for the time being, does not provide for transfer arrangements which would compensate for the asymmetries.

V.

The focus of our research was upon the tensions between trade liberalisation and social regulation, and the idea of ‘a three dimensional conflicts-law as constitutional form’ was developed as a response to the problems that we have encountered in our theoretical work and case studies. In its ‘first dimension’, the conflicts-law approach deals with ‘horizontal’, ‘vertical’ and ‘diagonal’ conflict constellations both within and beyond the EU. The ‘second dimension’ conflicts law reflects the need for transnational regulatory politics and provides frameworks for the co-operation of national and supranational administrative bodies. Conflicts law of the ‘third dimension’ is concerned with the establishment of transnational cooperative arrangements which build upon the participation of non-governmental actors and epistemic communities. We have retained this analytical frame and the normative commitments in the structuring of the following chapters which will hence first deal with markets (understood as ‘polities’), then with regulatory politics, and thereafter with comitology and new modes of governance. Europe’s recent crisis law has not done away with these institutions, but it has established new regulatory bodies, and assigned new functions to existing ones; but, most importantly, it has extended the intensity of its regulatory activities into fields which were formerly exclusively within the legislative domain of the Member States or beyond the reach of European rule.

V.1 Harm Schepel’s essay (Chapter five) is concerned with the social embeddedness of the economy and the dis-embedding moves of the ECJ’s interpretation of the free movement of capital in the treatment of public corporations, ‘golden shares’ and the establishment of shareholder primacy. This jurisprudence, he argues, is part and parcel of an intellectual and legal project that has ‘disconnected finance from the real economy and substituted “financialism” for capitalism’. It contributes to a structural transformation of the entire economy, where corporations cease to invest in productive activity and instead act as ‘cash machines, taking on huge amounts of debt only to pass the proceeds on to shareholders’, according to a logic which makes ‘no sense outside the stock market itself ’. There is a two-fold lesson to be learned from this analysis. The first is that the scope

Preface xi of this debate must not be restricted to the newly-enacted crisis law and its regulatory frameworks, but must also encompass how the ‘financial’ crisis is not just a crisis of financial and monetary matters, but a reflection of a re-configuration of the relationship between the financial and the ‘real’ economy. The second lesson is that these transformations are brought about through deliberate moves in the legal framework. Financialisation resists legal controls, but this resistance has been produced through law. European integration has generated inter-dependencies which overburden both European law and its political potential. What became apparent in the financial crisis can also be observed with regard to other important projects. Germany’s Energiewende is a case in point. This project cannot be organised hierarchically but requires a multitude of co-ordinative efforts already at national level. The European context increases these challenges again very significantly. Carola Glinski (in Chapter six) analyses different strategies to deal with these tensions and shows how the recent ambitions of the Commission and the judicial efforts to integrate the market for renewable energies further, based upon neo-classical ‘least-cost approaches’, would not only jeopardise national political concerns such as structural development, the promotion of small- and medium-sized producers and the promotion of renewable energies as such, but would, in effect, also reject political solutions at European level. However, in a policy area as sensitive and as highly contentious as energy policy, further harmonisation should be based upon political understanding, instead of the market-promoting activism of the Commission and the CJEU which will not generate a constructive alternative to Europe’s political deficit. Jotte Mulder’s contribution (Chapter seven) is part of a larger project which seeks to synthesise Polanyi’s economic sociology and the conflicts-law approach. Mulder’s understanding of social embeddedness is quite comprehensive. He suggests that independent and self-sustainable rationales for non-economic objectives need to be developed in order to overcome the existing asymmetries and to provide for a new perspective of the social dimension of the EU. His quest that ‘conflicts should be resolved upon the basis of a process of negotiated coordination’, providing for ‘deliberative space that allows the inclusion of broader than managerial, monetary or efficiency based considerations’, is in line with the intuitions of deliberative supranationalism, but opens new perspectives.

V.2 In the parlance of our approach, Chapters eight to twelve deal with the second and the third dimension of conflicts-law constitutionalism. The impact of the financial crisis is sometimes only indirect, but everywhere it is intense. European regulatory agencies which would not copy the American model but chose to adapt it to the European constellation should become the core institutions for the regulatory task(s) that the ‘completion of the internal market’ required.

xii Preface The discrepancy between Giandomenico Majone’s pioneering suggestions12 and current developments are drastic. European regulation is no longer concerned with the ‘sustained and focused control by a public agency over activities, that are valued by a community’.13 Both Deirdre Curtin and Michelle Everson focus, in their analyses of European ‘regulatory’ politics, on the recent transformation of these activities. Curtin’s contribution (Chapter eight) proceeds with her long-term project on European executive power and elaborates how the recent crisis management ‘aggravates a long-standing problem of executive domination in the EU’.14 In her account, the establishment of an autonomous executive layer is to be understood as the cumulative effect of under-specified legal requirements, de-formalised procedures and a steady increase in both the number of decisions to be delivered and the complexity of the tasks to be handled. By now, the executive layer no longer merely side-lines and/or complements the functioning of democraticallylegitimated institutions, but actually replaces them. The shifts of power to the European Council, the ‘least transparent branch’ of Europe’s compound executive, deepens Europe’s steadily-increasing legitimacy gap further. The ‘economic government’ entails discretionary executive decisions and is dominated by a ‘diplomatic paradigm’ which turns parliaments and the general public into structural outsiders. The developments which fostered the rise of the executive power cannot be reversed. But the potential of increased parliamentary involvement, at national as well as at European level, and new modes of accountability exist and could be used. Curtin’s analysis of a transformation of public rule is complemented by Everson’s diagnosis (in Chapter nine) of a structural transformation of the market sphere. Technocratic dominance, Everson argues, is not only a challenge to democratic statehood, but also to the functioning of markets. Whether conceived of as a Hayekian spontaneous order or as micro-economic rational machinery, technocracy cannot replace the rationality of markets or correct their assumed failures. Her generalising observations are substantiated by an illustrative analysis of the European System of Financial Supervision, established in 2010, and the supervision of British insurance industries by the UK Prudential Regulatory Authority. Behavioural economics, presented by its advocates as the philosopher’s new stone, rather than providing reliable guidance, will instead serve to foster the ‘pursuit of market utility in manipulation of industry and consumers alike’. The European Central Bank is, in the perception of many observers, the winner in the struggle for institutional influence, but it is certainly not the frontrunner in the quest for new legitimacy of European governance. Established and expected

12

G Majone, Regulating Europe (London, Routledge, 1996). P Selznick, ‘Focusing Organizational Research on Regulation’ in RG Noll (ed), Regulatory Policy and the Social Sciences (Berkeley CA, University of California Press, 1985) 363–67, at 363. 14 See J Habermas, ‘Bringing the Integration of Citizens into Line with the Integration of States’ (2012) 18 European Law Journal 485, 487. 13

Preface xiii to pursue its stated goal of price stability in a political vacuum, the bank was confronted with ever more socio-economic diversity within the Union and a crisis with asymmetric effects in both the centre and the periphery states, and massive conflicts over distributional conflict among (and within!) the states ‘whose currency is the euro’. ‘With conflicts over re-distributive issues becoming more salient’, Henning Deters observes (in Chapter ten), ‘the chances diminish to argue over these differences in a reasonable and consensus-oriented fashion’ which could be characterised as deliberative in the noble Habermasian sense. The (at least on paper) super-independent Bank is anything but a European independent agency in the Majonian understanding. Majone refers to it as a ‘constitutional monstrosity’,15 and indeed, the bank became involved in (re-)distributive bargaining, the design of policy memoranda, and their implementation. Its internal decision-making can no longer be understood in deliberative terms, but mirrors the controversies over the sharing of financial risks and burdens which the crisis continues to generate.

V.3 The study of the comitology system as it operated in the 1990s has inspired the concept of ‘deliberative supranationalism’, a mode of innovative problem-solving organised by a pluralistically-composed network of experts and administrators, orchestrated by the European Commission, under-legalised but worthy of deeper constitutionalisation—the prime example of the second dimension of conflictslaw constitutionalism. Josef Falke’s contribution (Chapter eleven) is an analysis of the recent legislative changes which concludes that the Lisbon amendments on delegated acts and the reform of the comitology procedure have structurally ‘weakened the conditions that comitology can function as a means of deliberative democracy’. Delegated regulation can now operate in somewhat autopoietic modes, no longer relying on committees, but subjected to political supervision and ex-post control by the European Parliament and the Council (Article 290 TFEU). The importance of these controls is marginal, however. Moreover, it seems unlikely that the ex-post control will allow for political debate on the content of a delegated act. The comitology procedure for implementing acts remains, at least on paper, based upon deliberation-enhancing rules. De facto, the Commission has gained a stronger role. The advisory procedure is informal and cannot ensure accountability on the part of the Commission. The examination procedure, on the other hand, does not function in controversial policy areas. In practice, the vast majority of appeal cases end in the same deadlock as the regular committee procedure,

15 G Majone, Europe as the Would-be World Power: The EU at Fifty (Cambridge, Cambridge University Press, 2010) 34 et seq, 162.

xiv Preface because the appeal committee fails to obtain the qualified majority which is needed for a negative or favourable opinion, which, in turn, again strengthens the position of the Commission. Furthermore, the written procedure does not allow for effective exchange of arguments and makes it difficult for the members of the committee effectively to control the Commission. ‘In sum, [the reforms] have strengthened the position of the Commission and changed the incentives for deliberation’. The authorisation of genetically-modified organisms (GMOs) is the most contested field of European regulatory politics. In her analysis (Chapter twelve), Maria Weimer points to a striking contrast between the legislative ordering and the practices of its implementation. The regulatory framework can be read as a codification of deliberative ‘ideals’. It provides for a separation between risk assessment and risk management, thereby reconciling two potentially conflicting rationalities of risk regulation: scientific and political rationality. Both procedures institutionalise horizontal co-operation, which should ensure the inclusion of different policy goals as well as respect of the principle of precaution. However, the typical problems of risk regulation such as scientific uncertainty, strong economic incentives and market pressure, have provoked controversies and political deadlock, to which the implementation machinery has responded with top-down technocratic decision-making. Weimer re-frames the problem of GMO regulation as one of a precarious co-production between the scientification and the politicisation of the authorisation process. She shows that both processes are mutually accelerative, ultimately leading to a breakdown in deliberation at EU level. This contradicts the assumption expressed by some authors that deliberation is fostered by technocratic ‘behind closed doors’ decision-making. In the GMO case, the top-down imposition of epistemic authority has only increased politicisation, thereby contributing to the de-legitimation of all the EU institutions involved.

VI.

The avant-garde function of the European models of transnational governance can obviously no longer be taken for granted. If the story of Europe as the magician and the globe as its apprentice is no longer plausible, its re-writing will have to consider the advantages of a less structured ordering and a more modest, rather than an ever closer, Union. When contrasting European and international examples in the preceding chapters, we did, in fact, observe such inversions. The studies in Part III of this volume will confirm this impression. Olga Batura explores the deliberative elements of conflict resolution beyond the EU in her study (Chapter thirteen) on the UN Specialised Agency for Information and Communications Technologies (ITU) and contrasts it with the European developments. The ITU originally presented a ‘typical seconddimension arrangement’ in the terms of the conflicts-law approach, driven by the common goal of co-ordinating the technical requirements for the operation

Preface xv of telecommunications services. However, with technological change and its expanding scope, liberalisation, privatisation and the growing concerns of the global South, new distributional conflicts have arisen which challenge the competence and legitimacy of this agency. Batura analyses the efforts of the ITU to internalise these political conflicts and to provide a forum in which ‘technical expertise meets political discourse’ through procedural arrangements that allow for inclusive deliberation and the balancing of all concerns. To be sure, these attempts have not remained unaffected by the liberalising and dis-embedding agenda of the WTO/GATS system, which have also led to adjustments in the ITU approach to the WTO’s liberalising rationale in order to retain its authority vis à vis the WTO dispute settlement mechanism. And yet, expert-driven activities such as information input and exchange, consultancy, risk assessment, monitoring, etc, are forms of interaction with deliberative elements; the impact of supranational or transnational committees and networks seems, to a significant degree, to depend upon the quality of professional practice. Professional practice and the ethos of professions are by no means mere fairytales, Martin Herberg adds (in Chapter fourteen). He distinguishes between two types of professional practice: a quality-oriented, reflective, context sensitive, client-oriented approach committed to the principles of professional integrity, impartiality and self-restraint, on the on the hand, versus a context-insensitive, theory-driven, standardised, quantity- and efficiency-oriented commercialised technocratic type of approach, dominated by a managerial paradigm, on the other. He argues that globalisation ‘in which quantity dominates over quality, in which the standardisation of all products and services becomes a dogma, and in which professional ethics are sacrificed in favour of efficiency’ advances the latter. However, he insists that there are also self-constitutionalising norms and standards of good practice emerging within the professions which could even be regarded as a counter-movement against the dominant neo-liberal and managerial paradigm. Therefore it is important that supra- and transnational governance arrangements are ‘shaped in a way that supports [good] professional practice’.

VII.

What is left of conflicts-law constitutionalism as we have designed it in the course of our research? Is there even a future for this approach? The introductory chapter by Joerges (Chapter one), in its concluding section, explores this potential. The premise is again the hope that technocratic rule will not be able to replace political processes—together with the expectation that the responses to the new conflict configurations which the European crisis and Europe’s crisis management generate will not simply be resignation and despair, but also contestation and political struggle. The survival of the project of conflicts-law constitutionalism will depend on an elaboration of such perspectives. It will also depend on its perception by, and

xvi Preface interaction with, related efforts. The concluding chapters by Joseph Corkin and Karl-Heinz Ladeur (Chapters fifteen and sixteen respectively) as well as Hauke Brunkhorst’s epilogue are encouraging signals. Corkin points to the ambivalences of the ‘argument from external or transnational effects’ and underlines the need to become aware of and understand the precarious balance between the results of (nuanced) national political balancing processes amongst competing national concerns and interests and their (potential) impact upon ‘foreign’ concerns and interests. For Corkin, this balance is all about achieving the ‘delicate and complex task’ of a ‘perfect blend of horizontal and vertical accountabilities’ in order ‘to stem a seemingly inexorable drift towards de-legalisation and de-politicisation’. The second aspect concerns the no less precarious tension between the legitimacy and accountability of governance architectures and their ‘problem-solving efficacy’ related to functional necessities, increased societal complexity, limited knowledge and persistent uncertainty both in day-to-day governance and in cases of crises. In the absence of conflict, the focus of horizontal co-operation is not then on the constitutional legitimacy of the architectures, but simply on their institutionalisation of mutual learning and on their problem-solving capacity; which, of course, changes in cases of conflict. Thus, European or transnational governance arrangements face the challenge of co-ordinating legal difference through mutual recognition, mutual law and mutual learning. How could we talk so often and at such length about the social embeddedness of markets and the economy without substantiating this notion with social norms? Karl-Heinz Ladeur’s contribution fills this deplorable gap in our argument and, by the same token, in our critique of Europe’s authoritarian crisis management. Social norms not only underlie the different national legal systems but are, in fact, instituting the different legal orders. Thus, some conflicts deriving from legal difference can be resolved through (European) law, whilst others cannot be addressed by law—even in fields of law that are already harmonised. The problems relating to the governance of the euro are so highly complex and politicised that it would be an illusion to pretend that a common economic or budgetary policy could be governed by the European Commission or the European Parliament. Consequently, ‘more intense integration requires a paradoxical “diversity management”, [and] it would be better to refine the new version of the conflict-of-laws approach as a tool-box for this task and to accept limits of integration instead of piling up ever more explicit European norms and competencies’. In Ladeur’s opinion, it might ‘turn out to be an even more destructive decision to deepen the political union in order to mitigate the bad consequences of the common currency’. Also, the necessary ‘like-mindedness’ of societal actors for a new move towards ‘constitutionalisation’ of the EU, which is meant to replace the emergency regime and to compensate for (the recent) dis-integrating tendencies, cannot be pre-supposed either. Do our efforts deserve some philosophical blessing? Hardly so, but Brunkhorst’s epilogue does deal with the concerns which we pursue in our defence of

Preface xvii conflicts-law constitutionalism against the European turn to authoritarian managerialism. We differ in our assessment of the difficulties of liberating Europe from this entanglement and also in the democratic credentials of the conflictslaw approach. But there is unity in this diversity. We seem to share the view that unity is not an accomplishment per se and the defence of the euro would be too high a price for the loss of democracy and the destruction of the rule of law. The efforts in the contributions to this book to find ways out of the crisis explore a great variety of options, but nonetheless remain tentative and cautious. We refrain from providing any comprehensive, let alone, harmonising, assessment of their relative merits. However, we do believe our re-conceptualisation of conflicts-law constitutionalism to be an option that deserves to be pursued further, and we can even explain why this is a thorny task for both conceptual and practical reasons: ‘Europe’, and, for that matter, those studying it, find their object and themselves ‘squeezed between the impotence of national politics, the democratic deficit of European policies and the growing mistrust of the markets’.16

VIII.

A Preface without acknowledgments may be possible but would, in our case, be thoroughly inadequate. All of the books cited in note 3 above and all of our articles produced during the long life of the projects mentioned in notes 1–2 above have been edited with great care, patience and understanding of the difficulties which non-native speakers have with the use of his language by Chris Engert. Thousands of pages, countless hours, stressful last-minute submissions, and many other things that money can’t buy: we have every reason to be very grateful. Carola Glinski & Christian Joerges Bremen/Berlin

16 I Krastev, ‘The Political Logic of Disintegration: Seven Lessons from the Soviet Collapse’, CEPS Essay, 9/2012, 1–10, at 1; text available at:www.ceps.eu/book/political-logic-disintegration-sevenlessons-soviet-collapse.

List of Contributors OLGA BATURA University of Bremen, Centre for European Law and Politics (ZERP) Olga Batura is lawyer and research associate at the Bremen TranState Research Centre in a project on ‘Trade Liberalisation and Social Regulation in Transnational Structures’. Batura’s research focuses on European and international economic law and regulation, and telecommunications law. Her recent publication ‘Embedded Transnational Markets for Telecommunications Services?’ in C Joerges and J Falke (eds), Karl Polanyi: Globalisation and the Potential of Law in Transnational Markets, was published in 2011 by Hart Publishing. HAUKE BRUNKHORST University of Flensburg, International Institute of Management and Economic Education Hauke Brunkhorst is Director of the Institute of Sociology and the Department of European Studies at the University of Flensburg and works in the Institute of Philosophy. His research interests are political sociology, social and evolution theory, and law and democracy in the world society. His latest book is Critical Theory of Legal Revolutions—Evolutionary Perspectives (Bloomsbury, 2014). RAPHAËL CALLSEN University of Frankfurt am Main, Cluster of Excellence ‘The Formation of Normative Orders’ Raphaël Callsen is research assistant at the University of Frankfurt am Main in the Cluster of Excellence ‘Normative Orders’. In December 2013, he completed his joint PhD thesis (cotutelle) at the universities of Göttingen and Paris Ouest Nanterre on ‘Overriding Mandatory Provisions and the Public Policy Exception in International Labour Law’. Recent publications: L’influence croissante du droit de l’Union européenne en droit du travail international: l’exemple des lois de police (Université Paris Ouest Nanterre La Défense—Formations Droit Allemand, Collection Allemand Juridique, 2011); Human Rights Abuses in the Contemporary World (ed with R Alleweldt and J Dupendant) (Peter Lang, 2012). JOSEPH CORKIN Middlesex University, School of Law Joseph Corkin is senior lecturer in law at Middlesex University. His PhD research was in the area of EU law and legal and political theory. He researches on

xxiv List of Contributors constitutional and administrative law (UK, European and US), the private role in public governance, risk regulation, food and drug regulation, and corporate social responsibly. He has conducted research for the European Commission and is currently leading a research project for Research Councils UK, in collaboration with Nina Boeger of Bristol University, on Making Europe in their Image: Communities of Expertise and the Shaping of Transnational Governance. He has published and presented widely in all these fields. His recent article ‘Constitutionalism in 3D: Mapping and Legitimating our Lawmaking Underworld’, was published in the European Law Journal in 2013. DEIRDRE CURTIN University of Amsterdam, Centre for European Law and Governance Deirdre Curtin is Professor of European Law at the University of Amsterdam and Director of the Amsterdam Centre of European Law and Governance. Until 2013, she was part-time Professor in European and International Governance at the Utrecht School of Governance. Her research interests are in the area of European institutional law and constitutional law, in particular, on issues relating to democracy and public accountability in Europe. She is the author of Executive Power in the European Union: Law, Practices and the Living Constitution (Oxford University Press, 2009), and (with M Bovens and P’t Hart) The Real World of EU Accountability: What Deficit? (Oxford University Press, 2010). HENNING DETERS University of Bremen, Collaborative Research Center 597 ‘Transformations of the State’ Henning Deters is political scientist and research associate at the Bremen TranState Research Centre in a project on ‘Trade Liberalisation and Social Regulation in Transnational Structures’. His main research interests are European law and politics, environmental and energy politics and policy analysis. His most recent publication, ‘National Constitutional Jurisprudence in a Post-national Europe: The ESM Ruling of the German Federal Constitutional Court and the Disavowal of Conflict’, (2014) 20 European Law Journal 204–18. MICHELLE EVERSON University of London, Birkbeck College Michelle Everson is Professor of European Law at the School of Law, Birkbeck College. She sits on the editorial boards of Law and Critique and the Journal for Socio-Legal Studies and is Vice-Chair of the Academic Board for Social Sciences of the Austrian Academy of Sciences. She has researched widely in the field of European law and has particular interests in the areas of European regulatory law,

List of Contributors xxv European administrative and constitutional law and European citizenship. She is the author of The Making of the EU Constitution: Judges and Lawyers beyond Constitutive Power (with Julia Eisner) (Routledge, 2007) and co-editor (with Marjolein van Asselt and Ellen Vos) of Trade, Health and the Environment: The European Union put to the Test (Earthscan-Inbunden, forthcoming), and (with Cosimo Monda and Ellen Vos) of European Agencies in between Institutions and Member States (Kluwer Law, 2014). JOSEF FALKE University of Bremen, Centre for European Law and Politics (ZERP) Josef Falke is Professor of Law at the University of Bremen, co-director of the Centre of European Law and Politics (ZERP) and project leader in a project on ‘Trade Liberalisation and Social Regulation in Transnational Structures’ at the Bremen TranState Research Centre. His main research interests are European law, technology law, environmental law, labour law, consumer law and sociology of law. His recent publication, Karl Polanyi: Globalisation and the Potential of Law in Transnational Markets (with Christian Joerges), was published in 2011 by Hart Publishing. SABINE FRERICHS University of Helsinki Sabine Frerichs is Assistant Professor at the Faculty of Law and Adjunct Professor in Sociology of Law at the University of Helsinki. She was member of the Finnish Centre of Excellence ‘Foundations of European Law and Polity’ (2008–13) and is currently leading a research project on ‘European Bonds: The Moral Economy of Debt’ (2013–17). In her recent work, she has focused on the ‘economic sociology of law’, which she outlined in her post-doctoral thesis (‘What Constitutes the Market Society? Studies in the Economic Sociology of Law’, University of Bamberg, 2012). CAROLA GLINSKI University of Bremen, Collaborative Research Center 597 ‘Transformations of the State’ Carola Glinski is lawyer and senior researcher at the Bremen TranState Research Centre in a project on ‘Trade Liberalisation and Social Regulation in Transnational Structures’ and at the Centre of European Law and Politics (ZERP) at the University of Bremen. Her research focuses on the legitimacy of European and transnational governance structures, and national, European and international environmental and economic law. Her book Die rechtliche Bedeutung der privaten Regulierung globaler Produktionsstandards was published in 2010 by Nomos Verlag.

xxvi List of Contributors MARTIN HERBERG University of Bremen, Collaborative Research Center 597 ‘Transformations of the State’ Martin Herberg is sociologist and senior researcher at the Bremen TranState Research Centre in a project on ‘Transnational Regulation and the Constitutional State’. Herberg’s research interests are sociology of law, sociology of organisations, global governance and environment. He is the author of Globalisierung und private Selbstregulierung: Umweltschutz in multinationalen Unternehmen (Campus Verlag, 2007), and co-editor (with Gerd Winter and Olaf Dilling) of Responsible Business: Self-Governance and Law in Transnational Economic Transactions (Hart Publishing, 2008) and Transnational Administrative Rule-Making: Performance, Legal Effects, and Legitimation (Hart Publishing, 2011). CHRISTIAN JOERGES University of Bremen, Collaborative Research Center 597 ‘Transformations of the State’, and the Hertie School of Governance, Berlin Christian Joerges is a part-time Professor of Law and Society at the Hertie School of Governance (Berlin), a Research Professor at the Law Faculty of Bremen University and Co-Director of the Centre of European Law and Politics (ZERP). Until 2007, he held the chair for European Economic Law at the European University Institute, Florence. He has published extensively on the Europeanisation of private and economic law, transnational risk regulation and governance structures. His Darker Legacies of Law in Europe (ed with Navraj S Ghaleigh, 2003) received 28 reviews. CHRISTIAN KREUDER-SONNEN WZB Berlin Social Science Center and Berlin Graduate School for Transnational Studies Christian Kreuder-Sonnen is Research Associate at the WZB Berlin Social Science Center (Research Unit Global Governance) and a PhD candidate at the Berlin Graduate School for Transnational Studies (BTS). Generally interested in the changing role of international institutions in global governance, his dissertation critically analyses the increasing political authority of international organisations from a constitutionalist perspective. He is author of Der Globale Ausnahmezustand: Carl Schmitt und die Anti-Terror-Politik des UN-Sicherheitsrates (Nomos Verlag, 2012). MING-SUNG KUO University of Warwick, School of Law Ming-Sung Kuo is assistant professor of law at the University of Warwick. He researches in the areas of constitutional and legal theory, comparative constitutional law, administrative law and regulatory theory, and global governance. His publications have appeared in the leading law journals in his fields, including

List of Contributors xxvii Modern Law Review, International Journal of Constitutional Law, European Journal of International Law, Ratio Juris, New York University Journal of International Law and Politics, and Oxford Journal of Legal Studies. He earned his doctorate from Yale Law School and held post-doctoral fellowships in several institutions, including a Max Weber Fellowship at the European University Institute in Florence, Italy. KARL-HEINZ LADEUR University of Hamburg Karl-Heinz Ladeur is Professor (Emeritus) at the Faculty of Law in Hamburg. In 2011, he was awarded an honorary doctorate from the University Freiburg im Üechtland. Ladeur’s research areas and interests are theory of law, public law with a focus on national, European and global administrative law, media and environmental law. He has published widely in all these fields. Recent publications include: ‘The Significance of General Administrative Law for European Administrative Law’ in Conflict of Laws and Laws of Conflict in Europe and Beyond, ed by Rainer Nickel (Intersentia, 2010) and Public Governance in the Age of Globalization (ed) (Ashgate Publishing, 2004). JOTTE MULDER European University Institute Florence, Law Department Jotte Mulder is PhD candidate at the European University Institute. His PhD research is concerned with the discursive constructions that are adopted within the dominating EU governance mechanisms, and how these fields may structurally limit and dis-embed the means through which certain aspects of ‘non-market’ objectives can manifest within the EU legal framework, thereby inhibiting the potential of a social purpose for the EU as foreseen in the Treaty of Lisbon. He is a co-editor of the EU Competition Law Handbook (Sweet and Maxwell, 2013). His recent publications include: ‘A New Chapter in the European Court of Justice Gambling Saga: A Stacked Deck?’ in Legal Issues of Economic Integration (2011). KERRY RITTICH University of Toronto, Faculty of Law Kerry Rittich is Professor at the Faculty of Law, the School of Public Policy and Governance and the Women and Gender Studies Institute at the University of Toronto. Her research interests are in the fields of critical legal theory, feminist analysis of law, labour law, law and globalisation, and law and international development where she has published widely. Among her publications are Labor Law Beyond Borders: ADR and the Internationalization of Labor Dispute Resolution (Kluwer Law International, 2003), and ‘The Future of Law and Development: Second Generation Reforms and the Incorporation of the Social’ in The New Law and Economic Development: A Critical Appraisal, ed by David Trubeck and Alvaro Santos (Cambridge University Press, 2006).

xxviii List of Contributors FLORIAN RÖDL University of Frankfurt am Main, Cluster of Excellence ‘The Formation of Normative Orders’ Florian Rödl works as project director at the Cluster of Excellence ‘The Formation of Normative Orders’ at the Goethe University Frankfurt am Main in a project on ‘The Change in Transnational Labour and Economic Law’. His research interests are private law theory, post-national constitutional theory, international private law, and labour relations in Europe. His most recent publication, ‘National Constitutional Jurisprudence in a Post-national Europe: The European Stability Mechanism, the German Federal Constitutional Court, and the Disavowal of Conflict’, is forthcoming in the European Law Journal. HARM SCHEPEL University of Kent Harm Schepel is Professor of Economic Law at Kent Law School and Director of Law Programmes at the Brussels School of International Studies, University of Kent. Schepel is interested in the legal institutionalisation of capitalism on different levels of governance. He is the author of The Constitution of Private Governance (Hart Publishing, 2005) and (with Wolf Sauter) of State and Market in European Law (Cambridge University Press, 2009). He sits on the Board of Editors of the European Law Journal. DAVID SCHNEIDERMAN University of Toronto, Faculty of Law David Schneiderman is Professor of Law and Political Science at the Faculty of Law at the University of Toronto. He has authored numerous articles and books on Canadian federalism, the Charter of Rights, Canadian constitutional history, and constitutionalism and globalisation. His recent book, Constitutionalizing Economic Globalization: Investment Rules and Democracy’s Promise, was published 2008 by Cambridge University Press. Schneiderman is founding editor of the quarterly Constitutional Forum Constitutionnel and founding editor-in-chief of the journal Review of Constitutional Studies. MARIA WEIMER University of Amsterdam, Amsterdam Centre for European Law and Governance Maria Weimer is Assistant Professor at the Amsterdam Centre for European Law and Governance. Her research focuses on EU law and governance, risk regulation, WTO law and global governance. Her most recent work is A Crisis of Executive Managerialism in the European Union—No Alternative? (with Christian Joerges) in Gráinne de Búrca, Claire Kilpatrick and Joanne Scott (eds), Critical Legal Perspectives on Global Governance: Liber Amicorum David M Trubek (Hart Publishing, 2013).

List of Abbreviations AG APA AUMF BCBS BIT BSE BTS CCFA CCPR CEO CFPS CJEU CLC COREPER DG EBA EC ECB ECHR ECJ ECtHR EEA EEAS EEC EFSA EFSF EFSM EIOPA EIP EMU EP EPEC ESA ESC ESFS ESM ESMA ESRB EU

Advocate General Administrative Procedure Act Authorization for the Use of Military Force Basel Committee on Banking Supervision Bilateral Investment Treaty Bovine Spongiform Encephalopathy (‘Mad Cow Disease’) Binding Technical Standards Codex Committee on Food Additives Codex Committee on Pesticide Residues Chief Executive Officer Common Foreign and Security Policy Court of Justice of the European Union Conflicts-Law Constitutionalism Committee of Permanent Representatives Directorate General Euro Banking Association European Community European Central Bank European Convention on Human Rights European Court of Justice European Court of Human Rights European Economic Area European External Action Service European Economic Community European Food Safety Authority European Financial Stability Facility European Financial Stabilisation Mechanism European Insurance and Occupational Pensions Authority Excessive Imbalances Procedure European Monetary Union European Parliament European Policy Evaluation Consortium European Supervisory Authority European Social Charter European System of Financial Supervision European Stability Mechanism European Securities and Market Authority European Systemic Risk Board European Union

xxx List of Abbreviations EUCFR FCA FCC GAL GATS GDP GFCC GIIPS GMO ICANN ICSID ICTs IEC ILC ILO IMF infoDev IO IPO IR ISO ITU ITU-D ITU-R ITU-T JMPR LTRO MoU MU NAFTA NCB NGO NSA OECD OMC OMT PAC PRA PSC QE QRMV RPS SME

EU Charter of Fundamental Rights/Charter of Fundamental Rights of the European Union Financial Conduct Authority German Federal Constitutional Court Global Administrative Law General Agreement on Trade in Services Gross National Product German Federal Constitutional Court Greece, Ireland, Italy, Portugal and Spain Genetically-Modified Organism Internet Corporation for Assigned Names and Numbers International Center for Settlement of Investment Disputes Information and Communication Technologies International Electrotechnical Commission International Law Commission International Labour Organization International Monetary Fund Information for Development Programme of the World Bank International Organisation Initial Public Offering International Relations International Organization for Standardization International Telecommunication Union ITU Telecommunication Development Sector ITU Radiocommunication Sector ITU Telecommunication Standardisation Sector Joint Meeting on Pesticide Residues Longer-term Re-financing Operation Memorandum of Understanding Monetary Union North American Free Trade Agreement National Central Bank Non-Governmental Organisation National Supervisory Authority Organisation for Economic Co-operation and Development Open Method of Co-ordination Outright Monetary Transactions Political Action Committee Prudential Regulatory Authority Political and Security Committee Quantitative Easing Qualified Reversed Majority Voting Regulatory Procedure with Scrutiny Small- and Medium-sized Enterprise

List of Abbreviations xxxi SMP SPS SSM TBT TEU TFEU TFTP TSCG UN UNCTAD UNDP UNEP UNSC US/USA USD VaR WHO WSC WSIS WTO

Securities Market Programme Sanitary and Phytosanitary Measures Agreement Single Supervisory Mechanism Technical Barriers to Trade Agreement Treaty on European Union Treaty on the Functioning of the European Union Terrorist Finance Tracking Programme Treaty on Stability, Co-ordination and Governance United Nations United Nations Conference on Trade and Development United Nations Development Programme United Nations Environment Programme United Nations Security Council United States of America United States Dollars Value-at-Risk World Health Organization World Standards Cooperation World Summit on the Information Society World Trade Organization

Prologue Money Matters: The Heads and Tails of Conflicts-Law Constitutionalism SABINE FRERICHS HELSINKI

I. INTRODUCTION

I

S THE EURO crisis the result of ‘democracy failures’ of the nation-states in the eurozone?1 Are the new modes of economic governance laid down in the crisis therefore justified? Christian Joerges defends the conflicts-law approach against a ‘neo-liberal’ reading of the ‘argument from external effects’,2 or what has been referred to as ‘a regulatory-competition-enhancing view of transnational constitutional law’.3 In economics, negative externalities are connected with market failure, which results from insufficiencies of the price mechanism. If the market price of a commodity does not fully reflect the social costs of its production, these are externalised. The same can be said about political decision-making at the expense of neighbouring countries, which creates ‘democratic externalities’ that can only be cured by ‘extending the sphere of democratic participation’ beyond national borders.4 A more sophisticated problem is addressed with the dilemma between ‘input’ and ‘output’ legitimacy—political autonomy and functional necessity—across different levels of governance.5 This is what the postnational constellation is about, for which the European experiment offers plenty of material.

1 C Joerges, ‘Conflicts-Law Constitutionalism: Ambitions and Problems’ in M Cremona, P Hilpold, N Lavranos, S Staiger Schneider and AR Ziegler (eds), Reflections on the Constitutionalisation of International Economic Law: Liber amicorum for Ernst-Ulrich Petersmann (Leiden, Brill, 2014) 111–137, at 112. 2 Ibid, 114. 3 A Somek, ‘The Argument from Transnational Effects I: Representing Outsiders through Freedom of Movement’ (2010) 16 European Law Journal 315–44, at 331. 4 A Somek, ‘The Argument from Transnational Effects II: Establishing Transnational Democracy’ (2010) 16 European Law Journal 375–94, at 377. 5 FW Scharpf, ‘Monetary Union, Fiscal Crisis and the Preemption of Democracy’, LEQS Discussion Paper No 36/2011, at 1–5.

2 Sabine Frerichs The European Monetary Union (EMU) is a perfect starting-point to study vertical, horizontal, and diagonal conflicts.6 Likewise, the European System of Financial Supervision (ESFS) offers a great example of regulatory politics based on co-operation between European Union and national agencies.7 Going beyond Europe, the accords of the Basel Committee on Banking Supervision (BCBS) are a paradigm case of transnational governance arrangements which involve selfregulation by private actors.8 All three—EMU, ESFS and BCBS—are instances of law, regulation, and governance in the post-national constellation, which is at the centre of the conflicts-law approach. But are they justified? Economics is preoccupied with the efficiency of institutional settings, provided that everything to be considered is given a price, ie ‘monetarised’. But what about money itself, the regulation of which is at stake in the above settings? What is market failure, what is democracy failure with regard to this ‘fictitious commodity’?9 What is the market price of money, what are its social costs? Only when we know what the regulation of money is meant to achieve—its commodification or de-commodification—can we start arguing about externalities. In such ‘constitutional’ matters, the question of legitimacy precedes the question of efficiency. In the following, I want to unpack the money commodity in as much as that seems necessary to understand its material force in contemporary conflict constellations—and its effects on democracy.

II. BETWEEN FACTS AND NORMS: LEGAL THEORY AND POLITICAL ECONOMY INTERTWINED ‘Conflicts-law constitutionalism, as we immodestly claim, provides an adaptation of the discourse theory of law to the postnational constellation’.10

The discourse theory of law is intimately connected with the name of Jürgen Habermas. In Between Facts and Norms, Habermas spells out the tensions between ‘facticity’ and ‘validity’ that constitute the law, one of which is ‘the familiar tension

6 C Joerges, ‘Europe’s Economic Constitution in Crisis and the Emergence of a New Constitutional Constellation’, ZenTra Working Papers in Transnational Studies No 06/2012 (revised edition Sept 2013). 7 M Everson, ‘A Technology of Expertise: EU Financial Services Agencies’, LEQS Discussion Paper No 49/2012. 8 S Picciotto, ‘Dis-embedding and Regulation: The Paradox of International Finance’ in C Joerges and J Falke (eds), Karl Polanyi: Globalisation and the Potential of Law in Transnational Markets (Oxford-Portland OR, Hart Publishing, 2011) 157–79. 9 K Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (Boston MA, The Beacon Press, [1944] 1957) ch 6. 10 C Joerges, ‘Legitimacy without Democracy in the EU? Perspectives on the Constitutionalization of Europe through Law’ in M Maduro, K Tuori and S Sankari (eds), Transnational Law: Rethinking European Law and Legal Thinking (Cambridge, Cambridge University Press, 2014), 248–268, at 251.

Money Matters: The Heads and Tails of CLC 3 between norm and reality’.11 To explain this, he distinguishes between social integration and systems integration: ‘Modern societies are integrated not only socially through values, norms, and mutual understanding, but also systemically through markets and the administrative use of power’.12 Social integration draws on the means of communicative action, which involves the minds of the participants, whereas systems integration is linked with the steering media of money and power, which ultimately work behind participants’ backs.13 And the law? According to Habermas, ‘modern law is linked with all three resources of integration’.14 It is thus in the position to ‘mediate between facts and norms’.15 What follows from this intertwinement of social and systems integration in the law, and the duality of insider and outsider perspectives on its social function, is that a meaningful theory of law has to combine normative and empirical analysis. This is one of the cornerstones of Habermas’ ‘re-constructive approach’,16 which combines insights of ‘the sociology of law and the philosophy of justice’.17 The discourse theory of law entails the promise that law can function as a ‘transformer’ which makes the normative communication of the life world understood (and applicable) in the world of systems.18 At the same time, it exposes—and is itself exposed to—the ‘functional imperatives of the market economy and bureaucratic administration’19 which always threaten to undermine law’s ‘normative presuppositions’.20 Conflicts-law constitutionalism specifies the re-constructive approach for the post-national constellation, focusing on markets and bureaucracy, money and power. The paradigm case for this venture, which combines (critical) legal theory with (critical) political economy, is: Europe. In normative terms, the conflicts-law approach is considered ‘as the proper constitutional form of law-mediated transnational democratic governance; as a democratic perspective which is not dependent on the establishment of a European state or a world republic’.21 In empirical terms, Joerges resorts to ‘Polanyi’s economic sociology … as a sociological basis of

11 J Habermas, Between Facts and Norms: Contributions to a Discourse Theory of Law and Democracy (Cambridge MA, The MIT Press, 1996) 39. 12 Ibid, 39. 13 Ibid, 39. 14 Ibid, 40. 15 As already proclaimed on the very first page: ‘Law as a category of social mediation between facts and norms’; Habermas, n 11 above, 1. 16 As specified for the ‘external relation between facticity and validity’; Habermas, n 11 above, 39. 17 Ibid, 7. 18 Ibid, 56 and 81. 19 Ibid, 42. 20 Ibid, 34. 21 C Joerges, ‘The Idea of a Three-dimensional Conflicts Law as Constitutional Form’ in C Joerges and EU Petersmann (eds), Constitutionalism, Multilevel Trade Governance and International Economic Law, 2nd edn (Oxford-Portland OR, Hart Publishing, 2011) 413–45, at 415.

4 Sabine Frerichs this vision’.22 In Polanyi’s work, the tension between facticity and validity which, according to Habermas, ‘again and again provokes a normative response’23 takes the form of the ‘double movement’. With the help of this concept, Polanyi substantiates the interplay of systems and life world, functional imperatives and social reaction, in concrete, historical terms. In his recent writings, Joerges shows concern with the increasing mismatch between the normative promises of conflicts-law constitutionalism and its factual pre-conditions, first and foremost, in Europe: ‘The re-constructive status of the conflicts-law approach was based on its sociological premises which reflect the conflict-laden European constellation more adequately than the orthodoxy of European law’.24 The latest developments in the European Union, such as the imposition of new modes of economic governance, have left ‘[t]his re-constructive side … seriously damaged’.25 However, even though some caution may be warranted as to the practical prospects of the conflicts-law approach, it has not lost its critical edge. This much Joerges acknowledges: What can nevertheless be explored are the conflict constellations which the new modes of economic governance and the imposition of austerity politics on a large part of the Union generate—together with the space for counter-movements which the unfortunate state of the Union may generate.26

III. LA MÉTHODE MONNAIE: STATES, MARKETS, AND MONETARY INTEGRATION IN EUROPE

This volume is concerned with the transformations of transnational governance under the impact of the European crisis. Rather than pointing to the exogenous causes of the crisis, such as the systemic effects of the US subprime mortgage crisis, or financialisation in general, Joerges’ interest is in the ‘transformation of Europe’s constitutional condition’, which manifests itself in ‘centralising transgressions of European legal competences and factual capacities’.27 Against this backdrop, the conflicts-law approach asserts itself as a ‘critical project’, albeit one ‘with a fading backing in the development of the integration project’.28 If we take the euro crisis as the starting-point, or rather the end-point, of this re-constructive exercise, we have to deal with the factual

22 Ibid, at 415; see the edited volume dedicated to this matter: C Joerges and J Falke (eds), Karl Polanyi: Globalisation and the Potential of Law in Transnational Markets, n 8 above. 23 Habermas, n 11 above, 39. 24 Joerges, n 6 above, 35; these sociological premises include ‘the inherently political dimension of “the Economic”’; ibid, 3. 25 Joerges, n 1 above, 127–128. 26 Joerges, n 6 above, 35. 27 C Joerges, ‘Three Transformations of Europe and the Search for a Way Out of its Crisis’, this volume, Chapter 1, 31 and 38. 28 Joerges, n 1 above, 128.

Money Matters: The Heads and Tails of CLC 5 and normative requisites of monetary integration. Joerges’ verdict is clear: ‘The legal constitution of EU Monetary Union “Europeanised” ordoliberal-monetarist conceptions; law, however, could not hope ever to substitute for the necessary historical evolution of the equally Europeanised social preconditions for successful monetary operation’.29 He suggests analysing the gap between normative template and socio-economic realities—the imposition of a monetary union for which the practical conditions are lacking—with the help of Polanyi’s ‘classification of money as a “fictitious commodity”’.30 A similar proposal was made after the financial crisis had already created turmoil in the US and elsewhere in the world but not yet morphed into the euro crisis.31 For Polanyi, fictitious commodities are regulatory artefacts which underpin the illusion of ‘self-regulating markets’.32 Commodification, which is effectuated as much by de-regulation as by re-regulation, turns ‘man’ into ‘labour’ and ‘nature’ into ‘land’—with fateful consequences for social and natural life outside the marketplace.33 With regard to ‘money’, the third fictitious commodity,34 the effects of its commodification can be witnessed in the economic, political and social repercussions of the recent crises. The paradox of self-regulating markets, the creation and correction of which requires a host of regulatory measures, is captured by the ‘conceptualisation of the “economy as polity”’,35 for which Joerges draws, again, on Polanyi’s work.36 In conflicts-law constitutionalism, the formula of the ‘economy as polity’ fulfils empirical, as well as normative, functions. In empirical terms, it reminds us of ‘the politically organised disembedding of market mechanisms’,37 which can be retraced historically.38 In normative terms, the ‘politicisation of the economy’ allows us to bring the state back in, or any national or supranational polity capable of ‘organis[ing] democratic processes’.39 The conceptual link between the economy and polity explains Joerges’ preoccupation with the relationship between states and markets, as in the following trilogy, which condenses the story of European economic and monetary

29 M Everson and C Joerges, ‘Reconfiguring the Politics-Law Relationship in the Integration Project through Conflicts-Law Constitutionalism’ (2012) 18 European Law Journal 644–66, at 648. 30 Ibid, 648. 31 C Joerges and J Falke, ‘The Social Embeddedness of Transnational Markets: Introducing and Structuring the Project’ in Joerges and Falke (eds), n 8 above, 1–15, at 9. 32 Polanyi, n 9 above, 69 and passim. 33 Ibid, 72–73 and 131–32. 34 Ibid, 72–73, 132 and 195–96; see S Frerichs, ‘From Credit to Crisis: Max Weber, Karl Polanyi, and the Other Side of the Coin’ (2013) 40 Journal of Law and Society 7–26, at 21–22. 35 C Joerges, ‘A New Type of Conflicts Law as the Legal Paradigm of the Postnational Constellation’ in Joerges and Falke (eds), n 8 above, 465–501, at 467. 36 See C Joerges, B Stråth and P Wagner (eds), Economy as a Polity: The Political Constitution of Contemporary Capitalism (London, UCL Press, 2005). 37 Joerges, n 1 above, abstract. 38 For European monetary integration, see B Stråth, ‘The Monetary Issue and European Economic Policy in Historical Perspective’ in Joerges, Stråth and Wagner (eds), n 36 above, 59–76. 39 Joerges, n 1 above, abstract of the draft version, available on SSRN.

6 Sabine Frerichs integration: ‘The market without a state?—States without markets!—The markets and their states?’40 The question and exclamation marks in this sequence express Joerges’ doubts about ‘ordoliberal-monetarist’ constructs, which would ideally separate states and markets, and subordinate the former to the latter.41 The three milestones of the integration process are explicated as follows: With its internal market project it has established a ‘market without a state’; with Monetary Union it has seriously curtailed political powers and degraded the ‘Masters of the Treaties’ to ‘States without markets’. Now we seem to be witnessing a new quality of market governance in which the ‘states operate as servants of the markets’.42

In the light of the three dimensions of the conflicts-law approach, the ‘new modes of economic governance’ laid down in the euro crisis, fall behind previous achievements and prospects of European integration-through-law: The European interventions are not confined to a compensation of democracy failure of the European nation-states. The new institutions and management practices have nothing or very little in common with the vision of a constitutionalised co-operation. The new hybrid transnational arrangements operate beyond the supervision and control mechanisms on which [conflicts-law constitutionalism] relies in its third dimension.43

It seems that the latest reforms reflect ‘functional necessities’, or what has been referred to as the ‘logic of the market’44 rather than the legitimate results of a transnational political process.

IV. HEADS OR TAILS: COMMODITY AND CREDIT THEORIES OF MONEY IN CONTEST

There are two sides of the coin:45 ‘On one side is “heads”—the symbol of the political authority which minted the coin; on the other side is “tails”—the precise specification of the amount the coin is worth as payment in exchange’.46 In simplified terms, ‘heads’ symbolises the state that issued the coin, ‘tails’ its nominal value on the market. Social theorists have focused either on the economic or the political side of money. As a result, ‘commodity’ and ‘credit’ theories of money compete for the best understanding of the coins in our pockets and the loans which shape our lives and drive the capitalist economy. However, the ‘nature’ of money can well be seen in its very ambiguity between its political and economic functions. 40 Which was the working title of Joerges, this volume, Chapter 1; see C Joerges, ‘The Market without a State? States without Markets? Two Essays on the Law of the European Economy’, EUI Working Paper LAW 02/1996. 41 Joerges, this volume, Chapter 1, 27–31. 42 Joerges, n 10 above, 250; reference omitted. 43 Joerges, n 1 above, 128. 44 Joerges, this volume, Chapter 1, 25 and 41. 45 K Hart, ‘Heads or Tails? Two Sides of the Coin’ (1986) 21 Man (New Series) 637–56. 46 Ibid, 638; see B Théret, ‘The Socio-Political Dimensions of the Currency: Implications for the Transition to the Euro’ (1999) 22 Journal of Consumer Policy 51–79, at 71.

Money Matters: The Heads and Tails of CLC 7 Framing money as a fictitious commodity, Karl Polanyi captured both sides of the coin. He defines ‘actual money’, in its uncommodified state, as ‘a token of purchasing power which … comes into being through the mechanism of banking or state finance’.47 However, his interest is in how money is ‘commodified’, that is, left to the logic of the market, while the state loses its monetary authority. Polanyi focuses on the rise and fall of the market economy in the ‘long’ nineteenth century. Alongside the economic doctrine of self-regulating markets, ‘[b]elief in the gold standard was the faith of the age’.48 Based upon the convertibility of currencies into gold, the international gold standard helped to control exchange rates and balance international accounts. However, as a ‘self-regulating mechanism of supplying credit’,49 it also diminished the political steering function of national central banks. The gold standard came to an end with the outbreak of the First World War, 100 years ago, and the last century of monetary history has raised new questions as to the ‘credit’ or ‘commodity’ character of money. David Graeber claims that ‘the original form of money’ was ‘virtual money’,50 long before it became a physical object, or even a commodity. In his history of debt, he suggests an alternation between ages of virtual (credit) money and physical (commodity) money: ‘history tends to move back and forth between periods dominated by bullion—where it’s assumed that gold and silver are money—and periods where money is assumed to be an abstraction, a virtual unit of account’.51 Of the 5000 years which Graeber’s story covers, the last 500 years include the ‘age of capitalist empires’, a period dominated by gold and silver bullion, as well as the present age, which witnessed a return to virtual money. The dividing line between yesterday’s commodity-based money and today’s credit-based money is given with the fall of the Bretton Woods system.52 But, of course, the year 1971 did not mean the end of capitalism, but only the beginning of its ‘financialisation’. Geoffrey Ingham distinguishes between ‘credit’ in general, which has been common throughout history, and ‘new forms of credit-money that appeared in Western Europe from the sixteenth century onwards’.53 What is characteristic of credit-money is its transferability: credit started circulating as a means of payment without being backed in gold or other commodities. For Ingham, modern capitalism is not premised on commodity money, even though this did play a role, but on credit as ‘negotiable (or transferable) debt—that is, ‘depersonalized’ debt that can be used as means of payment to a third party’.54 Ingham’s account

47

Polanyi, n 9 above, 72. Ibid, 25. 49 Ibid, 195. 50 D Graeber, Debt: The First 5,000 Years (Brooklyn NY, Melville House, 2011) 18. 51 Ibid, 18. 52 Ibid, 214. 53 G Ingham, ‘Fundamentals of a Theory of Money: Untangling Fine, Lapavitsas and Zelizer’ (2001) 30 Economy and Society 304–23, at 306; original emphasis. 54 Ibid, 305; original emphasis. 48

8 Sabine Frerichs of the ‘development of capitalist credit-money’55 can easily be extended into the recent decades, after the ‘disappearance of the useful ideological fiction of a gold standard’.56 Accordingly, there is more continuity than change in the development of capitalism. Bruno Théret starts from the theory of ‘primordial debt’,57 according to which money originated in traditional, religious societies as ‘a means of payment of the life debt’.58 Debt is acquired with birth and paid with death; however, during lifetime, sacrifices may extend the ‘credit of living’.59 In modern capitalist societies, which are organised around states and markets, these religious commitments have become secularised and taken new shape in ‘a dual system of life debts’.60 In the economic sphere, ‘each individual’s “life capital”’ is ‘valorised economically in market terms’.61 Based upon the prospective return on one’s life capital, private debt is incurred to allow for immediate exchange, production and consumption. Hence, in economic terms, ‘debt is now a “wager on the future”’.62 In the political sphere, the sovereign—replacing God—pledges to protect the life and welfare of his or her subjects who, in turn, pay tribute or taxes to the state.63 With regard to commodity theories of money, those rooted in the Marxist tradition promise more valuable insights than orthodox economic ones. Costas Lapavitsas’ adaptation of Marx’s ‘monetary theory of credit’64 is based upon the assumption that money evolved in exchange relations between ‘commodity owners’ which were ‘foreign’ to each other65 and, therefore, not ready to give much credit: ‘[c]apitalist commodity money is no-one’s liability and bears no necessary relation to credit processes’66 However, even though the capitalist prototype of money is seen in (physical) commodity money and not in (virtual) credit money, Lapavitsas qualifies the latter as the ‘capitalist form of money par excellence’, which became pivotal for financialisation.67

55

G Ingham, The Nature of Money (Cambridge, Polity Press, 2004) 107. Ingham, n 53 above, 312. This is one of two prominent origin stories of money and debt, complementing the economic ‘myth of barter’, see Graeber, n 50 above, ch 3. 58 Théret, n 46 above, 60. 59 Ibid, 61. 60 Ibid, 62. 61 Ibid, 62. 62 Ibid, 65. 63 Ibid, 61. 64 C Lapavitsas, Profiting Without Producing: How Finance Exploits Us All (London, Verso, 2013) 51 and 69. 65 C Lapavitsas, ‘The Social Relations of Money as Universal Equivalent: A Response to Ingham’ (2005) 34 Economy and Society 389–403, at 392. 66 Ibid, 401. 67 C Lapavitsas, ‘Relations of Power and Trust in Contemporary Finance’ (2006) 14 Historical Materialism 129–54, at 152. 56 57

Money Matters: The Heads and Tails of CLC 9 V. INTEREST ON THE RISE: THE COMMODIFICATION OF MONEY IN MODERN CAPITALISM

With regard to the commodification of money, we can, again, start from credit theories. The first step in the commodification of credit was made when a ‘commercial paper’—a short-term obligation based upon no more than the ‘promise to pay’—‘became transferable, that is, when it did not just represent an agreement between people who knew and trusted each other, but could pass from hand to hand’.68 Being able to circulate, commercial papers assumed the function of tradeissued money as a general means of exchange. In the second step, ‘[c]ommercial debt [was] exchanged for bank-issued money’ in the form of transferable ‘credit notes drawn on the bank’.69 In practice, this meant that the liability for the money moved from commercial issuers to private banks, by virtue of their own ‘promise to pay’.70 While the circuits of private credit money were already expanding, they still remained separate from the circuits of public fiat money: the coins and notes issued by the state.71 In the third step, which was crucial for capitalist development, the distinction between public and private money was blurred, and the ‘state’ became closely linked to the ‘market’—also with regard to money.72 This was the case ‘when the state declared that not only was its own fiat-issued money legal tender, but also bank notes issued in the process of trade’.73 In other words, ‘privately generated debts in the market sector were being turned into transferable state money’.74 As a consequence, ‘money creation is effectively in private hands through commercial decisions in the banking system, while the state retains responsibility for managing and supporting the system’.75 Private credit money came to dominate public fiat money. For Graeber, the beginnings of capitalism are marked not only by a return of commodity money, but also by a legalisation of interest-bearing loans: the commodification of money properly understood. The lift of the ban on usury allowed the ‘economy of credit’ of the Middle Ages to turn into an ‘economy of interest’, as we still know it today.76 Graeber points out that the term ‘interest’, which ‘originally meant “penalty for late payment on a loan”’, became central for the ‘new philosophy’ of economic liberalism.77 In fact, ‘interest’ means not only the price of money; as ‘self-interest’, it is the driving force of capitalist enterprise.78

68 M Mellor, The Future of Money: From Financial Crisis to Public Resource (London, Pluto Press, 2010) 15. 69 Ibid, 32. 70 Ibid, 15. 71 Ibid, 25. 72 Ibid, 56. 73 Ibid, 17. 74 Ibid, 32. 75 Ibid, 56. 76 Graeber, n 50 above, 332. 77 Ibid, 332. 78 Ibid, 332.

10 Sabine Frerichs Commodity theories in the Marxist tradition conceive ‘the act of credit [as] an act of exchange’, which extends over the period between payment and repayment. Upon this basis, Lapavitsas and Jessop likewise arrive at an understanding of commodified money as ‘interest-bearing capital’.79 Alternatively, Lapavitsas speaks of ‘loanable money capital’.80 This is specified as ‘a peculiar commodity that is traded in money markets and has a sharply defined price in the rate of interest’.81 The commodification of money can then be depicted as a ‘systematic transformation of idle money into loanable money capital’,82 the enhanced ‘tradability’ of which furthers financialisation.83 Jessop distinguishes between ‘real commodification’, ‘fictitious commodification’ and ‘quasi commodification’.84 In the case of money, real commodification simply refers to the production of commodity money (such as gold or silver) in a ‘capitalist labor process’.85 In contrast, fictitious commodification includes all forms of money, in which ‘money [acts] as a marketable store of value and medium of exchange’, be it ‘commodity monies (eg, gold, silver), fiduciary monies (tokens, paper money, bank credits), or tradable currencies (eg, dollars, euros, yen)’.86 Quasi-commodification refers to deliberate efforts ‘to increase the exchange value of … fictitious commodities, that is, their price as opposed to their value, through various forms of “investment”’.87 Under conditions of a highly developed financial system, credit money, in the above forms, has become dominant both in the domestic and in the international spheres, whereas commodity money has effectively been side-lined. Because of the amalgamation of private credit money and public fiat money, it seems questionable to hold on to the distinction between the ‘use-value’ of ‘national money’ (legal tender) and the ‘exchange-value’ of ‘international currency’88—if not for normative reasons. Whereas private credit money can be considered ‘a specifically capitalist form of money insofar as it is created spontaneously and according to the demand for credit among capitalist enterprises’,89 public fiat money can be

79 Lapavitsas, n 64 above, 113; see B Jessop, The Future of the Capitalist State (Cambridge, Polity Press, 2002) 20. 80 Lapavitsas, n 64 above, 118. 81 B Fine and C Lapavitsas, ‘Markets and Money in Social Theory: What Role for Economics?’ (2000) 29 Economy and Society 357–82, at 370; see Lapavitsas, n 64 above, 118. 82 Fine and Lapavitsas, n 81 above, 370. 83 Lapavitsas, n 64 above, 113 and 119. 84 B Jessop, ‘Knowledge as a Fictitious Commodity: Insights and Limits of a Polanyian Perspective’ in A Bugra and K Agartan (eds), Reading Karl Polanyi for the Twenty-First Century: Market Economy as a Political Project (Basingstoke, Palgrave Macmillan, 2007) 116–33, at 125. 85 Ibid, 125. 86 Ibid, 123. While this passage clearly refers to the ‘exchange-value moment’ of money as a fictitious commodity, the classification of ‘[s]ymbolic tokens for exchange of goods/services, payment of taxes, tithes’ as fictitious money commodity seems to be misleading, as it still focuses on the ‘use value’ of money before or beside its commodification (ibid, 125). 87 Ibid, 124. 88 N-L Sum and B Jessop, Towards a Cultural Political Economy: Putting Culture in its Place in Political Economy (Cheltenham, Edward Elgar Publishing, 2013), 278. 89 Lapavitsas, n 64 above, 85.

Money Matters: The Heads and Tails of CLC 11 attributed a management function, which leaves, at least in principle, ‘enormous scope for economic intervention’.90

VI. AFTER BRETTON WOODS: FINANCIALISED CAPITALISM AND NEW FORMS OF GLOBAL MONEY

The international gold standard, which ended with the First World War, was replaced, after the Second World War, by the ‘gold-exchange standard’ of the Bretton Woods system (1946–71). For most participating currencies, convertibility into gold was then only indirect, while the US dollar was still backed by (dwindling) national gold reserves. The US dollar kept its role as ‘world reserve currency’ even after its convertibility to gold had been suspended: the latest shift from physical to virtual money in Graeber’s history of debt.91 The ultimate move from commodity to credit did not necessarily strengthen the role of the state and of fiat money, in general. In the domestic context, the result of the legal nexus between state money and market money was that the state effectively lost the ‘seignorage benefit of money’ to private issuers.92 In the international context, the end of Bretton Woods gave the starting-signal for the ‘“financialisation” of money’,93 which means that the ‘“international monetary system” that once governed exchange rates between national currencies, and the “international financial system” that governed the creation, access to and trade in credit’ are no longer separate.94 What this leads to is better captured by commodity theories of money, which try to make sense of the new forms of global money in the virtual age: one of which is based upon credit money and one of which is (nominally) based upon fiat money, and both of which are deeply entangled with capitalism. The ‘distinguishing feature of financialised capitalism’ can be seen in the new intensity of trade in financial assets and derivatives, which allows profit to be ‘generated out of the processes of circulation’, and not in the sphere of production.95 According to LiPuma and Lee, financial derivatives are ‘founded on the connectivities of capital itself ’.96 The commensurability and connectivity of different forms of capital is, in turn, premised on the ‘objectification and abstraction of risk … into a single, homogeneous whole so that the financial community may

90

Ibid, 86. Graeber, n 50 above, ch 12. 92 That is, the profits made by bringing new money into circulation, after subtracting its production costs; see Mellor, n 68 above, 25 and 105. 93 N Dodd, ‘“Strange Money”: Risk, Finance and Socialized Debt’ (2011) 62 British Journal of Sociology 175–94, at 191. 94 S Strange, ‘What Theory? The Theory in Mad Money’, University of Warwick, CSGR Working Paper No 18/98, December 1998; see Dodd, n 93 above, 176–77, who draws on Strange’s work in this respect. 95 Lapavitsas, n 64 above, 168. 96 E LiPuma and B Lee, ‘Financial Derivatives and the Rise of Circulation’ (2005) 34 Economy and Society 404–27, at 408. 91

12 Sabine Frerichs price it’.97 In this process, the uncertainties of natural and social life and the contingencies of economic and political development are transformed into risks, which can be measured and manipulated. For risks to be priced and traded in derivatives markets, they are detached from their concrete contexts, reduced to general properties, dissected and re-combined: a process which can also be depicted as the ‘commodification’ of risk.98 Bryan and Rafferty go one step further, suggesting that financial derivatives are a new form of ‘commodity money’.99 Needless to say, financial derivatives are fictitious commodities which ‘exist purely within circulation’.100 As such, they further the commodification of their underlying assets (which can be almost anything). To make this point, Bryan and Rafferty emphasise the ‘blending’ function of derivatives, which is epitomised by convertible bonds, which allow for a continuous ‘comparison of the rates of return of … different forms of capital (money)’, namely, debt and equity.101 More generally, financial derivatives further the convertibility and commensurability of different forms of (physical as well as financial) capital, including different forms of money.102 In doing so, they ultimately ‘change money from being something that facilitates capitalist competition to being itself determined by the competitive processes of capitalism’.103 This ‘(relatively) new form of global money’104 works not under the auspices of states, but of private actors.105 As ‘quasi-world money’, the US dollar is no longer backed by gold but relies on the capitalist dynamic of money creation and a single state’s ‘promise to pay’.106 Also in this respect, the commodity fiction of money has become ever more fictional. Against this backdrop, Lapavitsas notes that, since the end of the gold standard 100 years ago, ‘[t]he conscious, or state-driven, elements of world money have come to the fore, compared to its spontaneous, or market-driven, elements’.107 However, as a Marxist theorist, Lapavitsas is not pitting states against markets, but puts both in the context of the international political economy. In this context, world money is not only requested as a means of facilitating international reserves and international transactions but also reflects the relations of power between states and serves ‘as a weapon of imperial power’.108 This concerns 97

Ibid, 413. Ibid, 416. 99 D Bryan and M Rafferty, ‘Financial Derivatives and the Theory of Money’ (2007) 36 Economy and Society 134–58, at 153. 100 Ibid, 148. 101 Ibid, 141. 102 Ibid, 141 and 153. 103 Ibid, 153–54. 104 Ibid, 135. 105 Ibid, 147. 106 Lapavitsas, n 67 above, 137–38. 107 Lapavitsas, ‘The Eurozone Crisis Through the Prism of World Money’ in MH Wolfson and GA Epstein (eds), The Handbook of the Political Economy of Financial Crises (Oxford, Oxford University Press, 2013) 378–92, at 382. 108 Lapavitsas, n 64 above, 289. 98

Money Matters: The Heads and Tails of CLC 13 not only the US dollar; the euro also has a role to play as well: as a ‘sui generis’ form of world money, which has been ‘designed to serve the interests of large financial, industrial and commercial capital in Europe as well as the interests of the most powerful states within the European Monetary Union’.109 Given the entanglement of these powerful interests in financialisation, ‘the [institutional] mechanisms … put in place to support the euro in its role as world money have mediated the emergence of the crisis in Europe’.110 Because of the asymmetrical design (lacking fiscal integration) and the underlying centre-periphery structure (creditor vs debtor countries) of the monetary union, the ‘crisis of financialisation’111 that originated in and spilled over from the United States developed into ‘a crisis of sovereign debt and consequently a crisis of the euro’.112 In the end, the European Central Bank (ECB) at the top of the pyramid of the Europeanised credit system ‘acquired significant credit risk from the public bonds of states that faced default’ to restore faith in the euro.113 In doing so, it ‘substitut[ed] itself for the missing unitary or federal state in the eurozone’.114 Sum and Jessop speak of the ‘“incompossible dream” of European monetary union without stronger fiscal and political integration’,115 which produced exactly the type of conflict constellations which the conflicts-law approach is concerned with. For Jeremy Leaman [t]he sovereign debt crisis has, above all, revealed the deficiencies of an asymmetrical EMU which has been subjected to a shock generated by a related asymmetrical global order, for which its overall guiding theory—monetarism and neo-liberal supplysidism—is co-responsible.116

This takes us to the role of central banking in financialised capitalism.

VII. POLANYI UPSIDE-DOWN: ON THE SOCIAL EMBEDDEDNESS OF ‘INDEPENDENT’ CENTRAL BANKING

For Polanyi, the international gold standard and national central banking were antagonistic institutions which were connected with economic liberalism and social protectionism, respectively. While the gold standard introduced the logic of ‘self-regulation’ into the monetary system, central banking stood for its ‘management’ and ‘manipulation’ ‘to keep manufacturers and other productive enterprises

109

Ibid, 289. Lapavitsas, n 107 above, 385. 111 Lapavitsas, n 64 above, 298. 112 Lapavitsas, n 107 above, 378–92, at 378. 113 Lapavitsas, n 64 above, 301. 114 Ibid, 301. 115 Sum and Jessop, n 88 above, 489. 116 J Leaman, ‘The Size That Fits No-One: European Monetarism Reconsidered’ in E Chiti, Edoardo, AJ Menéndez and PG Teixeira (eds), The European Rescue of the European Union? The Existential Crisis of the European Political Project. RECON Report No 19 (Oslo, ARENA, 2012) 229–55, at 249. 110

14 Sabine Frerichs safe from the harm involved in the commodity fiction as applied to money’.117 This antagonism became evident in the run-up to the First World War, when ‘[c]entral banking reduced the automatism of the gold standard to a mere pretense’.118 While Polanyi’s account of the ‘long’ nineteenth century and the commodification of money—or currency—in this period ends with ‘[t]he snapping of the golden thread’,119 the monetary history of the twentieth century, which culminated in the ‘twin crisis’ of global financialisation and European monetary integration, yielded the idea of independent central banking. The regulatory principle according to which monetary policy is to be delegated to a ‘non-majoritarian institution’ that is shielded from the whims of day-to-day politics120 is famously exemplified by the German Federal Bank (Bundesbank), which was established after the Second World War and later became ‘the unquestioned parent of the European Central Bank’.121 To understand this heritage properly, it seems worthwhile to start from its ‘grandparent’: the German Reichsbank, which was founded in 1876 while the gold standard reigned. Due to its private status and its ‘primary function’ as ‘a lender of last resort and guarantor of sufficient levels of credit to the private economy’, the autonomy of the Reichsbank seemed to be greater in relation to the government than to its shareholders.122 In fact, ‘commercial’ central banking in an internationalising credit economy caused a ‘gold reserve “problem”’ for the treasury.123 However, ahead of the First World War, all autonomy was revoked, gold was accumulated in the war chest, and the gold standard was finally suspended; the Reichsbank was instrumentalised as ‘a tool of war and generator of inflation’.124 After the war, a reparations moratorium was made contingent on the ‘autonomisation’ of the German central bank,125 whose ‘surreptitious (self-)nationalisation’ was thus reversed.126 Already in 1933, though, with the preparations for ‘Germany’s second war of expansion’ underway, the Reichsbank was ‘essentially re-nationalised’.127 And, again, it was foreign powers who sought to re-establish central bank independence after the war. In 1948, the Bank of the German Lands (Bank deutscher Länder), ‘a federal institution, owned by the constituent Land

117

Polanyi, n 9 above, 132 and 195. Ibid, 195. 119 Ibid, 27. 120 G Majone, ‘Europe’s “Democratic Deficit”: The Question of Standards’ (1998) 4 European Law Journal 5–28, at 15. 121 Leaman, n 116 above, 230. 122 J Leaman, The Bundesbank Myth: Towards a Critique of Central Bank Independence (BasingstokeNew York, Palgrave, 2001) 58. 123 Ibid, 60. 124 Ibid, 61. 125 Ibid, 72. 126 Ibid, 61. 127 Ibid, 90. 118

Money Matters: The Heads and Tails of CLC 15 Central Banks of the Trizone’, was established,128 and remained under Allied supervision until 1951.129 As Leaman concludes, the particular nature of its ‘autonomy’ … was based in the very particular distrust of German representative political institutions, engendered by the abuse of central banking on the part of administrations in the Wilhelmine Empire, the Weimar Republic and the ‘Third Reich’.130

In 1957, the Bank deutscher Länder was finally succeeded by the Bundesbank, which came to epitomise ‘independent’ central banking. This owes its high reputation first of all to the remarkable record of the secular German economy in the 1950s and early 1960s—the so-called ‘miracle years’—during which the elusive magic square of stable high growth, low inflation, full employment and healthy external balances was achieved and maintained.131

At the same time, the strong export orientation of the German economy actually posed a challenge to ‘the manipulation of interest rates, bank reserve ratios and rediscount quotas by the German central bank’, whose steering capacities were naturally limited to the domestic sphere.132 Moreover, ‘high and increasing bank liquidity’ and ‘high levels of corporate self-financing’ made it necessary to employ ‘more dirigiste methods’ of monetary policy than the adjustment of interest rates.133 With the end of Bretton Woods in 1971, and the floating of the German currency, a new ‘era of full-blown German monetarism’ set in.134 According to Leaman, this was no coincidence: In retrospect, there seems to be little doubt that the Bank’s exercising of autonomy in this period was driven by the need not just to maintain but to extend that autonomy, above all to remove the dysfunctional influence of an exchange rate system that made its job impossible.135

In the following years, the Bundesbank became increasingly dominant, albeit not ‘in terms of … a strengthened primacy of (monetary) politics in relation to “the” market’, which had become elusive to (national) regulation, but in terms of its relationship ‘a) to other (fiscal) agencies of the German state[,] b) to both the fiscal and monetary agencies of other developed countries[,] and c) to both private and state agencies in less developed countries’.136 Put differently, the ‘orthodoxy of

128

Ibid, 93. J Bibow, ‘On the Origin and Rise of Central Bank Independence in West Germany’ (2009) 16 European Journal of the History of Economic Thought 155–90, at 164. 130 Leaman, n 122 above, 94. 131 Ibid, 114. 132 Ibid, 124. 133 Ibid, 125. 134 Ibid, 154. 135 Ibid, 153 and 224. 136 Ibid, 157. 129

16 Sabine Frerichs monetarism’137 promoted by the Bundesbank produced economic and democratic ‘externalities’: Within a system of freer capital movements, the interest rate behaviour of a leading central bank presiding over structural surpluses would of necessity influence the interest rate behaviour of subordinate, weaker central banks in countries with structural deficits, and in a fundamentally asymmetrical way.138

The rest of the story is well known:139 with the establishment of the EMU and the ECB, ‘German cultural norms relating to monetary policy’ were translated onto the European level and ‘transplanted’ into ‘a set of other economic cultures’, often re-inforcing existing asymmetries.140 From a Polanyian point of view, the ‘protective’ institution of central banking has thus switched sides—it increases the commodification of money, currency, credit and debt rather than contains it. Nevertheless, there is also talk of the ‘social embeddedness’ of independent central banking. Most prominently, Giandomenico Majone claims that ‘the German central bank was not only politically independent, but also socially embedded’, whereas ‘[t]he ECB is politically and socially “disembedded”’.141 Accordingly, national central banking was (in the case of the eurozone members) or is (in the case of the UK or the US) more ‘embedded’ than supranational central banking in the eurozone, simply because ‘national parliaments could always change the rules if they thought the central bank was using its independence in a way of which they did not approve’.142 As to post-war Germany, the decisions of the Bundesbank were, at times, contested; however, the principle of central bank independence was never seriously attacked, for example, by taking legislative initiative ‘to revise the Bank’s statutes’.143 Hence, ‘social embeddedness’ meant, in the German context, not the containment, but, instead, the overall support of monetarist policies. What Majone is saying, then, is that the ‘statute-based’ political independence of the Bundesbank was actually re-inforced by ‘public opinion’, whereas the ECB ‘has to operate in a political and social vacuum’.144 In Polanyian terms, Leaman’s account is more convincing. Like Majone, he argues that the ‘autonomous status for the German central bank …is inextricably embedded in the country’s political economy’.145 However, Leaman also clarifies how this form of embeddedness—which is of an ‘ideological-

137

Ibid, 176. Ibid, 172. 139 Scharpf, n 5 above. 140 Leaman, n 122 above, 21, 25 and 157. 141 G Majone, ‘Rethinking European Integration After the Debt Crisis’, UCL European Institute Working Paper No 3/2012, at 14. 142 G Majone, ‘The Mutation of the EU as a Regulatory Regime’ in EO Eriksen and JE Fossum (eds), What Democracy for Europe? Proceedings from the RECON Midterm Conference, RECON Report No 11 (Oslo, ARENA, 2011) 31–71, at 60. 143 Leaman, n 122 above, 109. 144 Majone, n 141 above, 14. 145 Leaman, n 122 above, 109. 138

Money Matters: The Heads and Tails of CLC 17 cultural’ nature,146 and not based upon political deliberation or social justice147— is imposed on the eurozone as a whole: ‘the ceding of monetary sovereignty to the European Central Bank following the Treaty of Maastricht was only permitted on the basis that this embeddedness be transferred to the European level’.148 Perhaps the clearest in exposing the commodifying and disembedding force of ‘independent central banking’ is Lapavitsas. For him, this is but ‘a convenient legal fiction that separates the bourgeois electoral process from the juggling of economic and social factors undertaken by the central bank’ whose monetary policies are, first of all, ‘at the service of capital’.149 Accordingly, central banking is deeply implied in the logic of capitalism, and, even more so, of financialised capitalism, with ‘central bank independence and inflation targeting … shaping the course of financialisation’.150 With regard to inflation targeting, which became one of the key policies of independent central banks in the outgoing twentieth century, it is argued that this contributed to financial bubble-building and ‘actually exacerbated the risk of financial collapse’.151 Taking these arguments to the European context, Leaman speaks of ‘the relative powerlessness of the ECB—along with any central bank in the era of financialisation—to control directly the volume of base money’.152 This brings us back to ‘the privatisation of money creation, beyond the control of central banks’,153 which renders its public mandate paradoxical.

VIII. MONEY MATTERS: A MEDIATOR OF CONFLICTS AND CRISIS IN THE POST-NATIONAL CONSTELLATION

Money is a means of payment and exchange, which is, as we have seen, anything but neutral. For Lapavitsas, ‘the euro as world money has acted as the mediator of the world crisis in Europe’.154 In more general terms, money, in its commodified (tradable, transferable, profitable) form—including credit and capital, currencies as well as derivatives—is a medium of crisis. For the series of financial and monetary crises, which started in 2007, we can also speak of one crisis only, or ‘the transformation of a crisis that originated in private credit relations and securitization into a crisis of sovereign debt and public finances’.155 Considering the ‘privatisation’ of money in modern, financialised capitalism, it is interesting to see

146

Ibid, 109–10. In other words, it is ‘cognitive’ and not ‘normative’; see S Frerichs, ‘Re-embedding Neo-liberal Constitutionalism: A Polanyian Case for the Economic Sociology of Law’ in Joerges and Falke (eds), n 8 above, 65–84. 148 Leaman, n 122 above, 109. 149 Lapavitsas, n 67 above, 134. 150 Lapavitsas, n 64 above, 194. 151 Ibid, 197. 152 Leaman, n 116 above, 241. 153 Ibid, 242. 154 Lapavitsas, n 107 above, 379. 155 Sum and Jessop, n 88 above, 453. 147

18 Sabine Frerichs how the problem moved from the market to the state, that is, from private credit money to public fiat money. Sum and Jessop see a ‘deficit hysteria’ at play, which ‘redirected [attention] from the crisis in the financial sector and the real (but private) economy to the public sector, framed in terms of accumulated government debt, unsustainable public spending and public sector employment’.156 However, it would be misleading to blame the markets alone. States have their share in the crisis, too, and in capitalism in general. Financialisation is a result of regulatory efforts: ‘although this period is often described as one of deregulation, in fact, formal regulation of financial markets has greatly increased’.157 This includes a deliberate move to ‘market-based finance’ and a strong preference for ‘private or quasi-public self-regulation’.158 Lapavitsas usefully distinguishes between ‘market-conforming regulation’ and ‘market-negating regulation’ and, with regard to the latter, between ‘generic’ and ‘systemic’ market-negating regulation.159 What has been propagated under the banners of neo-liberalism, then, is basically ‘market-conforming regulation’. This is the least intrusive form of regulation (including self-regulation), which draws on ‘the new microeconomics of finance[,] stressing information-theoretic, principal-agent analysis of financial institutions’.160 In ‘generic market-negating regulation’, public safeguards and interventions play a greater role. The institutional mechanisms, which were resorted to when neo-liberal policies and practices failed, include ‘lender of last resort, deposit insurance guarantees and the application of [the principle of] “too big to fail”’.161 These mechanisms are market-negating in that they distort economic incentives (from a neo-liberal point of view); but they confirm the capitalist logic in that they preserve the ‘profitability of private financial institutions’,162 while the costs of such measures are generally distributed to the public (the socialisation of risk). In contrast, ‘systemic market-negating regulation’, which prevailed in the era of ‘embedded liberalism’ under Bretton Woods, is less preoccupied with the perspective of individual financial actors than with macro-economic steering, which includes ‘an array of mutually interacting measures, such as price and quantity controls, functional specialization of institutions, and capital controls’.163 While the new global money ‘behind the scenes’164 is not to be neglected as a trigger of the financial crisis, the European sovereign debt crisis puts the euro centre stage. The political logic of the common currency has been interpreted

156 157 158 159 160 161 162 163 164

Ibid, 493 and 484. Picciotto, n 8 above, 160. Ibid, 158–59. Lapavitsas, n 64 above, ch 10. Ibid, 315. Ibid, 323. Ibid, 306. Ibid, 306. Bryan and Rafferty, n 99 above, 153.

Money Matters: The Heads and Tails of CLC 19 both in terms of ‘the sinews of war’165 and ‘the pacification of society’.166 These different views reflect different theoretical starting-points: if money and society are conceived of in terms of ‘conflict’ and ‘commodities’, or in terms of ‘consensus’ and ‘credit’. As a representative of credit theories, Théret emphasises the ‘dual economic and political nature of the currency’, which circulates—and ideally mediates—between economic and political orders.167 In other words, money has an integrative function; it works ‘as a social bond that reconstitutes the unity of society and transcends society’s differentiation into separate and independent spheres of social practices’.168 However, Théret also notes that ‘these political and symbolic dimensions of money’169 have so far been bound to a ‘political community on a given territory’,170 and are not easily replicated on a European, or even global, scale. What conflicts-law constitutionalism shares with this approach is an interest in political legitimacy, arguing ‘inside out’ from national democracies and welfare states. In contrast, Marxist theories of money seem to prefer an ‘outside in’ approach, which sets out from global capitalism and imperial power. Moreover, they are less concerned with the cultural meaning of money—a bond that unites—than with its material force—a bond that subjects. Money matters, either way. However, an enquiry that starts with Polanyi’s notion of fictitious commodities and follows it through to new forms of money ‘beyond the state’, cannot stop short of reminding us of the ‘slowly grinding force’171 inherent in capitalism, which gnaws at all the institutions that are ‘market-breaking rather than marketmaking … in character: public rather than private, obligatory rather than expedient, and political instead of economic’.172 Applied to the commodification of money, this means that the ‘public foundations of private money’173 are ultimately undermined as well.

165

Lapavitsas, n 110 above, 387. Théret, n 46 above, 76. 167 Ibid, 55. 168 Ibid, 55. 169 Ibid, 72. 170 Ibid, 60. 171 W Streeck, Re-Forming Capitalism: Institutional Change in the German Political Economy (Oxford, Oxford University Press, 2009) 144. 172 Ibid, 252. 173 Mellor, n 68 above, 160. 166

1 Three Transformations of Europe and the Search for a Way Out of its Crisis CHRISTIAN JOERGES BREMEN/BERLIN

I. STRUCTURING THE ARGUMENT

T

HERE IS A widespread tendency in the debates on Europe’s financial crisis and institutional malaise to depart from the deficiencies or imperfections of the EMU as it was established by the Treaty of Maastricht of 1992 and the Stability Pact of 1997.1 This chapter argues that we have, instead, to extend our inquiries significantly, and to re-consider the sustainability of the institutional fabric of the integration project. Our focus in this inquiry will be the relationship of law and politics.2 This is a focus which is clearly related to a glorious past: the expectation that Europe’s integration could, and indeed should, be accomplished ‘through law’. This idea has been kept alive in theory, although it has gradually eroded in practice for quite some time.3 The new topicality in what has been called ‘Emergency Europe’4 is a negative one. Under assumed functional necessities, Europe has established a rigid economic and social discipline which threatens to discredit the idea of the rule of law and its intrinsic linkages to democratic rule. If this suspension of legal discipline could be attributed to wilful acts of disregard and disobedience, the cure would be obvious. Our analysis suggests, however, a more complex and, at the same time, more disquieting possibility, namely, a constellation in which compliance with Europe’s constitutional essentials would deepen, rather than resolve, its malaise, and the prospects for some constructive re-configuration of the relationship between law and politics

1 Decision of the European Council on the Stability and Growth Pact, [1997] OJ C236 of 2.8.1997 (Article 12). In the Treaty of Lisbon, see Article 126 and Protocol No 12. 2 In that respect we build on M Everson and C Joerges, ‘Reconfiguring the Politics-Law Relationship in the Integration Project through Conflicts-Law Constitutionalism’ (2012) 18 European Law Journal 644–66. 3 On this thesis, see C Joerges, ‘Integration Through De-Legalisation?’ (2008) 33 European Law Review 219–312. 4 See J White, ‘Emergency Europe’ (2013) 61 Political Studies 1–19, and Section III.1 below.

26 Christian Joerges are anything but promising. This exploration will nevertheless be undertaken with a view to providing insights into the conditions for a renaissance of the European project which do not invoke so-called functional necessities but rather indispensable pre-requisites for its integrity and legitimacy. Our ambition is hence not to elaborate the new ‘architecture’ of the European body politic, but to avoid the erroneous assumptions about the law-politics relationship of the past, and to re-configure this relationship so that law may help Europe to overcome its impasses and to regain a constitutional condition. Our argument will proceed in three steps: Under the heading, ‘From Common Market to Common Currency’, Section II will summarise two constitutional configurations, namely, the moves from the early ordo-liberal proclamations of a ‘European economic constitution’ towards Monetary and Economic Union as institutionalised by the Treaty of Maastricht. The aim here is by no means to provide a comprehensive re-construction of the disappointments and failures of this primarily German legacy; we will instead focus on the reasons which have contributed to the inability of European constitutional law scholarship to understand the political importance and theoretical challenges of ‘the economic’. Section III will first sketch out alternative visions of Europe’s constitutional ordering, namely, the notions of ‘Conflicts-Law Constitutionalism’ and of ‘Demoicracy’ as complementary and normatively viable projects. It will also underline, however, that these visions can, under the impact of the financial crisis, no longer be understood as re-constructive projects. They have to be re-oriented towards a return to a new constitutional condition. Section IV proceeds to this search, albeit with still only tentative deliberations.

II. FROM COMMON MARKET TO COMMON CURRENCY: THE PYRRHIC VICTORY OF THE INTEGRATION-THROUGH-LAW PROJECT

Following Joseph Weiler’s seminal narrative on the ‘Transformations of Europe’,5 it has become common to distinguish the formative phase of the integration project which had been consolidated by 1973, from its subsequent mutations with the ‘completion’ of the Internal Market by 1992. We are following this reconstruction although our focus on ‘the economic’ will emphasise a dimension of the European project which was present in its name, but absent from its academic re-construction not only in Weiler’s path-breaking work, but also in the successive generations of European constitutionalism.

5

J Weiler, ‘Transformations of Europe’ (1991) 100 Yale Law Journal 2403–83, at 2453 et seq.

Three Transformations of Europe 27 II.1. The Ordo-liberal Project of a European Economic Constitution The notable, and for this reason alone, laudable exception to this benign neglect of what was to become Europe’s Schicksal, the fate or destiny, is the ordo-liberal project of a European economic constitution. From early on, ie, this school re-constructed the legal essence of the European project as an order which was not in need of democratic legitimacy. The freedoms guaranteed in the EEC Treaty, the opening up of national economies, the anti-discrimination rules, and the commitment to a ‘system of undistorted competition’ were interpreted as a quasi-Schmittian ‘decision’ that supported an economic constitution and were also essentially compatible with ordo-liberal assumptions about the institutional framework conditions for a market economy. The fact that Europe had initiated the path towards integration as a mere economic community lent plausibility to such ordo-liberal arguments—and even required them: in an ordo-liberal account, the Community acquired a legitimacy of its own by interpreting its pertinent provisions as prescribing a law-based order committed to guaranteeing economic freedoms and protecting competition at a supranational level. This legitimacy was independent of the majoritarian institutions of the constitutional state. By the same token, it imposed limits upon the Community: thus, discretionary economic policies seemed illegitimate and unlawful.6 This latter aspect explains the animosity of the ordo-liberal tradition towards Keynesian macro-economics and the need for a constant balancing of the potentially-conflicting policy objectives of the ‘magic quadrant’ (price stability, high employment, balance of payments, and appropriate economic growth7). That insistence on law-bound economic policy is a core assumption by the ordo-liberal tradition which was kept alive in the Hayekian Ordnungspolitik which was to substitute the ‘classical’ (‘first generation’) ordo-liberal school in the 1970s.8

II.2. From Economic Constitution to Internal Market: Establishing a ‘Market Without a State’ This move which the ‘second generation’ of ordo-liberalism undertook with considerable energy from the 1970s, under the joint intellectual leadership of the jurist Ernst-Joachim Mestmäcker and the Freiburg economist Erich Hoppmann, 6 E-J Mestmäcker, ‘Macht-Recht-Wirtschaftsverfassung’ (1973) 137 Zeitschrift für das gesamte Handelsrecht und Wirtschaftsrecht 97–118, 109. [Power, Law and Economic Constitution (1973) 2 German Economic Review 177–208]. 7 Legally anchored within the 1967 Stability Law (Stabilitätsgesetz). 8 Ordo-liberalism, which was long neglected benignly in European studies, is by now attracting considerable attention, unfortunately at times for the wrong reasons. It seems, inter alia, grossly inadequate to attribute the present European crisis management, its German imprint notwithstanding, to the ordo-liberal legacy; but see, for example, G Dale and N El-Enany, ‘The Limits of Social Europe: EU Law and the Ordoliberal Agenda’ (2013) 14 German Law Journal 613–49. The replacement of law by discretionary political fiat which characterises the present praxis is a Schmittian rather than an ordo-liberal move.

28 Christian Joerges was of paradigmatic dimensions. It meant that, from that moment on, the prime target of Ordnungspolitik was to become anti-competitive (state) regulation rather than (private) economic power. In the mainstream of European studies, even in Germany’s public law quarters, this move was hardly noticed. But its political messages had powerful natural allies as they coincided with the turn to the monetarist doctrines of Milton Friedman, which promised, with the enhancement of market governance, to provide a remedy to the new phenomenon of ‘stagflation’ (the simultaneous increases in unemployment and inflation) which Keynesianism was unable to explain.9 It coincided equally well with the charismatic leadership of European Commission President Jacques Delors and the messages of the Commission’s legendary White Paper of 198510 which was to ‘complete’ the Internal Market with the help of institutional reforms and a new regulatory philosophy. The Hayekian turn, Friedman’s monetarism, the Chicago School’s critique of state interventionism were all contributing to a new Zeitgeist, perceived and acclaimed as an ‘institutionalisation of economic rationality’, a commitment to principles which were to guide and determine all political action.11 The broad support which this agenda obtained in so many political quarters was phenomenal, but not so surprising in view of its modernising implications. The White Paper did not advocate a one-dimensional notion of economic Chicago School-style efficiency or Hayekian market freedom. It gained broad political support because it responded to irrefutable concerns in the field of ‘social regulation’ (consumer and environmental protection and safety at work), which could, in an integrating market, no longer be pursued autonomously within the confines of the nation state. In this sense, it pursued a ‘third way’, albeit not one which would replace the ‘social regulation’ of the market with a European social democratic model.12

9 PA Hall, ‘Brother, Can You Paradigm?’ (2013) 26 Governance: An International Journal of Policy, Administration, and Institutions 189–92, 190. 10 Commission of the EC, ‘Commission White Paper to the European Council on Completion of the Internal Market’, COM(85) 310 final of 14 June 1985. 11 See MR Lepsius, ‘Institutionalisierung und Deinstitutionalisierung von Rationalitätskriterien’ [Institutionalisation and deinstitutionalisation of rationality criteria] in G Göhler (ed), Institutionenwandel (Opladen, Westdeutscher Verlag,1997) 57–69; Lepsius has recently, relying on the same methodology, provided an impressively dense analysis of the financial crisis: ‘In welchen Krisen befindet sich die Europäische Union?’ (2013) 60 Zeitschrift für Politik 182–93. 12 See G Majone, ‘Regulating Europe: Problems and Prospects’ (1989) 3 Jahrbuch zur Staats- und Verwaltungswissenschaft 159–77: Europe’s new regulatory politics could be understood as compensating for market failures through a ‘sustained and focused control … over activities that are socially valued’, Majone explained time and again with reference to Ph Selznick, ‘Focusing Organizational Research on Regulation’ in RG Noll (ed), Regulatory Policy and the Social Sciences (Berkeley CA, University of California Press, 1985) 363, 363–64. Distributive social politics, he underlined, would require majoritarian legitimacy which only constitutional democracies could provide.

Three Transformations of Europe 29 II.3. ‘One Market One Money’: Depriving the Member States of their Macro-economic Steering Powers The seemingly simply logical next step of the integration project was taken by the Treaty of Maastricht with the expansion of community powers into new, formerly uncharted fields and the establishment of the EMU. It is worth noting that the leading representatives of the ordo-liberal tradition were by no means amused.13 Their fierce critique was conclusive: How can one continue to assign a constitutive function to the ‘system of undistorted competition’ when the promotion of that system is only one among many other competing objectives, and its relative weight has to be determined in political processes? How can one reconcile the commitment to competition as the discovery procedure in economic affairs with the acknowledgement of industrial policy as a constitutionally-legitimated concern? The Treaty of Maastricht was, in their eyes, threatening the economic constitution. On paper, the EMU, as established by the Treaty of Maastricht, looked like the saviour of their project: the new exclusive European competence for monetary policy, its anti-inflationary dedication to price stability, the establishment of an independent central bank far removed from all political influence and placed firmly outside the institutional structures of the Union—this ensemble militated for such a reading and nurtured pertinent hopes. The designers of this architecture, however, realised and admitted that the whole edifice was fragile as long as both ‘economic policy’ and ‘fiscal policy’ remained national domains without the guidance of a ‘political union’. This is why the Stability Pact14 was needed. Additional precautionary safeguards were institutionalised in Article 122 TFEU with its restrictive definition of circumstances which justify financial assistance to a state in difficulties, and in the ‘no bail-out’ provision of Article 125 TFEU. The readiness, however, to turn a blind eye to the conditions for accession to the Eurozone discredited the trustworthiness of these accomplishments. Even more striking is the systematic neglect of the deep varieties of Europe’s forms of capitalism and the lack of serious open debates on the socio-economic conditions and prospects of ‘an ever-closer Union’. They could have made Europe’s publics aware of the political difficulties and economic costs of what it would have meant to take the new regime really seriously. It seems, against this background, hardly surprising that the Stability Pact was disregarded by such central players as Germany, France and The Netherlands, and that the Commission’s much vaunted efforts to take action against the deficits dwindled into nothing.15 It has nevertheless become routine to assign the failure of the EMU to non-compliance with its rules

13 Suffice it here to name ME Streit and W Mussler, ‘The Economic Constitution of the European Community. From “Rome” to “Maastricht”’ (1995) 1 European Law Journal 5–30. 14 Note 1 above. 15 For more detail on the following, see C Joerges, ‘What is left of the European Economic Constitution? A Melancholic Eulogy’ (2005) 30 European Law Review 461–89, at 476–78.

30 Christian Joerges and to conclude that such laxity would, in the future, have to be impeded by ever stricter economic governance. An alternative, more honest and more intriguing interpretation would attribute non-compliance to the economic, social and political costs of the enforcement of a regime which represented an ill-defined political compromise rather than a sustainable accomplishment of constitutional validity and strength. The new Treaty and the political compromises characterising its implementation were nevertheless enormously important. The integration-through-law project experienced what we now perceive as a pyrrhic victory. This victory was, ironically enough, won in the legal proceedings before Germany’s Constitutional Court, in which Herr Brunner tried to prevent the ratification of the Treaty of Maastricht in order to defend the Deutschmark—the cherished incarnation of Germany’s post-war economic success and new identity.16 The judgment saved the Treaty through a ‘yes-but’ reasoning which was to become a persistent feature of the Court’s jurisprudence. The pertinent passages on Monetary Union are simply amazing and remain noteworthy: the economic constitution with its substantive and institutional substitution of politics and policies by legal rules were, according to the Court’s reasoning, nothing less than a sine qua non for German participation within Monetary Union (MU). This assertion was the Court’s response to the argument that the European Union was about to acquire such wide-ranging competences that nation states could no longer act as the masters of their ‘democratic statehood’. Economic integration, so the Court held, was an autonomous and apolitical process, which might, and indeed must, take place beyond the reach of Member State political influence. By virtue of a constitutional commitment to price stability and rules that guarded against inappropriate budgetary deficits, MU was correctly structured. Accordingly, all doubts about the democratic legitimacy of economic integration were diverted. To rephrase the argument slightly: yes, the Treaty is compatible with the Basic Law. But this is true only because it is inspired by Germany’s stability philosophy and only as long as this stability pact is actually respected. The Court had been warned, for example, by the President of the Bundesbank, that a currency union, especially between States which are oriented towards an active economic and social policy, can ultimately only be realized in common with a political union (embracing all essential economic functions) and cannot be realized independently thereof or as a mere preliminary stage on the way to it.17

It could not be so naïve as to believe in the autonomy and sustainability of the ‘stability community’. And indeed, Ernst-Wolfgang Böckenförde, one of the judges

16

Judgment of 12 October 1993, Brunner v European Union Treaty [1994] CMLR 57. On the intense controversies in Germany over the common currency at the time of its introduction, see, recently, F Heinemann, ‘Zwischen “Kernschmelze” und “Fass ohne Boden”—zum Dissens deutscher Ökonomen in der Schuldenkrise’ (2013) 60 Zeitschrift für Politikwissenschaft 207–19. 17

Three Transformations of Europe 31 of the deciding 2nd Senate, has recently underlined that the judges were, indeed, fully aware of the fragility of the new edifice: The decision to agree on a monetary union and put it into operation without a simultaneous or immediately subsequent political union is a political one, for which the institutions with competence on the matter must take political responsibility.18

One remains perplexed. The judges knew very well that it would be simply inconceivable to correct politically the deal to which they had given their blessing. And they decided accordingly when they were confronted with the request to prevent the MU from entering the third stage.19 The dynamics which had been set in motion became irresistible. The common currency had created financial interdependencies in a socio-economically ever more heterogeneous Union which went out of control. The new exclusive European competence for monetary policy was too weak an instrument to govern the European economic sphere, but strong enough to deprive the Member States of crucially important governmental powers. Europe continued to be a ‘market without a state’, while the former masters of the Treaties had become ‘states without markets’.20

III. ALTERNATIVE VISIONS AND THE THIRD TRANSFORMATION OF EUROPE

Hence, the crisis did not come out of the blue even though it came in unpredictable modes and with unprecedented intensity. Not only the crisis, but also the efforts to cope with it through new modes of economic governance were breathtaking. Within a time-span of a few years, we have witnessed the emergence of a new legal or quasi-legal discipline introducing audacious regulatory mechanisms. These changes are by now widely perceived, affirmatively, complacently, or critically, as a transformation of Europe’s constitutional condition. There is, by the same token, wide agreement that the new modes of economic governance, the new division of the Union into creditor and debtor countries, and the imposition of rigid austerity measures on the debtor countries, are threatening the legitimacy of the integration project. The search for a functioning and normatively attractive ordering is hence to be continued and renewed. Such efforts must be two-fold. They have to re-examine self-critically the viability of their theoretical perspectives in the light of the experiences with the crisis, and then also reflect on the steps that have to be undertaken in order to regain constitutional ground.

18 Neue Züricher Zeitung, 21 June 2010, available at: www.nzz.ch/nachrichten/kultur/literatur_ und_kunst/kennt_die_europaeische_not_kein_gebot_1.6182412.html. 19 Decision of 31 March 1998—2 BvR 1877/97 und 2 BvR 50/98—available at: www.bverfg.de/ entscheidungen/rs19980331_2bvr187797en.html. 20 See C Joerges, ‘States without a Market: Comments on the German Constitutional Court’s Maastricht-Judgment and a Plea for Interdisciplinary Discourses’, NISER Working Paper, NISER: Utrecht, available at: eiop.or.at/eiop/texte/1997-020.htm.

32 Christian Joerges III.1. The Conflicts-Law Approach in Crisis We depart from the alternative that we have been advocating and elaborating on, first under the label of ‘deliberative supranationalism’, then as ‘a new type of conflicts-law’, and, more recently, as ‘conflicts-law constitutionalism’.21 Two core ideas on the functions and legitimacy of European law have oriented this reconceptualisation: (1) European conflicts-law should require the Member States of the Union to take their neighbours’ concerns seriously—in this respect, it aims at compensating the structural democratic deficits of nation-statehood. Here lies an inherently democratic potential of EU law, which is categorically different from that of nation states. Under the impact of Europeanisation, our societies are experiencing an ever-greater gulf between decision-making in and by individual polities and the impact of such decisions on foreign citizens. This schism is a normative challenge to democratic orders because the very notion of democratic self-legislation requires that citizens who are the addressees of a law and affected by it can, in the last instance, interpret themselves as its authors. The core problem of this dimension of conflicts-law is to determine the legitimacy of the restrictions of national political autonomy and to substantiate principles and mechanisms of mutual consideration. (2) European societies furthermore experience—in many domains—that they are not, or are no longer, in a position to ensure responses to their concerns autonomously but instead depend on transnational co-operation. European conflicts-law has therefore a vocation to structure co-operative problem-solving in such fields. The core problem here is the quality of such co-operative modes. Co-operation cannot be equated with democracy, but it should be organised so to ‘deserve recognition’.22 All this is not to say that the argument about the structural democracy deficit of nation states and their cure by European prerogatives would be simply selfevident and easily applicable. But its theoretical credentials are by now quite impressive: Nation-states … encumber each other with the external effects of decisions that impinge on third parties who had no say in the decision-making process. Hence, states cannot escape the need for regulation and coordination in the expanding horizon of a world society that is increasingly self-programming, even at the cultural level.23 21 For a recent elaboration, see C Joerges, ‘Conflicts-Law-Constitutionalism, Ambitions and Problems’ in M Cremona et al (eds), Reflections on the Constitutionalisation of International Economic Law: Liber Amicorum for Ernst-Ulrich Petersmann (Leiden, Brill, 2013); for a brief restatement and critical discussion, see C Joerges, PF Kjaer and T Ralli (eds), ‘Conflicts Law as Constitutional Form in the Postnational Constellation’ (2011) 2 Transnational Legal Theory (Special Issue) with contributions by M Amstutz, M Everson, M Herberg, PF Kjaer, AJ Menéndez and F Rödl. 22 ‘Comitology’ provided a case of exemplary importance for such perspectives. But see on its present state the contribution of J Falke, Chapter eleven in this volume, and C Joerges and J Neyer, ‘Deliberativer Supranationalismus in der Krise’, ZERP-Arbeitspapier 1/2014, available at: www.jura. uni-bremen.de/institute/zentrum-fuer-europaeische-rechtspolitik/publikationen/arbeitspapiere. 23 J Habermas, ‘Does the Constitutionalization of International Law still have a Chance?’, trans C Cronin, in Habermas, The Divided West (Oxford, Polity Press, 2007) 113–93, 176.

Three Transformations of Europe 33 Ulrich K Preuß has recently refined this further. Under conditions of interdependency, he argues, it is only through transnational co-operation that the domination of others can be transformed into legitimated rule. In this understanding, the integration project, if properly institutionalised, is not democratically deficient but a necessary pre-condition of democratic rule within constitutional democracies.24 Theoretically and normatively attractive as this may be, the crisis has damaged our project de facto. Our re-conceptualisation of European law as a new type of conflicts-law was designed as an exercise in critical theory with normative perspectives which would not confront the state of the integration project with merely normatively attractive ideas but which, in the tradition of the Frankfurt School, would identify aspects of the integration process which had a potential for institutional innovations, and might, thanks to the ingenuity of committed actors, be transformed in a constructive way. As it seemed in less troubled times, conflicts-law constitutionalism could eventually be elaborated further and proceed as a re-constructive project, ie, a re-conceptualisation of European law which would, to a considerable degree, be compatible with European law as it stood, and be able to orient its further development. The re-constructive status was based upon its sociological premises which reflect the conflict-laden European constellation more adequately than the orthodoxy of European law. All that seemed necessary, and was, indeed, overdue, was to re-consider the integration project in the light of Europe’s ever-growing diversity, to take the conflicts which this diversity generated into account, and to re-orient Europe’s agenda from harmonisation and unity to the fair management of complex conflict constellations under appropriate proceduralised safeguards. What is left of such aspirations after the financial crisis? The ‘external effects’ of national fiscal policies on the whole of the Eurozone are clearly visible. These effects are both deplorable and uncontrollable under the soft regime of the old stability pact. It seems intuitively only logical to establish regimes under which this failure can be cured. And indeed, the core of the recent transformation of Europe’s economic constitution is budgetary discipline, as agreed upon in the Fiscal Compact (Treaty on Stability, Co-ordination and Governance (TSCG)), in force as of 1 January 2013.25 National budgets have to be ‘in balance’ or ‘in surplus’. This goal will be deemed to have been met if their ‘annual structural government deficit’ does not exceed 0.5 per cent of nominal GDP. This discipline affects the whole range of policy-making, as every policy requires financing. This is a major substantive restraint on the political autonomy which constitutional

24 UK Preuß, ‘Gibt es eine völkerrechtliche Demokratietheorie?’ in HM Heinig and JP Terhechte (eds), Postnationale Demokratie, Postdemokratie, Neoetatismus (Tübingen, Mohr Siebeck, 2013) 169–78. In the same vein, see M Kumm, ‘Kosmopolitischer Staat und konstitutionelle Autorität. Eine integrative Konzeption Öffentlichen Rechts’ (2013) 21 Der Staat 245–66. 25 See: www.consilium.europa.eu/homepage/showfocus?focusName=fiscal-compact-enters-intoforce-on-1-january-2013.

34 Christian Joerges democracies used to enjoy. Its attainment through an international treaty without an amendment of the European Treaties and constitutional changes by the Member States subsequent to the ratification process is a procedural novelty. Compliance with the new discipline is accomplished through the ‘preventive arm’ and the ‘corrective arm’ of the stability and growth pact.26 With the corrective arm, country-specific medium-term budgetary objectives are established. This happens in two steps, the first taken by a submission of such draft budget by the Member States, the second by annual assessments and fiscal surveillance under the European Semester. With the preventive arm, ‘excessive deficits’ (a disregard of the requirements that the government budget-deficit relative to the gross domestic product (GDP) must not exceed three per cent and public debt must not exceed 60 per cent of GDP (or at least diminish sufficiently towards the 60 per cent) can trigger serious sanctions, such as annual fines for euro area Member States and, for all countries, possible suspension from the Cohesion Fund financing until the excessive deficit is corrected. Control and supervision are tightest where Member States seek financial assistance under the ESM Treaty. Article 3 explains the objective: [T]o mobilise funding and provide stability support under strict conditionality, appropriate to the financial assistance instrument chosen, to the benefit of ESM Members which are experiencing, or are threatened by, severe financing problems, if indispensable to safeguard the financial stability of the euro area as a whole and of its Member States.27

The design of both the objectives and the instruments through which they are pursued is not meant to foster deliberation and/or experimentalism, but is determined by what seems necessary to ensure the survival of the euro. These necessities have to be spelled out under conditions of high uncertainties. They can seek, and do seek, expert advice, but there is no such thing as ‘objective’ knowledge which would ensure the validity of their recommendations.28 The ‘Memoranda of Understanding’ (MoU) between the ESM and the state seeking support codifies in great detail discretionary assessments. This exercise of authority is neither based upon democratic processes, nor upon an exchange of reasons among equals; this is an authoritarian type of rule characterised by the kind of decision-making which Carl Schmitt foresaw and asked for in a state of emergency.29 ‘Conditionality’ as prescribed in the ‘Memoranda of Understanding’, which Member States in difficulties have to sign, amounts to a sell-out of the political autonomy and responsibility of democratically-legitimated institutions, an

26

See: ec.europa.eu/economy_finance/economic_governance/sgp/index_en.htm. The Treaty is available at: www.european-council.europa.eu/media/582311/05-tesm2.en12.pdf. 28 For a lucid and stringent explanation, see D Innerarity, ‘Power and Knowledge: The Politics of the Knowledge Society’ (2012) 16 European Journal of Social Theory 3–16. 29 See D Chalmers, ‘European Restatements of Sovereignty’, LSE Law, Society and Economy Working Papers 10/20; C Joerges, ‘Law and Politics in Europe’s Crisis: On the History of the Impact of an Unfortunate Configuration’ (2014) 21 Constellations (forthcoming). 27

Three Transformations of Europe 35 exchange of obedience for money.30 These deals are instituted outside European law as far as the ESM Treaty is concerned. ‘Conditionality’ has been integrated with the help of Article 48 into Treaty law (Article 136 II as amended). Its legitimacy, if not its legality, remains nevertheless dubious. The crisis management in which European institutions participate suspends the order of competences which formally remain in place. Are such practices compatible with the commitments of the Union to democracy and the rule of law, one wonders?31

III.2. False Commonalities: Contrasting Readings of the Argument from External Effects Our premises have gained considerable attention and recognition in the debates on the containment of the financial crisis. The most prominent effort to explain why new modes of economic governance are not merely a command of functional necessity but may ‘deserve recognition’ has been submitted by Miguel Poiares Maduro.32 His premises read like a re-statement of the conflicts-law approach: The EU should not be constructed as a challenge to national democracy but, instead, as offering renewed possibilities for democracy and social justice where States can no longer offer them.

And he continues a couple of sentences thereafter: The origin of the crisis can be found in the democratic failures of some states and the externalities they imposed on others but also in the incapacity of national democracies to control excessive cross-border capital flows.33

But, at this point, our communalities end. Maduro is not concerned about the normative quality of rescue operations, about democratic procedures of will-

30 ‘Zero choice democracy’ is an adequate characterisation of this kind of understanding; see N Hlepas, ‘Supra-national Technocracy and Zero Choice Democracy: The Greek Experience’, Athens/ Darmstadt (ms on file with the author). 31 See, in some detail with pertinent references, C Joerges and M Weimer, ‘A Crisis of Executive Managerialism in the EU: No Alternative?’ in G de Búrca, C Kilpatrick and J Scott (eds), Critical Legal Perspectives on Global Governance: Liber Amicorum for David M Trubek (Oxford, Hart Publishing, 2013) 295–322, at 314 et seq. H Enderlein’s analysis in his ‘Das erste Opfer der Krise ist die Demokatie: Wirtschaftspolitik und ihre Legitimation in der Finanzmarktkrise 2008–2013’ (2013) 54 Politische Vierteljahresschrift 714–39, is, in many respects, very similar. In his account, European governance has adopted an ‘Exekutivmodus’. A difference may exist with regard to the question mark in our title. As is argued in Section IV below, we do not give up the hope that a return into a constitutional condition can be organised. Enderlein seems pessimistic but underlines the need to legitimate re-distributive policies under conditions of high uncertainty and over long periods of time. For the affinities between the European turn to conditionality and internal investment law are striking; see D Schneiderman, ‘Compensating for Democracy’s “Defects”: The Case of International Investment Law’, Chapter two of this volume. 32 ‘A New Governance for the European Union and the Euro: Democracy and Justice’, European Parliament, September 2012, available at: www.europarl.europa.eu/studies. 33 Ibid, at 7.

36 Christian Joerges formation and the political accountability of transnational crisis management to European constituencies, but, instead, equates democracy deficits with economic externalities. This categorical and practical discrepancy becomes very drastically visible in his advocacy for transnational powers: [I]t is fundamental for democracy to be linked to a theory of justice in the EU. Citizens should be able to understand the benefits flowing from the process of European integration but also why those benefits come with certain duties towards others. Rights must be complemented by political empowerment and civic solidarity for the Union to be able to develop a really legitimate form of economic and political governance.34

This quest is underpinned by a very realistic statement on Europe’s ‘political deficit’: The Member States are ‘incapable of internalizing the consequences of the interdependence generated by the Euro and integrated markets’, whereas ‘the Union’s failure to solve the crisis is, instead, imputable to the diffuse character of its political authority and its excessive reliance on national politics’.35 It follows that justice and democracy in the Union can only be attained if financial solidarity in the EU is ‘detached from transfers between states and related, instead, to the wealth generated by the process of European economic integration’.36 In more mundane words, the Union needs, in particular, genuine taxing powers which would provide the means to pursue commitments to justice which would, at the same time, be democratically legitimated if, and, indeed, because, European citizens would become aware of the origin of these resources.37 This is amounts to the empowerment of Europe to execute what economic rationality—supposedly— requires and then fails to provide democratic credentials for such assumed requirements.38

34 Ibid. In a related paper on ‘The Euro Crisis and the Democratic Governance of the Euro: Legal and Political Issues of a Fiscal Crisis’ (Florence, 2012, ms on file with author) Maduro argued: ‘First, the lack of fiscal discipline of some states can produce externalities on other states. This can be presented as a democratic problem since the interests of the latter state are not taken into account in the former state’s democratic process (the EU can, in many respects, be presented precisely as expanding the scope of interests to be taken into account in national democracies). Second, budget deficit limits also help correcting an inter-generational democratic problem within the State (the generation that decides on the deficit is not necessarily the same that pays it) and, more broadly, disciplining the risks of political malfunction arising from the pressures of cycles. It is not uncommon for political communities to insulate certain issues from the pressure of day to day politics in order to attend to long term interests’. 35 Ibid, 1. 36 Ibid, at 1–2. 37 Ibid, at 12. 38 See, on these queries, AJ Menéndez, ‘Neumark’s Revenge: Taxing, not Exchequering the European Crises’ in D Chalmerds, M Jachtenfuchsa and C Joerges, Adjusting to European Diversity: The End of the Eurocrats’ Dream (Cambridge, Cambridge University press, 2015 forthcoming). On the, by now, officially confirmed suggestion of curing the democracy deficit through an election of the President of the Commission by the European Parliament; see C Joerges and F Rödl, ‘Would the election of a Member of the European Parliament as President of the Commission make democratic sense?’, available at: verfassungsblog.de/election-member-european-parliament-president-commissiondemocratic-sense.

Three Transformations of Europe 37 III.3. The Complementarities of Conflicts-Law Constitutionalism and Demoi-cracy Theory The conflicts-law approach is by no means unique in its quest for a European ‘unity in diversity’ which not only tolerates the specifics of national traditions but also assumes that this respect has the potential to promote a performance which is superior to that of the ‘one-size-fits-all’ philosophy which underlies the dominant integration strategies. There are clear affinities between our approach and the demoi-cratic theory which envisages ‘a Union of peoples, understood both as states and as citizens, who govern together but not as one’,39 or a ‘“republican” as opposed “liberal” intergovernmentalism’.40 There is no space here for a comprehensive review of these visions and their refinements, however.41 Suffice it to underline three aspects and affinities: (1) The first concerns the anchoring of citizenship in both the Member States and the Union, and as a notion which comprises political rights and social commitments beyond the freedoms of market citizens—and the differentiation between both. (2) The second concerns the understanding of the economy as a polity; even though the proponents of democratic theory do not discuss economic sociology, their understanding of democratic societies seems at least compatible with the Polanyian notion of social embeddedness and the insights of political economists into the varieties of Europe’s capitalism. (3) From these assumptions, it follows, stringently in my view, that Europe’s ‘ever closer Union’ must not be conceptualised as a society with a single demos which is on its way to a European state or federation. This Union must, instead, learn to live with its variety and the conflict constellations which this variety is bound to generate. This learning means, first and foremost, that all European societies have to respect the concerns of the others and to engage in co-operative problem-solving. Both of these challenges are addressed by conflicts-law constitutionalism with its commitment to law-mediated legitimacy. The most challenging issue in the present crisis concerns the bond between the demoi of the Union. Jürgen Habermas has recently re-constructed the duality of European and national citizenship as a dual commitment of Europeans as citizens both of their national states and of the Union.42 He by no means disregards the tensions of and among European citizens, but he believes that these citizens are increasingly becoming aware of their dual status, and that this transformation 39 For this formula, see K Nicolaïdes, ‘European Demoicracy and its Crisis’ (2013) 51 Journal of Common Market Studies 311–39, at 311. 40 R Bellamy, ‘“An Ever Closer Union Among the Peoples of Europe”: Republican Intergovernmentalism and Demoicratic Representation within the EU’ (2013) 35 Journal of European Integration 499–516, at 500. 41 See, in particular, F Cheneval, The Government of the Peoples: On the Idea and Principles of Multilateral Democracy (New York, Palgrave Macmillan, 2011); F Cheneval and F Schimmelfennig, ‘The Case for Demoicracy in the European Union’ (2013) 51 Journal of Common Market Studies 334–50. 42 J Habermas, ‘The Crisis of the European Union in the Light of a Constitutionalization of International Law’ (2012) 23 European Journal of International Law 335–48.

38 Christian Joerges of their mind-sets will generate solidarity and an identity spanning the national citizenries.43 Demoi-cracy theorists are more cautious, however. Although they tend to assume that ‘peoples and persons have a growing interest not only in the legitimacy of democratic decision-making within states but also between them’,44 they differentiate between the solidarity within national societies and the solidarity between them, and do not expect their convergence. It seems therefore, in principle, legitimate that the representatives of European citizens bring national interests to bear in their negotiations with other governments. At this point, Habermas seems to disagree: although he realises that Europe’s political élites tend to pursue particularistic-egoistic orientations in order to please their electorates, he expects that the crisis will force them to ‘rally the population behind a common European future’. There is a touch of voluntarism in this assumption which contrasts markedly from the demoi-cratic expectations and orientations. The discussion of solidarity illuminates this divergence clearly. Habermas does not negate the classical distinctions between solidarity and justice, the particularism of the former and the universalism of the latter. But he derives from the historical roots of the integration project and its present malaise a normative obligation of ‘Germany and several other countries to accept short- and medium-term negative redistribution effects’, subject to the condition, however, that those who demand assistance are ‘ready to accept the complementary step of transferring required sovereignty rights to the European level’.45 The normative stringency of this argumentation depends upon premises which are extremely risky. What we have witnessed in the third transformation of Europe are centralising transgressions of European legal competences and factual capacities. There are good reasons to insist on the solidarity of the socalled donor countries which were involved in the mis-construction of the EMU and which have then profited from its defects.46 It seems nevertheless important to explore alternatives to the ‘ever-more-Europe’ option and to consider how they might be realised.

43 Ibid, at 343: ‘What counts as a public interest orientation within a particular nation state changes at the European level into a particularistic generalization of interests confined to one’s own people, and that may well come into conflict with the generalization of interests’. 44 Bellamy, n 40 above, at 505. 45 See his lecture on ‘Democracy, Solidarity and the European Crisis’, delivered on 26 April 2013 at Leuven University, available at: www.kuleuven.be/communicatie/evenementen/evenementen. 46 See the similar account of G Majone, Rethinking the Union of Europe Post-Crisis. Has Integration Gone Too Far? (Cambridge, Cambridge University Press, 2014), 236-255, on the one hand, and C Offe, ‘Europe Entrapped. Does the EU have the Political Capacity to overcome its Current Crisis?’ (2013) 19 European Law Journal 585–611, on the other; for an illuminating analysis of the notion of solidarity, see M Sandel, ‘Solidarität’ (2013) 44 Transit 103–17.

Three Transformations of Europe 39 IV. UNFREEZING THE LAW-POLITICS RELATIONSHIP THROUGH CONFLICTS-LAW CONSTITUTIONALISM

The law-politics relationship is tragically involved in the European malaise in a three-fold way: (1) The integration-through-law machinery is insensitive to the political problématique of the European project. (2) The institutional framework of this project fosters the expansion of European law as an end in itself; equating ever more law with ever more Europe and the promotion of the benefit of its citizens. (3) The system of adjudication tends to step in where politics is at an impasse, but cannot substitute political deliberation. These fallacies require a re-configuration of the law-politics relationship in essentially two respects: (1) European law production must overcome the equation of uniformity with validity; it must cease to treat diversity as being inherently problematical and uniformity as being inherently better. (2) European law must cease to substitute politics with legal constructs and must, instead, ensure political contestation and provide frameworks for legally disciplined problem-solving. The idea of conflictslaw constitutionalism seeks to accomplish precisely these objectives. However, as we have underlined, the conflicts-approach has lost its re-constructive quality. It needs to be attuned to the new conflict configurations which the financial crisis has both revealed and generated. At this point, however, theoretical confidence in the normative validity of the conflicts-law approach has to be complemented by prescriptive modesty. The reasons are again—at least—three-fold: (1) Contrary to what the ‘no-alternative’ rhetoric of some political leaders suggests, our understanding of the causes of the crisis, our insights into its dynamics, and the means at our disposal for its containment are fallible and limited; indeed, the pretence of such knowledge is a massive and dangerous fallacy. (2) The reliance on fictitious regularities in which the functioning of the economy and society is equated with that of machines is, at the same time, a political and democratic fallacy. It is irreconcilable with the very idea of democratic will formation and tends to underestimate the ingenuity of democratic processes and the constructive potential of contestation. (3) There is hence no alternative to a search for ways out of the crisis through a ‘discovery procedure of practice’ which is instigated by controversy, and guided by the effort to find, and the readiness to accept, fair conflict resolutions. The difficulties and prospects of this search can best be defined negatively, namely, by a critique of the type of ‘crisis law’ which we have seen emerging in the third transformation of the integration project,47 and to which, by now, both the German Constitutional Court48 and the CJEU (sitting as Full Court)49 have given their blessing. Both of these judgments have implicitly accepted the conceptual 47

See Section III.1 above. Decision of 12 September 2012 on the ESM and Fiscal Compact, 2 BvR 1390/12; an— incomplete—translation is available at: www.bverfg.de/entscheidungen/rs20120912_2bvr139012en. html. 49 Case C-370/12 Pringle v Government of Ireland, Ireland and the Attorney General, judgment of 27 November 2012, nyr. 48

40 Christian Joerges basis of this transformation and refrained from subjecting the most important measure of Europe’s political praxis to critical legal yardsticks. The consensus in principle between politics and the judiciary is not perfect, however, and, more importantly, one can infer from both judgments conflicts constellations which have not been definitely settled. IV.1. The EP and National Parliaments: Institutional Interests and Re-politicisation ‘The lack of parliamentary politics is … the most disturbing element of European democracy’.50

The EP, as the most visible institutional embodiment of the Union’s democratic commitments, tends to be marginalised in Europe’s state of emergency by the new transgovernmentalism of the European Council.51 National parliaments, too, are in difficulties, albeit of different kinds. The debtor countries under the ESM that signed so-called Memoranda of Understanding have to pay with the loss of their political autonomy for access to financial funds—and their parliaments are forced to accept what they cannot like. The German Federal Constitutional Court has responded to the quest for solidarity on the part of the Member States in difficulties by rendering the signing of the Memoranda contingent upon the approval of the Bundestag.52 This requirement is a double-edged gift. Anybody aware of the time constraints under which such decisions have to be taken will wonder about the quality of such supervision.53 More irritating, however, is the Court’s failure to consider how the practice of conditionality affects the constitutional principles of the Member States concerned. The one-sidedness of the Court’s protection of the German Constitution mirrors precisely the democracy failure of autonomous nation-state decision-making which the conflicts-law approach seeks to cure. The position of a parliament preserving its budgetary autonomy at the cost of those who experience the constraints of ‘conditionality’ mirrors nothing better than the power asymmetries between the very states that those parliaments represent. Sensitive observers have started to plea for interparliamentary co-operation.54 The vision embedded in such quests for a new 50 J Pollak, ‘Compounded Representation in the EU: No Country for Old Parliaments?’ in S Kröger (ed), Political Representation in the European Union: Still Democratic in Times of Crisis? (AbingdonNew York, Routledge, forthcoming 2014), Part I, Section 1. 51 JE Fossum, ‘The structure of EU-representation and the crisis’ in S Kröger (ed) (ibid), Part I, Section 3. 52 See decision of 12 September 2012, n 48 above, in particular para 274. 53 ‘Is there no time for the law?’, Winfried Hassemer, the late constitutional judge, asked in the Frankfurter Allgemeine Zeitung in its 28 June 2012 issue. By now, the potential of parliaments gets more systematic attention; see, for example, A Maurer, ‘From EMU to DEMU: The Democratic Legitimacy of the EU and the European Parliament’, IAI Working Papers 13/11—April 2013. 54 See, only, A Benz, ‘An Asymmetric Two-level Game. Parliaments in the Euro Crisis’ in B Crum and JE Fossum (eds), Practices of Inter-Parliamentary Coordination in International Politics—The European Union and Beyond (London, Routledge, 2013) 125–40.

Three Transformations of Europe 41 sphere of ‘deliberative supranationalism’55 is certainly not meant to suggest that parliamentary representation at European level could be accomplished through the ensemble of national parliaments. Equally weak seems its problem-solving potential. Such communication may nevertheless foster the mutual respect of essential constitutional principles and thus exclude the kind of disrespect which the German Federal Constitutional Court has exercised in its ESM judgment. It may also release new political energies in the defence of such principles against intrusive executive managerialism. Such conflict constellations seem quite obvious in the context of the European Semester. To be sure, this procedure seeks to co-ordinate budgetary and economic policies ex ante, and is meant to reduce the political autonomy of national parliaments, with the EP’s role in this system being formally-speaking quite marginal. And yet, and somewhat paradoxically, some hopes are nurtured by the, so far, unimpressive outcome of the new regime. Assuming that the experts and technocrats in the Directorate General for Economic and Financial Affairs (DG ECFIN) in the European Commission and the European technocratic networks will not deliver what their political masters are promising, will parliamentarians seek advice elsewhere? What if they realise that the economic masterminds are themselves at a loss? What if it becomes ever more widely noticed that the ossification of the dominance of the ‘logic of the market’56 through law simply fails to take the ‘strange non-death of neoliberalism’ into account? A recent study on the legitimacy and effectiveness of the European Semester commissioned by Policy Department A of the EP57 concludes that output legitimacy cannot be accomplished under the uncertainties of the crisis while input legitimacy will depend, first and foremost, on the involvement of the parliaments. The powers of national parliaments remain considerable as long as they retain their so-called ‘ownership’ of the national contributions to the Semester process.58 It is hence not only conceivable, but also quite likely, that, in the none too distant future, the new policy co-ordination within the annual European Semester, the reporting and multilateral surveillance obligations, the macroeconomic imbalance procedures, and the responses to country-specific recommendations will lead to new assessments of the weight of socio-economic diversity, insights into the social embeddedness of the markets, acknowledgement of the different regulatory, social and economic

55 As opposed to U Puetter’s deliberative intergovernmentalism; see his ‘Europe’s Deliberative Intergovernmentalism: The Role of the Council and European Council in EU Economic Governance’ (2012) 19 Journal of Public Policy 161–78. 56 See the judgment in Pringle, n 49 above, para 136. 57 M Hallerberg, B Marzinotti and GB Wolff, ‘An Assessment of the European Semester’, study commissioned by the EP, Brussels 2012, 77 et seq, available at: www.europarl.europa.eu/studies. 58 Lawyers should add—and did add—that even the ‘soft’ powers of recommendations and co-ordination are subject to the rule of law and that their exercise must be legalised by an amendment of the TFEU; see B Braams, Koordinierung als Kompetenzkategorie (Tübingen, Mohr Siebeck, 2013), 228 et seq. On the range of competences disregarded by the European praxis, see A Ruser at: blogs. lse.ac.uk/europpblog/2014/01/30/the-eus-new-economic-governance-is-blurring-the-boundariesbetween-european-competences-and-domestic-sovereignty.

42 Christian Joerges cultures in the Member States, and a search for innovative responses to complex conflict constellations.59 All this is not to say that the law could build upon, let alone offer, new conceptual guidance. The point is rather that law may be better advised to become sensitive to political contestation and learning rather than opting to operate upon the basis of discredited assumptions.

IV.2. The Rebirth of the Social Question The move towards the type of ‘economic governance’ which the third transformation seeks to realise has long since been under way and the same is true for the abandonment of the ‘European social model’. More than a decade ago, Fritz Scharpf, in his discussion of the open method of co-ordination, observed that the policies promoted under this flag had to respect the priority of the internal market objectives and of the EMU.60 To be sure, alternative accounts of European social policy point to the structural changes of industrial societies and explain upon that basis the new ‘marketisation’ of labour, suggesting that high labour standards would foster quality production, skill formation and co-operation. After the Eastern enlargement, however, these debates were overshadowed by Europe’s new socio-economic diversity and the quest of the accession states to gain access to the labour markets of ‘old Europe’. The response was the judgments of the ECJ in Viking and Laval, both handed down in December 2007.61 By now, the imperative of euro survival has radicalised the pressures on welfare state traditions. The Euro Plus Pact of 201162 listed the measures which the signatories were expected to undertake in order to adapt their employment regimes to the exigencies of competitiveness. The Pact relied on the open method of co-ordination so

59 To be sure, according to the pertinent provisions of Regulation 472/2013 EU ‘on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability’ ([2013] OJ L140/1, 27.05.2013), the legal powers of the European and that of national paliaments are quite marginal (see Pollak, ‘Compounded representation’, n 50 above). This is so obviously irreconcilable with the promise of Article 10 TEU (‘the functioning of the Union shall be founded on representative democracy’) that resistance seems pre-programmed 60 FW Scharpf, ‘The European Social Model: Coping with the Challenges of Diversity’ (2002) 40 Journal of Common Market Studies 645–70, at 655. 61 C-438/05 International Transport Workers’ Federation, Finnish Seamen’s Union v Viking Line ABP, OÜ Viking Line Eesti [2007] ECR I-10779; C-341/05 Laval un Partneri Ltd v Svenska Byggnadsarbetareförbundet, Svenska Byggnadsarbetareförbundets avdelning 1, Byggettan und Svenska Elektrikerförbundet [2007] ECR I-11767. With hindsight, we can realise how well this derogation of core institutions of labour law fits into the context of MU. Under this economic regime, national societies cannot but through a reduction of public spending and a lowering of wages maintain or regain their competitiveness once their economies are in difficulties. While this regime operated via ‘soft law’ alone, the destruction of autonomous collective bargaining is, by now, under the much stricter new crisis law, pursued with great emphasis; see F Rödl and C Callsen, ‘The Struggle for Union Rights under the Euro and the Dialectics of Social Integration’, Chapter three in this volume. 62 Conclusions of the European Council, Brussels, 24/25 March 2011, EUCO 10/11, CO EUR 6, CONCL 3 (Annex I).

Three Transformations of Europe 43 that the Member States were left with considerable leeway. The Memoranda of Understanding which countries receiving bail-out funds had to sign are much more intrusive, however.63 They are an essential element of the new economic governance and revoke the promise of a European social model which will sooner or later complement, harmonise, renew or replace the variety of national traditions. Again, however, the envisaged transformations will meet with resistance. Popular protests on the streets of Athens, Madrid, Lisbon and, to a lesser extent, Dublin, indicate that the affected citizens are anything but amused. They experience a rigid dis-embedding of their markets and cannot believe that austerity will lead to sustainable societal reform. Equally disquieting, the asymmetries in social hardship not just within national societies but, more visibly, between debtor- and creditor-states create new tensions rather than solidarity commitments among the peoples of Europe. Europe’s crisis management feels, by now, the need to complement austerity with ‘ideas to strengthen the social dimension of the EMU’.64 This at least indicates that the erosion of social integration attracts attention, and can no longer be neglected. The seriousness and impact of such announcements is anything but clear. But one can be sure that the imposition of austerity will continue to meet with resistance from national parliaments and from Europe’s trade unions. The contours of a strategy which would organise the so far eruptive countermovements and provide conceptual re-orientation beyond the stereotypes of ‘ever more Europe’, on the one hand, and populist defences of national accomplishments and sentiments, on the other, are hardly discernible. Conceptually, however, the alternative outlined above seems viable: the socio-economic diversity of the Union precludes the construction of one uniform social model. Europe will have to distinguish between domestic and inter-state justice, between the solidarity within its various societies and the solidarity between its demoi.65

IV.3. Constitutional Guardianship through an Interactive Adjudication? Regaining a constitutional condition, this is the challenge to which the tension between the European commitments to the rule of law and democracy, on the one hand, and the practices of its crisis management, on the other, is exposing us. Parliaments, the European peoples, civil society and trade unions can be expected to become aware of this challenge. But what about the so-to-speak ‘natural ally’ 63 See the analysis of C Barnard, ‘The Financial Crisis and the Euro Plus Pact: A Labour Lawyer’s Perspective’ (2012) 41 Industrial Law Journal 98–114. 64 See the Commission Communication on ‘Strengthening the Social Dimension of Monetary and Economic Union’, COM(2013) 690 final of 2.10.2013. 65 See, for an elaboration, C Joerges, ‘Legitimacy without democracy in the EU? Perspectives on the constitutionalization of Europe’ in M Poiares Maduro, K Tuori and S Sankari (eds), Transnational Law: Rethinking European Law and Legal Thinking (Cambridge, Cambridge University Press, 2014) 248–68.

44 Christian Joerges of these commitments, namely, Europe’s judicial branch? It should only be a matter of time until these abstract concerns are framed as legal claims, even though there is not too much evidence of such developments to date. One signal has been sent by Portugal’s Constitutional Court,66 which has examined the compatibility of the austerity measures of the Portuguese government with the Portuguese Constitution. The Court explicitly recognised the seriousness of the current economic/financial situation and the need to attain the public-deficit goals included in the specific economic policy conditions laid down in the memoranda of understanding between the Portuguese government, the European Union and the International Monetary Fund.

However, it then objected to the implementation of these requests because of their disregard for the principles of equality and proportionality.67 This may not be much, but it is more than nothing.68 But this is not enough and there is a deeper problématique underlying these difficulties. As we have outlined briefly above69 and more extensively elsewhere,70 the ESM judgment of the German Federal Constitutional Court is an exercise in methodological nationalism because its reasoning is exclusively concerned with the defence of Germany’s Constitution, while the CJEU feels entitled to assign constitutional validity to an economic doctrine which is flawed in its conceptual premises and unworkable in practice. We have to conclude that the EU has no single constitutional guardian. But this is not the end of our story or of conflictslaw constitutionalism. The gist of this approach is that we cannot conceptualise a uniform European law whose dignity would be preserved by the CJEU thanks to the supremacy of its jurisprudence. The constitionalisation of Europe must

66 Acórdão No 187/2013, Processo no 2/2013, 5/2013, 8/2013 e 11/2013, Plenário, English translation available at: www.tribunalconstitucional.pt/tc/en/acordaos/20130187s.html; for an encouraging commentary, see Barnard, ‘The Financial Crisis and the Euro Plus Pact’ (n 63 above), Section C, text accompanying fns 37 et seq. 67 M Ioannidis, ‘EU Financial Assistance Conditionality’, Heidelberg Journal of International Law (forthcoming, text accompanying fn 183 et seq), points to a more audacious judgment of the Greek Supreme Administrative Court. The court found that the cuts imposed on public sector pensions ‘violate the principles of a social state, but also lead to its destruction since they deteriorate the pensioner’s situation to such a level that the principle of human dignity according to the Constitution is jeopardised’. See C Akrivopoulou, ‘Facing l’état d’exception: The Greek Crisis Jurisprudence’ (2013) International Journal of Constitutional Law Blog, 11 July 2013, available at: www.iconnectblog. com/2013/07/facing-letat-dexception-the-greek-crisis-jurisprudence. 68 A Fischer-Lescano has summarised the broad spectre of human rights violations through austerity measures in a pertinent study: ‘Human Rights in Times of Austerity Policy—The EU institutions and the conclusion of Memoranda of Understanding’, available at: www.jura.uni-bremen. de/institute/zentrum-fuer-europaeische-rechtspolitik/aktuelles. It remains to be seen, however, how these normative claims can be integrated in the search for a way out of the crisis which would take into account the constraints and uncertainties under which Europe’s crisis management operates. 69 Section IV. 70 M Everson and C Joerges, ‘Who is the Guardian for Constitutionalism in Europe after the Financial Crisis?’ in S Kröger (ed), n 50 above, 197–212.

Three Transformations of Europe 45 be understood as a process, and needs to operate through a proceduralisation of the category of law. This is not just utopian, but a vision which seems clearly present in a passage of the German ESM judgment in which the German Federal Constitutional Court re-defined the eternity clause (Article 79(3) of the Basic Law) in the following way:71 Article 79(3) of the Basic Law does not guarantee the unchanged existence of the law in force, but those structures and procedures which keep the democratic process open and, in this context, safeguard parliament’s overall budgetary responsibility … If the monetary union cannot be achieved in its original structure through the valid integration programme, new political decisions are needed as to how to proceed further. It is for the legislature to decide how possible weaknesses of the monetary union are to be counteracted by amending European Union law (emphasis added).

We can infer from this passage, the insight that the future constitutional gestalt of the Union cannot be shaped democratically from within one single national order and that judicial supervision of the European constitutionalisation process cannot be understood as an exclusive responsibility of the CJEU. This process must instead involve the constitutional courts of the Union and build upon their interactions with the CJEU. This is a demanding vision, but one which has a basis in the performance of Europe’s judiciary and can be re-constructed accordingly.72 We should refrain from any prophecy about the ingenuity of the judiciary and the future constitutional architecture of the Union. We can nevertheless defend our assertion that conflicts-law constitutionalism has retained its analytical 71 I am relying in that interpretation on M Everson, ‘An Exercise in Legal Honesty: Re-writing the Court of Justice and the Bundesverfassungsgericht’, Institute for Advanced Studies, Vienna, Political Science Series, 136/2014, available at: www.ihs.ac.at/publications/pol/pw_136.pdf, and on C Franzius, ‘Demokratisierung der Europäischen Union’ (2013) Europarecht 655–67, in particular 663, fn 22. 72 See L Viellechner, ‘Berücksichtigungspflicht als Kollisionsregel: Zu den innerstaatlichen Wirkungen von völkerrechtlichen Verträgen und Entscheidungen internationaler Gerichte, insbesondere bei der Auslegung und Anwendung von Grundrechten’ in N Matz-Lück and M Hong (eds), Grundrechte und Grundfreiheiten im Mehrebenensystem—Konkurrenzen und Interferenzen (Berlin-Heidelberg, Springer, 2012) 109–59; M Wendel, ‘Richterliche Rechtsvergleichung als Dialogform: Die Integrationsrechtsprechung nationaler Verfassungsgerichte in gemeineuropäischer Perspektive’ (2013) 52 Der Staat 339–70. Does the decision of 15 January 2014 on the legality of the ECB’s Outright Monetary Transaction programme (BVerfG, 2 BvR 2728/13 vom 14.1.2014, Absatz-Nr (1–105), available at: www.bverfg.de/entscheidungen/rs20140114_2bvr272813en.html) signal the Court’s readiness to engage in such discourses? It has been widely noted that the German Court has, for the first time, made use of the reference procedure. This is in line with its announcement in the Honeywell judgment (BVerfG, 2 BvR 2661/06 vom 6.7.2010, Absatz-Nr (1–116). It does not mean, however, that the court has subjected itself without further ado to the authority of the CJEU. It has made it so abundantly clear that in its view, the ECB has taken action outside its mandate that it is difficult to see how the CJEU could come up with arguments that would lead the German court to believe that there was no ‘manifest and structurally significant transgression of powers’. It is equally unconceivable that the CJEU will subscribe to the German reasoning. Educated guesses on the further development of this litigation include the possibility that the European Council will approve what the ECB is willing to do—and thereby release the judiciary from an impossible task. This would confirm the primacy of the political, albeit not the return to a constitutional condition: the Council does not dispose of the kind of legitimacy which the legislative bodies of constitutional democracies can claim.

46 Christian Joerges adequacy in the framing of horizontal, vertical and diagonal conflicts which the European crisis is generating. This is what one should expect from a theoretical concept which no longer substitutes political processes with legal prescriptions. One can expect more, namely, a further substantiation of the new conflict configurations and their legal framing. This project seems worth pursuing.

2 Compensating for Democracy’s ‘Defects’: The Case of International Investment Law DAVID SCHNEIDERMAN* TORONTO

I. INTRODUCTION

I

NTERNATIONAL INVESTMENT LAW is a transnational legal order in search of a credible political theory of justification. A handful of scholars and investment tribunals have taken up a version of democratic theory in order to legitimate this form of transnational legality. Attending to the idea of inclusiveness associated with the ‘all affected’ principle1—that the authors of law may not necessarily also be its addressees2—international investment law is claimed to be vindicating the interests of those seemingly unrepresented by host-state political processes. This is a trope familiar to US constitutional law scholarship associated with ‘representation reinforcement’ or ‘political process’ review.3 Though this explanation has been offered in different investment dispute contexts, it has arisen by way of explanation for investment law’s nearly unyielding response to the measures taken by the Republic of Argentina to mitigate the effects of its economic emergency of 2001–02. International investment law looked on mostly * With apologies to Anne Peters, who describes ‘constitutionalist reconstruction’ at the transnational level as a ‘desirable reaction to the visible de-constitutionalization on the domestic level’ (A Peters, ‘Compensatory Constitutionalism: The Function and Potential of Fundamental International Norms and Structures’ (2006) 19 Leiden Journal of International Law 570–610, 580). 1 N Fraser, ‘Transnationalizing the Public Sphere: On the Legitimacy and Efficacy of Public Opinion in a Post-Westphalian World’ (2007) 24 Theory, Culture & Society 7–30, 21. 2 J Habermas, Between Facts and Norms: Contributions to a Discourse Theory of Law and Democracy, trans William Rehg (Cambridge MA, The MIT Press, 1996) 104; C Joerges and J Neyer, ‘From Intergovernmental Bargaining to Deliberative Political Processes: The Constitutionalisation of Comitology’ (1997) 3 European Law Journal 273–99, 293; C Joerges and J Neyer, ‘“Deliberative Supranationalism” Revisited’ (2006) EUI Working Paper Law No 2006/20, pp 22–23, available at: cadmus.eui.eu/bitstream/handle/1814/6251/LAW-2006-20.pdf, last accessed 20 September 2013. 3 JH Ely, Democracy and Distrust: A Theory of Judicial Review (Cambridge MA, Harvard University Press, 1980) 74.

48 David Schneiderman with contempt at state measures taken for societal self-protection in the face of an economic meltdown of epic proportions. The troubling thing is that political process review does not capture well the underlying dynamics, prevalent in the foreign investment context, comprising a struggle between powerful economic actors and host states and citizens, principally in the periphery, desperate for new inward investment. The unrest accompanying economic emergencies will tend to exacerbate the intensity of this interaction. Nor is investment law all that concerned about democratic practice. It, instead, evinces mostly disdain for host-state political processes.4 By grounding investment law in a theory of political process, the aim of investment lawyers turns out to be more strategic than re-constructive: it is to obscure investment law’s deep distrust of democracy by embracing a theory of democratic justification. Alexander Somek has expressed concern, in the European context, that political process theory, if not carefully applied in transnational contexts, is ‘vulnerable to co-optation’—that it can end up re-inforcing models of economic due process.5 The point being made here goes substantially further than this: in the investment law context, this is precisely the hoped for outcome. Investment law’s principal aim is to restore ‘normality’ to host-state behaviour, never more so than in the context of an economic emergency. Normality is determined with reference to a ‘market mimicry test’,6 to the predictable behaviour of the rational market actor (homo economicus). States and their agents, in other words, are expected to behave as do economic actors in the marketplace, and will escape legal liability when they so act. Should they step outside of this role—by interfering in the legitimate expectations that flow from contractual relations, for instance—then their behaviour will be characterised as both ‘political’ and vulnerable to legal sanction and an award of damages.7 4 Gus Van Harten’s content analysis of 243 investment treaty cases confirms this observation. He finds that ‘where elections or democracy were mentioned by arbitrators, it was often to suggest that politics had contributed to unsound decisions.’ See Gus Van Harten, Sovereign Choices and Sovereign Constraints: Judicial Restraint in Investment Treaty Arbitration (Oxford, Oxford University Press, 2013) 73. On concerns about democratic debilitation in the investment law context, see E Benvenisti and D Lustig, ‘The Multinational Corporation as “The Good Despot”: The Democratic Costs of Privatization in Global Settings’ (2013) Tel Aviv University Law Faculty Papers, Paper 172, available at: law.bepress. com/taulwps/art.172, last accessed 15 October 2013; and G Mayeda, ‘Investing in Development: The Role of Democracy and Accountability in Investment Law’ (2009) 46 Alberta Law Review 1009–38. 5 On the closure of political discourse associated with the open-method of co-ordination, see O Parker, ‘Why EU, Which EU? Habermas and the Ethics of Postnational Politics in Europe’ (2009) 16 Constellations 392–409; and, in the EU more generally, see J Habermas, ‘Europe’s Post-Democratic Era’, The Guardian, 10 November 2011, available at: www.theguardian.com/commentisfree/2011/nov/10/ jurgen-habermas-europe-post-democratic, last accessed 12 December 2012; Habermas, The Crisis of the European Union: A Response (Cambridge, Polity Press, 2012) and FW Scharpf, ‘The Asymmetry of European Integration, or Why the EU cannot be a “Social Market Economy”’ (2010) 8 Socio-Economic Review 211–50; A Somek, ‘The Argument from Transnational Effects I: Representing Outsiders through Freedom of Movement’ (2010) 16 European Law Journal 315–44, 34. 6 DK Tarullo, ‘Beyond Normalcy in the Regulation of International Trade’ (1987) 100 Harvard Law Review 547–628, 578. 7 D Schneiderman, Resisting Economic Globalization: Critical Theory and International Investment Law (Basingstoke, Palgrave Macmillan, 2013) 59–62.

Compensating for Democracy’s ‘Defects’ 49 Normality is never more desirable for foreign investors than in periods of economic crisis. It is for this reason that investment law’s structure of punishment and reward is premised on the likelihood that economic emergencies typically will give rise to abnormal political decision-making. Though investment treaties contemplate exceptional measures (as do some international treaties and many constitutions),8 these are read narrowly and confined to circumstances not encompassed by crises such as that experienced in Argentina. So, despite the availability of exceptions in many bilateral investment treaties, investment arbitration tribunals have made a habit of construing these clauses narrowly. That is, the ‘exception’ is not meant to be beyond the regime’s legal architecture—it is not a ‘space without law’9—but is entirely subsumed by it. Investment treaty protections, the CMS v Argentina tribunal declared in the first US-Argentine arbitration, are ‘clearly designed to protect investments at a time of economic difficulties’.10 Indeed, the regime has a long history of assessing the impact of ‘macro-economic events’ on investor expectations and does not hesitate in passing judgement on such state measures.11 In order to display the regime’s record of crisis management together with its disdain for democratic self-rule, I take up investment law’s response to the Argentinian economic crisis in the early 2000s (Sections III and IV). These are events described in the pages of The Economist as ‘an economic collapse to match the Great Depression of the 1930s’.12 Having taken a variety of measures for societal self-protection—the second leg of Karl Polanyi’s ‘double movement’13—such as de-linking the peso from the US dollar (‘pesification’) and freezing tariffs payable to privatised public utilities, the economic emergency precipitated some 40 plus 8 S Humphreys, ‘Legalizing Lawlessness: On Giorgio Agamben’s State of Exception’ (2006) 17 European Journal of International Law 677–87, 678. 9 G Agamben, State of Exception, trans K Attell (Chicago IL, Chicago University Press, 2005) 51; D Dyzenhaus, The Constitution of Law: Legality in a Time of Emergency (Cambridge, Cambridge University Press, 2006) 39. 10 S Schill, ‘From Calvo to CMS: Burying an International Law Legacy—Argentina’s Currency Reform in the Face of Investor Protection: The ICSID Case CMS v Argentina’ (2005) 3 Zeitschrift Für Schiedsverhafen 285–92, 315. 11 JE Alvarez, ‘The Public International Law Regime Governing International Investment’ (2009) 344 Recueil des Cours 193–541, 415, fn 607. 12 B Emmott, ‘A Survey of Capitalism and Democracy: Liberty’s Great Advance’, The Economist, 28 June 2003, 4. 13 Polanyi described two organising principles of society that he associated with the ‘double movement’. The first was the principle of ‘economic liberalism, aiming at the establishment of a self-regulating market’. The other was ‘the principle of social protection, aiming at the conservation of man and nature as well as productive organization, relying on the varying support of those most affected by the deleterious action of the market—primarily, but not exclusively, the working and landed classes—and using protective legislation, restrictive associations, and other instruments of intervention as its methods’. See K Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (Boston MA, The Beacon Press, [1944] 2001) 138–39. Curiously, Alvarez claims that recent modifications to investment strictures, such as in narrowing the scope of expropriations in the 2005 US model treaty, can be interpreted as measures for societal self-protection—part of the ‘countermovement’ contemplated by Polanyi. See JE Alvarez, ‘The Once and Future Foreign Investment Regime’ in MH Arsanjani, JK Cogan, RD Sloane and S Wiessner (eds), Looking to the Future: Essays on International Law in Honor of W Michael Reisman (Leiden, Martinus Nijhoff, 2010) 607–48, 640.

50 David Schneiderman investment disputes against the Republic of Argentina. The record, discussed in Section III below, is both discouraging and instructive about the role of law and lawyers in transnational legal fields. I then turn, in Section IV, to appeals to democratic theory by investment law scholars aiming to justify investment law’s harsh outcomes in the Argentinian cases. This calls for an evaluation, in Section V, of political process rationales in the investment law context. By way of conclusion, I propose returning to procedurally-focused solutions, such as audi alteram partem (hearing the other side), as a means of responding to the ‘all-affected’ problem. I turn first to a discussion of the dominant logic pre-supposed by the strictures of investment law.

II. JUSTIFYING NEO-LIBERALISM

International investment law is organised around a regime of 2,860 bilateral investment treaties (BITs) together with 339 other international investment agreements.14 This international assemblage is intended to protect and promote foreign investment, one of the principal drivers of the phenomenon that we associate with economic globalisation. Though the regime is authored by states via treaty, and requires their ongoing complicity in order for the regime to maintain its legitimacy, it is, uniquely, a regime enforced by investors themselves. It does not, as in decades past, rely on diplomatic protection by home states. It is claimed, therefore, that the field has been ‘de-politicised’.15 It turns out, instead, to be a costly form of privatised justice resulting in awards ranging from tens of thousands to hundreds of millions of dollars.16 It has also proven to be a lucrative source of income for scholars, lawyers and arbitrators.17 It is a regime kindred to those promoting economic freedom at regional (ie, European Union) and global (ie, World Trade Organization) levels. It is also a regime closely-associated with the rise of neo-liberalism,18 with an emphasis on efficiency and the subsumption of politics to the logic of the markets.19 Indeed, it purports to empty economics of politics entirely. 14 United Nations Conference on Trade and Development (UNCTAD), World Investment Report 2013: Global Value Chains: Investment and Trade for Development (New York-Geneva, United Nations, 2013) 101. 15 D Schneiderman, ‘Revisiting the Depoliticization of Investment Disputes’ (2012) 2010–11 Yearbook on International Investment Law and Policy 693–714. 16 Investors, of course, cannot always win otherwise states would withdraw en masse and the system would collapse. See SD Franck, ‘Rationalizing Costs in Investment Treaty Arbitration’ (2011) 88 Washington University Law Review 769–852, 812. 17 M Sornarajah, ‘The Descent into Normlessness’ in C Brown and Kate Miles (eds), Evolution in Investment Treaty Law and Arbitration (Cambridge, Cambridge University Press, 2011) 631–57. 18 D Schneiderman, ‘How to Govern Differently: Neo-liberalism, New Constitutionalism and International Investment Law’ in Claire Cutler and Stephen Gill (eds), New Constitutionalism and Word Order (Cambridge, Cambridge University Press, 2014) 165–78. 19 C Joerges, ‘What is Left of the European Economic Constitution? A Melancholic Eulogy’ (2005) 30 European Law Review 461–89.

Compensating for Democracy’s ‘Defects’ 51 If the separation of economic from political life is the sine qua non of market society, this is largely impossible—markets are ‘already embedded’. In which case, non-economic social relations of reciprocity and re-distribution are always present.20 Yet, in the current climate, little else is on offer other than the logic of ‘more markets’ to counteract its self-destructive effects. The same economic rationality that gave rise to the ongoing global economic recession, it is claimed, will provide just solutions via its ‘plebiscite of prices’.21 Investment law is constructed, then, as are its kindred legal orders, on the crude distinction between economic, and social and political life, betraying whatever democratic aspirations it may claim to have. Despite its penchant for self-authored crises, neo-liberalism has had an astonishing career. The rise and success of market orthodoxy has dampened significantly the available range of policy options on offer. The market continues to be the frame by which citizens are expected to govern themselves. As all social relations are subsumed under the market paradigm, so ‘the ability of democracy to distort the economic on behalf of the moral economy … has progressively diminished’.22 The role of states, increasingly, is confined to that of functioning as ‘debt collection agencies on behalf of a global oligarchy of investors’, observes Streeck.23 One could characterise international investment law as performing precisely this function. It is constructed to constrain the policy space of host states and to ‘chill’ them into conformity.24 Running afoul of investment treaty disciplines entitles investors to collect sunk costs and future lost profits, whatever the burden on the host states and their citizens. Having achieved this astonishing level of legal security, there seems little likelihood that the system will collapse any time soon.25 This is, in part, due to the ‘work’ of an ensemble of powerful supporting actors and institutions, including states. By insisting on the active complicity of states,26 neo-liberalism is revealed not as a fixed blueprint, but as a fluid concoction with no real consensus about the appropriate limits of state functions. Neo-liberalism’s curse, Peck observes, ‘has been that it can live neither with, nor without the state’.27 Its policies give rise to so much political volatility as to require the constant production of new and

20 Polanyi, n 13 above, 218; F Block, ‘Karl Polanyi and the Writing of The Great Transformation’ (2003) 32 Theory and Society 275–306, 297. 21 M Foucault, The Birth of Biopolitics: Lectures at the College de France, 1978–79, trans G Burchell (Houndmills, Palgrave Macmillan, 2008) 162. 22 W Streeck, ‘How to Study Contemporary Capitalism?’ (2012) 53 European Journal of Sociology 1–28, 15. 23 W Streeck, ‘The Crises of Democratic Capitalism’ (2011) 71 New Left Review (September– October) 5–29, 28. 24 K Tienhara, The Expropriation of Environmental Governance: Protecting Foreign Investors at the Expense of Public Policy (Cambridge, Cambridge University Press, 2009). 25 M Sornarajah, ‘A Coming Crisis: Expansionary Trends in Investment Treaty Arbitration’ in KP Sauvant (ed), Appeals Mechanism in International Investment Dispute (Oxford, Oxford University Press, 2008) 39–80 is more hopeful about reversing this trend. 26 Polanyi, n 13 above 147; Foucault, n 21 above, 132. 27 J Peck, ‘Remaking Laissez-Faire’ (2008) 32 Progress in Human Geography 3–43, 25.

52 David Schneiderman expanding modes of regulation.28 I turn next to an instance in which modes of neo-liberal regulation have proven to be productive precisely in this sense.29

III. ARGENTINE REGIME SHIFT30

Argentina in the 1990s enthusiastically followed directives in pursuit of the developmental path promoted by international financial institutions.31 The IMF, admittedly, did not endorse one of the main pillars of Argentina’s economic transformation: the 1991 convertibility plan pegging the Argentinian peso to the US dollar at an exchange rate of one-to-one. After initially expressing ‘misgivings’ about Argentina’s currency board, the IMF soon thereafter joined in the chorus of support.32 After years of hyper-inflation, convertibility halted the printing of money, stabilised prices, sparking a four-year period of impressive economic growth. This was the first in a series of what the IMF labelled ‘regime shifts’33 that would lead the country down the path to economic ruin. Other regime shifts, enthusiastically endorsed by the IMF in a 1998 staff report, included trade reforms (eliminating export tariffs and non-tariff barriers to trade), de-regulation (ie, abolishing regulatory and marketing boards), privatisation (of 90 per cent of all state-owned enterprises yielding about 20 billion USD in revenue), and financial system reform (banking de-regulation and accelerated foreign ownership).34 Argentina was a laggard in labour market reform, however, lamented IMF staff.35 State authority, nevertheless, was effectively conscripted so as to enable these massive regime shifts to occur. Divestiture of key state assets particularly required ongoing state complicity. The bulk of Argentinian state enterprises touching on almost every important sector in the economy, including airlines, electricity, highways, natural gas, and telecommunications, were sold in short order, without public consultation,

28 L Zamosc, ‘The Ecuadorian Indian Movement: From Politics of Influence to Politics of Power’ in NG Postero and L Zamosc (eds), The Struggle for Indigenous Rights in Latin America (BrightonPortland OR, Sussex Academic Press, 2004) 132; S Sawyer, Crude Chronicles: Indigenous Politics, Multinational Oil, and Neoliberalism in Ecuador (Durham NC, Duke University Press, 2004) 93. 29 M Foucault, Abnormal: Lectures at the Collège de France 1974–75, trans G Burchell (New York, Picador, 2003) 50–51. 30 This part and the next draws on Schneiderman, n 7 above, 40–46. 31 P Blustein, And the Money Kept Rolling In (and Out): Wall Street, the IMF, and the Bankrupting of Argentina (New York, Public Affairs, 2005) 23. 32 International Monetary Fund (IMF), ‘Lessons From the Crisis in Argentina’, Prepared by the Policy Development and Review Department, 8 October 2003, available at: www.imf.org/external/np/ pdr/lessons/100803.pdf, last accessed 6 December 2011, 8, 66. 33 International Monetary Fund (IMF), ‘Argentina: Recent Economic Developments’ (1998) IMF Staff Country Report No 98/38 (April), available at: www.imf.org/external/pubs/ft/scr/1998/cr9838. pdf, last accessed 6 December 2011, 4. 34 Ibid, 5–6. 35 Ibid, 7.

Compensating for Democracy’s ‘Defects’ 53 mostly to foreign investors.36 Though generating a windfall profit to pay down public debt, these processes lacked transparency, were tainted with corruption, and often resulted in sales of assets below market value.37 One such investment, subsequently giving rise to an investment dispute launched by the French-based multinational water companies Suez and Vivendi, concerned a contract to provide water services to the inhabitants of the city of Buenos Aires. This turned out to be not only one of the world’s largest water concessions, but it also was one of the most profitable, according to The Economist, approaching a 40 per cent rate of return.38 It also resulted in little or no new inward investment, as discussed below, yet this remains one of the principal benefits touted by investment law supporters. The Argentinian economy became unglued as the trade deficit, capital outflows, and unemployment shot up, and stock prices plunged. Protestors took to the streets after the government, by decree, froze bank deposits and prohibited cash withdrawals of more than 250 USD/Arg per week (labelled the corralito or ‘little fence’). Thirty civilians died after one day of riots in December 2001. Also that month, Argentina defaulted on its sovereign debt by announcing the deferral of over 100 billion USD of external bond debt that was owed to both domestic and foreign creditors. In January 2002, Argentina enacted Emergency Law No 25.561, pulling the plug on convertibility, unpegging the peso from the dollar (‘pesification’), resulting in sovereign debt default and a general collapse of the Argentinian economy. By decree, all bank deposits were ‘pesified’, resulting in an unprecedented wave of 210,188 amaparos (injunctions) filed with Argentinian federal courts.39 With the collapse of the peso, thousands were thrown out of work, and foreign investors lost hope of reaping high returns on their investments guaranteed in the heyday of privatisation. Those at the bottom suffered the most: the population living in ‘extreme poverty’ more than tripled between the year 2000 and 2003.40 As it was divesting the state of assets in the ‘roaring’ 1990s, Argentina signed 57 bilateral investment treaties (BITs) with leading capital-exporting states, including one with the United States in 1991.41 The BIT tracked closely the 1987 US model investment treaty, ensuring high standards of protection for US-based investors

36 M Teubal, ‘Rise and Collapse of Neoliberalism in Argentina: The Role of Economic Groups’ (2004) 20 Journal of Developing Societies 173–88, at 181. 37 P Cooney, ‘Argentina’s Quarter Century Experiment with Neoliberalism: From Dictatorship to Depression’ (2007) 11 Revista de Economia Contemporanea, 7–37, 19; Blustein, n 31 above, 24–25. 38 D Artana, F Navajas and S Urbiztondo, ‘Regulation and Contractual Adaptation in Public Utilities: The Case of Argentina’ (1998) Washington DC, Inter-American Development Bank, available at: cdi.mecon.gov.ar/biblio/docelec/mu2015.pdf, last accessed 9 December 2011, 21. 39 H Spector, ‘Constitutional Transplants and the Mutation Effect’ (2008) 83 Chicago-Kent Law Review 129–45, 139. 40 United Nations Development Programme (UNDP), Human Development Report 2005: International Cooperation at a Crossroads: Aid, Trade and Security in an Unequal World (New York, United Nations Development Programme, 2005) 36. 41 Suez, Sociedad General de Aguas de Barcelona SA and Anther v Argentine Republic, ‘Decision on Liability’ (2010) ICSID Case No ARB/03/17 (30 July), para 29.

54 David Schneiderman (Argentinian investors in the US being less likely to surface). Lawyers subsequently awakened to the possibility that BITs could be a ‘powerful weapon’ against the Republic of Argentina as investors sought to recoup some of the losses suffered as a consequence of the economic collapse.42 Holding Argentina fast to these commitments proved to be the preferred strategy for foreign investors that were given no special regard in its wake. From the perspective of the regime’s lawyers, foreign firms should not be expected to share in the burden of the economic crisis; instead, they should expect a windfall of sunk costs and lost profits. It was a classic instance of what Stephen Gill described as ‘oligopoly and protection for the strong and a socialization of their risks, market discipline for the weak’.43

IV. INVESTMENT LAW RESPONDS

At one point, there were 42 cases filed before the dispute resolution arm of the World Bank, ICSID, against the Republic of Argentina based upon BITs legal disciplines. At present, about 17 disputes are still pending—others have been settled, resolved, or suspended.44 These actions were launched by some very large multinational companies based upon contracts for the provision of water and sewerage services, gas and oil production and transmission, information services, telecommunications, and electricity. In most of these cases, the companies contended that diminution in the value of their holdings in privatised Argentinian utilities were triggered by Argentina’s use of fiscal emergency measures in the wake of the collapse of the peso. They claimed that these measures amounted, inter alia, to the indirect expropriation of their investment interests or the denial of ‘fair and equitable treatment’, entitling them to enormous damage awards. Investment tribunals have been mostly receptive to the claims of foreign investors. Representative of the response is the very first tribunal decision initiated by the Michigan-based CMS Gas Transmission Company under the 1991 US-Argentine BIT.45 By refusing to convert tariffs into US dollars and periodically adjusting revenues in accordance with US-based indicators (the US Producer Price Index), it was claimed that Argentina had denied the company ‘fair and equitable treatment’. The company, after all, had invested in Argentina upon the basis that the state would guarantee the stability of its investment interest (paragraph 134). The panel concluded that the Argentinian programme of privatisation had been ‘successful’—over 10 billion USD had been raised—precisely because the state 42 LE Peterson, ‘All Roads Lead out of Rome: Divergent Paths of Dispute Settlement in Bilateral Investment Treaties’ (2002) International Sustainable and Ethical Investment Rules Project (November) available at: oldsite.nautilus.org/archives/enviro/PetersonFinalFormatted_2_2.PDF, last accessed 6 December 2011) 6. 43 S Gill, Power and Resistance in the New World Order, 2nd edn (Basingstoke, Palgrave Macmillan, 2003). 44 Embassy of Argentine Republic. ‘Argentina’s 2001 Default: Myths and Realities’ (April 2012) (Washington DC) available at: embassyofargentina.us/embassyofargentina.us/files/mythsandrealities. pdf, last acccessed 29 August 2013. 45 CMS, above. All in-text references are to this award.

Compensating for Democracy’s ‘Defects’ 55 offered commitments in a manner that would not ‘allow … for their reversal within a few years’ (paragraph 138). Because the licence was in the nature of a ‘guarantee’, the state was obliged to honour this commitment (paragraph 161). Freezing and then reducing the rate of return via pesification was not in keeping with this form of commitment through licensing. The state was ordered to pay CMS 133.2 million USD.46 According to the logic of CMS, foreign investors are to be granted priority in the wake of the state’s financial collapse; citizens should not expect to receive similar solicitude. Not only are rates of return guaranteed, but citizens and states are also made fiscally responsible for these prior commitments irrespective of fiscal capacity. There is a discernible ‘blame-the-victim’ narrative, sounding very much like the European response to the Greek debt crisis.47 The case illustrates well the cramped role to which states are confined when they act to protect citizens from economic crises, even when acting in the advancement of the collective project represented by the state’s constitutional order. The US-Argentine BIT includes an exceptions clause that, presumably, was available in cases of economic emergency.48 The BIT provides, in one short paragraph, that: This Treaty shall not preclude the application by either Party of measures necessary for the maintenance of public order, the fulfillment of its obligations with respect to the

46 An application for annulment of the CMS award was denied by the ICSID Annulment Committee, though it did find errors in the tribunal’s decision, including a mix-up of the treaty defence of necessity and the defence available under customary international law (S Schill, ‘International Investment Law and the Host State’s Power to Handle Economic Crises: Comment on the ICSID Decision in LG&E v. Argentina’ (2007) 24 Journal of International Arbitration 265–86, CMS, 2007, paras 130–34). This error, however, did not amount to a ‘manifest excess of power’ and so did not provide grounds for annulment under the ICSID Convention (paras, 36). But see JE Alvarez and K Khamsi, ‘The Argentine Crisis and Foreign Investors: A Glimpse into the Heart of the Investment Regime’ in KP Sauvant (ed), Yearbook on International Investment Law and Policy 2008–2009 (New York, Oxford University Press, 2009) 379–478, 431–32, who claim the US-Argentine BIT was intended to codify customary international law and not lex specialis. 47 C Douzinas, Philosophy and Resistance in the Crisis (Cambridge, Polity Press, 2013). 48 There is now a large literature on this subject. See, for example, JE Alvarez and T Brink, ‘The Argentine Crisis and Foreign Investors: A Glimpse into the Heart of the Investment Regime’ (2012) Yearbook on International Investment Law and Policy, 2010–2011 (New York, Oxford University Press, 2011) 319–62; WW Burke-White and A von Staden, ‘Investment Protection in Extraordinary Times: The Interpretation and Application of Non-Precluded Measures Provisions in Bilateral Investment Treaties’ (2008) 48 Virginia Journal of International Law 307–410; J Kurtz, ‘Adjudging the Exceptional at International Investment Law: Security, Public Order and Financial Crisis’ (2010) 59 International Comparative Law Quarterly 325–71; G Mayeda, ‘International Investment Agreements between Developed and Developing Countries: Dancing with the Devil? Case Comment on the Vivendi, Sempra and Enron Awards’ (2008) 4 McGill International Journal of Sustainable Development Law & Policy 189–230; and Schill, n 10 above, and Schill, n 46 above. I sought to explain the conflicting outcomes in the early awards with reference to judicial politics and legal sociology in D Schneiderman, ‘Judicial Politics and International Investment Arbitration: Seeking an Explanation for Conflicting Outcomes’ (2010) 30 Northwestern Journal of International Law & Business 383–416. For a discussion of the operation of such clauses’ exceptions in the context of the 2008 financial crisis, see A van Aaken and J Kurtz, ‘Prudence or Discrimination? Emergency Measures, the Global Financial Crisis and International Economic Law’ (2009) 12 Journal of International Economic Law 859–94.

56 David Schneiderman maintenance or restoration of international peace or security, or the protection of its own security interests (Article XI).

The CMS tribunal generously acknowledged that the clause was available to preclude state liability, not only in cases of military threat and war, but also in the case of an economic emergency.49 It was not, however, a ‘self-judging’ clause, in which case, the tribunal was entitled to scrutinise the circumstances that gave rise to the claim of necessity.50 In order to fill out the content of this defence, the tribunal looked to the International Law Commission’s (ILC) Draft Articles on State Responsibility (Article 25), which the tribunal treated as an accurate summary of customary international law.51 According to the ILC Articles, this ‘exceptional’ excuse is only available to states if it is ‘the only means for the State to safeguard an essential interest against a grave and imminent peril’,52 suggesting a form of means–ends proportionality analysis.53 This was not the only means available, the CMS tribunal concluded. Few alternative means are elaborated other than those that would have resulted in a raid on the public fisc.54 National and regional constitutional experiences are instructive in this context: it is the rare instance in which one cannot envisage less restrictive alternatives55—indeed, one can go so far as to say that proportionality is ‘procedurally skewed’ against vindicating matters of national concern.56 Moreover, the tribunal continued, Argentina had ‘significantly contributed’ to the economic crisis, another ILC criterion, and this too disentitled the state from relying on the customary international law of state

49 United Nations Conference on Trade and Development (UNCTAD), The Protection of National Security in IIAs, UNCTAD Series on International Investment Policies for Development (New YorkGeneva, United Nations, 2009) 8. 50 Ibid, 49. 51 Article 25 provides: Necessity may not be invoked by a State as a ground for precluding the wrongfulness of an act not in conformity with an international obligation of that State unless the act: (a) is the only means for the state to safeguard an essential interest against a grave and imminent peril; and (b) does not seriously impair an essential interest of the State or State towards which the obligation exists, or of the international community as a whole’ (J Crawford, The International Law Commission’s Articles on State Responsibility: Introduction, Text and Commentaries (Cambridge, Cambridge University Press, 2002) 178). 52 Schill, n 10 above, 316–17; Crawford, ibid, 184. 53 UNCTAD, n 49 above, 93. 54 The tribunal mentions only ‘dollarization of the economy, granting of direct subsidies to the affected populations or industries or many others’ (Schill, n 10 above, 323–24). The Enron Annulment Committee was dissatisfied with the Enron tribunal’s discussion of the ‘only way’ having relied only on expert opinion, and so failed to apply applicable law, and by failing to adequately state reasons (Enron Corporation and Ponderosa Assets LP v Argentina, Decision on Annulment (2010) ICSID Case No ARB/01/3 (30 July), paras 377–78; Enron Corporation and Ponderosa Assets LP v Argentina (2007) Award, ICSID Case No ARB/01/3 (15 May), paras 308–9). 55 G Sacerdoti, ‘BIT Protections and Economic Crises: Limits to their Coverage, the Impact of Multilateral Financial Regulation and the Defence of Necessity’ (2013) ICSID Review 1–13, 24; BurkeWhite and von Staden, n 48 above, 397. 56 Scharpf, n 5 above, 231. As if to prove this very point, Van Harten’s content analysis of tribunal decision-making reveals that tribunals are more likely to use the ‘language of restraint, such as the term proportionality, in the course of expanding rather than constraining their authority’ (Van Harten, n 4 above, 68, 100).

Compensating for Democracy’s ‘Defects’ 57 of necessity.57 Yet there will be few, if any, imaginable circumstances in which a state will not have contributed in some way to its own economic downturn58— almost every economic emergency will have, in other words, a significant endogenous element.59 Finally, events in Argentina were not even dramatic enough to warrant triggering the BIT emergency clause. The clause was intended to protect state action in the event of ‘total economic and social collapse’ and not merely a ‘severe crisis’.60 Argentina did not fare much better in other disputes arising out of the financial crisis. There has been virtual unanimity that Argentina breached the requirement of fair and equitable treatment by diminishing expected rates of return for investors.61 Almost every investment tribunal has read the exceptions clause restrictively.62 Of the nine tribunals that assessed Argentina’s state of necessity, only one found that the circumstances satisfied the customary law defence represented by Article 25 of the International Law Commission.63 Only two tribunals held that the treaty clause applied and excused the respondent state from damages until the crisis abated.64 The LG&E tribunal, for instance, accepted that Argentina could rely on the necessity defence in the BIT and under Article 25 of the International Law Commission’s Draft Articles on State Responsibility.65 Like most tribunals, the Sempra arbitrators, by contrast, did not ‘doubt that there was a severe crisis’, yet were not convinced that the ‘situation compromised the very existence of the State and its independence’.66 Rather than offering up alternative means that 57

Alvarez and Khamsi, n 46 above; Schill, n 10 above, 329. Sacerdoti, n 55 above, 24. 59 JE Stiglitz, ‘Rethinking Macroeconomics: What Failed, and How to Repair It’ (2011) 9 Journal of the European Economic Association 591–645, 596; The Enron Annulment Committee concluded that the tribunal failed to apply applicable law by failing to adequately identify the nature of Argentina’s contribution (Enron (2010) (n 54 above), para 393). For a more nuanced approach, applying the customary international law criteria identified by the ILC, see A Alvarez-Jiménez, ‘Foreign Investment Protection and Regulatory Failures as States’ Contribution to the State of Necessity Under Customary International Law: A New Approach Based on the Complexity of Argentina’s 2001 Crisis’ (2010) 27 Journal of International Arbitration 141–77. 60 Schill, n 10 above, 355. 61 Schneiderman, n 48 above. 62 El Paso Energy International Company v Argentina (2011) Award, ICSID Case No ARB/03/15, IIC 519 (27 October) 650. 63 LG&E Energy Corp v Argentine Republic (2006) ICSID Case No ARB/02/01 (3 October). The summary is provided in EDF International SA and others v Argentina (2012) Final Award, ICSID Case No ARB/03/23, IIC 556 (11 June), para 1181. 64 LG&E, n 63 above; Continental Casualty v Argentine Republic (2008) ICSID Case No ARB/03/09 (5 September); El Paso (n 62 above) 666–70. In Continental Casualty, the tribunal explicitly adopted a loose proportionality standard of review in its interpretation of Argentina’s necessity defence. Van Harten predicts that this example of tribunal restraint is not likely to endure as tribunals have returned to a strict interpretation of the exceptions clause (Van Harten, n 4 above, 67). 65 Ibid, 257. 66 Sempra Energy International v Argentina (2007) Award, ICSID Case No ARB/02/16 (18 September), para 348. The Sempra Annulment Committee (Sempra Energy International v Argentina (2010) Decision on Annulment, ICSID Case No ARB/02/16 (10 June), para 196) found that this part of the tribunal’s reasons, refusing to apply the treaty defence of necessity, resulted in an excess of authority. See, also, Enron (2007) (n 54 above), para 306. 58

58 David Schneiderman Argentina could have employed, the Sempra arbitrators leave us only with the following bland statement: A rather sad global comparison of experiences in the handling of economic crises shows that there are always many approaches to addressing and resolving such critical events. It is therefore difficult to justify the position that only one of them was available in the Argentine case.67

There has been little success on Argentina’s part because the regime’s structural tilt is intended to inhibit the ability of states to take Polanyian measures for societal self-protection, in an emergency or any other similar situation. It is precisely in circumstances in which states are most likely to take such measures that the regime is expected to step in, no matter how painful living up to those commitments may be for the host states and their citizens. José Alvarez maintains that states ‘enter into treaties like the United States-Argentina BIT to reassure investors, particularly in the case of a volatile or unstable economy when their rights are most vulnerable’.68 The BIT is intended precisely to protect investors in circumstances when such damages are most likely to occur, namely during periods of perceived economic or political crisis in host States. A BIT such as the United States-Argentina treaty … presumes that its protections continue—indeed may be most significant—during a period of host State crisis.69

It is not the case that the law, in Schmittian terms, is suspended in the face of an exception.70 Rather than the norm being destroyed by the exception, it is instead expressly contemplated by it. Giorgio Agamben’s gloss on Schmitt better captures this development: the exception is not an ‘external and provisional state of factual danger’ but is internal to the juridical rule itself.71 It is a new ‘juridico-political paradigm in which the norm becomes indistinguishable from the exception’.72

67

Ibid, 350. Alvarez, n 11 above, 416; Alvarez and Brink, n 48 above, 348. 69 Alvarez, n 11 above, 415. Having entered into its BIT with the US, this signalled the end of an era for Argentina, observe Alvarez and Khamsi (n 46 above). Despites its ‘penchant for declaring national emergencies’, Argentina could no longer escape liability owed to foreign investors in the wake of any future economic crisis (Alvarez and Khamsi (n 46 above) 415; Suez (n 41 above), para 234. 70 C Schmitt, Political Theology: Four Chapters on the Concept of Sovereignty, trans G Schwab (Cambridge MA, The MIT Press, 1985) 12–14. 71 G Agamben, Homo Sacer: Sovereign Power and Bare Life, trans D Heller-Roazen (Stanford CA, Stanford University Press, 1998) 168. 72 Ibid, 170. Aihwa Ong develops this thought further in her work on neoliberalism in Southeast Asia. The exception, she declares, can be used to ‘include as well as exclude’. If, conventionally understood, the sovereign ‘marks out excludable subjects,’ it also can be a positive decision to include selected populations and spaces as targets of “calculative choices and value orientations” associated with neoliberal reform’: A Ong, Neoliberalism as Exception: Mutations in Citizenship and Sovereignty (Durham NC, Duke University Press, 2006) 5. 68

Compensating for Democracy’s ‘Defects’ 59 V. DEMOCRATIC THEORY CONSCRIPTED

Investment lawyers and scholars may be of the view that the harsh calculation associated with neo-liberal thought—the protection of investors at all costs—is difficult to defend. This may help to explain why some have been in search of a legitimating theory that will help carry the regime through the current impasse. José E Alvarez and Kathryn Khamsi offer up representation reinforcement review in defence of the harsh treatment Argentina has received at the hands of investment tribunals. In so doing, they contrast investment law with European developments, like the European doctrine ‘margin of appreciation’; an interpretive posture is being touted by some investment law scholars.73 Deference to state objectives, as might occur under the doctrines of margin of appreciation and subsidiarity, is inappropriate in investment disputes, they assert: Although both U.S. BITs and the European Convention attempt to correct … some of the systemic deficiencies of national government by permitting recourse to supranational adjudication, the similarities between the two regimes end there. U.S. BITs operate on the assumption that alien investors, who are by definition not part of national political processes to the same extent as voting members of the national polity, need international protection from protectionist governments, who are apt to act against their interests in part because of this very lack of political access.74

This recourse to ‘democratically-grounded validity claims’ is significant.75 This is because international investment law has, for the most part, been uninterested in democracy promotion. Indeed, the regime is premised on a deep distrust of both democratic processes and national institutions of judicial review. Although the regime has been described as promoting democratic values by contributing to ‘good governance’, transparency, and respect for due process,76 investment treaties and tribunals have said little about the operation of democratic processes other than to disparage them.77 Admittedly, none of the Argentinian tribunals explicitly embraced a democratic process theory in the course of their reasons. Two other tribunals have done so,

73

Burke-White and von Staden, n 48 above; Schill, n 10 above; and Schill, n 48 above. Alvarez and Khamsi, n 46 above, 446. 75 C Joerges, PF Kjaer and T Ralli, ‘A New Type of Conflicts Law as Constitutional Form in the Postnational Constellation’ (2011) 2 Transnational Legal Theory 153–65, 158. 76 A Newcombe, ‘Sustainable Development and Investment Treaty Law’ (2007) 8 Journal of World Trade and Investment 357–407, 403. ‘Far from promoting good governance’, observes Van Harten in his empirical study of investment treaty decision-making, as a consequence of the disdain and suspicion exhibited by arbitrators ‘the messages conveyed by the tribunals may potentially erode responsive government and discredit international adjudication’ (Van Harten, n 4 above, 73). 77 Others have made similar claims that the GATT-World Trade Organization (WTO) agreements (see DA Farber and RE Hudec, ‘Free Trade and the Regulatory State: A GATT’s-Eye View of the Dormant Commerce Clause’ (1994) 47 Vanderbilt Law Review 1401–40, 1405; JP McGinnis and ML Movsevian, ‘The World Trade Constitution’ (2000) 114 Harvard Law Review 511–605, 515) and international law, more generally, reinforce the operation of domestic political processes (A Chander, ‘Globalization and Distrust’ (2005) 114 Yale Law Journal 1193–236, 1234). 74

60 David Schneiderman however. The Loewen tribunal (2003) declined to grant standing to the Canadian claimant by reason of its re-organisation, precipitated by events giving rise to the dispute and after the requisite notice was filed, into a US-based company. This disentitled the company from proceeding with its claim against the United States. ‘It is inconceivable’, wrote the tribunal unanimously, ‘that sovereign nations would negotiate treaties to supplement or modify domestic law as it applies to their own residents’.78 It was instead NAFTA’s object, they wrote, ‘to protect outsiders who do not have access to the political or other avenues by which to seek relief from nefarious practices of governmental units’.79 The opinion in Tecmed80 offers a more fully developed account, relying upon the European Court of Human Rights (ECtHR) precedent in James.81 The dispute arose under a Spain-Mexico BIT and concerned failure to renew a permit to operate a hazardous waste facility site eight kilometres from Hermosillo, the Sonora state capital. Disregarding the intensity of local opposition to the operation of the site in addition to numerous violations of federal environmental law82 (significantly, the notice not to renew did not adequately invoke these transgressions), the tribunal concluded that the resolution did ‘not specify any reasons of public interest’ that could justify it (paragraph 125). Instead, there were ‘socio-political factors’, having to do with the proximity of the site to the local municipality, that drove the government’s decision not to renew (paragraphs 130, 132). The government’s actions ‘fully and irrevocably destroyed’ the investment and so amounted to an expropriation requiring the provision of compensation (paragraph 117). Rather than focusing solely on the impact of the government’s actions on the investor, the tribunal also purported to undertake a proportionality analysis.83 In answering the question of ‘whether such measures are reasonable with respect to

78

Loewen Group Inc and Loewen v United States (2003) Award. ICSID Case No ARB(AF)/98/3 223. Ibid, 224. 80 Técnicas Medioambientales Tecmed SA v Mexico (2003) 43 ILM 133. Further in-text references are to this decision. 81 James and Others v United Kingdom [1986] ECHR 2 (Series A No 98) 19–20, 24. The following two paragraphs draw on Schneiderman, n 7 above, 119–25. 82 These included exceeding landfill limits, temporarily storing hazardous waste outside of the landfill, and receiving ‘liquid and biological-infectious waste’ that was not authorised by the permit (Tecmed (n 80 above), para 99). These did not ‘compromise public health, impair ecological balance or protection of the environment, or … [were] the reason for a genuine social crisis’, the tribunal ruled (ibid, para 124). 83 There are sporadic, if increasing, references to proportionality in investment arbitration (D Schneiderman, ‘Legitimacy and Reflexivity in International Investment Arbitration: A New SelfRestraint?’ (2011) 2 International Journal of Dispute Management 471–95). Scholars increasingly are calling for tribunals to embrace proportionality analysis in order to enhance the system’s legitimacy: ‘Intense concerns about legitimacy in the system … should drive a rapid adoption of proportionality analysis as a standard technique’ (B Kingsbury and S Schill, ‘Investor-State Arbitration as Governance: Fair and Equitable Treatment, Proportionality and the Emerging Global Administrative Law’ in B Kingsbury et al, El Nuevo Derecho Administrativo Global en América Latina: Desafíos Para las Inversiones Extranjeras, La Regulación Nacional y el Financiamiento Para ed Desarrollo (Buenos Aires, RPA, 2009) 221–94, 276, available at: www.iilj.org/GAL/documents/GALBAbook.pdf, last accessed 15 May 2010). 79

Compensating for Democracy’s ‘Defects’ 61 their goals, the deprivation of economic rights and the legitimate expectations of [those] who suffered such deprivation’ (paragraph 122), the Tecmed tribunal took into account a number of factors including the ‘size of the ownership deprivation’ and whether compensation was offered (ibid). Also weighing into the proportionality analysis, the tribunal added, is that the foreign investor has a reduced or nil participation in the taking of the decisions that affect it, partly because investors are not entitle[d] to exercise political rights reserved to the nationals of the state, such as voting for the authorities that will issue the decisions that affect such investors (ibid).

Defects in the political process, in other words, gave support to the Madrid-based investor’s sense of being wronged. In support of this political process rationale, the tribunal noted that the Strasbourg Court in James also considered the extent to which foreign investors are disenfranchised from participating in decisions that give rise to such measures by public authority, ‘partly because the investors are not entitled to exercise political rights reserved to the nationals of the State’ (paragraph 122). Yet the record of the ECtHR suggests the Court does not appear to be at all interested in deprivations of foreign-based wealth.84 In almost every instance where non-nationals have invoked their property rights under the European Convention, the Court has exhibited little or no heightened concern about interference with foreign-owned wealth. Consequently, it never has applied the strict criteria that may be mandated by general principles of international law under Article 1, Protocol 1.85 The Court came closest, perhaps, to doing so in Iran Shipping Lines.86 There the Court found that compensation was due to an Iranian company once Turkey interfered unjustifiably with the use of its Cypriot-owned chartered vessel. The Court came to this conclusion, however, after applying its loose standard of proportionality review, keeping in mind the wide margin of appreciation owed to signatory states.87 No special consideration was owed to the applicant due to its foreignness or that the property at issue was foreign owned.

84 Nor does the Tecmed tribunal offer a very nuanced interpretation of the issues at stake in James. They had to do with whether the ‘general principles of international law’ in Article 1 of Protocol No 1 (which arguably required compliance with a strict standard of prompt, adequate, and effective compensation) applied. The ECtHR concluded that, in cases where nationals merely are affected they did not. This was in contrast to circumstances where such a burden is imposed on non-nationals, who will have ‘played no part in the election or designation of its authors nor have been consulted on its adoption’ (James, n 81 above). 85 U Kriebaum, ‘Nationality and the Protection of Property under the European Convention on Human Rights’ in I Buffard, J Crawford, A Pellet and S Wittich (eds), International Law Between Universalism and Fragementation: Festscrhift in Honour of Gerhard Hafner (Leiden, Martinus Nijhoff, 2008) 649–66, 657; U Kriebaum, ‘Is the European Court of Human Rights an Alternative to Investor-State Arbitration?’ in PM Dupuy, F Francioni and E-U Petersmann (eds), Human Rights in International Investment Law and Arbitration (Oxford, Oxford University Press, 2009) 219–45, 242. 86 Islamic Republic of Iran Shipping Lines v Turkey (2008) 47 EHRR 24. 87 Ibid, para 94.

62 David Schneiderman There is, admittedly, a superficial appeal to conscripting democratic theory in the investment law context. It has the appearance of fully drawing out the logic of customary law regarding the diplomatic protection of aliens. Aliens, after all, do not vote; nor do they serve in the armed forces of host states. Home states, instead, are expected to vindicate the rights of their citizens.88 The notion that home states represent citizens in their encounters with host states suggests the corollary: that host states cannot be expected to protect the interests of foreigners or even take their interests into account. All host states, including their courts, are expected to be ‘defective’ in this way. Note that this theory of representation has no necessary linkage to democratic practice. Any home state, whatever its political order, could be expected to rely upon these principles of customary international law. It also seems beneficial, in our highly integrated world, to improve democratic processes so that the interests of those affected by decision-making within national borders are taken into account (the ‘all-affected principle’).89 Such disciplines appear, after all, to be in the pursuit of the elimination of inequality in administrative and political decision-making.90 This, I think, is what animates the movement towards a global administrative law91 and what makes ‘conflicts law as constitutional form’ an attractive proposal for Europe. I should think that an appeal to the high ground of democratic theory is especially attractive to those who are marginalised by the current processes of national and transnational economic integration, those whom Partha Chatterjee lumps into the category of ‘the governed’.92 It should appear a less attractive rationale for powerful economic actors and their home states which hardly deserve the heightened solicitude that representation review affords. Foreign investors can in no way be considered equivalent to the vulnerable persons unaccounted for in contemporary political processes.

88 E Borchard, The Diplomatic Protection of Citizens Abroad or the Law of International Claims (New York, The Banks Law Publishing Co, 1915) 43, 106; E Borchard, ‘The “Minimum Standard” of the Treatment of Aliens’ (1939) 33 American Society of International Law Proceedings 51–63, 57. 89 Fraser, n 1 above. 90 H Brunkhorst, ‘The Crisis of Legitimization in the World Society’ (2012) [unpublished] available at: www2.warwick.ac.uk/fac/soc/sociology/staff/emeritus/robertfine/home/teachingmaterial/humanrights/pdfreadings/brunkhorst-the_crisis_of_legitimation_of_human_rights.pdf, last accessed 15 May 2013. 91 B Kingsbury, N Krisch and RB Stewart, ‘The Emergence of Global Administrative Law’ (2005) 68 Law & Contemporary Problems 15–61. 92 P Chaterjee, The Politics of the Governed: Reflections on Popular Politics in Most of the World (New York, Columbia University Press, 2004).

Compensating for Democracy’s ‘Defects’ 63 VI. DEMOCRATIC THEORY’S DEFECTS

I have made the case elsewhere that a democracy-promoting rationale provides a dubious foundation for international investment law.93 I briefly recap the main points here before returning to the Suez and Vivendi investment dispute by way of illustration. First, corporate entities do not have a vote. If firms are to be ‘represented’, be they domestic or foreign, this will be accomplished via proxies including ‘officers, employees, [and] stockholders’.94 Secondly, firms typically are not in need of special solicitude in the early phases of an investment. This is, after all, an era in which states compete aggressively for scarce foreign capital.95 Desirous of signalling to investors that they will be accorded the highest priority within the policy-making apparatus of the state, state actors have adopted a variety of devices for this purpose: among them abandoning foreign investment screening mechanisms, forsaking regulatory intervention, or executing concession contracts with guaranteed rates of return. In this pre-establishment phase, conditions for wealthy corporate actors typically will be favourable. According to Vernon’s theory of the ‘obsolescing bargain’,96 it is in the post-establishment phase that investments will be most vulnerable to political risk.97 Even then, thirdly, there is a high likelihood that foreign subsidiaries will participate, directly or indirectly, in host-state deliberations that affect future profitability. By having recourse to two different sets of literature—one having to do with ‘business and politics’ and the other with ‘political risk’—we learn that foreign firms can take measures to reduce the diminution in the value of their investments. Adopting the premise of profit maximisation as an explanation for corporate political activity,98 we can extrapolate from studies conducted in the US that foreign firms will use a variety of tactics to achieve political ends, including contributing to political action committees (PACs), lobbying, and charitable giving.99 The data suggest that ‘corporate political strategies

93 D Schneiderman, ‘Investing in Democracy? Political Process Review and International Investment Law’ (2010) 60 University of Toronto Law Journal 909–40. 94 Ely, n 3 above, 85. 95 Z Elkins, AT Guzman and BA Simmons, ‘Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960–2000’ (2006) 60 International Organization 811–46; J Stopford and S Strange, Rival States, Rival Firms: Competition for World Market Shares (Cambridge, Cambridge University Press, 1991). 96 R Vernon, Sovereignty at Bay: The Multinational Spread of U.S. Enterprises (New York, Basic Books, 1971) 47. 97 Almost ‘from the moment that the signatures have dried on the document,’ observes Vernon, ‘powerful forces go to work that quickly render the agreements obsolete in the eyes of the government’ (ibid). 98 KB Grier, MC Munger and BE Roberts, ‘The Determinates of Industry Political Activity, 1978– 1986’ (1994) 88 American Political Science Review 911–26. 99 WL Hansen and NJ Mitchell, ‘Disaggregating and Explaining Corporate Political Activity: Domestic and Foreign Corporations in National Politics’ (2000) 94 American Political Science Review 891–903; Hansen and Mitchell, ‘Globalization or National Capitalism: Large Firms, National Strategies, and Political Activities’ (2001) 3 Business and Politics 1–19, available at: www.bepress.com/ bap/vol3/iss1/art1; EJ Malesky, ‘Rethinking the Obsolescing Bargain: Do Foreign Investors Really

64 David Schneiderman converge’ around practices common within the host-state context—that foreign entities do not ‘carry their home practices abroad’.100 Other factors, many of them internal to foreign subsidiaries, also help to mitigate investor vulnerability to political risk. For instance, the more complex the managerial and operational tasks undertaken by the foreign firm, the larger the volume of sales to associated firms, the more intense the volume of exports, and the greater the proportion of foreigners in managerial and technical positions, the greater a foreign firm’s bargaining power vis-à-vis the host government.101 In a 1999–2000 survey using a sample of 4085 US and foreign firms operating in 48 developing countries, Rodolphe Desbordes and Julien Vauday test the hypothesis represented by what they call the ‘national preference model’—that foreign firms will be discriminated against in favour of domestic firms102—which is the operating presumption of the investment rules regime. Significantly, they conclude otherwise: that the ‘foreign privilege hypothesis finds more empirical ground than the national preference’ hypothesis.103 Foreign firms, it turns out, ‘enjoy a better business climate’ than other less influential firms by ‘benefiting from lower fiscal and regulatory constraints’. Emma Aisbett, relying on World Bank data drawing on the experience of companies operating in 80 countries during the period 1999–2000, similarly finds that foreign firms are ‘no more or less influential’ than domestic firms and that ‘both foreign and domestic multinationals are significantly more influential’ than other firms.104 The premise of the ‘obsolescing bargain’ does not hold up well according to these empirical accounts.105 With such evidence in hand, we can conclude that foreign corporate actors operating within host states with representative democratic institutions are not ‘voiceless’ and even can be ‘represented’ in ways similar to nationally-based corporate actors. They might elect, however, to engage in less visible forms of political action for fear of being seen as illegitimately influencing local politics. In order to illustrate why the solicitude offered by representation re-inforcement review is less than necessary in the investment law context, I return to the previously mentioned concession awarded to the consortium led by Frenchbased multinationals, Suez and Vivendi, for the delivery of water and sewerage

Surrender their Influence over Economic Reform in Transition States?’ (2005) [unpublished] at 26, available at: nathanjensen.wustl.edu/me/files/WP2_06.pdf. 100

Ibid, 17. TA Poynter, ‘Government Intervention in Less Developed Countries: the Experience of Multinational Companies’ (1982) 13 Journal of International Business Studies 9–25, 21; CW Moon and AA Lado, ‘MNC-Host Government Bargaining Power Relationship: A Critique and Extension within the Resource-Based View’ (2000) 26 Journal of Management 85–117,111. 102 R Desbordes and J Vauday, ‘The Political Influence of Foreign Firms in Developing Countries’ (2007) 19 Economics & Politics 421–51, 429. 103 Ibid, 432. 104 E Aisbett, ‘Powerful Multinational or Persecuted Foreigners: “Foreignness” and Influence Over Government’, Australian National University, Centre for Economic Policy Research Discussion Paper No 638 (April 2010) 19. 105 Desbordes and Vauday, n 102 above, 446. 101

Compensating for Democracy’s ‘Defects’ 65 services to the citizens of greater Buenos Aires.106 In the year leading up to the bidding process, water rates were artificially increased—up to five times the base rate, resulting in a 62 per cent price increase107—in order to attract bidders. The concession contract, it was anticipated, would then be awarded to the company that offered the greatest tariff reduction in the light of the new higher base-line tariff. Aguas Argentina, the French consortium’s locally incorporated subsidiary, proposed, for instance, that water tariffs shrink 26.9 per cent in the first 10 years. This resulted in a contract being awarded to the company for a lengthy term of 30 years.108 It is noteworthy that both the World Bank and the Inter-American Development Bank pointed to the Buenos Aires contracting process as a model for ‘managing’ future privatisations.109 Its ‘success’ was, of course, the product of an entirely managed process of fabricated tariff reductions.110 After the initial drop in prices, water rates rose significantly with the government’s co-operation.111 This turned out to be inconsistent with the terms of the concession contract: price increases were, in fact, banned during the first 10 years.112 Increases were also well beyond the ability of poor people to pay, amounting to about 23 per cent of their monthly wages.113 The investor provided little new inward capital: only a modest 2.6 per cent of total funding between 1993 and 2001.114 This experience, common to water privatisation contracts around the world, belies one of the principal claims of its promoters that privatisation attracts fresh private investment.115 Not only was this a contract for the world’s largest water concession, it was also one of the world’s most profitable, approaching a 40 per cent rate of return.116 Even then, progress towards improving water services was unhurried. Unhappy with the rate of progress in connecting new users, the municipal government 106

The following draws on Schneiderman, n 7 above, 48–49. M Solanes, ‘Efficiency, Equity and Liberalisation of Water Services in Buenos Aires, Argentina’ in OECD Trade Policy Studies, Liberalisation of Universal Access to Basic Services: Telecommunications, Water and Sanitation, Financial Services and Electricity (Paris, OECD and the International Bank for Reconstruction and Development and The World Bank, 2006) 149–71, 154. 108 AJ Loftus and DA McDonald, ‘Of Liquid Dreams: A Political Ecology of Water Privatization in Buenos Aires’ (2001) 13 Environment and Urbanization 179–99, 185. 109 C Crampes and A Estache, ‘Regulating Water Concessions: Lessons from the Buenos Aires Concession’ (1996) Public Policy for the Private Sector, Note no 91; S Wenyon and C Jenne, ‘Water and Sewerage Privatization and Reform’ in F Basañes, E Uribe and R Willig (eds), Can Privatization Deliver? Infrastructure for Latin America (Washington DC, Inter-American Development Bank, 1999) 173–216, 197–98. 110 Loftus and McDonald, n 108 above, 190. 111 AA Cassarin, J Delfino and ME Delfino, ‘Failures in Water Reform: Lessons from the Buenos Aires’s Concession’ (2007) 15 Utilities Policy 234–47, 238; G Schneier-Madanes, ‘From Well to Network: Water Supply and Sewerage in Buenos Aires (1993–2000)’ (2001) 8 Journal of Urban Technology 45–63, 50. 112 Solanes, n 107 above, 159. 113 Cassarin, Delfino and Delfino, n 111 above, 239, 241. 114 JE Castro, ‘Neoliberal Water and Sanitation Policies as Failed Development Strategy: Lessons from Developing Countries’ (2008) 8 Progress in Development Studies 63–83, 68. 115 Ibid. 116 Artana, Navajas and Urbiztondo, n 38 above, 21. 107

66 David Schneiderman asked Aguas Argentina to accelerate expansion ahead of schedule and multiply connections beyond the original plan. Rather than cross-subsidising new connections or injecting new capital, the company preferred to seek further rate increases and private borrowing, incurring indebtedness in excess of that contemplated in the concession contract.117 The investment collapsed in the aftermath of Argentina’s economic crisis, precipitating an investment dispute under French, Spanish, and UK BITs, all signed with Argentina in the early 1990s. Predictably, the investment tribunal sided with the investor, finding that the investor had been denied fair and equitable treatment by Argentina.118 The tribunal was oblivious to the investment’s early profitability: As is customary in long-term concessions implying substantial investments in early years, the Concession’s investment requirements exceeded the amounts that might be gained immediately from tariff revenues; consequently, the Concessionaire sought loans from local and international sources, primarily from multilateral lending agencies whose loans were denominated and payable in U.S. dollars [paragraph 35; also paragraph 124].

Nor would the tribunal accept that the concessionaire had offered an unrealistically low bid in order to secure the concession (paragraph 40). Instead, it considered the investor to have acted entirely reasonably, even as it sought tariff increases at the same time as the Argentinian economy plunged into a nosedive. Having failed to live up to the terms of the 30-year concession contract, Argentina undermined the investor’s ‘legitimate expectations’. This was a legal framework upon which the investors specifically had relied and, the tribunal was confident, without which no investor would have acted.119 Applying a version of proportionality analysis, the tribunal concluded that Argentina could have adopted ‘more flexible means’ in responding to the requests for tariff increases, such as relieving the concessionaire of further investment commitments, passing on tariff increases to consumers who could pay, and having governmental bodies pay overdue tariffs to the concessionaire (paragraph 235). To have done otherwise was an abuse of regulatory discretion (paragraph 237). Yet Argentinians experienced a serious decline in household income after May 2001 and a subsequent ‘collapse’ after October 2001, ranging from 23 per cent to 41 per cent120—54 per cent of the population was living below the poverty line at the time!121 By the end of 2005, this number remained at a high of about 31 per cent

117

Cassarin, Delfino and Delfino, n 111 above, 245. Suez, n 41 above. Further in-text references in this and the next paragraph are to this decision. 119 ‘[W]ithout such belief in the reliability and stability of the legal framework the Claimants— indeed no investor—would ever have agreed to invest in the water and sewage system of Buenos Aires’ (Suez, n 41 above, para 231). 120 A Corbacho, M Garcia-Escribano and G Inchauste, ‘Argentina: Macroeconomic Crisis and Household Vulnerability’ (2003) IMF Working Paper WP/03/89 (April) 12, 32, available at: www.imf. org/external/pubs/ft/wp/2003/wp0389.pdf, last accessed 12 December 2012. 121 M Mortimore and L Stanley, ‘Has Investor Protection Been Rendered Obsolete by the Argentine Crisis?’ (2006) 88 CEPAL Review (April) 15–31, 25. 118

Compensating for Democracy’s ‘Defects’ 67 despite strong GDP growth.122 Nowhere does the tribunal identify the proportion of the paying population of Buenos Aires that could have offset the company’s losses. The tribunal also takes for granted that it was more appropriate, in the face of a 100 billion USD sovereign default, for the state to give priority to investors, requiring it to pay overdue tariffs, than addressing other economic priorities, such as assisting economically desperate Argentinians. IMF staff admitted, after all, that it was difficult even for non-poor households to cope with the economic shocks in Argentina. In the circumstances, ‘social intervention’—including public works programmes and direct transfers—was ‘useful’, IMF staff frankly admitted, in order ‘to assist households during macroeconomic crises’.123 Nor, predictably, would the Suez panel allow Argentina to take advantage of the customary international law defence of necessity (there was no treaty defence for the tribunal to consider, unlike the 1991 Argentine-US BIT). Because it could have taken less drastic measures and also because Argentina contributed ‘substantially’ to the circumstances giving rise to the crisis, two of the requisite four conditions for invoking the customary international law defence had not been satisfactorily proven (paragraphs 260, 264). It was simply beyond the capacity of the tribunal to acknowledge the possibility of reversing the investment law regime’s order of priority.

VII. CONCLUSION: RETURN TO DELIBERATION?

All of this is not to say that states, even operationally democratic ones, do not behave badly. They can, and often, do. It is only to say that this means of controlling state misconduct, constitutionalising neo-liberal values for the benefit of a transnational class of foreign investors, seems disproportionate in the light of the regime’s objective of improving economic development. This is particularly so in the light of the ambivalent evidence empirically showing a connection between the signing of BITs and the attraction of new inward investment.124 This leads me to recommend, by way of conclusion, a return to an emphasis on the deliberative and the procedural. ‘A post-national law’, Christian Joerges and Michelle Everson remind us, ‘must re-establish itself as a strong partner to political process’.125 Rather than imposing substantive limits on the capacity of states to resolve social and economic problems, particularly in the context of a state of economic

122 S Galiani, M González-Rozada and E Schrgrodsky, ‘Water Expansion in Shantytowns: Health and Savings’ in A Chong (ed), Privatization for the Public Good? Welfare Effects of Private Intervention in Latin America (Washington DC, Inter-American Development Bank/David Rockefeller Center for Latin American Studies, 2008) 25–41, 30. 123 Corbacho, Garcia-Escribano and Inchauste, n 120 above, 27, 33. 124 JW Yackee, ‘Bilateral Investment Treaties, Credible Commitment, and the Rule of (International) Law: Do BITs Promote Foreign Direct Investment?’ (2008) 42 Law & Society Review 805–31. 125 M Everson and C Joerges, ‘Reconfiguring the Politics-Law Relationship in the Integration Project through Conflicts-Law Constitutionalism’ (2012) 18 European Law Journal 644–66, at 662.

68 David Schneiderman emergency, investment law should recede from the field. This goes somewhat further than proposals for investment law ‘minimalism’126 and, instead, calls on lawyers, scholars, and public officials to give ground to deliberative processes rather than relying on third party arbitration. I can only offer the outlines of this proposal here. I have suggested elsewhere that procedures satisfying the maxim audi alteram partem (‘right to be heard’)127—with its emphasis on ‘voice’ rather than ‘exit’128— might generate an appropriate remedy for foreign investors negatively impacted by host-state regulations.129 Quentin Skinnner, for instance, derives this ‘rhetorically minded view’ from his work on Renaissance humanism which he associates with the latin maxim audi alteram partem—that we should always listen to the other side:130 This commitment stems from the belief that, in moral and political debate, it will always be possible to speak in utramque partem [in either direction], and will never be possible to couch our moral and political theories in deductive form. The appropriate model will always be that of a dialogue, the appropriate stance a willingness to negotiate over rival intuitions concerning the applicability of evaluative terms. We strive to reach understanding and resolve disputes in a conversational way.

Skinner is drawn to this view from his studies of Hobbes, who develops an account of rationality and reason in The Leviathan131 in response to the troubling coolness of the rhetoricians, who could always be expected to construct probable arguments in the alternative. It turns out that even Hobbes, Skinner observes, is unable to appeal to universal reason and so ultimately resorts to an authority (the sovereign) whose own judgement will, of necessity, be an arbitrary one.132 It is for this reason that Skinner laments the burying of this account associated with Roman and neo-Roman thought. Disputes over justice and policy never give rise to any final resolution, he wishes to remind us. This is the place that Stuart Hampshire arrives at in his work on justice and conflict.133 Without having to

126 JW Yackee, ‘Toward a Minimalist International Investment Law?’ (2009) 32 Suffolk Transnational Law Review 303–39. 127 Associated with a principle of natural justice in English administrative law, that ‘parties be given adequate notice and opportunity to be heard’ (SA De Smith, Judicial Review of Administrative Action, 4th edn, ed JM Evans (London, Stevens & Sons Limited, 1980) 156. 128 D Miller, ‘Democracy’s Domains’ (2009) 37 Philosophy & Public Affairs 201–28, 224. 129 D Schneiderman, Constitutionalizing Economic Globalization: Investment Rules and Democracy’s Promise (Cambridge, Cambridge University Press, 2008) 237. 130 Q Skinner, Reason and Rhetoric in the Philosophy of Hobbes (Cambridge, Cambridge University Press, 1996) 15–16. 131 T Hobbes, Leviathan or the Matter, Forme, and Power of a Commonwealth Ecclesiasticall and Civill, ed M Oakeshott (Oxford, Blackwell Publishing, [1651] 1957). 132 Q Skinner, ‘Hobbes on Rhetoric and the Construction of Morality’ in Quentin Skinner, Visions of Politics, vol 3 (Cambridge, Cambridge University Press, 2002) 87–141, 140–41; Hobbes (ibid), ch 5, 26. For another view of Hobbes, which places him squarely in the ‘rule of law’ tradition, see D Dyzenhaus, ‘Hobbes Constitutional Theory’ in I Shapiro (ed), Leviathan or the Matter, Forme & Power of a Commonwealth Ecclesiasticall and Civill (New Haven CT, Yale University Press, 2010) 453–80. 133 S Hampshire, Justice is Conflict (Princeton NJ, Princeton University Press, 2000).

Compensating for Democracy’s ‘Defects’ 69 subscribe to his view about ‘fairness in procedure’ being a ‘constant in human nature’,134 we can agree that, in order to resolve the ‘inevitable recurring conflicts which must be resolved if communities are to survive’,135 a fair process for ‘weighing and balancing of contrary arguments’ must be devised, ‘all subject to the single prescription audi alteram partem [“hear the other side”]’.136 Inspired by Hannah Arendt’s proposal for an ‘enlarged mentality’,137 Seyla Benhabib develops an account of a universal communicative ethic that has, at its organising centre, the capacity to change minds—to ‘reverse’ perspectives as a consequence of ‘willingness to reason from the other’s point of view’.138 This also is where James Tully ends up in his proposal for ‘agonistic’ constitutional democracy.139 Tully points to audi alteram partem as ‘the first and perhaps the only universalisable principle of democratic deliberation’:140 By exchanging pros and cons in dialogues with partners who see the constitutional arrangement of a shared political association differently and who can give reasons for their views, citizens are empowered to free themselves from their partial and limited views to some extent (often assumed to be universal), reflect critically together on them and negotiate the modification of the relations of meaning and power that bear them: that is, to think and act differently.141

The agonistic dimension of this account suggests that the binary ‘agreement/ disagreement’ represents only contingent outcomes in ongoing political relations. It does not entail the end of politics—or the ‘de-politicisation’ of investment disputes—but the maintenance of political relations over time. This is, after all, what new inward investment purports to advance—to assist not only in economic development but also in the development of institutions for the advancement of the ‘rule of law’. The proposal at this stage, admittedly, is preliminary and demands further development. It implies, however, that existing institutions can be enhanced or new institutions developed to accommodate more robust opportunities to be heard in full public view so that all those affected by a decision have a voice in

134

Ibid, 4. Ibid, 14. 136 Hampshire credits HLA Hart for having drawn to his attention ‘the centrality of this phrase’ (ibid, 8–9). 137 H Arendt, Between Past and Future: Six Exercises in Political Thought (Cleveland OH-New York, Meridian Books, 1961) 220. 138 This, according to Alexis de Tocqueville, was one of the great advantages of democracy in America, having ‘the ability to make repairable mistakes’ (A de Tocqueville, Democracy in America, trans HC Mansfield and D Winthrop (Chicago IL, University of Chicago Press, 2000) 216); S Benhabib, Situating the Self: Gender, Community and Postmodernism in Contemporary Ethics (New York, Routledge, 1992) 8, 54; J Nedelsky, ‘Communities of Judgment and Human Rights’ (2000) Theoretical Inquiries in Law 1. 139 J Tully, Public Philosophy in a New Key, Volume II: Imperialism and Civic Freedom (Cambridge, Cambridge University Press, 2008) 85. 140 Ibid, 110. 141 Ibid, 111. 135

70 David Schneiderman its formulation. It is offered as a means of performing ‘a genuinely political task outside regular legislative and judicial processes’.142 It is revealing that foreign investors and home states are likely to be dissatisfied with such processes. It means, among a number of things, a marked reduction in investor power. It also means investors having to make their case, not only in new venues but, in states with an independent press, in the public sphere. This will be a challenge because, as I have maintained, international investment law has not been interested in democratic deliberation. It has, instead, been pursuing a politics of closure.143 Questions regarding state capacity are now resolved, its policy entrepreneurs maintain, by favouring the free movement of goods, services, and capital. In cases where there has been a significant diminution of the value of an investment, there is not much more to discuss other than the quantum of damages owed. A marriage of investment law and democratic principle, I surmise, turns out to be both awkward and enticing.

142 C Joerges, ‘The Idea of Three-Dimensional Conflicts Law as Constitutional Form’ (2010) RECON Online Working Paper 2010/05 (May) p 11, available at: www.reconproject.eu/main.php/ RECON_wp_1005.pdf?fileitem=5456171, last accessed June 2010. I should mention here that this proposal is not offered up specifically as a contribution to the literature on global administrative law (GAL). Others have described the current system of investment arbitration as an exemplar of GAL: as the ‘only case of global administrative law in the world today’. See G Van Harten and M Loughlin, ‘Investment Treaty Arbitration as a Species of Global Administrative Law’ (2006) 17 European Journal of International Law 121–50, 149; Kingsbury and Schill, n 83 above; Kingsbury, Krisch and Stewart, n 91 above, 36–37. 143 J Habermas, ‘The Postnational Constellation and the Future of Democracy’ in Habermas, The Inclusion of the Other: Studies in Political Theory (Cambridge MA, The MIT Press, 2001) 58–112, 73.

Comment Global Exceptionalism and the Euro Crisis: Schmittian Challenges to Conflicts-Law Constitutionalism CHRISTIAN KREUDER-SONNEN WZB BERLIN SOCIAL SCIENCE CENTER

I. INTRODUCTION1

T

HE CONCEPT OF conflicts law as constitutional form can be described as a specific variant of what Anne Peters has called ‘compensatory constitutionalism’.2 In this type, the increasing interdependence of constitutional nation-states is seen to pose a structural problem of external effects: legal acts emanating from one jurisdiction also affect people in other jurisdictions, who have no say in their formulation.3 In order to compensate for such democratic defects, the conflicts-law approach advocates a legally-structured deliberative supranationalism as a method of finding mutually-acceptable solutions in regulatory governance settings. As Christian Joerges and Jürgen Neyer put it in their early formulation of the concept, ‘Supranationalism is therefore to be understood as a fundamentally democratic concept’.4 In this comment, I want to confront the conflicts-law approach with a ‘Schmittian’ reading of European emergency governance in the euro crisis and thus problematise some of its basic notions and assumptions. By reference to the concept of ‘global exceptionalism’, which denotes a mode of quasi-dictatorial authority at the level of international organisations (IOs), I wish to highlight the practical and conceptual limitations to the idea of democratic and deliberative supranationalism. Supranationalism, I argue, is sometimes part of the problem, and not the solution, to democratic defects.

1

I would like to thank Christian Rauh for helpful comments on a draft version of this comment. A Peters, ‘Compensatory Constitutionalism: The Function and Potential of Fundamental International Norms and Structures’ (2006) 19 Leiden Journal of International Law 579. 3 C Joerges, PF Kjaer and T Ralli, ‘A New Type of Conflicts Law as Constitutional Form in the Postnational Constellation’ (2011) 2 Transnational Legal Theory 153, 158. 4 C Joerges and J Neyer, ‘From Intergovernmental Bargaining to Deliberative Political Processes: The Constitutionalization of Comitology’ (1997) 3 European Law Journal 273, 295. 2

72 Christian Kreuder-Sonnen In a first step, I will briefly develop the concept of global exceptionalism by drawing on the example of the UN Security Council’s role in counter-terrorism after the 9/11 attacks (11 September 2001) and apply it to the European crisis politics in the ongoing efforts to stabilise the eurozone. In a second step, I shall use this as a background foil against which to pitch my discussion of Joerges’ and Schneiderman’s contributions to this volume (Chapters one and two) and the ‘Schmittian challenges’ that they purport. Especially with regard to the high value accorded to deliberation as the preferred solution in conflicts-law constitutionalism, the lens of global exceptionalism provides a much more pessimistic picture in which discourses of ‘necessity’ and ‘security’ trump all attempts at deliberation. The third and final section ventures to take a look ahead and briefly discusses conjectures about the European future and the existing reform proposals with a view to the implications of global exceptionalism, and delineates the remaining re-constructive or prescriptive potential of conflicts-law constitutionalism.

II. EMERGENCY POLITICS AND EXCEPTIONALISM IN THE EURO CRISIS

It is quite a general pattern in the international law and international relations (IR) literature to hail the advent of ever stronger and more authoritative IOs as they impose constraints on otherwise voluntaristic states and imbue the international with a sense of order. Sure, there are many critical and more nuanced positions,5 yet the overall assessment of supranational authority is most often positive—not only in functional, but also in normative, terms.6 Both legal and IR scholars even trace processes of constitutionalisation within IOs such as the EU, the WTO, or the WHO, because their exercise of authority arguably becomes increasingly democratic and bound to the rule of law.7 What is rarely taken into account, however, is the fact that IOs can also exercise authority in a less benign and more autocratic fashion, which turns the constitutionalisation thesis upside down. Especially in times of trans-boundary systemic crisis, IOs can set

5 Suffice it to mention the post-structuralist camp, which basically rejects the normative foundations of the global governance architecture altogether; see M Hardt and A Negri, Empire (Cambridge MA, Harvard University Press, 2000) as well as those who discuss the legitimacy and accountability deficits in an otherwise desirable development, for example, FW Scharpf, Governing in Europe: Effective and Democratic? (Oxford-New York, Oxford University Press, 1999); M Zürn, ‘Democratic Governance Beyond the Nation-State: The EU and Other International Institutions’ (2000) 6 European Journal of International Relations 183. 6 See the contributions in B Cronin and I Hurd (eds), The UN Security Council and the Politics of International Authority (London, Routledge, 2008) as well as A Peters, ‘Global Constitutionalism in a Nutshell’ in K Dicke et al (eds), Weltinnenrecht: Liber amoricum Jost Delbrück (Berlin, Duncker & Humblot, 2005) 535. 7 DP Fidler, ‘Constitutional Outlines of Public Health’s “New World Order”’ (2004) 77 Temple Law Review 247; DZ Cass, The Constitutionalization of the World Trade Organization: Legitimacy, Democracy, and Community in the International Trading System (Oxford, Oxford University Press, 2005); F Schimmelfennig and B Rittberger, ‘Explaining the constitutionalization of the European Union’ (2006) 13 Journal of European Public Policy 1148.

Schmittian Challenges to CLC 73 themselves up as assertive governors of such globalised states of emergency. The more the situation is attended by public fear and existential security concerns, the more decision-makers (in IOs) can portray their measures as necessary and without alternative, and hence the greater becomes the decisionist IO authority.8 Not unlike the state of exception at the national level, executive self-empowerment, the transgression of competences, and the suspension of rights also characterise exceptionalism at the global level.9 The example of the United Nations Security Council’s (UNSC) measures to fight terrorism after 9/11 may illustrate this. Especially with regard to its so-called terror lists, the Council took far-reaching measures which were hardly covered by the existing legal order. Individuals and entities suspected of being involved in the financing or other support of terrorist activities, who were listed by the Security Council sub-committee established pursuant to Resolution 1267 (1999) were subject to a comprehensive asset-freeze and a travel ban executed by the respective country of residence or citizenship. To this day, listed individuals do not have access to any effective legal remedy in order to appeal such a decision. Therefore, international lawyers have found the UNSC to have acted in violation of international human rights law, especially the right to due process.10 What is more, the UNSC also assumed legislative competences to decree quasi-statutory norms to the international community as a whole, thus fiercely stretching its mandate as an executive organ. Many legal observers, therefore, hold that to adopt Resolutions 1373 (2001) and 1540 (2004)—which were of abstract and general character and set up a number of legal obligations that all states had to translate into their domestic legislation—represented an extra-legal self-empowerment by the Security Council.11 In fact, this kind of exercising supranational authority and the institutional and power transformations that it entailed within the UN Charter system can be understood as a form of globalised exceptional dictatorship

8 T Hanrieder and C Kreuder-Sonnen, ‘WHO Decides on the Exception? Securitization and Emergency Governance in Global Health’ (2014) 45; Security Dialogue 331. See, also, J White, ‘Emergency Europe’ (2013) Political Studies, published online ahead of print at: onlinelibrary.wiley.com/doi/10.1111/ 1467-9248.12072/abstract, last accessed 12 October 2013. 9 See C Kreuder-Sonnen and B Zangl, ‘Which Post-Westphalia? International Organizations between Global Constitutionalism and Global Exceptionalism’, Paper presented at the ISA Annual Convention, ‘The Politics of International Diffusion: Regional and Global Dimensions’, San Francisco, California, 3–6 April 2013. 10 See, for example, I Cameron, ‘Protecting Legal Rights: On the (in)security of Targeted Sanctions’ in P Wallensteen and C Staibano (eds), International Sanctions: Between Words and Wars in the Global System (London, Routledge, 2005) 181; Andrew Hudson, ‘Not a Great Asset, The UN Security Council’s Counter-Terrorism Regime: Violating Human Rights’ (2007) 25 Berkeley Journal of International Law 203. 11 E Rosand, ‘The Security Council as “Global Legislator”, Ultra Vires or Ultra Innovative?’ (2004) 28 Fordham International Law Journal 542, 567; B Elberling, ‘The Ultra Vires Character of Legislative Action by the Security Council’ (2005) 2 International Organizations Law Review 337, 351; M Fremuth and J Griebel, ‘On the Security Council as a Legislator, A Blessing or a Curse for the International Community?’ (2007) 76 Nordic Journal of International Law 339.

74 Christian Kreuder-Sonnen à la Carl Schmitt:12 a more or less autocratic rule-setting coupled with a more or less arbitrary rule application. The European emergency politics since the outbreak of the sovereign debt crisis in 2008 have shown a similar pattern. As Jonathan White rightly observes, ‘Emergency Europe’ has degenerated into a non-deliberative discursive space of security in which the dominant mode of justification for political decisions reverts to the urgency and exceptionality of the situation and the consequent necessity of the proposed or already adopted measures.13 This form of validation is mostly used to back acts of authority that contravene established norms or practice. Its transformative character notwithstanding, White denies that the European crisis law is indicative of Schmittian traits of dictatorship because the locus of authority is too elusive and dispersed; sovereignty is diffuse.14 Indeed, the crisis, in its entirety, is not being handled by one key actor who would have proven sovereign in the Schmittian sense by authoritatively deciding on the exception.15 Out of the list of the powerful Member States, the European Commission, the Council, the ECB, the troika, and ‘the markets’, all of whom have their stakes in the politics of this crisis, it is impossible to single out the one unitary actor with ultimate authority. This is not to say, however, that we leave the realm of decisionist authority behind. By contrast, the dispersed authority structure of European emergency governance can, in part, be re-configured as nothing but a conglomerate of coexisting islands of dictatorial order that have been carved out for the sake of the crisis and now inhabit the constitutional order of the European Monetary Union (EMU).16 This might indeed be a long way from Schmitt’s encompassing conception of dictatorial rule, yet it highlights the topicality of the legal transformations of the state of exception, not just the rhetoric of emergency. Let me zoom in on some of these islands of dictatorial order. Take the case of the introduction of emergency credit facilities in order to save financially-distressed euro states from sovereign default. Schematically speaking, first the Council, with its creation of the European Financial Stabilisation Mechanism (EFSM), and then the European Council, establishing the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) outside the European legal order, arrogated the competence practically to undermine the material constitution of the Monetary Union by circumventing Article 125(1) TFEU. Thus, the emergency credit facilities have to be considered at odds with the ‘no bail-out

12 JL Cohen, Globalization and Sovereignty: Rethinking Legality, Legitimacy and Constitutionalism (Cambridge, Cambridge University Press, 2012) ch 5; C Kreuder-Sonnen, Der Globale Ausnahmezustand: Carl Schmitt und die Anti-Terror-Politik des UN Sicherheitsrates (Baden-Baden, Nomos Verlag, 2012). 13 White, n 8 above, 3–4. 14 Ibid, 12. For a comprehensive analysis of Carl Schmitt’s theory of emergency powers and exceptional dictatorship, see O Gross, ‘The Normless and Exceptionless Exception, Carl Schmitt’s Theory of Emergency Powers and the “Norm-Exception” Dichotomy’ (2000) 21 Cardozo Law Review 1825. 15 Carl Schmitt, Political Theology. Four Chapters on the Concept of Sovereignty, ed University of Chicago Press (Chicago IL, University of Chicago Press, 2005 [1922]) 5. 16 See Kreuder-Sonnen and Zangl, n 9 above.

Schmittian Challenges to CLC 75 clause’, which provides that neither the Union nor any Member State shall be liable for or assume commitments of another member.17 While the finding of a violation of this provision is certainly a matter of degree and legal interpretation, it is hardly surprising that the CJEU as well as the German Constitutional Court would not dare to interfere judicially with the political necessities apparent in this economic emergency situation.18 Present-day exceptionalism is more generally characterised by courts procedurally upholding the appearance of judicial checks on executive power while substantially providing legal cover for emergency measures through (sometimes far-fetched) teleological interpretations of authority functions.19 The CJEU’s reasoning in Pringle, attributing to Article 125(1) TFEU the ultimate telos of maintaining the financial stability of the monetary union,20 and thus allowing for a wide discretion to political decision-makers, might thus be interpreted as an act of judicial deference to emergency politics. Or, following Pieter-Augustijn van Malleghem’s remarks on the judgment, the Court itself perpetuated a ‘Schmittian Ausnahmezustand’ as the ‘bailout prohibition of Art. 125 TFEU [had to] be disregarded in order to save the EU’s most prestigious symbol—the euro’.21 What is more, the operation of these facilities goes along with basically unfettered executive discretion on the part of the troika as well as a suspension of rights on the side of the addressees of austerity measures, both collective and individual.22 Its starting-point is the fiscal conditionalities attached to the disbursement of an emergency loan which are laid down in a Memorandum of Understanding (MoU) between the recipient state and the Commission together with the ECB and monitored by the troika as a whole. There are hardly any limits to what the troika may require from Member States which are under one of its support programmes. The troika has indeed forced draconian fiscal measures on to indebted eurozone Member States such as Greece, Portugal, and Ireland, which were thus stripped of their fiscal sovereignty and budgetary autonomy. As Andreas Fischer-Lescano points out, though, the troika has even gone so far as to micromanage complete overhauls of labour and employment law as well as cutbacks of public-goods provisions ranging from health to education sectors. According to 17 K Hentschelmann, ‘Finanzhilfen im Lichte der No Bailout-Klausel—Eigenverantwortung und Solidarität in der Währungsunion’ (2011) Europarecht 282; M Ruffert, ‘The European Debt Crisis and European Union Law’ (2011) 48 Common Market Law Review 1777; B Ryvkin, ‘Saving the Euro: Tensions with European Treaty Law in the European Union’s Efforts to Protect the Common Currency’ (2012) 45 Cornell International Law Journal 227. 18 M Everson and C Joerges, ‘Who is the Guardian for Constitutionalism in Europe after the Financial Crisis?’ (2013) LSE ‘Europe in Question’ Discussion Paper Series, available at: papers.ssrn. com/sol3/papers.cfm?abstract_id=2287111, last accessed 25 September 2013. 19 For a discussion of the reasons, see D Cole, ‘Judging the Next Emergency: Judicial Review and Individual Rights in Times of Crisis’ (2003) 101 Michigan Law Review 2565, 2570–71. 20 Case C-370/12 Pringle v Government of Ireland, Ireland and Attorney General of Ireland, judgment of 27 November 2012, paras 135–36. 21 P-A van Malleghem, ‘Pringle: A Paradigm Shift in the European Union’s Monetary Constitution’ (2013) 14 German Law Journal 141, 161. 22 See, also, the contribution by F Rödl and R Callsen, Chapter three in this volume.

76 Christian Kreuder-Sonnen his legal analysis, these practices violate a broad canon of international human rights.23 And since the ESM has expressly been created as an international institution outside the legal order of the European Union, it is all the more questionable whether avenues for legal protection and judicial review will be available to the citizens affected. Another such island has been carved out by the European Central Bank. In theory, the ECB’s democratic legitimacy as a non-majoritarian institution derives, on the one hand, from the output-oriented understanding that an independent central bank is functionally best-suited to take over the regulatory, pareto-optimising task of maintaining price stability. And, on the other hand, delegation to nonmajoritarian institutions can also enhance the secondary (ie, non-participatory) values of constitutional democracy, such as the suppression of factions and the facilitation of deliberation.24 Clearly, this construction can only work as long as the bank’s activities are covered by the initial delegation contract and, in fact, remain regulatory, not distributive. What the bank’s emergency actions in the sovereign debt crisis have shown, however, is a departure from both pre-conditions at the same time. While the ECB’s role in the rescue activities was prominent from the beginning and marked a deviation from its more traditional concentration on the technical aspects of monetary policy,25 its introduction of the Outright Monetary Transactions programme (OMT) in September 2012 represents more of a seizure of competences by executive self-empowerment that stretch the limits of the bank’s mandate.26 Indeed, Mario Draghi never stopped re-iterating the ECB’s view that the OMT fell squarely within its mandate to preserve price stability,27 yet the explicit prohibition on the bank purchasing direct government bonds, as codified in Article 123 TFEU, is at least experiencing a very questionable treatment here. Some predominantly German commentators have been less reticent, dubbing the OMT ‘out-of-mandate transactions’.28 Apart from this, by adopting the OMT programme, the ECB also left its home turf of monetary policy and became deeply involved in fiscal policy because its aid is coupled to the strict fiscal conditionalities of the ESM. More importantly, however, the (in-) direct purchase of government bonds by the ECB from economically-distressed 23 A Fischer-Lescano, ‘Competencies of the Troika, Legal Limitations of the Organs of the European Union’ in N Bruun, K Lörcher and I Schömann (eds), The Economic and Financial Crisis and Collective Labour Law in Europe (Oxford, Hart Publishing, 2014), forthcoming. 24 RO Keohane, S Macedo and A Moravcsik, ‘Democracy-Enhancing Multilateralism’ (2009) 63 International Organization 1. 25 Take the Securities Market Programme (SMP) or the Longer-term Re-financing Operations (LTRO) as examples. See T Mayer, Europe’s Unfinished Currency: The Political Economics of the Euro (London-New York, Anthem Press, 2012). 26 S Homburg, ‘Der neue Kurs der Europäischen Zentralbank’ (2012) 92 Wirtschaftsdienst 673. 27 ECB, ‘Introductory statement to the press conference (with Q&A)’, 6 September 2012, available at: www.ecb.europa.eu/press/pressconf/2012/html/is120906.en.html, last accessed 29 October 2013; ECB, ‘Introductory statement to the press conference (with Q&A)’, 2 August 2012, available at: www. ecb.europa.eu/press/pressconf/2012/html/is120802.en.html, last accessed 29 October 2013. 28 J Stark, ‘The ECB’s OMT’s (Out-of-Mandate Transactions)’ (2012) The International Economy 52; Homburg, n 26 above, 676.

Schmittian Challenges to CLC 77 euro states also represents a shift from regulatory to re-distributive policy.29 The OMT re-distributes financial risk among the ECB shareholders without their involvement: if the programme is activated, it automatically creates financial obligations for the remaining eurozone members. The bank may thus autonomously accumulate enormous risks for the domestic budgets of the countries financing the ECB.30 By these processes, one could argue, the bank went all the way from ‘democracy-enhancing multilateralism’31 to democracy-undermining supranational decisionism. What these instances of exceptionalism share structurally is the ‘executivisation’ of decision-making, at the expense of judicial and parliamentary prerogatives, that undermines the legal protection of the rule-addressees. If this process is propelled by executive self-empowerment and silent deference by the other branches, it is indeed wrapped in Schmittian clothes. But there are also more subtle (yet no less troubling) ways in which exceptionalism may play out. In the EU context, the introduction of the Excessive Imbalances Procedure (EIP) is an example of this sort, because it amounted to an act of self-disempowerment by the European legislature; an undermining of the constitutional balance in favour of the executive Commission. In the perceived emergency situation, the Parliament and the Council did not refrain from installing an unofficial European economic government through the normal legislative process—an act which was, in itself, incompatible with European primary law.32 Hence, executive authority has been conferred by extra-constitutional legislative empowerment.

III. GLOBAL EXCEPTIONALISM AND CONFLICTS-LAW CONSTITUTIONALISM

Supranationalism of this sort is obviously less enticing than the version envisaged by the conflicts-law approach. In fact, it challenges the re-constructive validity of deliberative supranationalism to the extent that the argumentative weighing of interests and the accommodation of external effects were altogether shelved during the crisis. It was replaced by a rationality of ‘rescue’ and ‘austerity’ that does not acquiesce in alternatives. This is the first and most important Schmittian 29

See the contribution by H Deters, Chapter ten in this volume. D Murswiek, ‘Erwiderung auf Stellungnahmen der Bundesregierung und des Bundestags für Beschwerdeführer Dr. Peter Gauweiler in dem Verfassungsbeschwerdeverfahren 2 BvR 1390/12 und dem Organstreitverfahren 2 BvE 5/12 vom 11.02.2013’ (2013), 19–21, available at: www.jura.unifreiburg.de/institute/ioeffr3/forschung/papers/murswiek/erwiderung-auf-bundestag-und-bundesreg. pdf, last accessed 23 September 2013. 31 Keohane, Macedo and Moravcsik, n 24 above. 32 J Bast and F Rödl, ‘Jenseits der Koordinierung? Zu den Grenzen der EU-Verträge für eine Europäische Wirtschaftsregierung’ (2012) 39 Europäische Grundrechte-Zeitschrift 269; C Joerges and M Weimer, ‘A Crisis of Executive Managerialism in the EU: No Alternative?’, Maastricht Faculty of Law Working Paper No 2012-7, available at: papers.ssrn.com/sol3/papers.cfm?abstract_id=2190362, last accessed 26 March 2013; FW Scharpf, ‘Monetary Union, Fiscal Crisis and the Disabling of Democratic Accountability’ in W Streeck and A Schäfer (eds), Politics in the Age of Austerity (Cambridge, Polity Press, 2013) 108. 30

78 Christian Kreuder-Sonnen challenge to conflicts-law constitutionalism and, to a certain extent, I think, it is also reflected in Christian Joerges’ contribution at the beginning of this Part. His analysis goes much further in identifying the EMU’s institutional design deficits underlying the current crisis and in portraying the increasing discrepancy between constitutional form or aspiration and the de-legalisation necessary to cope with diverse factual circumstances.33 Yet his treatment of the ‘third transformation of Europe’, that is, the new mode of economic governance during the crisis, also conveys the Schmittian challenge in a similar way, namely, as an empirically observable form of politics. It highlights and criticises the emergency mode of politics in the ongoing crisis response, the legal exceptionalism at the EU level, the Court’s deference to political necessity and the introduction of ‘an authoritarian type of rule’.34 By contrast, David Schneiderman’s contribution implicitly conveys another Schmittian challenge to conflicts-law constitutionalism, which operates at a very different level. It is not so much concerned with the empirical topicality of Schmitt’s thought on the state of exception, but rather with the critical theoretical edge towards liberal legalism inherent in his legal and political theory.35 In his study of international investment law and the neo-liberal bias in arbitration awards, Schneiderman contends that the democratic compensation function of conflicts-law is actually used as a cover for legalising and thus solidifying the power-inequalities between the investor and the host states. Bilateral investment treaties (BITs) are used as a non-derogable bulwark to protect economic investors’ interests. Not even in the direst economic emergency situation are arbitrators willing to tolerate deviations from BITs. Thus, in contrast to Joerges, Schneiderman, in fact, demands exceptionalism where there is none: in a neoMarxist re-interpretation of Schmitt, he advocates a return of politics to the detriment of a socially-imbalanced neo-liberal constitutionality.36 However, this eventually represents little challenge to the overall theoretical conflicts-law framework, but rather to its instrumentalisation by investment lawyers. It does not seem to be the concept or the theory which is flawed, but the empirical pre-conditions in the field of investment law. The compensatory function of conflicts law—and this is also Schneiderman’s own thrust—simply seems to be misused as a normative cover in this case. This is also why Schneiderman’s proposal to cure this imbalance can revert to the corrective potential of deliberative supranationalism, which allows for legal minimalism as opposed to the constitutionalisation of neo-liberal values. International investment law should escape the de-politicisation trap of 33

See C Joerges, Chapter one in this volume. See, also, C Joerges, ‘Europe’s Economic Constitution in Crisis’ (2012) ZenTra Working Papers in Transnational Studies 06/2012, available at: papers.ssrn.com/sol3/papers.cfm?abstract_id=2179595, last accessed 25 March 2013. 35 See C Schmitt, The Concept of the Political: Translated and with an Introduction by George Schwab, expanded edn (Chicago IL, University of Chicago Press, 2007 [1932]). 36 See D Schneiderman, Chapter two in this volume. 34

Schmittian Challenges to CLC 79 legalisation, and embark on the route of democratic deliberation. Based upon the ‘right to be heard’ and a ‘duty to hear the other side’, so the argument goes, ‘existing institutions can be enhanced or new institutions developed to accommodate more robust opportunities to be heard in full public view so that all those affected by a decision have a voice in its formulation’.37 Interestingly, Schneiderman and Joerges come back on the same page here. While ending on a more pessimistic note in his contribution to this volume, Joerges, nevertheless, continues to venerate the value of deliberation as a tool to break with the crisis-induced primacy of the political. As he writes together with Michelle Everson, ‘Conflicts-law constitutionalism, by contrast, would require legally structured [“constitutionalised”] cooperative deliberation’.38 It is here that I would like to issue a caveat that draws on my earlier discussion of the concept of global exceptionalism and which questions not so much the normative desirability of deliberation but its very feasibility in situations of perceived emergency. The point is, I reckon, the antithetical nature of deliberation and the ‘securitisation’ that usually attends the politics of emergency and exceptionalism. As framed by the prominent Copenhagen School in International Relations, securitisation denotes the discursive construction of political problems as existential security threats. The claim is that the securitisation of an issue moves that problem out of normal politics and into the realm of the exception, where the legitimation of resorting to extraordinary means is given by the perception of threat.39 Now, while the normative idea behind the deliberation approach is highly appealing in my view, it nevertheless hinges on fairly ambitious facilitating conditions that have to be met in order for mere communication to turn into deliberation. And its most important pre-condition is probably that some form of presumptively impartial discourse is possible at all.40 However, the situations that we are talking about here are not at all prone to open discourse—in fact, it is a claim derived from securitisation theory that a discursively constructed emergency situation creates what one could call an ‘anti-deliberative space’. In times of crisis, the raison d’État takes over and what is claimed to be necessary by the authorities to preserve the stability of the order is mostly supported by the

37

Ibid. Everson and Joerges, n 18 above, 24. 39 O Wæver, ‘Securitization and Desecuritization’ in RD Lipschutz (ed), On Security (New York, Columbia University Press, 1995) 46; B Buzan, O Wæver and J de Wilde, Security: A New Framework for Analysis (London-Boulder CO, Lynne Rienner Publishers, 1998); M McDonald, ‘Securitization and the Construction of Security’ (2008) 14 European Journal of International Relations 563. In the case of the UNSC, for example, an analysis of the meeting records before and after 9/11 has shown how the threat perception with regard to terrorism dramatically changed after the attacks and brought about the image of terrorists as hostis humani generis, the existential enemy of humanity per se, which had to be fought by all means necessary. This discourse facilitated the acceptance of extra-legal measures that would have been hardly conceivable in normal times: see Kreuder-Sonnen, n 12 above, 55–66. 40 J Cohen, ‘Deliberation and Democratic Legitimacy’ in AP Hamlin and P Pettit (eds), The Good Polity: Normative Analysis of the State (Oxford, Blackwell Press, 1989). 38

80 Christian Kreuder-Sonnen fearful public.41 The argumentative rationality in a securitised environment can be conceived as antipodal to deliberation, because there is no plurality of legitimate positions in the first place. The dictum of necessity (for urgent responses, extraordinary measures, etc) trumps any other norms and values.42 I would thus question the appropriateness of the deliberation approach as a cure for the very problems that we are facing in ‘Emergency Europe’ and with situations of exceptionalism more generally. This is certainly not to say that deliberative supranationalism is to be disposed of as a normative ideal. The warning is merely to highlight the empirical conditions upon which its practicability might be dependent. What the Schmittian challenge to conflicts-law constitutionalism consists in, in my view, is thus especially the need to engage the problem of genuinely supranational exercises of authority, and hence to complement the conflicts-law focus on the ‘horizontal’ constitutionalisation of non-hierarchical governance structures43 with the more state-analogous ‘vertical’ constitutionalisation of hierarchical authority structures. If deliberative supranationalism is to flourish, executive authority, and executive decisionism especially, have to be kept at bay; there need to be constitutionally-structured legal and societal constraints on the exercise of supranational authority that will also tame securitising moves and emergency powers. On the one hand, there might be legal-institutional means of how to contain exceptionalist practices ex ante or to sanction them ex post.44 On the other hand, there is also the need to counter securitisation and emergency governance by discursive de-securitisation and societal contention.45 The latter component is again ridden with pre-requisites, however. This is because the broad and effective opposition to, and contestation of, emergency politics with its underpinning security speech should depend, for its realisation, on the existence of something akin to a public sphere designed to enable polity-wide politicisation.46 Especially in the context of IOs—including the EU, for that matter—it is an open question to what extent such political spaces (can) actually exist.

41 See, also, D Dyzenhaus, ‘The State of Emergency in Legal Theory’ in VV Ramraj (ed), Global Anti-Terrorism Law and Policy (Cambridge, Cambridge University Press, 2006) 72. 42 See A Liese, ‘Exceptional Necessity, How Liberal Democracies Contest the Prohibition of Torture and Ill-Treatment when Countering Terrorism’ (2009) 5 Journal of International Law and International Relations 17; R Heller, M Kahl and D Pisoiu, ‘The “dark” side of Normative Argumentation—The Case of Counterterrorism Policy’ (2012) 1 Global Constitutionalism 278. 43 Joerges and Neyer, n 4 above, 298. 44 For a discussion, see Hanrieder and Kreuder-Sonnen, n 8 above. 45 On de-securitisation, see C Aradau, ‘Security and the Democratic Scene: Desecuritization and Emancipation’ (2004) 7 Journal of International Relations and Development 388; P Roe, ‘Securitization and Minority Rights: Conditions of Desecuritization’ (2004) 35 Security Dialogue 279. And with explicit regard to the countering of European emergency politics, see White, n 8 above, 14-15. 46 VS Tjalve, ‘Designing (de)security: European Exceptionalism, Atlantic Republicanism and the “public sphere”’ (2011) 42 Security Dialogue 441.

Schmittian Challenges to CLC 81 IV. ONE STEP BACK, TWO STEPS FORWARD?

This, at least, is the main objection raised by Joerges against the policy proposals advanced by Miguel Poiares Maduro and, by implication, Mattias Kumm.47 Both authors, while differing in their analysis of the causes of the crisis, suggest that the rectification of the ensuing institutional and democratic defects will best be attained by a further centralisation and strengthening of supranational governance in the EU, which should concomitantly become subject to democratic control and transnational political struggle. Based upon the idea that ‘there is no successful political community without distributive justice’, and that, therefore, there could be ‘no representation without taxation’,48 it is proposed to endow the Commission with genuinely European taxing powers which would replace the system of interstate transfer mechanisms.49 Such a turn to re-distributive politics at EU level, they argue, would have positive effects for democratic will-formation in the EU, because public interest and debate would necessarily be re-directed to a European transnational political space. To foster this democratic potential, Maduro and Kumm both suggest turning the elections to the European Parliament into a genuine political competition for the ‘European government’, especially by giving the Parliament the power to choose the President of the Commission.50 Now while the proposal’s authors share the expectation that such a re-location of political authority should create the pre-conditions for a more democratic Economic and Monetary Union, Christian Joerges and Florian Rödl fear that it would merely provide the semblance of legitimacy to the authoritarian rule of a supranational regulatory machinery. Their outright rejection of the reform ideas especially stems from the observation that there is presently no—and that in the foreseeable future there will not be any—such genuinely European political space conceived of as a transnational public arena to engage in contestation over issues requiring majoritarian legitimacy. Arguably, Europe’s socio-economic, political and cultural diversity is simply too pronounced to allow for pan-European communication and will-formation.51 It is certainly not in my capacity to adjudicate between these claims. Instead, I should like to draw attention to the empirical work by Christian Rauh and Michael Zürn which supports more optimistic assumptions about the development of a

47 See MP Maduro, ‘A New Governance for the European Union and the Euro: Democracy and Justice’ (2012) RSCAS Policy Papers 11, available at: papers.ssrn.com/sol3/papers.cfm?abstract_ id=2180248, last accessed 28 September 2013; M Kumm, ‘What Kind of a Constitutional Crisis is Europe in and What should be Done about it?’ (2013) WZB Discussion Paper SP IV 2013-801, available at: bibliothek.wzb.eu/pdf/2013/iv13-801.pdf, last accessed 10 October 2013. 48 Maduro, n 47 above, 7. 49 Ibid, 11–16; Kumm, n 47 above, 16–17. 50 Maduro, n 47 above, 18–21; Kumm, n 47 above, 18–20. 51 C Joerges and F Rödl, ‘Would the election of a Member of the European Parliament as President of the Commission make democratic sense?’, available at: www.verfassungsblog.de/election-membereuropean-parliament-president-commission-democratic-sense, last accessed 3 March, 2014.

82 Christian Kreuder-Sonnen European public sphere.52 Starting from the hypothesis that the growing political authority of international institutions leads to their increasing politicisation,53 it is argued that the euro crisis might actually not only pose a challenge to, but also represent a longer-term opportunity for, democracy in Europe. In a nutshell, the argument is that, while the crisis has certainly accentuated legitimacy gaps in the short run, its assertive (and, I should add, exceptionalist) governance by European institutions beyond the nation state also functions as a prism of politicisation, because it makes the importance and the effects of European policies more apparent for a broader segment of society. The ensuing widespread awareness of political authority, they claim, has enabled societal contestation and substantive debate to unprecedented levels. In sum, ‘this creates the conditions for fruitful political discourse on a widely acceptable future course of European policies and institutions’.54 Accordingly, in this reading, the outlook for a European political space is not as bleak as might be feared. More importantly, however, Rauh and Zürn also hold that, in order to make the detected societal politicisation live up to its democratising potential, it is, in fact, necessary to push for an institutional design which combines public accountability with participation in supranational decision-making—especially by rendering the mandate of the Commission and its president subject to political competition in electoral contests.55 If this optimistic scenario were to materialise, the European financial and monetary crisis would indeed prove to be only a minor setback with far greater potential to improve the democratic credentials and constitutional quality of the EU than to deteriorate them sustainably. This would be the trajectory of a constitutional dialectic in which exceptionalism triggers opposition that eventually leads to even more constitutionalisation. A more pessimistic scenario is also possible, however. First, exceptionalism knows its own regularities. It has a tendency to extend, to lock in, and to become the new rule.56 It could thus be more than just a transitional period. Secondly, it is an open question as to whether the presently high degree of societal politicisation can, in the end, also propel a more democratic European polity. It is also possible and, in fact, not so far-fetched a suggestion that it might, instead, just lead to an increase in Euro-scepticism and the strengthening of European fringe parties. If this is the case, though, the authority-legitimacy gap will not be reduced but amplified. The warning of authoritarian managerialism undermining the principle of ‘unity in diversity’ should, therefore, not be taken lightly. 52 C Rauh and M Zürn, ‘The Politicization of the EU in Times of Crisis—Implications for Institutional Design’, paper presented at the 20th International Conference of Europeanists, Amsterdam, 25–27 June 2013. See also, C Rauh and M Zürn, ‘Zur Politisierung der EU in der Krise’ in Martin Heidenreich (ed), Krise der europäischen Vergesellschaftung? Soziologische Perspektiven (Wiesbaden, Verlag für Sozialwissenschaften, forthcoming 2014). 53 See M Zürn, M Binder and M Ecker-Ehrhardt, ‘International Authority and its Politicization’ (2012) 4 International Theory 69. 54 Rauh and Zürn, The politicization, n 52 above, 13. 55 Ibid, 18. 56 O Gross and F Ní Aoláin, Law in Times of Crisis: Emergency Powers in Theory and Practice (Cambridge, Cambridge University Press, 2006) 228–30. See, also, White, n 8 above, 16.

Comment The Moment of Schmittian Truth: Conceiving of the State of Exception in the Wake of the Financial Crisis MING-SUNG KUO WARWICK

I. INTRODUCTION: THE FINANCIAL CRISIS AND THE FACES OF EXECUTIVE DOMINANCE

E

‘

MERGENCY TALK’ ABOUNDS on both sides of the Atlantic following the 2008 financial crisis.1 With the Eurozone grappling with the issue of sovereign debt in several Member States, a new model of crisis governance has been taking shape, which has great implications for global governance and for the European Union (EU) in particular. One of the most striking developments is the plethora of institutional frameworks in response. Some of them are established according to the EU law;2 others sit alongside the EU but are institutionally attached to the EU, regardless of whether they have their own legal personality;3 still some others stay outside the EU legal framework as informal institutional arrangements but involve the institutional elements of the EU, including the European Commission and the European Central Bank (ECB). While not all of

1 For the state of emergency in relation to the 2008 financial crisis in the United States, see S Levinson and JM Balkin, ‘Constitutional Dictatorship: Its Dangers and Its Design’ (2010) 94 Minnesota Law Review 1789, 1810–11. For a study focused on the European context, see A Dimopoulos, ‘PIGS and Pearls: State of Economic Emergency, Right to Resistance and Constitutional Review in the Context of the Eurozone Crisis’ (2013) 7 Vienna Journal on International Constitutional Law 501, available at: www.icl-journal.com/download/ccd868636fb3dd1af665197159cb89b4/ICL4_Dimop.pdf, last accessed 15 February 2014. 2 See, eg, Council Regulation (EU) No. 407/2010 establishing a European financial stabilisation mechanism ([2011] OJ L118/1). 3 See, eg, The Treaty on Stability, Coordination and Governance (a separate treaty-based regulatory framework with close links to the EU), the temporary European Financial Stability Facility (EFSF, a limited liability company incorporated under Luxembourg law according to a decision made within the framework of the ECOFIN Council), the European Stability Mechanism (ESM, an international organisation with a separate legal personality).

84 Ming-Sung Kuo these responsive frameworks are within the remit of the EU law, they jointly bear greatly on the everyday EU administration. Against this backdrop, critics have quickly pointed out the danger of executive dominance in transnational governance.4 While agreeing on the dominance of the executive/administrative power, scholars have been debating its root cause and solution. With regard to the EU, some trace back to the asymmetrical structure governing the participation of national constitutional organs in steering the relationship between the EU and the Member States, resulting in what Jürgen Habermas calls ‘a special kind of “executive federalism”’;5 others focus attention on ‘[the] praxis of authoritarian executive managerialism’;6 yet some others pin hopes for curtailing executive dominance on more representative democracy.7 Echoing these prognoses, this chapter will focus on one particular aspect of the executive dominance taking shape amidst the euro crisis: the exigent, rightslimiting, economic measures imposed by the so-called troika with the participation of two EU bodies, ie, the European Commission and the ECB. Instead of addressing the various opaque organisational arrangements around the EU system in response to the sovereign debt crisis, my objective in this chapter is simply to explore why such exigent measures can easily be brought into the fold in global governance, even with the involvement of the EU bodies, in the light of the American experience. I shall argue that the euro crisis management evokes the design of emergency power in the United States (US) constitutional architecture: executive emergency powers are ‘normalised’ through ordinary legislation, but only switched on with the ‘securitisation’ of the administrative machinery when a crisis kicks in. As global governance is ungrounded by a political community, an explicit constitutionalisation of its emergency power is inconceivable, casting the global crisis governance into the shadow of the American model. Further reflections upon the appeal and limits of constitutionalisation in response to the new crisis management suggest that the dilemma facing the constitutionalisation of global crisis governance reveals its elusive political character.

II. BETWEEN SECURITISATION AND NORMALISATION: GLOBAL GOVERNANCE AND AMERICAN ADMINISTRATIVE LAW 2.0

Before we can do justice to the euro crisis management, some of its characteristics are worthy of note. First, the responsive measures are extraordinary. They are not

4 See D Curtin, ‘Challenging Executive Dominance in European Democracy’ (2014) 77 Modern Law Review 1, 7–11. 5 J Habermas, ‘The Crisis of the European Union in the Light of a Constitutionalization of International Law’ (2012) 23 European Journal of International Law 335, 337, 345–48. 6 See C Joerges and M Weimer, ‘A Crisis of Executive Managerialism in the European Union— No Alternative?’ in G de Búrca, C Kilpatrick and J Scott (eds), Critical Legal Perspectives on Global Governance: Liber Amicorum David M Trubek (Oxford, Hart Publishing, 2013) 295. 7 See, for example, Curtin, n 4 above, 29–32.

The Moment of Schmittian Truth 85 only austere in the economic sense, but also harsh from the legal perspective. The decision to mandate the account holders of some Cypriot banks to ‘bail in’ with their deposits is just the most striking example.8 Secondly, the role of national parliaments is limited in the adoption of these extraordinary measures. It is true that all the bail-out agreements and other austerity measures gained parliamentary approval. Yet, the conditions of these bail-outs had already been decided in the fora of the heads or ministers of governments and the technocrats from the troika before they were even put forward before parliaments. Members of parliaments were virtually mandated to pass the bail-out package but only received their mandate from the troika, instead of from their constituents. Thirdly, these extraordinary responsive measures are adopted, despite the constitutional or foundational instruments that govern the EU operation.9 Like other issues, the decisions are de facto decided in the institutional fora provided in the foundational treaties, such as the Euro Group, although their de jure implementation is carried out through re-configured legal channels.10 In this way, the EU is able to make extraordinary decisions and then implement them with the collaboration of other governance players, while, at the same time, staying out of the remit of the EU law.11 Thus, while the ECB’s Outright Monetary Transactions (OMT) suffered a deadly blow in the hands of the Karlsruhe Court, its involvement in the troika remains unaffected.12 To sum up, what is characteristic of the euro crisis management is the resort to extraordinary measures in times of exigency with the administrative machinery switching its governance mode from normality to exception, but without contravening its constitutional mandate. If my characterisation of the euro crisis management is correct, how should we make sense of this development? Echoing the commentary on the national responses to terrorist threats in the post-9/11 world, scholars point to the same trend of securitisation as characteristic of the euro crisis management.13 With the increasing security concern and the enlarging role of security agencies in policymaking, many countries have re-balanced the relationship between liberty and

8 See AA Antoniou, ‘Original Sin: the EU Tampering with the Right to Property in Cyprus is an Unprecedented Departure from EU Norms and Shared Constitutional Rights’ (Eutopia Law, 19 March 2013), available at: eutopialaw.com/2013/03/19/original-sin-the-eu-tampering-with-the-rightto-property-in-cyprus-is-an-unprecedented-departure-from-eu-norms-and-shared-constitutionalrights, last accessed 15 February 2014. 9 See Curtin, n 4 above, 10–12. Notably, the ESM Treaty indirectly provides for exigent measures in its Preamble (12): ‘In accordance with IMF practice, in exceptional cases an adequate and proportionate form of private sector involvement shall be considered’ (emphasis added). 10 This is the way the deal was struck on the Cyprus bail-out. See Antoniou, n 8 above. 11 See, also, D Chalmers, ‘European Restatements of Sovereignty’ in R Rawlings, P Leyland and A Young (eds), Sovereignty and the Law: Domestic, European and International Perspectives (Oxford, Oxford University Press, 2013) 186, 209. 12 BVerfG, 2 BvR 2728/13 (14 January 2014), para 67. This paper cites its official English translation at: www.bundesverfassungsgericht.de/en/decisions/rs20140114_2bvr272813en.html, last accessed 15 February 2014. 13 See, eg, N Boy, JP Burgess and A Leander, ‘The Global Governance of Security and Finance: Introduction to the Special Issue’ (2011) 42 Security Dialogue 115, 115.

86 Ming-Sung Kuo security at the expense of civil liberties and fundamental rights. Through this lens, the exigency of the responses to the euro crisis, as embodied in the mandated bail-in in the Cyprus crisis, results from the diminished role of civil liberties and fundamental rights in the broad context of securitisation. Yet, there is a significant distinction between these two areas. It is one thing to say that security concerns gradually chip away at civil rights and fundamental rights through each instance of constitutional balancing; it is quite another to say that they can be easily thrown overboard because of security concerns. Both are the indication of securitisation, indeed, but, in the latter case, the government will have to step outside the normal legal framework into the state of emergency (or exception). Most governments can only appeal to emergency measures by formally declaring a temporary derogation from the normalcy of the rule of law under their constitutional framework.14 Moreover, making such a formal declaration is not without political risk.15 With the exception of the US, what we have observed of the general situation of civil liberties and fundamental rights in the post-9/11 legal landscape is the lesser case of securitisation, if you will, rather than resorting to outright emergency powers.16 In contrast, as the Cyprus crisis clearly shows, the euro crisis management has extended to the extraordinary measures beyond the realm of normal legal regulation. More striking is that these extraordinary measures have been adopted in the face of the existing constitutional framework of the EU. In other words, the euro crisis management suggests that the EU’s existing constitutional framework allows for a smooth switch between normal legality and emergency measures without incurring too much political risk to decisionmakers.17 What design in the EU constitutional framework makes it possible to make such a crucial switch in such an unnoticeable fashion? What does this tell us of the state of the EU beyond the general move towards securitisation? To illuminate these issues, it is time to call up my protagonist, American emergency law. Commenting in 2005 on the impact on the state of the rule of law of the 2001 Authorization for the Use of Military Force (AUMF)—a statutory Congressional joint resolution prompted by the 9/11 terrorist attacks—Cass Sunstein provocatively suggested that the AUMF be read in the light of American administrative law principles rather than the laws of war.18 Given its brevity, the AUMF appears to be an unlikely candidate for the executive power to justify their extraordinary measures in legal terms. Rather, it reads more like a declaration of war that would 14 See B Ackerman, Before the Next Attack: Preserving Civil Liberties in an Age of Terrorism (New Haven CT, Yale University Press, 2006) 122–41. See O Gross and F Ní Aoláin, Law in Times of Crisis: Emergency Powers in Theory and Practice (Cambridge, Cambridge University Press, 2006) 37. 15 See Ackerman, n 14 above, 81–82; Gross and Ní Aoláin, n 14 above, 133–37. 16 See HH Koh, ‘On American Exceptionalism’ (2003) 55 Stanford Law Review 1479, 1498. But, see G Frankenberg, Political Technology and the Erosion of the Rule of Law: Normalizing the State of Exception (Cheltenham, Edward Elgar Publishing, 2014) 29. 17 Damian Chalmers notes that Case C-370/12 Pringle v Ireland ([2013] All ER (EC) 1 (ECJ)) suggests several limits the EU law may impose on the ESM, but concludes that ‘[n]one of these checks are meaningful’. Chalmers, n 11 above, 210. 18 CR Sunstein, ‘Administrative Law Goes to War’ (2005) 118 Harvard Law Review 2663, 2663–64.

The Moment of Schmittian Truth 87 confer on the executive department exceptional powers aimed at prosecuting the war successfully.19 Yet, Sunstein reads the AUMF in line with the landmark case in American administrative law, Chevron USA Inc v Natural Resources Defense Council, Inc,20 arguing that the AUMF is no different than other legislation, and thus its textual ambiguities should be resolved in the way set out in Chevron: courts should defer to the interpretation given by the President, as the head of the administration, of legislation, including the AUMF, if the administrative interpretation is ‘reasonable’ and Congress has not directly decided the precise question at issue in the legislation.21 Read in this light, the AUMF grants the executive department broad discretion in its interpretation. Notably, Chevron is not an abrupt deviation in the development of American administrative law. Rather, it is the culmination of the rise of the modern administrative state, continuing to tip the balance of separated powers in favour of the administration.22 What is important here is that Chevron has brought about a kind of counter-revolution of law.23 In the post-Chevron era, the court’s ultimate role in legal interpretation set out in Marbury v Madison24 has been fundamentally challenged. When faced with statutory ambiguity, Sunstein points out, now ‘it is emphatically the province and duty of the administrative department to say what the law is’.25 Under the Chevron doctrine, when Congress chooses ambiguous text in legislation such as the AUMF, the administration is virtually given a free hand in legal interpretation as long as it acts in a reasonable way. To be sure, the test of reasonableness is not without teeth. Nor does it mean issuing carte blanche to the administration. Nevertheless, the ambiguous standard of reasonableness indisputably falls short of a clear controlling criterion and is thus susceptible to adaptation when necessary.26 It is in this very adaptability of legal standards, whether they are statutorily stipulated or judicially decreed, that Adrian Vermeule discovers the Schmittian character of American administrative law.27 Taking a close look at the statutory foundation of modern American administrative law, the Administrative Procedure Act (APA), and landmark cases, including Chevron, Vermeule identifies ‘black holes’ and ‘grey holes’ in administrative law, which have enabled the administration to act without much 19 See CA Bradley and JL Goldsmith, ‘Congressional Authorization and the War on Terrorism’ (2005) 118 Harvard Law Review 2047, 2057–66, 2091–94. 20 Chevron USA Inc v Natural Resources Defense Council, Inc 467 US 837 (1984). For the (counter-) revolutionary impact of Chevron, see CR Sunstein, ‘Chevron Step Zero’ (2006) 92 Virginia Law Review 187, 188. 21 Sunstein, n 18 above, 2665. 22 See RA Epstein, ‘Why the Modern Administrative State Is Inconsistent with the Rule of Law’ (2008) 3 New York University Journal of Law and Civil Liberty 491, 505–7. 23 Sunstein, n 20 above, 189, 198. 24 Marbury v Madison 5 US (1 Cranch) 137 (1803). Sunstein characterises Chevron as ‘counterMarbury for the administrative state’. Sunstein, n 20 above, 189. 25 Sunstein, n 20 above, 189. 26 See, generally, JA Pojanowski, ‘Reason and Reasonableness in Review of Agency Decisions’ (2010) 104 Northwestern University Law Review 799. 27 A Vermeule, ‘Our Schmittian Administrative Law’ (2009) 122 Harvard Law Review 1095.

88 Ming-Sung Kuo judicial control. Alongside what he calls black holes, ie, the APA provisions that preclude its application to some circumstances,28 Vermeule notes the existence of grey holes in the APA where the most important statutory standards of judicial scrutiny fail to provide clear criteria, subjecting themselves to adaptation.29 According to the APA, agency policy choices and, in regard to informal proceedings, agency fact-finding are subject to ‘arbitrary and capricious’ review.30 In the hands of the Overton Park31 Court, this standard of review was turned into the so-called ‘hard look’ review. Yet, in the light of the subsequent case law, Vermeule observes that the ambiguous standard of ‘arbitrary and capricious’ review has been ‘dial[led] down’ to what he terms ‘soft review’.32 Similarly, the ‘substantial evidence’ review in the APA is also subject to such adaptation. The APA provides that this standard of review apply only to formal proceedings.33 As the open-ended statutory text suggests, however, it is hard to distinguish between the standard of the substantial evidence review and that of the arbitrary and capricious review. Thus, notes Vermeule, the courts have used them interchangeably, conflating these two standards of judicial review.34 Both are adaptable in the hands of the courts, softening the APA requirements. Together with the adaptable judicial doctrines such as the Chevron standard of reasonableness, these ambiguous legal concepts create—for the administration as well as the courts—the grey holes in which law becomes adaptable and subject to the administrative decisions under the watch of the courts.35 Thus, Vermeule argues that the doctrinal and statutory pillars of American administrative law amount to ‘adjustable parameters’,36 falling far short of controlling principles. The point that Vermeule makes of what he calls adjustable parameters is that American administrative law includes the structural elements by virtue of which the rule-of-law mode of governance guarded by the courts can be swiftly switched to one based upon administrative discretion.37 To be sure, the decision as to whether to switch the mode remains subject to judicial scrutiny when the courts apply these ambiguous statutory standards and judicial doctrines to administrative decisions. Still, Vermeule argues that judicial interpretations of the adjustable parameters have been influenced by circumstances. Courts have been highly deferential to the administration in applying these open-ended standards or doctrines to matters of nation security and foreign relations, especially in times of emergency like the post-9/11 era.38 On the face of it, nothing seems to 28 29 30 31 32 33 34 35 36 37 38

Ibid, 1107–18. Ibid, 1106. Administrative Procedure Act, 5 USC § 706(2)(A). Citizens to Preserve Overton Park v Volpe, 401 US 402 (1971). See Vermeule, n 27 above, 1119–21. 5 USC § 706(2)(E). See Vermeule, n 27 above, 1121–22. Ibid, 1118–31. Ibid, 1097, 1106, 1113–15, 118–31. Ibid, 1103–6, 1139–42. Ibid, 1143–44.

The Moment of Schmittian Truth 89 have changed. Beneath the normality of administrative law sneaks in a de facto dictatorship in which the separation of powers yields to the executive prudential judgement on circumstances.39 If American administrative law is Schmittian with its inbuilt open-ended standards and adaptable doctrines, as Vermeule provocatively argues,40 the US seems to have long entered a permanent state of emergency with the enactment of emergency legislation at the inception of the modern administrative state. Apart from the provisions regarding the declaration of war and the suspension of habeas corpus, the US Constitution stands apart from other modern constitutions as it provides for no emergency powers. Yet, it does not mean that there is no emergency law in the US. In addition to the pre-twentieth-century legislation, which the federal government invoked to supress strikes in the 1890s,41 statutes were enacted during World War I that delegated broad discretion to the President. Later, a series of legislative responses to the state of economic emergency during the Depression continued this strategy of responding to crises with more powers delegated to the President, laying the groundwork for the modern US emergency power regime.42 In the wake of World War II, Clinton Rossiter compared different experiences of governance by emergency power in the world and concluded that the Franklin D Roosevelt presidency acted like ‘an emergency government but … was not a really dictatorship’.43 He emphasised ‘no suppression of rights, no complete abdication by a demoralized legislature, no thoroughgoing enabling act’,44 although he noted that the famed Hundred Days series of emergency statutes ‘constitute[d] the largest single instance of delegated power in American history’, ‘delegating the President unprecedented power to wage war on the economic front’.45 What is characteristic of these economic emergency statutes is that they were enacted as ordinary legislation. Once they were written into the law books, the decree power authorised thereby became permanent.46 It is true that the duration of the actual executive decrees and derived emergency measures is not without end. Rather, they are valid only during the declared state of emergency. Nevertheless, it is the administration that decides on the duration of the state of emergency.47 Congress can only prevail over the emergency executive decrees by terminating the statutory delegation through the cumbersome legislative process

39

Ibid, 1139–44. Ibid, 1103–6. 41 For the early legislation concerning emergency power, see SI Vladeck, Note, ‘Emergency Power and the Militia Acts’ (2004) 114 Yale Law Journal 149. 42 See Levinson and Balkin, n 1 above, 1832–35; C Rossiter, Constitutional Dictatorship: Crisis Government in the Modern Democracies (Princeton NJ, Princeton University Press, 1948) 240–64. 43 Rossiter, n 42 above, 263. 44 Ibid. 45 Ibid, 260. 46 Sanford Levinson and Jack Balkin note that the main legal authority of the responses taken during the Bear Stearns crisis in 2008 came from the Emergency Relief and Construction Act of 1932. Levinson and Balkin, n 1 above, 1834. 47 Ibid, 1862–63. 40

90 Ming-Sung Kuo in the US.48 Moreover, this approach of establishing the emergency power regime by the permanent authorisation of emergency executive decrees in ordinary legislation is not restricted to the state of economic emergency. It has become the pattern of various American emergency statutes, governing issues ranging from natural disaster relief to disease control to national security, besides economic crisis.49 Taken as a whole, with no general emergency framework provided in the Constitution, the American emergency power regime pivots on the broad delegation of decree power in ordinary emergency legislation.50 While the executive power to declare a state of emergency and thus to issue emergency decrees to respond to various exigent situations corresponds to many emergency designs in modern constitutional democracies, Congress’s role in the decision as to whether to switch the rule-of-law mode to one of government by decrees is diminished following the passage of parent emergency statutes.51 The switch between these two governance modes is easy, depending virtually only on the decision of the executive power. Taken together, a strong executive power equipped with broad delegated discretion, whether it is exercised through its ordinary rule-making power or by issuing emergency decrees,52 results from the legal construct of the Schmittian character of administrative law and the formal emergency legislation in the US. Of particular pertinence to my present discussion is that the inbuilt, ordinary nature of delegated decree power and administrative discretion has made possible the swift switch between the rule of law and government by emergency measures. With such broad discretion provided in the ordinary legislation, the administration naturalises the decision as to whether to ‘go exigent’ as part of its normal exercise of discretionary power in every-day governance. This normalisation of emergency power is characteristic of the American emergency governance framework, setting it apart from other modern constitutional designs.53 Moreover, as noted above, these normalised emergency powers tend to be ‘switched on’ when a crisis is seen to be approaching. Claiming to be necessitated by circumstances of emergency such as national security, be it real or perceived, the executive department can easily appeal to the inbuilt discretion and invoke the decree power to step out 48 Although the National Emergencies Act empowered Congress to rescind a declared state of emergency by a concurrent resolution when it was enacted in 1976, this provision was amended in 1985 in the wake of the Chada decision (Immigration and Naturalization Service v Chadha 462 US 919 (1983)), which declared ‘legislative veto’ clauses unconstitutional. To terminate a declared state of emergency now requires a joint resolution, the passage of which has to go through the parliamentary procedures for statutes. See 50 USC § 1622(a)(1). 49 See Levinson and Balkin, n 1 above, 1831–43. 50 Ibid, 1862–63. See, also, Ackerman, n 14 above, 124. 51 See Ackerman, n 14 above, 124. 52 John Carey and Matthew Shugart notes four types in their analysis of executive decree authority: delegated rule-making authority, delegated decree authority, constitutional decree authority, and paraconstitutional initiative. JM Carey and MS Shugart, ‘Calling Out the Tanks or Filling Out the Forms?’ in JM Carey and MS Shugart (eds), Executive Decree Authority (Cambridge, Cambridge University Press, 1998) 1, 12–14. 53 See Ackerman, n 14 above, 124. See, also, Frankenberg, n 16 above, 25–29.

The Moment of Schmittian Truth 91 of the normalcy of law into the state of emergency with little trouble getting the judiciary to play along.54 In sum, the alignment of normalisation and securitisation, which is characteristic of the American emergency governance framework, allows for a smooth switch between normal legality and emergency measures by the executive power. Let us take a closer look at why this variety of American exceptionalism is illuminating to the economic crisis management in global governance. Given the existing transnational political landscape, framing global governance with the principles and rules of administrative law has been considered to be the key to a more rational and legitimate model of global governance.55 Inspired by the experience of how the US reacted to the rise of the administrative/regulatory state in the early twentieth century,56 this non-constitutional, administrative approach to legitimate global governance, which the Global Administrative Law (GAL) project enthusiastically espouses, has won approval among many governance scholars.57 Yet, in the light of the characteristics of normalisation and securitisation as discussed above, the state of the euro crisis governance, which also indicates the smooth switch between normal regulation and extraordinary measures, also bears a striking resemblance to American emergency law. While securitisation prompts the de facto economic state of emergency decreed by the troika, in the light of American experience, an unnoticed normalisation of administrative discretion into the foundational framework of global governance (including the troika) seems to be what underpins the smooth shift from normal legal regulation to extraordinary measures.58 Taken together, American administrative law provides the lens through which the state of global governance can be clearly seen. With the discovery of its Schmittian character, the resemblance to American administrative law seems to dampen the hope of taming global governance with legality. In the face of the less noble side of associating global governance with American

54

See Levinson and Balkin, n 1 above, 1843–55; Vermeule, n 27 above, 1139–42. See B Kingsbury, N Krisch and RB Stewart, ‘The Emergence of Global Administrative Law’ (2005) 68 Law and Contemporary Problems 15. 56 See M-S Kuo, ‘On the Constitutional Question in Global Governance: Global Administrative Law and the Conflicts-Law Approach in Comparison’ (2013) 2 Global Constitutionalism 437, 451–52, 457–58. 57 See, eg, G de Búrca, RO Keohane and C Sabel, ‘New Models of Pluralist Global Governance’ (2013) 45 New York University Journal of International Law and Politics 723, 737–38. 58 To clarify, normalisation does not necessarily result from the ex ante legalisation of emergency powers. Even in what Oren Gross and Fiona Ní Aoláin call ‘models of extra-legality’, the use of emergency powers can become normalised if the ex post facto ratification turns out to be a standard practice in the operation of the juridico-political structure. See Gross and Ní Aoláin, n 14 above, 17–170. This is what Günter Frankenberg calls ‘the ambivalence of the liberal paradigm’ with respect to the limits of the legal regulation of the state of exception. See Frankenberg, n 16 above, 97–100. In the case of global governance, the normalisation of emergency powers takes place despite the model of extra-legality in the sense that they are not explicitly accommodated in the related hard and soft legal framework. As for its cause, it has to be found in the complex relationship between the omnipotent nation-states and the politically-limited transnational governance arrangments. 55

92 Ming-Sung Kuo administrative law, is constitutionalisation the answer to the state of emergency beyond the state? This is the theme that I address next.

III. IS CONSITUTIONALISATION THE ANSWER TO GLOBAL ECONOMIC EMERGENCY?

As has been widely discussed, the fundamental defect of the American emergency governance framework lies in its constitutional design, which leads to a kind of permanent state of emergency underpinned by its adjustable administrative law with little legislative oversight and judicial control. Considering the virtually insurmountable hurdle of the amendment procedure, scholars have taken up the notion of ‘framework statutes’ as a way to work fundamental or quasi-constitutional changes on American emergency law around a formal constitutional amendment.59 In other words, (re-)constitutionalisation seems to be the way out of the de facto state of emergency in which the US has long been stuck with the normalisation of emergency decree power and the securitisation of American society. Does constitutionalisation also point to the direction as to how to roll back the Schmittian character of global governance, as the euro crisis management has revealed, and to re-found the legitimacy of global governance? It is true that the US Constitution provides for no comprehensive framework of emergency powers, except that the privilege of habeas corpus, the safeguard of personal freedom rooted in the common law tradition, can only be suspended in the cases of rebellion or invasion when it is necessary for the sake of public safety (Article II Section 9). Rebellion and invasion are the classical examples of resorting to emergency powers.60 Yet, the situation that may require the government to deviate from the normalcy of the rule of law does not necessarily implicate belligerent acts such as rebellion or invasion. The history of the ancient Roman dictatorship shows that natural disasters and pandemics may also call for emergency measures in response.61 Moreover, acts to counter rebellion or invasion may encroach upon other civil liberties and fundamental rights than personal freedom.62 Yet, it is one thing to say that the US Constitution is incomplete in its design of emergency power; it is another to say that its framers did not conceive of constitutional responses to emergency. Instead, despite their disagreement on the role of the federal government in the constitutional order, both Alexander Hamilton and James Madison came to terms with the dominant role of the President in times of emergency.63 In the face of a crisis, the President would be expected to wield all the necessary and proper powers to overcome it whether 59

See Ackerman, n 14 above, 123–41. Ibid, 127–30; Gross and Ní Aoláin, n 14 above, 26–45. 61 See Rossiter, n 14 above, 22. 62 See Gross and Ní Aoláin, n 14 above, 58–62. 63 See S Levinson, Framed: America’s Fifty-One Constitutions and the Crisis of Governance (Oxford, Oxford University Press, 2013) 365–68. 60

The Moment of Schmittian Truth 93 they are enumerated in the Constitution or not. Contrasting the provisions concerning the executive power with those governing the legislative power in the Constitution, some scholars even praise the wisdom of the framers in providing for the Presidency in general terms instead of stipulating the specific powers of the executive department so that the President can take all the measures necessitated by circumstances. On this view, the controversy of President Lincoln’s suspension of habeas corpus in 1861 lay in the delay in his seeking Congressional approval rather than in his initiative to suspend without Congressional authorisation.64 As suggested above, the US Constitution conceives the Presidency with dual functions. On the one hand, the President is the chief executive in charge of “taking care the law be faithfully executed’ (Article II Section 3). On the other hand, he is the commander-in-chief empowered to preserve, protect and defend the security of the US (Article II Section 2, Clause 1). The design of a dual-role President suggests the blurring of the law enforcement and emergency powers inherent in the Constitution, sowing the seeds of the normalisation of emergency powers with the help of the Schmittian character of American administrative law as discussed in Section II. From this perspective, the problem of current American emergency law concerns how the emergency regime should be designed in the constitution rather than whether it should be constitutionalised at all.65 After all, the framers of the US Constitution did foresee the issue as to how a constitutional republic would respond to emergency situations and designed the Constitution as it has been. Unfortunately, in view of my analysis in Section II, constitutional dictatorship is conceived in the US Constitution indeed, but its design has made it more dictatorial than constitutional.66 Thus, the lesson that we can draw from the American experience seems to be that we need to study more how to constitutionalise global governance (including the euro governance mechanism) and its institutional responses to exceptional circumstances. The role of the executive power, whether it is national or transnational, must be tamed with constitutions so that the exercise of administrative discretion will not run riot. The euro crisis management shows that the step towards the constitutionalisation of global governance cannot be separated from the issue of constitutional design. Unlike the domestic context, however, the constitutionalisation of transnational emergency power does not just raise the issues of institutional design. More importantly, it goes to the heart of global governance. Whether global governance should take the path of constitutionalisation has been a contentious

64 See D Farber, Lincoln’s Constitution (Chicago IL, University of Chicago Press, 2003) 161–73, 191–92. 65 See Levinson and Balkin, n 1 above, 1856–65; Ackerman, n 14 above, 122–41; Levinson, n 63 above, 375–84; WE Scheuerman, ‘Emergency Powers and the Rule of Law After 9/11’ (2006) 14 Journal of Political Philosophy 61, 74–80. 66 See Levinson and Balkin, n 1 above, 1848–55; Scheuerman, n 65 above, 80.

94 Ming-Sung Kuo topic.67 Some scholars argue against the idea of constitutionalisation for fear that it would further consolidate the current unequal distribution of decision-making powers in global governance.68 Others prefer the status quo to a constitutional version of global governance, as a non-constitutional approach underpinned by administrative law principles provides a pragmatic solution to the diverse constitutional visions entertained by global governance players.69 Yet, at the core of the constitutionalise-or-not ambivalence is whether a constitutional order could form ungrounded by a political community. With no global demos in sight, a constitutional version of global governance appears to be nothing but an elusive dream.70 Through this lens, the constitutionalisation of transnational emergency power will also be stonewalled since global governance itself is not open to constitutionalisation. Even if we de-couple the construction of a constitutional order from the existence of a political community with a demos,71 this may resolve the debate as to whether to constitutionalise global governance, but it will not answer all the constitutional questions arising from a transnational or global state of emergency. As has been noted above, the institutional feature of emergency power design in modern constitutions is to keep the emergency power regime apart from the normal functioning of government powers. Thus, the existence of emergency power and its activation must be explicitly provided for in the constitution or its functional equivalent; otherwise constitutional orders would fall into the trap of a US-like permanent state of emergency.72 Upon closer inspection, the existing institutional make-up of global governance turns out to be impervious to the constitutionalisation approach. With regard to formal transnational governance bodies such as the EU, there are two issues in the potential move towards constitutionalisation. As the German Federal Constitutional Court’s (GFCC’s) recent decision on the ECB’s OMT seems to suggest, the EU and its constitutional organs may be constitutionalised but remain politically limited.73 Given that decisions on the state of exception are core political decisions,74 they are not transferrable and must reside with the Member States. Formal transnational governance bodies can only be partially constitutionalised and remain categorically precluded 67 See N Krisch, Beyond Constitutionalism: The Pluralist Structure of Postnational Law (Oxford, Oxford University Press, 2010) 27–105. 68 See JL Dunoff, ‘The Politics of International Constitutions: The Curious Case of the World Trade Organization’ in JL Dunoff and JP Trachtman (eds), Ruling the World? Constitutionalism, International Law, and Global Governance (Cambridge, Cambridge University Press, 2009) 178, 196–204. 69 See Krisch, n 67 above. 70 See D Grimm, ‘The Achievement of Constitutionalism and its Prospects in a Changed World’ in P Dobner and M Loughlin (eds), The Twilight of Constitutionalism? (Oxford, Oxford University Press, 2010) 3, 17–18. But see Chalmers, n 11 above, 207–08. 71 This is characteristic of what the Bremen School, headed by Christian Joerges, has advocated as conflicts-law constitutionalism. See Kuo, n 56 above, 459–64. 72 See Ackerman, n 14 above, 141. 73 BVerfG, 2 BvR 2728/13, n 12 above, paras 56–83. 74 C Schmitt, Political Theology: Four Chapters on the Concept of Sovereignty, (trans and ed George Schwab) (Chicago IL, University of Chicago Press, 1985) 1.

The Moment of Schmittian Truth 95 from emergency powers. Even if we conceive of emergency powers as a part of governance rather than a constituent of sovereignty, it would still be unthinkable that national governments would explicitly agree to the creation of any transnational governance mechanism equipped with the power to take emergency measures given the popular distrust of transnational institutions. The last point is not only a calculation of present domestic politics but speaks to the core of global governance. Public trust of transnational administration can be rebuilt; misgivings about global governance can be dispelled. But neither could deliver a transnational version of constitutional dictatorship. As generations of commentators since Machiavelli have emphasised, the state of emergency, or, rather, dictatorship, is beyond the normalcy of law indeed.75 Yet, it is not meant to degenerate into a lawless state of nature as Hobbes imagined. How to design the mechanism of dictatorship in constitutional terms to make it steer safely between the Scylla and Charybdis lies at the core of this centuries-old debate.76 No matter how specific a constitution is with regard to the state of emergency, in the event it is the judgment of the chief executive that decides whether the character of its emergency power regime is constitutional or merely dictatorial.77 Prudential judgement by the chief executive is expected to assure that the state of emergency is extra-legal, if you like, but remains without being plunged into lawlessness.78 Moreover, the personal will of individual political leaders alone does not make the invocation of emergency powers a success. Whether an administrative judgment in this regard is an indication of prudence or a sign of lawlessnesss and arbitrariness cannot be decreed by the executive power. It has to stand trial in the court of public opinions. If the extraordinary measure adopted by the administration fails to win in this open trial, it may well be considered arbitrary or lawless. Thus, the question is: What makes an exercise of emergency power look prudential to the public? What makes the public believe that the executive department turns to extraordinary measures only for well-considered reasons? To answer the question in a satisfactory fashion requires much more than a comment like this present chapter. Still, I would suggest that, without a sense of identification between citizens and the executive power, an extraordinary measure by the administration would hardly be judged as an exercise of prudence instead of an unlawful usurpation of power. From this sense of identification results a common political will.79 It is also on the sense of identification that 75

See Gross and Ní Aoláin, n 14 above, 21–26; Levinson, n 63 above, 358–63. See Levinson, n 63 above, 359–63. 77 See Levinson and Balkin, n 1 above, 1865. For the issues raised by what Levinson and Balkin call ‘distributed dictatorship, see ibid, 1840–43. As my present discussion is focused on judgement, I confine my discussion to the emergency regime centering on the chief executive. 78 See Gross and Ní Aoláin, n 14 above, 155–56. See C Schmitt, Dictatorship: From the Origin of the Modern Concept of Sovereignty to Proletarian Class Struggle, trans M Hoelzl and G Ward (Cambridge, Polity Press, 2014) xlii–xliii, 33. 79 See M-S Kuo, ‘Cutting the Gordian Knot of Legitimacy Theory? An Anatomy of Frank Michelman’s Presentist Critique of Constitutional Authorship’ (2009) 7 International Journal of Constitutional Law 683–714. 76

96 Ming-Sung Kuo a constitutional dictator can possibly take society forward with the support of citizens without being accused of committing lawless violence. Considering the non-existence of such a sense of identification, it is simply unimaginable to institute emergency powers at transnational or global level. This point transpires in the de facto transnational economic state of emergency imposed by the troika. As an informal arrangement, the troika does not stand on any legal or constitutional foundations.80 Through this very informal arrangement, there seems to be no problem with the troika adopting exigent measures.81 Although it operates at the mercy of the big powers that remain the masters of international law, its everyday administration, rigorous national auditing, and periodical review are in the hands of faceless international technocrats. It is due to this layered collaboration that has made the troika-induced transnational economic state of emergency more outrageous as one finds it hard to identify with those at the helm. In sum, the underlying cause of the failure to constitutionalise transnational emergency powers lies in the current political condition of global governance, that is, the total absence of the sense of identification between citizens and global governance institutions. Compared to the American example, the question of how to govern transnational states of emergency is more than one of constitutional design. Rather, the difficulties constitutionalising transnational emergency powers illuminate the constitutional debate over global governance and its political condition in a different light. Explicit constitutionalisation is bound to be stonewalled not only because of the popular distrust of global governance institutions, but also because of the lack of a sense of identification between the rulers and the ruled in global politics. The dilemma facing the constitutionalisation of transnational states of emergency reflects the absence of a common political will, which is necessary (but not sufficient) for a successful invocation of emergency power at transnational level, but, in the meantime, has been considered the underlying reason why a constitutionalised global governance remains a noble dream. Here is where the constitutional question of transnational emergency powers comes full circle back to the constitutionalise-or-not debate over global governance.

IV. CONCLUSION

In this chapter, I started by discussing the character of the US emergency power regime and what light it can shed on the debate on the euro crisis in global governance literature. I have shown that the euro crisis management evokes the design of emergency power in the US: executive emergency powers are ‘normalised’ 80 While the ESM Treaty stipulates the role of the European Commission and the ECB vis-à-vis the International Monetary Fund under the informal framework of troika, it has no bearing on the troika itself. 81 This paradoxical position seems to be suggested in the above GFCC’s decision as the GFCC pins its indirect impugning of the ECB’s ultra vires OMT on the limited, conferred powers of the ECB as stipulated in its foundational instruments. See BVerfG, 2 BvR 2728/13, n 12 above, para 67.

The Moment of Schmittian Truth 97 through ordinary legislation but only switched on with the securitisation of the administrative machinery when a crisis is looming. The resemblance that the euro crisis management bears to the American emergency regime reveals the second, but more disturbing, aspect of modelling global governance on American administrative law. Then, I reflected upon the appeal and limits of constitutionalisation as a practical response to the new crisis management. In contrast to the issues concerning the American emergency regime, the question of transnational states of emergency is entangled with the constitutional debate over global governance and its political condition. The dilemma facing the constitutionalisation of global crisis governance exposes the Achilles’ heel of global governance: the absence of a common political will beyond the state. Thus situated, not only is a successful invocation of emergency power unlikely at transnational level but global governance will also continue to be conceived in non-constitutional terms. It is here that the cunning of the crown jurist of the Third Reich shines.82 We are bearing witness to the moment of Schmittian truth in the wake of the financial crisis.

82 See C Schmitt, Constitutional Theory, trans and ed J Seitzer (Durham NC, Duke University Press, 2008) 241–52.

3 The Struggle for Union Rights Under the Euro and the Dialectics of Social Integration* FLORIAN RÖDL AND RAPHAËL CALLSEN FRANKFURT AM MAIN & BERLIN-FRANKFURT AM MAIN

I. INTRODUCTION

E

UROPEAN UNION POLICIES that aim at the short- and long-term stabilisation of the eurozone target, among others, the national constitutions of collective labour relations. The conditioned credit facilities demand debtor countries to reduce statutory and collectively-agreed minimum wages, to de-centralise collective bargaining, to de-regulate protection from collective agreements, to undermine legally the position of trade unions and so on.1 Since the unions exert virtually no influence on the political euro-stabilisation cartel of the European Commission, the European Central Bank, the International Monetary Fund and the European Council, the question becomes pertinent as to whether this stabilisation policy has not, at the very minimum, to observe legal limitations; from the perspective of trade unions, this primarily regards the legal protection of collective bargaining under Article 28 of the Charter of Fundamental Rights of the European Union (EUCFR). The current struggle for trade union rights under the euro is, therefore, the immediate trigger for this chapter.

* Translation by Harry Bauer. Sections II and III of this chapter develop further the analysis of the European Union’s labour constitution hammered out in F Rödl, ‘The Labour Constitution’ in A von Bogdandy and J Bast (eds), Principles of European Constitutional Law (Oxford-Portland OR-Munich, Hart Publishing-CH Beck Verlag, 2011) 623–58; Section IV presents preliminary results of a research project conducted by the authors and funded by the Hugo Sinzheimer Institute of Labour Law (HSI), Frankfurt am Main, and the Hans-Böckler-Stiftung (HBS), Düsseldorf. 1 See S Clauwaert and I Schömann, ‘The Crisis and National Labour Law Reforms: A Mapping Exercise’, ETUI-Working Paper 2012.04, available at: www.etui.org/Publications2/Working-Papers/ The-crisis-and-national-labour-law-reforms-a-mapping-exercise; K Busch, C Herrmann et al, ‘Euro Crisis, Austerity Policy and the European Social Model’, 2013, available at: library.fes.de/pdf-files/id/ ipa/09656.pdf.

102 Florian Rödl and Raphaël Callsen The subject-matter is, however, somewhat more ambitious: the stability crisis of the euro is apparently being tackled with the help of a sustained dismantling of national systems of collective labour relations in the respective Member States. This diagnosis should horrify all those who, until a few years ago, still pinned high hopes on the social dimension of the European integration process: the workings of the Economic and Monetary Union were, it was thought, also, slowly but surely, to generate elements of a social union, a process that would lead to the United States of Europe as a federal welfare state. This optimistic view of historical progress encountered its first manifest contradiction in the recent case law of the European Court of Justice, in which the legal and societal importance of collective bargaining is almost marginalised.2 The above-mentioned euro-stabilisation policies form the second, real historical contradiction to this story of alleged social progress, which, in this case, does not originate in the law, but in the politics of the Union. The severity of this contradiction between high hopes and juridico-political realities suggests putting this story of social progress to the test. When, in doing so, one pays particular attention to collective labour relations, which are currently in the focus of both the Court of Justice and the stability provisions of Union policy, a rather different picture emerges. It is a picture of decline, of a gradually increasing, factual and legal undermining of collective labour relations through European integration. While this history of decline acquires new dynamic, and some dramatic, aspects through the euro-stabilisation policies, the latter still remains an integral part of the former. In this picture, the stabilisation policies lose the character of a radical break with the functional logic of European integration, which, indeed, they must have if one still holds to the perspective of the story of social progress. Only against this backdrop, which will turn out to be a dialectical history of decline concerning the importance of collective labour relations in the process of European integration, can the trade union struggle to defend at least basal legal positions vis-à-vis the stabilisation policies be properly understood and categorised. In the following, the original story of social progress is outlined, which was, for a long time, only criticised by a few sceptics, who were, however, unable to unsettle it fundamentally (Section II). Then, the juxtaposed history of decline is re-constructed, with the euro-stabilisation policies as its most recent culmination (Section III). Finally, the possibilities of erecting the ultimate legal limits to these policies by dint of the fundamental rights guarantee of collective bargaining in Article 28 EUCFR are discussed (Section IV).

2 Case C-438/05 International Transport Workers’ Federation, Finnish Seamen’s Union v Viking Line ABP, OÜ Viking Line Eesti (Viking), [2007] ECR I-10779, CJEU (Grand Chamber), Judgment of 11.12.2007; Case C-341/05 Laval Un Partneri Ltd v Svenska Byggnadsarbetareförbundet (Laval), [2007] I-11767, CJEU (Grand Chamber), Judgment of 18.12.2007; Case C-346/06 Rüffert v Land Niedersachsen (Rüffert) [2008] I-1989, CJEU, Judgment of 3.4.2008; Case C-271/08 (Commission v Germany (Occupational Pensions)) [2010] I-7091, CJEU (Grand Chamber), Judgment of 15.7.2010.

The Dialectics of Social Integration 103 II. THE FATE OF ‘THE SOCIAL’ IN THE TRAJECTORY OF THE UNION

II.1. The Story of Social Progress The history of European integration has been told as a story of steady progress in the field of the social, first and foremost among socially-oriented European lawyers and Europe-oriented labour lawyers. In this narrative, the European Union found itself, from the very start, on a trajectory to the United States of Europe with a robust welfare state character as its end. This narrative, in brief, runs as follows:3 At the start, there was the establishment of the European Economic Community (EEC) with the Treaty of Rome in 1957, in which the French could not win through against the Germans. This is why the founding Member States ended up with a treaty whose focus was to create the Common Market and in which the harmonisation of the social realm was of secondary importance. Consequently, the Treaty of Rome contained no independent legislative competences in the field of labour and social law. Instead, any legislation in this field had to be based upon recourse to harmonisation for generating the Common Market, ie, harmonisation for market-functional purposes, which required general unanimity (Article 100 EEC Treaty; Article 115 TFEU today). The Treaty of Rome nevertheless already contained the nucleus of a social Europe, namely, the principle of equal pay for men and women (Article 119 EEC Treaty; Article 157 TFEU today). The CJEU stressed this principle early on as directly applicable to employment under private law, and derived from the increasingly sophisticated and more extensive requirements for both employers and collective bargaining.4 At the level of Treaty change, the Single European Act 1987 had already brought an important change. With Article 118a EEC Treaty (now included in Article 153 TFEU), the first specific Community competence in labour law was established, namely, in the field of technical and social labour protection. The focus here was on the harmonisation of health and safety to promote the market for machinery5—which is the reason why here, as well as with the new legal basis for the establishment of the Common Market (Article 100a EEC Treaty, now Article 114 TFEU), the majority method was used. However, in the interest of a legally secure basis for this harmonisation, a formally autonomous competence for

3 A paradigmatic short version with further references can unfortunately be found in the Lisbon Ruling of the German Federal Constitutional Court: Bundesverfassungsgericht, Judgment of 30.6.2009, 2 BvE 2/08 et al, 123 Entscheidungen des Bundesverfassungsgerichts (BVerfGE) 267–437, 427 et seq, para 394 et seq, English translation available at: www.bundesverfassungsgericht.de/en/ decisions/es20090630_2bve000208en.html. 4 For a detailed overview, see D Schiek, Europäisches Arbeitsrecht (Baden-Baden, Nomos Verlag, 2007) 227 et seq. 5 J Curall in H von der Groeben et al (eds), Kommentar zum EWG-Vertrag, 4th edn (BadenBaden, Nomos Verlag, 1991) Art 118 EWG-Vertrag, para 62: ‘keine Erweiterung des materiellen Geltungsbereichs der Gemeinschaftsbefugnisse’ [no expansion of the material scope of community competences].

104 Florian Rödl and Raphaël Callsen labour law was established. This was meant—at least symbolically—to represent a move away from the concept of purely market-functional labour law. In connection with the new dynamic of market integration triggered by the programme to complete the Single Market, the idea emerged of constitutionalising social rights at European level.6 This led to the first major success with the Community Charter of the Fundamental Social Rights of Workers, jointly proclaimed by the Member States in 1989.7 Although the Community Charter had no binding effect, it was nevertheless phrased in the language of individual and collective rights, including the rights to ‘fair wages’, collective participation, and collective bargaining. Although the Community Charter explicitly acknowledged the division of competences in primary law, according to which the guarantee of fundamental rights was primarily the task of the Member States, the Commission developed an ambitious programme of social policies upon the political basis of the Community Charter.8 This was the starting-point for extensive legislative activity in the field of labour law at European level, based upon Articles 100a and 118a EEC Treaty.9 In the context of the story of progress, the Treaty of Maastricht provided the next big step. Already in the run-up to Maastricht, and associated with providing the foundations for monetary union and in the context of treaty negotiations, significant efforts were made to expand the social dimension in a materially-relevant and publicly-visible manner.10 Due to the veto of the United Kingdom during the negotiations, the envisaged improvements could, however, only take the form of an agreement between the other 11 Member States: the Agreement on Social Policy, which was formally linked to the Treaty of Maastricht via the ‘Protocol on Social Policy’. In addition to the integration of the European social partners into the European legislative process (now Article 155 TFEU) the Social Protocol contained two innovations in particular. The first was to expand the legislative competences in labour law beyond health and safety. This included working conditions and employment termination protection, matters of the information and consultation of workers as well as the representation of workers’ interests (now Article 153(2)(b) TFEU). Expressly excluded were pay and the right to association and industrial action. The second innovation was the restriction of European legislation to the adoption of minimum standards.11 In this way, Member State labour law was meant to receive support at European level, while, upon this basis, 6 Referred to by the Commission’s Working Paper ‘Social Dimension of the Internal Market’, SEC(88) 1148 final, para 104. 7 COM(89) 248 final; the United Kingdom signed the Community Charter in 1998. 8 Communication from the Commission concerning its Action Programme relating to the implementation of the Community Charter of Basic Social Rights for Workers, COM(89) 568 final. 9 See M Rhodes, ‘A Regulatory Conundrum: Industrial Relations and the Social Dimension’ in S Leibfried and P Pierson, European Social Policy (Washington DC, Brookings Institution, 1995) 78–122. 10 J Kenner, EU Employment Law: From Rome to Amsterdam and Beyond (Oxford-Portland OR, Hart Publishing, 2003) 219 et seq. 11 A Lyon-Caen and S Simitis, ‘Community Labour Law’ in P Davies, S Simitis and S Sciarra (eds), European Community Labour Law: Principles and Prospectives: Liber Amicorum Lord Wedderburn

The Dialectics of Social Integration 105 European de-regulation was meant to be precluded. The Agreement on Social Policy seemed to complete the move away from a merely economic community also in substantial terms. With the integration of the Agreement in the text of the EC Treaty via the Treaty of Amsterdam, this step was re-affirmed. With regard to the constitutionalisation of social rights, the political potential of the Community Charter appeared to be exhausted after the Commission’s socio-political programme had been implemented.12 Given the non-legallybinding quality of the Community Charter, the demand for a constitutional portfolio of social rights could be restored. This endeavour could align itself with the general process of creating a positive legal basis for the CJEU’s normatively freefloating fundamental rights jurisprudence upon the basis of a Charter. At that time, however, the European Court of Justice had not turned fundamental social rights into ruling-relevant general principles of Community law.13 But the drafters of the Charter indeed succeeded in anchoring not only liberal and democratic, but also fundamental, social rights in the EU Charter of Fundamental Rights, with the result that many welcomed the proclamation of the Charter of Fundamental Rights in 2001 precisely because it codified social rights. The Treaty of Lisbon then brought the high point: the EU Charter of Fundamental Rights became legally-binding. But the Lisbon Treaty also provided additional elements to the story of progress. Article 3(3) TFEU continued the earlier commitment to social progress, which was mediated by the more recent goal of ‘a highly competitive social market economy’.14 In addition, the Union is now also meant to promote social justice (Article 3(3) TFEU). Moreover, a new norm about the values of the Union (Article 2 TFEU) was added, in which the principle of ‘solidarity’ could not make it into the ranks of those values upon which the Union is founded, but only into those principles that should characterise European society.15 Finally, Article 9 TFEU now included a cross-sectional clause also for the area of the social, which was even seen by competent pundits as the equivalent, under Union law, of the German welfare state principle under Article 20(1) Grundgesetz (German Basic Law).16

(Oxford, Clarendon Press, 1996) 1–22, 8; S Giubboni, Social Rights and Market Freedoms in the European Constitution: A Labour Law Perspective (Cambridge, Cambridge University Press, 2006) 238. 12

Giubboni, n 11 above, 102. E Szyszczak, ‘Social Rights as General Principles of Community Law’ in NA Neuwahl and A Rosas (eds), The European Union and Human Rights (Leiden, Martinus Nijhoff Publishers, 1995) 207–20, 211. 14 For this curiosity, see F Rödl, ‘Europäisches Verfassungsziel “Soziale Marktwirtschaft”’ (2005) 28 Integration 150–61. 15 C Calliess in C Calliess and M Ruffert (eds), EUV/AEUV Kommentar, 4th edn (Munich, CH Beck Verlag, 2011) Art 2 EUV, para 29. 16 B-O Bryde, ‘Europäisches Grundrecht der Tarifautonomie und europäisches Sozialstaatsprinzip als Schranken europäischer Wirtschaftsregulierung’ (2012) 2 Soziales Recht 2–16. 13

106 Florian Rödl and Raphaël Callsen II.2. Sceptical Analyses The above outline of European integration as a story of progress in the field of the social is at least plausible, since it takes each new appearing element at the level of the Treaties, which relates to the social—be it a competence, a fundamental right, a certain objective—and interprets it as progress in social integration. Since provisions with social content, or at least tone, are never abolished, the integration process can only appear as a trajectory of progress, which only temporarily stalls when, during major Treaty amendments, the field of the social remains untouched—which has not actually happened since Maastricht. A rather different picture emerges, however, if one limits the discussion to those central norm categories essential for substantive integration, ie, competence provisions. Then, one can argue: the social competences of the Union were only expanded in a significant way once, namely with the Treaty of Maastricht. Since then, the competence catalogue has remained the same, and marginal changes concern the process of European legislation. The Maastricht expansion was, therefore, a unique event in the history of European integration, which accompanied the actually profound step of creating a monetary union. The story of progress has been criticised by social scientists, and not just at the present time, but also independently of the social and political upheavals stemming from the euro-crisis. Two of these critical voices are introduced here. The first is that of Wolfgang Streeck,17 who is certainly one of the most critical voices. Since the mid-1990s, his credo has ultimately been that a social Europe will not emerge.18 According to his analysis, the historically-grown social welfare institutions and procedures differ significantly among the Member States. This means that they are affected by European and international competitive pressures differently. Likewise, very different options in order to react and adapt are at their disposal. In such a constellation, a uniform European system of labour relations and welfare, he maintains, cannot be developed. It is even more difficult to find a system that would affect the competitiveness of the Member States’ economies in a nearly symmetrical manner. Rather, the adjustment costs of a uniform European system would be so different for the Member States and their social partners, due to their different starting-points, that the uniform European system would have

17 For similar analyses, see F Scharpf, ‘The European Social Model: Coping with the Challenges of Diversity’ (2002) 40 Journal of Common Market Studies 645–70; C Offe, ‘The European Model of Social Capitalism: Can it Survive European Integration?’ (2003) 11 Journal of Political Philosophy 437–69, and A Somek, ‘Concordantia Catholika. Exploring the Context of European Antidiscrimination Law and Policy’ (2005) 14 Transnational Law and Contemporary Problems 959–1006. 18 W Streeck, ‘From Market Making to State Building? Reflections on the Political Economy of European Social Policy’ in Leibfried and Pierson (eds), n 9 above, 389–431; an updated analysis of the dynamics of European integration can be found in W Streeck, Gekaufte Zeit. Die vertagte Krise des demokratischen Kapitalismus (Berlin, Suhrkamp, 2013) 141 et seq. (English version: Buying Time: The Delayed Crisis of Democratic Capitalism, forthcoming June 2014).

The Dialectics of Social Integration 107 no chance of being implemented under the consensus requirement to which such a fundamental step of European social integration would naturally be subject. Stefan Leibfried and Herbert Obinger now mainly share this view.19 Based upon historical and comparative research into federalism, their analysis argues that a Euro-federal centralisation of the social can only be achieved by by-passing the political veto-positions of the Member States. However, the European Union has at its disposal only one single by-passing strategy among three historical models, namely, the regulatory strategy. The European anti-discrimination legislation represents a very typical manifestation of this strategy. Unlike the strategies of the historical models, which were based upon an opulent tax budget or the establishment of federal welfare structures, a regulatory strategy just ends ‘where a core task of the welfare state, namely, re-distributive policy, begins’.20 From the perspective of Leibfried and Obinger, a realistic perspective for European social integration needs to rely on the reference to indefinite external shocks that could, perhaps, propel a new European social model onto the agenda.21 However, such a veritable external shock as the current international financial and economic crisis has not turned out to drive matters in this direction, rather to the contrary.

III. ANOTHER FOCUS: THE MEMBER STATES’ LABOUR RELATIONS

Today, however, merely dissecting the story of progress cannot suffice. It needs to be contrasted with a story of decline, which revolves around collective labour relations and especially their factual and legal power to negotiate fair pay for human labour. This is the story of an originally harmonious co-existence of Member State labour relations in the Single Market, the progressive undermining of this harmony by deepened economic integration, and, finally, the de-regulation of Member State labour relations under the current pressures of the monetary union.

III.1. A Story of Decline: From Harmonious Co-existence to Competitive De-regulation The original notion of the effects of European integration coagulated in the former actual key norm of the social, Article 117 EEC Treaty (now Article 151 TFEU), which reads: Member States agree upon the need to promote improved working conditions and an improved standard of living for workers, so as to make possible their harmonisation

19 S Leibfried and H Obinger, ‘Nationale Sozialstaaten in der Europäischen Union: Zukünfte eines “sozialen Europas”’ in M Höpner and A Schäfer (eds), Die politische Ökonomie der europäischen Integration (Frankfurt aM, Campus Verlag, 2008) 335–65. 20 Ibid, 357. 21 Ibid, 360.

108 Florian Rödl and Raphaël Callsen while the improvement is being maintained. They believe that such a development will ensue not only from the functioning of the common market, which will favour the harmonisation of social systems, but also from the procedures provided for in this Treaty and from the approximation of provisions laid down by law, regulation or administrative action.

Thus, the norm entails, above all, the social promise of an equalising trajectory of living and working conditions for employees. This progress is primarily expected as a direct effect of the Common Market. Furthermore, ‘the procedures provided for under this Treaty’ are meant to work in the same direction, ie, the European Social Fund (Articles 123–128 EEC Treaty) or the European co-operation of the Member States (Article 118 EEC Treaty).22 In isolated areas, harmonisation requirements were also expected upon the basis of Article 100 EEC Treaty. Above all, the Common Market itself acted as the guarantor of social progress. With its promise of the progressive harmonisation of the living and working conditions of employees as a result of the Common Market, Article 117 EEC Treaty condensed an economic narrative that was based upon neo-classical ‘pure trade theory’, which was the mainstream approach in economics at the time.23 Its core arguments were the following: the Common Market would lead all Member States to welfare gains due to a deepened division of labour. Contrary to the already existing widespread fears, it would not initiate transnational wage competition, given that the average real costs of labour (‘unit wage costs’) were largely the same in all the Member States.24 This would also apply in the future, given the assumption that capital mobility would at least continue to remain low in spite of the Common Market.25 If differences of real labour costs arose in the course of economic structural change, it would be the task of the national central banks to adjust the exchange rates of their currencies accordingly, as part of their long-term aim of balanced foreign trade balances (see Article 104 EEC Treaty).26 For collective labour relations at national level, this conception meant that the Common Market would neither trigger any legal frameworks to change, nor open up any arena for transnational wage competition which would pressure the Member States’ systems of wage formation. The Common Market would therefore only generate welfare gains and would leave collective labour relations unaffected both legally and factually. It was mainly due to the sluggish market integration at political level, and not the counterfactual assumptions of trade theory pointing to low capital mobility and an enlightened exchange rate policy, that its central prediction—that transnational wage competition would not emerge—did not have to undergo 22 J Pipkorn in H von der Groeben (ed), Kommentar zum EWG-Vertrag, 3rd edn (Baden-Baden, Nomos Verlag, 1983), vor Arts 117–122 EWG-Vertrag, para 7 et seq. 23 See International Labour Organization, ‘Social Aspects of European Economic Co-operation: Report of a Group of Experts’, Studies and Reports, New Series 46 (1956). 24 International Labour Organization, n 23 above, para 99. 25 Ibid, para 261 et seq. 26 Ibid.

The Dialectics of Social Integration 109 a serious reality check. An essential dynamic of market integration was finally triggered by the CJEU with its seminal rulings in the Dassonville and Cassis de Dijon cases.27 With this case law, the Court massively reduced the possibilities for Member States to restrict the free movement of goods. Since then, not only duty-like regulatory discrimination against imports but also any restriction on the movement of goods have been prohibited (Dassonville); moreover, neutral measures that aimed not just at imported goods were seen as restrictions (Cassis de Dijon). Contrary to widespread reading, be it critical or affirmative, the actual purpose of this case law was not to put the European legal order on a de-regulatory trajectory. Rather, the restriction of Member State regulatory possibilities on the free movement of goods was meant to create a political harmonisation dynamic at European level, since the requirements of the European Court, when it comes to the justification of limitations to market freedom, apply only to the autonomous law of a Member State and not to harmonised law.28 The potential created by the European Court was taken up by integration policy and, in particular, by the Single European Act of 1987. With this treaty change, the Common Market was paired with the Internal Market (Article 14 EEC Treaty, now Article 26 TFEU); thus, the legal harmonisation required for the Internal Market could, from now on, be adopted by qualified majority (Article 100a EEC Treaty, now Article 114 TFEU). From the perspective of collective labour relations, the effect of the Internal Market programme was not only a further deepening of the division of labour, but also an intensification of intra-European competition in merchandise markets. This gave rise to the expectation of a noticeable increase in transnational wage competition in the relevant economic sectors. It was—at least for some far-sighted observers—obvious that this development would have to be answered with the Europeanisation of collective labour relations. For this reason, the Delors Commission initiated a wide-ranging discussion about the social dimension of the Internal Market, which was meant both to capture political resistance and actually look for ways to foster the spill-over of market integration into the field of the social. In this context, the ‘social dialogue’ had already been launched at European level, which was later to obtain a legal basis in the Maastricht Agreement on Social Policy. The most visible result of this period for the given context is the aforementioned Community Charter of 1989. However, from the perspective of collective labour relations, this non-binding declaration of workers’ rights represents only modest compensation for the increase in the de facto transnational labour cost competition at merchandise markets. The socio-political action programme of

27 Case 8/74 Procureur du Roi v Dassonville, [1974] ECR 837, CJEU, Judgment of 11.7.1974,; Case 120/78 Rewe-Zentral AG v Bundesmonopolverwaltung für Branntwein (Cassis de Dijon) [1979] ECR 649, CJEU, Judgment of 20.2.1979. 28 With regard to this question, see the discussion of the relationship between the Posted Worker Directive and the free movement of services in F Rödl, ‘Bezifferte Mindestentgeltvorgaben im Vergaberecht’ (2011) 22 Europäische Zeitschrift für Wirtschaftsrecht 292–96, at 295.

110 Florian Rödl and Raphaël Callsen the Commission at the time served mainly to exceed the per se purely symbolic and non-legally binding character of the Community Charter at least a little. The next significant step delivered the agreement on the establishment of the European Monetary Union in the Treaty of Maastricht of 1999. For many actors in European politics and for many economic observers alike, the decision for a monetary union was a necessary consequence of the Internal Market project.29 Without a common currency, the functioning of the Internal Market would be diminished, because international currency markets distorted intra-European exchange rates and thus price formation in the intra-European market. At political level, the formation of the monetary union also appeared, at the time, to be an important, perhaps even necessary, move in return for the acceptance of German re-unification.30 When focusing on collective labour relations, the initial effect of the monetary union was to establish complete price transparency, resulting in a further intensification of intra-European competition, which, in turn, had to lead to increased wage competition in the absence of centralised labour relations. Furthermore, the monetary union excluded compensation for disparate unit labour cost developments through exchange rate adjustments—which was, as mentioned, a cornerstone of the original conception of the Common Market—both generally and definitively. Finally, in addition to the exchange rate, Member State interest rate policies dropped out as a key instrument of macro-economic management. The discontinuation of these instruments of macro-economic control meant that the importance of labour costs and wage-related social costs increased as macroeconomic factors. In this way, the collective bargaining parties, originally primarily committed to their respective economic and social interests, became key actors of macro-economic steering. From this perspective, the Social Protocol of Maastricht offered, alongside the new autonomous legislative competences in the field of labour law and the constitutional role for the European social partners, modest compensation for the strengthening of transnational competition and the macro-economic burdening of collective bargaining. But there was good reason for this compensation, since the optimism about the continuation of the expansion of competencies in the area of the social by far outweighed the scepticism that resulted from the analysis of the actual effects of monetary union on collective labour relations.31 But, even

29 The so-called Werner Report (‘Report to the Council and the Commission on the realisation by stages of economic and monetary union in the Community’, 8 October 1970, available at: ec.europa. eu/economy_finance/emu_history/documentation/chapter5/19701008en72realisationbystage.pdf) epitomises the political actor perspective; the plan suggested a currency union within 10 years; T Padoa-Schioppa is representative of the economic perspective; see The Road to Monetary Union in Europe: The Emperor, the Kings, and the Genies (Oxford, Oxford University Press, 2004) ch 6: ‘The EMS is not Enough: The Need for Monetary Union’ 93–110. 30 O Issing, ‘Großer Beifall von allen Seiten’, Frankfurter Allgemeine Zeitung, 3 September 2012. 31 Especially K Busch, Europäische Integration und Tarifpolitik—Lohnpolitische Konsequenzen der Wirtschafts- und Währungsunion (Cologne, Bund-Verlag, 1994).

The Dialectics of Social Integration 111 among the many critics, there was a pre-dominant hope that monetary union would trigger a politico-economic dynamic automatism which would, sooner or later, lead to a social union with the respective politico-democratic foundations.32 In the context of the Treaty of Amsterdam, the fiscal discipline to which Member States have to adhere has become stricter with the Stability and Growth Pact.33 It was meant to keep the public debt of the Member States within acceptable limits over the long term, taking the inter-dependence between Member State debts and the stability of the monetary union as a whole into account. What certainly appears justified, in terms of the stability of a supranational monetary union,34 turns, from the perspective of labour relations, into a further aggravation of the problématique, since, with fiscal discipline, fiscal policy was also excluded as an instrument of macro-economic steering which could have reduced the macro-economic importance of labour costs, at least to a certain extent. Against this backdrop, the employment chapter in the Treaty of Amsterdam (now Articles 145–150 TFEU) appears again primarily as compensation for this additional burden.35 If Member States were to lose their ability to stimulate their own labour market through an expansionary fiscal policy, then this should be compensated through a co-ordinated European employment strategy at Union level. However, the publicly-visible benefits of this strategy have still failed to materialise, for the simple reason that the procedures of the co-ordinated employment strategy can neither rely on fiscal resources nor generate legally-binding effects. Beyond Treaty changes, the next milestone was the recent expansion of the Internal Market for services. In the Commission’s view, an important barrier to the market for services was the fact that the CJEU awarded Member States the possibility of including posted labour in the scope of their own legal provisions and collective norms.36 Unlike in the case of merchandise markets, this could prevent full transnational wage competition from developing in the service sector. A centrepiece of the Internal Market for services is, therefore, the Posted Workers Directive,37 which does not eliminate, but does restrict, the possibility of Member States limiting transnational wage competition.38 Furthermore, there 32 See the instructive footnote in W Böckenförde, ‘Welchen Weg geht Europa?’ in Böckenförde, Staat, Nation, Europa (Frankfurt aM, Suhrkamp Verlag, 1999) 68–102, 81 fn 29. 33 Fundamental are Regulations (EC) No 1467/97 and 1466/97. 34 See Bundesverfassungsgericht, Judgment of 7.9.2011, 2 BvR 987/10 et al (Financial aid for the Hellenic Republic) 129 BVerfGE 124–86, 181, para 129, English translation available at: www.bundesverfassungsgericht.de/en/decisions/rs20110907_2bvr098710en.html, and Bundesverfassungsgericht, Judgment of 12.8.1993, 2 BvR 2134, 2159/92 (Maastricht Treaty) 89 BVerfGE 155–213, 204 et seq. 35 J Goetschy, ‘The European Employment Strategy: Genesis and Development’ (1999) 5 European Journal of Industrial Relations 117–37, 124. 36 Joined Cases C-49/98 et al Finalarte Sociedade de Construção Civil Lda v Urlaubs- und Lohnausgleichskasse der Bauwirtschaft (Finalarte) [2001] ECR I-7831, CJEU, Judgment of 25.10.2011. 37 Directive 96/71/EC. 38 This was at least the interpretation of the Directive by the CJEU (Case C-341/05 (Laval) Grand Chamber, Judgment of 18.12.2007, and Case C-346/06 (Rüffert) Judgment of 3.4.2008), which was expressly consistent with the intentions of the Commission during the court procedure.

112 Florian Rödl and Raphaël Callsen is the Services Directive,39 which is meant to eradicate other barriers to the trade in services, and has thus served to intensify competition in this area. In addition, the Services Directive facilitates cross-border access to labour markets in the form of so-called ‘bogus self-employed’ services, for which the minimum protection levels of the Posted Workers Directive do not apply. In this way, even in the service sector, transnational wage competition has intensified considerably. In this context, one may see the adoption of the EU Charter of Fundamental Rights in 2001 with its social rights, including the rights to association, collective bargaining and action (Article 12(1), Article 28 EUCFR), again as compensation for such additional burdens to collective labour relations.

III.2. The Consequences of Euro-crisis Policy Up to this point, the effects of European integration on collective labour relations resulted primarily in a steady intensification of transnational wage competition, supplemented only by a legal ban on Member State counter-measures. Initially, collective labour relations dealt with this competitive pressure. When this was not sufficient to maintain an intra-European competitive position, as in Germany in the mid-2000s, Member State policies could support the adaptation of measures that indicated the direction of autonomous collective wage formation, such as the de-regulation of sub-contracted labour or a cap on unemployment benefits.40 However, not all Member States are prepared for these kinds of adaptation efforts, which must eventually be borne by both governments and collective bargaining partners. In addition, they require a sufficient degree of co-ordination in the process of wage formation, which can only be found in a few euro countries.41 Hence, this provides an essential element of the ongoing stability crisis of the euro,42 to which the European level increasingly responds with legal requirements for de-regulating collective labour relations, given that monetary union requires the synchronistic development of the Member States and their respective competitiveness. The great difficulties in meeting these conditions are a major cause of the instability in the eurozone and therefore of the current euro crisis.43 Since

39

Directive 2006/123/EC. Deutsche Bundesbank, ‘On the problems of macroeconomic imbalances in the euro area’ (2010) 62 Monthly Reports, No 7, July, 17–38, 25. 41 See, at length, M Höpner, ‘Die Verschiedenheit der europäischen Lohnregime und ihr Beitrag zur Eurokrise’, MPIfG Discussion Paper 13/5, available at: www.mpifg.de. 42 For the following, see F Scharpf, ‘Monetary Union, Fiscal Crisis and the Pre-emption of Democracy’ (2011) 9 Zeitschrift für Staats- und Europawissenschaften 163–98; W Streeck, ‘Auf den Ruinen der alten Welt’ (2012) 12 Blätter für deutsche und internationale Politik 61–72; M Höpner, ‘Soziale Demokratie? Die politökonomische Heterogenität Europas als Determinante des sozialen und demokratischen Potenzials der EU’ in J Bast and F Rödl (eds), Wohlfahrtsstaatlichkeit und soziale Demokratie (Baden-Baden, Nomos Verlag, 2013) 69–89, 80–83. 43 An equivalent diagnosis is the complaint about the distortion of exchange rates; see S Collignon, ‘Macroeconomic Imbalances and Competitiveness in the Euro Area’ (2013) 19 Transfer 63–87 and 40

The Dialectics of Social Integration 113 differences in competitiveness lead to unbalanced trade balances in the internal market, and imbalances have, in turn, to be financed by the increased debt of the deficit countries. In a normal economy, competitiveness can be shaped by macro-economic measures, exchange rate policy, interest rate policy, fiscal policy, and wage policy, in conjunction with wage-related social policy. Even with full Member State control over these instruments, it would be no easy matter to realise a synchronous trajectory of competitiveness. However, with the monetary union in its present form, Member States are unable to utilise three of the four instruments listed. What is left to them is the instrument of wage policy, which, in the context of a monetary union, functionally replaces exchange-rate policy (as so-called real appreciation or depreciation). By lowering wages, the prices of domestic goods and services can be reduced, and by increasing wages, prices can be increased; in this way, comparable effects to the depreciation or appreciation of one’s own currency can be achieved. For many pundits, the macro-economic flexibility of wages is therefore the key to the enduring success of the eurozone. Only with sufficient flexibility can labour costs perform the role that they structurally gain under monetary union as a major macro-economic adjustment factor. Adaptation can basically work in two directions: deficit countries can depreciate in real terms by wage reduction, while surplus countries can appreciate through wage increase. Considering the economic credentials in the eurozone, there is no macro-economic reason to burden the deficit countries alone with this adjustment.44 However, given the comparatively weak economic growth rates of the EU Member States, the substantial focus has always been on the option of real depreciation. Moreover, an obligation to macro-economic adjustment would also apply to surplus countries, above all, to Germany. Given the export orientation of the German growth model, such an undertaking can hardly find acceptance by the German government, economy or unions. However, this would be significant, given the overriding importance of the German contribution to stabilising the euro in the current crisis situation. Against this backdrop, the role of labour costs as a key macro-economic adjustment factor to achieve real depreciation in the monetary union stands in increasing tension with free collective bargaining and the collective bargaining systems of the Member States. Collective wage bargaining upon the basis of stable and inclusive collective bargaining systems is the opposite of macro-economicallyflexible wage development, especially a unilateral downward-oriented flexibility. Consequently, a major focus of short- as well as long-term European crisis policy is on the change in the framework of wage formation in the Member States, in the political debate usually termed ‘necessary labour market reform’. The point is to slow down wage increases or even to reverse them in indebted countries, in Deutsche Bundesbank, ‘The euro ten years on—the German economy in monetary union’(2008) 60 Monthly Reports, No 12, December, 31–47. 44 See, for instance, H Flassbeck and F Spieker, ‘The Euro—a Story of Misunderstanding’ (2011) 46 Intereconomics 180–87.

114 Florian Rödl and Raphaël Callsen addition to reducing welfare state services. However, the wage level cannot simply be dictated politically or even at Union level in any of the Member States. Direct political control exists only with regard to the level of statutory minimum wages and public sector wages. The essential remaining steering option, when it comes to the general wage level, is therefore the de-regulatory intervention in the collective bargaining systems of the Member States, especially the weakening of trade union rights and the limiting of the scope of collective agreements.45 Because the required interventions are difficult to implement under the auspices of democratic politics and free collective bargaining, these measures must become the subject of binding European targets. The Memoranda of Understanding (MoU) of the European rescue funds were the first steps in this direction.46 In return for the financial aid granted, the beneficiary countries had to commit themselves to undertake comprehensive reform programmes, including, inter alia, interventions into their collective bargaining systems. In the case of Greece, this included, among other things, the recognition of the status of nonunion employee organisations as collective bargaining partners, the annulment of the after-effects of collective bargaining and the elimination of the ‘favourability’ principle under collective bargaining law. For many, the situation in Greece is a particular one—a huge exception—but the requirements vis-à-vis Portugal and the measures that have been taken in both Spain and Italy in order to avoid the assistance of the European facilities show a similar thrust.47 The second instrument is the newly-introduced mechanism for cases of ‘excessive macro-economic imbalances’.48 Given the previous experiences of the crisis, the Union does not want to wait until an acute case of over-indebtedness has occurred but intends to apply counter-measures earlier. Using this new method, the non-legally-binding policy recommendations in the context of economic policy co-ordination (Article 121(4) TFEU) become de facto binding for some Member States. This applies to eurozone Member States that are not in an acute funding crisis, but in a state of ‘excessive macro-economic imbalances’, which could lead to a financial crisis. The recommendations are made binding, since the failure to implement them is sanctioned with fines. Since wage development is explicitly a crucial parameter for the Commission’s determination of macroeconomic imbalances,49 upon this basis one can also expect demands for Member States to de-regulate their collective bargaining systems.

45 Within comparative political economy, it is however heavily contested whether destabilised trade agreement systems result in reduced labour costs, see Höpner, n 41 above, 3 et seq, and 19, fn 17. 46 A survey of the provisions for collective labour relations in the existing Memoranda of Understanding can be found in S Maaßen, ‘EU-Wirtschaftspolitik und Tarifautonomie’ (PhD thesis, Goethe-University Frankfurt am Main, 2013), on file with the authors. 47 See the sources cited in n 1 above. 48 Regulations (EU) No 1176/2011 and 1174/2011 are fundamental. 49 See Commission, Alert Mechanism Report 2013, COM(2012) 751 final, p 29 et seq.

The Dialectics of Social Integration 115 Thus, one can summarise that the stability of the euro requires the Member States to largely absorb the actual competitive pressure of the Internal Market and monetary union via their wage formation, principally through downward-oriented adjustment. The reduction in the competitiveness of the individual Member States which otherwise occurs leads to trade deficits that must be compensated by public debt, which may soon reach a level which is no longer viable for the euro area. But, because wage formation upon the basis of free collective bargaining cannot fulfil its macro-economic function, the only remaining alternative is to weaken the power and reach of the collective bargaining systems of the Member States through de-regulation, which raises the question of the possible limits of such efforts under fundamental rights even more.

IV. EUROPEAN FUNDAMENTAL RIGHTS PROTECTION AS A LIMITATION OF CRISIS POLICIES?

IV.1. The De-centralisation of Collective Bargaining Systems In terms of collective bargaining systems, the de-regulation imperative translates mainly into a demand for the widest de-centralisation possible. Both in the context of the award of financial aid and in the context of forward-looking macro-economic monitoring, different variants are brought before euro states: wage formation should be shifted from the national, regional or sectoral level to the level of the individual company. This demand was formulated in the case of Greece, particularly clearly and early. While the Council decisions asking Greece to end its excessive budget deficit only demanded a streamlining of tariff structures in the public sector with the aim of reducing the wage bill,50 the Memoranda extended—almost at the same time—this obligation to the private sector,51 which was further substantiated in the first ‘Memorandum of Understanding on Specific Economic Policy Conditionality’ of 3 May 2010. It required Greece to reform its collective bargaining system within a few months, so that industry tariffs could be undermined by local agreements, and by using variable wage agreements, wage development could be coupled to the productivity of an individual company. Moreover, in October 2011, the lenders demanded the suspension of the ‘favourability’ clause until at least the end of 2015, in order to ensure that

50 Art 2 C.(c) of Council Decision 2010/182/EU, [2010] OJ L83/13, 30.03.2010; see also Art 2 para 2(d) and para 5(a) of Council Decision 2010/320/EU, [2010] OJ L145/6, 11.06.2010; Art 2 para 2(c) and para 5(a) of Council Decision 2011/734/EU, [2011] OJ L296/38 of 15.11.2011. 51 Memorandum of Economic and Financial Policies, 3 May 2010, para 22, published in European Economy—Occasional Papers No 61, May 2010, 48.

116 Florian Rödl and Raphaël Callsen company agreements take precedence over industrial and occupational collective agreements.52 However, such demands are not only made towards acute crisis-ridden financial aid recipients. The country-specific recommendations adopted for Belgium in July 2013 to prevent macro-economic imbalances show this clearly: Belgium was meant to ensure that wage developments were more responsive to changes in productivity and additionally that they reflected better regional and local differences in productivity and labour market structures. The inflation-linked wage indexation was to be repealed; instead, automatic corrections were to be introduced in the event that wage increases threatened to reduce competitiveness.53 However, this recommendation is not yet binding, but it may become so if Belgium is diagnosed as having excessive macro-economic imbalances. The recommendation for Belgium thus points to the future trajectory. Compared to the reform targets for Greece, which pre-suppose the existence of employee representatives and effective collective bargaining at company level, the recommendations for Belgium present a further stage of escalation in the drive for de-centralisation. After all, the demand for automatic wage cuts is nothing less than the demand to make collective bargaining conditional on competitiveness and thus to dismantle it. The reference to the consultation of the social partners and national practices is thus only to be understood as a cliché, which the Greek experience further substantiates. 54 The suggested coupling of wages to the productivity of a company equals a call for wage reductions under the current conditions. Apart from the fact that this disturbs the equilibrium of the employment contract—since the employee is forced to bear business risks without compensation—economic automatisms render collective bargaining essentially superfluous and thus weaken the bargaining partners, especially the unions. Furthermore, looking at the history of labour relations, sector and territorial agreements have prevailed, because they present the effective level of negotiations for introducing better work conditions and unified competitive conditions. Even if, adopting an economic perspective, one wanted to affirm the usefulness of a de-centralised collective landscape, a respective reform would—at least in the short- and medium-term—lead to a shift of bargaining power towards the employers, given that, in structures that are 52 Updated Memorandum of Understanding on Economic and Financial Policies, fifth update, October 2011, para 22, published in European Economy—Occasional Papers No 87, December 2011, 121. 53 Council recommendation of 9 July 2013 on the National Reform Programme 2013 of Belgium and delivering a Council opinion on the Stability Programme of Belgium, 2012–16, [2013] OJ C217/5–9, 30.7.2013, recommendation no 3 and recital no 12. 54 The Memoranda emphasised the participation of the social partners also for the implementation of the Greek reforms. But since negotiations with the social partners did not lead to the results favoured by the lenders within the three-month deadline, the trialogue between government and social partners was without further ado replaced by a dialogue between members of the Troikamission and the government, as the Commission reports officially: The Second Economic Adjustment Programme for Greece, European Economy—Occasional Papers, No 94, March 2012, p 36.

The Dialectics of Social Integration 117 historically built on sector or regional agreements, it is likely the trade unions or other employee organisations will find it difficult to accumulate similar power at individual company level.55 It is therefore important to evaluate whether such measures are limited by fundamental rights protected under EU law.

IV.2. The Potential of Article 28 EU of the Charter of Fundamental Rights Since 1 December 2009, the EU-Charter of Fundamental Rights is binding and has the status of primary law in accordance with Article 6(1) TEU. Both EU institutions and the Member States are bound by the Charter in accordance with its Article 51(1), at least when they act upon the basis of Union law, ie, when they make recommendations or establish corrective action plans in the context of macro-economic monitoring. The applicability of the Charter of Fundamental Rights is, however, less clear when it comes to measures agreed between the Member States and the EU institutions upon other legal bases. The Charter is only applicable to the actions of the Member States when they implement Union law. Since October 2012, the award of financial aid has been conducted by the European Stability Mechanism (ESM), an independent international financial institution established by an international treaty between the euro countries, whose existence, alongside the EU, was legalised by the specially introduced Article 136(3) TFEU. In the Pringle case, the CJEU ruled that the creation of the ESM was not an implementation of EU law, and that Member States were, therefore, not bound by the EU Charter of Fundamental Rights.56 However, this does not necessarily mean that the same has to apply to MoUs, which define the conditions for the granting of financial assistance by the ESM. On the one hand, Article 136(3) TFEU only permits, and does not command, the establishment of the ESM but, on the other, it does oblige Member States, once they have chosen to establish such a mechanism, to make financial assistance ‘subject to strict conditionality’. In this perspective, the conclusion of MoUs does constitute an implementation of EU law. This assessment has to prevail even more since Regulation (EU) No 472/2013 entered into force on 30 May 2013, which reinforces the link between EU law and financial aid awarded upon the basis of international law. Article 7(1) obliges the EU Member States that request or receive financial assistance to present a macro-economic adjustment programme that ‘shall fully observe’ Article 28 EUCFR. According to Article 16, the euro countries that received financial aid on 30 May 2013 are automatically subject to the Regulation and are therefore bound 55 According to T Schulten, ‘The impact of the Troika policy on wages and collective bargaining’, Public Hearing at the European Parliament, 9 January 2014, p 9, available at: media.boeckler.de/ Sites/A/Online-Archiv/12778, the number of sectoral agreements in Greece fell from 65 (2010) to 14 (2013), while the number of firm-level agreements rose from 227 (2010) to 976 (2012) and 406 (2013), 80% of the latter introducing wage cuts. 56 Case C-370/12 Pringle v Government of Ireland, Ireland and the Attorney General (Pringle), [2012] ECR I-0000, CJEU (Full Court), Judgment of 27.11.2012, para 180.

118 Florian Rödl and Raphaël Callsen by Article 7. This currently applies to Greece, Ireland, Portugal and Cyprus.57 Equipped with an explicit mandate under Union law to act for the ESM, the Commission, in turn, has to ensure that the MoUs agreed in the context of the ESM are ‘fully consistent’ with the macro-economic adjustment programme created upon the basis of Union law (Article 7(2)). Accordingly, the content of the MoUs agreed for the ESM becomes, at least via (EU) Regulation No 472/2013, an implementation of Union law, so that the Charter binds Member States. The binding of the Commission by the Charter has to be affirmed even more, since it acts upon the basis of Union law. However, such a binding of the Commission existed anyway. After all, a restriction to the implementation of EU law by the EU institutions and other EU bodies is not envisaged, so that, in turn, the Charter always applies to their actions, independently of the legal basis.58 If the applicability of the Charter of Fundamental Rights is established, one needs to determine the level of protection which Article 28 EUCFR guarantees. In December 2007, the CJEU had already recognised, in its Viking and Laval rulings, ‘the right to take collective action including the right to strike’ as a general principle of European Union law; here, it drew not only upon the still non-binding Article 28 EUCFR, but also on ILO Conventions Nos 87 and 98, the European Social Charter, and the Community Charter of the Fundamental Social Rights of Workers.59 Article 28 EUCFR has, however, been interpreted by the CJEU in an ambivalent way. On the one hand, the scope of the right to strike is interpreted so widely that even the blockade of a construction site was covered. On the other hand, drastic restrictions have also been approved. Following its wording, the right to conclude collective agreements is, inter alia, guaranteed ‘in accordance with Union law and national laws and practices’. It is noteworthy that neither before nor after the entry into force of the Treaty of Lisbon did the CJEU refer to the general limitation provision of Article 52(1) EUCFR, but only directly to the provisions contained in Article 28 EUCFR in order to justify restrictions on the fundamental right.60 Here, the impression emerges that the fundamental right tends to be subordinated to simple secondary law,61 although the core of the matter is, instead, a weighing of other goods under primary law.62 This casts 57 See Commission, Communication to the European Parliament and the Council on the application of Regulation (EU) No 472/2013, COM(2014) 61 final, p 3, Section 2.1. 58 See view of Advocate General Kokott delivered on 26 October 2012, Case C-370/12 (Pringle) para 176; A Fischer-Lescano, ‘Human Rights in Times of Austerity Policy—The EU institutions and the conclusion of Memoranda of Understanding’, Legal opinion commissioned by the Chamber of Labour, Vienna, 17 February 2014, 9, available at: media.arbeiterkammer.at/PDF/Human_Rights_in_ Times_of-Austerity_Policy.pdf. 59 Case C-438/05 (Viking) CJEU (Grand Chamber), Judgment of 11.12.2007, para 43 et seq; Case C-341/05 (Laval) CJEU (Grand Chamber), Judgment of 18.12.2007, para 90 et seq. 60 For instance, C-438/05 (Viking) CJEU (Grand Chamber), Judgment of 11.12.2007, para 44; Case C-271/08 (Commission v Germany) CJEU (Grand Chamber), Judgment of 15.7.2010, para 43. 61 See Case C-447/09 (Prigge and others) CJEU (Grand Chamber), Judgment of 13.9.2011, para 49; Cases C-297/10 and C-298/10 (Hennigs and Mai) CJEU, Judgment of 8.9.2011, para 63. 62 See CaseC-297/10 and C-298/10 (Hennigs and Mai) CJEU, Judgment of 8.9.2011, paras 68, 80 et seq; Case C-172/11 (Erny) CJEU, Judgment of 28.6.2012, para 50.

The Dialectics of Social Integration 119 doubt on an autonomous understanding of fundamental rights under Union law. Some believe that Article 28 EUCFR is meaningless and entirely dependent on the moulding by the Union and national law.63 In turn, others emphasise that the existing warranties under fundamental rights, at national level, have to be read into Article 28 EUCFR.64 The key to a yet more substantial understanding of Article 28 EUCFR lies in its strong counterpart in the European Convention on Human Rights, Article 11, which has been expanded into a veritable right to collective bargaining by the ECtHR in recent years.65 The method that the ECtHR used is also noteworthy. By way of progressive interpretation, it takes not only the (revised) European Social Charter into account, but also the EU’s Charter of Fundamental Rights as well as other conventions agreed upon in the context of other international organisations, while it also makes recourse to the case law of the permanent committees responsible for the European Social Charter (ESC) and the ILO Conventions.66 What and how the ECtHR decides here is also relevant to the Charter. In fact, Article 52(3) EUCFR mandates that Charter rights must have at least the same meaning and scope as the corresponding rights of the ECHR. This also refers to limitations, as the official commentary to the Charter makes clear.67 Thus, Article 11 ECHR represents the minimum standard for protection provided under Article 28 EUCFR and forces a conception of a genuine subjective right. However, the relevant content of this standard is still to be elaborated in view of the relevant rulings by the ECtHR and the relevant committees. With regard to de-centralisation, it is at least arguable that Article 28 EUCFR, interpreted in the light of ILO Conventions Nos 87 and 98, must shield against the ‘elaboration of procedures systematically favouring decentralized bargaining of exclusionary provisions that are less favourable than the provisions at a higher level [and that] can lead to a global destabilization of the collective bargaining machinery’.68 However, this does not overcome all the difficulties. Macro-economic adjustment programmes, MoUs or recommendations sanctioned by fines do not directly lead to a change in the legal situation, but, instead, do oblige the Member 63 S Krebber in C Calliess and M Ruffert (eds), n 15 above, Art 28 EU-GRCh [EU GrundrechtCharter], para 3 et seq. 64 B-O Bryde, n 16 above, 10. 65 ECtHR (Grand Chamber), Judgment of 12.11.2008, Application no 34503/97 (Demir and Baykara v Turkey) para 145 et seq, 154; ECtHR, Judgment of 21.4.2009, Application no 68959/01 (Enerji Yapı-Yol Sen v Turkey) para 24 et seq; ECtHR, Judgment of 9.7.2013, Application no 2330/09 (Sindicatul ‘P storul cel bun’ v Romania) para 135. 66 A Iossa, ‘Protecting the Right to Collective Action and to Collective Bargaining: Developments and New Perspectives at European and International levels’ in A Bücker and W Warneck (eds), Reconciling Fundamental Social Rights and Economic Freedoms after Viking, Laval and Rüffert (BadenBaden, Nomos Verlag, 2011) 245–314, 276 et seq; A Bücker, F Dorssemont and W Warneck, ‘The Search for a Balance: Analysis and Perspectives’, ibid, 315–60, at 331 et seq; R Zimmer, ‘Soziale Grundrechte in der EU’ (2012) 60 Arbeit und Recht 114–19, at 117 et seq. 67 [2007] OJ C303/33, 14.12.2007. 68 ILO Committee on Freedom of Association, 365th Report (Governing Body, 316th Session, Geneva, 1-16 November 2012), Case No 2820 (Greece) paras 784–1003, at 997.

120 Florian Rödl and Raphaël Callsen State concerned to adopt national legal provisions. This raises the question of whether MoUs and recommendations represent limitations at all. According to the jurisprudence of the CJEU and the ECtHR, indirect measures are sufficient if they necessarily induce third parties to the impairment of fundamental rights.69 The more limited the substantive and temporal scope that adjustment programmes, MoUs or recommendations leave Member State for transposition and the greater the pressure is, the more likely it is that this constitutes an impairment, although a justification in terms of economic objectives may be apposite. However, a general degradation of the national, regional or sectoral level for collective bargaining might be disproportionate.70 An automatic coupling of wages to the productivity of a company is likely to violate the guarantee of the essence of this right under Article 52(1) EUCFR due to the fact that it partially repeals the need for negotiations. It is uncertain, however, how individuals or trade unions can draw on and effectively use their rights under Article 28 EUCFR. When national laws have already been enacted, action before national courts is essential, but protection might be provided according to national standards. Especially after (EU) Regulation No 472/2013 entered into force, questions referred from national courts to the CJEU for a preliminary ruling under Article 267 TFEU would seem not to be hopeless. They could inquire as to whether macro-economic adjustment programmes or recommendations are contrary to the fundamental rights of the Union, or whether, interpreted in the light of these fundamental rights, such programmes or recommendations are in contradiction to the MoU and national implementation measures that rest on them. The most effective way would be to repeal MoUs or recommendations which infringe fundamental rights prior to their implementation. However, the condition of direct concern required for annulment proceedings under Article 263 TFUE is handled restrictively, and the deadline is short, so that interim legal protection under Article 278/279 TFEU, which can only be requested in connection with a pending lawsuit (see Article 160 CJEU Rules of Procedure), will be difficult to achieve. Overall, the situation does not render genuine protection of fundamental rights under Union law a hopeless affair, but it does remain fraught with considerable difficulties.

V. CONCLUSIONS

From the vantage point of today, the history of the social as a story of progress leading to a United States of Europe equipped as a strong federal welfare state is rather out-dated; future observers may find even the debate about it strangely naïve. In contrast, the integration story of decline appears cogent and up-to-date 69

See Fischer-Lescano, n 58 above, 35 et seq. Similar in its result, see, also, M Krajewski, ‘Human Rights and Austerity Programmes’, 11 January 2013, 16–17, available at: ssrn.com/abstract=2199625. 70

The Dialectics of Social Integration 121 when one looks at collective labour relations as the heart of the welfare state. After a long period of the factual intensification of competitive pressure through Internal Market integration and monetary union, the Member States are currently in a phase of demolishing their systems of collective labour relations under the functional imperative of monetary union. While there are plausible approaches to impose at least, legal limits on this move by using Article 28 EUCFR, they are fraught with difficulties and potentially limited in scope. It may well be that this process will affect deficit countries in particular, rather than surplus countries, in the future, and that these roles will not be reversed over the medium- to long-term period. This is, in turn, the reason for the basic divergences between the Member States in their quest for the right approach to tackle the crisis at its roots. Against this backdrop, it also becomes clear that the persistent hopes that the ongoing crisis could trigger new integration leaps towards deepened European social integration, will probably not be realised, although, in the current reform debate, the call can occasionally be heard for a ‘European economic government with extensive powers in the field of labour and social policy’. But these ideas remain as vague as ever. Alternatively, there is primarily the demand for an even stronger and directly binding oversight of Member State policies.71 Economic objectives are meant to become binding for all Member States of the eurozone, and, following the above analysis, will also aim at weakening collective labour relations further.72 From this chapter, it should become clear that, in terms of the progressive logic of integration, this almost pre-supposes that legal protection under Article 28 EUCFR comes to nothing. In contrast, if the protection of this fundamental right at EU level is not taken very seriously by all European institutions, this will almost inevitably clash with the legal protection of collective bargaining provided for under national constitutional law, under the European Convention of Human Rights, and the European Social Charter.73

71 Die Glienicker Gruppe, ‘Mobil, gerecht, einig’, Die Zeit, 17 October 2013, English translation available at: www.glienickergruppe.de/english.html. 72 Herman Van Rompuy, ‘Towards a Genuine Economic and Monetary Union’, 5 December 2012, available at: www.consilium.europa.eu/uedocs. 73 See, for example, European Committee of Social Rights, Decision of 3 July 2013, Complaint No 85/2012, considering that the current status of social rights in the EU legal order would not justify a presumption of conformity of EU law with the ESC (para 74) and recalling that the economic freedoms guaranteed by EU law ‘cannot be treated … as having a greater a priori value than core labour rights’ (para 122).

4 Labour Market Governance in Wake of the Crisis: Reflections and Possibilities KERRY RITTICH TORONTO

I. INTRODUCTION

B

EYOND GENERATING A host of problems requiring immediate policy and regulatory responses, the financial crises that have beset the industrialised world since 2008 have provided a context in which to test, explore, vindicate and repudiate contending theories about the relationship between modes of regulation and economic growth. Crisis interventions have become vehicles in which to further and reject different visions of social and political integration simultaneously. The crises also appear to have given rise to distinct modes of governance, even ‘crisis law’,1 which, in turn, have provoked a renewed, more urgent, debate about the relationship between the market and the social. For lawyers and legal scholars in particular, these events have set in motion a series of inquiries about the state and status of social rights, including the extent to which settled legal norms, institutions and processes concerning social issues still effectively govern or ‘rule’. These complexly intertwined theoretical, political and legal experiments and struggles have turned out to be immensely consequential for both labour markets and labour market governance. Reforms to labour law were among the first conditions attached to loan disbursements, and, as subsequent events have revealed, continued reforms remain on the agenda when it comes to the release of further funds. Crisis interventions have thus surfaced as an occasion of, and a mechanism for, the transformation of domestic labour laws, ranging from the more modest to the quite radical, as well as a means of rewriting the labour contracts of public employees and, in some cases, the employees of key private industries as well.

1 C Joerges, ‘Europe’s Economic Constitution in Crisis and the Emergence of a New Constitutional Constellation’, ZenTra Working Papers in Transnational Studies, No 06/2012 (Revised Edition September 2013), available at: papers.ssrn.com/sol3/papers.cfm?abstract_id=2179595, Section IV.3.

124 Kerry Rittich At the same time, the crisis has confirmed the plural character of labour market governance, revealing the extent to which the sites of labour market regulation are quite varied and dispersed. Mid-crisis, it has become easier to see that labour market governance in toto is effected through the joint operation of layered and intersecting regimes and normative systems, from the formal and juridified to the less formal and merely conventional. In particular, the first phases of the crisis made clear the extent to which fiscal and monetary policy decisions matter to employment, to labour markets, and to the state of the social contract writ large. Indeed, in the light of their evident centrality to both the operation of labour markets and the terms and conditions of work, there are reasons to see macroeconomic governance as a central part of the broader law of work.2 We might think of the crisis response as effecting a two-fold reframing of the field of labour law. The first dimension of this reframing involves the subordination of labour market objectives to broader economic and investor objectives, from the maintenance of competitiveness for both firms and states to the confidence of bond markets. The most immediate consequence has been, at least among élites, an acceptance verging on normalisation of extraordinary, if not pathological, labour market outcomes: falling wages and very high levels of unand under-employment with correlatively elevated levels of emigration of workers from the countries most adversely affected, young workers in particular. The second dimension might be described as an inversion of the classic aims of labour law, as well as related fields within social policy. There seems to be little doubt that the crisis has fuelled the growth of the ‘precariat’, already a welldocumented feature of contemporary labour markets for several decades.3 At the empirical level, the picture of work remains one of declining wages and economic security for many workers, as well as reduced access to jobs, even in states that appear to have largely overcome the crisis itself. In the US, for example, notwithstanding the abatement of high rates of unemployment experienced during the first phase of the crisis, the longer-term picture is one of significant decline in labour force participation rates despite measures of economic ‘recovery’ on other fronts.4 There also appears to be an intensified conversion in the forms of work from more to less stable; see, for example, the extraordinary increase in resort to ‘zero hours’ contracts on the part of UK employers in recent years.5 A focus on labour market indicators alone, however, risks masking a parallel normative and institutional shift: at the level of law and policy, the story is one of deep re-orientation, even reversal, rather than simply decline. During the crisis, the objectives of labour law and social policy—stated in their most general and 2 K Rittich, ‘Fragmented Work and Multilevel Labour Market Governance: Informality, Crisis Policy and an Expanded “Law of Work”’ in G de Búrca, C Kilpatrick and J Scott (eds), Critical Legal Perspectives on Global Governance: Liber Amicorum David M Trubek (Oxford-Portland OR, Hart Publishing, 2013) 185–206. 3 G Standing, The Precariat: The New Dangerous Class (London, Bloomsbury, 2011). 4 See the data provided through the Federal Reserve of St Louis, ‘Civilian Employment-Population Ratio (EMRATIO)’, available at: research.stlouisfed.org/fred2/graph/?id=EMRATIO. 5 L Blackburn, ‘The Rise of Zero-hours Contracts’ (2013) 141 Employment Law Journal 9–11.

Labour Market Governance 125 traditional terms, de-commodification6—were arguably inverted,7 as many states adopted measures that exposed their workers to intensified market pressures and economic risk not simply as a collateral aspect or unfortunate consequence of other imperatives, but as a matter of conscious strategy. With the possible exception of Germany, the most salient feature of the crisis was that the use of collective bargaining and labour market standards to protect workers’ jobs and wages and generally shore up their bargaining power was all but abandoned as a policy objective; instead, existing levels of protection were reduced, and, in some cases, key entitlements for workers were simply eliminated. Wage competition and devaluation, rather than the evils to be avoided as classically conceived within labour law,8 were explicitly endorsed in the name of higher labour productivity, restored balance in terms of trade, and other economic goals. Fiscal policy, too, rather than an instrument of solidarity and security, has become a mechanism of perverse re-distribution, as citizens of countries in deficit face increased taxes and reduced services to service debts which, in cases such as Ireland, they neither incurred nor benefit from. A brief reprise of the interventions, in respect of fiscal and monetary policy as well as labour law and policy, conducted in the course of the crisis, is in order.

II. LABOUR MARKETS IN CRISIS: FISCAL, MONETARY AND LABOUR MARKET POLICY9

The troika—the EU, the ECB and the IMF—all championed policies of austerity in the midst of the crisis and, in a mode deeply reminiscent of the IMF’s earlier approach to the debt and balance of payment crises in sub-Saharan Africa, Latin America and East Asia of the 1980s and 1990s,10 imposed dramatically contractionary fiscal policies on countries experiencing financial and sovereign debt crises in exchange for crucial access to loans. While, in Europe, the Stability and Growth Pact itself placed considerable constraints on the use of fiscal instruments for counter-cyclical purposes, limiting debts and deficits to three per cent of GDP and sixty per cent of annual budgets respectively, these constraints turned out to be consonant with the reigning orthodoxy in any event. Whatever the source of increased sovereign debt levels, be it the nationalisation of private bank debt or merely the inevitable result of falling tax receipts in a depressed economy, initial

6 International Labour Conference (1944) ‘Declaration Concerning the Aims and Purposes of the International Labour Organization’, Philadelphia PA, available at: www.ilo.org/public/libdoc/ ilo/1944/44B09_10_e_f.pdf. 7 K Rittich, ‘Making Natural Markets: Flexibility as Labour Market Truth’ (2014) 65 Northern Ireland Legal Quarterly, forthcoming. 8 See, for example, the Preamble to the ILO Constitution of 1919, available at: www.ilo.org/dyn/ normlex/en/f?p=1000:62:0::NO:62:P62_LIST_ENTRIE_ID:2453907:NO. 9 The following discussion is drawn from, and explored in more detail in K Rittich, n 2 above. 10 For an analysis of these policies, see J Stiglitz, Globalization and its Discontents (London-New York, Penguin Books, 2002).

126 Kerry Rittich efforts to support demand quickly gave way to fiscal restraint in the form of cuts to public employment and public services, rather than increased taxation or other efforts to increase demand. The costs, in terms of jobs and income, as well as the wider social wage, are both difficult to calculate and assuredly immense, if only because the magnitude of the bail-outs and the costs of debt servicing have displaced so many other possible uses of funds.11 Austerity in the public sphere, moreover, appears to have run parallel with sharp increases in private debt,12 a state of affairs that both exacerbates the pressure to acquire income through labour market participation and increases the significance of falling terms and conditions of work. Monetary policy deeply inflected by an emphasis on inflation control and price stability13 has also ensured that labour market concerns are subordinated to macro-economic concerns, even where, as is largely the case outside the eurozone, central banks have a dual mandate that includes employment creation. A number of states adopted non-traditional monetary policies, namely, ‘quantitative easing’ (QE): the announced policy of regular, long-term bond purchases on the part of central banks, to counter the effects of the financial recession.14 Nonetheless, the enduring fears about inflation that animate contemporary monetary policy operate against the interests of workers by undercutting objectives such as full employment.15 At the same time, the concern to prevent inflation also protects the interests of creditor states vis-à-vis those with large sovereign debts, notwithstanding the consensus view that monetary policy both is and should be largely technical and non-political. Especially in the absence of transfer mechanisms, monetary policy has thus exacerbated the costs of the crisis on peripheral states in the eurozone, and, by extension, the economic prospects of sectors and workers within those states. The negative if indirect effects of fiscal and monetary policy have been intensified by the direct effects of labour market reforms. There seems to be little reason to identify failures of labour market policy as the proximate cause of the financial crisis. And in a context in which substantial numbers of workers already faced uncertain and worsened job prospects while the economy itself suffered

11 J Heyes, P Lewis and I Clark, ‘Varieties of Capitalism, Neoliberalism and the Economic Crisis of 2008–?’ (2012) 43 Industrial Relations Journal 222, 229. See, also, Paul Krugman, End This Depression Now! (London-New York, WW Norton, 2012). 12 C Crouch, ‘Privatized Keynesianism: An Unacknowledged Policy Regime?’ (2009) 3 British Journal of Politics and International Relations 382. 13 J Singleton, Central Banking in the Twentieth Century (Cambridge, Cambridge University Press, 2011) ch 14 (‘Inflation Targeting: The Holy Grail?’). 14 The Bank of England, the Bank of Japan and the US Federal reserve, for example, all adopted such policies. On 13 September 2012, the US announced the third round of such measures and committed to the purchase of bonds at a rate of 85 billion USD a month; at point of writing, these are still underway. See G Davies, ‘No Tapering Yet for Central Banks’, Financial Times, 16 July 2013, available at: blogs.ft.com/gavyndavies/2013/07/16/no-tapering-yet-for-global-central-banks. 15 R Schettkat and R Sun, ‘Monetary Policy and European Unemployment’ (2009) 25 Oxford Review of Economic Policy 94–108.

Labour Market Governance 127 from a lack of demand, the active pursuit of wage cuts and enhanced employer ‘flexibility’—read freedom to discard labour in a costless or less costly manner— might seem counter-productive if not actually perverse as a policy objective. Nonetheless, buttressed by the narrative of the ‘lazy Greek worker’, reductions in labour standards, public employment as well as pensions and other collectivelybargained entitlements all quickly became the favoured means of reducing costs and addressing balance of payments crises. Initial cuts to minimum wages in Greece mandated by the troika, for example, ranged from 22 per cent to 32 per cent, while pensions were reduced and the positions of 150,000 public employees were terminated.16 Even where it was clear that the sources of the problem lay elsewhere, wages cuts and job losses were among the preferred solutions; Ireland, too, cut its minimum wage and agreed to roll back collective agreements, including those of low-wage workers, in exchange for bail-out funds.17 Less wellpublicised and therefore less well-known, however, were the parallel reductions imposed on private sector workers in the North American auto industry. There, too, significant concessions in negotiated benefits and, most importantly, the reduction of wages to match a non-union benchmark, were the price of saving firms such as General Motors and Chrysler, whose futures were in danger because of the immediate effects of the crisis.18 Although a relatively rapid recovery followed for the firms themselves, the loss of thousands of jobs19 as well as a sizeable re-distribution of resources and power between the firms and their workers has endured as the legacy of the crisis. Yet, if one puzzle is the alacrity with which the cuts to labour standards were adopted, it must be recognised that collective-bargaining rules, employment standards, and the extensive use of public goods and services, as well as social policy and social protection to re-distribute risk and resources—in short, the standard post-war package of labour law instruments used to further labour law’s traditional purposes and objectives—were already under considerable pressure before the crisis. A series of forces had already converged to demote labour market institutions at normative and operative levels. A short, non-exhaustive list of the sociological forces would include the combined effects of: the vertical disintegration of firms and the resulting fragmentation and proliferation of the forms of work; global market integration and new sources of competition among

16 A Koukiadaki and L Kretsos, ‘Opening Pandora’s Box: The Sovereign Debt Crisis and Labour Market Regulation in Greece’ (2012) 41 Industrial Law Journal 276, at 286–301. 17 See, Memorandum of Understanding of the EU/IMF Programme of Financial Support for Ireland (16 December 2010) pp 8–10, 17, 20–21, available at: www.finance.gov.ie/documents/publications/ reports/2011/euimfrevised.pdf; 2011–2014 National Recovery Plan, 36–37, available at: budget.gov.ie/ RecoveryPlan.aspx. 18 J Stanford, ‘The Geography of Auto Globalization and the Politics of Auto Bailouts’ (2010) 3 Cambridge Journal of Regions, Economy and Society 383. 19 See ‘Motor vehicles and parts’ under ‘Manufacturing, Transportation’ from 2002–2012 at Bureau of Labor Statistics, available at: www.bls.gov/webapps/legacy/cesbtab1.htm, disclosing a loss of around 450,000 jobs.

128 Kerry Rittich workers; and new fiscal pressures occasioned by capital’s increased exit options and propensity to engage in regulatory arbitrage among states.20 A crucial set of drivers, however, lies in the normative and ideological sphere, namely, the rise of neo-liberalism or market fundamentalism as a general regulatory episteme, the consequences of which have been particularly marked for labour market institutions.21 We might also point to the declining significance of political institutions in tandem with a growing reliance on expertise, which has led to the technocratic generation of policy norms, a phenomenon that is such a central, even defining, dimension of contemporary governance practice.22 In post-Lisbon Europe, the Open Method of Co-ordination and other new governance strategies that deploy benchmarks, indicators and peer monitoring as mechanisms of policy co-ordination have been central to the new direction of labour market policy.23 At international level, influential projects such as the World Bank’s Doing Business project deploy indicators that purportedly measure the quality of the regulatory climate for investment to induce states to reduce labour market protections and increase employer flexibility.24 This convergence between technocratic control over labour market policy and enhanced flexibility is not merely serendipitous. For over two decades, sub-standard labour market outcomes have been repeatedly identified with both labour market rigidity and rich terms and conditions of work that, by definition, are not justified by market metrics. International institutions such as the OECD and the IMF have trumpeted the benefits of enhanced labour market flexibility and relentlessly promoted the elimination of job security, the de-centralisation of collective bargaining and a general reduction in other labour market institutions that impose ‘costs’ on employers, identifying such ‘structural reforms’ as essential

20 H Arthurs, ‘Compared to What? The UCLA comparative Labor Law Project and the Future of Comparative Labor Law’ (2006–07) 28 Comparative Labor Law and Policy Journal 521. 21 Joseph Stiglitz, Keynote Address at the Industrial Research Association: Democratic Development as the Fruits of Labor (25 January 2000) in Ha-Joon Chang (ed), Joseph Stiglitz and the World Bank: The Rebel Within (London-New York, Anthem Press, 2001) 279 (describing the approach to labour market issues within the World Bank); Kerry Rittich, ‘Global Labour Policy as Social Policy’ (2008) 14 Canadian Labour and Employment Law Journal 227. 22 K Davis, A Fisher, B Kingsbury and S Engle Merry (eds), Governance by Indicators: Global Power through Quantification and Rankings (Oxford, Oxford University Press, 2012); A Lang, World Trade Law after Neoliberalism: Re-imagining the Global Economic Order (Oxford-New York, Oxford University Press, 2011); K Rittich, ‘Governing by Measuring: The Millenium Development Goals in Global Governance’ in H Ruiz-Fabri, R Wolfrum and J Gogolin (eds), Select Proceedings of the European Society of International Law, vol 2, 2008 (Oxford-Portland OR, Hart Publishing, 2010) 463. 23 D Ashiagbor, The European Employment Strategy: Labour Market Regulation and New Governance (Oxford, Oxford University Press, 2005). 24 See World Bank, Doing Business, various years. The Employing Workers Indicator, a measure of labour market flexibility, was withdrawn following complaints by trade unions that it encouraged states to violate their obligations under international law to protect workers’ rights; however comparative data on flexibility are still included as an annex to the report. See World Bank, Doing Business 2013: Smarter Regulation for Small and Medium Enterprises (2013).

Labour Market Governance 129 to the promotion of economic growth.25 This campaign must be counted as, by and large, successful: reductions in labour standards and other protection for workers are now widely endorsed as a means of fuelling enhanced economic growth, as they seem to support the intertwined objectives of labour market activation, reducing welfare dependency and ‘making work pay’ as reflected in the Lisbon Agenda and beyond. Thus, rather than something entirely novel, it is possible to read the crisis as confirming, if also intensifying, a series of regulatory trends and policy choices that were already well-established before the crisis itself was underway.26 When labour law and labour contracts, both public and private, were redrawn in the name of restoring growth and competitiveness, much of the political and ideational ground had, as it were, already been prepared. These crisis-driven reforms reflect both a more general absorption and convergence of labour law and social policy with broader economic governance objectives,27 and a concomitant normalisation of enhanced risk for workers.28 How permanent, and how stable, the current regulatory landscape is remains to be seen. Although their immediate effects on workers, the very best-positioned workers excepted, have been almost uniformly negative, the ultimate consequences of this spectrum of governance choices, on labour markets as well as broader economic growth, are, at this point, unknown. Notwithstanding this irreducible uncertainty, at this point there remain markers and policy areas of obvious interest when it comes to labour market governance. First, what, in the way of labour market law and policy, as well as the consequences, has been normalised both in and through the crisis? Secondly, what fissures and fault lines are emerging around macro-economic policy that might affect labour markets and the direction of labour law in the future? And what new issues are on the horizon that might unfreeze the current policy consensus around the governance of labour and other markets, at the same time opening up new avenues and responses to the interlinked crises of work, social inclusion and distributive justice? In particular, given its evident connections to work, does the new salience of growing income inequality as a public issue, especially marked in the Anglo-American world, hold any promise for reframing the current debate around the governance and regulation of labour markets?

25

OECD Jobs Study (1994); OECD, Boosting Jobs and Income (2006). For a parallel argument in respect of social policy, see P Tsoukala, ‘Euro-Zone Crisis Management and the New Social Europe’ (2013) 20 Columbia Journal of European Law 31. 27 Rittich, n 21 above. 28 The classic reference to this general turn remains U Beck, Risk Society: Towards a New Modernity (London, SAGE Publications, 1992). 26

130 Kerry Rittich III. THE NEW NORMAL IN LABOUR MARKETS

Although there appear to be remaining pockets of belief that everything is turning out just fine,29 the financial crisis continues to exert negative effects on the labour markets across the industrialised world. In a number of countries of the European periphery—Ireland, Greece and Spain most immediately—these effects can only be described as catastrophic, especially from the vantage point of those who represent the future of the workforce. Unemployment rates among young people are at almost unimaginably high rates: recent statistics put them at 62.9 per cent for Greece, over 56 per cent for Spain, and 28.6 per cent for Ireland,30 and they would be even worse but for the extent to which the possibility of migration has created a safety valve; elsewhere youth employment rates are roughly double the prevailing rate as well.31 The pervasiveness of this phenomenon indicates not only an immediate youth (un-) employment crisis as well as quite severe problems of absorptive capacity within labour markets, it also testifies to transformation in employment norms and practices that will have significant effects well into the future. Living standards as well as the terms and conditions of work have worsened, in some cases dramatically, in the countries of the European periphery as well. For example, as of January 2013, pensions and public sector pay in Greece had declined more than 25 per cent; private sector pay by 15 per cent; and effective tax rates had increased by 20 per cent, while impending changes to the minimum wage ensure that incomes will decline still further.32 In the meantime, Greece is both wracked with social and political conflict already foreseen years ago as the necessary outcome of the adoption of a contractionary economic policy,33 and experiencing declining birth rates characteristic of countries in extreme economic crisis.34 By 2011, real GNP in Ireland had already declined by 14.5 per cent since 2008, implying a significant decline in living standards,35 and levels of emigration have now reached levels not seen since the Great Famine of 1845–49. At this point, it seems beyond dispute that these dismal employment results, rather than simply a result of the crisis, are, instead, a function of crisis management strategies, as well as the wider legal and institutional context in which 29 See Ambrose Evans-Pritchard and his response to Wolfgang Schaueble, available at: blogs. telegraph.co.uk/finance/ambroseevans-pritchard/100025568/my-grovelling-apology-to-herr-schauble. 30 Finfacts, Eurozone inflation dips to 1.3% in August; Unemployment stable in July, 30 August 2013, available at: www.finfacts.ie/irishfinancenews/article_1026472.shtml. 31 Ibid. 32 V Monastiriotis, ‘“A Very Greek Crisis” in Austerity Measures in Crisis Countries—Results and Impact on Mid-term Development’ (2013) 48 Intereconomics 1–9. 33 W Streeck, ‘The Crises of Democratic Capitalism’ (2011) 71 New Left Review 5–29. 34 H Smith, ‘Greece’s birth rate falls as austerity measures hit healthcare: Hospitals report 10% reduction in births as ministers say families cannot afford to have children’, The Guardian, 18 September 2013, available at: www.theguardian.com/world/2013/sep/18/greece-birthrate-austeritymeasures-healthcare. Compare, for example, the birth rates in Russia in transition from planned to market economies. 35 Niamh Hardiman and Aidan Regan, ‘“The Politics of Austerity in Ireland”, Austerity Measures in Crisis Countries—Results and Impact on Mid-term Development’ (2013) 48 Intereconomics 9–14.

Labour Market Governance 131 labour markets now operate. Pro-cyclical fiscal policies have kept growth and employment well below their potential wherever they have been adopted, depressing tax receipts and exacerbating the very problem that they were introduced to solve, while austerity policies have had a predictably disproportionate effect on social programmes, public goods and other expenditures that contribute to the social wage. Across the eurozone, the constraints of monetary union continue to close off an important avenue of adjustment to current account imbalances and sovereign debt crises which would otherwise be available, namely, external devaluation of the currency. At the same time, the absence of some form of fiscal union or transfer mechanisms has prevented redress of the inevitably unbalanced effects of a monetary union by other means. This has compelled states to pursue enhanced competitiveness and solvency through domestic policy, shifting the burden of adjustment to the internal mechanisms of wage and price devaluation. Wage suppression has thus been intimately linked both to crisis management and, in some places, to the broader institutional context in which market integration has been pursued; within Europe, we might think of it as the necessary counterpart to an imperfect monetary union. But the reliance on wage devaluation is also something enabled, if not required, by decisions about what cannot be done in response to the crisis. Debt re-structuring, its rejection in particular, remains hugely significant given the extent to which debt servicing now drives the ongoing austerity measures. The annual payments on the promissory note issued by the Irish government to the European Central Bank to fund its insolvent banks, for example, are roughly equal to the cuts exacted by austerity measures.36 However, despite the colossal burden that the debt imposes on taxpayers, the only relief so far is tacit acceptance of the decision of the Irish government to lengthen the debt repayment period.37 Even the exceptional forms of monetary policy that were adopted now appear to have ambiguous effects, perhaps even disadvantages of their own. QE has become a way to generate if not robust economic growth, then at least better levels of growth than would otherwise have been achieved in some of the leading industrial countries. There seems little doubt that QE eased the collapse in private demand that would otherwise have followed in the wake of the crisis, abating the jobs crisis in measurable ways38 even if the main beneficiaries appear to have been financial institutions that enjoy expanded access to funds at virtually no cost. But QE has also disproportionately benefited higher income earners, thus exacerbating income inequality.39 And however desirable or necessary in times 36

Ibid. J Smith and M Steen, ‘Dublin Hails “Historic” Debt Restructure’, Financial Times, 7 February 2013, available at: www.ft.com/intl/cms/s/0/3ed71cc8-712d-11e2-9d5c-00144feab49a.html#axzz2toJEsK7E. 38 JC Williams, ‘The Federal Reserve’s Unconventional Policies’, available at: www.frbsf.org/publications/ economics/letter/2012/el2012-34.html. 39 L Elliot, ‘Britain’s richest 5% gained most from quantitative easing—Bank of England’, The Guardian, 23 August 2012, available at: www.theguardian.com/business/2012/aug/23/britains-richestgained-quantative-easing-bank. 37

132 Kerry Rittich of crisis, QE is also difficult to stop, in part because, as one commentator put it, ‘western economies have become hooked on expanding levels of debt’.40 At least in the United States, there is an argument that the financial crisis is, at base, a crisis of work, as easy access to credit helped to mask an underlying weakness in labour markets dating from the end of the last slowdown as well as a longer-term divergence between economic growth and income and wage growth.41 And, by fuelling the growth of the money supply, QE works to suppress interest rates, thus undergirding the continued growth of consumer debt that was already at historically high levels well before the crisis. Given the proximity and contribution of credit and debt-fuelled property bubbles to the recent financial crises, the worry is that continued reliance on this ‘solution’ will simply fuel further iterations of the crisis.42 Thus, the normalisation of economic support through extraordinary forms of monetary policy may pose risks in itself, leaving both industrialised and emerging states vulnerable to economic slowdowns and recessions, if not worse, when the flood-tide of easy money is inevitably ‘tapered’ or reversed. The negative labour market outcomes generated by the preferred policy responses to the crisis are shattering, to national identities, futures and projects as well as to the individuals and communities that are directly affected. In times of normal politics, we might expect such cataclysmic effects to provoke not just consternation and debate but also significant response and even institutional innovation when it comes to labour law and social policy, particularly where existing entitlements and programmes are inadequate to mitigate the losses in jobs, incomes and economic security. For example, in the United States, the last economic event of this magnitude gave rise to the National Labor Relations Act,43 the Fair Labor Standards Act,44 and the Social Security Act.45 The commitment to ‘social’ Europe, omnipresent in the normative commitments of the European Union, if less clearly evident in its legal and institutional fabric,46 too, reflects a political vision in which economic stability and growth is securely tethered to employment and higher living standards. Yet, while a response has indeed emerged, it has operated largely to confirm and entrench, rather than to mitigate, the consequences of the crisis. Christian Joerges has described a transformation

40 G Tett, ‘West’s debt explosion is real story behind Fed’s QE dance’, Financial Times, 19 September 2013, available at: www.ft.com/intl/cms/s/0/76b6f332-2133-11e3-8aff-00144feab7de.html?siteedition =intl#axzz2fSLmf6fU. 41 E Saez, ‘Striking it Richer: The Evolution of Top Incomes in the United States (updated with preliminary 2012 estimates)’, UC Berkeley, 3 September 2013 (ms on file with author). 42 Governor DK Tarullo, ‘Monetary Policy and Financial Stability’, 25 February 2014, available at: www.federalreserve.gov/newsevents/speech/tarullo20140225a.htm. 43 National Labor Relations Act, ch 372, 49 Stat 449 (1935) (codified as amended at 29 USC §§ 151–169 (2006)). 44 Fair Labor Standards Act of 1938, ch 676, 52 Stat 1060 (codified as amended at 29 USC §§ 201–219 (2006)). 45 Social Security Act of 1935, ch 531, §§ 201–210, 49 Stat 620, 622–25 (codified as amended at 42 USC §§ 301–302 (2006)). 46 See F Rödl and R Callsen, Chapter three in this volume.

Labour Market Governance 133 in contemporary competition law in the EU involving a shift from control of private power to the control of anti-competitive regulation;47 a direct parallel can be observed in the field of labour law. Rather than an instrument to abate the effects of market pressures on workers, the crisis has been used to compel states to re-organise labour markets and their institutions in ways that actively expose workers to intensified levels of competition and risk. The crisis has provided an occasion to implement reforms to labour law which, because they constitute such a sharp attack on long-established and institutionalised norms and standards, could not have easily been introduced in times of normal politics, if they could have been introduced at all. In deficit countries in Europe, labour laws have suffered a sustained assault, with significant damage to jobs and wages, as well as to the levels of protection that labour law affords to workers. But post-crisis, public sector collective bargaining remains under siege in North America too, and public service employment is similarly in question, as contracting out service delivery from the public to the private sector continues apace, with foreseeably degraded economic security and lower incomes for the affected workers. Although labour laws and institutions persist largely intact elsewhere, across the board, few States are enthusiastic about re-building labour law to strengthen the position of workers or to mitigate broader social and distributive inequalities, irrespective of whether these issues are attributable to the crisis, to broader structural transformations within labour markets, or to both. Thus, post-crisis, labour law languishes in a kind of status limbo, its position degraded by the perceived contribution of labour market institutions and worker protection to the downward rigidity of wages in deteriorating labour markets as well as to price adjustments in markets where labour is thought to be ‘over-valued’. Moreover, the waning of the immediate risk to financial markets appears to have relieved the pressure to respond to crises in other markets, those in housing and labour markets in particular. Politicians and technocrats alike have been quick to call an end to the crisis as soon as economic indicators such as growth rates have moved into positive territory,48 notwithstanding the continuing economic disruption and malfunction as measured by other market indicators. Worse, reform programmes such as Ireland’s have been deemed a success even, perhaps especially, when wage indicators are becoming worse rather than better.49 And enduring fears of inflation, despite significant deflationary pressure, have led to repeated calls to raise interest rates even where wages and wage growth have

47 C Joerges, ‘What is left of the European Economic Constitution? A Melancholic Eulogy’ (2005) 30 European Law Review 461–89, at 472 et seq. 48 In the US, the crisis was deemed officially ‘over’ in 2009. See Scott Lanman and Craig Torres, ‘Bernanke Says U.S. Recession “Very Likely” has Ended’, Bloomberg Press, 15 September 2009, available at: www.bloomberg.com/apps/news?pid=20601087&sid=aflWYD0hCPqA. 49 P Krugman, ‘Meanwhile, in the Role Model’, 17 June 2012, available at: krugman.blogs.nytimes. com/2012/06/17/meanwhile-in-the-role-model/?_php=true&_type=blogs&_r=0.

134 Kerry Rittich still not recovered to pre-crisis levels.50 In a context in which any sign of upward movement or pressure on wages is taken as a bad, rather than a good, sign, it is less surprising that labour law is not only re-oriented away from objectives such as worker protection and the re-calibration of bargaining power, but, like other policies, is deployed in the service of suppressing wages too. If this marked re-alignment of labour law seems over-determined, post-crisis, yet another factor can be added to the list: it can—at least partly—be attributed to the loss of policy space as well as a significant re-drawing of the boundaries of sovereignty and democratic control, at least among smaller and politically weaker states including those in the European periphery.51 Accompanying this re-drawing of political control is a substitution of the priorities of the transnational supervisory bodies which, in general, remain both insulated from their direct effects and, perhaps for this reason, committed to a diagnosis of market dynamics which locates labour law on the negative side of the ledger when it comes to prescriptions for restored economic health. In the case of Europe, moreover, these policies are partly underwritten by law, a predicament sometimes described as the juridification or constitutionalisation of an economic model. Even though it is possible to point to the positive contribution of labour market institutions and tripartite labour-policy co-ordination in crisis abatement,52 the displacement of Keynesian by monetarist thinking seems to have made their role as potential macro-economic stabilisers, as opposed to mere ‘social’ instruments, not only less desirable but also less comprehensible, and perhaps simply less visible. Thus, although there is no shortage of genuine economic pressures on labour markets, the degraded status of labour law and labour market institutions remains a question of epistemology, a matter of the economic knowledge that circulates within the technocracies of both public and private institutions.53 The question becomes, what might unsettle the prevailing policy and regulatory consensus at the normative and ideological levels as well as in the domains of knowledge and institutional practice? Given the role of dominant regulatory epistemes in shaping the received understanding of the problems thrown up by the crisis in the first place, labour market or other ‘facts’ alone, however disturbing, will not necessarily shift the consensus. Nonetheless, if there is to be movement, some of it might emerge from the following developments.

50 A Monaghan, ‘Real wages likely to take six years to return to pre-crisis levels’, The Guardian, 7 February 2014, available at: www.theguardian.com/money/2014/feb/07/wages-six-years-pre-crisis; T Duy, ‘Unemployment, Wages, Inflation and Fed Policy’, 6 March 2014, available at: economistsview. typepad.com/timduy/2014/03/unemployment-wages-inflation-and-fed-policy.html. 51 See D Schneiderman, Chapter two in this volume. 52 The adoption of short-hours in Germany during the initial stages of the crisis is the signal example. 53 Rittich, n 7 above.

Labour Market Governance 135 IV. NEW FAULT LINES? DEBT AND INEQUALITY

IV.1. Debt and Austerity Until recently, there was virtually solid technocratic support within the mainstream international economic and financial institutions for policies of austerity, notwithstanding a robust, even raging, debate among economists as to the expected effects and wisdom of policies of austerity in the middle of a sharp economic contraction. Despite the insistence of many heterodox and New Keynesian economists that contractionary economic policy really is contractionary,54 conventional wisdom converged upon, and ratified, the view expressed in a paper by economists Carmen Reinhart and Kenneth Rogoff that debt levels above 90 per cent were associated with sharply-declining economic growth.55 Although it was often crudely caricatured as about the significance of debt, the debate was in fact just as much about the point at which rising debt levels became worrisome and when and how to tackle them as whether debt mattered as such. Nonetheless, and even though Reinhart and Rogoff ’s paper has suffered some devastating critiques,56 the policy debate continues to pivot simply around the advisability of incurring debt. If recent comments by their leading executives are a reliable guide, both the OECD and the European Central Bank still remain entrenched in their commitment to austerity.57 The question, apparently, is not whether to engage in policies of austerity, otherwise known as ‘fiscal consolidation’: it is only ‘how much, how fast, and by what means’.58 A number of internal contradictions, however, are now evident in this strategy. The contractionary effects of policies of austerity have been unusually powerful because the fiscal multiplier—broadly speaking, the degree of economic activity stimulated by state expenditures—appears to be unusually strong when interest rates remain, as they have been for some time, at the ‘zero bound’.59 The collapse in tax receipts produced—as the tax base in a contracting economy shrinks even faster than expenditures—is, in turn, causing debt levels to rise rather than fall.

54 See K O’Rourke, ‘A Summit to the Death’, 9 December 2011, available at: www.project-syndicate. org/commentary/a-summit-to-the-death; Krugman, n 11 above. 55 CM Reinhardt and KS Rogoff, ‘Growth in a Time of Debt’, January 2010, available at: www.nber. org/papers/w15639. 56 Herndon, Ash and Pollin revealed a coding error that undermines the paper’s most basic assertion about the correlation between debt and economic growth. See Herndon, Ash and Pollin, ‘Does High Public Debt Consistently Stifle Growth? A Critique of Reinhardt and Rogoff ’, 15 April 2013, available at: www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_301-350/WP322.pdf. 57 M Buti and PC Paduan, available at: www.voxeu.org/article/reduce-policy-uncertainty-solidifyez-recovery. 58 OECD, ‘Fiscal Consolidation: How much, how fast, and by what means?’, available at: www.oecd. org/eco/outlook/fiscalconsolidationhowmuchhowfastandbywhatmeans.htm. 59 See IMF paper, below.

136 Kerry Rittich While influential people and institutions are still counselling policies of internal wage devaluation for states in the periphery, such as Spain and Greece, as a way to regain competitiveness,60 the limits of this strategy are already clear enough. Both Germany and Sweden pursued such policies as a means of combating their own economic slumps. However, they succeeded during periods of general economic expansion rather than periods of contraction and uncertainty. More importantly, they did so in a context in which other countries were not simultaneously pursuing the same path. As the fallacy of composition indicates, it is not possible for all states in Europe to pursue competitiveness by devaluing wages, given that this devaluation must occur in relation to each other; a fortiori when the most important producer, Germany, relies on wage suppression as a means of fuelling its own economic growth. Thus, another problem with austerity arises from the external effects of national labour policy: put simply, wage suppression, and reduced demand, in the centre contribute to balance of payment crises and unemployment experienced in the periphery.61 A cleft has opened up because of an apparent change of heart, or mind, on the part of both economists and at least some leading institutions concerning precisely these effects.62 While austerity is still the reigning dogma within significant parts of the technocracy, because of the defection of the IMF it no longer enjoys anything close to universal assent. The shift in position on the part of the IMF is reflected in a series of reports which confirmed, inter alia, that the contractionary effects of austerity policies had been under-estimated, significantly so, and accompanying forecasts of resumed growth similarly over-estimated. For example, the IMF’s 2012 October World Economic Outlook was followed by a report by the IMF’s chief economist confirming that fiscal multipliers were unusually important in the current circumstances.63 In a special report on Greece, IMF researchers reported that the economic damage that would be done by the bail-out terms had been vastly under-estimated.64 One possibility is that these critiques will gain traction and induce a re-consideration of the commitment to fiscal austerity and, in turn, generate knock-on effects on labour policy as well. If tight fiscal and monetary policies appear to be shrinking the economy, then perhaps the parallel labour market strategy, a return to competitiveness via downward wage adjustments, will begin to seem less persuasive and appealing too. However, this is far from inevitable, and nothing like it is on the horizon yet. Despite promises that there is light at the end

60

www.theguardian.com/world/2014/mar/03/christine-lagarde-spain-austerity-imf-madrid. M Wolf, ‘Germany’s Strange Parallel Universe’, Financial Times, September 2013, available at: www.ft.com/intl/cms/s/0/b3faf9b0-2489-11e3-8905-00144feab7de.html?siteedition=intl#axzz2fufq6jjf. 62 At this point, the number of economists who still openly defend austerity in response to economic crisis or slowdown appears to be relatively small. See P Krugman, available at: krugman.blogs. nytimes.com/2013/09/23/where-are-the-austerian-economists/?_r=0. 63 O Blanchard and D Leigh, ‘Growth Forecast Errors and Fiscal Multipliers’, available at: www.imf. org/external/pubs/cat/longres.aspx?sk=40200.0. 64 www.imf.org/external/pubs/ft/scr/2013/cr13156.pdf. 61

Labour Market Governance 137 of the tunnel, there is no immediate relief from the austerity policies previously agreed or imposed, which, in classic form, still remain contingent on a return to ‘primary surplus’.65 And to the extent that the real battle is fundamentally about contending political visions—those concerning the role and size of the state in particular or, more simply, who can be made to pay for the inevitable losses in a downturn or crisis—rather than the actual efficacy and effects of fiscal, monetary or labour policy, a collapse of the theoretical scaffolding of austerity may be beside the point.

IV.2. The Politics of Inequality The other possible avenue of change is through the renewed attention to the question of income inequality. In North America, the path-breaking research of Thomas Piketty and Emmanuel Saez documenting a striking increase in income inequality66 has been picked up by both journalists and academics,67 securing the issue a place on the political agenda even in that most resistant of locations, the United States. As Piketty and Saez make clear, the principal driver of change is declining wage income and the de-coupling of wage growth from broader economic growth. The crisis has only made more visible what is, in effect, a long-term and well-established trend that delivers outsized gains to the top one per cent at the expense of everyone below. Given the importance of regulatory narratives and ideals in driving regulatory transformation, whether the political salience of inequality is ephemeral or more enduring and, more importantly, the form that any political movement to address inequality takes may depend in part on the received understanding of the causes of inequality in the first place. Thus, one question is whether there is any will on the part of the technocracies that have played such an important role in generating the mainstream narratives about economic regulation to re-visit—in partial or more thoroughgoing ways—the role of regulatory policy and the analysis of legal institutions in labour, tax, trade, investment and other areas that might undergird the growth of inequality. This, of course, is a large research agenda, and one for the future. So far, the evidence of a move in this direction is fragmentary at best. Only a brief snapshot of the terrain still to be travelled by way of illustration can be provided here. In Divided We Stand, the OECD recently confirmed the phenomenon of growing

65 www.nytimes.com/2013/09/08/business/global/greek-prime-minister-says-positive-economicdata-points-to-austerity-easing.html. 66 T Piketty and E Saez, ‘Income Inequality in the United States, 1913–1998’ (2003) 118 Quarterly Journal of Economics 1, 1–3); Saez, n 41 above. 67 J Hacker and P Pierson, Winner-Take-All Politics: How Washington made the Rich Richer—And Turned its Back on the Middle Class (New York, Simon and Schuster, 2010); R Reich, Supercapitalism: The Transformation of Business, Democracy, and Everyday Life (New York, Vintage Books, 2007).

138 Kerry Rittich inequality that only a couple of years earlier it saw fit to pose as a question.68 As Divided We Stand notes, the single most important driver of this inequality is greater inequality in wages.69 However, the analysis goes on to attribute this wage inequality to the rise in part-time and other atypical forms of work, as well as the increased number of low-wage workers who, due to structural changes to labour market institutions, now participate in labour markets from which they were formerly excluded. In so doing, the report normalizes the growth of wage inequality to some degree and, repeating the now-standard claim about the exclusionary effects of market institutions, at least implicitly confirms the wisdom of the equally standard remedy, structural reforms to engender greater flexibility in labour market. Labour scholars, by contrast, would certainly want to investigate the status of the many labour and employment rules and social policies which, given the inter-state variation in labour market outcomes in the face of common economic pressures, may well have contributed to this growing wage inequality. This investigation might encompass the passive de-regulation and the deliberate weakening of labour market institutions which, especially in North America, have almost certainly contributed to falling incomes as well as declining rates of unionisation.70 Secondly, we would want to connect both labour market rules and policies in areas such as tax law that are identified as relevant to inequality to broader norms and practices in respect of governance; as the analysis of the crisis response indicates, the extent to which fiscal and monetary as well as trade and investment policy may have contributed to growing inequality is surely now a central issue. Finally, the analytic paradigms and institutional priorities informing these norms and practices, in which institutions such as the OECD have been central participants, are surely of independent interest, for they have a profound effect on the constitution and representation of the problem to be solved in the first place. Their most immediate effect has been to displace attention from the massive stakes that are disposed in the course of designing bail-outs and other crisis interventions. While the pronouncements emanating from the OECD are not, of course, definitive in any way, they do suggest that the underlying analytic framework, far from being in question, remains a potentially formidable obstacle to any thoroughgoing re-imagination of labour law and its purposes at this point in time. For labour lawyers, this is the central task;71 it is also, I suggest, a crucial endeavour when it comes to politics and democracy.

68

OECD, Growing Unequal? (2008). OECD, Divided We Stand (2011). 70 Hacker and Pierson, n 67 above. 71 See, for example, B Langille and G Davidov (eds), The Idea of Labour Law (Oxford, Oxford University Press, 2011). 69

Labour Market Governance 139 V. LABOUR LAW AND DEMOCRACY GOING FORWARD?

The crisis has illustrated the extent to which labour law is already transnational. Whatever debates persist within Europe about the competence of EU institutions to ‘make’ labour policy, for example, the crisis has made clear in a variety of ways that control over the character and direction of labour law no longer resides exclusively, or even primarily, with states. Not only did the crisis provide the occasion to reduce wages and labour standards in specific industries and countries. It confirmed that both labour law and collective agreements are subordinate to macro-economic imperatives and can, apparently, now be changed by fiat as those managing the macro-economic picture see fit; ‘who elected the bankers?’72 is once more the question, this time for the global North as well as the South. At this point, the persistence and consistency of these policy prescriptions, moreover, in spite of the social and labour market havoc that they provoke and in the face of their evident failure to achieve their putative objectives (debt reduction and economic growth), suggest that it is the adoption and normalisation of the policies themselves that may be the overarching aim. Unlike in Europe, where the crisis has provoked open debate about the constraints on democratic politics occasioned by monetary policy and externallyimposed budgetary constraints, there has been relatively little consideration of the implications of bail-outs for either law or democratic politics in North America. Perhaps it is because the crisis no longer seems as immediate as it does in Europe. Perhaps it is because the measures that were adopted were exceptional, in the sense of time-limited, rather than continuing. And, to the extent that crisis measures merely continue secular trends that are already in evidence in the AngloAmerican world, perhaps they may have also appeared entirely, if disturbingly, ‘normal’. In North America, there are, of course, no questions that directly parallel those at the centre of legal and political debates in Europe concerning: the status of the supranational bodies that author the constraints on national states; the nature of the obligations flowing between the citizens of the different Member States of the European Union; or the legality and legitimacy of actions taken in times of crisis or subsequent to it under the terms of union itself, including TFEU Article 125. All of these decisions are being made by nation states exercising sovereign power; at the end of the day, all will be explicitly or implicitly ratified or rejected through ‘normal’ political processes. Nonetheless, it would seem to be a missed opportunity, if not simply an error, to conclude that the fundamental issues raised in European debates have no broader or external relevance. As is the case in Europe, in North America the crisis measures imposed on workers within the private as well as the public sectors raise fundamental questions about the distribution of burdens and benefits among citizens and workers, sectors and regions, and social 72 LW Pauly, Who Elected the Bankers?: Surveillance and Control in the World Economy (Ithaca NY, Cornell University Press, 1997).

140 Kerry Rittich classes that are, at the end of the day, quite far-reaching in their implications for the state of the social contract. As is the case in Europe, budgetary constraints adopted in the frenzy to reduce or avoid debt and deficits have had massive distributional consequences; so have decisions—and non-action—in areas such financial regulation, bankruptcy and consumer debt. By way of counterfactual illustration, consider the effects of a decision to re-inflate the economy by channelling money directly to households, or even to states and municipalities, rather than merely to banks. In addition, the process by which crisis measures were introduced has placed the normative status of labour law, even its character as law, in question in quite fundamental ways. During the crisis, public authorities made it clear that neither labour law nor the contractual agreements negotiated by organized workers would be treated as hard constraints, indeed as anything more than provisional and revisable agreements. Open, active hostility to the formation of unions continues on the part of some public authorities, even in the absence of resistance by employers.73 Workers continue to face calls to reopen contracts or simply give up accrued benefits like pensions due to their employers’ financial exigencies. The question now is the extent to which action taken during the crisis has licensed, or will license, similar action by both public and private sector employers in the future. In short, on both sides of the Atlantic Ocean crucial, intertwined questions around work, inequality, the status of social law and the future of democracy and social inclusion remain to be addressed. Given the increasing emphasis on workforce and labour market adjustments to solve larger financial problems, on the one hand, and the historic role of labour law in addressing disparities in bargaining power and resources among the parties to labour contracts, on the other, it is hard to imagine that labour law will not remain a central ground of struggle in the immediate future. Although its shape in particular locales remains to be determined,74 labour law understood once again as a political, rather than technical or purely legal, endeavour must be central to any re-construction of the mechanisms for resolving distributive conflict, many of which, as Wolfgang Streeck has noted, have at this point been displaced.

73 Steven Greenhouse, “Volkswagen Vote is Defeat for Labor in South” New York Times Feb 14th 2014, http://www.nytimes.com/2014/02/15/business/volkswagen-workers-reject-forming-a-union.html. 74 Arthurs, n 20 above.

5 Of Capitalist Nostalgia and Financialisation: Shareholder Primacy in the Court of Justice HARM SCHEPEL BRUSSELS/KENT

I. INTRODUCTION

F

OR OVER A decade now, the Court of Justice of the European Union has been chipping away at the efforts of Member States to retain a measure of control over large privatised corporations through the use of so-called ‘golden shares’. In the process, the Treaty regime on the free movement of capital has come of age.1 Just like the provisions on the free movement of goods, services and workers, Article 63 TFEU is now interpreted not merely as preventing Member States from enacting and maintaining discriminatory rules, but as granting economic operators the right to ‘market access’.2 And just as the other freedoms are held to be restricted by any measure that renders their exercise ‘less attractive’, the Court has taken the view that any measure that is liable to ‘dissuade’ investors from acquiring shares in the undertakings concerned amounts to a restriction of the free movement of capital.3 After turning Article 63 TFEU into a Charter of Shareholder Rights, the Court will inevitably soon be faced with the question that it has already resolved for the other free movement provisions: if the ‘rights’ that it has inferred from the

1 See, generally, for example, J Usher, ‘The Evolution of the Free Movement of Capital’ (2007) 31 Fordham International Law Journal 1533, and J Snell, ‘Free Movement of Capital: Evolution as a Nonlinear Process’ in P Craig and G de Búrca (eds), The Evolution of EU Law, 2nd edn (Oxford, Oxford University Press, 2011) 547. 2 See Case C-463/00 Commission v Spain [2003] ECR I-4581, para 61, and Case C-98/01 Commission v UK [2003] ECR I-4641, para 47. On the concept, see, generally, J Snell, ‘The Notion of Market Access: A Concept or a Slogan?’ (2010) 47 Common Market Law Review 437, and G Davies, ‘Understanding Market Access: Exploring the Economic Rationality of Different Conceptions of Free Movement Law’ (2010) 11 German Law Journal 671. 3 See Case C-367/98 Commission v Portugal [2002] ECR I-4731, para 45, and Case C-483/99 Commission v France [2002] ECR I-4781, para 41.

144 Harm Schepel obligations on the Member States in the Treaty are as effectively curtailed by private parties as they are by Member State measures, does it follow that these rights can be exercised against private measures?4 Investors can notably be ‘dissuaded’ from acquiring shares, according to the Court, by two aspects of ‘golden shares’: first, corporations may be run with a view to other interests than those of shareholders, and secondly, that control rights over corporations may deviate from the rule of ‘one share one vote’. It is easy to see how this case law has little, if anything, to do with the integration of financial markets, or even, ultimately, with the separation of the political process from the market;5 rather, it has to do with the relationships between the various stakeholders in the corporation.6 The Court seems on its way to consecrate, as a constitutional norm, what repeated attempts at secondary legislation in the Union have miserably failed to establish:7 the rule that corporations should ultimately be run by shareholders in 4 See, generally, H Schepel, ‘Constitutionalising the Market, Marketising the Constitution, and to Tell the Difference: On the Horizontal Application of the Free Movement Provisions in EU Law’ (2012) 18 European Law Journal 177. The point has received little attention by company lawyers, but see, for example, M Andenas, T Gütt and M Pannier, ‘Free Movement of Capital and National Company Law’ (2005) European Business Law Review 757, and W-G Ringe, ‘Company Law and Free Movement of Capital’ (2010) 69 Cambridge Law Journal 378. 5 See Advocate General Maduro’s Opinion in Joined Cases C-282 and 283/04 Commission v Netherlands, para 28 (‘When a State decides to open a certain sector of the market, it must act in a manner which is consistent with that decision. This requirement for consistency arises from the need to ensure that the State acts in conformity with either the market process or the political process’.) In Joined Cases C-105/12 to C-107/12 Staat der Nederlanden v Essent NV and Others, judgment of 22 October 2013, nyr, para 43, however, the Court seems to deduce from Article 63 TFEU a right to privatisation, holding a Dutch measure to offend Article 63 TFEU since ‘the prohibition of privatization means that no private investor can acquire shares or interests in the capital of an electricity or gas distribution operator active in the Netherlands’. 6 The OECD Principles of Good Governance define corporate governance as involving ‘a set of relationships between a company’s management, its board, its shareholders and its other stakeholders’. OECD, Principles of Corporate Governance, 2nd revised edn (2004), available at: www.oecd.org/daf/ corporateaffairs/corporategovernanceprinciples/31557724.pdf. The European Commission adopts this definition in its Green Paper—the EU Corporate Governance Framework, COM(2011) 164 final, at 2. With ‘stakeholders’ out of the way, A Schleifer and RW Vishny, ‘A Survey of Corporate Governance’ (1997) 52 Journal of Finance 737, define corporate governance as ‘the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment’. 7 Suffice it to refer to the battles over Directive 2004/25 on Takeover Bids [2004] OJ L142/12, designed to establish a European ‘market for corporate control’, the core provisions of which had to be recast as ‘opt-in’ clauses for the Directive to be adopted in the first place. The lack of implementation of these and other provisions of the Directive prompted the Commission to the disarming announcement that it was going ‘to analyse why the Member States are so reluctant to endorse the fundamental rules of the Directive’. Commission report on the Implementation of the Directive on Takeover Bids, SEC (2007) 268, 11. For the issues at stake, see, for example, H Callaghan and M Höpner, ‘European Integration and the Clash of Capitalisms: Political Cleavages of Takeover Liberalization’ (2005) 3 Comparative European Politics 307, and B Clift, ‘The Second Time as Farce? The EU Takeover Directive, the Clash of Capitalisms and the Hamstrung Harmonization of European (and French) Corporate Governance’ (2009) 47 Journal of Common Market Studies 55. See, generally, M Rhodes and B van Apeldoorn, ‘Capital Unbound? The Transformation of European Corporate Governance’ (1998) 5 Journal of European Public Policy 406; B van Apeldoorn and L Horn, ‘The Marketisation of European Corporate Control: A Critical Political Economy Perspective’ (2007) 12 New Political Economy 211, and L Horn, ‘Corporate Governance in Crisis? The Politics of EU Corporate Governance Regulation’ (2012) 18 European Law Journal 83.

Shareholder Primacy in the CJEU 145 the exclusive interests of shareholders. Given the dominance of public corporations in the economic life of the Union, the Court thus hands over to equity markets the task to ‘work for a highly competitive social market economy, aiming at full employment and social progress’.8 This may not be a very bright idea. This chapter will glide over the legal intricacies of the ‘golden share’ case law and take, instead, a political economy perspective on the shareholder primacy norm.9 It will contrast the Court’s underlying narrative—one of nostalgia for the days when ‘capitalists’ risked their money in productive entrepreneurial activity— with the realities of modern equity markets and the ‘financialised’ economy. It will highlight the destructive tendency of shareholder primacy to disconnect finance from the real economy and substitute ‘financialism’ for capitalism. As Lawrence Mitchell puts it: This economic system is one in which the financial markets exist primarily to serve themselves. In this system, capital is raised for the purpose of creating, selling and trading securities and derivative securities that do not finance industry but rather trade within markets that exist as an economy unto themselves.10

The point is decidedly not to establish a causal relationship or even a correlation between internal market law and our deeply dysfunctional economy: the relationship between law and economics is not that straightforward, thankfully.11 The objective is, rather, on the one hand, to cast a different light on the debates over European economic constitutionalism, too often framed in simple oppositions of market and state. On the other hand, it also seeks to make the point that the current obsession with the ‘financial’ crisis—focused, it seems, exclusively on banks and other financial institutions—radically under-estimates the extent of the structural transformation of the entire economy and the erosion of contemporary capitalism.

II. CAPITALISM IN THE COURT OF JUSTICE

The ‘golden share’ cases usually deal with the various ways in which Member States retain control over privatised companies in ‘strategic’ sectors through measures ranging from favourable voting arrangements, authorisation schemes

8

Article 3(3) TEU. See, for example, S Soederberg, Corporate Power and Ownership in Contemporary Capitalism: The Politics of Resistance and Domination (Abingdon, Routledge 2010), and J Cioffi, Public Law and Private Power—Corporate Governance Reform in the Age of Finance Capitalism (Ithaca NY, Cornell University Press, 2012). 10 L Mitchell, ‘Financialism: A (very) Brief History’ in C Williams and P Zumbansen (eds), The Embedded Firm: Corporate Governance, Labor, and Finance Capitalism (Cambridge, Cambridge University Press, 2011) 42. 11 See, generally, C Milhaupt and K Pistor, Law & Capitalism: What Corporate Crises Reveal about Legal Systems and Economic Development around the World (Chicago IL, University of Chicago Press, 2008). 9

146 Harm Schepel for the acquisition of shares, the power to appoint members of the board, and so on.12 The Court analyses these arrangements on their deterrent effect on two distinct types of investments. The first, and most straightforward, are ‘portfolio investments’, which are defined as the ‘acquisition of shares and bonds in companies on pure financial investment grounds, that is, without the aim of exerting any influence in the management of the company’.13 How these investments are dissuaded by ‘golden shares’ is explained, for example, in the case against Portugal concerning the state’s power of veto attached to its shares in EDP: [T]he right of veto at issue may have a deterrent effect on portfolio investments in EDP in so far as a possible refusal by the Portuguese State to approve an important decision, proposed by the organs of that company as being in the company’s interests, is in fact liable to depress the value of the shares in that company and thus reduce the attractiveness of an investment in such a company.14

From the prohibition of restrictions to the free movement of capital, the Court thus arrives at a right of shareholders for the companies they invest in to be run with an exclusive view to the value of their shares. This would be a little less objectionable only if the assumption holds that the share price actually reflects the company’s best interests. As will be argued below, that is quite an assumption to make. The point for now is one of logic: if we believe that stock markets are ‘efficient’, there is no ground to the Court’s assumption of a ‘deterrent effect’. After all, the disciplinary and monitoring powers of the stock market stem from its purported ability to process all available information in such a way that the share price reflects the true value of the firm. According to the ‘efficient market hypothesis’, beating the market in any sustained fashion is thus impossible.15 This is all well and good, but leaves the Court’s reasoning with a problem: if we are to have any faith at all in the powers of the stock market, we have to assume that the very publicly available information about the state’s right of veto and its associated risks are already discounted in the price of the shares in EDP. It may well be, of course, that the absolute value of shares in EDP is lower with the golden share than it would be without it. But it is hard to think of a compelling reason why any potential investor would be ‘deterred’ by low absolute values, or attracted by high absolute values. In either case, what matters is the reasonable prospect of future earnings, already always discounted in the current price. Take away the golden share today, and all that would be achieved is to give a windfall profit to the current shareholders.

12 See the list of targeted measures in the Commission’s Communication on Certain Legal Aspects on Intra-EU Investments [1997] OJ C220/6. 13 Ibid, para 3. 14 Case C-543/08 Commission v Portugal [2010] ECR I-11241, para 57. 15 See the Nobel-prize winning work of E Fama, ‘Random Walks in Stock Market Prices’ (1965) 21 Financial Analyst Journal 55, and Fama, ‘Efficient Capital Markets: A Review of Theory and Empirical Work’ (1970) 25 Journal of Finance 383.

Shareholder Primacy in the CJEU 147 The second type of investments that the Court worries about is that of ‘direct investments’. For its definition, the Court relies heavily on the Nomenclature of a 1988 Directive for the implementation of what was then Article 67 of the Treaty.16 This document, now abolished, defines ‘direct investments’ as [i]nvestments of any kind by natural persons or commercial, industrial or financial undertakings, and which serve to establish or to maintain lasting and direct links between the person providing the capital and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry out an economic activity.17

The objective to establish ‘lasting and direct links’, in turn, according to the Court, pre-supposes ‘that the shares held by the shareholder enable him to participate effectively in the management of the company or in its control’.18 How golden shares discourage these investments the Court explains again in the Portuguese case of EDP: That right of veto, in so far as it confers on that State an influence on the management and control of EDP which is not justified by the size of its shareholding in that company, is liable to discourage operators from other Member States from making direct investments in EDP since they could not be involved in the management and control of that company in proportion to the value of their shareholding.19

The problem here is not with the theory, but the practice of corporate finance. On the face of it, the romantic picture of nineteenth-century capitalism is just seriously inappropriate nostalgia. But, really, it is rather worse than that. Exceptions made for the trickling of ongoing issues of equity and the increasingly rare and unimportant cases of IPOs, investments in shares do not, of course, ‘make capital available to the company’—they make capital available to other shareholders. ‘Investments’ of the kind in which companies raise capital on the stock markets

16 Council Directive 88/361 for the Implementation of Article 67 of the Treaty [1988] OJ L178/5. The Court started this in Case C-222/97 Trummer and Meyer [1999] ECR I-1661. Advocate General Ruiz-Jarabo Colomer has harshly condemned the practice as ‘particularly inappropriate’ in his Opinion in Cases C-463/00 Commission v Spain and C-98/01 Commission v United Kingdom [2003] ECR I-4581, para 36. The Commission’s vademecum in its crusade against golden shares relies heavily on the Directive as well, and the Court probably finds it even less appropriate to refer directly to that Communication on Certain Legal Aspects Concerning Intra-EU Investment [1997] OJ C220/15. 17 Council Directive 88/361, n 16 above, Explanatory notes. 18 Case C-466/04 Test Claimants in the FII Group Litigation [2006] ECR I-11753, para 182. The Court claims that this is ‘confirmed’ by the Explanatory notes in the Directive. There, however, it is simply noted that: ‘there is participation in the nature of direct investment where the block of shares held by a natural person of another undertaking or any other holder enables the shareholder, either pursuant to the provisions of national laws relating to companies limited by shares or otherwise, to participate effectively in the management of the company or in its control’. Council Directive 88/361, above, Explanatory notes. The obvious conclusion to be drawn from this is not that effective participation is presupposed by the desire to establish lasting links, but that shareholdings only qualify as ‘direct investments’ if they entail rights of effective participation. 19 Case C-543/08 Commission v Portugal [2010] ECR I-11241, para 56.

148 Harm Schepel are a negligible part of the trade in shares.20 They are also a marginal source of corporate finance.21 What is more, share re-purchases, the private equity movement, and cash for share deals in takeovers have been such, over the last decade or so, that the net flow of capital in developed countries runs from corporations to stock markets, not the other way around. As John Kay put it pithily in his influential Review of UK Equity Markets: ‘Equity markets today should primarily be seen as a means of getting money out of companies rather than a means of putting it in’.22 In sum, to ground shareholder rights in their contribution to raising capital for the productive activity of companies is, at best, ideology masquerading for nostalgia.23 The Court’s direct investors are not content with making capital available to companies, they also seek to establish or maintain direct and lasting links with them. In conditions of stock market turnover ratios close to 100 per cent—and hence an average holding period of one year—these creatures are rare enough.24 Investors burning with the desire to ‘participate effectively’ in the management of the company are even harder to find, so much so that the main driver of EU corporate governance policy is now to encourage ‘shareholder engagement’.25 The 20 Total proceeds of IPOs in Germany over the entire period 1990–2007 have been estimated at 106 billion USD at 2007 dollars. See C Doidge, G Karolyi and R Stulz, ‘The U.S. Left Behind: The Rise of IPO Activity Around the World’, ECGI Finance Working Paper 303/2011, Table 2. Stock market turnover in 2007 alone in Germany stood at 3789 billion USD, according to World Bank data. 21 The ECB reports total gross issues of debt securities other than shares, excluding financial derivatives, of non-financial corporations in the EU 17 over 2005 of 1092 billion euro. Gross new issues of quoted shares of non-financial corporations came in at 63 billion euro. Minus redemptions (which does not include share repurchases if these are made by the company as an investment in its own shares), this gives net new issues worth 12.3 billion euro in 2005. That is also the last year for which H van Eije and W Megginson, ‘Dividends and Share Repurchases in the European Union’ (2008) 89 Journal of Financial Economics 347, report data: for the EU15 at 2000 prices, they put total repurchases at close to 59 billion euro, and dividends at 113 billion euro. 22 J Kay, The Kay Review of UK Equity Markets and Long-Term Decision Making, July 2012, para 2.32, available at: www.bis.gov.uk/assets/biscore/business-law/docs/k/12-917-kay-review-of-equitymarkets-final-report.pdf. Counting just IPOs, secondary offerings and buybacks, McKinsey reports negative equity issuance in developed countries over 2005–07. That issuance has turned positive in recent post-crisis years is due largely to financial institutions raising equity capital in order to ‘deleverage’. J Roxburgh, S Lund and J Piotrowski, Mapping Global Capital Markets 2011 (McKinsey Global Institute, 2011) 15. 23 See, generally, for example, L Mitchell, ‘The Legitimate Rights of Public Shareholders’ (2009) 66 Washington & Lee Law Review 1635, and S Deakin, ‘Corporate Governance and Financial Crisis in the Long Run’ in Williams and Zumbansen (eds), n 10 above, 15. The Court continues to conflate primary and secondary markets. See Case C-271/09 Commission v Poland, judgment of 21 December 2011, nyr, para 52 (noting that the prohibition on Polish pension funds to invest abroad has ‘a restrictive effect’ on companies established in other Member States ‘in that it constitutes an obstacle to the raising, by such companies, of capital in Poland’.) 24 Stock market turnover ratios stood, in 2012, at 66% in France, 91% in Germany, and 84% in the United Kingdom, according to the World Bank. This is down from 131%, 180%, and 270%, respectively, in 2007. 25 See Commission Communication, Action Plan: European Company Law and Corporate Governance: A Modern Legal Framework for more Engaged Shareholders and Sustainable Companies, COM(2012) 740.

Shareholder Primacy in the CJEU 149 debate concentrates on ways of getting investors interested in long-term active engagement by imposing duties of ‘stewardship’,26 and giving incentives in various ways that almost inevitably deviate from the principle of shareholder equality. The Court, on the other hand, seems to infer from the assumed abundance and collective frustration of these mythical investors the need to grant them the right to ‘one share one vote’,27 on the theory that the lack of opportunity to ‘participate effectively’ renders investments less attractive. True, shares with full voting rights generally trade at higher prices than other shares. But it has not yet occurred to the corporate finance literature that this could be, as the Court seems to imply, a function of the huge demand for the ability to establish ‘lasting links’ and the privilege to ‘participate effectively’ in the management of the company. Rather than a ‘participation premium’, the differential is generally described as the ‘control premium’, denoting the ‘private benefits of control’ that acquisition of a controlling stake in a company confers.28 For minor stakes, these private benefits of control are, of course, zero. But the share price anticipates the premium that potential acquirers will be willing to pay casting around for voting rights in the event of a takeover bid. And so it should be clear what the Court is really doing behind the rhetoric of ‘lasting links’ and the desire to ‘participate effectively’: grant current shareholders the windfall profit that comes from a (leveraged) acquirer, say, Porsche, being able to take control over, say, Volkswagen.29

26 See, for example, Sir David Walker, A Review of Corporate Governance in UK Banks and Other Financial Industry Entities: Final Recommendations (the Walker Report) (26 November 2009), available at: www.hm-treasury.gov.uk/d/walker_review_261109.pdf, para 5.7 (‘those who have significant rights of ownership and enjoy the very material advantage of limited liability should see these as complemented by a duty of stewardship’.) The Financial Reporting Council duly launched The UK Stewardship Code in July 2010, available at: www.frc.org.uk/Our-Work/Codes-Standards/Corporategovernance/UK-Stewardship-Code.aspx. For a sceptical view, see B Cheffins, ‘The Stewardship Code’s Achilles’ Heel’ (2010) 73 Modern Law Review 985. 27 See, for example, W-G Ringe, ‘Deviations from Ownership-Control Proportionality: Economic Protectionism Revisited’ in U Benz and W-G Ringe (eds), Company Law and Economic Protectionism (Oxford, Oxford University Press, 2010) 209. It must be noted that the Court resisted the temptation to declare shareholder equality a ‘general principle of law’ of constitutional status in Case C-101/08 Audiolux SA and others v Groupe Bruxelles Lambert SA and others [2009] ECR I-9823. 28 See, for example, A Dyck and L Zingales, ‘Control Premiums and the Effectiveness of Corporate Governance Systems’ (2004) 16 Journal of Applied Corporate Finance 51. 29 See Case C-112/05 Commission v Germany [2007] ECR I-8995, partially redeemed by Case C-95/12 Commission v Germany, judgment of 22 October 2013, nyr. The view that takeovers achieve anything much but, at most, re-distributions of wealth from bondholders and acquiring firms’ shareholders to target firm’s shareholders, though still dominant in certain circles, is surely fatally undermined by now. See, for example, S Moeller, F Schlingemann and R Stulz, ‘Wealth Destruction on a Massive Scale? A Study of Acquirer-Firm Returns in the Recent Merger Wave’ (2005) 60 Journal of Finance 757 (calculating aggregate losses to acquiring firms’ shareholders in the US from 1998 to 2001 of 240 billion USD, only partly offset by target shareholders’ gains of 106 billion USD, in 2001 dollars).

150 Harm Schepel III. SHAREHOLDER PRIMACY AND FINANCIALISM

However flawed its assumptions and reasoning in the golden share case, the Court is not alone, of course, in thinking that the norm of shareholder value maximisation is an appropriate organising principle of corporate capitalism. It has been the dominant view for decades in the United States and the United Kingdom, and its alleged superiority has long been widely predicted to lead to wholesale global convergence around it.30 But a legal norm it is not;31 let alone a constitutional norm. True enough, from Milton Friedman onwards, efforts have been made to anchor shareholder interests in property rights, notions of ‘ownership’ and adventurous interpretations of fiduciary duties in company law.32 But these fancies have been thoroughly discredited,33 most ferociously by those who generally support the principle.34 By and large, shareholder primacy is now recognised in purely instrumental terms, as the best means to overcome the ‘agency problems’ assumed to be inherent in a corporation with dispersed ownership of stock.35 The ‘agency problem’ approach to corporate governance is, paradoxically, grounded in the counter-intuitive idea that shareholders are the least privileged and most vulnerable stakeholders of the corporation.36 Employees, creditors, and suppliers are all protected by contractual guarantees, and have little incentive to monitor managers. Shareholders, on the other hand, are but ‘residual claimants’ whose interests will only be furthered if the company performs well. Dispersed shareholders, however, have obvious collective action problems in exercising their governance rights in any sustained manner. The market price of a company’s shares, then,

30 The high-water mark of this was surely H Hansmann and R Kraakman, ‘The End of History for Corporate Law’ (2001) 89 Georgetown Law Journal 439. 31 The point is made forcefully in L Stout, The Shareholder Value Myth (San Francisco CA: BerrettKoehler, 2012), and even more forcefully by one of her fiercest critics, J Macey, ‘Sublime Myths: An Essay in Honor of the Shareholder Value Myth and the Tooth Fairy’ (2013) 91 Texas Law Review 911 (‘Shareholder primacy is not bad law because it is not law at all’.) 32 See M Friedman, ‘The Social Responsibility of Business is to Increase its Profits’, NY Times Magazine 13 (1970) (‘In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society’.) 33 See, for example, P Ireland, ‘Company Law and the Myth of Shareholder Ownership’ (1999) 62 Modern Law Review 32, and E Elhauge, ‘Sacrificing Corporate Profits in the Public Interest’ (2005) 80 New York University Law Review 733. 34 See, for example, S Bainbridge, ‘Director Primacy: The Means and Ends of Corporate Governance’ (2002) 97 Northwestern University Law Review 547, 565 (‘we can throw Friedman’s concept of ownership out the window, along with the associated economic and ethical baggage’.) W Bratton and M Wachter, ‘The Case against Shareholder Empowerment’ (2010) 158 University of Pennsylvania Law Review 653, 665 (describing the ‘conceptual legacy of unitary ownership and the teaching that shareholders are owners who are natural principals in an agency relationship with corporate management’ as ‘noise’ to be cleared from the screen.) 35 The locus classicus here is M Jensen and W Meckling, ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure’ (1976) 3 Journal of Financial Economics 305. 36 See, generally, R Kraakman et al, The Anatomy of Corporate Law: A Comparative and Functional Approach, 2nd edn (Oxford, Oxford University Press, 2009).

Shareholder Primacy in the CJEU 151 acts not just as a proxy for shareholders’ interests, but as a proxy for the interests of society at large. In the words of two influential shareholder-primacy advocates: All thoughtful people believe that corporate enterprise should be organized and operated to serve the interests of society as a whole, and that the interests of shareholders deserve no greater weight in this social calculus than do the interests of any other members of society. The point is simply that now, as a consequence of both logic and experience, there is convergence on a consensus that the best means to this end (that is, the pursuit of aggregate social welfare) is to make corporate managers strongly accountable to shareholder interests and, at least in a direct sense, only to those interests.37

Before substituting judicial fiat for ‘logic and experience’, it would seem a noble task for all thoughtful people, including judges, to evaluate the success of shareholder primacy in promoting social welfare. As it turns out, there may be some reason for caution. A reasonable measure of how companies contribute to overall social welfare would seem to be their investment rate. In the year 2000, gross capital formation of non-financial corporations in the euro area stood at well over eight per cent of net value added. This dropped to around three per cent at the height of the crisis, for understandable reasons. Far less obviously, it has declined further since, arriving at a shocking 1.7 per cent in the third quarter of 2013.38 The drop has nothing to do with a lack of funds: according to some estimates, eurozone corporate cash stood at nearly two trillion euro, or 20 per cent of GDP, in 2012.39 Net income has remained largely stable. In the year 2000, it stood at 28.5 per cent of net value added. It then reached the dizzy heights of 36 per cent in 2007 before dropping to a low of 30 per cent in the crisis. It is now hovering around 31.5 per cent.40 Of course, it is conceivable that there are perfectly good reasons why companies do not invest. But a growing body of ‘heterodox’ work in economics is compellingly linking this ‘profit-investment’ puzzle to broader structural transformations of the economy, driven by the shareholder value maximisation norm and the associated process of ‘financialisation’.41 37

Hansmann and Kraakman, n 30 above, at 441. Eurostat and ECB, Sector accounts, Table S11-5. 39 Figures from Treasury Strategies, available at: www.treasurystrategies.com/sites/default/files/ TSI_CorpCashBriefingApril2013.pdf. 40 Ibid, Table S11-2. The figures denote net entrepreneurial income as a percentage of net value added. See, also, The Kay Review, n 22 above, para 1.10. (‘Quoted companies, both taken as a whole and in most individual cases, generate more cash from operations than they use for investment. They are not short of cash; they are awash with it. The value of the cash holdings of British business today is larger than the value of its plant and machinery’.) 41 See, for example, E Stockhammer, ‘Financialisation and the Slowdown of Accumulation’ (2004) 28 Cambridge Journal of Economics 719; J Froud et al, Financialization and Strategy: Narrative and Numbers (Abingdon, Routledge, 2006); E Stockhammer, ‘Shareholder value orientation and the investment-profit puzzle’ (2006) 28 Journal of Post-Keynesian Economics 193; O Orhangazi, ‘Financialisation and Capital Accumulation in the Non-financial Corporate Sector: A Theoretical and Empirical Investigation on the US economy: 1973–2003’ (2008) 32 Cambridge Journal of Economics 863; T van Treeck, ‘A synthetic, stock-flow consistent macroeconomic model of ‘financialisation’’ (2009) 33 Cambridge Journal of Economics 467; E Hein and T van Treeck, ‘Financialisation and Rising 38

152 Harm Schepel The starting-point is the staggering growth of finance and its increasing importance in the economy.42 McKinsey reports that global financial stock in 2010 stood at 212 trillion USD, surpassing pre-crisis heights and representing almost a four-fold increase from 1990. ‘Financial depth’ in Western Europe runs at 400 per cent of GDP. Global stockmarket capitalisation stood at 54 trillion USD, up from 11 trillion USD in 1990.43 What it is generally good for is harder and harder to understand;44 what is clear is that financialisation has gone hand in hand with the falling wage share, the rising capital income share, and the shocking rise in inequality.45 What the usual measures of the growth of finance— profits and income share of financial institutions—tend to under-estimate is the extent to which non-financial corporations are being ‘financialised’:46 part of the ‘profit-investment’ puzzle seems to be solved by the fact that companies active in the ‘real’ economy spend their cash looking for returns from financial investment rather than investing in new and better products and services. A few figures should suffice to show this: the ratio of financial assets to fixed assets of non-financial corporations in the Euro 17 was around 85 per cent in 1999, and reached nearly 100 per cent in 2007; after the logical drop in the crisis, it crept up to 90 per cent again in 2013.47 The ratio of financial investment to gross value added of non-financial corporations, meanwhile, reached 370 per cent in 2013, well above pre-crisis heights.48 Further pieces of the ‘profit-investment puzzle’ are to be found in the changing structure of equity markets. It is not just that investors do not ‘make capital available’ to entrepreneurs and do not wish to establish or maintain ‘direct and lasting links’ with the companies that they invest in; they increasingly do not even invest

Shareholder Power in Kaleckian/Post-Kaleckian Models of Distribution and Growth’ (2010) 22 Review of Political Economy 205, and G Krippner, Capitalizing on Crisis—the Political Origins of the Rise of Finance (Cambridge MA, Harvard University Press, 2012). 42 See, for example, G Davis, Managed by Markets: How Finance Re-shaped America (Oxford, Oxford University Press, 2009), and W Tabb, The Restructuring of Capitalism in Our Time (New York, Columbia University Press, 2012). 43 Roxburgh, Lund and Piotrowski, n 22 above. 44 Even perfectly orthodox economists have come to the view that there may be too much of a good thing. See S Cecchetti and E Kharroubi, ‘Reassessing the Impact of Finance on Growth’, BIS Working Papers 381 (Bank for International Settlements, 2012) 1 (‘[A]t low levels, a larger financial system goes hand in hand with higher productivity growth. But there comes a point—one that many advanced economies passed long ago—where more banking and more credit are associated with lower growth’.) For a re-construction of the political potency of the narratives of the benefits of finance, see E Engelen et al, After the Great Complacence: Financial Crisis and the Politics of Reform (Oxford, Oxford University Press, 2011). 45 A recent ILO report claims that financialisation is the greatest single contributing factor in the falling wage share. See International Labour Organization, Global Wage Report 2012/2013: Wages and Equitable Growth (Geneva, ILO, 2013) 51. 46 See, especially, J Froud et al, Financialization and Strategy: Narrative and Numbers (Abingdon, Routledge, 2006), and G Krippner, Capitalizing on Crisis: the Political Origins of the Rise of Finance (Cambridge MA, Harvard University Press, 2012). 47 Calculated from ECB, euro area accounts, Financial balance sheets and non-financial assets. 48 ECB, Euro area accounts, Main indicators.

Shareholder Primacy in the CJEU 153 in ‘companies’ at all but in financial institutions that invest for them. The decline of household ownership of stock in the European Union has been dramatic, standing at a mere 13 per cent or so in 2011. Investment funds and ‘other financial intermediaries’, on the other hand, have more than doubled their share since the 1990s and now manage 25 per cent of market capitalisation. Add to this insurance companies and pension funds (12 per cent), and a good chunk of what are reported as ‘foreign investors’ (22 per cent), and it becomes clear that institutional ownership of equity has reached well over 50 per cent.49 In the United States, the transformation has been even more dramatic, with institutional ownership now standing at over 70 per cent.50 This has, undoubtedly, led to a major widening of participation in equity markets. Hansmann and Kraakman have even declared the end of class struggle: ‘No longer do labor and capital constitute clearly distinct interest groups in society. Workers, through share ownership, increasingly share the economic interests of other equity-holders’.51 This is lovely, of course, but it does make a rather crucial and unwarranted assumption: that fund managers act as faithful agents to the interests of their principals—the beneficiary owners. This would imply, perhaps, widespread pressure on companies to do their bit for a ‘highly competitive social market economy aiming at full employment and social progress’. But this agency problem turns out to be rather worse than the other one—between managers and shareholders—and institutional investors, by and large, are even less interested in ‘lasting links’ with the companies that they invest in than others. As Gilson and Gordon explain the agency costs of agency capitalism: [A] significant percentage of institutional fiduciaries have business models that limit their incentives and capacity to monitor the business choices of their portfolio companies except through assessing stock market performance. The combination of limited institutional investor incentives and limited capacity establishes strong reasons to sell the stock of underperformers rather than to undertake a governance intervention.52

With the majority of stock under active professional management and with advances in information technology, stock markets have become hyperactive

49 D Davydoff, ‘Who Owns European Quoted Shares?’, Focus No 249, November 2013, World Federation of Exchanges. The remainder is made up of non-financial corporations (18%), banks (4%), and governments (4%). 50 See J Lewellen, ‘Institutional Investors and the Limits of Arbitrage’ (2011) 102 Journal of Financial Economics 62. 51 Hansmann and Kraakman, n 30 above, at 452. See M Gelter, ‘The Pension System and the Rise of the Shareholder Primacy’ (2013) 43 Seton Hall Law Review 909. For critique, see P Ireland, ‘Shareholder Primacy and the Distribution of Wealth’ (2005) 68 Modern Law Review 49, and Ireland, ‘Law and the Neoliberal Vision: Financial Property, Pension Privatization and the Ownership Society’ (2011) 62 Northern Ireland Legal Quarterly 1. 52 R Gilson and J Gordon, ‘The Agency Costs of Agency Capitalism: Activist Investors and the Re-evaluation of Governance Rights’ (2013) 113 Columbia Law Review 863, 865 See, also, L Strine, ‘One Fundamental Corporate Governance Question we Face: Can Corporations be Managed for the Long Term unless their Powerful Electorates also Act and Think Long Term?’(2010) 66 Business Lawyer 1.

154 Harm Schepel with vertiginous trading volumes. They have also become enormously ‘efficient’: beating ‘the market’, that is, the consensus of hundreds of thousands of highlytrained professionals at the world’s major financial institutions, has become next to impossible.53 But this does not, so the theory goes, stop asset managers from trying. And this, in turn, should lead to ever more analysis and research by competing market operators, which should lead to ever more ‘efficient’ prices. This process is widely thought to lead to considerable economic benefits for society. As Greenwood and Scharfstein make the case: [F]rom a social benefit perspective, the critical question is not whether active management leads investors to earn excess returns—it does not. Rather, what matters is whether the pursuit of excess returns produces social benefits. One such benefit is more accurate (‘efficient’) securities prices, which enable firms to raise new capital at prices that better reflect their underlying value. If prices are closer to fundamental value, firms have greater incentives to invest in the most productive projects, and to choose the appropriate scale of investment, thereby improving the economy’s overall allocation of capital.54

But there is very little reason to believe that ‘efficient’ prices accurately reflect underlying values. For one thing, there is a logical problem. As John Kay explains: If all relevant information were fully incorporated in market prices, there would be no incentive to obtain the information in the first place. The more efficient is the process described as ‘price discovery’—the more rapid the incorporation of the views of market participants in market prices—the less the reward from engaging in the socially more important function of ‘value discovery’—understanding the fundamental value of the company attributable to its potential earnings and cash flow.55

Corporate managers—their own compensation packages based increasingly upon stock options so as better to align their interests with those of shareholders56—

53 Which raises the question of why anyone should be prepared to pay asset managers the kind of sums they demand. Malkiel calculates that the total expenses paid to equity mutual fund managers in the US increased from 170 million USD in 1980 to 24 billion USD in 2010. He also records that actively managed funds have been consistently outperformed by passive portfolios that simply bought and held all stocks in a broad-based market index. B Malkiel, ‘Asset Management Fees and the Growth of Finance’ (2013) 27 Journal of Economic Perspectives 97. 54 R Greenwood and D Scharfstein, ‘The Growth of Finance’ (2013) 27 Journal of Economic Perspectives 3, 14. The canonical statement here is R Rajan and L Zingales, ‘Financial Dependence and Growth’ (1998) 88 American Economic Review 559, which, in turn, forms the basis of much of the optimistic forecasting about the impact on growth of the integration of financial markets in the Union. See, for example, L Guiso et al, ‘Financial Market Integration and Economic Growth in the EU’ (2004) 19 Economic Policy 523. 55 The Kay Review, n 22 above, para 4.11. 56 Lazonick reports a mean income in 2010 of 36 million UDS for the top 100 US executives, 49% of which derived from stock options. For the year 2000, at 2010 dollars, the figure was 104 million USD, 87% of which derived from stock options. See W Lazonick, ‘The Financialization of the US Corporation: What has been Lost and How it can be Regained’ (2013) 36 University of Seattle Law Review 857. There is, of course, a half decent case to be made that the absurdities of executive pay are a function of the lack of shareholder control of managers. See L Bebchuk and J Fried, Pay without Performance: The Unfulfilled Promise of Executive Compensation (Cambridge MA, Harvard University Press, 2005).

Shareholder Primacy in the CJEU 155 understand this dynamic far better than regulators (and judges). Under the shareholder value maximisation norm, they now see their job as managing the share price (in the short term), not managing the company (for the long term).57 In stark contrast with the falling investment rate, shareholder pay-outs have skyrocketed over the last two decades. In 1989, European corporations paid out 35 billion euro in cash dividends to shareholders; by 2005, this had arisen to 113 billion euro.58 A growing proportion of shareholder pay-outs takes the form of share re-purchases.59 In 1989, European corporations spent 7 billion euro in share buybacks; by 2005, this had climbed up to 58 billion euro. This makes European corporations relatively reluctant. For 2007, McKinsey reports total buybacks in developed countries of well over one trillion USD, over half of that in United States alone.60 The share buyback truly is the epitome of the folly of shareholder primacy: corporations ‘invest’ vast amounts of cash in their own shares to ‘manage earnings’,61 to no perceivable benefit to aggregate social welfare.62 The justifications offered all fail to make any sense outside the logic of the stock market itself: buybacks are said to be more ‘flexible’ than dividends because the latter create expectations for next year—and failing to meet those expectations will cause a drop in the share price. Buybacks are said to have an important ‘signalling’ function to the market that the corporation feels its share is undervalued (the CEO who decides to sell treasury stock because he or she feels the share is overvalued, of course, is yet to be born).63 The most compelling explanation for the practice, however, lies in executive compensation: by simultaneously bumping up the share price and cancelling the dilution effect of exercising stock options, buybacks are a main driver of the rise and rise of CEO pay.64 The bonanza was halted temporarily by the crisis, but with current low corporate borrowing rates, companies have yet again become little more than cash

57 It is in this sense that Jack Welch, former CEO of General Electric, should be understood. See Financial Times, 12 March 2009, ‘Welch condemns share price focus’ (‘On the face of it, shareholder value is the dumbest idea in the world’, he said. ‘Shareholder value is a result, not a strategy’.), available at: www.ft.com/cms/s/0/294ff1f2-0f27-11de-ba10-000779fd2ac.html#axzz2v7vl2sP2). 58 H van Eije and W Megginson, ‘Dividends and Share Repurchases in the European Union’ (2008) 89 Journal of Financial Economics 347, 355. 59 D Skinner, ‘The Evolving Relation Between Earnings, Dividends and Stock Repurchases’ (2008) 87 Journal of Financial Economics 482. 60 Roxburgh, Lund and Piotrowski, n 22 above, 15. 61 See, for example, K Farrell, E Unlu and J Yu, ‘Stock Repurchases as an Earnings Management Mechanism’ (2014) 25 Journal of Corporate Finance 1. 62 The Market Abuse Directive shields buybacks from the prohibition of market manipulation, even if a better example of ‘giving misleading signals as to the supply of, demand for, or price of financial instruments’ and of securing the price of financial instruments at an ‘artificial level’ is hard to think of. Articles 2(a) and 8, Directive 203/6/EC on insider trading and market manipulation [2003] OJ L96/16. 63 See Lazonick, n 56 above, 886 et seq. 64 See, for example, G Fenn and N Liang, ‘Corporate Payout Policy and Managerial Stock Incentives’ (2001) 60 Journal of Financial Economics 45; J Fried, ‘Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay’ (2011) 89 Texas Law Review 1113, and A Bhargava, ‘Executive Compensation, Share Repurchases and Investment Expenditures: Econometric Evidence from US Firms’ (2013) 40 Review of Quantitative Finance and Accounting 403.

156 Harm Schepel machines: taking on huge amounts of debt only to pass the proceeds on to shareholders.65 Capitalism as we know it was described by Marx (and Keynes) by the dynamics caught in shorthand by ‘M–C–M1’, where money turns into more money through profits accrued from investing ‘capital’ in productive industry which, in turn, was re-invested to turn it into even more money. Under conditions of ‘financialism’, M turns into M1 (and M2) without any need for C.

IV. CONCLUSIONS

To describe shareholder primacy as the triumph of ‘the market’ over ‘the state’ is seriously misleading, and, in itself, a good measure of the hegemony of neoliberal ideology. Nowhere is neo-liberalism more exposed as an intensely political and class-driven project than in the relentless gargantuan rent-seeking that characterises the modern corporation driven by ‘shareholder value’. And never has the self-destructive nature of modern finance capitalism become clearer than in the present crisis. Reports of the ‘end of history’ of corporate law have been, thankfully, premature,66 and it seems an odd time for the Court of Justice to try and revive it in the midst of the rubble of the crisis. The public corporation plays a pivotal role in the economy, and is deeply embedded not just in financial markets, but in welfare and production systems. Corporate governance is worth fighting over. The purpose and role of the public corporation is surely a matter of constitutional concern. But it is hard to think of a more inappropriate guide to a ‘highly competitive social market economy aiming at full employment and social progress’ than modern equity markets.

65 See, for example, A Blugnell-Wignall and C Roulet, ‘Long Term Investment, the Cost of Capital, and the Dividend and Buyback Puzzle’ (2013) OECD Journal: Financial Market Trends, available at: www.oecd.org/daf/fin/financial-markets/Long-term-investment_CapitalCost-dividend-buyback.pdf. In the US, non-financial corporations paid out close to 500 billion USD in dividends over 2013, well above pre-crisis heights. Equity issuance was negative to the tune of 380 billion USD (respectable but well below the 2007 lows of 786 billion USD). In order to pay for all of that, they borrowed 780 billion USD from credit markets. Federal Reserve, Flow of Funds, Table F.102. 66 Hansmann and Kraakman, n 30 above.

6 External Effects and Legal Constraints of the German ‘Energiewende’: A Search for Sound Responses to European Conflict Constellations CAROLA GLINSKI BREMEN

I. INTRODUCTION

T

HIS VOLUME IS concerned with the retreat of democratic and political governance in order to manage (perceived) economic requirements or to foster further liberalising aims. This holds particularly true not only for the management of the crises outside established political procedures, but also for the application of treaty provisions, namely, the fundamental freedoms and the demands of a competitive internal market, to the disadvantage of political processes. The conflicts-law approach is based upon the assumption that conflicts due to socio-economic, political and cultural diversity constitute a prominent feature of the European project, and that European law should structure a civilised and thoughtful conflict based upon democratic commandments—but ‘without assuming the mandate to streamline Europe’s diversity’.1 In particular, this approach turns against a shift in the relation between law and politics, which either pre-determines the direction of the political process or renders the politically-driven governance of a certain policy area impossible. What it suggests is that European law should not be used as a substitute or as compensation for Europe’s political deficit.2

1 M Everson and C Joerges, ‘Reconfiguring the Politics-Law Relationship in the Integration Project through Conflicts-Law Constitutionalism’ (2012) 18 European Law Journal 644. 2 See, for systematic elaboration, Everson and Joerges, ibid; C Glinski and C Joerges, ‘“Unity in Diversity”?!—A Conflicts-Law Re-Construction of Controversial Current Developments’ in K Purnhagen and P Rott (eds), Varieties of European Economic Law and Regulation—Liber amicorum for Hans Micklitz (Berlin, Springer, 2014) 189.

158 Carola Glinski Energy policy has always been at the centre of national economics and politics, and socio-economic conditions are as diverse between EU Member States as political attitudes, the most fundamental ones being related to the use of nuclear power.3 The German ‘Energiewende’ is an example of such national preference and has strong support from the people.4 It implies a nuclear phase-out by 2022, combined with accelerated development of renewable energies (35 per cent in 2020, 50 per cent in 2030, 65 per cent in 2040 and 80 per cent in 2050).5 At the same time, an integrated European electricity market, based upon competition and fundamental freedoms, is being developed. Thus, the different national energy policies collide in the European electricity market. The promotion of energies from renewable sources is, in principle, an undisputed part of the European (climate and energy) policy framework as laid down in Article 194 TFEU and concretised in Directive 2009/28/EC on the promotion of the use of energy from renewable sources,6 which, amongst other things, lays down binding national minimum quotas for renewable energies. However, in the absence of an EU-wide promotion scheme—as the EU is not equipped for the financial support of renewable energies—the promotion of renewable energies is carried out at national level in accordance with national political preferences. This leads to the support—to date either per feed-in-tariffs or per quotas—of the respective national producers. Feed-in tariffs are considered to be particularly suitable to adjust promotion schemes to further political aims such as structural development or diversified and de-centralised energy supply. The current German feed-in tariffs, for example, differ considerably for different sources of renewable energy, and are higher for small-scale than for large-scale producers.7 Meanwhile, the production of renewable energy has increased considerably throughout the EU, and the German support scheme has operated particularly well, with production not insignificantly based upon small- and medium-scale producers.8 As a result, the increasing competitive impact of renewable energies and the market-distorting effects of national promotion schemes on the development of an integrated energy market have become a major concern both for the European Commission and in ECJ/CJEU proceedings. 3 For example, France, the UK and the Czech Republic have opted for further development of nuclear energy whereas Austria and Italy object to the use of nuclear energy. 4 See TNS Infratest, Energiekompass 2013, available at: www.innovationsforum-energiewende.de/ schwerpunkte/deutscher-energie-kompass-2013. 5 § 1 para 2 Erneuerbare Energien Gesetz (Renewable Energy Sources Act (‘EEG’)), BGBl. 2008 I, 2074. In parallel, in 2012, Germany imported 43.8 TWh electricity, mainly cheap base-load electricity deriving from French nuclear power stations, and exported 66.6 TWh electricity, mainly expensive peak-load electricity, mainly to Eastern Europe, see de.wikipedia.org/wiki/Energiemarkt#Entwicklung_ der_Stromhandelsbilanz. 6 [2009] OJ L140/16. 7 See §§ 23 ff EEG. 8 See de.wikipedia.org/wiki/Erneuerbare_Energie#Deutschland. In 2010, 37.8% of the installed power was in the hand of private persons, 14.4 % was run by citizen projects, 11.0% by banks and funds, 10.8% by farmers, 9.3% by trade, 6.5% by energy corporations, 1.6% by regional producers and 6.7% by others.

The Energiewende: Effects and Constraints 159 Thus, national promotion schemes are caught between internal political and constitutional requirements, the (European) requirements from climate and energy policy, and those from a competitive internal electricity market, namely, those from subsidies law and the free movement of goods. Article 194 TFEU shows these conflicting objectives by mentioning the aims of the functioning of the integrated energy market, the development of new and renewable forms of energy, and the Member States’ right to determine their choice between different energy sources and the general structure of their energy supply—without solving the conflicts.9 One collision approach applied until recently by Member States as well as by EU organs—for example, with a view to the German promotion scheme—could be called a ‘circumvention strategy’, that is, circumventing the requirements of a competitive integrated market through formal non-applicability of subsidies law and avoiding interference with the free movement of goods in order to maintain political leeway. In parallel, a change of strategy towards a stricter application of intervention prohibitions and market freedoms can be observed at European level. Here, the interpretation of the provisions justifying interventions into a competitive free market (Articles 36 and the Cassis de Dijon formula and Article 107 TFEU) by the European Commission or the European Court of Justice and the outreach and impact of European secondary law, namely, Directive 2009/28/EC, as a form of political co-ordination are of major importance for balancing national political preferences and the aim to further integrate the electricity market. The latter strategy could either support politically-driven conflict mediation, or, conversely, favour a market-driven approach based upon competition, efficiency and the (presumed) optimal allocation of resources. Whereas, until recently, the Commission and the ECJ seemed to respect the pre-dominance of political governance, and allowed for considerable national leeway, current developments point in the direction of the increasing predominance of market liberalism and EU-wide competition over political choices concerning the structure of energy production and supply. Therefore, (renewable) energy law provides a good example to highlight different collision approaches and their impact upon a politically-led governance vis-à-vis the establishment of an integrated market in a highly controversial and sensitive policy field. The external economic effects of national promotion schemes will be used as a starting-point for discussion. First, national promotion of renewable energies has 9 Originally, the Member States’ right to determine the sources and structure of their energy supply was included into the Treaty in order to protect national decisions concerning their use of conventional and nuclear energy. However, Art 194 TFEU could also be invoked for defending national decisions against nuclear energy and in favour of accelerated development of renewable energies; see, eg, O Däuper, ‘Einführung in das Europäische Energierecht’ in W Danner and C Theobald (eds), Energierecht (Munich, Beck, 2012), at n 20; C Calliess, ‘Art. 194’ in C Calliess and M Ruffert (eds), EUV, AEUV, 4th edn (Munich, Beck, 2011), at n 28.

160 Carola Glinski an effect on the amount and price of electricity on the market, which impacts upon other economies and on the competitiveness of their energy policies. Secondly, support for national producers might give them a competitive advantage over foreign producers. These economic effects, however, originate exclusively from and in relation to the establishment of a (competitive) integrated electricity market. Thus, balancing competing national environmental and political preferences with the aim of an integrated energy market at an early stage is of major importance.

II. THE POINT OF DEPARTURE: PREUSSENELEKTRA

The famous PreussenElektra ruling10—concerning the German Stromeinspeisungsgesetz, a predecessor of the recent promotion scheme of the Renewable Energies Act (Erneuerbare-Energien-Gesetz (EEG))—can be regarded as the point of departure of the contested relationship between Member States’ latitude concerning their (renewable) energy policies and the aim to further integrate the EU electricity market, based upon subsidies law and the free movement of goods.

II.1. Subsidies Law According to Article 107(1) TFEU, a subsidy (incompatible with the internal market) is defined as any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods … in so far as it affects trade between Member States (emphasis added).

The ECJ interpreted subsidies law with a strong focus on the question of whether the money flows could be regarded as direct or indirect transfer of state resources, thereby applying a rather formal perspective: In this case, the obligation imposed on private electricity supply undertakings to purchase electricity produced from renewable energy sources at fixed minimum prices does not involve any direct or indirect transfer of State resources to undertakings which produce that type of electricity. Therefore, the allocation of the financial burden arising from that obligation for those private electricity supply undertakings as between them and other private undertakings cannot constitute a direct or indirect transfer of State resources either.

10 Case C-379/98 PreussenElektra AG v Schleswag AG [2001] ECR I-2099, ECJ, judgment of 13/3/2001.

The Energiewende: Effects and Constraints 161 In those circumstances, the fact that the purchase obligation is imposed by statute and confers an undeniable advantage on certain undertakings is not capable of conferring upon it the character of State aid within the meaning of Article 92(1) of the Treaty.11

II.2. Free Movement of Goods According to the settled case law of the ECJ, electricity qualifies as a good so that the rules on the free movement of goods apply.12 The duty (of electricity providers) to purchase electricity from national renewable sources, either combined with feed-in or with certificates or quota systems, qualifies as interference with the free movement of goods in the terms of Article 34 TFEU. The ECJ stated the purchase obligation imposed on electricity supply undertakings applies only to electricity produced from renewable energy sources within the scope of that statute and within the respective supply area of each undertaking concerned, and is therefore capable, at least potentially, of hindering intra-Community trade.13

The Court, however, had no doubts that the promotion of renewable energy aims at the protection of the environment. Although the purchase obligation for electricity suppliers only applied to renewable energies from national producers, the ECJ referred to its contribution ‘to the reduction in emissions of greenhouse gases which are amongst the main causes of climate change which the European Community and its Member States have pledged to combat’ as also being one of the priority objectives of the EU, and as one of the EU’s international obligations.14 This was supported by the sectoral clause of former Article 130r(2) TEC (now Article 11 TFEU), and the 28th recital in the preamble to Directive 96/92/EC, which expressly states that it is ‘for reasons of environmental protection that [the latter] authorises Member States in Articles 8(3) and 11(3) to give priority to the production of electricity from renewable sources’.15 Importantly, the ECJ accepted the purely national scope of the promotion scheme for environmental reasons—despite the Cassis de Dijon ruling, which is often regarded as excluding (directly) discriminatory measures.16 The Court, however, did not mention ‘discrimination’ or ‘justification’, but alongside the high value of environmental protection referred to the protection of ‘the health and life of humans, animals and plants’ and therefore to Article 30 (now 36 TFEU) and to the ‘particular features of the electricity market’ as a regulated market

11 12 13 14 15 16

Ibid, paras 59–61. This has already been established in Case 6/64 Costa v ENEL [1964] ECR 585. ECJ, PreussenElektra, n 10 above, para 71. Ibid, para 72 et seq. Ibid, para 76. See below, Section IV.2.

162 Carola Glinski which, at the time, had not been liberalised and was not functioning at European level. Even the minimum pre-requisite for the opening of promotion schemes to renewable energy produced in other Member States—a compatible system of certificates of origin—had not yet been put in place.17 The Court concluded that the Stromeinspeisungsgesetz was not incompatible with Article 30 TEC (now Article 34 TFEU).

II.3. Conclusion and Further Development PreussenElektra left the Member States with wide political discretion in their energy policies and their design of promotion schemes. The decision could also be regarded as judicial self-restraint in favour of (European) political processes in a sensitive policy field.18 Its doctrinal nebulosity, in particular with regard to the free movement of goods, however, made it another cornerstone in the controversial scientific debate about the justifiability of ‘discriminatory’ environmental measures.19 The—remaining, and, due to the legal and factual development, even increasing—ambiguities have led to different collision approaches at Member State, as well as at EU, level. Meanwhile, secondary law that confirms the possibility of purely national promotion schemes and the promotion of specific political preferences therein has been adopted and is still valid.20 At the same time, the second and the third energy packages21 were launched, the integration of a European electricity market has been progressing, and renewable energies have gained an ever-increasing market share due to the success of the various promotion schemes. Also, a compatible system of certificates of origin has been established.

III. CIRCUMVENTION STRATEGY

III.1. The German Promotion System The current German promotion scheme differs considerably from the relatively simple Stromeinspeisungsgesetz, which was subject to PreussenElektra. It constitutes a highly elaborated system of private payment and other duties in order to

17

ECJ, PreussenElektra, n 10 above, para 78 et seq. See also, A Johnston and G Block, EU Energy Law (Oxford, Oxford University Press, 2012) 349. 19 The first was Case C-2/90 Commission v Belgium (Walloon Waste) [1992] ECR I-4431. 20 Directive 2001/77/EC on the promotion of electricity produced from renewable energy sources in the internal market, [2001] OJ L283/33, replaced by Directive 2009/28/EC on the promotion of the use of energy from renewable sources, [2009] OJ L140/16. 21 Directive 2003/54/EC concerning common rules for the internal market in electricity, [2003] OJ L176/37, replaced by Directive 2009/72/EC concerning common rules for the internal market in electricity, [2009] OJ L211/55. 18

The Energiewende: Effects and Constraints 163 promote renewable energies according to Germany’s political preferences, but, at the same time, aims to avoid the applicability of subsidies law as well as interference with the free movement of goods.22 First, Germany keeps trying to avoid the applicability of Article 107(1) TFEU by organising the promotion of renewable energy without any (direct) involvement of the state. In essence, the grid system operators have to pay the producers the legally fixed ‘feed-in tariffs’ and they also have to transmit, distribute and sell the renewable energy on the electricity market. They also have to calculate and administer the so-called EEG surcharge, which derives from the differential costs between the feed-in tariffs and the revenues gained on the electricity market. It is calculated as a uniform tariff per kilowatt-hour, which, in the end, has to be paid—via the electricity suppliers—by the end-user.23 Building on this system, the concomitant payment privilege for energy-intensive enterprises does not involve any transfer of state resources either.24 Secondly, in order to avoid any potential conflict with the free movement of goods, the German legislator has completely separated the payment duties that are meant to support the producers of electricity from renewable sources, from the real sale of the respective electricity. The ‘green’ electricity has to be sold by the grid system operators on the (free) electricity market as ‘grey’ electricity, independently from the promotion scheme. Electricity suppliers no longer need to purchase the ‘green’ electricity but may buy any ‘grey’ electricity on the market.25 Thus, the promotion scheme does not lead to a competitive advantage of the ‘green’ electricity produced by national producers on the electricity market; neither in relation to foreign ‘green’ electricity, nor to conventional electricity.26 Thus, the current promotion scheme has, until now, been regarded as not interfering with the free movement of goods.27 However, at present, the Swedish system—which has also de-coupled the financial support for the producers from the real sale of the ‘green’ electricity—is under judicial review.28 AG Bot has advanced the opinion that every advantage given to

22 See the explanation of the draft Verordnung zur Weiterentwicklung des bundesweiten Ausgleichsmechanismus (AusglMechV), BT-DrS 16/13188, at 13. 23 See §§ 8, 16 et seq, 34 et seq, 37 EEG. 24 See the letter of the European Commission, C(2002) 1887 fin of 22/5/2002 concerning the German EEG. See, also, S Schlacke and J Kröger, ‘Die Privilegierung stromintensiver Unternehmen im EEG’ (2013) 32 Neue Zeitschrift für Verwaltungsrecht 313, at 317. 25 See AusglMechV, n 22 above. 26 See, for example, V Oschmann, ‘Erneuerbare Energien, Einführung’ in W Danner and C Theobald (eds), Energierecht, at n 87. 27 This can be regarded as the prevailing German opinion. See, again, Oschmann, n 26 above, at n 87. The Commission has not raised any doubts yet, either. 28 Case C-573/12 Ålands Vindkraft AB v Energimyndigheten [2013] OJ C/16. Swedish electricity suppliers have to purchase an electricity certificate from ‘green producers’, corresponding to a certain share of their sales or use, without there being a specific requirement also to purchase electricity from the same source.

164 Carola Glinski domestic producers—albeit unrelated to the marketing of the product—could interfere with the free movement of goods.29 Also, the non-applicability of subsidies law to promotion schemes based upon private payment duties has been increasingly challenged. Although the ECJ has just confirmed the PreussenElektra requirement of public funding in principle,30 recent decisions by the ECJ31 and the Commission32 which have considered similar promotion schemes that are also based upon private payment duties as subsidies, point towards a more extensive interpretation of Article 107 TFEU. There, the qualification as a subsidy has essentially been derived from the fact that one specific private undertaking has been assigned the administration of money in the public interest, namely, the support of renewable energies.33 The German legislator and also German academia nevertheless rely on the non-application of subsidies law to the German scheme based upon the differentiation between whether a financing system is based upon para-fiscal taxes or merely upon private payment duties.34 They thereby—rather artificially—draw the line on the criterion of whether the state has mandated a private undertaking with the collection and re-distribution of the feed-in charge, or whether private undertakings (for example, grid net operators) without the involvement of any intermediate body have to use their own resources, the costs of which they pass on to electricity consumers.35 Meanwhile, the European Commission has taken a different position and has initiated subsidies proceedings against the German promotion scheme, in particular against the extensive privileges for energy-intensive enterprises.36 It regards the EEG surcharge as a state resource, arguing that the state has appointed undertakings, namely, the grid system operators, to administer a surcharge established by the state.37

29

Case C-573/12 Ålands Vindkraft, AG Bot, Opinion of 28/1/2014, para 75 et seq. Case C-262/12 Association Vent de Colère! Federation nationale and others v Ministre de l’Écologie, du Développement durable, des Transports et du Logement und Ministre de l’Économie, des Finances et de l’Industrie, CJEU, judgment of 19/12/2013, not yet reported. 31 See, eg, Case C-206/06 Essent Netwerk Noord and others v Aluminium Delfzijl BV [2008] ECR I-5497, ECJ, judgment of 17/7/2008. See, also Vent de Colère, n 30 above. 32 See, eg, Commission decision C 24/2009, COM(2011) 1363 final (Austria). 33 Ibid, at para 68. See, also Vent de Colère, n 30 above. 34 See, for example, Oschmann, n 26 above, at n 82; TM Rusche, ‘Die beihilferechtliche Bewertung von Förderregelungen aus erneuerbaren Energiequellen: Ein Überblick über die Entscheidungspraxis der europäischen Kommission’ (2007) 11 Zeitschrift für Neues Energierecht 143, at 154 et seq; recently, Schlacke and Kröger, n 24 above, 315 et seq. 35 Also, Commission decision C 24/2009, COM(2011) 1363 final (Austria), para 68. 36 State aid SA.33995, [2014] OJ C37/73. 37 Ibid, 74. For the energy-intensive enterprises that have been privileged under the current system this would be disastrous since the EEG-surcharge would be unlawful as it has never been notified to the Commission, regardless of its potential compliance with the substantive requirements of EU subsidies law. 30

The Energiewende: Effects and Constraints 165 III.2 Economic Consequences and Conclusion The artificial separation of the promotion scheme from public-funding mechanisms, on the one hand, and from the real sale of the respective ‘green’ electricity as ‘grey’ electricity, on the other, has led to economic effects which are difficult to control at national level, such as high and continuously rising costs for national consumers. Since the extra cost for renewable energy depends on the difference between the guaranteed price and the actual market price of electricity on the stock exchange, this strategy has rendered the national promotion scheme highly dependent on developments on the European ‘grey’ electricity market, without really providing for the possibility of regulatory corrections. Concerns as to the subsequent decreasing competitiveness of national enterprises on the European and international market have then led to the introduction of ever-increasing payment privileges for high-volume consumers, which, in turn, have to be compensated for by the non-privileged consumers, namely, private households and enterprises with lower energy consumption instead of from the general budget.38 The consequences are internal conflicts about the level and the allocation of payment duties, and serious constitutional equality problems.39 Therefore, the promotion of renewable energies risks losing its political credit despite the general high support for the policy among the population. The only political corrections that are possible within the current system are considerably reduced feed-in tariffs.40 Also, this approach does not address the (potential) external market effects in a reasonable manner. A subsidies perspective which focuses on the exact internal administration of money flows would, in principle, allow every degree of distortion of competition due to national over-compensation as far as the promotion system has been designed in ‘the right way’, which means by-passing subsidies law. Therefore, competition lawyers have argued in favour of an approach which covers all kinds of state interventions into competition through the distribution of financial resources, regardless of the actual source of the funds, that is, towards the inclusion of all measures having equivalent effect.41

38 The EEG surcharge has increased from 3.59 ct/kWh in 2012 to 5.3 ct/kWh in 2013, with a tendency to further increase. Already in 2012, the EEG surcharge constituted around 15% of the electricity price, whereas 50% of the industrial electricity consumption had been at least partly freed from the EEG surcharge which had amounted to exemptions for 18% of the total energy consumption. 39 See G Manssen, ‘Die EEG-Umlage als verfassungswidrige Sonderabgabe’ (2012) 65 Die Öffentliche Verwaltung 499 et seq. Until now, German courts have accepted the ‘EEG-Umlage’ to be in line with the German constitution, see OLG Hamm, 14/5/2013 (2013) 24 Zeitschrift für Umweltrecht 502, with case note J Kröger, (2013) Zeitschrift für Umweltrecht 480 et seq; LG Stuttgart, 20/2/2013 (2013) 17 Zeitschrift für Neues Energierecht 417. 40 This is exactly what the government has done, see the new Renewable Energy Sources Act of 2014, BGBl. 2014 I, 1066. 41 For critique, see, eg, W Frenz, ‘Energiewende und Beihilfenverbot’ (2012) 16 Zeitschrift für Neues Energierecht 417.

166 Carola Glinski Avoiding interference with the free movement of electricity prevents negative external market effects, such as the (potential) disadvantage for foreign producers of both renewable and conventional electricity on the German market. This, however, comes at the price of (reduced) national political control over the economic effects of the policy, as it renders the system highly dependent on European developments of the ‘grey’ electricity market without the possibility of including the production costs for the ‘green’ electricity into the market price.42 Therefore, national promotion schemes that pursue the strategy of circumventing EU law restrictions only maintain their political freedom in appearance, whilst, in fact, they reduce the possibilities for political corrections. Thus, the circumvention strategy might have been a reasonable approach as long as an integrated European electricity market had not yet been established. Nowadays, with progressing market integration, an approach which takes the market dimension of the promotion of renewable energies into account might provide a better collision strategy.

IV. JUSTIFICATION AND POLITICAL GOVERNANCE UNDER RECOGNITION OF THE EU INTERNAL MARKET

The acknowledgement of the applicability of subsidies law and the (potential) interference with the free movement of goods, however, could either allow for a politically-driven governance of the relationship between (national) political aims and market integration aims, or lead to a predominance of market liberalism to the disadvantage of (national) political projects. Here, indeed, two phases can be distinguished. For the interpretation of the relevant provisions that allow for justifying interference with a competitive free market, concretising acts of the European Commission and the ECJ, as well as EU secondary law, provide guidance. In particular, Directive 2009/28/EC could be regarded as a political understanding on the subject-matter. It provides for a binding national minimum quota of renewable energies in the energy mix,43 the acceptance of different national promotion schemes (mainly per feed-in-tariffs or quotas),44 the freedom of the Member States to decide upon the inclusion of foreign renewable energies into their national promotion schemes45 and upon co-operative instruments,46 as well

42 Quite the opposite, the market price has considerably decreased as a consequence from the increased production of renewable energies and in particular due to their low marginal costs, so-called ‘merit-order-effect’. 43 Article 3 with Annex I A. 44 Article 2 (k). 45 Article 3(3) 2; see, also, very clearly recital (25). Even stronger Art 15(2) sub-para 4: foreign certificates cannot be included into the (mandatory) national quota. 46 Articles 6 to 11.

The Energiewende: Effects and Constraints 167 as for considerations concerning national preferences for structural development or for de-centralised energy supply.47

IV.1. Subsidies Law EU subsidies law primarily aims at the prevention of distortion of interstate competition through subsidies and the respective inefficient allocation of resources. A second task, however, is to balance conflicts between national measures which foster EU interests and the related interference with the internal market. One such EU interest is the promotion of renewable energies in order to achieve an increasing share of renewable energies in the European energy mix.48 Limits to the support of renewable energies include the prevention of over-compensation and windfall gains, as well as disproportionate distortion of the internal market.49 Articles 107(2) and (3) TFEU lay down criteria for subsidies to be considered compatible with the internal market, and can therefore be regarded as collision norms for the balancing of national measures promoting community interests and the respective interference with the internal market.50 The relevant provision is Article 107(3)(c), which contains a catch-all clause: ‘aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest’. The very wide wording needs to be concretised, which is mainly done by the Commission, to which the ECJ leaves a great margin of discretion. The relevant concretising acts include the General Block Exemption Regulation,51 and the ‘Community Guidelines on State Aid for Environmental Protection’ (the Guidelines),52 both of which were adopted in 2008 (prior to Directive 2009/28/ EC) and are currently under revision. Notably, the Guidelines are applicable for promotion schemes for renewable energies and thus for operating aid, whilst the General Block Exemption Regulation is restricted to investment aid.

47 On the Directive, see AG Bot, Ålands Vindkraft, n 28 above, at para 39 et seq; see, also, W Lehnert and J Vollprecht, ‘Neue Impulse von Europa: Die Erneuerbare-Energien-Richtlinie der EU’ (2009) 20 Zeitschrift für Umweltrecht 307 et seq. 48 See Art 3(1) with Annex I A providing for national minimum quota and an EU-wide minimum of 20% for 2020; see, also, Energy Roadmap 2050, COM(2011) 885 final, at 2. (3), envisaging 96 to 99% of renewable electricity by 2050. 49 See with regard to State aid for renewable energies, J Lutz, M Schütt and V Behlau, ‘Klimaschutz durch nationale Energiebeihilfen, Möglichkeiten und Grenzen nationaler Maßnahmen zur Förderung Erneuerbarer Energien und Energieeffizienz unter dem europäischen Beihilferegime’ (2011) 21 Zeitschrift für Umweltrecht 178, at 179, with further references. 50 See, also, J Lutz et al, ibid. 51 Commission Regulation (EC) No 800/2008 declaring certain categories of aid compatible with the common market, [2008] OJ L214/3. 52 Community Guidelines on State Aid for Environmental Protection, [2008] OJ C82/1.

168 Carola Glinski IV.2. Support for Producers of Renewable Energies One important criterion for subsidies to be regarded as being compatible with the internal market is the limited amount of state aid53 or ‘limited aid intensity’.54 Further aspects regarding state aid for environmental protection, as determined by the Guidelines, include: that the aid must result in a higher level of environmental protection than could be achieved without the aid; that the aid be adequate and necessary, and that the positive effects have to outweigh the negative effects (distortion of competition). Guiding considerations for environmental subsidies, which, in particular, apply for the promotion of renewable energies, are to provide for innovation and to correct market failures stemming from insufficient internalisation of pollution costs. Therefore, the Guidelines limit the use of operating aid for the production of renewable energy to the difference between the production costs and the market price of the respective energy. The previous Guidelines define themselves to be an instrument for the implementation of European energy policy towards sustainable energy supply, and acknowledge different national promotion concepts (such as feed-in guarantees or green certificates plus quotas) in principle.55 Thus, the renewable energy framework of Directive 2009/28/EC impacts upon the balancing exercise, and European promotion aims must not be restrained by subsidies law. Whether or not an approach which allows renewable energies to be put on an equal economic footing with conventional energies—as opposed to its promotion in the sense of affirmative action—is sufficient to achieve a steadily increasing market share of renewable energies, is primarily a matter of fact. In principle, a thus concretised justification clause implements the European policy goal with respect to different national approaches, although national promotion schemes with high incentives to increase the renewable market share considerably beyond the European targets might theoretically fail the test. However, until now, the national promotion schemes which have been qualified as subsidies have concomitantly been justified by the European Commission as being in compliance with these requirements.56 The Commission has also indicated, in the current subsidy procedure against Germany, that the feed-in tariffs of the EEG meet the requirements of the Guidelines.57

53 For example, ‘de minimis aid’, see Commission Regulation (EC) No 1998/2006 on the application of Articles 87 and 88 of the Treaty to de minimis aid, [2006] OJ L379. 54 See Article 23 General Block Exemptions Regulation: investment aid for the promotion of energy from renewable sources is not to exceed 45% (up to 65% for small enterprises) of the eligible costs. 55 See Guidelines, 1.1. 56 See, eg, Commission decision C(2006) 2955 final (Austria); Commission decision C(2007) 1181 (Slovenia). 57 State aid SA.33995, [2014] OJ C37/73, 74.

The Energiewende: Effects and Constraints 169 IV.3. Privilege for Energy-intensive Enterprises Usually, promotion schemes based upon private payment duties via electricity prices contain reductions or exemptions for high-volume consumers in order to maintain their competitiveness. If a promotion scheme is regarded as being financed by a transfer of state resources, the privilege, as such, could also qualify as a subsidy. Here, reductions or exemptions from the normal payment duties imposed by a promotion scheme are considered to constitute an economic advantage relevant for the application of subsidies law.58 The Austrian privilege has already been rejected,59 and the German exemptions are now under scrutiny. In fact, the Guidelines also provide for the possibility of reducing, or of granting exemptions from, environmental taxes in order to maintain the competitiveness of producers, provided that the overall effect of the tax leads to improved environmental protection and a better internalisation of costs. Furthermore, the reduction has to be necessary (for example, costs cannot be passed on to consumers) and proportionate (with regard to competitive disadvantages), and they must somehow be related to the environmental performance of the undertaking. As a minimum, the undertaking has to pay a European-wide tax level.60 Comparable criteria are also applied to promotion schemes which are usually not based upon environmental taxes but on other payment duties such as parafiscal taxes.61 The reductions from payment duties for energy-intensive businesses in the Austrian promotion scheme were regarded by the Commission as not in line with these criteria. First, Austria had not sufficiently laid down the (economic) necessity of the reduction,62 and secondly, the reduction scheme had been designed in a way which did not encourage energy efficiency but even worked to the opposite direction.63 These considerations would also apply to the German privilege for energy-intensive enterprises, as the reduction requires a certain percentage of energy consumption in relation to other production costs, and increases in relation to the absolute energy consumption.64 Austria has meanwhile abolished the exemptions with the Ökostromgesetz 2012.65

58 See, eg, Commission decision C 24/2009, C(2011) 1363 final (Austria), para 56 et seq; see, also, Schlacke and Kröger, n 24 above, 315. 59 Commission decision C 24/2009, COM(2011) 1363 final. Austria has challenged the decision; see Case T-251/11, [2011] OJ C232/30. 60 See Guidelines, 1.5.12. and 4. 61 See Commission decision C 24/2009, C(2011) 1363 final (Austria), paras 139 et seq, and 149 et seq, directly from Art 107(3)(c) TFEU. 62 Ibid, para 129 et seq. Germany has not sufficiently justified the necessity of its promotion scheme either, see State aid SA.33995, [2014] OJ C37/73, para. 234 et seq. 63 Ibid, para 124. 64 See §§ 40 and 41 EEG: electricity costs must amount to at least 14% of gross value added; up to 1 GWh/a 100% of the EEG-surcharge have to be paid, above 1 GWh/a 10%, above 10 GWh/a 1% and above 100 GWh/a and 20% electricity costs only 0.05 ct/kWh for total consumption have to be paid. 65 The new law was approved by the European Commission, SA.33384 Green Electricity Act 2012, Austria.

170 Carola Glinski Thus, the criteria of the Guidelines enable national environmental measures and their political fine-tuning in order to make them economically viable, thereby avoiding environmentally harmful and competition-distorting over-compensation with the related negative external effects. The greatest difficulty here seems to be the calculation and the political anticipation of the related economic effects.66 Hence, Germany (and others) would have to face the challenge of calculating and proving the—also domestically challenged—economic necessity of the privileges,67 and would have to link them better to the environmental performance of the enterprise, for example, through obligations of continuous energysaving and energy-efficiency measures.68 Corrections in line with these requirements would also address the main critical points expressed in the national discussion, namely, that the deficient relation between the privilege and the factual competitive situation of the respective enterprises combined with an incentive for even higher energy consumption leads to increasing competitive disadvantages and electricity costs for energy-efficient enterprises.69

IV.4 Free Movement of Goods, Article 34 TFEU As clarified in PreussenElektra, national promotion schemes that include the obligation (on the electricity suppliers) to purchase electricity from domestic producers of renewable energies constitute obstacles to the free movement of goods. This could also apply to other forms of preferential treatment of national renewable energy—in quota systems as well as in feed-in systems. Even national promotion systems which have de-coupled the support for the producers from the sale of the electricity have to justify their promotion schemes vis-à-vis the free movement of goods.70 Clearly, impediments to the free movement of goods can be justified if they are necessary for the protection of the environment.71 The justification of national schemes with a ‘discriminatory’ character, however, poses particular problems. In PreussenElektra, the Court accepted the ‘discriminatory’ German promotion system. What has since become clear from this decision is that the ECJ is willing

66 For difficulties of calculation, see E Gawel and C Klassert, ‘Probleme der besonderen Ausgleichsregelung im EEG’ (2013) 24 Zeitschrift für Umweltrecht 467 et seq. 67 In particular, it is criticised that big companies already benefit from the drastically decreased energy price at the stock exchange and therefore would not need to be privileged to the given extent with exemptions from the EEG-surcharge. 68 See Schlacke and Kröger, n 24 above, 319. 69 See Gawel and Klassert, n 66 above, 467 et seq. 70 See Ålands Vindkraft, n 28 above. 71 Case C-120/78 Cassis de Dijon, ECJ judgment of 20/2/1979.

The Energiewende: Effects and Constraints 171 to recognise ‘discriminatory’ environmental measures in certain specific cases— and that the promotion of renewable energies may provide for such a case.72 Following this decision, authors have offered various doctrinal approaches— with or without principal recognition of ‘discriminatory’ environmental measures—to substantiate the recognition of national promotion schemes.73 Even an exemption from the scope of application of Article 34 TFEU for measures promoting recognised values, such as environmental protection, has already been proclaimed.74 In contrast, others have rejected the continued validity of PreussenElektra pointing out the increased integration of the European electricity market and the system of certificates of origin in place.75 But even with this compatible system of certificates of origin in place, national schemes that privilege renewable energy produced by domestic producers should remain justifiable. First of all, environmental measures, which, as a priority, should rectify environmental damage at source and have to be based upon the polluter-pays principle (see Article 191(2) TFEU) are of an inherently discriminatory character. These principles would suggest a regional change of patterns of production and thus regional promotion of renewable energy, for example, in order to avoid concentration of pollution in areas where production of ‘green’ energy is more expensive. This (interpretation) would also support the European interest in balanced development.76 Secondly, the inherently political character of environmental protection can hardly be reduced to efficiency and the (perceived) optimised allocation of resources, but, instead, relates to a personal and/or societal mindset and responsibility or—as it was for the German ‘Energiewende’—to a (national) political project backed by the vast majority of the population.77 As has been pointed out, from the outset, an important pillar of the ‘Energiewende’ has been regional projects, citizens’ initiatives and private engagement based upon (emancipatory) ideas

72 See also, W Cremer, ‘Staatlich geförderter Klimaschutz und Gemeinschaftsrecht—Sind das Erneuerbare-Energien-Gesetz (EEG) und das Kraft-Wärme-Kopplungsgesetz (KWKG) seit dem 1.7.2007 gemeinschafts-rechtswidrig?’ (2007) 18 Europäische Zeitschrift für Wirtschaftsrecht 591, at 593. 73 Basically, either the inclusion of environmental protection into Art 36 TFEU, the outstanding importance of environmental protection reflected in the Treaty or a recourse to secondary law have been suggested, see S Heselhaus, ‘Rechtfertigung unmittelbar diskriminierender Eingriffe in die Warenverkehrsfreiheit’, (2001) 12 Europäische Zeitschrift für Wirtschaftsrecht 645 et seq; see, also, Johnston and Block, n 18 above, 342 et seq. 74 See Johnston and Block, n 18 above, 347. On that interpretation see also generally, FW Scharpf, ‘The asymmetry of European integration, or why the EU cannot be a “social market economy”’ (2010) 8 Socio-Economic Review 211, at 218 et seq. 75 See, for example, U Karpenstein and C Schneller, ‘Die Stromeinspeisungsgesetze im Energiebinnenmarkt’ (2005) Recht der Energiewirtschaft 6 et seq; AG Bot, Ålands Vindkraft, n 28 above, para 82 et seq. 76 See, eg, Johnston and Block, n 18 above, 348. 77 Against Heselhaus, n 73 above, 649, who suggests a European standard for justifiable discriminatory measures.

172 Carola Glinski of self-sufficiency, a de-centralised energy supply and the wish not to live at the (environmental) expense of others.78 The political sensitivity of energy policy is also reflected in Article 194(2) subparagraph 2 TFEU which calls for respect for a Member State’s right to determine its choice between different energy sources, and the general structure of its energy supply. Arguably, this provision supports national energy policies beyond the aim of a free and competitive European electricity market, such as de-centralised energy supply, structural development, plurality and the promotion of small-scale producers.79 The political sensitivity further derives from the fact that the promotion of energy from renewable sources not only needs a regulatory framework but also concrete financial support, which—in the absence of European-wide mechanisms—is to be provided at national level. It has been pointed out that respect for national budget sovereignty requires that the Member States which finance their promotion schemes must be left with the sovereignty to decide about the beneficiaries.80 Furthermore, opening the scheme to foreign producers might put the economic viability of the national systems at risk, due to financial overburdening and political non-acceptance.81 It would provide producers of ‘green’ electricity with the possibility to choose the system with the highest subsidies. Thus, an opening would most likely result in the promotion of only the absolute minimum amount of the renewable energy required by (EU) law and bring a halt to further efforts to support ‘green’ energy, or even lead to the breakdown of the system.82 One should remember that Directive 2009/28/EC expressly spells out the freedom of Member States to decide upon the inclusion of foreign renewable energies into their national promotion schemes. Moreover, the regional character of promotion schemes is particularly reflected in recitals (3) and (4) of Directive 2009/28/EC. According to recital (3), production of energy from renewable sources often depends on local or regional small and medium-sized enterprises (SMEs). The opportunities for growth and employment

78 See I Arzt, ‘Der Traum der Bürger zählt nicht’, Die Tageszeitung, 20 January 2014, p 1. See, also, de.wikipedia.org/wiki/Erneuerbare_Energie#Deutschland. 79 This argument was also submitted by the responding governments in Ålands Vindkraft, see AG Bot, Ålands Vindkraft, n 28 above, para 103 et seq. 80 See J Gundel, ‘Europäisches Energieverwaltungsrecht’ in JP Terhechte (ed), Verwaltungsrecht der Europäischen Union (Baden-Baden, Nomos Verlag, 2011) 837, at 869 et seq. 81 See V Oschmann, ‘Neues Recht für Erneuerbare Energien’ (2009) 62 Neue Juristische Wochenschrift 263, at 266, with further references. See, also, the responding governments in Ålands Vindkraft, cited by AG Bot, Ålands Vindkraft, n 28 above, para 107. 82 Decidedly, F Ekardt and A Schmeichel, ‘Erneuerbare Energien, Warenverkehrsfreiheit und Beihilfenrecht, Nationale Klimaschutzmaßnahmen im EG-Recht’ (2009) 12 Zeitschrift für Europarechtliche Studien 195 et seq. This argument was also submitted by the responding governments in Ålands Vindkraft, see AG Bot, Ålands Vindkraft, n 28 above, para 105 et seq. The German government assumes that in this case the whole of the EU waterpower producers and also a major part of the EU windpower producers would claim German subsidies, which would inevitably make the German promotion scheme collapse, see Spiegel Online, 9 March 2014, available at: www.spiegel.de/wirtschaft/ soziales/eu-generalanwalt-will-oekofoerderung-auch-fuer-importstrom-a-957654.html.

The Energiewende: Effects and Constraints 173 that investment in regional and local production of energy from renewable sources brings about in the Member States and their regions are important. The Commission and the Member States should therefore support national and regional development measures in those areas, encourage the exchange of best practices in production of energy from renewable sources between local and regional development initiatives and promote the use of structural funding in this area.

Recital (4) refers to the necessity to take into account the positive impact on regional and local development opportunities, export prospects, social cohesion and employment opportunities, in particular with regard to SMEs and independent energy producers. Recital (25) refers to the functioning of support schemes: [T]he majority of Member States apply support schemes that grant benefits solely to energy from renewable sources that is produced on their territory. For the proper functioning of national support schemes it is vital that Member States can control the effect and costs of their national support schemes according to their different potentials. One important means to achieve the aim of this Directive is to guarantee the proper functioning of national support schemes, as under Directive 2001/77/EC, in order to maintain investor confidence and allow Member States to design effective national measures for target compliance. This Directive aims at facilitating cross-border support of energy from renewable sources without affecting national support schemes.

In conclusion, Directive 2009/28/EC provides a coherent framework for the national promotion of renewable energies consisting of binding national minimum quotas which have to be fulfilled through national production designed at the discretion of the Member States,83 combined with the freedom of Member States to decide upon the inclusion of foreign renewable energies into their national promotion schemes, and the option for voluntary co-operative instruments. It represents European political consent to respect national varieties and to respect national decisions to limit their promotion systems to domestic producers.84 The Directive could be regarded as harmonising secondary law which blocks the applicability of the free movement of goods,85 renders it subsidiary,86 or provides for an interpretation.87 The impact of secondary law on the fundamental freedoms relates to the ascribed law–politics relationship in Europe and to the relationship of positive to negative integration, and therefore differs from the national hierarchy of norms.

83

Article 3 with Annex IA. See Lehnert and Vollprecht, n 47 above, 308. 85 See S Klinski, ‘Zur Vereinbarkeit des EEG mit dem Elektrizitätsbinnenmarkt—Neubewertung unter Berücksichtigung der Richtlinien 2003/54/EG und 2001/77/EG’ (2005) 9 Zeitschrift für Neues Energierecht 207 et seq; V Oschmann and F Sösemann, ‘Erneuerbare Energien im deutschen und europäischen Recht—ein Überblick’ (2007) 18 Zeitschrift für Umweltrecht 1. 86 See Cremer, n 72 above, 594. 87 See, also, the submission by the European Commission in Ålands Vindkraft, cited by AG Bot, Ålands Vindkraft, n 28 above, para 59. 84

174 Carola Glinski Indeed, the European project, and, in particular, the accomplishment of the internal market is not only based upon fundamental freedoms but increasingly also on political unification processes through secondary law. Secondary law supplements fundamental freedoms and blocks their applicability to the extent that a certain situation has been regulated (in line with primary law).88 This supplementing, interpreting and even superseding role of secondary law is also reflected in ECJ case law, for example, in PreussenElektra where the Court referred to (the former) Directive 96/92/EC to justify Member States’ giving priority to the production of electricity from renewable sources.89 Only such a view gives due consideration to European political processes beyond those aiming at full harmonisation.90 Overall, there are good reasons to take the socio-economic and political embeddedness of national promotion schemes into account: first, their consideration safeguards the functioning of the promotion systems as such, and therefore ensures the realisation of a principally undisputed European political goal. Thereby, feed-in tariffs have proven cheaper and more effective than quota systems.91 Secondly, it ensures politically-driven governance of the introduction of renewable energies. With regard to external effects, such an approach would not ignore the ambitions of foreign producers of renewable electricity, but embed them into a political framework—as is provided for by Directive 2009/28/EC. Nevertheless, discussions concerning the compliance of promotion schemes with the requirements of the free movement of goods have never come to an end, and even the compliance of Directive 2009/28/EC with primary EU law has been questioned.92 Also, the EU Commission aims to revamp the whole legal framework for the promotion of renewable energies, as will be shown below.

V. CURRENT DEVELOPMENT: TOWARDS PREDOMINANCE OF MARKET LIBERALISM

V.1. Free Movement of Goods In the currently pending cases of Essent Belgium and Ålands Vindkraft, AG Bot has considered the compatibility respectively of the Flemish and the Swedish

88

See Cremer, n 72 above, 594 et seq; see, also, Klinski, n 85 above, 208 and 212. ECJ, PreussenElektra, n 10 above, para 76. 90 See also the German government, cited by AG Bot, Ålands Vindkraft, n 28 above, para 58. 91 See Commission Communication The support of electricity from renewable energy sources, COM(2005) 627. See, also, V Lauber, ‘The European Experience with Renewable Energy Support Schemes and their Adoption: Potential Lessons for Other Countries’ (2011) 2 Renewable Energy Law and Policy Review 120 et seq. 92 See W Berg, ‘Energie, Umwelt, Wettbewerb in der Schnittmenge des Unionsrechts’ (2013) 48 Europarecht Beiheft 53, 70 et seq, with further references. Now also AG Bot, Ålands Vindkraft, n 28 above, para 65 et seq; see in the following. 89

The Energiewende: Effects and Constraints 175 certificate systems with the rules on the free movement of goods.93 Under the Flemish system, energy suppliers have to buy a certain amount of green energy, documented with green certificates. The Swedish system only requires the purchase of green certificates but not of the respective electricity. The particular quota can only be fulfilled with certificates from domestic renewable energy producers. Although AG Bot favoured an approach which principally recognises discriminatory measures for environmental reasons (due to the outstanding importance of environmental protection in EU law as now reflected in Articles 11 and 191 TFEU),94 he, at the same time, did not recognise any environmental advantage which could justify the national scope of the certification system vis-à-vis the free movement of goods.95 In both opinions, AG Bot made a distinction from PreussenElektra, arguing that the internal electricity market had not been integrated then as it was now,96 and rejected the argument that a preference of national renewable energy producers over their foreign competitors could be justified for environmental reasons. In particular, the reduction of greenhouse gas emissions did not, in his opinion, depend on the location of the renewable energy producer within the EU. To the contrary, it would hinder an environmentally reasonable allocation of resources.97 Also, he considered the promotion of renewable energies and combating climate change not to be of national, but of common European, concern.98 This would imply that national political preferences, for example, relating to the promotion of renewable energies beyond European obligations, would not count as valid criteria. Essentially, the Advocate General rejected all the arguments put forward above relating to the financial risks of an open system and the acceptance of the scheme within society. Furthermore, he rejected political aims such as a balanced distribution of installations between nations, electricity autarchy at national level, or a close-by electricity supply to be valid concerns in energy law (as opposed to waste law) and ignored the secondary goals of the promotion of local or regional small- and medium-sized producers that clearly benefit from a reliable national market.99 He also stated that Article 194(2) TFEU did not provide a basis for national preferences, as the Member States’ political freedom was anyway reduced with regard to renewable energies.100

93 Joined Cases C-204/12 to 208/12 Essent Belgium NV v Vlaamse Reguleringsinstantie voor de Elektriciteits- en Gasmarkt, AG Bot, Opinion of 8/5/2013, not yet reported. 94 Ibid, para 87 et seq. 95 Ibid, para 92 et seq. This approach had already been taken in the year 2000 by AG Jacobs, PreussenElektra, n 10 above, para 236. 96 For details, see AG Bot, Ålands Vindkraft, n 28 above, para 82 et seq. 97 AG Bot, Essent Belgium, n 93 above, para 102 et seq. 98 Ibid, para 110. 99 Ibid, para 105 et seq. 100 AG Bot, Ålands Vindkraft, n 28 above, para 104.

176 Carola Glinski In terms of the relationship between primary and secondary law, in Essent Belgium he explicitly denied that Directive 2001/77/EC, the predecessor of Directive 2009/28/EC, could be regarded as a harmonising act with any impact upon the applicability of the requirements of the free movement of goods or the interpretation of the justification clause.101 To the contrary, he regarded the fact that the Directive did not harmonise promotion systems, but left the respective design and option of opening to foreign producers explicitly at the discretion of the Member States, as a non-harmonisation measure which maintains the (full) applicability of the fundamental freedoms.102 In Ålands Vindkraft, AG Bot even proposed to declare Article 3(3) of Directive 2009/28/EC invalid for breach of the free movement of goods. He took an approach that relies solely on the hierarchy of norms, thereby denying any impact of the Directive on the interpretation of the free movement of goods.103

V.2. Subsidies Law A similar development emerges in subsidies law. The ‘Draft Guidelines on environmental and energy aid for 2014–2020’,104 published by the European Commission in December 2013, aim to reshape the subsidies regime substantially as far as the promotion of renewable energies is concerned. Although guiding ideas, such as the addressing of market failures105 and the achievement of EU sustainable energy targets through national promotion schemes,106 are to remain, the draft Guidelines would confine leeway in national promotion considerably. The hitherto general acknowledgement of the various national promotion approaches, in as far as some guiding aspects were observed and over-compensation was avoided, would be replaced by system-relevant pre-determination in favour of competitive approaches. In particular, (fixed) feed-in tariffs should no longer be possible. This would constitute a renunciation from the Directive’s decided acceptance of the different national promotion approaches.107 The Guidelines distinguish between the deployed (at least 1–3 per cent market share EU-wide) and the less deployed technologies. The promotion of the

101

AG Bot, Essent Belgium, n 93 above, para 70 et seq. Ibid, para 70: ‘First of all I want to point out that due to the lack of a harmonised support regime for renewable energies by Directive 2001/77/EC, the Member States are obliged to respect the fundamental freedoms of the Treaty, which includes the free movement of goods’ (translation by the author). 103 AG Bot, Ålands Vindkraft, n 28 above, paras 60 et seq, and 111 et seq. 104 See: ec.europa.eu/competition/consultations/2013_state_aid_environment/draft_guidelines_ en.pdf. 105 Caused by incomplete internalisation of the costs of greenhouse gas emissions; see para 111 of the Draft Guidelines. 106 See Draft Guidelines, para 110: ‘an appropriate instrument to contribute to the achievement of EU objectives and related national targets’. 107 Article 2 (k) Directive 2009/28/EC. 102

The Energiewende: Effects and Constraints 177 deployed technologies should aim at their market integration.108 In particular, (fixed) feed-in tariffs would have to be replaced by competitive bidding processes upon the basis of so-called ‘feed-in premiums’ (bidders’ demands on top of the market price).109 Also, political decisions in favour of a certain electricity mix or certain renewable energy sources would be limited to the definition of ‘a minimum number of different renewable energy sources … without pre-defining those technologies’.110 Although the less deployed technologies could still be compensated for upon the basis of the difference between the market price and production costs (that is, the idea that feed-in tariffs have been traditionally based upon), aid could only be ‘granted by way of a feed-in-premium or equivalent measures involving the direct marketing of the electricity produced’.111 Furthermore, ‘operating aid schemes should in principle be open to other EEA [European Economic Area] countries’. However, ‘the Commission will not require that schemes are open to other EEA or Energy Community countries as long as Member States duly explain the reasons for the absence of a co-operation mechanism’.112 Thus, the draft Guidelines would re-interpret Directive 2009/28/EC: the freedom of the Member States to decide upon the introduction of co-operative mechanisms and upon the inclusion of foreign renewable energy in their support schemes would be turned into a rule–exception relationship with the need to explain the non-inclusion of foreign producers. In effect, this reform would render promotion schemes based upon fixed feedin tariffs impossible; thus, precisely those self-same schemes that have proven particularly successful in promoting renewable energies as well as the related political aims such as de-centralised or regional energy-supply based upon smalland medium-producers. Concerns have been raised that competitive bidding systems have never proven successful throughout Europe and that their mandatory introduction might actually endanger the existence and development of renewable energy production.113 At least, it would change Germany’s (and others) production structures substantially as the small- and medium-sized energy producers that have benefited from reliable feed-in tariffs might not be able to succeed in competitive systems, 108

Draft Guidelines, para 119. Ibid, para 120. The changes concerning aid granted by way of certificates (para 127 et seq) are less serious—as certificates systems have always been regarded as being more market based than feed-in tariffs. 110 Ibid, para 120. 111 Ibid, para 121. In addition, the Draft provides for special rules on biomass, biofuels and hydropower in paras 113, 124 et seq, and 134 et seq. 112 Ibid, para 118. 113 Lauber, n 91 above, elaborated that the Commission has always—in line with neo-classical economic theory—favoured market-based so-called ‘least cost approaches’ like quotas and bidding procedures, although there is evidence that their performance is far less convincing and their costs are higher than those of feed-in systems. 109

178 Carola Glinski and the big energy companies might regain their monopolies. Also, small- and medium-sized producers are not equipped for the required direct marketing of their energy, and would depend on intermediaries. Technologies which will be regarded as ‘deployed’ on an EU-wide scale, but not necessarily in a range of Member States, would no longer be able to obtain adequate promotion in these countries. Overall, a thus changed system would produce considerably increased economic risks for small- and medium-sized producers and thus might lead to more expensive credit and higher securities, and, in effect, to probably higher costs than recent feed-in approaches that are already considered too expensive. In fact, investment in the production of renewable energies has dropped dramatically recently.114 At the same time, it would not provide the equivalent political and environmental advantages, such as a considerably increasing share of renewable energies and a balanced distribution of installations between Member States or regions.

V.3. Conclusion Recent developments point in the direction of a re-interpretation of existing political consent by the Commission and in judicial proceedings. This reinterpretation is based upon an Europeanised approach towards environmental protection and the promotion of renewable energies, to be accomplished through competition and market integration. This approach is based upon neo-classical ‘least cost’ theory115 and considerations of efficiency and Europe-wide optimised allocation of resources which ignore given political and economic conditions. In effect, this strong focus on competition not only addresses external market effects, but also interferes with national political decisions and established promotion systems, most likely to the disadvantage of the small- and medium-sized producers, and therefore also works to the disadvantage of the political engagement of local communities, citizen initiatives and the citizens themselves.116 This is even more worrying against the background of recent European developments: due to political disagreement amongst the Member States, the Council and the Commission do not intend to establish further mandatory promotion quotas beyond the year 2020. Whereas eight Member States favour further ambitious mandatory aims,117 others118 prefer the promotion of nuclear energy.119 114 See www.spiegel.de/wirtschaft/soziales/almunia-will-foerderung-der-erneuerbaren-energien-ineu-stutzen-a-938651.html; and www.spiegel.de/wirtschaft/service/eigenverbrauch-von-strom-neuermarkt-neue-gerechtigkeitsfrage-a-939563.html. 115 See Lauber, n 91 above. 116 See, again, Arzt, n 78 above. 117 Germany, according to the recent ‘Koalitionsvertrag’, intends to increase its production of renewable energy to 40–45% by 2025 and to 60% by 2035. 118 For example, France and the UK. 119 The European Parliament, in contrast, favours a binding minimum quota of 30% by 2030. See www.spiegel.de/wirtschaft/soziales/eu-kommission-will-ziele-fuer-oeko-strom-und-klimaschutzab schaffen-a-943595.html.

The Energiewende: Effects and Constraints 179 Thus, political projects such as the German ‘Energiewende’ might be thwarted due to the dissent of other Member States which favour nuclear power.

VI. CONCLUSIONS AND OUTLOOK

In view of the increasing market integration, national promotion strategies that try to circumvent intervention prohibitions and market freedoms only ostensibly maintain political freedom, while, in fact political corrections that would not put the political goal, as such, at risk are considerably reduced. Externally, this approach either does not meet the (potential) external effects at all, or, conversely, it gives them full priority. A strategy that takes European market effects into consideration and therefore accepts the applicability of intervention prohibitions and market freedoms in principle, but tries to foster politically-driven conflict mediation at European level which respects national political preferences seems to be more in line with our approach. Moreover, it would not only take due account of external market effects, but increase the potential for internal corrections. Until recently, the European Commission and the ECJ have provided an interpretation of the related collision norms which has enabled politically-led governance of the tensions between national political preferences and the aim of further integrating the European electricity market. Current European developments in favour of increasing the predominance of market liberalism and EU-wide competition, however, would not only render the political choices of the Member States concerning the structure of their energy production more difficult, it would also reject political solutions at European level. This is of particular concern, as, in a policy area as sensitive and as highly contentious as energy policy, further harmonisation should be based upon political understanding, instead of the activism of the Commission or the European Court of Justice—to the disadvantage of codified political considerations! The recent controversies between Member States relating to the further promotion of renewable energy, as opposed to the further use of nuclear energy, clearly show the potential for political conflict. The resolution of such conflicts should not be consigned to competitive market mechanisms, but should rely on political processes. This becomes even more important when one considers that there is neither consensus nor evidence that the envisaged market mechanisms will deliver the results that the Commission ascribes to it. Potentially, further market integration aims would have to stand back due to the continuing political dissent between the Member States.

Epilogue

I

N THE MEANTIME, important developments have taken place, and European (and national) institutions have decided upon their collisions strategies. The Court of Justice judged in the case of Ålands Vindkraft,1 the Commission adopted the final Guidelines on State aid for environmental protection and energy 2014–2020,2 and the German legislator enacted a new Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz).3 Contrary to the opinion of Advocate General Bot, the CJEU neither expanded the scope of application of the free movement of goods to production advantages instead of obstacles to trade, nor did it force Sweden to open its promotion scheme to renewable energy produced in other Member States via the free movement of goods. Indeed, the Court accepted all (political and economic) considerations, aims and contents of Directive 2009/28/EC while justifying potential obstacles to trade of the Swedish promotion system and thus accepted the predominance of political processes. Vice versa—despite a few amendments—the final Guidelines on State aid for environmental protection and energy 2014–2020 have, in principle, remained in line with the Draft Guidelines and require a change of systems towards a direct marketing duty of producers and a step-by-step introduction of competitive bidding procedures; although a large number of exemptions apply, for example, to small producers.4 The requirements of the new Guidelines have already been implemented with the Renewable Energy Sources Act of 2014, and accordingly, the Commission has already confirmed compliance of that Act with EU state aid law.5 In conclusion, this means that EU law does not enforce the immediate Europeanisation of promotion schemes through the law on the free movement of goods but, instead, requires, through state aid law, adjustments to internal market policies, which, ultimately, aim at Europeanisation too.

1 2 3 4 5

Case C-573/12 Ålands Vindkraft, CJEU, Judgment of 1/7/2014. [2014] OJ C200/1. BGBl. 2014 I, 1066. Guidelines, n 2 above, 124 et seq, 109, 122. Commission decision SA.33995 of 23/7/2014.

7 Re-embedding EU Governance Fields: A Research Agenda JOTTE MULDER FLORENCE

I. INTRODUCTION

T

HIS CHAPTER INTRODUCES a theoretical perspective to understand, critique and remedy the effects of EU governance structures on the pursuit of social policy. That is to say, governance as the manner in which the EU legal order conditions how power is to be exercised in the management of economic and social resources.1 The implicit and explicit types of governmentalities within these structures set out norms and standards for Member State ambitions, judgements and conduct, thereby enabling EU governance ‘at a distance’. EU governance structures mainly conceptualise the social sphere in terms of market objectives. In critiquing this process, I will relate some of the key points of the topical ‘Sandel’ debate regarding the harmful effects of the increasing marketisation of social objectives, to the operation of EU governance frameworks. I conclude that there are some lessons to be learned from this debate and tentatively develop two of them. First, the conventional framing of the conceptual dichotomy between the market, on the one hand, and the public, political, social (the ‘non-economic’) on the other, is underdeveloped in EU governance frameworks and fails to capture what is at stake when social and market spheres meet. Secondly, that clarity in the framing of market and non-economic conflicts is needed to instruct balancing exercises in these frameworks. It is specifically the lack of this clarity that may undermine the social sphere of the EU as foreseen in the Treaty of Lisbon. Drawing on the idea of embeddedness as developed by Karl Polanyi, I develop an argument for contestation and change. I will tentatively explore the idea of embeddedness as an alternative governmentality, and, in particular, the extent to which a conflicts-law-constitutionalism approach could function as an alternative ‘embedded’ style of governance. The claim of the chapter is that a research agenda inspired by an ‘embedded’ constitutional conflicts-law approach could 1

I use the World Bank definition of governance in the World Bank’s PRSP Handbook.

182 Jotte Mulder lead to challenging views and a new perspective for a policy in the ‘social sphere’ for the EU through conceptualising the non-economic sphere as a force field and entrance point for forms of democratic deliberation. Below, I will first discuss the rise of the EU polity that aims for a combination of wealth creation with the values of an inclusive and sustainable society. It is this development that has led to the inherent need for the EU to develop a policy in the social sphere. Section III discusses what a possible policy in the social sphere for the EU could look like upon the basis of a specific normative understanding of the function of the EU polity and how such a policy can be implemented within governance frameworks. Section IV develops the argument that a policy in the social sphere requires a developed understanding of a substantial notion of the non-economic sphere as opposed to the market/economic sphere. Section V introduces how the ‘embeddedness approach’ could be adopted as an alternative governmental rationale while incorporating the non-economic sphere as a force field for democratic deliberation.

II. THE RISE OF THE EU POLITY AIMING FOR MAXIMUM WEALTH CREATION WITH VALUES OF AN INCLUSIVE AND SUSTAINABLE SOCIETY?

Until the Treaty of Maastricht (1992), the structure of the treaties referred to tasks and activities (in Rome 1957). After Maastricht, the structure became objectives, tasks and activities. The general provisions were changed again with Rome (2004) and this is kept in Lisbon (2007). Rome introduced one article that identifies the values of the Union, followed by an article setting out the Union’s objectives. Instead of activities, the Treaty now speaks of the Union’s competences. The structure that was then introduced, and which we have to this day, is values, objectives and competences. The movement towards the values, objectives and competences structure is accompanied by the rise of the non-economic as part of the EU value system and the consequent need to manage and re-balance competing Treaty aims.2 Giorgio Monti (2013) argues that, from Amsterdam (1997) onwards, there is somehow an increasing awareness that market talk alone in the treaties might be a bit alienating.3 Indeed, from Amsterdam onwards, there is an increase in references to social progress and sustainability, and the implementation of policies that ensure progress in other fields besides economic integration. Similarly, Andrea Sangiovanni notes an increased reference to principles of solidarity as unease spreads about the liberalising effects of European integration.4 It is also 2

See P Craig, The Lisbon Treaty (Oxford, Oxford University Press, 2010) 312 et seq. See G Monti, ‘EU Competition Law from Rome to Lisbon’ in C Heide-Jorgensen et al (eds), Aims and Values in Competition Law (Copenhagen, DJOF Publishing, 2013). 4 See A Sangiovanni, ‘Solidarity in the European Union’ (2013) 196 Oxford Journal of Legal Studies 1–29; P Craig, ‘Competence and Member State Autonomy: Causality, Consequence and Legitimacy’ in H-W Micklitz and B de Witte (eds), The European Court of Justice and the Autonomy of the Member 3

Re-embedding EU Governance Fields: A Research Agenda 183 from Amsterdam onwards that the coherence of EU policies is considered more important through the creation of the following cross-sectional clauses: the Treaty includes a requirement of consistency among Union policies (Article 7 TFEU), a duty to eliminate inequalities and promote equalities between men and women in all activities (Article 8 TFEU), a duty to take into account employment, social protection, education, health, to combat discrimination in the definition and implementation of its policies (Articles 9/10 TFEU), and to integrate environmental protection requirements and consumer protection requirements when defining and implementing Union activities (Articles 11/12 TFEU). Whereas one of the main objectives in the Treaty of Lisbon remains the establishment of the internal market, this is now combined with an increased emphasis on sustainable development of a Europe that is based upon balanced economic growth and price stability / policies based upon a spirit of solidarity / a competitive social market economy aimed at full employment and social progress / the pursuit of social cohesion / a high level of protection and improvement of the quality of the environment. Clearly, there is an increase in the relevance of the social that was not part of the EU discourse before. Compared with the objectives in previous treaties one could argue that an important addition concerns the aim to work for a ‘highly competitive social market economy’ especially when compared with the objective of the ‘open market economy’.5 The increased emphasis on social development and the increase of cross-sectional clauses are examples of what one could coin as the rise of non-economic objectives within the EU legal framework. On paper, at least, it appears as if the ambition of the EU today is to work towards a ‘polity’6 in which the maximal wealth creation of the capitalist system is combined with social values of an inclusive and sustainable society. It can be argued that the centrality of the market as a focal point for EU policy objectives has changed. The ‘single market’ (interpreted as requiring the removal of nontariff barriers to trade) constituted a different conceptualisation of the market than the original ‘common market’ (requiring only the removal of tariff barriers to trade) of Europe.7 Whereas the ‘internal market’ of Lisbon still requires the States (Oxford Legal Studies Research Paper No 57/2009) (Antwerp, Intersentia, 2012); J Shaw, Social Law and Policy in an Evolving European Union (Oxford, Hart Publishing, 2000); G de Búrca, EU Law and the Welfare State: In Search of Solidarity (Oxford, Oxford University Press, 2005); M Dougan and E Spaventa (eds), Social Welfare and EU Law (Oxford, Hart Publishing, 2005). 5 Craig, n 4 above, argues that the reference to social market economy is specified by the phrase ‘highly competitive’ and hence ‘a signal of compromise in the corridors of power’. He also notes, however, that this does not undermine the significance of use of the term ‘social market economy’. In a similar vein, J-C Piris, The Lisbon Treaty: A Legal and Political Analysis (Cambridge, Cambridge University Press, 2010) relates this idea of the social in the economy to the system that was developed in Germany in the post-war Federal Republic also described as ordo-liberalism. It aims for a balance between the market and social policy, and Piris submits that it is comparable to the ‘European Social Model’ in that it enables the free play of forces on the market with the state creating the framework for competition to work and combining that with a complete system of social protection. 6 Defined as an area characterised with an overlapping system of governance, as defined above. 7 See, also, SL Mudge and A Vauchez, ‘Building Europe on a Weak Field: Law, Economics, and Scholarly Avatars in Transnational Politics’ (2012) 118 American Journal of Sociology 449–92.

184 Jotte Mulder abolition of the same barriers, it appears that the connection to non-economic values has changed. One could argue that the non-economic is de-coupled from the market and the Treaty of Lisbon asks for autonomous types of EU governance in the economic and the social sphere. In the words of the Court of Justice of the European Union (‘the Court’): the activities of the Community are to include not only an ‘internal market characterised by the abolition, as between Member States, of obstacles to the free movement of goods, persons, services and capital’, but also ‘a policy in the social sphere’ … Since the Community has thus not only an economic but also a social purpose, the rights under the provisions of the Treaty on the free movement of goods, persons, services and capital must be balanced against the objectives pursued by social policy.8

What form would a policy in the social sphere take in the EU? Before developing an answer to this question, it is important to discuss three initial points that are often overlooked or disregarded. The first is to be explicit about the normative idea of what the EU should be about, the second is terminological, and the third practical. I argue that all three will need to be resolved before it is possible to discuss the potential direction of a policy in the social sphere for the EU.

III. EU POLICY IN THE SOCIAL SPHERE?

Many of the existing narratives on this topic take, as a point of departure, the need to move towards an ideal form, either relating to the type of constitutionalism of the EU legal order or a political model that resolves issues of legitimacy, in particular, the issues of democratic deficit, relating to the power relationship between the Member States and the European Union and the potential of the formation of a European identity.9 Other contributions take, as a point of departure, a critique of the impact of the EU on sensitive policy areas (mainly the social).10 Each of these narratives has—often implicitly—a normative understanding of what the European Union should look like: that the EU should resemble a process of representative democracy similar to that which exists in the Member States; or that European identity should be based upon characteristics that exist within Member States; or that the European constitution should function in a similar way

8 Case C-438/05, International Transport Workers’ Federation and Finnish Seamen’s Union v Viking Line ABP and OÜ Viking Line Eesti [2007] ECR I-10779, paras 78–79 (CJEU). 9 See the overview provided by G Majone, Dilemmas of European Integration the Ambiguities and Pitfalls of Integration by Stealth (Oxford, Oxford University Press, 2005) 134. 10 See, for example B van Apeldoorn, J Drahokoupil and L Horn (eds), Contradictions and Limits of Neoliberal European Governance: from Lisbon to Lisbon (Basingstoke, Palgrave Macmillan, 2008); C Joerges, ‘A Critique of the Disregard for History in European Constitutional Theory: Are Those that Forget the Past Doomed to Repeat its Mistakes?’, Florence, EUI Working Paper LAW No 2005/14; C Joerges and F Rödl, ‘Informal Politics, Formalised Law and the “Social Deficit” of European Integration: Reflections after the Judgments of the ECJ in Viking and Laval’ (2009) 15 European Law Journal 1–19.

Re-embedding EU Governance Fields: A Research Agenda 185 as national constitutions. Often, as was argued by Giandomenico Majone,11 with regard to democratic deficit demands, such normative claims are based upon— so-called—category mistakes. A category mistake, or category error, is a semantic or ontological error in which ‘things of one kind are presented as if they belonged to another’, or, alternatively, a property is ascribed to a thing that could not possibly have that property.12 As such, the EU polity is often erroneously critiqued for a lack of resemblance to a category (Member State polity) to which it clearly does not belong. A critique on the EU’s lack of a clear social purpose should try to avoid such category mistakes. The category mistake that is easily made here is to look for an autonomous European social model.13 Clearly, the claim that such demands are category mistakes is a normative judgement in itself. This normative judgement is based upon an alternative idea of what the EU polity should be about when concerned with the question of how power is to be exercised in the management of economic and social resources at both EU and Member State level. The normative idea that grounds this chapter is informed by—what I think are—the most obvious empirical facts that characterise and challenge the European Union today: the diversity of the socio-economic constellations of the Member States and the increasing asymmetry of interests amongst the Member States.14 This defines what the EU should be about today: managing diversity; and, essentially, this task is already embodied within the two values that define the central point of conflict that EU law, traditionally, addresses: integration and Member State sovereignty.15 The EU is governing diverse functional systems in which different mixtures of public–private entities are active within the Member States, and these different systems may conflict with each other when different rationalities have been adopted in the pursuit of particular objectives (that may also differ per Member State).16 The governance rationale of the EU to cope with this increasing diversity is to structure and unify the discursive fields within which the functional rationalities are developed at Member State level. Within this context, the objective of 11

Majone, n 9 above. G Ryle, The Concept of Mind (Chicago IL, University of Chicago Press, 1949). 13 FW Scharpf, ‘The Asymmetry of European Integration, or why the EU cannot be a “Social Market Economy”’ (2009) 8 Socio-Economic Review 211–50; J Caporaso and A Tarrow, ‘Polanyi in Brussels: Supranational Institutions and the Transnational Embedding of Markets’ (2009) 63 International Organization 593–620; K Lenaerts and T Heremans, ‘Contours of a European Social Union in the Case-Law of the European Court of Justice’ (2006) 2 European Constitutional Law Review 101–15. 14 Pablo Beramendi, ‘Inequality and the Territorial Fragmentation of Solidarity’ (2007) 61 International Organization 783. 15 Similarly, Conway describes this norm conflict in his thesis as being of central importance postLisbon. See G Conway, ‘Conflicts of Competence Norms in EU Law and the Legal Reasoning of the ECJ’ (2010) 11 German Law Journal 966–1005. 16 On the issue of functional rationalities and the complexities this brings for international law, see G Teubner and A Fischer-Lescano, ‘Regime-collisions: The Vain Search for Legal Unity in the Fragmentation of Global Law’ (2004) 25 Michigan Journal of International Law 999–1046, AL Paulus in response to that article ‘Commentary to Andreas Fischer-Lescano and Gunther Teubner: The Legitimacy of International Law and the Role of the State’ (2003) 25 Michigan Journal of International Law 1047–58, and again, G Teubner and A Fischer-Lescano, ‘Reply to Andreas L. Paulus Consensus as Fiction of Global Law’ (2003) 25 Michigan Journal of International Law 1059. 12

186 Jotte Mulder integration starts functioning as a type of unifying governance method within an environment of Member State diversity and value pluralism. This type of governance follows necessarily out of the covert and intrinsic need for administrability within a polity characterised by pluralism such as the EU. It seems that often the types of governance rationale that are adopted within the EU legal system are based upon this intrinsic need to make things administrable for the sake of making them administrable.17 The point is that the EU is thereby structurally affecting the governance rationales of the Member States in a way that could structurally constrain the pursuit of a policy in the social sphere. The pursuit of this form of administrability is well captured in the following consideration of the Court in the Laval case: collective action … cannot be justified in the light of the public interest objective … where the negotiations on pay … form part of a national context characterised by a lack of provisions … which are sufficiently precise and accessible … to determine the obligations with which it is required to comply.18

The main point here is that the Court is engaged in a process which unifies the discursive fields of functional rationalities that are developed at Member State level. In this way, the Court interprets the objective of integration as a type of unifying governance-method within an environment of Member State diversity and value pluralism. The intention here seems to be to make the law of the Member States more calculable, transparent and accessible from an economic perspective. The normative starting-point of this chapter is that EU policy in the social sphere should be primarily about channelling diversity and asymmetry towards unity in the form of a ‘gentle civiliser’ of the functional rationalities developed within the systems of protection of the Member States.19 The normative claim in this concerns the element of ‘gently civilising’. Specifically, the process of channelling the diversity of the various national systems has to take account of what diversity means in a transnational context. Essentially, this concerns the issue of how national systems of protection that choose high standards can be sustained when interacting with systems that are unlike their own.20 It is in resolving the conflict situations that arise from this that a policy in the social sphere can be formulated. Starting from this normative claim, the role of the EU as a discourse-setter becomes important. The EU legal sphere has the power to set up the platforms for the pursuit of policy objectives. As a resolver of the potential conflict situations that can arise out of the differences between functional rationalities and the issue 17 G Majone, ‘From the Positive to the Regulatory State: Causes and Consequences of Changes in the Mode of Governance’ (2008) 17 Journal of Public Policy 139–67. Majone argues that a confederation built on the solid foundation of market integration offers the only viable model for an EU capable of playing a significant role on the international scene. 18 Case C-341/05, Laval un Partneri Ltd v Svenska Byggnadsarbetareförbundet [2007] ECR I-2529, para 110. 19 See Teubner and Fischer-Lescano, ‘Regime-collisions’, n 16 above. 20 This is what Somek coins as ‘the’ social question in a transnational context: A Somek, Engineering Equality: An Essay on European Anti-discrimination Law (Oxford, Oxford University Press, 2011) 11.

Re-embedding EU Governance Fields: A Research Agenda 187 of how and for what ends economic and non-economic objectives are and can be combined within the EU legal sphere, it is thus able to provide an essential feature for the fulfilment of a social purpose for the EU polity. I argue that this evaluation process is to be further informed by the idea of embeddedness, which necessitates a legal framework that allows instruments of governance to transcend the pursuit of non-economic objectives to an institutional domain beyond commodity logic: a process of re-instituting non-economic spheres upon a non-economic basis. The idea of what EU social policy should be about is closely linked to the second initial point that needs to be developed before discussing a potential social policy of the EU. This means we must think clearly about what is meant by the term ‘social’ in this context. More specifically, we must determine whether this is an autonomous sphere or merely a sub-section of economic policy objectives? Here, the debate on a social purpose for the EU intertwines closely with the broadly held debate on the desirability of increasing the marketisation of societal objectives. This is a familiar narrative: markets are not mere mechanisms, but embody a specific normative order, meaning that they pre-suppose—and promote—a specific way of valuing the goods and services that are being exchanged, and a specific idea about how particular sectors are to be organised.21 The non-economic spheres of life are not necessarily best served within a normative order that is based upon market principles. However, as argued convincingly by Sandel, alongside many others, social relations today are often re-made in the image of market relations and, as ‘markets extend their reach into non-economic spheres of life the more entangled they become with moral questions’.22 I will make this somewhat more specific. The potential harm of applying market logic to non-economic spheres rests on the assumption that people derive satisfaction not from goods and (the provision of) services as such, but from the various properties or characteristics that they embody. Fred Hirsch developed the idea that the utility derived from goods and services emanates not only from their embodied characteristics, but also from the environmental conditions in which they are used.23 He provides the example of the services of a doctor that may yield, besides a direct improvement in health, additional characteristics stemming from the patient’s trust in the doctor’s judgment, his assessment of the doctor’s motivation, and his assurance or anxiety about his prospects of securing similar services in the future.24

The doctor-patient relationship is based upon trust. A basic human relationship is an important part of the service that is provided and this relationship is fundamentally non-economic. The thesis developed by Hirsch posits that the latter non-economic characteristics can be influenced by the social basis under which 21

F Hirsch, Social Limits to Growth (London, Routledge, 1977) 36. MJ Sandel, What Money Can’t Buy: The Moral Limits of Markets (New York, Farrar, Straus and Giroux, 2012) 88. 23 Hirsch, n 21 above. 24 Ibid. 22

188 Jotte Mulder medical services are supplied. Therefore, it matters whether the services are supplied as market transactions, forms of private insurance, or comprehensive public insurance.25 It is the neglect of the social context, in which the normative order of markets values goods, services and the organisation of sectors, which can be of detriment to the non-economic spheres.26 The detriment lies specifically in the potential effect on the characteristics of a product or activity, of supplying it exclusively or predominantly on commercial terms, rather than upon some other basis. The idea then is that, before we can decide whether market relations are appropriate to non-economic domains, we have to figure out (i) what is noneconomic, and (ii) what norms should govern with regard to these areas. I will discuss both in the next section. However—and here we touch upon the third preliminary point—one basic issue with non-economic objectives is to govern them in a clear and transparent manner. There is often no autonomous or self-sustainable rationale to support non-economic objectives, and it is much easier and seemingly transparent to connect them to market-based types of governmentality. In this process, the noneconomic objective becomes either re-defined as a corrective to market processes (as an externality) or is completely translated within a market metric. Take, by way of illustration, the discourse on ‘sustainable development’: a discourse that re-contextualises external nature, first, in terms of an ecosystem and, secondly, as an area in which rights to pollute can be traded. Thereby, previously untapped areas are being opened in the interest of capitalisation and chances for commercial exploitation.27 It is not only nature to which this discourse of re-contextualisation applies. It is quite broad: for example, social cohesion expressed as the idea to include as many people as active labourers in the market as possible. To dramatise things, one could posit that, thereby, nature and life itself are being drawn into the economic discourse of efficient resource management. This process adopts primarily a shift in representation whereby, in this case, non-economic aspects of society become internal to a process of marketisation.28 This is, at first sight, a clear and clean way of approaching otherwise complex objectives that are not easily translated into targets and the means of achieving them. In other words, society might well be willing to protect a particular non-economic issue but might also want a mechanism that allows the application of a clear and transparent 25 Hirsch notes one striking example of the accompanying diminution in trust in doctor-patient relationships: one in five of all physicians in the US had been or was being sued for malpractice. This in turn has stimulated the pursuit of legally defensive professional practice, marking a further twist in the diminution of trust between doctor and patient. Therefore the product or service that is supplied solely under the motive of satisfying private wants can be seen as different from the product or service supplied at least partly under the motive of satisfying the wants or needs of others, including society as a whole. 26 Similarly C Crouch, Making Capitalism Fit for Society (Cambridge-Malden MA, Polity Press, 2013) 37. 27 T Lemke, ‘Foucault, Governmentality, and Critique’ (2010) 3 Rethinking Marxism: A Journal of Economics, Culture & Society 49–64. 28 Coined by Lemke as ‘the governmentality of marketisation’, n 27 above.

Re-embedding EU Governance Fields: A Research Agenda 189 standard of assessment. Thus, the use of a market rationale in order to evaluate market and non-economic balancing is also partly about simplifying the application of the rules to account for the non-economic objective, rather than a way of saying that non-economic issues only count if they can be perceived in terms of the market. The argument is, therefore, not that markets are inherently bad, but that if EU governance frameworks adopt a rationale that contextualises non-economic objectives as externalities or calculable efficiency goals within a welfare-maximising model, this potentially limits the defining features of non-economic objectives, and the need for contestation arises when (i) the discarded features of non-economic objectives that are identifiable within these frameworks represent something worth caring about, and (ii) a credible alternative of dealing with these objectives exists. In order to determine this, it will be necessary to operationalise a substantive understanding of the non-economic sphere.

IV. TOWARDS AN OPERATIONAL SUBSTANTIVE DEFINITION OF THE NON-ECONOMIC SPHERE

As I briefly touched upon in the previous section, the social is a ‘polluted’ concept. This is because, in many cases, the objective at stake is not purely social, but perceived and contextualised within a market order. This can partly be explained by the wave of reforms undertaken in many OECD countries during the 1980s that were inspired by market-informed measures and led to the liberalisation of labour markets, capital markets, the de-regulation of industry and the privatisation of state enterprises. Importantly, during this time, many public sector departments were re-structured and downsized through outsourcing and installing so-called New Public Management tools. This basically installed a new discursive field with regard to public management, introducing a move towards entrepreneurial systems of public management that were largely market-based. Although, over the course of the 1990s, this trend became less radical through counter-reforms, today, a lot of public policy is still informed by, and measured in terms of, success through a market-based metric. Simultaneously, the EU, as a discourse-setter, has enforced a narrative that often re-defines social policy objectives as ancillary to economic objectives. Therefore, social policy measures of the Member States can, to a large degree, be qualified as a sub-section of economic policy which is created mainly with the purpose of making markets work better by channelling social concerns within a model that renders the social manageable. Hence, when one speaks about norm conflicts between economic and social policies, often this is not a conflict of different norms but, rather, disagreement with regard to the best design of one economic norm. Take the example of limiting the number of working hours of a labourer: one could posit that this intervenes with the free forces of the market because factories cannot use their labour force to the extent to which they may want. However, if limiting the working hours

190 Jotte Mulder of a labourer leads to increased productivity because labourers will be more rested and happy, this qualifies as a beneficial constraint on the market because it actually lets the market function better than it would function without the constraint. In other words, not all measures that restrict the market are based upon non-economic considerations. A lot of perceived norm conflicts actually remain within the economic/market realm. The same applies, for example, to strikes by trade unions, environmental regulation, integrity standards imposed by associations of undertakings, state aid in order to finance social objectives, and public monopolies on gambling services. Initially, these interventions in free trade and competition present themselves as non-economic interventions. Quite soon, it becomes clear, however, that relating the non-economic merely to the act of intervention in these cases is unsatisfactory since not all interventions that restrict free trade and competition are pure manifestations of an objective that is not related to the functioning of markets. The right to strike can be regulated in order to channel the interests of workers through institutional mechanisms that make these interests controllable, manageable and, to a certain extent, foreseeable, and thereby allow sectors of the economy to perform better. Environmental regulation can be shaped as tradable rights to pollute, subjected to self-regulating market mechanisms, etc. This is all more or less suggested by Pablo Ibáñez Colomo, who argues that non-economic-based interventions within the EU competition law framework are often responses to market failures (externalities) and constructed in a way to make markets work better.29 These instances represent examples of what I would gather under the label of beneficial constraints on the market, and hence essentially fulfilling a market objective. There is no true conflict of norms in these cases, although it is, of course, highly questionable whether a policy that is created upon this market basis is not overly one-sided. Overall, the side-effects of this market-dominated thinking make it difficult to conceptualise something social that is purely non-economic. A ‘true’ non-economic objective is an objective that falls outside of the concerns that are related to the functioning of markets—it is residual in that sense. Hence, a fuller recognition of non-economic dimensions of objectives within market-based governance frameworks, such as competition-law frameworks, requires an identification of instances in which something of value is actually lost in the market method of dealing with non-economic objectives. The primary purpose of an exercise that tries to clarify the non-economic objective is therefore to provide an operational conceptualisation that allows these ‘things’ to be distinguished from market objectives. Indeed, this approach accepts the primacy of the market but then allows the non-economic to be identified as a residual and conflicting objective, meaning that the non-economic is to be found in features of values that become lost, are not addressed or are negatively impacted within

29 Pablo Ibáñez Colomo, ‘Market failures, transaction costs and Article 101(1) TFEU case law’ (2012) 37 European Law Review 541–62.

Re-embedding EU Governance Fields: A Research Agenda 191 market-based governance styles. Secondly, dimensions of the non-economic can be found in the way that certain objectives are pursued. Non-economic objectives tend to share or should share a social and political pact that underlies the objectives that are pursued. As such, even if, theoretically speaking, a market approach towards social inclusion would address all of the features of this value, there may be something lost in the process of pursuing the value.30 This is a common feature that is related to the discursive process through which social rights are normally created at national level. The idea behind such a discursive process is that, through the exercise of political processes, citizens become somehow jointly responsible for these objectives and, thereby, mutual obligations are created to ensure that they operate according to the social value attached to these particular objectives. Access to important social and economic benefits is normally associated with such discursive processes. Lastly, it is dynamic and can be derogated from because non-economic interests can develop and evolve. This can be illustrated with the example of the regulation of child labour as state ‘intervention’ that restricts the access to labour markets of economic operators and limits the choice of companies to employ whomever they want. Ha-Joon Chang discusses how, in ‘advanced’ societies, the ban on child labour is no longer a legitimate policy debate but that this differs from the situation in developing countries.31 In developing countries, a state ban on child labour may still be considered to be an ‘intervention’ against market forces and its impact on economic efficiency remains a legitimate subject of policy debate. Clearly, within the EU legal framework that promotes free trade, a ban on child labour is not seen as an intervention and hence it is not seen as a restriction to freedom of trade. Rather, you could say, it has evolved into a necessary precondition of the concept of free trade, instead of something that would ‘intervene’ and restrict free trade. Chang argues that, once a right or obligation (such as a ban on child labour) is accepted as one of the fundamental rights of all members of a society, the ban will no longer be considered as interfering with free trade. So, depending on which rights and obligations are regarded as legitimate and what kind of hierarchy of these rights and obligations is accepted by the members of a society, an intervention could be considered as intervening in trade in one historical period of society but not in another. Similarly, for example, AG Cruz Villalón, in his opinion of 5 May 2010 (in Case C-515/08, Vítor Manuel dos Santos Palhota and Others) argues that social protection should no longer be seen as an intervention in free trade, but as a commitment of general validity. As such, the legal qualification of an act as an intervention in free trade tells something about the rights and obligations that are regarded as legitimate and of the hierarchical

30 See, similarly, R Bellamy, ‘The Liberty of the Moderns: Market Freedom and Democracy within the EU’ (2012) 1 Global Constitutionalism 141–72, at 168. 31 Ha-Joon Chang, ‘Breaking the Mould: An Institutionalist Political Economy Alternative to the Neo-liberal Theory of the Market and the State’ (2002) 26 Cambridge Journal of Economics 539, 542.

192 Jotte Mulder relationship between these rights and obligations as they are accepted by the members of a society. It follows from these considerations that the non-economic is far from a fixed idea that can be determined ex ante or upon the basis of a form of dominance reasoning, that is to say, a type of reasoning that says that ‘x is better than y in all respects’, so if conflicts arise in practice, x will always be put above y. This type of reasoning is unlikely to reflect societal consensus. The non-economic is a dynamic and residual concept that forces an open and inclusive outlook beyond market considerations in governance frameworks. This has consequences for the means through which governance rationales that affect non-economic objectives should operate. The qualification of ‘intervention’ in or ‘restriction’ of free trade or competition tells something about the rights and obligations that are regarded as legitimate, and the hierarchy of these rights and obligations that is accepted by the members of a given society. Therefore, a public value choice is made every time a qualification is made that a non-economic objective restricts competition. The institutional governance-design consequence of this is that, whenever a public interest objective can be voiced and weighed as a market objective, for example, an externality, without losing anything of the public interest that is being pursued, managerial forms of decision-making could be appropriate governance structures to resolve these types of conflict. In contrast, where a public interest objective represents more than can be reasonably captured within managerial-based efficiency rationalities, the setting should change in favour of an institutional domain beyond efficiency logic and managerial forms of decision-making, and conflicts should be resolved upon the basis of a process of negotiated co-ordination that involves more public stakeholders. This will be expanded in the next section.

V. THE EMBEDDEDNESS APPROACH

The embeddedness concept has been a prevailing and persistent idea in economic sociology for many years. There are plenty of legal commentators these days who refer to Polanyi now when discussing current issues of EU economic integration,32 leading to statements such as ‘we are all Polanyians now’.33 The need for an appealing moral normative framework when criticising apparent market dominance in EU law may be one of the main reasons for this. Polanyi has always had great appeal in social sciences generally (since the 1970s), but it is only recently that he has been picked up as inspiration in scholarly discussions regarding the

32 C Joerges was the first to give Polanyi a serious and thorough consideration. See C Joerges and J Falke (eds), Karl Polanyi: Globalisation and the Potential of Law in Transnational Markets (OxfordPortland OR, Hart Publishing, 2011). 33 H Schepel, ‘Rules of recognition: A Legal Constructivist Approach to Transnational Private Regulation’ in P Jurcys, PF Kjaer and R Yatsunami (eds), Regulatory Hybridization in the Transnational Sphere (Leiden, Martinus Nijhoff, 2013) 189–202, at 193.

Re-embedding EU Governance Fields: A Research Agenda 193 future of EU governance issues.34 As a consequence, Polanyian concepts, such as embeddedness and the double-movement, are now often randomly used to criticise or describe developments within the EU legal order.35 Polanyi is being ‘mainstreamed’ in legal narratives that critically discuss the social effects of economic integration. However, an exhaustive critical analysis of the potential relevance of the work of Polanyi is lacking.36 Is it, indeed, realistic or possible to translate his ideas, which are primarily a reaction to orthodox liberalism as it arose during the English Industrial Revolution, into a normative hypothesis that can provide new and useful ways of looking at processes of EU economic integration today? I take the Polanyian notion of embeddedness to be concerned with the way that broad human and societal objectives are commodified as part of an economic model and thereby dis-embedded from their societal roots when approached solely upon the basis of the self-regulatory mechanisms. Karl Polanyi’s acclaimed masterpiece, The Great Transformation: the Political and Economic Origins of our Time, written in the early 1940s and first published in 1944, provides a theory for the origin of the political turbulence and economic collapse of nineteenthcentury civilisation.37 The core argument is that market liberalism requires everything to be tradable, including important ecological and societal phenomena such as labour, land and money. To place these within mechanisms of a self-regulating market is the main, and, at the same time, self-destructive, flaw of market liberalism. Polanyi conceptualised these elementary societal substances as fictitious commodities because they were treated as tradable goods despite not being produced for sale. An unchecked and autonomous economic sphere seeks to incorporate these and other social and human elements as commodities into efficiency-based supply-and-demand-regulated market mechanisms. If treated as commodities within such self-regulating mechanisms, these interests would certainly trigger movements within society that would rise to defend an interest against the danger of the market method of dealing with them. The self-regulating market requires a separation of politics and the economy, and this plants a seed for political and economic unsustainability. A counter-movement against commodification will seek to de-commodify the commodity fictions. However, this process undermines the efficiency of the

34 Caporaso and Tarrow, n 13 above; C Joerges and J Neyer, ‘“Deliberative Supranationalism” Revisited’, Florence EUI Working Paper LAW No 2006/20; C Joerges, ‘The Law in the Process of Constitutionalizing Europe’, Florence EUI Working Paper LAW No 2002/4; Joerges and Falke (eds), Karl Polanyi: Globalisation and the Potential of Law in Transnational Markets, n 32 above; M Höpner and A Schäfer, ‘Polanyi in Brussels? Embeddedness and the three dimensions of European economic integration’ (MPIfG Discussion Paper 2010). 35 See, for example, Caporaso and Tarrow, n 13 above. 36 For example, Caporaso and Tarrow n 13 above, argue that in the case of the free movement of labour the CJEU’s market interventions work to facilitate labour exchanges but go beyond the correction of market failures and include social purposes such as family considerations and fair treatment, thereby transcending these situations from mere market logic. 37 K Polanyi, The Great Transformation: The Political and Economic Origins of our Time, 2nd edn (Boston MA, The Beacon Press, [1944] 2001).

194 Jotte Mulder market and thus provides a cause for further economic crisis. The division of society into an economic and political sphere, and the acceptance of the principles of gain and profit as organising forces in society is one of the main contributors to the rise of unstable societies. Markets become unstable as non-economic values with important societal consequences are commodified as part of an economic model and thereby dis-embedded from their societal roots when approached solely from the standpoint of a self-regulatory mechanism of the free-market model. As the dis-embedding of non-economic-realm objectives become disproportional, Polanyi argues, society will become unstable unless a process of embedding de-commodification takes place. In other words, Polanyi informs us of the importance of national welfare systems in how they create a sense of belonging and togetherness. The dismantling of the structures of a community is therefore something that deserves a little thought.38 Polanyi’s idea of embeddedness poses the question of how to manage both market and non-economic values in a manner which is both coherent and sustainable within an increasingly-complex EU society. But how do we govern the institutional tension between the processes of dis-embedding commodification and embedding de-commodification as overlapping moments in the double-movement of market-making and marketconstraining initiatives?39 There is debate in the literature with regard to the exact meaning of embeddedness in Polanyian terms, and it has been roughly described in two ways. The political economist Fred Block argues that markets are, necessarily, always embedded, and that there can be no such thing as a pure and dis-embedded market economy.40 Economic processes cannot but result from a mixture of cultural, political and economic forces. Block submits that Polanyi was mainly concerned with identifying this ‘always embedded economy’, a thesis which recognises that markets are always and necessarily somehow related to other social and cultural elements of societies, and therefore are never fully independent from the start. This interpretation of the concept mainly allows for descriptive research with regard to why economic infrastructures and institutions function and look the way that they do.41 Another, closer, reading of Polanyi’s concept of embeddedness acknowledges that Polanyi identified the need to position markets in an institutional order that is ‘always embedded’, but distinguishes this from what Polanyi considered to be the actual process of (dis-)embedding markets,42 and it is this process that is more interesting and revealing in the context of the issue

38 G Davies, ‘The Process and Side-effects of the Harmonisation of European Welfare States’, Jean Monnet Working Paper 02/06. 39 A Ebner, ‘Transnational Markets and the Polanyi problem’ in Joerges and Falke (eds), n 32 above, 19–41. 40 F Block, ‘Karl Polanyi and the Writing of “The Great Transformation”’ (2003) 32 Theory and Society 275–306. 41 See, also, G Dale, Karl Polanyi: The Limits of the Markets (Cambridge-Malden MA, Polity Press, 2010) 200. 42 Ebner, n 39 above, 19–41, at 28.

Re-embedding EU Governance Fields: A Research Agenda 195 presented in this chapter. This requires a close look at the actual mechanisms and rules that are adopted to govern market interaction. In other words, it requires a look at discursive fields. This reading emphasises the importance of a microanalysis of the actual content of the socio-economic rules with regard to commodity fictions. Regardless of the social and cultural features that surround markets, the mechanisms that determine the actual process of market-making and marketconstraining will determine whether a market is (dis-)embedded from this perspective of the Polanyian concept. This is most insightfully described by Ebner: This specification is well illustrated by the case of labour markets. Rules that simply fulfil a market enhancing function, for instance, by reducing transaction costs and information asymmetries in wage-setting, do not qualify as embedding rules. They support a rationale of commodification that follows the allocative logic of market supply and demand. However, a set of rules that delegates some components of wage-setting and the related features of industrial relations to an institutional domain beyond this commodity logic qualifies as a factor in the embedding of markets. These sets of rules, which may refer to the inclusion of welfare arrangements in wage-setting or to the participation of the workforce in management decision … may promote a de-commodification of labour, as they shield its reproductive conditions from market conditions.43

Therefore, even though a market may always be embedded in existing social and cultural institutional mechanisms, this does not necessarily exclude the potential (dis-)embeddedness of the content of the socio-economic rules and regulations that set a discourse upon the basis of a commodification rationale. This reading of the process of embeddedness provides a framework of contestation. Types of governance systems that follow this process of dis-embedding can be contested upon the basis of the societal undesirability of such processes. Hence, as Ebner describes, regulating the freedom of workers to withhold their labour either individually or collectively in trade-union laws is only embedding from a Polanyian perspective if the content of these rules is grounded outside mere commodity logic. At this point, it will be interesting to take a closer look at how a constitutional conflicts-law approach could be combined with these ideas of embeddedness as a governance rationale. Embeddedness as a type of governance incorporates the idea that certain values should be protected and kept sustainable independently of market rationality. This type of governance rationality involves a re-institution of economic activity in ways that subject it to social control, enabling mediation between market and non-economic thinking upon the basis of a system of participatory planning.44 In its ideal form, this system envisages situations of self-government in which those affected by a decision participate in making the decision, in proportion to the extent to which they are affected by it.45 Thereby, a governance rationale 43

Ibid. Mark Harvey, R Ramlogan and Sally Randles, Karl Polanyi: New Perspectives on the Place of the Economy in Society (Manchester, Manchester University Press, 2007) 145. 45 Ibid. 44

196 Jotte Mulder upon the basis of embeddedness is grounded within the idea of social ownership. When interpreting Polanyi, I think it is important to realise that the essential concern for him was the deep flaw in market liberalism that subordinates human purposes to the logic of an impersonal market mechanism. He argues, instead, that ‘the people’ should use instruments of democratic governance to control and direct the economy to meet individual and collective needs. From a Polanyian perspective, the sustainability of transnational capitalist market economies, such as those that are collected in the European Union, relies, in part, on the potential for reciprocal dynamics between the market and the non-economic realms.46 As introduced above, embeddedness, as a type of governance, incorporates the notion that certain values should be protected and kept sustainable independently of market rationality through the enabling of mediation between the market and the non-economic sphere on the basis of a system of participatory planning.47 The idea of ‘horizontal law-mediated legitimacy’, or theory of ‘conflicts-law constitutionalism’ or ‘deliberative supranationalism’ is based upon the premise that norm collisions within the EU are a logical and necessary result of the legal diversity in the EU Member States, and that EU law should not be focused on the elimination of diversity, but should, instead, strive to find ways to channel this diversity for deliberative solutions to conflict situations. It founds its validity as a law that is focused on the normative (deliberative) quality of the political processes that create it.48 From here, it then becomes possible to conceptualise the dichotomy between the market and non-economic, or the economic and noneconomic, as an entrance point for a deliberative space that allows the inclusion of broader than managerial, monetary or efficiency-based considerations. The doctor-patient relationship, the lawyer-client relationship, or the way animals are treated harbour important non-economic spheres that not do necessarily speak the language of the market. Thus, a public value choice is made every time a qualification is made that a non-economic objective restricts competition. Where a public-interest objective represents more than can be reasonably captured within efficiency- or welfare-maximising-based rationalities, the setting should change in favour of an institutional domain beyond efficiency logic or managerial forms of decision-making. Conflicts should be resolved upon the basis of a process of negotiated co-ordination that includes public stakeholders and is reflective of the different normative orders, and a political decision should eventually provide guidance as to which normative order should take precedence. As such, the identification of non-economic spaces could be structured as force fields or entrance points for forms of democratic deliberation procedure in order to incorporate the idea that certain values should be protected and kept sustainable independently

46

Similarly, Ebner, n 39 above. Harvey, Ramlogan and Randles, n 44 above. 48 C Joerges, ‘Conflicts-Law Constitutionalism: Ambitions and Problems’ (18 November 2012), ZenTra Working Paper in Transnational Studies No 10/2012; C Joerges, ‘Unity in diversity as Europe’s vocation and conflicts law as Europe’s constitutional form’, LEQS Working Paper No 28/2010. 47

Re-embedding EU Governance Fields: A Research Agenda 197 of efficiency logic. This type of governance rationality involves a re-institution of economic activity in ways that subject it to social control in specific situations, enabling mediation between economic and non-economic thinking upon the basis of a system of participatory planning.49 Now, in making evaluations about the extent to which particular social owners are affected by decisions and would need to be included in the process, a rationality will be required that is very similar to the one that is being critiqued in the first place. To some extent, a process of translation of the abstract, that is to say, a clear and clean way to measure the impact of decisions and a subsequent evaluation of them, is to be informed by principles of administration that allow the abstract to become somehow manageable. However, the main difference from the situation as it existed before is that this administrability, here, is used as a means of evaluating processes of negotiated co-ordination to deal with non-economic objectives, instead of as a means of making non-economic objectives themselves manageable within a set framework, thereby limiting the manifestation of these objectives. As such, in embedded processes of negotiated co-ordination, the non-economic objective obtains more space to breathe.

VI. CONCLUSION: THE FURTHERANCE OF AN ‘EMBEDDEDNESS’ RESEARCH AGENDA

There are ways in which the institutional set up of the EU seems to share Polanyi’s concerns for embedding markets in social foundations. As discussed above, the Treaties and the Court seem to call for a balanced approach and the integration of both market and non-economic concerns. In addition, the EU’s ability to make some social as well as some economic rules means that it can itself provide some degree of social protection and work to alleviate the disruptions caused by the market system. However, the governance rationales that are implemented within the EU appear either to externalise non-economic concerns or to re-define them according to a quantifiable market metric. Thereby, non-economic concerns are not provided an independent existence within governance mechanisms, but are instead made more manageable within the dominant policy-making structures of the EU. The nature of the EU governance rationale, in addition, is one that seeks to set the norms and standards for Member State ambitions, judgements and conduct. The result is a covert, but increasingly limited, scope for Member State derogations from the EU mode of thinking. Within the presence of the clear and clean administrative types of governance rationalities, most non-economic objectives have not been accompanied by clear, independent and self-sustainable rationalities of their own, and consequently get lost in translation of the existing 49 See, for example, the conceptualisation of F Adaman, P Devine and B Ozkaynak, ‘Reinstituting the Economic Process: (Re)embedding the Economy in Society and Nature’ in Harvey, Ramlogan and Randles (eds), n 44 above, 97.

198 Jotte Mulder types of governance rationality for the purpose of becoming administrable in a clear and transparent manner. Therefore, in view of the hidden normativity within EU governance, any alternative, challenging forms of governance should be concerned with opening up and re-embedding these processes. In order to reconcile the incompatibility between the values of the European Union that require a social dimension and the market objectives that are strongly established within the existing infrastructure, there is a need for a new perspective to ensure the presence of a social dimension in the European Union. I think a combination of the idea of embeddedness and conflicts-law constitutionalism could provide for such a challenging thought. The social dimension of the EU can be constructed around this idea of embeddedness. My hypothesis is that a horizontal mediation-through-law approach can ensure the embeddedness of the social dimension within the current EU economic law infrastructure. The proposed operationalisation of the non-economic sphere allows for a conceptualisation of the non-economic as an entrance point for forms of democratic deliberation in EU governance frameworks. Clearly, a lot of questions should be addressed in the furtherance of this research agenda: What solutions to a Polanyian interpretation of the EU market versus non-economic interplay are provided by a framework of legal principles that is based upon a deliberative supranational approach to EU economic law? To what extent does the current Treaty and case law allow for an approach along the lines of an ‘embedded horizontal law-mediated’ approach to EU economic law issues? To what extent do the existing concepts and case law favour such deliberative interactions and tie these interactions to substantive and enforceable rules? How can deliberate forms of governance avoid interest capture? These questions all merit further research.

8 Challenging Executive Dominance in European Democracy* DEIRDRE CURTIN AMSTERDAM

I. INTRODUCTION

W

HY DOES EXECUTIVE dominance matter in the context of the European Union? One reason is the nature and the reach and intensity of EU governance as it has evolved, in recent years in particular. European governance embraces the Treaty-based and other powers of the various key political actors (the European Council, the Commission, the Council, the European Parliament), in particular their role in law-making and execution. The European Council sets the agenda and directs the law-making institutions, the Commission proposes the content of far-reaching legislation, ensures its implementation and negotiates international agreements, and the Council is co-legislator, main decisionmaker and executive actor depending on the policy area. European governance also covers the (considerably greater) executive power of the European Union, which is exercised, to a considerable extent, by a host of more ‘hidden’, but nonetheless formal, actors towards the backstage of European governance (for example, Europeanlevel agencies and ‘comitology’ committees).1 Agencies that supervise banks, provide key certification of airplanes or medicines or food, and committees that decide which tracts of land to place on the environmentally-protected area list are adopting decisions that are seemingly ‘technical’ but may also be politically salient in a host of ways. All these decisions matter, also, ultimately, for the European citizen, even if they only sporadically or invisibly affect him or her. Another reason to be concerned about executive dominance is the manner in which democracy is hollowed out in the context of the EU. The phenomenon of strong executive power side-lining the institutions of representative or liberal democracy often consolidates and intensifies in times of emergency or crisis. The * This chapter is a revised and reduced version of the article by the same title in the (2014) 77 Modern Law Review 1–32. I am grateful to the publishers for permission to re-publish. 1 See, further, D Curtin, H Hofmann and J Mendes, ‘Constitutionalising EU Executive Rule-Making Procedures: A Research Agenda’ (2013) 19 European Law Journal 1.

204 Deirdre Curtin US security emergency had repercussions worldwide and also in Europe, and continues to be felt today. The fight against terrorism has spawned a variety of disputed legal acts and legislation in Europe with fundamental implications for the privacy and civil liberties of citizens and non-EU citizens. Unilateral control over information and decision-making at the expense of parliaments is a longstanding feature of more ‘inter-governmental’ arenas of decision-making, including the EU’s Common Foreign and Security Policy (CFSP).2 The Terrorist Finance Tracking Programme (TFTP) Agreement with the US, for example, allows the sharing, between the EU and the US, of the personal banking records of suspected terrorists.3 Europol, the EU policing organisation, oversees the implementation of the TFTP agreement by the US, but, as we now know in the aftermath of the Snowden revelations, the US simply continues to take the information that it wants directly anyway and operates in a largely law-free and parliament-free zone. In what became known as the ‘SWIFT’ affair, power was exercised through the de-politicisation of the TFTP as well as a de-politicised understanding of the European fight against terrorism finance in general.4 The most recent emergency or crisis, the economic crisis, resulted in an acceleration of decision-taking by supranational and national executives at European level, often with a very profound and wide-reaching national impact.5 The new role of the European Union in the adoption process of national budgets is obviously of direct consequence to the financial well-being of citizens across Europe.6 Plans for a single supervisory mechanism for banks7 and for a banking resolution

2 See, further, the special issue of the Journal of European Public Policy edited by H Sjursen, ‘The EU’s Common Foreign and Security Policy: The Quest for Democracy’ (2011) 18 Journal of European Public Policy 1069–77. 3 See Agreement between the European Union and the United States of America on the processing and transfer of Financial Messaging Data from the European Union to the United States for the purpose of the Terrorist Finance Tracking Program, [2010] OJ L195/5. 4 See M Wesseling, ‘The European Fight against Terrorism Financing: Professional Fields and New Governing Practices’, PhD thesis defended on 2 September 2013, University of Amsterdam. 5 See, in general, F Scharpf, ‘Monetary Union, Fiscal Crisis and the Pre-emption of Democracy’ (2011) MPIfG Discussion Paper 11/11; J Habermas, The Crisis of the European Union: A Response (Cambridge, Polity Press, 2012); J Weiler, ‘In the Face of Crisis: Input Legitimacy, Output Legitimacy, and the Political Messianism of European Integration’ (2012) 34 Journal of European Integration 825; M Maduro, ‘A New Governance for the European Union and the Euro: Democracy and Justice’ (2012) RSCAS Policy Papers, PP, 2012/11; K Nicolaïdis, ‘European Demoicracy and Its Crisis’ (2013) 51 Journal of Common Market Studies 351; B Crum, ‘Saving the Euro at the Cost of Democracy?’ (2013) 51 Journal of Common Market Studies 614. 6 See, for example, D Chalmers, ‘The European Redistributive State and a European Law of Struggle’ (2012) 18 European Law Journal 667. 7 See, Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions, [2013] OJ L287/63 (29 October 2013) and Regulation (EU) No 1022/2013 of the European Parliament and of the Council amending Regulation (EU) No 1093/2010 establishing a European Supervisory Authority (European Banking Authority) as regards the conferral of specific tasks on the European Central Bank pursuant to Council Regulation (EU) No 1024/2013, [2013] OJ L287/5 (29 October 2013).

Challenging Executive Dominance 205 authority8 touch on very sensitive areas of national policy. Executive dominance by EU institutions and by (some) national actors at European level has now reached into such sensitive policy fields as national budgets and macro-economic decisions (for example, with regard to Cyprus).9 The phenomenon of executive dominance in the EU context should not be seen as being particularly exceptional or sui generis in comparative terms. Rather, it can be understood as part of a much wider phenomenon of the migration of executive power towards types of decision-making that eschew forms of electoral accountability and popular democratic control in a context in which there is ‘less party on the ground’.10 Peter Mair’s work shows how the very rationale behind the EU, long before the economic crisis, conformed closely to more general thinking about the role and the drawbacks of popular democracy. He analysed the EU as a deliberate construction by national executives as ‘a protected sphere’ in which policy-making can evade the constraints imposed by representative democracy at national level.11 This democratic gap is fed by far-reaching secrecy arrangements and practices exercised in a concerted fashion by the various executive actors at different levels of governance, which results in the ‘blacking out’ of crucial information and documents.12 Unilateral executive control over whatever information the executive chooses to consider sensitive disconnects part of the essential machinery of representative democracy. The contemporary challenge is to overcome, in the words of Jürgen Habermas, ‘the reluctance of the political elites to contemplate replacing the established mode of pursuing the European project behind closed doors with the shirt-sleeve mode of a vociferous, argumentative conflict of opinions within the broad public’.13 This chapter is premised on an understanding of democracy that is representative in nature, but informed by deliberation and publicity.14 It leaves to one side for now the debate on the desirability and reality of more ‘participatory’

8 See, Proposal for a Regulation of the European Parliament and of the Council establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Bank Resolution Fund, and amending Regulation (EU) No 1093/2010 of the European Parliament and of the Council, COM(2013) 520 final, 10 July 2013. 9 See, also, J Fossum, ‘The Structure of EU Representation and the Crisis’ in S Kroger (ed), Political Representation in the European Union: Still Democratic in Times of Crisis (London, Routledge, 2014) 105. 10 R Katz and P Mair, How Parties Organize: Change and Adaptation in Party Organisation in Western Democracies (London, SAGE Publications, 1994). 11 See, further, P Mair, Ruling the Void: The Hollowing of Western Democracy (London, Verso, 2013), in particular, ch 4, 99. See, also, P Lindseth, Power and Legitimacy: Reconciling Europe and the NationState (Oxford, Oxford University Press, 2010). 12 See, further, D Curtin, ‘Overseeing Secrets in the EU: New Frontiers, Old Challenges’ (2014) 52 Journal of Common Market Studies, forthcoming. 13 See, Habermas, n 5 above, 6. 14 See, further, J Habermas, Between Facts and Norms—Contributions to a Discourse Theory of Law and Democracy (Cambridge MA, The MIT Press, 1996); J Mansbridge, ‘Rethinking Representation’ (2003) 97 American Political Science Review 515, and M Saward, The Representative Claim (Oxford, Oxford University Press, 2010) and Fossum, n 9 above.

206 Deirdre Curtin democracy in the EU context, important though this is as a complement.15 Beyond a de-construction exercise on the nature and location of EU executive power, I seek to focus on the challenges facing the democratic actors, (national) parliaments in particular.16 This should not be confused with a search for parliamentary democracy at European level as such. It is not. Rather, my overarching goal here is to make a contribution to the (incomplete) re-construction, contributing to a larger and continuing conversation about the necessarily pro-active and networked role of parliaments (both the national parliaments and the European Parliament) in order to provide democratically legitimate countervailing power to an executive power in Europe that migrates and expands in an often accelerated manner, in particular, over the course of the past decade or so.

II. EU EXECUTIVE POWER: EVER DEEPER AND WIDER?

II.1. Fragmented EU Government(s) The European Economic Community, as it was originally known, embodied a special form of international relations among the governments of the Member States, bounded by the rule of law. Executive power was never meant to reside at European level.17 The Commission was the original public administration with clearly-defined tasks and functions.18 Most prominently, the Commission exercised supranational executive power in imposing sanctions on companies for infringement of the Treaty competition rules, as well as having a policy leadership role. There are, in addition, well over 40 agencies at EU level which exercise an expert-driven or technocratic executive power, also operationally at times.19 This has included the creation of more quasi-autonomous ‘satellites’ (agencies

15 But see, for example, B Kohler-Koch, ‘Zivilgesellschaftliche Partizipation: Zugewinn an Demokratie oder Pluralisierung der Europaischen Lobby?’ in B Kohler-Koch and C Quittkat, Die Entzauberung Partizipativer Demokratie, Zur Rolle der Zivilgesellschaft bei der Demokratisierung von EU Governance (Frankfurt aM-New York, Campus Verlag, 2010), and J Mendes, Participation Rights in EU Rule-Making: A Rights-Based Approach (Oxford, Oxford University Press, 2011). 16 A von Bogdandy speaks more broadly of the ‘European lesson’ for ‘international democracy’: ‘The European Lesson for International Democracy: The Significance of Articles 9–12 EU Treaty for International Organizations’ (2012) 23 European Journal of International Law 315. 17 See, in general, D Curtin and M Egeberg, ‘Tradition and Innovation: Europe’s Accumulated Executive Order’ (2008) 31 Western European Politics 639, and D Curtin, Executive Power of the European Union: Law, Practices and the Living Constitution (Oxford, Oxford University Press, 2009). 18 See, further, A Wille, The Normalization of the European Commission. Politics and Bureaucracy in the EU Executive (Oxford, Oxford University Press, 2013). See, also, Curtin, n 17 above. 19 See, for example, E Chiti, ‘European Agencies’ Rulemaking: Powers, Procedures, and Assessment’ (2013) 19 European Law Journal 93; M Busuioc, ‘Rule-Making by the European Financial Supervisory Authorities: Walking a Tight Rope’ (2013) 19 European Law Journal 111; J Pollak and P Slominski, ‘Experimentalist but not Accountable Governance? The Role of Frontex in Managing the EU’s External Borders’ (2009) 32 Western European Politics 904; M Busuioc, D Curtin and M Groenleer, ‘Agency Growth Between Autonomy and Accountability: The European Police Office as a “Living Institution’’’ (2011) 18 Journal of European Public Policy 848.

Challenging Executive Dominance 207 and novel entities such as the European External Action Service) with their own distinct roles and functions, especially in the fields of foreign policy and economic policy. If anything, the ‘agencification’ process has deepened and intensified as a result of the response to the economic crisis in the EU—a phenomenon which is considered more specifically elsewhere.20 Executive power has long been the ‘residual’, hard-to-define and rarely attempted category, and, as exercised within the EU political system, it is clearly not unitary.21 It consists of supranational institutions and the governments and civil servants of the Member States (with the input of ‘experts’). The two most important institutions in this context are the European Council, ‘the alpha and omega of executive power in the EU’,22 and the hierarchically inferior Council. The Councils of the EU are, in fact, the institutions in the EU political system where the most powerful actors reside: the Member State governments.23 National executives are involved both at the level of ministers and prime ministers in the Council and the European Council, and also at the lower levels of institutions (working parties, committees) where civil servants operate in largely invisible supporting roles.24 Executive actors and administrative constellations transgress levels of governance and national borders in a manner that challenges the coherence of national governments in an unprecedented way. The result is an increasingly compound and accumulated ‘order’ of executive power in contemporary Europe.25 The chameleonic and variegated nature and function of the executive at European level, with the supranational intertwined with the national, has a habit of popping up often in an unpredictable and novel manner in evolving legal and institutional practices.26 It also evolves and changes—unpredictably—over time. Thus, executive power within the Council of Ministers has migrated away from it in recent years as a result of the shift of some sensitive and operational policy areas, either to the Commission in the case of police and judicial co-operation,27 or to the new High Representative for CFSP and the European External Action Service (EEAS) in terms, generally, of foreign affairs.28 Yet the Council still retains

20 See, further, H Hoffmann and A Morini, ‘Constitutional Aspects of the Pluralisation of the EU Executive through “Agencification”’ (2012) 36 European Law Review 419; M Everson, ‘A Technology of Expertise: EU Financial Services Agencies’, LEQS Paper No 49/2012, available at: www.lse.ac.uk/ europeanInstitute/LEQS/LEQSPaper49.pdf, last accessed 27 September 2013, and Busuioc, n 19 above. 21 N Barber, ‘Prelude to the Separation of Powers’ (2001) 60 Cambridge Law Journal 59. 22 Curtin, n 17 above, at 71. 23 F Hayes-Renshaw and H Wallace, The Council of Ministers (Basingstoke, Palgrave MacMillan, 2006). See, also, D Naurin, ‘Representation in the Councils of the EU’ in Kroger (ed), n 9 above. 24 K Juncos and A Pomorska, ‘Invisible and Unaccountable? National Representatives and Council Officials in EU Foreign Policy’ (2011) 18 Journal of European Public Policy 1096. 25 Curtin and Egeberg, n 17 above. 26 See, further, D Curtin and I Dekker, ‘The European Union from Maastricht to Lisbon: Institutional and Legal Unity out of the Shadow’ in P Craig and G de Búrca (eds), The Evolution of EU Law (Oxford, Oxford University Press, 2011). 27 See, in general, S Peers, EU Justice and Home Affairs Law (Oxford, Oxford University Press, 2011). 28 See Council Decision 2010/427/EU of 26 July 2010 establishing the organisation and functioning of the European External Action Service, [2010] OJ L201/30; S Vanhoonacker and N Reslow, ‘The

208 Deirdre Curtin executive powers of a more operational kind, for example, over areas such as the imposition of sanctions and the blacklisting of terrorists. One of the key characteristics of the practice of executive-type power by various institutions and actors, as it has emerged over the past few decades, is its fragmentation.29 To state the obvious, there is no single, comprehensive and unitary European executive institution or body that can, in any meaningful way be described as an EU government in the sense that we know it from the national domain. The fragmentation is both at the political level of executive power and also in terms of the administrative apparatus.30 At the same time, if one shift is reinforced by the EU’s reaction to the economic crisis in particular, it is the shift that has taken place from a more normative or rule-making type of governance to one clearly and explicitly exercising hands-on executive power even in such sensitive policy fields as national budgets and macro-economic decisions. Crisis management especially by the European Council has shifted from ‘economic governance’, in the sense of a rules-based normative system, to ‘economic government’ entailing discretionary executive decisions.31 All the ‘governance’ literature and analysis of recent years notwithstanding,32 ‘government’, in a non-unitary sense, is also part of what must be studied and understood in the context of the evolving political system of the EU. In this line, two main actors are the focus of more detailed attention: the European Council in the lead and the Council where the (national) executive power legislates and supranational executive power is also exercised.

II.2. The European Council Leads and Constructs (also Extra-murally) The ‘ever mighty’ European Council is authoritatively considered as the toplevel ‘leader’ of the European Union as such.33 It has seen its executive powers consolidated and even expanded in processes of incremental institutionalisation, first in layers of legal and institutional practices, and, more recently, in formal Treaty provisions after the Treaty of Lisbon. It had already been for a long time

European External Action Service: Living Forwards by Understanding Backwards’ (2010) 15 European Foreign Affairs Review 1, and, S Blockmans et al, EEAS 2.0: A Legal Commentary on Council Decision 2010/427/EU Establishing the Organisation and Functioning of the European External Action Service (CEPS, 2013). 29 See B Crum, ‘Executive Accountability in the European Union’ (2013) paper presented at the EUSA Thirteenth Biennial Conference, Baltimore MD, USA, 9–11 May 2013. 30 H Sjursen, ‘Not so Intergovernmental After all? On Democracy and Integration in European Foreign and Security Policy’ (2011) 18 Journal of European Public Policy 1078, 1082. 31 See P de Schoutheete and S Micosi, ‘On Political Union in Europe. The Changing Landscape of Decision-making and Political Accountability’ (2013) CEPS Essay No 4, 21 February 2013. 32 For an overview, see J Zeitlin and C Sabel (eds), Experimentalist Governance in the European Union: Towards a New Architecture (Oxford, Oxford University Press, 2010). 33 Editorial Comments, ‘An Ever Mighty European Council—Some Recent Institutional Developments’ (2009) 46 Common Market Law Review 1383.

Challenging Executive Dominance 209 the motor behind many important steps in the European integration process, particularly those at its outer edges, such as, initially, justice and home affairs, foreign and defence policy, and, most recently, the EU reactions to the economic and financial crisis.34 With the Treaty of Lisbon, it formally became an institution of the Union subject to its rules, rather than floating outside it, and its powers were explicitly stated to be non-legislative, defining the ‘general political directions and priorities’.35 The European Council has gradually developed into a very significant agenda-setter of the larger developments of the EU, in spite of the Commission’s monopoly of legislative initiative.36 An example of this can be found in the area of justice and home affairs where the European Council sets out five-year programmes (Tampere, Stockholm) with the Commission required to keep within these leading parameters. Empirical evidence points to a ‘progressive erosion’ of the Commission’s power of initiative, and the European Council’s detailed setting of the legislative agenda is pronounced.37 The European Council is, in addition, a type of default ‘crisis manager’ of the EU, handling successive events such as the constitutional crisis of 2005 and the economic crisis.38 Given that the EU has found itself in a, more or less, perpetual crisis in recent years, this key role accentuates a strong executive power. This does not mean, of course, that other actors at supranational level, such as the Commission and the European Central Bank (ECB), do not also receive significant powers in this context, but, generally, the European Council maintains an overall supervisory role and has also become an effective supervisor of the Council of Ministers.39 The European Council has a President, Herman Van Rompuy, with his own Cabinet and supported by the Council.40 This new President plays a fundamental role in enabling the European Council, in practice, to be the agenda-setter and effective co-ordinator and power-broker of the Union institutions and the

34 See, in general, Curtin, n 17 above, and L van Middelaar, The Passage to Europe: How a Continent Became a Union (New Haven CT-London, Yale University Press, 2013). 35 Article 15(1) TEU. 36 See, further, P Bocquillon and M Dobbels, ‘An Elephant on the 13th Floor of the Berlaymont? European Council and Commission Relations in Legislative Agenda Setting’ (2014) 21 Journal of European Public Policy 20–38. 37 See, further, P Ponzano, C Hermanin and D Corana, ‘The Power of Initiative of the European Commission: A Progressive Erosion’ (Paris, Notre Europe, Studies and Research no 89, 2012), available at: www.notre-europe.eu/media/commission_power_of_initiative_ne_feb2012.pdf?pdf=ok. See, also, EP Resolution of 12 June 2013 on strengthening European democracy in the future EMU (2013/2672, RSP), points 2–4: www.europarl.europa.eu/sides/getDoc.do?type=MOTION&reference=B7-20130271&language=EN. 38 See Naurin, n 23 above. 39 U Puetter, ‘Europe’s Deliberate Intergovernmentalism: The Role of the Council and the European Council in EU Economic Governance’ (2012) 19 Journal of European Public Policy 161, 162. 40 See, further, S Blavoukos, D Bourantonis and G Pagoulatos, ‘A President for the European Union: A New Actor in Town?’ (2007) 45 Journal of Common Market Studies 231; H de Waele and H Broeksteeg, ‘The Semi-permanent European Council Presidency: Some Reflections on the Law and Early Practice’ (2012) 49 Common Market Law Review 1039.

210 Deirdre Curtin Member States.41 These tasks belonged, in the past, to the Commission, but the Commission has seen its position progressively weakened over the years as, bitby-bit, the roles of legislative initiator and de facto supervisor of implementation have been assumed, to some extent in practice, by the European Council.42 The professionalisation of the support of the European Council has meant that it has been able to increase greatly the frequency with which it meets, over and above the four times a year prescribed in Article 15(3) TEU. Thus, in 2011, no less than six European Council summit meetings took place, including one ‘informal’ one.43 The Euro Summit has emerged as a potential rival to European Council summits since the end of 2011. These are composed of the eurozone heads of state or government, the President of the Euro Summit (now Van Rompuy) and the President of the Commission. These new meetings quickly became a decisive element in defining strategic orientations for the conduct of economic policies in the eurozone. In current practice, these Euro Summits are often held in the full European Council format,44 and the General Secretariat of the Council supports the Euro Summits.45 Yet the agenda of the Euro Summits is prepared by the Eurogroup meetings composed of the national finance ministers of the eurozone. The administrative support of the Eurogroup is provided by the national civil service holding the Presidency. The centrality and sheer leading power of both types of summit meetings are now very visible as a result of the debt-crisis measures in particular, and this contributes to their empowerment. In addition, the political salience of what is being discussed has led to repercussions at national level, especially in debtor states, in the shape of governmental crises and political downfalls.46 The European Council calls the shots in general terms and largely tells the Commission (and the Council) what to do if formal legislation needs to be adopted. In the early days of the debt crisis, for example, it seemed as if the Commission would emerge as the institutional winner with it exercising its normal role of initiation on the ‘European

41 See the special issue of Western European Politics edited by D Naurin and A Rasmussen, ‘Linking Inter- and Intra-institutional Change in the European Union’ (2011) 36 Western European Politics. 42 See, also, M Dawson and F de Witte, ‘Constitutional Balance in the EU after the Euro-crisis’ (2013) 76 Modern Law Review 817, 830. 43 H Van Rompuy, The European Council in 2011 (2012) and Van Rompuy, The European Council in 2012 (2013). The Euro Summits were formalised at the October 2011 meeting. Since that date, the European Council has met 11 times (last checked on 21 October 2013). 44 See, for example, www.eurozone.europa.eu/summits. 45 See Article 8(1) of the Rules of Procedure of the Euro Summits, 14 March 2013, available at: eurozone.europa.eu/media/401510/20130314-eurosummits-rules-of-procedures.pdf. 46 W Wessels et al, ‘Democratic Control in the Member States of the European Council and the Euro Zone Summits’ (2013) study requested by the Constitutional Affairs Committee of the European Parliament, DG for Internal Policies study, Annex II: In-depth reports on 12 Member States, the reports on Greece and Italy regarding the resignation of Greek PM Papandreou over the bail-out packages in 2011 and the fall of the Berlusconi III government (2008–11) over Berlusconi’s increased isolation at European Council summits.

Challenging Executive Dominance 211 Semester’.47 This ‘soft’ new procedure seeks to co-ordinate economic and budgetary policies between the EU and Member States of the eurozone.48 Based upon an annual growth survey, the Commission systematically reviews national budget plans and publishes detailed budget recommendations for Member States, potentially touching on sensitive issues such as wage-setting, pension age and social spending. Moreover, the introduction of ‘reverse qualified majority voting’ in the context of the implementation of the European Semester strengthened the position of the Commission vis-à-vis the Council. ‘Hard’ new rules allowed for easier sanctions against Member States with excessive deficits.49 A new monitoring mechanism was introduced and enforceability of the pact was improved in order to avoid the lenient implementation of the past. The Commission’s countryspecific reports show that there it enjoys, in practice, (quite) some discretion in the implementation of hard and fast rules.50 Later, however, the Commission’s role did seem to be weakening. The European Council (pushed, arguably, by certain Member States within it) took the lead and called on the European Commission to present a legislative proposal on panEuropean supervision of banks (Single Supervisory Mechanism, SSM).51 The real ‘winner’ in terms of tasks at supranational level is the ECB, which is given a leading and unprecedented role in the day-to-day management of financial markets. Once the SSM is in place, additional steps towards a fully-fledged banking union will include a single resolution mechanism for failing banks and a common 47 Regulation (EU) No 1175/2011 of the European Parliament and of the Council of 16 November 2011 amending Council Regulation (EC) No 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies, [2011] OJ L306/12. 48 See, further, K Armstrong, ‘The New Governance of EU Fiscal Discipline’ (2014) 20 European Law Journal, forthcoming. 49 The policy package included a directive and five regulations (the so called ‘six-pack’) that entered into force in December 2011. Regulation (EU) No 1173/2011 of the European Parliament and of the Council of 16 November 2011 on the effective enforcement of budgetary surveillance in the euro area, [2011] OJ L306/1; Regulation (EU) No 1174/2011 of the European Parliament and of the Council of 16 November 2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area, [2011] OJ L306/8; Regulation (EU) No 1175/2011, n 47 above; Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances, [2011] OJ L306/25; Council Regulation (EU) No 1177/2011 of 8 November 2011 amending Regulation (EC) No 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure, [2011] OJ L306/33; Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the Member States, [2011] OJ L306/41. 50 See the Commission’s country-specific recommendations 2013, adopted on 29 May 2013. See Commission press release, ‘Moving Europe Beyond the Crisis: Country-specific Recommendations 2013’, available at: europa.eu/rapid/press-release_IP-13-463_en.htm, last accessed 23 September 2013. For the separate country-specific recommendations, see ec.europa.eu/europe2020/making-it-happen/ country-specific-recommendations, last accessed 23 September 2013. 51 On 15 October 2013, the Council adopted regulations creating a single supervisory mechanism for the oversight of banks and other credit institutions, thus establishing one of the main elements of Europe’s banking union. The single supervisory mechanism (SSM) will be composed of the European Central Bank (ECB) and the supervisory authorities of the Member States. The ECB will have direct oversight of eurozone banks. See, Council Regulation (EU) No 1024/2013 and Regulation (EU) No 1022/2013, n 7 above.

212 Deirdre Curtin deposit guarantee scheme.52 The visible and new non-monetary powers of the ECB raise novel issues of delegation of powers to non-majoritarian institutions in the supranational context and, in particular, the legitimacy of epistocracy.53 At the same time, the debt crisis has also amplified pre-existing tensions between those states that want closer integration, notably to stabilise the eurozone, and those that do not want to become euro members, especially the UK, but also Denmark. The Fiscal Compact is an international agreement concluded by 25 Member States outside the context of the EU institutional framework. Most of what it contains in terms of economic governance at European level could have been adopted through EU legislation or by means of a modification of Protocol No 12 on the excessive deficit procedure. However, since the governments of the UK and the Czech Republic abstained from signing an amendment to the existing Treaties, the remaining Member States decided to proceed with an intergovernmental treaty outside the existing Treaties but still using the Union institutions of all 28 Member States, with some legal review provided by the CJEU.54 The European Commission is confined to reporting on whether a contracting state has breached its obligation to implement the balanced budget rule and/or to adopt a correction mechanism, with no power to refer compliance to the CJEU.55 The path of intergovernmental treaties by eurozone members by now further includes the European Stability Mechanism (ESM) and the Euro-plus Pact (including a larger number of countries). The pre-cursor of the ESM, the European Financial Stability Facility (the EFSF) was adopted outside the EU legal framework. In the margins of a meeting of the Ministers of Economy or Finance, the ECOFIN Council, the members of the Council from the (then) 16 euro area countries ‘switched hats’ and transformed themselves into the representatives of their states at an intergovernmental meeting.56 In this capacity, they adopted an executive decision by which they committed themselves to constitute the EFSF (outside the EU legal framework) which became immediately operational upon

52 See Communication from the Commission to the European Parliament and to the Council, ‘A Roadmap Towards a Banking Union’ 2012(COM) 510 final. 53 See more generally on the problem of dominant epistocracy as applied to security governance, EO Eriksen, ‘Governance Between Expertise and Democracy: The Case of European Security’ (2011) 18 Journal of European Public Policy 1169–89. 54 See Treaty on Stability, Coordination and Governance in the Economic and Monetary Union. For an extensive analysis, see P Craig, ‘The Stability, Coordination and Governance Treaty: Principles, Politics and Pragmatism’ (2012) 37 European Law Review 231. 55 On the issue whether the EU institutions can be ‘borrowed’ by the Member States when implementing an international agreement concluded outside the EU legal framework, see, contra, S Peers, ‘Towards a New Form of EU Law? The Use of EU Institutions Outside the EU Legal Framework’ (2013) 9 European Constitutional Law Review 37. See, also, P Craig, ‘Pringle and the Use of EU Institutions Outside the EU Legal Framework: Foundations, Procedure and Substance’ (2013) 9 European Constitutional Law Review 263. 56 See for details, B de Witte, ‘Using International Law in the Euro Crisis: Causes and Consequences’ (2013) Arena working paper no 4. Available at: www.sv.uio.no/arena/english/research/publications/ arena-publications/workingpapers/working-papers2013/wp4-13.pdf, last accessed 23 September 2013.

Challenging Executive Dominance 213 signature by the representatives of the governments without the need to go through ratification by their national parliaments. They established the EFSF as a private company established under Luxembourg law of which the 17 euro states are the only shareholders. By using ‘a curious mixture of public international law and private law, a large part of the Council parted company with the Commission and the European Parliament’.57 At a later stage, the ESM, the permanent successor of the temporary EFSF, was created by means of a fully fledged treaty between the 17 euro Member States, even though, arguably, a EU legal instrument could have been used.58 The ESM was constituted as a separate international organisation established under international law rather than as an EU agency. Its legality has been found by the CJEU to be unobjectionable.59 It appears from the above that it is not just that the European Council—as a formal EU institution—is taking the really leading decisions, but a smaller group within the European Council may change hats and convert itself into another entity with fewer participants if it needs to because of a looming veto or otherwise and adopts decisions outside the EU altogether. It does this largely en marge of a (European) Council meeting. As far as the Council is concerned, the non-euro area Member States cannot vote on euro-area issues anyway. The smaller group votes, for example, by the ESM Board of Governors, are done on the margins of the Eurogroup, not on the margins of the subsequent ECOFIN Council meetings. A variety of clever legal constructions are thus used that are tailor-made to each situation—the view being seemingly taken that there is no alternative. The ‘extramural’ decisions are, in any event, binding under international law, and are subject to some of the constraints of the EU system. If this is the ‘fire brigade’ of a more politically integrated future EU, it is, arguably, one that is, like Schengen when it functioned outside of the EU, even more dominated by executives than was the case with the traditional Community method.

II.3. The Council of the EU Legislates, Negotiates and Executes Below the European Council in the (national) executive hierarchy of the EU is the Council—the body originally conceived as the principal decision-making body for European integration. The Council of Ministers, as it was initially known, was designed as the political decision-making centre among the institutions of 57

Ibid, 7. See, for example, C Koedooder, ‘The Pringle Judgment: Economic and/or Monetary Union?’ (2013) 37 Fordham International Law Journal 111. 59 Case C-370/12 Pringle v Government of Ireland, Ireland and the Attorney General [2012] not yet reported. For a detailed analysis, see B de Witte and T Beukers, ‘The European Court of Justice Approves the Creation of the European Stability Mechanism Outside the EU Legal Order: Pringle’ (2013) 50 Common Market Law Review 805, and V Borger, ‘The ESM and the European Court’s Predicament in Pringle’ (2012) 14 (Special Issue) German Law Journal 113. 58

214 Deirdre Curtin the Union and its predecessors.60 It is inter-governmental both in conception and composition and has been described as ‘a complex and chameleon-like beast’.61 The Council continues to be perceived as mainly a political organ with (both formal and substantive) legislative power (either autonomous or shared with the European Parliament depending on the policy area). National ministers are predominantly members of the executive power at national level and legislators at European level. The residual executive power of the (European) Council would then be vested in the ministers’ role of national executives. With the application of qualified-majority voting over a wide range of areas, individual Member States can be outvoted in the Council even if consensus remains the main working method in practice.62 After Lisbon, the Council’s core role as a legislative body became even more prominent.63 This legislative power is shared with the European Parliament. Its composition of national ministers and (at lower levels) national civil servants means that, even in a context in which the outcome is legislation with direct effect and supremacy, its self-perception is that it remains a forum for intergovernmental negotiations among the representatives of the executive power of the Member States.64 The modus operandi of the Council is still today grounded in conventions of diplomacy, which hark back to a different era when the precursor of the EU, the EEC, could be considered as embodying a special form of international relations among the governments of the Member States.65 Legislation was originally adopted in the context of the EU (and its predecessors) by a process of diplomatic negotiations among the Member States in the Council. Diplomats typically embrace secrecy as part of their working method.66 The Council today remains ambiguous about its ‘legislative’ preparation, and, in particular, the preparation of its own collective position, seeking always to ensure that the individual Member States can ‘negotiate’ freely in a ‘blacked out’ space.67

60 See W Wessels, ‘The EC Council: The Community’s Decision-Making Centre’ in R Keohane and S Hoffmann (eds), The New European Community: Decision-Making and Institutional Change (Boulder CO, Westview Press, 1991) 133. See, in general terms, Hayes-Renshaw and Wallace, n 23 above. 61 H Wallace, ‘The Council: An Institutional Chameleon?’ (2002) 15 Governance 325, 342. 62 L van Middelaar, n 34 above. 63 See, in general, R Thomson, Resolving Controversy in the European Union: Inputs, Processes and Outputs in Legislative Decision-Making before and after Enlargement (Cambridge, Cambridge University Press, 2011). 64 Naurin, n 23 above. 65 See D Curtin, ‘Judging EU Secrecy’ (2012) Cahiers de Droit Européen 459. 66 A Colson, ‘Secret et transparence à l’égard de tiers en négociation. Contribution à une histoire de la négociation international’ (PhD thesis, Paris-Descartes and University of Kent) 47–99. See, also, Colson, ‘The Ambassador Between Light and Shade: The Emergence of Secrecy as the Norm for International Negotiation’ (2008) 13 International Negotiation 179. 67 See, further, Case C-280/11P Council v Access Info Europe, judgment of 17 October 2013, nyr.

Challenging Executive Dominance 215 At the same time, the Council is clearly more than an arena for intergovernmental negotiations. It is an institution with an institutional memory and institutional preferences. Institutional memory directly results from the centralisation of the administrative functions of an international organisation. This includes keeping the records, minutes and archives.68 As a result, the Secretariat also becomes a source of co-ordination, coherence and continuity in the Council’s work.69 The Council General Secretariat developed into its institutional memory and it also functions as a bridge between various chairs. Its officials support not only the Council in all its formations, but also its preparatory bodies such as the Committee of Permanent Representatives (COREPER) and the various working groups. In addition, the hierarchically inferior Council is now ‘joined’ and linked in concrete terms to the European Council by the Council General Secretariat. Another clear link is the Legal Service of the Council, which, given that the European Council does not have its own, advises and represents the European Council (for example, in the Pringle case when the European Council intervened for the first time).70 Due to the rotating nature of the Council Presidency, national governments are given the opportunity to influence the political priorities of the EU, and the visibility of the EU is increased due to the involvement of national politicians. The advent and practice of the European Council has, however, clearly affected the ability of a Council Presidency, which changes hands every six months, to perform a concerted agenda-setting role that is long-term oriented and aims to find solutions beyond the common denominator. The European Council has, in effect, provided such political leadership in recent years, and not the Council Presidency, even with the advent of more supranational team Presidencies in 2007.71 On the other hand, useful management and organisation tasks are efficiently performed by the rotating Council Presidency. In addition, the Council Presidency seeks to find solutions aimed at the common denominator and facilitates wider group processes (which increasingly include negotiating with the European Parliament in co-decision).72

68 See H Dijkstra, Policy-Making in EU Security and Defence: An Institutional Perspective (Basingstoke, Palgrave Macmillan, 2013) 37. 69 See, also, T Christiansen and S Vanhoonacker, ‘At a Critical Juncture? Change and Continuity in the Institutional Development of the Council Secretariat’ (2008) 31 West European Politics 751. 70 See de Witte and Beukers, n 59 above, 1. 71 The principle of Team Presidencies in the Council came into force on 1 January 2007. See Council Decision (2006/683/EC, Euratom) of 15 September 2006 adopting the Council’s Rules of Procedure, [2006] OJ L285/47. 72 See, further, A Schout and L van Schaik, ‘Reforming the EU Presidency?’ (2008) 6 Journal of Comparative Government and European Policy 35, and A Cianciara, ‘Rotating Council Presidency within the Post-Lisbon Institutional Dynamics: Politically Irrelevant?’ (2012) 15 Yearbook of Polish European Studies 27.

216 Deirdre Curtin The introduction of ‘political union’ in the Treaty of Maastricht 20 years ago changed the nature of the Council in a significant way and meant that it had to become ‘operational’ in an executive manner that had not been originally envisaged. In many ways, its executive-type tasks were parallel to those of the Commission, albeit in the newer, sensitive policy areas of foreign policy, and justice and home affairs.73 The structures of the Council itself and, in particular, the Council General Secretariat acquired a powerful role in these years, especially with regard to areas relating to internal security and external security and foreign affairs.74 In this field, the Secretariat played an important and influential role in the preparation and implementation of civilian and military missions75 and, during these missions, it fulfilled certain implementing tasks.76 Some things changed further when the Treaty of Lisbon entered into force at the end of 2009.77 The EEAS was formed from the merger of the external relations services of the European Commission with those of the Council Secretariat with the addition of some seconded national diplomats.78 This is now the most visible expression of Europe’s foreign affairs administration and a significant component of EU executive foreign affairs power.79 From the viewpoint of the Treaty, the Council takes CFSP decisions. It continues to exercise an important role, for example, when it comes to sanctions for the financing of terrorism where a firm legal basis is required.80 The steady reinforcement over the years of other ‘backstage’ actors, such as the COREPER, provide the backbone that enables the Council to function as an institution, aided and abetted by often very powerful, (quasi-) autonomous committees, such as the Political and Security Committee (PSC).81 Composed of national ambassadors permanently based in Brussels, it has been described as the ‘linchpin’ of the system of foreign and security policy82 and as the ‘executive board’ of the CFSP.83 Also of considerable importance are the various working

73

See, further, Curtin and Dekker, n 26 above. Ibid, and Christiansen and Vanhoonacker, n 69 above. 75 See, further, in detail, Dijkstra, n 68 above. 76 See A Missiroli, ‘Euros for ESDP: Financing EU Operations’ (2003) Occasional Paper 45, Paris, EU Institute for Security Studies. 77 See, in general, P Craig, The Lisbon Treaty, Law, Politics and Treaty Reform (Oxford, Oxford University Press, 2010). 78 Ibid. 79 D Thym, ‘The Intergovernmental Constitution of the EU’s Foreign, Security & Defence Executive’ (2011) 7 European Constitutional Law Review 453. 80 See, generally, C Eckes, EU Counter-Terrorist Policies and Fundamental Rights: The Case of Individual Sanctions (Oxford, Oxford University Press, 2009). See also Joined Cases C-584/10P, C-593/10P and C-595/10P Commission, Council and others v Kadi, [2013] not yet reported. 81 A Juncos and C Reynolds, ‘The Political and Security Committee: Governing in the Shadow’ (2007) 12 European Foreign Affairs Review 127. 82 S Duke, ‘The Linchpin COPS: Assessing the Workings and Institutional Relations of the Political and Security Committee’ (2004) European Institute of Public Administration Working Paper 05/5, Maastricht: (EIPA). 83 Thym, n 79 above. 74

Challenging Executive Dominance 217 groups and working parties.84 Research suggests that, over time, these institutions have gained considerable autonomy from the governments which they are meant to serve.85 The national bureaucratic input into Council decision-making starts at the important Working Party level.86 Here, too, research suggests that national representatives become socialised over time into group norms that may establish a ‘we-feeling’ among the policy-makers. This indicates more generally moves de facto beyond strict ‘inter-governmentalism’.87

III. EVOLVING WORKING PRACTICES OF EU EXECUTIVE ACTORS

III.1. Informational Asymmetry and the Diplomatic Paradigm The democratic deficit of the EU has been discussed for decades.88 The EP, which will soon be elected by the citizens of the 28 EU Member States, has become a key player in the EU decision-making system. Yet European elections are seen as ‘second-order’ elections;89 they are popularity tests for the national incumbent parties rather than opportunities for real public deliberation on European issues.90 Much of the debate in the run up to the EP elections in 2014 focuses on strengthening the accountability relationship between the Commission and the EP, in particular, by having a directly elected Commission President at some point in the future.91 The evolving relationship between the directly elected EP and the Commission as an important part of the supranational executive (if not the ‘government’ in any national sense)92 is, of course, important, but it will not solve the predominant source of executive dominance in the EU: the lack of democratic accountability of national prime ministers in the European Council and under 84

Juncos and Pomorska, n 24 above. S Vanhoonacker, H Dijsktra and H Maurer, ‘Understanding the Role of Bureaucracy in the European Security and Defence Policy: the State of the Art’ in Vanhoonacker, Dijsktra and Maurer (eds), ‘Understanding the Role of Bureaucracy in the European Security and Defence Policy’ (2010) European integration online Papers (EIoP), Special Issue 1, available at: eiop.or.at/eiop/texte/2010-004a. htm, last accessed 23 September 2013. 86 See Naurin, n 23 above. 87 Juncos and Pomorska, n 24 above, 1098. 88 See, for example, P Pescatore, ‘Les exigences de la démocratie et la legitimité de la Communauté européenne’ (1974) 10 Cahiers de Droit Européen 499; JHH Weiler, UR Haltern and F Mayer, ‘European Democracy and its Critique’ (1995) 18 West European Politics 4; G Majone, ‘Europe’s “Democratic Deficit”: The Question of Standards’ (1998) 4 European Law Journal 5. 89 See, however, Commission Recommendation on enhancing the democratic and efficient conduct of the elections to the European Parliament, C(2013)1303 final, Brussels, 12 March 2012. 90 See Y Papadopoulos, Democracy in Crisis? Politics, Governance and Policy (London, Palgrave Macmillan, 2013) 103. 91 See, for example, A Føllesdal and S Hix, ‘Why There is a Democratic Deficit in the EU: A Response to Majone and Moravcsik’ (2006) 44 Journal of Common Market Studies 533, 554. See, further, M Maduro, ‘A New Governance for the European Union and the Euro: Democracy and Justice’ (2012) RSCAS Policy Papers 11, 19. 92 See the discussion by P Dann, ‘The Political Institutions’ in A von Bogdandy and J Bast (eds), Principles of European Constitutional Law (Oxford, Hart Publishing, 2010) 253. 85

218 Deirdre Curtin that, in terms of power hierarchies, the accountability of national ministers and national civil servants in the Council of Ministers. Yet, only five years ago, the Treaty of Lisbon was hailed as a significant milestone in reducing the deficit in democratic accountability at European level, as the European Parliament became, virtually across the board, a co-legislator.93 This was supposed to be a huge injection for what is known as the directly democratic route of legitimation:94 through direct elections, the EP would ‘represent’ the peoples of Europe in the legislative process.95 This Treaty, in addition, gave the national parliaments a collective role on legislative subsidiarity (Protocol 2, TEU) and stressed the important role of national parliaments in indirectly legitimating the activities of their (prime-) ministers in the Councils of the EU (Article 10 TEU). The indirect democratic link to the Councils goes via national elections, national parliamentary control over national government, and prime ministerial instruction-giving.96 This is what Article 10 of the Treaty of Lisbon explicitly refers to— the link to the electoral process at national level as justification for what happens at European level.97 On this reasoning, the representation of Member States in the Council and in the European Council is a vital source of democratic legitimacy. The state, or rather, the ‘democratically organised peoples’ of the Member States, emerges or emerge as a subject of democracy.98 Yet this formal presentation is at odds with the empirical realities that are highlighted below. There are real challenges to establishing the links of accountability—on which Article 10(2) TEU relies—of the democratically-elected or democratically-accountable Heads of State and Government for their actions in the EU institutions that they compose. The fact remains that the Council (co-)adopts legislative acts that are directly 93 See, for example, (then EP President) J Buzek, ‘Welcoming the Lisbon Treaty’, Spiegel Online, 30 November 2009: ‘The treaty represents an era of increased democracy in the European Union and gives a huge boost to the powers of the European Parliament’, available at: www.spiegel.de/international/europe/welcoming-the-lisbon-treaty-a-change-for-the-better-in-europe-a-664338.html, last accessed 25 June 2013. For a more nuanced view, see J Piris, The Lisbon Treaty: A Legal and Political Analysis (Cambridge, Cambridge University Press, 2010) and S Sieberson, ‘The Treaty of Lisbon and Its Impact on the European Union’s Democratic Deficit’ (2007) Working Paper Series. Available at: ssrn. com/abstract=1628869 or dx.doi.org/10.2139/ssrn.1628869, last accessed 27 September 2013. 94 The lack of electoral equality featured prominently in the judgment of the German Constitutional Court on the Lisbon Treaty: BVerfG, Lissabon-Urteil, 2 BvE 2/08 of 30 June 2009. In the Court’s view, ‘the European Parliament is not a representative body of a sovereign European people … [It] is designed as a representation of peoples in the respective national contingents of Members, not as a representation of Union citizens in unity without differentiation, according to the principle of electoral equality’ (para 280). See, contra, C Schoenberger, ‘Lisbon in Karslruhe: Maastricht’s Epigones at Sea’ (2009) 10 German Law Journal 1201, 1211–16, and D Halberstam and C Möllers, ‘The German Constitutional Court Says ‘Ja zu Deutschland!’ (2009) 10 German Law Journal 1247. 95 It is beyond the scope of this chapter to discuss the problems of ‘representation’ of the EP in detail, but see P Mair and J Thomassen (eds), Political Representation and European Union Governance (London-New York, Routledge, 2011). 96 Ibid, and special issue of Western European Politics, n 41 above. 97 See, further, D Curtin and J Mendes, ‘Transparence et participation: des principes démocratiques pour l’administration de l’Union Européenne’ (2011) Revue Française d’Administration Publique 101. 98 See A von Bogdandy, ‘Founding Principles’ in A von Bogdandy and J Bast (eds), Principles of European Constitutional Law (Oxford, Hart Publishing, 2010) 49.

Challenging Executive Dominance 219 applicable in the national legal orders or need to be implemented by national authorities, and both the Council and the European Council adopt executive decisions with real effect on both the Member States and their citizens. The fact that national governments are key actors at European level means that, to a large extent, national parliaments are structurally outsiders; some even speak of them as ‘passive bystanders’.99 National parliaments have, on the whole, been slow to re-assert control of decisions that are taken beyond the confines of the nation state, and whatever access they have to European politics is mostly filtered through their own executives.100 It is not only a question of not being structurally consulted—it also (and crucially) has to do with a lack of timely—or indeed often any—information in advance of decision-making. In this context, it is hard for national parliaments to compensate for the information advantage that the executives enjoy because of their direct engagement in European politics. As Robert Putnam famously pointed out many years ago, executives may well want to exploit their innate information advantage by misrepresenting—at national level—the negotiation situation which they face at international level. This is the traditional paradigm of diplomacy in international relations.101 Control over secrecy and openness gives power: it influences what others know and thus what they choose to do.102 The culture and rules on secrecy are extensive and are enforced by the Council, in particular, in a manner that affects very directly access to information by national parliaments.103 If executive officials are given largely unchecked power to conceal both from the public and from parliament(s) whatever information they consider to be sensitive, then part of the essential machinery of democracy is inevitably disconnected. It seems that both the publicity and the deliberative quality of parliamentary debate are under challenge for both the EP and the national parliaments. The reason lies, in large part, in the working practices of both the European Council and the Council. It is also because of the rules agreed internally at EU level as to the non-public nature of many of the crucial documents under discussion. Secret, behind-closed-doors meetings and discussions and no prior public debate makes effective parliamentary input difficult at any level. At the same time, it seems that the parliaments—in particular, the EP—become sucked into the executive mode of diplomatic and secret negotiations and discussions. This relates both to (early) legislative processes and to non-legislative processes, in particular, before

99 B Crum and J Fossum, Practices of Inter-Parliamentary Coordination in International Politics: The European Union and Beyond (Colchester, ECPR Press, 2013). 100 See A Cygan, ‘The Parliamentarisation of EU Decision-Making? The Impact of the Treaty of Lisbon on National Parliaments’ (2011) 36 European Law Review 478. 101 R Putnam, ‘Diplomacy and Domestic Politics: The Logic of Two-Level Games’ (1988) 42 International Organization 427. 102 G Simmel, ‘The Sociology of Secrecy and of Secret Societies’ (1906) 11 American Journal of Sociology 441, 482. 103 See statement by Dutch foreign minister Timmermans to the Dutch Parliament regarding European Council information, Dutch Second Chamber documents 22 112, no 1581, 12 March 2013.

220 Deirdre Curtin the European Council. How can national parliaments be even marginally in the loop during ongoing legislative and non-legislative processes if they do not know specifically what national civil servants and (prime-) ministers are putting into the process? I now explore two distinct challenges in this regard. First, in the context of legislative preparation, the question of how visible the Member State input is into the ‘low-level’ working parties? Secondly, in the context of ‘high-level’ European Council decision-making, the question of what role the emerging informal and ‘deliberative’ working method plays?

III.2. Challenging Low-level Executive Secrecy The working method or process of the Council internally, in terms of its preparation of legislation, is that Member States first input their views in a rolling ‘negotiation’ process by national civil servants in Council Working Parties of which there are now some 158 members.104 In these working party meetings, Commission proposals for legislation are discussed, often also including the latest point(s) of view from the EP, and re-formulations are sought that are acceptable both to the Member States and to the Commission. Social science research shows, however, that many national civil servants who participate regularly in committees at European level become ‘socialised’ into this level, and develop a modus operandi that is more akin to deliberation than negotiation in the national interest, in line with a strictly circumscribed mandate from the political level.105 The Council has consistently argued that identification of the Member State delegations that make various legislative proposals at working party level (but also at Council level) would seriously undermine the institution’s decision-making process. The Council basically argues that to allow access to the legislative kitchen at this early stage could destroy the ability to ‘pre-cook’ decisions at Council level so that it can be warmed up later. The argument is that the denial of the ability of the Council to do preparatory work of this kind without observers would impede significantly the Council’s decision-making process on legislation. The Council perceives itself as engaging in a type of diplomatic ‘negotiations’ that have to be kept secret in order not to damage the chance of reaching a consensus. The actual input of Member States, in this view, remains hidden behind notions of diplomacy applied in the context of a legislative procedure, and this influences the usual way of doing business within the Council. National parliaments may, of course, individually make their own arrangements on an ongoing basis with 104 General Secretariat of the Council, ‘List of Council Preparatory Bodies’ (2013) Document No 5581/13. 105 GJ Brandsma and J Blom-Hansen, ‘The EU Comitology System: Intergovernmental Bargaining and Deliberative Supranationalism?’ (2009) 47 Journal of Common Market Studies 719, and GJ Brandsma, ‘Backstage Europe: Comitology, Accountability and Democracy in the European Union’ (2010) PhD thesis, Utrecht University. But see, contra, FM Häge (2008), ‘Decision-Making in the Council of the European Union: The Role of Committees’, PhD thesis, University of Leiden.

Challenging Executive Dominance 221 their own governments, but, if the Council prepares minutes of working party meetings with the governments’ names blacked out, then it is not evident that many national parliaments will, in practice, receive more information from their governments at a later stage (although some do, for example, Sweden). The full minutes will not necessarily be classified but will nonetheless be kept secret or ‘limited’—for internal use only—and are not intended to be shared ‘publicly’, even with other public actors such as national parliaments.106 The same kind of diplomatic thinking now permeates, in a very substantial fashion, the early stages of co-decision with the European Parliament.107 The European Parliament, too, has been sucked into a system of law-making at European level in which the executive negotiation of legislation behind closed doors in early stage legislative processes has become the norm. Here, too, it may only be through litigation one day that the political actors will be forced to change those of their institutional working practices that undermine fundamental principles of democracy and publicity at European level. Advocate General Cruz Villalón has opined that the entire early legislative procedure before the Council involving the input by the various Member States must be compared to a national legislative procedure. Owing to the characteristics of law-making at EU level, the requisite level of democratic legitimacy can only be bestowed by ‘a procedure based on the principles that have traditionally governed the workings of national legislatures that are representative in nature’.108 On this reasoning, democratic accountability requires that the identity of those participating in the debate, and, in particular, the terms on which they are doing so, be made known.109 Member States taking part in an EU legislative procedure ‘as members of an institution are more like the common perception of a national legislature than they are like a sovereign body playing a role in relations governed by international law’.110 This really represents a paradigm shift in thinking about the Council’s role in the legislative procedure and means that, if followed by the Court, the Council must be fully open, as ‘openness is an inherent point of the working method of a legislature’.111 It follows that, in the opinion of this Advocate General, ‘there is no such thing as an “internal opinion”’ in the context of a legislative procedure, even in its very early stages.112 This reasoning fleshes out the notion of democratic accountability at supranational level. The Court of Justice dismissed the appeal by the Council against the judgment in favour of

106

See, further Curtin, n 12 above. See, further, A Stie, Democratic Decision-making in the EU: Technocracy in Disguise? (London, Routledge, 2012). See, also, A Héritier and C Reh, ‘Codecision and its Discontents: Intra-organisational Politics and Institutional Reform in the European Parliament’ (2012) 35 West European Politics 1134. 108 AG opinion of 16 May 2013, n 67 above, para. 43. 109 Ibid, para 71. 110 Ibid, para 69. 111 Ibid, para 51. 112 Ibid. 107

222 Deirdre Curtin the applicant, Access Info Europe.113 In my opinion, it implies that the Council’s own rules on keeping secret any documents in the legislative procedure as such, independently of whether or not these papers reveal the negotiating position of individual Member States, are arguably no longer valid. This definitive judgment upholding openness in the legislative procedure should prod the Council to change its own internal rules to take account of its function as a legislature and its democratic legitimacy in this context. In the context of international relations negotiations, the Council maintains similar levels of secrecy, arguing that a ‘blacked out’ non-public space is imperative to enable effective diplomatic negotiations with third parties. International agreements are traditionally regarded as agreements between two contracting parties (the EU and a third state or international organisation) with no direct effects on citizens and limited parliamentary involvement in most national systems. A more substantive understanding of the nature of some recent EU international negotiations, however, reveals direct and indirect effects on the rights and interests of citizens.114 Practice reveals some of the highly political issues that the EU negotiates with third states or other international organisations, some clearly having a legislative-type impact or effect on citizens’ rights or interests. One example is the bilateral agreement between the EU and the US allowing the US to have access to and to process financial messaging data (of individuals, including EU citizens) stored by SWIFT, a private company based in the EU.115 The European Parliament vetoed an earlier version of this agreement in 2011.116 During the course of these international negotiations, Members of the European Parliament were refused access to (classified) documents despite enjoying a certain ‘privileged’ access to information under the then existing rules.117 Prior to the Council authorisation to open negotiations with the US on this agreement, a Council legal service opinion on the competence of the EU to negotiate such an agreement and its legal basis was distributed within the Council and to the Member States. It was classified as ‘restricted’, which is the lowest level in the Council’s security classifications and falls outside the scope of Article 9 of the Access Regulation on ‘sensitive’ (classified) documents.118 According to the Council, irrespective of whether the legal basis chosen for the negotiations was the correct one, any disclosure of information relating to it would have affected the European Union’s negotiating position and could have had a negative impact on the substance of the diplomatic negotiations.119

113

Judgment of the Court of Justice of 17 October 2013, nyr. See, further, D Curtin, ‘Official Secrets and the Negotiation of International Agreements: Is the EU Executive Unbound?’ (2013) 50 Common Market Law Review 423. 115 TFTP agreement, n 3 above. 116 See J Monar, ‘The Rejection of the EU-US SWIFT Interim Agreement by the European Parliament: A Historic Vote and its Implications’ (2010) 15 European Foreign Affairs Review 143. 117 See, further, G Rosén, ‘Can you Keep a Secret? How the European Parliament got Access to Sensitive Documents in the Area of Security and Defence’ (2011) RECON Working Paper, No 22. 118 See, further, Case C-350/12 P In ‘t Veld v European Council, appeal pending. 119 See Case T-529/09 In ‘t Veld v European Council [2012] not yet published, para 42. 114

Challenging Executive Dominance 223 III.3. Challenging High-level Executive Informality Deliberation is a quality of parliaments where a public debate can take place prior to decision-making. The challenge is to ensure that it can take place within parliaments themselves as public and deliberative arenas. But what if executive actors not only negotiate diplomatically as a means of decision-making but also internally improve their own deliberative capacity at the highest levels of decision? Does this executive ‘space to think’ and decide have consequences for the ability of parliaments at any level to hold these actors to account or to participate in decision-taking (as part of their own deliberations or otherwise) in a timely fashion? Does a consensus dependency by actors such as the European Council, the Eurogroup and the Council pre-empt effective and timely parliamentary oversight? Or is Europe’s ‘deliberative intergovernmentalism’, as it has been called,120 contributing overall to democratic legitimacy? The EU’s response to the economic and financial crisis puts at the forefront the (novel) working methods of the European Council and also of the Eurogroup in recent years. Puetter has highlighted how, in recent years, informal Eurogroup meetings and informal ECOFIN breakfasts have enabled ministers (and one adviser) to have face-to-face discussions and react to interventions. Such meetings have become an important venue for EU policy debates in which ministers try to reach a common understanding on specific policy challenges. The use of informal working methods has become much more extensive with policy debates now increasingly dominating the agenda of such meetings. As one EU official explained: ‘Sometimes the breakfast lasted for three hours while the normal ECOFIN was only one hour. What was new was that they were also really negotiating on language [for common positions]’.121 The allocation of more time to the informal elements of the ECOFIN meetings appears to be even more significant, since ministers tend to leave the meetings after the informal lunch and leave the conduct of the rest of the meeting to their deputies. The finalisation of detailed discussions over policy is now taking place at the highest levels of decision-making and follows a conscious choice on the part of the policy-makers in question.122 A similar pattern and working method is arguably also emerging in the context of the European Council, in particular, in relation to economic governance issues. Already in one of his first statements as new permanent President, Herman Van Rompuy defined the adjustment of working methods as one of his main priorities.123 He called for more focused sessions with fewer officials and a

120

Puetter, n 39 above, 161–78. Ibid, 173. 122 Ibid, 175. 123 T Barber, ‘EU to Plan ten Years of Growth’, Financial Times, 5 January 2010; F Riccardi, ‘A Look Behind the News’, Agence Europe, 5 January 2010, and H Van Rompuy, ‘The Challenges for Europe in a Changing World’ (2010) European Council Press Release, PCE 34/10. 121

224 Deirdre Curtin distinction between formal and informal meetings. He also suggested that there should be fewer written documents tabled for discussion, thus allowing more room for open debates between participants. Finally, Van Rompuy considered the communication of clear results of the meetings to be crucial for the acceptance by the public of the work of the European Council. In the words of Puetter regarding such informal deliberative working methods: [P]olicy deliberation spreads when the negotiation setting provides for the possibility to have open debates and when policy-makers perceive specific policy issues as common challenges. As the case of the co-ordination of responses to the crisis demonstrated, uncertainty reinforces the readiness to engage in open debates.124

The reference to ‘open debates’ is something of a misnomer, as the debates in question are taking place behind closed doors and are informed (as anticipated by Van Rompuy) by fewer documents.125 The issue of access to the documents of the European Council, if they exist, is under-explored both in relation to the public and in relation to the parliaments. The rules of procedure of the European Council specify that the European Council ‘may decide’ to make public the results of the votes regarding the decisions that it adopts, the statements in its minutes and the items relating to the adoption of decisions to make these elements public (emphasis added).126 The rules on public access to Council documents ‘apply mutatis mutandis to European Council documents’, although it is specifically stated that the deliberations of the European Council are, as a rule, covered by the obligation of professional secrecy.127 Given that the Council General Secretariat at present manages the public access provisions for the European Council as well, it can be expected that similar rationales for secrecy will prevail in this context. This is likely to include a heavy reliance on the process rationale for secrecy—that publicity prior to decision-making would hinder the effectiveness and the ability of the (prime) ministers to take decisions. Unlike the Council, the European Council does not produce an Annual Report on how it applies the public access provisions and the numbers of public and non-public documents in its possession. Further empirical work is needed to unveil what exactly the European Council is withholding from public access and its rationale for so doing. Extra-murally, it appears that national courts may order release of previously secret documents in the public interest and against the wishes of EU Member States and co-contracting parties. For example, when Finland demanded collateral from Greece in the context of the Greek loan package, Greece insisted on its terms being kept secret. But the Finnish Supreme Administrative Court held that the terms of the Finnish-Greek collateral agreement were a matter of public interest and thus they should be 124

Puetter, n 39 above, 176. See, also, J Tallberg, ‘Bargaining Power in the European Council’ (2008) 46 Journal of Common Market Studies 685, 686. 126 Article 10(1) of the Rules of Procedure of the European Council (European Council Decision of 1 December 2009 adopting its Rules of Procedure, [2009] OJ L315/52). 127 Ibid, Articles 10(2) and 11. Wessels et al, n 46 above, 6. 125

Challenging Executive Dominance 225 made publicly accessible, in their entirety, with the exception of any credentials relating to the co-contracting banks.128 This shows how national constitutional and administrative rules may force more openness at European level. When it comes, however, to access by parliaments to information in advance of actual decision-making, the picture is quite varied and fragmented, and depends on the national constitutional arrangements and the manner in which these have been implemented. This issue of the balance between the need for executive secrecy and the requirement of parliamentary oversight in a democracy will now be addressed more specifically.

IV. EXECUTIVE DOMINANCE AND DEMOCRACY IN EUROPE: A RECURRENT CHALLENGE

Given the dominant paradigm of diplomatic-type negotiations including that for (quasi-) legislation, what role has representative democracy to play in checking executive dominance both national and supranational? After all, a key challenge for executive accountability in the EU is that there is ‘no single, comprehensive and integrated European executive body’.129 On the contrary, the fact that the EU executive is composed, to a significant extent, of national governments means that these governments are accountable for implementation through the usual domestic channels, in particular the national parliaments. This does not exclude at the same time a complementary role for the European Parliament as the supranational democratic accountability forum. Yet, these parliaments—national and European—have been hollowed out and blacked out to such an extent that their ability to perform their functions as democratic accountability forums is under challenge.130 Courts at different levels have some role to play in prodding parliaments (and executive actors) to be more open and responsive. Both sets of actors—courts and parliaments—have distinct but complementary roles to play in ensuring that systems of representative democracy are not further hollowed out or blacked out as a result of ongoing European integration processes.131 Courts may not be good at the overall picture like parliaments—they are, after all, dependent on the cases that are brought before them—but they excel in applying even vague norms to real life practices and can study them in detail, calling in evidence

128 See, press release by the Supreme Administrative Court of 14 May 2013: yle.fi/uutiset/court_ orders_release_of_secret_greek_agreement/6641511, last accessed 27 September 2013. 129 Crum, n 29 above. 130 See, for an analysis of the practices that have evolved in various national parliaments, D Curtin, ‘Challenging Executive Dominance in European Democracy’ (2014) 77 Modern Law Review 1–32. 131 On the limited incentives for constitutional engagement by both sets of actors, see M Dawson, ‘Constitutional Dialogue Between Courts and Legislatures in the European Union: Prospects and Limits’ (2013) 19 European Public Law 369.

226 Deirdre Curtin where necessary.132 Parliaments, on the other hand, can and should keep hold of the structural overview and look at the big picture also in terms of institutional design. The key challenges come from the executive’s de facto drift towards secrecy in one form or another, and informality above and beyond the apparent reach of formal law. There are signs that these topics—which have long been at the periphery of thinking about democracy in Europe—are now moving towards centre stage. It is now up to the parliaments themselves, in various horizontal and vertical constellations, to ensure that a re-invigorated democracy does, indeed, emerge from the crisis.

132 See, in general, F De Londras and F Davis, ‘Controlling the Executive in Times of Terrorism: Competing Perspectives on Effective Oversight Mechanisms’ (2010) 30 Oxford Journal of Legal Studies 19.

9 A Technocracy of Governing: Power Without the State; Power Without the Market MICHELLE EVERSON BIRKBECK COLLEGE, LONDON

I. DOMINANT RATIONALITIES

I

T HAS BECOME an academic commonplace, albeit one heard only within very restricted critical circles,1 that financial and sovereign debt crises have not fatally exposed the failings within post-welfarism. Instead, they have merely finalised processes of the abdication of state responsibility for public wellbeing, as well as the subordination of political process to a market discipline, which is now overseen by a technocratic swarm of national, supranational and global expertise. By contrast, public protest on the streets of Athens, Madrid and Lisbon is loud.2 Its lack of impact, however, and its striking inability to overturn the dominant rationality of austerity now brutally imposed within the ambit of the European Stability Mechanism (ESM), only confirms critical analysis of the deafness of modern governance to claims for justice expressed in anything other than a rhetorical idiom of market discipline. Far less readily grasped, however, are the technocratic challenges posed, not to democratic statehood, but to markets. The insight is counter-intuitive, often lost in the simplistic shorthand of a contemporary critique of ‘neo-liberalism’, but is nonetheless vital as the subordination of market process to the pursuit of abstract visions of market utility emerges as the counterpart, but inadequate counterweight, to de-politicisation; a utilitarian chimera of maximised welfare, or a totalising claim to exercise mastery within markets, which cannot but disappoint,

1 See, for example, C Crouch, The Strange Non-Death of NeoLiberalism (Cambridge-Malden MA, Polity Press, 2011); F Scharpf, ‘Monetary Union, Fiscal Crisis and the Pre-emption of Democracy’ (2011) 9 Zeitschrift für Staats- und Europawissenschaften 163–98; W Streeck, ‘Markets and Peoples: Democratic Capitalism and European Integration’ (2012) 73 New Left Review 63; C Douzinas, Philosophie und Widerstand in der Krise (Hamburg, LAIKA Verlag, 2014). 2 Though, see Douzinas, n 1 above, giving good account of agonistic impact of protest.

228 Michelle Everson as market uncertainties are only heightened by the scientific programme and technocratic machinery of perfected competition within what may be termed ‘socialised market operation’. Above all, and in response to financial crisis, unbearable strains arise within the enhancement of structures of prudential oversight over markets and money, and within their claim to reconcile prudence and innovation. Widespread delegation of public wellbeing to processes of ‘futurisation’3 may furnish further rhetorical legitimation for wide-scale technocratic intervention within financial markets, in order to secure consumer interests and public wellbeing. At the same time, however, it similarly facilitates the empty promise inherent in the enforcement of abstractly-construed, competition-inducing regimes, dedicated not only to capital maximisation, but also to the provision of heightened individual welfare through competitive generation of wide consumer choice. Misplaced faith in the ability of a technocratic credo of market utility to discount market uncertainty in its delivery of welfare maximisation is currently suffered by populations within peripheral eurozone economies, namely in the false assertion of the continuing capacity of autonomous market operation to internalise increasingly brutal social externalities through ever more elusive growth. It nevertheless also creates economic and social hazards for the whole of Europe. The problem is not simply one that scientific discourse masks its own uncertainties. Instead, the rationality of technocracy is given a further air of impregnability by virtue of its claim to be a ‘regulatory enterprise’ rather than a process of deregulation. That is, a simple expression of the dissolution of the once sharp divides made between public and private spheres, between efficiency-led regulation and continuing pursuit of social goals, and the establishment of a praxis of discretionary supervision, or a network of radicalised delegation in which all competing regulatory rationales of efficiency and consumer choice, pursuit of legal rights, social solidarity and consumer protection are still pursued.4 The dual socialising claim of modern technocracy—its safeguarded pursuit of welfare utility and its apparent regulatory re-integration of social and ethical concerns—nonetheless enhances economic uncertainty; not least, as competing aims of market and social justice arise at different distorting points within fragmented and fractured structures of national and supranational oversight. At the same time, however, the co-option of socialising rhetoric within the technocratic regime similarly insulates it against agonistic re-assertion of contrasting paradigms of economic and social organisation, and protects it against competing political rationalities, as well as—and vitally so—market rationalities which 3 See, for the concept of futurisation, including individual and systemic forms, E Esposito, The Future of Futures: The Time of Money in Financing and Society (Cheltenham, Edward Elgar Publishing, 2013); E Esposito, ‘The Present Use of the Future: Management and Production of Risk on Financial Markets’ in C Luetge and J Jauernig (eds), Business Ethics and Risk Management (Dordrecht, Springer Verlag, 2014). 4 T Prosser, The Regulatory Enterprise: Government Regulation and Legitimacy (Oxford, Oxford University Press, 2010).

A Technocracy of Governing 229 might respond to inherent economic uncertainty within less ambitious, but far less totalising, steering strategies.

II. DEAF TECHNOCRACY

For critical lawyers, one of the most depressing consequences of sovereign debt crisis is co-option of the law within the technocratic regime. Mutuallysupportive judgments by the Court of Justice of the European Union (CJEU) and German Federal Constitutional Court (FCC), upholding the legality of EU Treaty modification in order to facilitate fiscal transfers between Member States within the establishment of the European Stability Mechanism (ESM),5 as well as on conclusion of the Treaty on Stability, Coordination and Governance (TSCG), enrage jurists dedicated to the coherence of the rule of law in Europe. Above all, the CJEU’s reasoning in Pringle strains the credulity of any lawyer not wholly unsighted by the blind optimism that pollutes European integration studies;6 and shocks in its refusal to apply Occam’s razor, or to ignore the obvious conclusion that Article 125 TFEU should surely be held by the Court to mean what it clearly appears to mean, that the Treaty prohibits any form of debt financing between Member States.7 At the same time, however, the consequences of the twin judgments for the rule of law are far greater than mere dissolution of legal method to be found within, for example, nonsensical formal reversal of the normal course of legal reasoning; or, more particularly, the CJEU finding that the Treaty’s detailing of specific circumstances of permitted cross-subsidisation between Member States (122(2) TFEU) impliedly indicates the potential for, rather than explicitly precludes, a general as well as a specific competence for fiscal transfers between states. Instead, to the degree that each Court reconciles the irreconcilable, and discounts illegallyheightened liquidity within the ESM in a discourse of imposed conditionality, or the market discipline that is to be applied to the Member States,8 the most disturbing feature of crisis-busting jurisprudence is its legal ossification of a violently disputed economic theory of market-disciplined structural renewal at a time of radicalised protest against austerity at national level.

5 Article 48(6) Treaty for European Union (TEU), modifying Article 136 TFEU; Case C-370/12 Pringle v Government of Ireland, Ireland and the Attorney General, Judgment of 27 November 2012, not yet reported, available at: curia.europa.eu/juris; Decision 2 BvR 1390/12 (an incomplete English translation is available at: www.bundesverfassungsgericht.de/entscheidungen/rs20120912_2bvr139012en.html). 6 Sadly evinced by Paul Craig; see P Craig, ‘Pringle: Legal Reasoning, Text, Purpose and Teleology’ (2013) 20 Maastricht Journal of Law 1. 7 G Beck, ‘The Legal Reasoning of the Court of Justice and the Euro Crisis—The Flexibility of the Cumulative Approach and the Pringle Case’ (Manuscript 2013). 8 In the best scenario, by the detailed technical calculations of the European Commission (TSCG) and, in the worst indebted case (ESM), by the functional imperatives of an unholy alliance of Member State representatives, the European Commission and the IMF.

230 Michelle Everson Street protest, startling in its intensity in Greece, Portugal and Spain, may or may not represent the only viable option for expression of dissent within the national political processes of debtor nations, where the differences between the mainstream political traditions of left, centre and right have necessarily unravelled within imposed conditionalities. What is certain, however, is the legal foreclosure of any perspective for return to normally contested, or unconstrained, political process as the imperative of euro survival is pursued in a judicial discourse that gives enduring status and power to an executive regime of international and supranational law. This regime’s pursuit of its solely functionalist aim of preservation of European Economic and Monetary Union (EMU) re-channels such normatively empty functionalism back to the level of the nation state through imposed legal constraint of national political choice. Reaching its apogee in the imposition by the FCC of a duty of accountability for integration (Integrationsverantwortung) upon the German Parliament9 (which it is similarly enjoined to exercise over the ESM with due regard for the conditionality for German participation within EMU),10 judicial disdain for the rule of law is similarly matched by a process of the subordination of the constitutional jurisdiction to economic theory and technocratic imperatives. In turn, where illegality unfolds within the post-constitutionalist functionalism of a technocratic substitution for political process, early warnings given by Kant that, without due attention to the continuing imperatives of control of executive power, the international legal jurisdiction would only facilitate princely corruption of national constitutionalities,11 are re-iterated within the actions of European law. These warnings at the same time coalesce with more modern concerns—most forcefully expressed by Michel Foucault12—that a law founded in economic rationality could usurp all politics and political subjectivity. Far from heralding transition to Kant’s Constitution of constitutions, the move to EMU has finally witnessed the crowning of executive power throughout Europe, and similar establishment of totalising technocracy in place of politics, as dissenting voices no longer find a channel for institutionalised expression. To dissent is also to have no voice, no political personhood.

9

Decision 2 BvR 1390/12, n 5 above. Which the FCC established in its seminal Maastricht Judgment (Judgment of 12 October 1993, 2 BvR 2134/92 and 2 BvR 2159/92, 89 BVerfGE 155 (1993) [Brunner v European Union Treaty, [1994] 1 CMLR 57]). 11 M Koskenniemi, ‘Miserable Comforters: International Relations as New Natural Law’ (2009) 15 European Journal of International Relations 395. 12 M Foucault, Birth of Biopolitics: Lectures at the Collège de France, 1978–79 (Basingstoke, Palgrave MacMillan, 2008). 10

A Technocracy of Governing 231 III. POST-CRISIS MARKET UTILITY

The European System of Financial Supervision (ESFS) was established by a raft of EU regulations in 2010.13 In the meantime, augmented and shadowed within the eurozone by the structures of Banking Union, the Single Supervisory Mechanism (SSM) and enhanced ECB oversight of credit institutions,14 the ESFS comprises: 1) The European Systemic Risk Board (ESRB), chaired by the President of the ECB and including the governors of national central banks (NCBs), a Commission representative and the Chairs of the three European Supervisory Authorities (ESAs). The role of the ESRB is to provide ‘macro-prudential’ supervision, or to identify and combat ‘systemic risks’, or hazardous financial activities, which threaten the ESFS’s functioning; 2) The ESAs, which administer a complex series of common financial regulations for Banks, Insurers and Financial Markets by means of establishment of the Binding Technical Standards (BTS) and jointly-established practices which inform micro-prudential supervision of financial institutions at national level. ESAs are also charged with the identification of systemic risks within the ESFS, their notification to the ESRB, as well as direct intervention to end them.15 In the case of credit institutions, or banks within the eurozone, the ECB performs the primary role of market authorisation within the SSM, and will also oversee the recovery of the market in the case of banking failure;16 3) National Supervisory Authorities (NSAs) are formally responsible for microprudential supervision at Member State level, as well as macro-prudential supervision within the ESRB and SSM. Together with the SSM, the ESFS is not the first endeavour to co-ordinate financial supervision at supranational level. Instead, it builds upon the EU regulatory principles and standards, as well as national regulatory networks for the financial services established in the wake of the report of the Lamfalussy Committee of Wise Men on the Regulation of European Securities Markets in early 2001. However, lying between the Commission’s establishment of its own comitology 13 Comprising Regulation (EU) No 1092/2010 (ESRB Regulation); Regulation No 1096/2010 (ECB Regulation); Regulation (EU) No 1095/2010 (ESMA); Regulation (EU) No 1093/2010 (EBA), Regulation (EU) No 1094/2010 (EIOPA). 14 Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions. 15 In emergency situations, in protection of the consumer, or to prevent systemic risk. See, for full details, M Everson, ‘A Technology of Expertise: EU Financial Services Agencies’, LSE ‘Europe in Question’ Discussion Paper Series (LEQS Paper No 49/2012). 16 With the help of yet another new agency; see, the new resolution mechanism: Proposal for a Regulation establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Bank Resolution Fund and amending Regulation (EU) No 1093/2010 of the European Parliament and of the Council ((2013)COM 0520 final—2013/0253 (COD)).

232 Michelle Everson system for EU financial services and a far broader Union commitment to the ESFS, we find the collapse of Lehmann Brothers in late 2008, a significant change in the rhetorical justification for institutional reform at EU level, a host of new financial regulations, and a significant widening and deepening of supranational regulatory structures founded in independent expertise. The Lamfalussy group was primarily concerned with the establishment of a globally-competitive European market for financial services. At this stage, unwieldy EU regulation and national implementation arbitrage were seen as regulatory failings, not because they accentuated obscurity within financial markets, but rather since they led to differential treatment of financial instruments, consequently ‘violating the pre-requisite of the neutrality of financial supervision’ in the EU market, and retarding adaption of European financial services ‘to the pace of global financial market change’.17 By rhetorical contrast, the ‘high-level’ de Larosière group on EU financial supervision, convened in response to financial melt-down, ostensibly returned to a more traditional concept of market failure, concluding that the system of European financial regulation must be strengthened and expanded: first, to improve an ‘inadequate mix’ of regulatory and supervisory skills, which had seen too little information gathered and shared on the magnitude of global leveraging, exhibiting a similarly-catastrophic failure to ‘fully understand or evaluate the size of the risks’; and secondly, to create a co-ordinated early-warning system to identify ‘the macro-systemic risks of a contagion of correlated horizontal shocks’.18

III.1. Risk above Uncertainty The promise of the ESFS, as well as of the SSM, is one of security within European financial markets. However, notions of market soundness and the lessening of contagion potential are, vitally, still a part of the broader trend toward market utility. The goals of de Larosière must still be understood in the context of Lamfalussy and the pursuit of global competition, with the notable consequence that the promise to ensure the stability of European financial services can itself be seen as just one more step towards achievement of a dominant paradigm, wherein the vital advantages of futurisation must be delegated to vibrant private markets. Not, however, those private markets which are left to their own devices, but to those which are, instead, carefully constructed and secured in line with abstract economic visions of maximised market utility. Whereas Lamfalussy was portended by wide-scale withdrawal of the state from provision of public welfare, and the consequently heightened socio-economic expectations levelled at the futurisation potential of private financial markets, this 17 Final Report available at: ec.europa.eu/internal_market/securities/docs/lamfalussy/wisemen/ final-report-wise-men_en.pdf. 18 ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf.

A Technocracy of Governing 233 particular manifesto for the increased competitiveness of the European sector was indelibly marked by the greatest paradox of our age, as market liberalisation was presaged, not by de-regulation, but by its own substantial increase in regulatory standards and supervisory structures. These structures purported not only to enhance consumer protection, in its competitively new guise as consumer choice, but also to facilitate improved market operation. To the degree that financial crisis provided useful institutional leverage to counter the residual political objections to Lamfalussy which were given perennial voice within the regulatory arbitrage that characterised its comitology-based operation, as well as strong market objections to final application of portions of the newly-competitive regime proposed by the report,19 economic meltdown was far less an abrupt end to the dominance of market utility, than its facilitative apogee, as proven shortcomings in quantitative regulation could now be compensated for by an exponential growth of qualitative as well as quantitative governance inside markets. For all of its apparently cumbersome nature, the ESFS, together with the SSM, and a radical increase in the autonomous supervisory capacity of ESAs and the ECB, promises the establishment of a modern regulatory environment, informed by sensitively-responsive economic and regulatory theory, and dedicated to the perfection, rather than the dampening, of competition. All the while it also gives its prudential and material assurance that the vital interests of policy-holders and beneficiaries within the market will be secured, even and especially so, under conditions of heightened competition. Above all, augmented solvency and capital requirements placed upon banks, insurers and credit markets, are joined by the enhanced application of Pillar II governance requirements, laid down in broad form by the Basel III group of banking supervisors in response to the recognition that financial crisis was, in large part, caused by the pro-cyclical bias within quantitative Value-at-Risk (VaR) methods of solvency accounting, which can—and did—promote over-exposure within a rising market.20 The latter-day recognition that risk analysis is not always an objectively quantitative exercise, but may be skewed at the very outset by subjective assumptions— for pertinent example, one that a rising market will continue to rise—and, above all, the amplified awareness that some dangers cannot be foreseen,21 are perhaps only re-statements of the seminal distinction long ago made by Frank Knight between risks and uncertainty. The distinction, that is, between dangers which 19 For example, Solvency II applying to the EU insurance market, Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II). 20 J Black, ‘Restructuring Global and EU Financial Regulation: Capacities, Coordination and Learning’, LSE Law, Society and Economy Working Papers 18/2010, London School of Economics and Political Science. 21 This realisation is general to the social sciences and pre-dates the lessons of the financial crisis, above all, where dangers are posed by physical processes. For example, increased reliance on genetically modified organisms is subject to concerns about (non-calculable) uncertainties, such as general environmental damage; see M van Asselt and E Vos, ‘Science, Knowledge and Uncertainty in EU Risk Regulation’ in M Everson and E Vos (eds), Uncertain Risks Regulated (London, Routledge, 2008).

234 Michelle Everson can be calculated in probabilistic paradigms (risks), and hazards which defy all statistical accounting (uncertainty).22 As applied within the post-crisis environment, however, the current acceptance that financial business is conducted in the face of a multitude of interlinked and complex perils—some of which it only struggles to comprehend—has not only found expression within the heightened regulatory solvency requirements applied to the financial sector, but also in the more stringently interventionist supervisory approach to the internal governance of economic solvency requirements, or own risk models and market disclosure. A national example is highly instructive. Explaining its application to the UK insurance sector of an onerous prudential regulatory burden closely aligned with, and by way of future transposition of, the competition-inducing EU Solvency II Directive, the UK Prudential Regulatory Authority (PRA)—a division of the Bank of England and member of the ESFS—acknowledges industry disquiet about the imposition of the new regime upon it, conceding that ‘insurers are not systemic in the same way as banks’.23 Nevertheless, in addition to highlighting the de-futurisation potential of a sudden withdrawal of general insurance for the populace, the Authority is similarly quick to re-iterate the threats which insurance failure, as well as normal business conduct, might pose to banking and financial systems. All the more so, in view of the growth of group financial services and the role played by insurance guarantees in bank lending (derivatives), as well as with regard to the potential hazards posed to asset prices by (life) insurance investment strategies. In immediate contrast—and the collapse of AIG apart—history teaches us only that the sector is marked by its exposure to, rather than generation of, systemic risk.24 Yet, crisis has now done its decisive job, facilitating inclusion of the market within an intrusively-permissive regime, modelled on banking supervision standards. At the same time, and given the resilience of the sector during financial crisis, the PRA is perhaps overly pedagogical when it notes that quantitative ‘risk models have been used in understanding and managing insurance risks for many years’, but immediately qualifies this statement, urging ‘insurers to be prudent in their use of such models given the inherent difficulties with risk measurement’, and, to be aware above all of, ‘the limitations from the structure and complexity of models, the data used as inputs and key underpinning assumptions’.25 Nevertheless, the PRA’s concomitant management injunction to establish ‘independent validation’ and ‘alternative risk management processes’ that both challenge the ‘key assumptions supporting the models’, as well as ‘the risks that are not adequately

22

F Knight, Risk, Uncertainty and Profit (Kissimmee FL, Signalman Publishing, [1921] 2009). Bank of England, Prudential Regulatory Authority, ‘The Prudential Regulation Authority’s approach to insurance supervision’, April 2013, para 116. Available at: www.fsa.gov.uk/static/pubs/ other/pra-approach-insurance.pdf (para 15). 24 See, International Association of Insurance Supervisors, Global Insurance Market Report (GIMAR) 2010 (IAIS, Basel, October 2012), available at: www.iaisweb.org/News/Global-InsuranceMarket-Report-GIMAR-962. 25 Bank of England, n 23 above, para 116. 23

A Technocracy of Governing 235 captured by them’,26 together with its self-commitment to the monitoring of this onerous internal function, is an illustrative reflection both of the post-crisis turn to ‘really-responsive’ regulation,27 and of the longer underlying trend for the placing of oversight emphasis upon supervision rather than regulation. The extraordinary degree of emphasis that is placed upon risk management processes is testament to the positing of successful pursuit of dual and potentially-conflicting goals of heightened competition and increased financial probity within capital markets through unprecedented direct supervisory intervention into the governance structures, both of individual firms and of the market. Contemporary prudential oversight is arguably advantaged in its responsiveness towards the hazards posed by the competitive forces that a liberalised approach to the regulation of financial service markets has unleashed. Seen in the abstract, and seemingly founded within partnership rather than hierarchical direction, the supervisory relationship between overseer and market facilitates competitive operation, also providing an early-warning system and a means of jointly-calibrated response to inherent market uncertainty. Nevertheless, a market-friendly scheme of supervision creates its own intricate complexity in practice. The PRA’s injunction to a UK market that ‘they should not, however, approach their relationship with the PRA as a negotiation’,28 reveals much that is of concern within such an intimate marriage, not least, its exposure to industry capture,29 a problem that equally finds its important counterpart reflection in market-led doubts about the efficiency of such comprehensive supervisory intervention, and also raises significant issues of institutional design (see Section IV below). The PRA has already given voice to a stringently prudential temperament. The PRA recognises that its own ‘limited resources mean that it cannot be expected to identify and account for all the risks that insurers may face’,30 and similarly seeks to apply Solvency II proportionately to the market through delineation of four categories of insurer, who are subject to varying degrees of applicable oversight according to their potential for de-futurising failure and generation of systemic risk. The Authority has nonetheless signalled its suspicious determination to react vigorously to industry manipulation of internal governance and risk management structures. Above all, the Authority will object to insurers issuing regulatory capital instruments that are deliberately structured to meet the letter but not the spirit of [regulatory capital] criteria, notably where their incentive is to minimise issuance cost and promote the attractiveness to investors at the expense of genuine loss-absorbing capacity.31

26

Ibid. R Baldwin and J Black, ‘Really Responsive Risk-Based Regulation’ (2010) 32 Law and Policy 181–201. 28 Bank of England, n 23 above, para 47, re-iterated in the introduction to the document (p 7). 29 See J Stiglitz et al, The Economic Role of the State (Oxford, Blackwell Publishers, 1989). 30 Bank of England, n 23 above, para 128. 31 Ibid, para 131. 27

236 Michelle Everson Equipped also with the ex ante power to impose disciplinary sanctions on individuals exercising ‘significant functions’, who knowingly act in contravention of PRA requirements,32 the Authority’s stated intention to make periodic on-site validations of insurer data appears to have bite, not only bark, similarly enhancing apprehension that, with the advent of really-responsive regulation, the fragile balance between supervisor as market-facilitating partner and supervisor as permanently distorting shadow within the firm will always be a tense one.33 Given the PRA’s signalled willingness to intervene in the daily operations of the insurance market, one pertinent question to be posed in the wake of permissive interventionism might accordingly be: What is now left of the market? A tentative sensation that market utility has begun to overwhelm market process only hardens upon re-consideration of the prudential supervision of the sector. Greeting the passage of the 2012 Financial Services Act, The Guardian newspaper opined that ‘financial economics is heading back towards the world as Keynes and Hayek knew it: where economic uncertainty was recognised as such, rather than mathematized and missold as controllable risks’.34 Equally, to the degree that the PRA has indicated that its supervisory functions will be ‘judgement-based’,35 in order to compensate for the brutally exposed failings in abstract economic modelling, market uncertainty has renewed its place within the regulatory mentality in its hardened suspicion of quantitative risk modelling. Yet, tensions inherent to futurisation expectations remain. Above all, where the socio-economic purposes of financial services are broadened to compensate for public welfare retreat, and pursued within the deep structures of market utility, the simultaneous quest for contrasting market innovation and prudential oversight locates autonomous supervisory authorities on the frontline of the underlying paradox in modern macro-economic market thinking. To be markets, and to supply market utility, markets must fail; yet, the de-futurisation consequences of market failure are now too great to be borne by markets. Now also the subject of renewed European harmonisation efforts in Solvency II (Title V), insurance failure lacks the catastrophic potential of banking failure. Given the temporal nature of the insurance mechanism, the deferred disbursement liabilities of an insolvent undertaking may be resolved during a protracted winding-up period, during which it ceases to incur new business and existing liabilities are either run-off or transferred within the sector. Nevertheless, at a rhetorical level, the spectre of insurance failure prompts the UK PRA to give voice to this very modern enigma: Allowing insurers to fail, so long as failure is orderly … reflects the view that insurers should be subject to the disciplines of the market. It is important for insurers to be able

32

See, fshandbook.info/FS/html/PRA/APER. See, for industry comment, ‘Guiding Hand’, Post Magazine (14 April 2011); see, also, L Quaglia, ‘The Politics of Insurance Regulation and Supervision Reform in the European Union’ (2012) 9 Comparative European Politics 100–122. 34 The Guardian, ‘On knowing too much’, 10 September 2012, p 26. 35 Bank of England, n 23 above. 33

A Technocracy of Governing 237 to fail in an orderly way without public funds being put at risk since apart from being an unwarranted subsidy, the public provision of solvency support to an insurer (or its creditors) can create an expectation of future assistance. This ‘moral hazard’ in turn increases the risk of future financial instability, as it provides incentives for excessive risk taking and reduces market discipline.36

The doctrine of behavioural insight, which is so central to behavioural economics, plays its own masterful role. The PRA expects insurers to have a risk appetite, but only one which is ‘consistent with the PRA’s objectives’;37 any other form of hunger is no longer a normally-imperfect market process, but rather a moral hazard, a sinful gluttony, preferably to be exorcised in ex ante application of the creed of own-risk-management, at worst to be atoned for in orderly processes of market restoration. Within this constellation, uncertainty is just as surely still reduced to risk, something that can be governed. The full extent of the Hayekian truth of a market of spontaneous, unknowable and unmanageable processes of human exchange relations is still far too unpalatable to digest.

III.2. The Regulatory Enterprise Behavioural economics, however, has its own very special part to play in the new paradigm of technocratic pursuit and oversight of market utility. In one optimistic, and often left-leaning analysis, the trend toward an autonomous market regulation is wholly overstated: although the ideological battle between command interventionism and market autonomy has been comprehensively lost, competing justificatory discourses and the contradictions inherent in the endeavour to establish an autonomous sphere of regulation—within which learning, but also continued engineering is the norm—are argued to matter, or are argued to do so to the extent that they both reflect and impact upon our view and our reality of how steering capacities within the modern economy are exercised and to what end.38 The blurring of the public and the private, the flattening of distinctions between governors and governed is no more than overdue pragmatic recognition that steering capacities cannot be assured through political fiat. Instead, steering is possible only where political capacity is radically extended into the private sphere, where it acts within a network of public-private relations. Pareto-efficient regulation is revealed as the purely theoretical construct that even its supporters concede it to be;39 a putative limitation of the regulatory sphere which has no concrete meaning. Modern regulation is instead a ‘regulatory enterprise’, a

36

Ibid, para 25. Ibid, para 108. 38 F Vibert, ‘Regulation in an Age of Austerity: Reframing International Regulatory Policies’, LSE Working Paper, WP 03/2011 (2011). 39 G Majone, The EU in Comparative Context: Regional Integration and Political Transaction Costs (Cambridge, Cambridge University Press, forthcoming 2014). 37

238 Michelle Everson radical sphere of discretionary supervision, host still to all competing regulatory rationales of efficiency and consumer choice, pursuit of legal rights, social solidarity and consumer protection.40 Depending on the regulatory variant chosen, emphasis is accordingly laid either upon mutual knowledge-creation—wherein the cognitive capacities of the regulator and the regulated are enhanced within a sliding enforcement scale, ranging from more common suasion to rarelydeployed sanction41—or, upon the behaviour or perceptions of private actors, whereby command is replaced with incentive and sanction with the (radical) steering-capacity of ‘nudge’ or the cognitive re-alignment of private to public interest within paradigms of behavioural economics.42 In addition, however, a ‘performance-based element’ within sensitive modern regulation also seeks to re-establish the missing-link, or component of macro-economic control within modern regulation—not through defunct commands, but rather through better enunciation and co-ordination of micro- and macro-economic goals.43 Only feeding permissive consensus between the aggressive pursuit of wealth maximisation, on the one hand, and an optimistic faith in the continuing vitality of social or macro-economic steering capacities within contemporary governance structures, on the other, modern faith in the regulatory enterprise is nonetheless incongruous, especially in view of the increasing complexities of interlinked processes of national, supranational and global regulation. The uncertainities created by ESFS operation provide us with a telling example, To reiterate, ESFS establishment is remarkable, not least due to its creation of general tension between the regulatory goals of Lamfalussy and de Larosière, between a long-standing mission to secure a globally-competitive place for the EU financial services market and a latter-day imperative to secure capital market stability, a task made all the more urgent by the systemic re-emergence of global financial meltdown as the European sovereign debt crisis.44 Rapid reform in response to each emergency, however, has also created its own stresses within EU institutional structures, above all, with regard to the legality of delegation within the Union following the Treaty of Lisbon reforms. The ESFS poses both general and specific challenges to the financial sector. At global level, the initial establishment of the European Systemic Risk Board (ESRB), in pursuit of macro-prudential control, together with subsequent SSM-driven modification of the workings of the ESFS to accommodate the conferral upon the European Central Bank (ECB) of direct supervision powers over the private

40

Prosser, n 4 above. Baldwin and Black, 27 above. 42 C Sunstein and R Thaler, Nudge: Improving Decisions about Health, Wealth, and Happiness (New Haven CT, Yale University Press, 2008). 43 Black, n 20 above; Baldwin and Black, n 27 above; Vibert, n 38 above. 44 See, for the inherent connection between financial crisis and sovereign debt crisis, Scharpf, n 1 above. 41

A Technocracy of Governing 239 banking market,45 is significant to the exact degree that this reform also entails, however obliquely, EU adoption of a structural commitment to ‘sound money’;46 or commitment to the re-assertion, if not of state, at least of Central Bank steering capacity for futurisation, or ECB control over debt and private money-creation. However, where ECB intervention within banking supervision, or in the exercise of its ESRB emergency powers to combat systemic risk, is directed to limitation of the financial instruments offered on capital markets, its macro-prudential steering capacity only becomes one further risk factor, or uncertainty with regard to permitted investments, to be included within risk management processes within the market. The ESFS likewise poses very specific risks for the financial sector; in particular, by virtue of its concomitant creation of institutional, as well as efficiency, uncertainty within its supervisory realm. At the creation of the ESFS, the longstanding ECJ Meroni doctrine dating from 195847 was widely thought to preclude full independence of agencies at EU level, which agencies were instead viewed as being only ever ‘semi-autonomous’, independent in fact rather than law, operating under the formal competence umbrella of the European Commission. The source of the doctrine was the principle of the balance of powers, which the ECJ construed as meaning that executive powers might only be delegated to institutions recognised by European Treaties. As creatures of ad hoc regulatory necessity, agencies had no named place within EU institutional architecture and no formal autonomy. By the same token, the Commission’s relations with its own agencies have often been strained, at least to the degree that de facto autonomous agency operations threaten to alienate the competences of a Commission held legally accountable for them. Agencies have also been viewed with mistrust by other European institutions, notably the European Parliament, which sees in them a similar executive threat to its prerogatives, as well as by Member States, which remain suspicious that agencies might also usurp national competence.48 In this febrile constellation, the legal challenge made by the UK Government to emergency intervention powers afforded the European Securities and Markets Authority (ESMA) was far less surprising than its outcome, whereby the now Court of Justice of the European Union (CJEU) belatedly confirmed direct delegation of EU competence to the ESMA. The Court achieved this ESFS-sustaining feat with reference to the inclusion by the Treaty of Lisbon of agencies under the institutions against whom European judicial review 45 To be exercised in parallel to the powers of the European Banking Authority (EBA). See, proposal COM(2012) 512 of 12 September 2012 for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 1093/2010 establishing a European Supervisory Authority (European Banking Authority) as regards its interaction with the Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions. 46 See, for details, G Teubner, ‘A Constitutional Moment? The Logics of “Hitting the Bottom”’ in PF Kjaer, G Teubner and A Febbrajo (eds), The Financial Crisis in Constitutional Perspective: The Dark Side of Functional Differentiation (Oxford-Portland OR, Hart Publishing, 2012) 9–51. 47 Case 9/56 Meroni v High Authority [1957–58] ECR 133. 48 See Everson, n 15 above.

240 Michelle Everson proceedings might be pursued.49 However, the ESMA case cannot be viewed as a simple legal end to the institutional matter: uncertainty has instead been highlighted by the judgment, particularly with respect to the Commission’s politically-straightened position since passage of the Lisbon Treaty, and the consequent potential for mismatch between Commission legislation transposing framework directives for European financial services and the rule-making and interventionist competences of ESAs. Whereas the TFEU subjects delegation to the Commission of detailed implementing competence for financial services framework directives to temporal constraint in the form of sunset clauses, as well as to standing Parliament and Council recall powers (the sword of Damocles thereby hovering over Brussels heads); meanwhile ESAs, with their distanced seats in Paris, Frankfurt and London, and now operating under the direct protection of the Meroni doctrine, maintain their own autonomous powers over the financial sector. The Commission has moved to mediate the risk that it will be cast as a perpetually-rancorous loser in an institutional game of competence accrual, giving re-iterated life to the original Lamfalussy construction of legislation and implementation for EU financial services.50 The Omnibus I and Omnibus II Directives now seek to co-ordinate Commission and ESA competences. Nevertheless, success or otherwise of the Omnibus Directives rests on the durability both of the substantive distinction they make between Commission and ESA rules, and of the processes that they establish in cases of conflict between the views and actions of the Commission and ESAs.51 In turn, this gives renewed vigour to the long-stated concern that, where the purpose of ESA establishment is to promote expert-led market regulation, continuing doubts about the exact extent of their autonomy might create the worst of all possible supervisory worlds, whereby inter-institutional conflict around ESAs stokes regulatory inefficiency within them.52 Returning to the steering discipline of behavioural economics, nudge-like coordination under such circumstances appears difficult, if not impossible. In this regard then, such new regulatory techniques are perhaps far better understood as tools, founded in abstract theory, which relate less to co-ordination of regulatory goals, and more to perfected pursuit of market utility in manipulation of industry and consumers alike. To once again cite an instructive national example, the UK Financial Conduct Authority (FCA)—also a National Supervisory Authority within the terms of the ESFS—has recently given its formal approbation to the use of behavioural economics in its oversight of the financial products offered by the market. In

49 In Article 263 TFEU. See Case C-270/12, United Kingdom v Parliament and Council, not yet reported, available at: curia.europa.eu/juris. 50 Omnibus II is still awaiting final approval (IP/11/49). See, for Omnibus I, Directive 2010/78/EU of 24 November 2010. 51 See n 50 above. 52 N Moloney, ‘The European Securities and Markets Authority and Institutional Design for the EU Financial Market—A Tale of Two Competences: Part 1: Rule-making’ (2011) 12 European Business Organization Law Review 41–86.

A Technocracy of Governing 241 particular, the exhibition by consumers of behavioural markers such as present bias and loss aversion, is seen as a ‘means to assess problems in financial markets better’ and to ‘choose more appropriate remedies’, such that the Authority ‘will be a more effective regulator as a result’.53 Above all, and in view of recent UK mis-selling scandals,54 identification of peace-of-mind-bias to the purchase of, for example, too much insurance, or inappropriate products, is a valuable insight, and is equally usefully combated by nudge steering mechanisms, or financial consumer incentivisation towards a more nuanced understanding of personalised risk profiling.55 Such behavioural steering is a similarly expedient tool to discourage consumers away from immediate gratification bias in, say, the use of credit cards, towards more sustainable futurisation opportunities. Behavioural economics emerges as manna from heaven, both in terms of its insights into consumer preference formation, and with regard to its promise to enhance softly-effective steering capacity in pursuit of providing as wide and individually-tailored a product offer as possible. Yet, it is similarly vulnerable to the charge that it can equally be deployed to adapt people to the purposes of markets, as markets to the preferences of people, and likewise raises a renewed spectre of distorting supervisory presence within the market, at least to the degree that permissive interventionism may likewise prove destructive in its vaulting ambition. In the opinion of the FCA, a major ‘risk factor’ for the industry is the ‘structures, processes and management that have been designed into and become embedded in the financial sector, allowing firms to profit from systematic consumer shortcomings’.56 To the degree that the Authority similarly equates the desire for peace of mind (loss aversion) and consequent cross-subsidisation (within financial mutualisation) with ‘consumer biases’ that must be expunged from the market,57 the irony that behavioural economics is, in large part, built on long-standing insights garnered by the insurance industry on policy-holder behaviour will not be lost on insurers in particular, and the sector in general.58 Certainly, the sector misbehaves, not least with regard to a further FCA bête noire, that of limitation of access to financial products.59 Nevertheless, loss aversion and cross-subsidisation are not just market failures, but market failures upon which many financial 53 Martin Wheatley, CEO, Financial Conduct Authority, forward to, Financial Conduct Authority, ‘Applying Behavioural Economics at the Financial Conduct Authority’, Occasional Paper No 1 (Kristina Erta, Stefan Hunt, Zanna Iscenko and Will Brambley) at 5. 54 Ibid, 15. 55 Ibid, 9; Sunstein and Thaler, n 42 above. 56 Financial Conduct Authority, n 53 above, 23. 57 Ibid. 58 LR Cohen and ME Boardman, ‘Methodology: Applying Economics to Insurance Law—An Introduction’ in J Burling and K Lazarus (eds), Research Handbook on International Insurance Law and Regulation (Cheltenham, Edward Elgar Publishing, 2011) 19–31. 59 A failing shockingly apparent in the arbitrary capping by the US market of life assurance policies concluded by HIV positive policyholders, regardless of the existence of by now comprehensive actuarial data on progression, or rather non-progression to AIDS, and beyond. See D Stone, ‘AIDS and the Moral Economy of Insurance’, The American Prospect (November 2013), available at: prospect.org/ article/aids-and-moral-economy-insurance.

242 Michelle Everson services are built;60 integral shortcomings to be managed, even manipulated, but never purged if the market is to remain a market.

IV. WHAT IS LEFT OF MARKETS?

The sensation that market utility has overwhelmed market process only hardens upon consideration of the explicit preparedness of the institutions of market technocracy to nudge, or rather to manipulate, the deep psyches of industry and consumers alike. At the same time, however, application of the precepts of behavioural economics to financial services is further confirmation of the totalising dominance of a rationality that posits socialising utility in the competitive and competition-inducing establishment of market offers tailored to the perfected risk-personalisation profiles of individual consumers, or savvy beneficiaries of welfare maximisation. Protestors on the streets of Athens, Lisbon and Madrid should it seems take note, and attend to closer study of the means of perfecting their own risk management skills. At the same time, however, the dissolution of market uncertainty within qualitatively governable risk cannot but disappoint. Directing his comments at Richard Posner, one of the most prominent legal proponents of market utility, ErnstJoachim Mestäcker, a staunch Hayekian, equates this utilitarian form of mastery within markets with ‘ideology in the service of unlimited government and socialism [sic]’.61 Mestmäcker might or might not overstate his case with regard to the law & economics movement. However, current European and national pre-occupation with perfectly regulated competition perhaps displays a similar hubris; at least with regard to the ability of any form of supervisory oversight, let alone such a fragmented one, to master such a conflicting set of economic and social goals. To this exact extent, socialisation of financial markets through perfected competition, just as surely creates its own set of hazards for industry and for consumers alike. A consistent feature of concomitantly amplified socio-economic expectations levelled at private financial markets, following state welfare withdrawal, has been political silence about the possible consequences of such public abdication; above all, the inevitability of individual welfare loss due to market failure, but also the difficulties facing the denuded state in the matter of the co-ordination of competing welfare claims. Law has been similarly silent: within Europe, judicial resort to the comfort blanket of constitutionalised price stability continues to muffle public reception of the consequences of the original sin of Economic and Monetary

60 For example, insurance risk pools are only sustainable where insurers can entice—through discounted premiums—low-risk individuals into the pool to ‘subsidise’ high-risk individuals; see Cohen and Boardman, n 58 above. 61 E-J Mestmäcker, A Legal Theory without Law. Posner v. Hayek on Economic Analysis of Law (Beiträge zur Ordnungstheorie und Ordnungspolitik) (Tübingen, Mohr-Siebeck, 2007).

A Technocracy of Governing 243 Union, its denial of the politically-integrative nature of the project.62 At the same time, it represents judicial abdication of any responsibility for generating the degree of explicitly re-distributive conviction within Europe necessary to atone for the brutally-experienced consequences of that EMU sin. Under such circumstances, faith in the ‘irritating’ capacity of steering mechanisms, such as sound money63 cannot overcome but may even accentuate the perverse distortions of matching subsuming of politics and markets within a technology of power. Nevertheless, Michel Foucault does still give us a measure of hope. Agonism, or constant re-assertion of contrasting rationalities, can eventually overcome the dominance of technocratic power; albeit that very many re-iterations will be required. However, in our re-assertion of market and politics over technocratic power, we must similarly take care to be honest in our rendering unto markets of that which belongs to markets (uncertainty), and our rendering unto politics that which of that belongs to politics (an always limited steering capacity).

62 See G Majone, ‘Rethinking European Integration after the debt crisis’, UCL, European Institute, Working Paper No 3/2012 (2012). 63 See Teubner, n 46 above, for faith in the Luhmannian mechanisms of irritation to require adaptation of systems behaviour.

10 Deliberative Supranationalism in the Euro Crisis? The European Central Bank and The European Council in Times of Conflict HENNING DETERS BREMEN

I. INTRODUCTION: CONFLICT, CRISIS, AND DELIBERATION

T

HIS CHAPTER APPLIES Conflicts-Law Constitutionalism (CLC) as a theoretical framework to examine the conflicts about the European Central Bank’s (ECB) monetary-policy decisions at the height of the euro crisis. The crisis has been a particular challenge for CLC’s vision to defend law-mediated legitimacy in a post-national constellation. Premised on the notion of supreme emergency,1 fundamental treaty provisions have been blatantly neglected,2 national democratic self-government has come under attack,3 and executive and administrative power has slipped further away from parliamentary control.4 Moreover, there is reason to worry that the quality of political contestation has also suffered, because the crisis has finally dredged up the always latent conflict5 between the competitive eurozone core that managed to weather the storm in relatively good health and those uncompetitive economies in the euro periphery that were hit particularly hard. With conflicts over re-distributive issues becoming more salient, the chances of arguing about these differences in a reasonable 1 K Dyson, ‘Sworn to Grim Necessity? Imperfections of European Economic Governance, Normative Political Theory and Supreme Emergency’ (2013) 3 Journal of European Integration 207–22; C Kreuder-Sonnen, Comment in this volume. 2 M Ruffert, ‘The European Debt Crisis and European Union Law’ (2011) 6 Common Market Law Review 1777–1806. 3 S Kouvelakis ‘The Greek Cauldron’ (2011) 72 New Left Review 17–32. 4 A Benz, ‘An Assymetric Two-level Game. Parliaments in the Euro Crisis’ in B Crum and JE Fossum (eds), Practices of Inter-parliamentary Coordination in International Politics (Colchester, ECPR Press, 2013); D Curtin, Chapter eight in this volume. 5 B Eichengreen and JA Frieden (eds), The Political Economy of European Monetary Unification (Boulder CO, Westview Press, 1994).

246 Henning Deters and consensus-oriented fashion—which, in a Habermasian sense, ‘includes the other’—diminish. From the theoretical perspective of this volume, this development would be troubling, since CLC has relied on deliberation—the free exchange of reasonable arguments in search of a co-operative solution that is more than a pure modus vivendi—as a way of structuring political contestation in such a way that it would enhance social acceptance and normative acceptability. CLC has found ‘deliberative supranationalism’ to be a crucial feature of the EU’s institutional set-up, which is both normatively desirable and explains part of the Union’s dynamism and problem-solving capacity. Theoretically, this chapter submits that the reality of deliberative supranationalism rests on the question of whether or not we can still regard the European Union (EU) mainly as a regulatory state. Since the regulatory state is essentially a world of common interests, there are few incentives for strategic bargaining behaviour. Nothing, however, could be further from an accurate account of the eurozone’s current state. Empirically, this chapter examines the conflicts and politics surrounding the ECB’s response to the crisis. It asks how the new quality of the intergovernmental conflict that emerged during the crisis has affected the political interactions around monetary-policy decisions. The busy emergency actions at European Council level have distracted scholarly attention somewhat from the important decisions of the Central Bank.6 Consciously designed as a politically-independent institution governed by experts, the ECB would appear to be a stronghold of both deliberation and supranationalism. By contrast, the chapter’s main empirical thesis is that, far from being an example of deliberative supranationalism, the monetary-policy response has been the subject of fierce contestation, recourse to formal voting, arguing from inflexible positions, and partial deadlock. The following section (II) provides a short background on the euro crisis and re-visits how the associated conflicts are rooted in socio-economic diversity. Section III explains the concept of deliberative supranationalism and its place within CLC. It also argues at a conceptual level that the applicable domain of deliberative supranationalism is the regulatory state, and situates monetary policy within this realm. After a few methodological reflections in Section IV, Section V looks at the European crisis response and asks to what extent decisions were taken in a deliberative mode of interaction. In this main section, I advance three observations: Member States initially found themselves in a political stand-off (Section V.1), at which point the ECB flew in like a rescue helicopter (Section V.2). The conflict between the eurozone periphery and the core also affected ECB decision-making, leading to isolation and inflexible positions (Section V.3). Each observation implies that the new degree of conflict, which the euro crisis has brought about, has discouraged deliberative interaction in monetary politics. It also shows how the ECB did not

6 G Menz and MP Smith, ‘Kicking the Can Down the Road to More Europe? Salvaging and the Future of European Economic Governance’ (2013) 3 Journal of European Integration 195, 203.

Deliberative Supranationalism 247 succeed in exploiting the intergovernmental differences to expand its mandate in the long run. Section VI discusses some implications of this conclusion.

II. BACKGROUND

A mere 10 years after its inception, the euro has faced a crisis that was severe enough to challenge its very existence. Several eurozone members, namely, Greece, Ireland, Italy, Portugal and Spain (the GIIPS),7 are, or were, unable to re-finance government debt at sustainable rates—or simply not able to finance it at all. They found themselves forced to cut public spending at a time of economic recession and surging unemployment. The proximate cause of the euro crisis was the 2007/2008 global banking and financial crisis. It originated in the collapse of the sub-prime segment of the United States mortgage market and culminated in the insolvency of Lehman Brothers and other high-street banks and insurance companies. Bankruptcies then spread to certain European financial institutions that had invested in ‘toxic’ US securities. Those considered ‘too big to fail’ had to be bailed out by their respective governments, straining public finances. More importantly, while credit supply was over-abundant before the financial crisis, after the failure of Lehman Brothers, the global economy was suddenly hit by a serious credit crunch that was particularly hurtful to the GIIPS economies. While the prescribed cures differ, there is a rough consensus about the structural cause of the euro crisis. Its root is seen in the heterogeneity of national economies that, within the Procrustean bed of a unitary currency, produced economic imbalances. One line of thought emphasises how the centralised monetary policy could not address asynchronous national business cycles.8 Thus, during the first years after Maastricht, the German economy, given its low rates of growth and inflation, suffered from real interest rates that were too high, a situation that led to stifling domestic demand and economic stagnation, and encouraged an export-led growth strategy. The situation in the GIIPS was reversed: the ECB’s prime rate locally translated into very low or even negative real interest rates at a time when the EMU periphery was already overheating. The large demand, fed by cheap private credit, absorbed much of German exports. But as long as money remained cheap, the system kept running in spite of the accumulating trade imbalances. It stopped working with the arrival of the financial crisis, when credit became scarce and banks started to scramble for cash. Another line of thought, sympathetic to the ‘varieties of capitalism’ school, does not deny the relevance

7

The acronym GIIPS has been chosen to avoid the use of the offensive acronyms, PIGS and PIIGS. FW Scharpf, ‘Monetary Union, Fiscal Crisis and the Preemption of Democracy’ (2011) 11 MPIfG Discussion Paper; J Leaman, ‘The Size that Fits No-one: European Monetarism Reconsidered’ in E Chiti, AJ Menéndez and P Texeira (eds), The European Rescue of the European Union?: The Existential Crisis of the European Political Project (Oslo, ARENA, 2012) 229–55; T Mayer, Europe’s Unfinished Currency: the Political Economics of the Euro (London, Anthem Press, 2012). 8

248 Henning Deters of the aforementioned mechanism, but draws further attention to the role of heterogeneous national growth models and institutions of wage co-ordination.9 The EU has been struggling in the last few years to resolve these problems without breaking up the eurozone. By the end of 2012, the main political crisis responses had been set up: a reform of economic governance institutions at EU level and a series of emergency funding packages, which were finally transformed into standing institutions and coupled with economic adjustment (‘conditionality’) programmes.10 These measures were accompanied by, and partly preceded by, a set of exceptional measures implemented by the ECB.11 The same diversity that led the eurozone into the crisis also makes it difficult to find viable ways out of it beyond mere emergency programmes. The euro rescue requires some sorts of transfer between the GIIPS and the euro core, but the EU has no way to do this other than via the arduous process of intergovernmental negotiation. This problem is further exacerbated by the differences among those who believe that the crisis can be resolved at its root by implementing fiscal austerity in the GIIPS countries and by adopting the northern, export-centred growth model as a ‘onesize-fits all solution’, and those who argue in favour of reflationary measures.12

III. DELIBERATIVE SUPRANATIONALISM AND THE LIMITS OF THE REGULATORY STATE

III.1. Conflicts Law and Deliberative Supranationalism CLC as a normative re-constitution of European law draws on the basic notion of democracy as self-rule. Citizens must be able to conceive of themselves as the (indirect but) ultimate authors of the laws by which they are bound.13 CLC is also inspired by private international law (ie, ‘conflict of laws’)—the legal methodology by which to determine the legal system that applies in a dispute with crossborder elements. Because they may subject citizens to foreign law, these disputes pose a challenge to the notion of democratic authorship: national democracy in transnational problem-settings is democracy curtailed. A simplistic solution to deal with such externalities is to integrate the conflicting elements into a hierarchy. But long before a European super-state, there are obvious limits to further integration, most notably pertaining to the accountability of supranational 9 PA Hall, ‘The Economics and Politics of the Euro Crisis’ (2012) 4 German Politics 355–71; M Höpner, ‘Die Verschiedenheit der europaeischen Lohnregime und ihr Beitrag zur Eurokrise: Warum der Euro nicht zum heterogenen Unterbau der Eurozone passt’ (2013) 5 MPIfG Discussion Paper. 10 See Ruffert, n 2 above; M Buti and N Carnot, ‘The EMU Debt Crisis: Early Lessons and Reforms’ (2012) 6 Journal of Common Market Studies 899–911. 11 See F Drudi, A Durré and FP Mongelli, ‘The Interplay of Economic Reforms and Monetary Policy: The Case of the Eurozone’ (2012) 6 Journal of Common Market Studies 881, 886–89; Mayer, n 8 above, 108–11. 12 Hall, n 9 above. 13 See C Joerges, Chapter one in this volume, and D Schneidermann, Chapter two in this volume.

Deliberative Supranationalism 249 institutions and the heterogeneity (economic, regulatory, cultural) among the EU Member States. CLC puts itself forward as a middle ground that steers clear of the excessive demands of transnational constitutionalism, on the one hand, and a legal pluralism that is overly optimistic about the legal system’s potential for selfregulation, on the other. It emphasises the procedural and pragmatic character of conflict resoluion through litigation that eschews carving solutions in stone, and it underlines the ‘other’-regarding logic behind private international law principles such as comity.14 Thus, CLC has set its hopes on the deliberative forms of conflict-handling among national democracies, and has called upon the EU to ‘lay down a legal framework which structures political deliberation’.15 Examples of deliberative procedures were found and critically examined in the myriads of ‘comitology’ committees.16 Such institutionalised deliberative supranationalism was seen as a way to complement the national democracy that is curtailed by not including all those affected. It would give a voice to ‘foreigners’ and allow them to find normatively satisfying solutions to what would be understood as common problems. While the outcomes of interest-based bargaining tend only to replicate the negotiators’ unequal starting positions,17 the logic of deliberation is transformative to the extent that it requires taking the ‘other’ into account as an equal counterpart in a mutual truth-seeking endeavour.

III.2. Deliberation The deliberative features of the EU’s decision-making system have been identified and advertised as a way of coping with the problem of externalities that inevitably arise in a common market. The notion has subsequently been extended to other settings, and, with a certain optimism befitting the decade following Maastricht, it has also become an attractive theoretical framework that seemed to explain, or, in fact, did explain, a lot of the European Union’s unexpected dynamism and problem-solving capacity in those years.18 Thanks to the conflict-taming qualities of deliberative supranationalism, the tensions which a transnational ‘market

14 C Joerges, ‘Rethinking European Law’s Supremacy: A Plea for a Supranational Conflicts of Law’ in B Kohler-Koch and B Rittberger (eds), Debating the Democratic Legitimacy of the European Union (Lanham MD, Rowman & Littlefield, 2007) 311, 312–15. 15 C Joerges and J Neyer, ‘Deliberative Supranationalism Revisited’ (2006) EUI Working Papers Law, 23. 16 C Joerges and J Neyer, ‘Transforming Strategic Interaction into Deliberative Problem-solving. European Comitology in the Foodstuffs Sector’ (1997) 4 Journal of European Public Policy 609–25. 17 FW Scharpf, Games Real Actors Play: Actor-centered Institutionalism in Policy Research (Boulder CO, Westview Press, 1997) 146. 18 J Neyer, ‘Explaining the Unexpected. Efficiency and Effectiveness in European Decision-Making’ (2004) 1 Journal of European Public Policy 19–38.

250 Henning Deters without a state’19 would inevitably provoke20 neither stalled nor disrupted the integration project. Deliberation and bargaining are two ideal-typical interaction styles in negotiations. Putting aside long-winded conceptual discussions about what constitutes ‘real’ deliberation, I content myself, for the purpose of this study, with a roughand-ready analytical definition:21 —

—

Deliberation (synonym: ‘arguing’) refers here to an exchange of arguments in search of the best solution to common policy-problems. Negotiators strive for a reasoned consensus and conceive of their discussion as a collective truth-seeking endeavour. They try to persuade, rather than to pressure, their counterpart(s) into agreement, and are open to being persuaded by the ‘unforced force of the better argument’.22 Deliberation may transform individual preferences. Bargaining is an exchange of threats and promises in search of a modus vivendi. Through offers and counter-offers, negotiators strive for a deal that renders them better off than their individual ‘best alternative to a negotiated agreement’,23 which may be very unequal and is therefore a resource of bargaining power. They try to get as close to their preferred negotiation outcome as possible, taking the preferences of their counterparts into account only strategically. Bargaining may, therefore, induce negotiators to mis-represent their preferences and engage in all sorts of opportunistic behaviour.

In real-world interactions, deliberation and bargaining blend into each other.24 Some studies try to measure quantitatively the degree to which negotiations conform to perfect deliberation or bargaining.25 My aim is less sophisticated. I wish to examine whether policy-makers have met minimum requirements for deliberation (see Section IV) during the political negotiations surrounding the euro crisis.

19

Joerges and Neyer, n 16 above. K Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (Boston MA, The Beacon Press, 2001). 21 T Risse, ‘“Let’s Argue!” Communicative Action in World Politics’ (2000) 1 International Organization 1, 7; J Elster, Explaining Social Behaviour. More Nuts and Bolts for the Social Sciences (Cambridge, Cambridge University Press, 2007) 405–9. 22 J Habermas, Between Facts and Norms: Contributions to a Discourse Theory of Law and Democracy (Cambridge MA, The MIT Press, 1996) 306. 23 R Fisher and W Ury, Getting to YES: Negotiating Agreement without Giving in (New York, Penguin Books, 1981). 24 J Lewis, ‘How Institutional Environments Facilitate Co-operative Negotiation Styles in EU Decision-making’ (2010) 5 Journal of European Public Policy 648–64. 25 J Blom-Hansen and GJ Brandsma, ‘The EU Comitology System. Intergovernmental Bargaining and Deliberative Supranationalism’ (2009) 4 Journal of Common Market Studies 719–40. 20

Deliberative Supranationalism 251 III.3. Regulation and Re-distribution The quality of political interaction is obviously affected by the intensity of political conflict. The intensity of conflict varies across policy types. This relationship is captured by Theodore Lowi’s famous dictum that ‘policies determine politics’.26 The substance of a political issue thus affects the mode of interaction among political actors. More specifically, following Lowi, it has become commonplace in policy analysis to distinguish between (re-)distributive and regulative policies, and to expect that political interactions differ, depending on these policy types. Re-distributive policies allocate benefits to certain recipients, and, at the same time, impose costs on others. These costs and benefits are assigned unequally. Re-distribution, more often than not, takes place via the budgetary process, be it at national level or—in very few areas, such as the Common Agricultural Policy or the Cohesion Funds—at the level of European expenditure policy. By re-allocating values, re-distributive policies create clearly identifiable winners and losers, and are therefore likely to be contested and to become subject to intense bargaining. Regulatory policies, by contrast, are about normative rules. They do not distribute charges and benefits, but, instead, assign rights and duties. Regulations do not impinge on the budget, be it the notoriously minute budget of the EU or that of its Member States. For the regulator, regulatory policies are, therefore, all but cost-free. While regulations may have indirect and unequal cost effects, these are borne by the regulated.27 The distribution of the indirect costs and benefits of regulatory policies is often opaque and therefore escapes distributive bargaining. Moreover, regulatory policy-making takes place ‘against a backdrop of common benefits’.28 It is, in other words, either an issue of pure positive-sum co-ordination or at least a mixed motive situation, in which decision-makers have to negotiate both about the production and the distribution of value. While, in the latter case, the problem of finding the Pareto frontier may be complicated by conflicts along the distributive dimension, Pareto-efficient solutions, by definition, do not exist for (re-) distributive policies. Turning back to the issue of the quality of political interaction, the literature on the ‘negotiator’s dilemma’29 tells us that the attitudes and orientations required to jointly create value, that is, the deliberation part of the negotiations, differ

26 TJ Lowi, ‘Four Systems of Policy, Politics, and Choice’ (1972) 4 Public Administration Review 298, 299. 27 G Majone, ‘The European Community between Social Policy and Social Regulation’ (1993) 2 Journal of Common Market Studies 153, 161. 28 JA Caporaso, ‘The European Union and Forms of State: Westphalian, Regulatory or PostModern?’ (1996) 1 Journal of Common Market Studies 29, 40. 29 DA Lax and JK Sebenius, The Manager as Negotiator: Bargaining for Cooperation and Competitive Gain (New York, Free Press, 1986).

252 Henning Deters systematically from those required for distributing value, that is, the bargaining part of the negotiations.30 From the bird’s eye view, the conflicts about the crisis response resemble a giant ‘battle of the sexes’ game. For the north, ‘the spread of contagion across the eurozone rendered the cost of bail-out potentially less than the cost of adhering to rules of fiscal federalism’.31 While, at the beginning of the crisis, northern policymakers were still uncertain about the repercussions of letting individual countries default—until autumn 2012, German Chancellor Angela Merkel still considered letting Greece exit from the Euro32—they finally settled on the notion that the fall-out would be too costly. The consequences of non-agreement came to be seen as less and less acceptable. ‘It was thus in the interest of all in Europe to find a solution to the sovereign debt crisis’.33 But this, of course, did not settle the issue of who should bear the costs of the crisis. With its minute budget and its few truly re-distributive policies, on the one hand, and its ever-expanding regulatory powers, on the other, the dominant image of the EU in recent years has been that of a ‘regulatory state’.34 Ideally, regulation is about producing outcomes in everyone’s interests—‘public interest policies’ with Pareto-efficient outcomes. It is precisely with regard to the safeguarding of the public interest that the delegation of regulatory powers to supranational institutions has been explained and justified. This notion maintains that governments have, in their long-term interest, delegated, for example, the monitoring and implementation of the single-market and competition-policy rules to independent agents—the European Commission and the European Court of Justice—to prevent them from free-riding35 and from adopting policies in the short-term interest of frequently changing electoral majorities.36 The concepts of the regulatory state and of deliberative supranationalism were first tested in the early 1990s, and each first examined the newly-emerging field of ‘social regulation’.37 The handling of external effects is a central issue in the regulatory state, just as it is for deliberative supranationalism. As James Caporaso observes:38 ‘the regulatory state is … essentially an international and arguably

30

Scharpf, n 17 above, 130–32. Menz and Smith, n 6 above, 202. 32 L Bini Smaghi, Morire di Austerità: Democrazie Europee con le Spalle al Muro (Bologna, Il Mulino, 2013) 39. 33 L Gocaj and S Meunier, ‘Time will Tell: The EFSF, the ESM, and the Euro Crisis’ (2013) 3 Journal of European Integration 239, 241. 34 G Majone, Regulating Europe (London, Routledge, 1996). 35 MA Pollack, ‘Delegation, Agency, and Agenda Settings in the European Community’ (1997) 1 International Organization 99, 105. 36 G Majone, ‘Europe’s Democratic Deficit: The Question of Standards’ (1998) 4 European Law Journal 5, at 17–18. 37 G Majone, ‘The Development of Social Regulation in the European Community. Policy Externalities, Transaction Costs, Motivational Factors’ (1995) 50 Aussenwirtschaft 1, 79–110. 38 Caporaso, n 28 above, 9. 31

Deliberative Supranationalism 253 supranational state specializing in the control and management of international externalities’. With the euro crisis, the regulatory state has been severely challenged. The international bail-out programmes are only the most prominent examples of recent political decisions with a re-distributive purpose. The distributive implications of monetary-policy decisions taken by the politically independent ECB have also come into view and were politicised accordingly. This is particularly interesting, because the independence of the ECB has been justified for so long precisely along the lines of the regulatory state argument: monetary policy should be shielded from the re-distributive pretensions of governments catering to their particular clientele; and the delegation of monetary policy to an independent central bank committed exclusively to price stability would, therefore, improve aggregate welfare in the long term.39 If it is true that, as critics have argued, the ECB has, in its handling of the crisis, introduced fiscal policy through the monetary back-door,40 a distributive conflict should affect decision-making among central bankers. Accordingly, the second part of the following analysis examines the emerging conflicts around the hitherto apolitical issue of central banking and how they affect the mode of interaction among responsible decision-makers.

IV. METHODOLOGICAL REMARKS

The following analysis examines the crisis response of the European Central Bank, on the one hand, and the European and ECOFIN Council, on the other. As will become apparent, the responses of both actors are closely intertwined, with the supranational ECB partly stepping into the breach for a paralysed inter-governmental Council. From a theoretical point of view, deliberative supranationalism should be expected of the ECB, rather than of the Council(s). The latter are highly salient venues, staffed by high-ranking politicians, who are directly accountable to their domestic electorates. The function of the European Council, moreover, is to define ‘the general political directions and priorities’ (Article 13 TEU) of the Union, so that agreement over political goals cannot be taken for granted. The Council thus seems already prima facie an unlikely place for policy-makers to deliberate. Yet, even so, it has recently been argued that the Council has emerged during the crisis as a prime site for open-minded deliberation.41

39 KR McNamara, ‘Rational Fictions: Central Bank Independence and the Social Logic of Delegation’ (2002) 1 West European Politics 47, 54. This is not to say that Majone has not been quite critical about the degree of the ECB’s independence, calling it even a ‘constitutional monstrosity’, for example, in: McNamara, Europe as the Would-be World Power: The EU at Fifty (Cambridge, Cambridge University Press, 2009) 34. 40 W Schelkle, ‘European Fiscal Union: From Monetary Back Door to Parliamentary Main Entrance’ (2012) CESifo Forum 1. 41 U Puetter, ‘Europe’s Deliberative Intergovernmentalism: the Role of the Council and European Council in EU Economic Governance’ (2012) 2 Journal of European Public Policy 161.

254 Henning Deters Consider, by contrast, the ECB. The choice for the ECB as a second case is motivated not only because of its being the relevant actor in European currency issues; as a politically independent, supranational body governed by policy experts, it is also an excellent test case for deliberative supranationalism. In fact, the ECB is the most politically independent central bank in the world, and the Member States defined, in the Treaty of Maastricht, its sole purpose and mandate: to preserve price stability. Accordingly, Kathleen McNamara believes, ‘[i]f the ECB is staffed by professionals largely educated and socialized along similar lines, consensus is relatively likely in the ECB as national policy traditions become less dominant over the past decades of monetary co-operation’.42 Political independence, expert staff, and general agreement over the goals of monetary policy suggest that the ECB should be very much shielded from political contestation, and should thus embody a prime example of the consensusoriented, arguments-based interaction captured by deliberative supranationalism. However, my analysis demonstrates that deliberative supranationalism has a hard time even in the ‘most likely case’43 of the ECB. The empirical information for the case study stems from news sources and publicly available documents generated by the European institutions. I do not attempt a fine-grained measurement of the extent to which speech-acts of each individual actor were deliberative in individual decisions. The case studies take a more distanced and broader view, and examine whether crisis negotiations have met the minimum requirements for deliberation. To operationalise the theoretical notion of deliberation, I use a list of simple and established indicators: if deliberation prevailed, policy-makers would strive for reasoned consensus, offer arguments for their positions (referring to shared norms and rules), show willingness to being persuaded, avoid insisting on an isolated position or outright obstruction of a decision as well as avoid pushing others into isolation. If bargaining prevailed, policy-makers would rarely reach consensus, maintain inflexible positions and offer no—or only perfunctory—arguments for them, disregard collectively-shared norms and rules, engage in brinkmanship and arrive at lowest-common-denominator agreements by a quid pro quo exchange of concessions (package-deals, side-payments, log-rolling, etc). In deliberation, all Member States bear equal weight as the participants in a collective use of reason. In bargaining, large Member States may use their power to influence the outcome.44

42 KR McNamara, ‘Economic Governance, Ideas and EMU: What Currency does Policy Consensus have Today?’ (2006) 4 Journal of Common Market Studies 803, 813. 43 J Gerring, Case Study Research: Principles and Practices (Cambridge, Cambridge University Press, 2007) 116–19. 44 MA Pollack and GC Shaffer, ‘Risk Regulation, GMOs and the Limits of Deliberation’ in D Naurin and H Wallace (eds), Unveiling the Council of the European Union: Games Governments Play in Brussels (Houndmills, Palgrave Macmillan, 2010) 144, 149; A Dür and G Matteo, ‘Bargaining Power and Negotiation Tactics: The Negotiations on the EU’s Financial Perspective 2007–13’ (2010) 3 Journal of Common Market Studies 557, 561; Lewis, n 24 above.

Deliberative Supranationalism 255 V. ANALYSIS

The combination of national socio-economic diversity and centralised monetary policy played a major role in unleashing the euro crisis. The same heterogeneity also means that Member States have been affected by the crisis differently and disagree about the way in which it should be managed. The following analysis suggests that the increased level of inter-governmental conflict has frustrated deliberative supranationalism during the management of the crisis. In particular, I advance three claims: first, the Member States were stuck in distributive bargaining and therefore could not agree fast enough on decisive emergency action (Sub-section V.1.). Secondly, this nolens volens empowered the ECB to the point of stretching its legal mandate (Sub-section V.2.). Yet, finally, even the Central Bank’s internal decision-making was affected by controversy about how financial risks should be distributed. This had implications for the effectiveness and perceived legitimacy of its decisions (Sub-section V.3.). The analysis of the negotiations on the emergency responses in the inter-governmental Council and the supranational ECB thus casts doubt on the notion that deliberative problem-solving thrives in times of crisis.

V.1. Political Stalemate and Incrementalism It would be a gross overstatement to claim that the eurozone governments remained completely inactive in response to the crisis. In order not to put the life of the common currency at risk, the more affluent Member States have, in their own best interest, made hundreds of billions of euros available to the GIIPS in rescue loans and guarantees. Given the heretofore sacrosanct ‘no bail-out’ clause (Article 125 TFEU), this is nothing short of a paradigmatic innovation (and its implications are currently up for debate). Nevertheless, the initial response of the Member States was slow, incremental and ultimately ineffective. The underlying reason for this is that distributive conflict impaired deliberative problem-solving. V.1.(a). The Greek Vortex That the response was slow can be seen first of all from the fact that the eurozone Member States needed more than half a year to agree on providing emergency loans to Greece, the first eurozone country on the verge of sovereign default. Already in early October 2009, the newly-elected finance minister Giorgos Papakonstantinou disclosed the dismal state of the Greek finances,45 but it was not until April 2010, after Greek bonds had been downgraded to junk status, that 45 The preceding government had—with a little help from Goldman Sachs and JP Morgan— tweaked the fiscal statistics, meaning that inter alia the Greek deficit was more than three times higher than previously reported and would hence exceed the Maastricht convergence criteria by far.

256 Henning Deters the eurozone governments finally agreed on the details of a loan guarantee. It was the first of several ‘rescue packages’ to come. In the meantime, the Member States, and most of all Germany, had been reluctantly kicking the proverbial can down the road. In the beginning, they hoped that the combination of rhetorical commitments to solidarity, on the one hand, and calls to fiscal discipline, on the other, which they put forward in the 11 February 2010 informal summit meeting, would calm down the bond markets.46 But when these hopes turned out to be in vain, and the break-up of the euro with its transnational fallout came to be regarded as an actual possibility, the German stance changed, at least to some extent. Following a Franco-German initiative, the eurozone governments declared on 11 April 2010 that they would provide a package of co-ordinated bilateral loans in the amount of 30 billion euros, which the International Monetary Fund (IMF) would top off with another 15 billion. After the markets had reacted ‘with a burst of scepticism’,47 the eurozone governments finally adopted the first Greek bail-out package on 2 May 2010, which now consisted of 110 billion euros; 80 billion in bilateral loans pooled by the Commission, and 30 billion provided by the IMF. The programme was supposed to run for three years but it had to be ramped up twice. Thus, one piecemeal response was followed by another. V.1.(b). The EFSF: Too Little, Too Late Instead of calming the situation, the original Greek bail-out once more renewed fears that the risk of sovereign default might spread to other European countries such as Spain, Italy, Portugal and Ireland.48 It was at this moment that the idea of an institutionalised European rescue fund finally gained leverage. Immediately after the original emergency deal for Greece was adopted, the Member States announced the semi-permanent European Financial Stability Facility (EFSF) on 10 May 2010, a special purpose vehicle that would issue bonds backed by the guarantees on the part of eurozone Member States. It was to be large enough to cover the needs of countries such as Portugal or Ireland and thereby assure the bond markets that those states would remain able to service their debt. Under the new mechanism, the Commission, following a formal request, and assisted by the ECB and the IMF, would negotiate an aid programme with the respective country, the conditions of which were fixed in a ‘memorandum of understanding’. The final decision before the EFSF is allowed to act remains with the ECOFIN Council, however, and thus firmly within the hands of the Member State governments, each of which holds a veto. Originally, the fund was charged with managing 440

46 D Schwarzer, ‘Griechenland enthuellt Schwaeche der EWU’ (2010) SWP-Aktuell; European Council, ‘Statements by the Heads of State or Government of the European Union’, 4 February 2011, EUCO 2/1/11. 47 Gocaj and Meunier, n 33 above, 239, 241. 48 Bini Smaghi, n 32 above, 79; Mayer, n 8 above, 109; Gocaj and Meunier, n 33 above, 242.

Deliberative Supranationalism 257 billion euros backed by Member State guarantees in proportion to their share in the paid-up capital of the ECB. By including loans from the IMF and an existing European balance-of-payments assistance facility, the combined volume was 750 billion. Just like the Greek aid programme, the new rescue mechanism was also amended repeatedly to keep pace with the bond market developments. The EFSF began functioning only on 4 August 2010, after sufficient Member States had confirmed their guarantee commitments. The first country to slip under the new ‘rescue blanket’ was Ireland. In November 2010, Ireland reluctantly accepted a 67.5 billion euro EFSF programme after the ECB had threatened to cut the lifeline it had thrown to ailing Irish banks, while the EFSF was not yet operational.49 At this point, it was foreseeable that contagion would soon spread to Portugal, Spain, and maybe Italy. The bail-out fund had only just been set up and already needed amendment. The negotiations about the EFSF amendment were coupled with other economic governance issues. By and large, the eurozone core, led by Germany and including Finland and The Netherlands, demanded more fiscal discipline and self-reliance. They were sceptical about another extension of the rescue umbrella. In particular, Chancellor Merkel was extremely cautious, wanting to limit the cost to the German electorate. Federal elections were held in September 2013, and several Länder elections took place during the negotiations of the rescue umbrellas, such as the election of the Landtag in the largest federal State, North Rhine-Westphalia. In May 2010, Merkel’s options were also constrained by the uncertain stance of the Federal Constitutional Court, with several pending cases on the constitutionality of the bail-out measures.50 Germany’s primary goal was, therefore, to limit future bail-outs, and, instead, to strengthen the ‘stability union’ by de-politicising the budgetary rules of EMU. On the receiving end, the euro periphery pushed for more joint liability—be it under the EFSF structure or in the form of Eurobonds. The French position stood between these extremes, with a banking sector heavily exposed to the GIIPS debt but less constrained than Germany by the judiciary and the electorate. The compromise was an exchange of concessions between France and Germany, the two eurozone heavyweights.51 Accordingly, there would be future bail-outs, but the private sector was to be involved. These ‘haircuts’ were a strategy hatched out by Merkel’s advisors to appease a domestic electorate to whom the notion of ‘using taxpayers’ money to bail out banks’ was anathema. At first, the French President Nicolas Sarkozy had fiercely opposed this notion due to the exposure of French financial institutions to periphery debt. He was supported,

49

Bini Smaghi, n 32 above, 167–68. H Deters, ‘National Constitutional Jurisprudence in a Post-National Europe: The ESM Ruling of the German Federal Constitutional Court and the Disavowal of Conflict’ (2014) 20 European Law Journal 2, 204. 51 Bini Smaghi, n 32 above, 80; Mayer, n 8 above, 171. 50

258 Henning Deters albeit for different reasons, by the president of the ECB at the time, Jean-Claude Trichet, who, on the eve of the Irish EFSF bail-out, was struggling to re-build investor confidence. At Deauville in October 2010, during a series of sunset strolls, the President of the French Republic conceded the private sector involvement in return for the German Chancellor dropping her demand for automatic sanctions under a tightened excessive deficit procedure.52 The ECOFIN met the same day in Luxembourg and was, much to the assembled finance ministers’ chagrin, presented with a fait accompli. With the exceptions of Finland and The Netherlands, the remaining eurozone countries could live with the fact that the excessive deficit procedure would not entirely be delegated to the Commission. But the ECB remained strictly opposed to the private sector involvement, and Trichet thus lobbied the Member States at least to dilute the haircut in order not to shatter market confidence completely. The governments did not, however, dare to pick the Franco-German compromise apart, most likely to avoid further delays. In front of journalists, Sarkozy declared the ‘victory of politics over technocracy’,53 alluding to Trichet’s cautioning against the potentially disastrous effects of unsettling private bondholders. At the same minute, traders began to divest their GIIPS bonds wholesale. Yield spreads between core and periphery bonds rose again, frustrating the efforts that the ECB had undertaken following the first Greek bail-out to stabilise markets with its large-scale bond market interventions in May (see Section V.1.(a)). Only after the mistake had become apparent, did Sarkozy silently instruct his technical experts to re-discuss some of the aspects of private sector involvement with the central bankers. In the December 2010 European Council conclusions, the clause about private sector involvement was, to some extent, alleviated,54 but the issue would flare up again. V.1.(c). The ESM: A Permanent Makeshift When the ECOFIN approved the Irish programme, it also presented the details of a permanent fund, the European Stability Mechanism (ESM) that would run in parallel with and ultimately replace the EFSF. The new mechanism was owed to the insight that it needs more than a temporary fix to restore a crisis of confidence. In particular, Germany had, for a long time, tried to avoid a permanent rescue fund. Pressured by these developments, Member States agreed, at the March 2011 Council summit, to raise the effective lending capacity of the EFSF/ESM to 500 billion euros, to lower the interest rates by 100 basis points, and to equip the institution with bond-buying powers in primary markets. These changes notwithstanding, the new institution was not re-built from the ground up. As Gocay and Meunier observe, the ‘creation and existence of the EFSF structured the 52 C Forelle et al, ‘As Ireland Flails, Europe Lurches Across the Rubicon’, Wall Street Journal, 27 December 2010. 53 Ibid. 54 Bini Smaghi, n 32 above, 78–83.

Deliberative Supranationalism 259 subsequent terms of the debate’.55 An initial makeshift response, that had emerged in an ‘atmosphere of confusion, panic, and desperation’56 and that was determined more by the desire of Member States to retain sovereignty than by effective crisis-management, became locked in. The ESM therefore inherited the main shortcomings of its predecessor, namely its limited firepower, which depends on the contributions of its fiscally sound Member States, and the vulnerability to its own downgrades, which depend on the credit ratings of its Member States.57 The reformed institution thus again turned out to be insufficient to restore confidence in the bond markets and lastingly depress borrowing costs for the GIIPS countries. Greece needed another bail-out, and in May 2011, Portugal was forced into a rescue programme as well. The issues of another extension of the EFSF/EMS structure and of how the private haircut should be implemented in the upcoming bail-out programmes were back on the agenda. In July 2011, Member States agreed to shore up the fund’s capital guarantee once more from 440 to 780 billion euros. Controversy over these extensions delayed the ratification until October 2011. After considerable international pressure, the last country to ratify the extension was Slovakia, after the first attempt to muster a parliamentary majority had failed and had led to the fall of the governing coalition under Prime Minister Iveta Radicˇová. The details of the second EFSF/ESM reform were hammered out at another Franco-German summit. The European accord finally presented in July 2011 was based on a position Sarkozy and Merkel had jointly drafted in Berlin. This time, Trichet also attended the meeting.58 The second Greek bail-out was now to be conducted under the auspices of the ESM. Merkel again insisted that the private sector should participate in a re-structuring of the Greek debt. In order not to send bond markets down the rollercoaster this time, the compromise, for which the German government managed to gain the assent of national financial institutions, assured that the haircut be ‘voluntary’. France conceded the haircut in return for Germany accepting additional powers for the ESM, namely, giving states precautionary credit lines even before they are cut off from the market, to re-capitalise banks, and to intervene in secondary markets. Germany had previously blocked these proposals. Also the Finnish and Dutch parliaments had been unlikely to sign the deal without a haircut. A more ambitious proposal supported by France and other eurozone countries was to prop up the rescue fund with a banking licence. The ESM’s market interventions could then have been backed by the ECB’s unlimited firepower. Although secondary market interventions would have been made contingent on prior assessment by the Troika of the IMF, the ECB and the European Commission, the German government and the Bundesbank rejected the notion, pointing to the risk of moral hazard. Even in its ‘voluntary’ 55 56 57 58

Gocaj and Meunier, n 33 above, 248. Ibid, 243. D Gros and T Mayer, ‘Refinancing the EFSF via the ECB’ (2011) CEPS Commentary. Reuters (21 July 2011).

260 Henning Deters form, the haircut agreed in July amounted to a loss in value of roughly a fifth of private creditors’ exposure. This was a major reason why in August 2011, investors began to ditch Spanish and Italian bonds.59 By the end of July, Spain and Italy were paying more than six per cent for 10-year bonds.60 V.1.(d). Crisis Bargaining or Crisis Deliberation? ‘[I]n a period of crisis, each country defends its own interests while attempting to benefit from “free-rider” tactics’, maintains Michel Aglietta with respect to the euro crisis.61 This certainly captures the narrative presented above more adequately than the notion that the crisis has pushed the European and ECOFIN Council into a mode of ‘deliberative intergovernmentalism’.62 In terms of its effectiveness, the response of the Council has certainly not been an example of deliberative problem-solving: My analysis confirms Peter Hall’s assessment, according to which the response ‘has been largely unsuccessful and far more costly than it might have been if decisive action had been taken earlier’.63 As a typical example of incremental muddling-through, the EFSF only came about after other ad hoc experiments had failed; and because it quickly turned out to be ‘wholly inadequate’64 the instrument had to be amended time and again. In many respects, it was the result of ineffective compromises on the least common denominator. Policy-makers, time and time again, failed to reach consensus. Decisions were taken in the last minute, mostly disappointed bond market expectations, and thus failed to lower the cost of borrowing in Southern Europe. Partly, the effects were even counterproductive, and with every disappointment, the promise that EU institutions were capable of resolving the crisis became less credible. Potentially more effective solutions were blocked by inflexible positions, such as the granting of a banking licence to the EFSF or any other future rescue facility, so as to back up the structurally fragile rescue umbrella with the unlimited firepower of the ECB. In procedural terms, Council interactions even more suggested a bargaining rather than deliberative image of policy-making. Each step forward was preceded by protracted negotiations from fixed positions. The major bargains were concluded under what was euphemistically termed the joint ‘leadership’ of France and Germany, effectively reducing the remaining governments to mere bystanders. The Franco-German pairing moreover had little traction in itself, as it moved forward only when bilateral conflicts could be bridged via a series of package deals, as in Deauville and Berlin.

59 60 61 62 63 64

Bini Smaghi, n 32 above, 168; Mayer, n 8 above, 109–10. Gros and Mayer, n 57 above, 2. M Aglietta, ‘The European Vortex’ (2012) 75 New Left Review 15, 24. Puetter, n 41 above. Hall, n 9 above, 364. Menz and Smith, n 6 above, 199.

Deliberative Supranationalism 261 The fixed positions and by extension the lukewarm, piecemeal response were due to the ultimately re-distributive quality of the issues at hand. The GIIPS countries, which suffered from excessive risk premiums demanded more time to implement economic reforms and requested increased joint liability to ease the pressure in the meantime. Core eurozone states such as Germany, Finland and The Netherlands resisted these calls. They benefited from their low borrowing costs—the flipside of the risk premiums—and rejected the notion of being held accountable for what in their view were the self-inflicted results of fiscal profligacy and other bad economic policy decisions made by foreign governments. Relatively new eurozone members such as Slovakia joined the northerners.

V.2. The ECB as a Technocratic Stand-In The collective abdication of Eurozone governments has temporarily empowered another, supranational, institution: the ECB. The conflictive and cumbersome political decision-making on the rescue packages delayed their implementation, left markets insecure and even had perverse effects. Spreads between Eurozone bonds kept augmenting and Southern European Member States remained more or less cut off from market funding. The failure of deliberative problem-solving thus had created a governance vacuum, and the ECB set out to fill it. The bank found itself caught between a rock and a hard place. It could either interpret its mandate tightly, strictly observe the prohibition of monetary state financing, avoid getting tangled up in fiscal policy, watch periphery states default and thereby risk the disorderly break-down of the eurozone. Or it could point to a greater responsibility (vaguely derived from Article 127 TFEU) for the integrity of the currency and adopt measures that would momentarily ease the burden on the periphery, while possibly circumventing Article 123 TFEU. On several occasions, the ECB decided in favour of a more activist stance and thereby, as German central Banker Weidmann put it bluntly, ‘took up the slack’ that governments had left behind when they ‘deliberately avoided decisions’.65 In addition to its standard interest rate policy, it funnelled liquidity to sovereign debtors either through the secondary market or through the banking system by means of various non-standard measures, namely (1) the Securities Market Programme (SMP), (2) Longer-term Re-financing Operations (LTROs), and (3) the Outright Monetary Transactions Programme (OMT). (1) As noted above, the first Greek bail-out came too late, was too small, and hence only incited new nervosity. Next, Irish and Portuguese bonds came under pressure, and the EFSF was set up. It took policy-makers longer than planned, however, to get the fund working.66 The ECB therefore began to buy the 65 S Böll, M Sauga and A Seith, ‘Mario Draghi’s New Euro Rescue Plans Sow Strife in ECB Council’, Spiegel Online (July 2012). 66 Bini Smaghi, n 32 above, 167.

262 Henning Deters sovereign debt of troubled EMU members on the secondary market in order to bring their bond yields down. Starting in May 2010, the year following the first Greek bail-out, it acquired Greek, Irish and Portuguese bonds in the amount of some 75 billion euros. This initial bond-buying policy later became known as the ‘Securities Market Programme’ (SMP). The European Council, in Summer 2011, finally decided on augmenting the Greek programme and on the details of a European rescue fund. The deal was based upon the Franco-German agreement that included a ‘voluntary’ haircut on Greek debt held by private investors. The haircut incited nervosity among private bondholders. When Italian and Spanish bond markets came thus under pressure, the ECB begun to ‘actively implement’67 SMP. Between late June 2011 and the end of the year, it more than re-doubled the volume of government and covered bonds on its balance sheet.68 The ECB linked its purchases of Italian and Spanish bonds to promises of fiscal consolidation and economic reform, which these countries accepted in two confidential letters, blurring the line between (supranational) monetary and (domestic) fiscal policy.69 The intervention temporarily brought Italian bond yields down from almost 6.5 per cent to 5.0 per cent during the summer, but they went up to 7.5 per cent in November 2011, when the Berlusconi government did not implement austerity as markets and the ECB had expected.70 While Germany and the Bundesbank criticised the SMP, they also rejected the ESM banking licence that would have relieved the ECB from pursuing the programme. (2) In December 2011 and February 2012, the ECB conducted two three-year Longer-term Re-financing Operations (LTROs). These instruments ran much longer than the main re-financing operations, which have mostly two-week or one-month maturities, and they also ran longer than any LTRO before 2008, the maximum having been three months. Financial institutions were offered 1.2 trillion euros at a low one per cent interest rate. The ECB, moreover, relaxed its collateral requirements to the effect that those banks that participated in the LTROs could deposit ‘bad’ sovereign debt at the ECB. In particular, the ECB waived credit rating requirements for Greek, Irish, and Portuguese bonds. The stated aim of the three-year LTROs was to prevent inter-bank lending from freezing, as it did when the global financial crisis first hit Europe in 2008, and thereby keep the transmission of the ECB’s interest rate policy to the real economy working.71 However, the LTROs also encouraged financial institutions to buy government bonds, and thereby indirectly helped distressed sovereign debtors and pushed their bond yields down. Most of all, GIIPS banks used the cheap LTROs to stock 67

European Central Bank, Statement of the President of the ECB, 7 August 2011. Bini Smaghi, n 32 above, 165–66; Drudi, Durré and Mongelli, ‘The Interplay of Economic Reforms and Monetary Policy’ n 11 above, 889. 69 Bini Smaghi, n 32 above, 168–69. 70 Mayer, n 8 above, 155. 71 P Cour-Thimann and B Winkler, ‘The ECB’s Nonstandard Monetary Policy Measures: the Role of Institutional Factors and Financial Structure’ (2013) Working Paper Series 1528, European Central Bank. 68

Deliberative Supranationalism 263 up on more profitable government bonds. This was the case in particular with Italian and Spanish banks. In Italy, this operation together with the replacement of the Berlusconi government by a technical government under the leadership of ex-Commissioner Mario Monti in November 2011 brought yields back towards five per cent, but it did little for Spain.72 Since southern European banks preferred bonds of their own governments, as Hall remarks, ‘an increased proportion of southern debt is now held, outright or as collateral, by the ECB, and the transnational character of financial flows in Europe has eroded’.73 Instead of funding government debt directly, which the ECB is not allowed to do, commercial banks, as it were, functioned as intermediaries. Nicolas Sarkozy was well aware of this mechanism, when he told reporters that the ECB’s huge liquidity injection ‘means that each state can turn to its banks, which will have liquidity at their disposal’. The ‘Sarko-Trade’, as it was dubbed then, comes with side-effects. As Mayer warns, ‘entire national banking sectors become dependent on the ECB funding their assets when the financial market regards the government debt these banks hold as impaired’.74 (3) At the end of July 2012, the height of another crisis wave, ECB president Mario Draghi at a conference in London famously announced that ‘within our mandate, the ECB is ready to do whatever it takes to preserve the Euro. And believe me, it will be enough’.75 Behind this statement stood the plan to buy sovereign bonds on the secondary market (which, in contrast to direct purchases from governments—the ‘primary market’—it is allowed to do) to bring bond yields down. Financial markets and periphery states picked up this announcement with delight, seeing it as the long-awaited ‘bazooka’ that would finally restore confidence. Draghi’s announcement was later implemented as the Outright Monetary Transactions (OMT) programme. It came after another round of bad news: Moody’s had cut the outlook of its triple-A rating for the EFSF. Spanish bond yields had crossed the magical line of seven per cent, and also Italy’s re-financing costs had again been steadily increasing after the two big LTROs had brought them down. Moreover, speculation about ‘Grexit’, the Greek exit, surged since it became obvious that Greece would hardly be able to implement the conditionalities that it had accepted in return for the second bail-out package. With an economy the size of the German State of Hesse, a Greek bail-out was manageable, but the EFSF was not large enough to bail out Spain or Italy. In early September 2012, the ECB Council decided on the modalities for the OMT programme, which supplanted the temporary and limited SMP. Under this programme, the ECB announced to buy unlimited volumes of sovereign debt from troubled eurozone members on

72

Mayer, n 8 above, 157. Hall, n 9 above, 364. 74 Mayer, n 8 above, 132. 75 European Central Bank, Speech by Mario Draghi, President of the ECB at the Global Investment Conference in London, 26 July 2012. 73

264 Henning Deters the secondary market. The primary aim of the programme was to depress yields for Spanish and Italian bonds.76

V.3. The ECB Response: Activist or Constrained? While the European Council was stuck in distributive conflict, the ECB had thus taken up the slack and implemented measures that would help Latin European governments in distress to return to the financial markets. The ECB’s decisions were relatively successful, at least compared to the long-term wrangling and piecemeal approach taken by the European Council. Since the crisis was to a large extent a crisis of confidence, ie a social situation in which bad expectations fed on themselves, and thus yield spreads were no longer justified by economic fundamentals, all it took was to assure bondholders that a sovereign default was out of the equation77—at least as a way to buy time.78 Hence the sighs of relief, when Mario Draghi announced the launch of his rescue helicopter in London. A joint decision-making body like the European Council that tends to become paralysed over distributive conflicts is not able to restore confidence effectively, because investors remain insecure as to whether the next rescue package will suffice or whether and how they will be affected by some kind of debt re-structuring. When the ECB decided to apply the non-standard measures mentioned above, it could do this not because they were uncontested but because, unlike the intergovernmental European or ECOFIN Council, the ECB Council decides by simple majority and thus remains able to act even when its members disagree. In that case, the dissenters may simply be outvoted. Acting as a non-majoritarian, supranational institution, the ECB can then impose its decisions in the mode of hierarchical direction. But while the ECB was much more flexible than the European Council, this is not to say that the bank was completely unconstrained or engaged in unfettered activism. Indeed, the ECB did not stray very far from its mandate.79 For the bank to restore confidence, the most effective way would have been to indicate that it would buy, when push comes to shove, unlimited amounts of sovereign debt80— an operation that was structurally impossible for the EFSF to undertake.81 Draghi’s announcement in London that the ECB would do ‘whatever it takes’ was interpreted along these lines and had the desired sedating effect. A possible

76

European Central Bank, Statement of the President of the ECB, 7 August 2011. P De Grauwe, ‘Design Failures in the Eurozone: Can they be Fixed?’ (2013) Tech rep 57/2013 London School of Economics, 16–18. 78 Bini Smaghi, n 32 above, 163–79. 79 J Yiangou, M O’Keeffe and G Glöckler, ‘“Tough Love”: How the ECB’s Monetary Financing Prohibition Pushes Deeper Euro Area Integration’ (2013) 3 Journal of European Integration 223–37. 80 Hall, n 9 above, 365; C Wyplosz, ‘The ECB’s Trillion Euro Bet’ (2012), available at: www.voxeu. org/article/ecbs-trillion-euro-bet. 81 Gros and Mayer, n 57; De Grauwe, n 77 above. 77

Deliberative Supranationalism 265 way to underwrite this commitment would have been for the bank to subscribe to a ceiling of yield spreads and to quasi-automatically engage OMT as soon as the ceiling was exceeded.82 With the unlimited liquidity of a central bank in the background, bond markets would refrain from ‘testing’ the solvency of sovereign debtors, making the actual implementation of a large-scale intervention redundant. But instead, in what appears to be a back-paddling move, when, a few weeks later, on 6 September 2012, the ECB Council decided on the modalities of the OMT programme, it attached a number of conditions. In particular, the ECB demanded that it would only purchase government debt under OMT from a country that has applied for an ESM programme and committed itself to the supervision of the Troika, consisting of the ECB, the Commission and the IMF. In Germany, the permissibility of OMT was also part of a lawsuit that was mainly directed against the ESM.83 Hence, at least with the OMT and its connection with the ESM, central bank interventions have been re-politicised. Under the ESM treaty, the Member States decide whether a government qualifies for ESM funding. With the linkage between OMT and ESM they also decide, by extension, whether a Member State may benefit from the secondary market interventions the ECB implements under OMT. After the ESM decision of the German Federal Constitutional Court, this virtually means that the implementation of OMT is contingent on the assent of the German Bundestag. Depending on the normative viewpoint, the ECB thereby has been made hostage to politics (ie, inter-governmental, re-distributive conflict) or finally forced back into its narrow mandate and cut off from politics. In any case, such political conditionality limits the announcement effect of OMT. With this decision, the ECB and Member States have decided against making the central bank a lender of last resort to governments. After the ECB first took up the slack, why has it subsequently been constrained? First, central bankers were fiercely divided ideologically and—not coincidentally—along national lines. When the ECB buys sovereign debt from illiquid Member States, its balance sheet deteriorates. As a result, Germany, first and foremost, which holds the largest share of ECB capital, but also other members of the eurozone core such as Finland and The Netherlands oppose this move. In their view, it re-distributes fiscal risk between governments and taxpayers from different Member States. Moreover, while GIIPS suffered from high-risk premiums, the

82 Bini Smaghi, ‘A Lifeline is Thrown Into Periphery’ (2012) Financial Times; Wyplosz, n 80 above. In a similar vein, the Swiss Central Bank set a 1.2 ceiling on the exchange rate between the euro and the Swiss Franc and vowed to defend it with quasi-automatic and unlimited currency interventions in September 2011. Investors had been pulling out of the Eurozone and sought a safe haven in the Franc, thereby pushing its exchange rate close to parity; see B Eichengreen, ‘Die Zentralbank als vorlaeufiger Retter’, Handelsblatt (6 June 2012). 83 BVerfGE, 2 BvR 1390/12 (2012). See M Everson and C Joerges, ‘Who is the Guardian for Constitutionalism in Europe after the Financial Crisis?’ SSRN Scholarly Paper ID 2287111 (Rochester NY, Social Science Network, 2013) and Deters, n 50 above, for a critical discussion on how the Federal Constitutional Court disregards the external effects of its judgment.

266 Henning Deters flipside of the yield spread is that states such as Germany become a safe haven. They can borrow extremely cheaply, with German Bunds temporarily bearing negative interest rates. These conflicting distributive interests among governments partly extended into the ECB’s main decision-making bodies. While a majority of eurozone countries were in favour of the ECB’s interventions, ECB president Draghi could not completely ignore the opposition. The central bank had to strike a balance between opposing positions and hence could not actually do ‘whatever it takes’. Bundesbank president Axel Weber and ECB executive board member and chief economist Stark were permanently isolated. In the course of 2010 to 2011, they stepped down over their principled opposition against the SMP. Also Weber’s successor, Jens Weidmann, voted against OMT in the respective ECB Council session in early September 2012.84 Thus, interactions among central bankers showed signs of bargaining rather than the truth-seeking deliberation based on common technical criteria that may be expected of discussions among independent experts. This confirms McNamara’s conjecture, that ‘severing ties to democratic representatives and relying on technocratic expertise does not apoliticise monetary policy’.85 The second constraint for the ECB’s activism was the economic paradigm enshrined in the Maastricht economic constitution. According to this paradigm, monetary policy is ‘constitutionalised’ on the supranational plane with price stability as its only target, while each member state is to keep its own fiscal house in order. In particular, Article 123(1) expressly prohibits the monetary financing of sovereign debt. There is no exception that would permit the ECB to play the role of lender of last resort to governments in order to prevent a situation in which sovereign default becomes a self-fulfilling prophecy.86 In this conflictual constellation, positions remained inflexible, with German members of the governing council permanently being isolated. The ECB had to adopt its non-standard instruments with reluctance: from the beginning, it declared the SMP to be exceptional and temporary, and tied it to reform promises. Moreover, it ultimately subjected the SMP’s successor, the OMT, back to intergovernmental decision-making. While the lifeline that it threw to ailing banks via the two large LTROs seems more like the long-awaited ‘bazooka’, it looks like a circumvention strategy. Since the ECB was neither permitted nor politically able to backstop public debt directly, it funnelled liquidity to governments through the commercial banking system—a strategy that comes with side-effects.87 Insecurity about its treaty-mandated competences not only further reduced the central bank’s capacity to act but also challenged its credibility and legitimacy. The ECB weaselled out of legal constraints by emphasising that it purchased 84 85 86 87

Bini Smaghi, n 32 above, 160. McNamara, n 39 above, 47–48. Mayer, n 8 above, 153; De Grauwe, n 77 above, 16. See Mayer, n 8 above, 157; Wyplosz, n 80 above.

Deliberative Supranationalism 267 state bonds only on the secondary market instead of directly from governments. The central bank argued that, since the money market was the transmission belt, which transmits interest signals to the economy, and since the crisis brought this transmission to stall, the ECB could no longer effectively control inflation with ordinary instruments only. According to the ECB, the open market operations therefore not only remained within the mandate of price stability, but were even necessary to fulfill the mandate effectively during the crisis.88 This reasoning has been taken up with irritation.89 The legal justification seems formally correct at face value, but critics argue that the ECB needed the ‘transmission theory’ as a perfunctory argument to legitimise its partial backstopping of public debt. In conclusion, the ECB filled in the governance vacuum that the Member States had created through their distributive bargaining stand-off. However, it was not unconstrained, because the same distributive conflicts that affected ECOFIN and the European Council were mirrored in its own decision-making bodies. When the ECB acted as a quasi-lender of last resort, it was exposed to severe criticism both from within and without. Together with the vote-taking, constant isolation of German governing council members, and even their subsequent resignation, this created the image of a central bank in which delegates function as national representatives rather than supranational experts. In addition, these resignations attest to the inflexibility of positions. The extensive interpretation of its stability mandate together with the tailor-made ‘transmission theory’, moreover, conveyed the impression that the bank used perfunctory arguments to rid itself of legal constraints that prevented the bank from taking on a lender of last resort role and effectively backstop sovereign debt. Taken together, these observations challenge the deliberation image even of a supranational institution staffed with experts such as the ECB.

VI. OUTLOOK

I have argued that deliberative supranationalism—a core notion within CLC— has withered during the emergency response to the euro crisis. The politics surrounding the ECB’s reactions to the crisis has served as empirical evidence substantiating this claim. Due to their socio-economic heterogeneity, core and periphery states have been affected differently and their policy preferences differ accordingly. The ensuing conflict is structured like a ‘battle of the sexes’ game with a huge conflict over distribution. Member States have therefore been deadlocked. They failed to adopt a co-ordinated response as quickly as was needed to assuage market fears. The ECB stepped in at this point and temporarily filled a dangerous governance vacuum by announcing and partly implementing several sovereign debt purchasing programmes. But conflict about the distribution of risks even 88 89

Drudi, Durré and Mongelli, n 11 above, 891–92. See Ruffert, n 2 above, 1787–88.

268 Henning Deters affected deliberations inside the bank and led to bargaining from fixed positions, isolation and ultimately even resignation of certain ECB Council members. It indirectly also harmed the effectiveness and legitimacy of ECB interventions. One way of restoring these would be to accord the ECB the role of a true lender of last resort to governments, or at least to allow it to commit itself to a fixed target for spreads between sovereign borrowing costs. Core Member States reject such proposals, however, out of fear that it would ultimately pull down the boundary between a regulatory state and a fiscal union. Their arguments are understandable, but, at least to some extent, perfunctory, casting yet more doubt on the reality of deliberative supranationalism during times of crisis. Since the ECB is an independent, supranational body staffed by experts, it is a rather likely case for deliberative supranationalism to be put into action. Hence, careful generalisation of the chapter’s negative findings to other, more political venues should be possible. The political wrangling during the negotiations about the several bail-out programmes and the piecemeal, minimal compromisefashion in which they were adopted cast doubt on the notion that the European Council has emerged as a site of ‘deliberative inter-governmentalism’90 rather than a venue of interest-based bargaining. On a more general level, the analysis confirms Lowi’s old dictum, that ‘policies determine politics’.91 In the regulatory state envisioned by Majone, deliberation is probably widespread. It is in the regulators’ best collective and individual interest to push the Pareto frontier. Regulatory problems are often pure co-ordination games, or at least distributive issues are not as salient and can be settled through diffuse reciprocity during repeated interaction among the same group of (administrative) negotiators. By contrast, the resolution of salient re-distributive conflicts presupposes some pre-established notion of solidarity. But although the delegation of monetary policy to an independent technocracy has been justified by its efficiency, it seems that at least in a crisis, monetary policy cannot be effectively de-politicised. In the crisis, central bank policy has become a stand-in for deadlocked political decision-making. Far from being purely efficient, it was criticised as fiscal policy by proxy. These political differences could be papered over during the boom period. In the crisis, they suddenly re-surfaced, and deliberative supranationalism has suffered under the increased salience of these distributive issues.

90 91

Puetter, n 41 above. Lowi, n 26 above, 299.

11 Comitology After Lisbon: What is Left of Comitology as We Have Praised it? JOSEF FALKE BREMEN

I. A NEW STRUCTURE FOR LEGISLATIVE DELEGATION AND IMPLEMENTING POWERS OF THE EUROPEAN COMMISSION—ARTICLES 290 AND 291 TFEU

R

IGHT FROM THE early days of the European Communities, the various EC and EU legislators respectively were entitled to delegate powers to the European Commission, enabling it to work out the details of any legal instruments. Because the Member States, nevertheless, wanted to contribute their own ideas to—or, more realistically, to control—the adoption of the implementing rules, a system was developed over the years under which special committees assist the Commission in exercising its implementing powers. To date, there are about 270 committees comprising thousands of Member State representatives who are involved in the preparation of about 1,800 implementing legal acts every year. This is round about 65 per cent of the Union’s legislative output. Over the years, the comitology system has increasingly approved more sensitive implementing acts, and, thus, it needs to be more extensively controlled. The balance between the political sensitivity of implementing acts and the required political control by the legislators (the Council and European Parliament) needs a new adjustment. The new system of delegated and implementing acts is a response to this challenge. Articles 290 and 291 of the Treaty of the Functioning of the European Union (TFEU) have opened a new chapter in the long history of comitology and introduced a new competence of the European Commission.1 Contrary to Article

1 The new regulations on delegated and implementing acts are commented in an abundant flood of scientific and practical comments; see J Bast, ‘New Categories of Acts after the Lisbon Reform: Dynamics of Parlamentarization in EU Law’ (2012) 49 Common Market Law Review 885–928; P Craig, ‘Delegated Acts, Implementing Acts and the New Comitology Regulation’ (2011) 36 European Law Review 671–87; J Blom-Hansen, ‘The EU Comitology System: Taking Stock before the New Lisbon Regime’ (2011) 18 Journal of European Public Policy 607–17; GJ Brandsma and J Blom-Hansen, ‘The

272 Josef Falke 202 EC Treaty, they make a clear distinction between the powers delegated to the Commission to adopt, according to Article 290 TFEU, non-legislative acts of general application to supplement or amend certain non-essential elements of a legislative act—delegated acts—on the one hand, and the powers conferred on the Commission according to Article 291 TFEU to adopt implementing acts, on the other.

Post-Lisbon Battle over Comitology: Another Round of the Politics of Structural Choice’, EUI Working Papers, SPS 2011/03; GJ Brandsma and J Blom-Hansen, ‘Negotiating the Post-Lisbon Comitology System: Institutional Battles over Delegated Decision-Making’ (2012) 50 Journal of Common Market Studies 939–57; T Christiansen and M Dobbels, ‘Comitology and Delegated Acts after Lisbon: How the European Parliament lost the Implementation Game’ (2012) European Integration online Papers; T Christiansen and M Dobbels, ‘Non-Legislative Rule Making after the Lisbon Treaty: Implementing the New System of Comitology and Delegated Acts’ (2013) 19 European Law Journal 42–56; V Georgiev, ‘Too much Executive Power? Delegated Law-making and Comitology in Perspective’ (2013) 20 Journal of European Public Policy 535–51; A Hardacre and M Kaeding, ‘Delegated and Implementing Acts: the New Worlds of Comitology—Implications for European and National Public Administrations’, EIPASCOPE 2011/1, 29–32; A Hardacre and M Kaeding, Delegated & Implementing Acts: The New Comitology, European Institute of Public Administration, EIPA Essential Guide, 5th edn (Maastricht, EIPA, 2013); J Mendes, ‘Delegated and Implementing Rule Making: Proceduralisation and Constitutional Design’ (2013) 19 European Law Journal 22–41; JL Miller, ‘A New “Democratic Life” for the European Union? Administrative Lawmaking, Democratic Legitimacy, and the Lisbon Treaty’ (2011) 17 Contemporary Politics 321–34; A Metselar, ‘The Functions of Comitology—What Will Lisbon Change?’, PhD Thesis, Faculty of Law, Universiteit Maastricht; S Peers and M Costa, ‘Accountability for Delegated and Implementing Acts after the Treaty of Lisbon’ (2012) 18 European Law Journal 427–60; C Stratulat and E Molino, ‘Implementing Lisbon: What’s New in Comitology?’, European Policy Centre, Policy Brief, April 2011; C Stratulat and E Molino, ‘Comitology Reform: Setting the Record Straight’, European Policy Centre, Commentary, 19 April 2012; R Watson, ‘Shedding Light on New Comitology’ (2012) Europolitics No 4360, 9 February 2012; T Achleitner, Y Soetopo and H Wutscher, Der neue Rechtsrahmen für die Komitologie nach dem Vertrag von Lissabon (Vienna, Wirtschaftskammer Österreich, 2014); E Bueren, ‘Grenzen der Durchführungsrechtssetzung im Unionsrecht. Neuerungen nach Lissabon?’ (2012) 23 Europäische Zeitschrift für Wirtschaftsrecht 167– 76; B Daiber, ‘EU-Durchführungsrechtsetzung nach Inkrafttreten der neuen Komitologie-Verordnung’ (2012) 47 Europarecht 240–54; A Edenharter, ‘Die Komitologie nach dem Vertrag von Lissabon: Verschiebung der Einflussmöglichkeiten zugunsten der EU-Kommission?’ (2011) 64 Die Öffentliche Verwaltung 645–50; C Fabricius, ‘Abgeleitete Rechtsetzung nach dem Vertrag von Lissabon— Überlegungen zu Delegierten Rechtsakten und Durchführungsrechtsakten’ (2011) 14 Zeitschrift für Europarechtliche Studien 567–605; C Haselmann, Delegation und Durchführung gemäß Art. 290 und 291 AEUV (Berlin, Duncker & Humblot, 2012); HCH Hofmann and AH Türk, ‘Die Ausübung übertragener Normsetzungsbefugnisse durch die Europäische Kommission’ (2012) 27 Zeitschrift für Gesetzgebung 105–37; T Kröll, ‘Delegierte Rechtsetzung und Durchführungsrechtsetzung und das institutionelle Gleichgewicht der Europäischen Union’ (2011) 66 Zeitschrift für Öffentliches Recht 253– 98; C Möllers and J von Achenbach, ‘Die Mitwirkung des Europäischen Parlaments an der abgeleiteten Rechtsetzung der Europäischen Kommission nach dem Lissabonner Vertrag’ (2011) 46 Europarecht 39–61; A Pilniok and E Westermann, ‘Strukturwandel im Verwaltungsverbund? Eine Analyse des neuen Rechtsrahmens der unionalen Komitologieausschüsse’ (2012) 103 Verwaltungsarchiv 379–98; S Schlacke, ‘Komitologie nach dem Vertrag von Lissabon. Die (neue) Bedeutung des Ausschusswesens für delegierte und Durchführungs-Rechtsetzung’ (2012) 61 Jahrbuch des Öffentlichen Rechts der Gegenwart 293–327; U Stelkens, ‘Art. 291 AEUV, das Unionsverwaltungsrecht und die Verwaltungsautonomie der Mitgliedstaaten—zugleich zur Abgrenzung der Anwendungsbereiche von Art. 290 und Art. 291 AEUV’ (2012) 47 Europarecht 511–46; G Sydow, ‘Europäische exekutive Rechtsetzung zwischen Kommission, Komitologieausschüssen, Parlament und Rat’ (2012) 67 Juristenzeitung 157–65; D Wolfram, ‘“Underground Law”? Abgeleitete Rechtsetzung durch Komitologieverfahren in der EU: Bedeutung, Stand und Aussichten nach dem Vertrag von Lissabon’ (Freiburg, Centrum für Europäische Politik (CEP), 2009).

What is Left of Comitology After Lisbon? 273 I.1 Delegated Acts—Article 290 TFEU As the Commission has rightly argued in its Communication on the implementation of Article 290 TFEU, this provision does not require the adoption of any binding instrument of secondary legislation to ensure its implementation; it is sufficient in itself and contains all the elements required by the legislator for defining, case by case, the scope, content and practical arrangements for delegating power.2

However, the Commission, the European Parliament (EP) and the Council have reached a common understanding that it would be both useful and necessary to define the general framework within which such delegations of legislative power3 should operate. The Commission, which is responsible for preparing and adopting delegated acts, and the EP and the Council, which are responsible as co-legislators for the basic legal acts and the objectives, content and scope of the delegation of power, and for controlling the proposed delegated acts prepared by the Commission, have promoted the introduction of a system that is as homogenous and predictable as possible. The intense debate on the general conditions for legislative delegation in the EP can be seen as an indicator that legislative delegation ‘is a delicate operation in which the Commission is instructed to exercise a power which is intrinsic to the Legislator’s own role’, and that ‘the starting-point in examining the issue of delegation must therefore always be the freedom of the Legislator’.4 The EP has underlined the fundamental difference between the basic legal act and the delegated acts. In its view, the ‘delegated power can only consist in supplementing or amending parts of a legislative act which the Legislator does not consider to be essential; whereas the resulting delegated acts adopted by the Commission will be non-legislative acts of general scope’.5 Notwithstanding the fact that it is fully aware that delegated acts will have implications in many areas, the EP has emphasised that it is of paramount importance, ‘that they are developed and decided

2 Communication from the Commission to the European Parliament and the Council, Implementation of Article 290 of the Treaty on the Functioning of the European Union, COM(2009) 673 final, 9.12.2009, p 2. 3 Especially on the delegated legislation after the Treaty of Lisbon, see B Driessen, ‘Delegated Legislation after the Treaty of Lisbon: An Analysis of Article 290 TFEU’ (2011) 35 European Law Review 837–48; M Kaeding and A Hardacre, ‘The Execution of Delegated Powers after Lisbon: A Timely Analysis of the Regulatory Procedure with Scrutiny and its Lessons for Delegated Acts, EUI Working Papers RSCAS 2010/85 (Robert Schuman Centre for Advanced Studies); M Rihs, ‘Die Delegation von Rechtsetzungsbefugnissen nach Art. 290 AEUV’ (2012) 53 Zeitschrift für Europarecht, Internationales Privatrecht und Rechtsvergleichung 52–60; R Schütze, ‘From Rome to Lisbon: “Executive Federalism” in the (New) European Union’ (2010) 47 Common Market Law Review 1385–1427; W Voermans, ‘Delegation is a Matter of Confidence: The New EU Delegation System under the Treaty of Lisbon’ (2011) 17 European Public Law 313–30. 4 European Parliament Resolution of 5 May 2010 on the power of legislative delegation, [2011] OJ C81E/6–10, recital C, 15.3.2011. 5 Ibid, recital D.

274 Josef Falke upon in a fully transparent manner which effectively enables the co-legislators to democratically control the exercise of the power delegated to the Commission’.6 Furthermore, it has acknowledged that delegation can be seen as a tool for better law-making, the objective of which is to ensure that legislation can at the same time remain simple and be completed and updated without needing to have recourse to repeated legislative procedures, whilst also allowing the Legislator to maintain its ultimate power and responsibility.7

The power to adopt delegated acts authorises the Commission to supplement or amend the work of the legislator. It is a discretionary decision on the part of the legislator, whether and, if so, under which conditions he or she delegates explicit and clearly-defined powers to the Commission. In the interest of legal certainty, the legislator has to define, as precisely as possible, the objectives, content and scope of delegated acts in each relevant basic legal act. The EP and the Council have new possibilities by which to control the Commission: they can limit the time-frame for the delegation in the basic legal act; each of them may decide to revoke the delegation or to prevent a specific delegated act, prepared by the Commission, from entering into force. In contrast to the implementing acts, the control mechanisms regarding delegated acts have been designed with a view to guarding the horizontal balance of power. They serve as a means of control by the Union legislature (the principal) over the Commission (the agent). In principle, the exercise of delegated authority is exposed to ‘unfiltered’ political supervision. Both the Council and the EP possess the legal means to prevail in the case of political disagreement with the Commission. The delegated law-making by the Commission takes place in the shadow of a potential veto by the Council or the EP. Delegated acts are the successors of the measures adopted under the regulatory procedure with scrutiny (RPS). Regarding the experiences with the RPS, one has to expect that the EP or the Council will use the option to object to a prepared delegated act of the Commission very rarely. In the period from 2008 to 2012, the Commission adopted 696 RPS measures in total. Until the end of 2012, the EP only objected three times (0.4 per cent) and the Council 10 times (1.4 per cent) to draft RPS measures.8 It is reported that, in several cases, members of the responsible committee of the EP have raised objections to specific RPS measures but that, after a detailed explanation by the Commission and an exchange of views in committee or plenary sessions, these objections were not supported by the required absolute

6

Ibid, recital E. Ibid, recital H. 8 Annual Report from the Commission on the Working of Committees during 2012, COM(2013) 701 final, 7 et seq; Annual Report 2011, COM(2012) 685 final, 9 et seq; Annual Report 2010, COM(2011) 879 final, 7; Annual Report 2009, COM(2010) 354 final, 8; Annual Report 2008, COM(2009) 335 final, 8 et seq. 7

What is Left of Comitology After Lisbon? 275 majority.9 There are no indications available that either the EP or the Council has objected so far to a delegated act.10 At no stage during the process of drafting and adopting a delegated act is the Commission subject to a comitology procedure or to controls or checks by Member State representatives. By way of compensation, the Member States have received an assurance from the Commission that they will be allowed to carry out ‘adequate consultations’ with Member State experts when preparing and drawing up delegated acts. The Commission does not want to tear up the networks of administrative co-operation that provide it with expert knowledge.11 As Jürgen Bast rightly points out: ‘Nonetheless, holding consultations with an advisory expert group is something completely different from pacifying the dilatory veto power of a “real” comitology committee’.12 Regarding the framework for the delegation of powers, one can differentiate between material and temporal limits. The material limits must be concretised in each relevant legal basic act. The legislator has to specify which parts of the basic provisions may be amended or supplemented by a delegated act on the part of the Commission, provided that certain conditions are fulfilled, for example, when scientific or technical progress has been made, a particular event has taken place, certain margins have been reached, or a certain threshold has been attained or has to be adapted. The temporal limits may be defined in a more general way for certain classes of case. The legislator has to lay down the duration of the delegation and they may choose between delegation for an indeterminate period or for a period of some years following the entry into force of the delegated act. The latest version may be designed as a strict cut-off date or in a way in which the delegation of power will be automatically extended for periods of fixed duration, unless the European Parliament or the Council revokes it. If the Commission has used its ‘mandate’ and formulated a delegated act, it has to inform the EP and the Council simultaneously if the basic instrument is governed by the ordinary legislative procedure. The EP and the Council, together or independently, may use their right of opposition and object to the delegated act within a certain time period after the date of notification. The notified delegated act will enter into force if, on expiry of that specified period, neither the EP nor the Council has objected to the delegated act, or if, before that date, the EP and the Council have both informed the Commission that they have decided not to raise objections. The delegation of power may be revoked at any time in cases in which the EP or the Council wishes to withdraw the powers that they have conferred on the Commission, in order to take into account new circumstances that would justify a legislative intervention or if the right to object to a delegated act would be ineffective or impractical. 9 10 11 12

See PE506.179v02-00, 17.4.2013, 8. Ibid. See Bast, n 1 above, 918 et seq. Bast, n 1 above, 919.

276 Josef Falke Whether the institution wishing to use its right of revocation or its right of opposition to a certain delegated act should explain its reasons for doing so was a controversial issue. Article 290 TFEU does not list the grounds on which the legislator may object to a delegated act. The right to express objections in a general way in the form of the revocation of the delegated powers or in the form of opposing a certain delegated legal act should, in principle, fall under the discretionary power of the EP and the Council. But the argument that an explanation could ensure that the Commission does not continue to pursue the course of action that has prompted the EP or the Council to express objections, is less convincing.13 The EP and the Council normally hesitate to foresee an urgency procedure. In some cases, the Commission has proposed that a delegated act will enter into force without delay and will apply as long as no objection is expressed within the short period after the date of notification.14 The Commission has announced its intention to carry out the preparatory work it considers necessary in order to ensure, first, that from a technical point of view the delegated acts comply fully with the objectives laid down by the basic instrument and, second, that from a political and institutional point of view everything possible is done to avoid any objections being made by Parliament or the Council.

It intends ‘systematically to consult experts from the national authorities of all the Member States, which will be responsible for implementing the delegated acts once they have been adopted’.15 For this purpose, the Commission might form new expert groups16 or use existing ones.17 It underlines the paramount importance of this preparatory stage and endeavours to establish an ‘effective partnership at the technical level with experts in the national authorities’, notwithstanding the fact that these experts will have a consultative, rather than an institutional, role in the decision-making process.18 The 36 Commission Expert Groups with the task of

13 See Communication from the Commission to the European Parliament and the Council, Implementation of Article 290 of the Treaty on the Functioning of the European Union, COM(2009) 673 final, 9 et seq. 14 For the background, see ibid, 10. 15 Ibid, 6. 16 For more information on the expert groups of the European Commission, see J Metz, ‘Expert Groups in the European Union: A sui generis Phenomenon?’ (2013) 32 Policy and Society 267–78; A Gornitzka and U Sverdrup, ‘Who Consults? The Configuration of Expert Groups in the European Union’ (2008) 31 West European Politics 725–50; A Gornitzka and U Sverdrup, ‘Access of Experts: Information an EU Decision-making’ (2011) 34 West European Politics 48–70. 17 On 1 February 2014, the Register of Commission Expert Groups and Other Similar Entities, accessible at: ec.europa.eu/transparency/regexpert, listed, in total, 839 active expert groups outside the comitology procedures. Most of them can be characterised as informal (81.3%), but permanent (58.0%). 521 groups have the task of co-ordinate with Member States and of exchanging views, 377 assist the Commission in the preparation of legislation or in policy definition, 101 provide expertise to the Commission when drafting implementing measures, ie, before the Commission submits these drafts to a comitology committee, 94 have the task of monitoring the development of national policies and the enforcement of EU legislation by national authorities, and 36 groups prepare delegated acts. 18 See COM(2009) 673 final, 6.

What is Left of Comitology After Lisbon? 277 preparing delegated acts are clearly dominated, not to mention monopolised, by the representatives of the national administrations. Due to Point 15 of the Framework Agreement on relations between the EP and the European Commission,19 ‘the Commission will provide full information and documentation on its meetings with national experts within the framework of its work on the preparation and implementation of Union legislation, including soft law and delegated acts’. According to the Paragraph No 4 of the Common Understanding on Delegated Acts, the Commission, when preparing and drawing up delegated acts, will ensure a simultaneous, timely and appropriate transmission of relevant documents to the European Parliament and the Council and carry out appropriate and transparent consultations well in advance, including at expert level.

Upon the request of the EP, the Commission services may invite the EP to send experts to attend meetings of experts groups. This looks like an expansion of the ‘trilogue style’ to the field of delegated acts and leads to two questions: —

—

Can the EP and the Council effectively and independently control the Commission if they are so closely involved in the preparatory proceedings of a delegated act? Do the ex-post control instruments foreseen in Article 290 TFEU really allow the EP and the Council to influence the content of delegated acts during the decision-making procedure?

I.2 Article 291 TFEU and the New Comitology Regulation (EU) No 182/2011 According to Article 291(1) TFEU, the Member States are responsible for implementing the legally-binding acts of the European Union. Where uniform implementing conditions are needed, the Commission must exercise its executive power in order to create the conditions for a uniform implementation by the Member States. In other words, the Commission has to co-ordinate the implementation of binding Union acts by the Member States. Whereas, according to Article 290(1) TFEU, the legislator defines, in each basic legal act, case by case, the objectives, content, scope and duration of the delegation of power, the EP and the Council have to lay down in advance—ie for an undefined number of legislative acts in a uniform manner—the rules and general principles concerning the mechanisms for control—by the Member States—of the Commission’s exercise of implementing powers. Based upon Article 291(3) TFEU, Regulation (EU) No 182/2011 of the EP and of the Council of 16 February 2011 laying down the rules and general

19 Published as Annex XIV of the Rules of Procedure of the European Parliament, 7th parliamentary term, March 2011, [2011] OJ L116/1, 5.5.2011.

278 Josef Falke principles concerning mechanisms for control of the Commission’s exercise of implementing powers20 by the Member States has simplified the comitology procedure and repealed Comitology Decision 1999/468/EC.21 It clearly states that the adoption of implementing acts by the Commission is subject to the control of the Member States.22 The legislator is free to decide in respect of each basic act whether to confer implementing powers on the Commission in accordance with Article 291(2) TFEU.23 In the interest of simplification, the Commission should exercise implementing powers in accordance with one of only two procedures, namely, the advisory procedure or the examination procedure.24 The advisory procedure mirrors the existing advisory procedure, while the new examination procedure replaces the existing management and regulatory procedures. A basic act may provide for the application of the advisory procedure or the examination procedure, taking the nature or the impact of the implementing act required into account.25 For the first time in the long history of comitology, certain criteria have been laid down to determine the procedure to be used for the adoption of implementing acts by the Commission.26 The more challenging examination procedure applies, in particular, for the adoption of implementing acts of general scope, and of other implementing acts relating to programmes with substantial implications, the common agricultural and common fisheries policies, the environment, security and safety, or protection of the health or safety of humans, animals or plants, the common commercial policy, as well as taxation.27 The advisory procedure applies, as a general rule, for the adoption of implementing acts not falling within the ambit of the above-mentioned fields,28 which can be characterised by the pronounced financial or regulatory interests of the Member States. As an exception, the advisory procedure may apply for the adoption of implementing acts in the more crucial fields in duly justified cases.29 In conformity with the old comitology practice, the Commission is to be assisted by committees composed of representatives of the Member States. These committees are to be chaired by a representative of the Commission without a voting right.30 The Chair is to submit to the committee the draft implementing

20

[2011] OJ L55/13–18, 28.2.2011. Council Decision 1999/468/EC of 28 June 1999 laying down the procedures for the exercise of implementing powers conferred on the Commission, [1999] OJ L184/23–26, 17.7.1999, amended by Council Decision of 17 July 2006, [2006] OJ L200/11–13, 22.7.2006. The Council Decision 1999/468/ EC had repealed the Council Decision 87/373/EEC of 13 July laying down the procedures for the exercise of implementing powers conferred on the Commission, [1987] OJ L197/33–35, 18.7.1987. 22 Regulation (EU) No 182/2011, Art 1. 23 Ibid, Recital 2. 24 Ibid, Recital 8. 25 Ibid, Art 2(1). 26 Ibid, Recital 10. 27 Ibid, Art 2(2). 28 Ibid, Art 2(3), sentence 1. 29 Ibid, Art 2(3), sentence 2. 30 Ibid, Art 3(2). 21

What is Left of Comitology After Lisbon? 279 act to be adopted by the Commission.31 The committee is to deliver its opinion on the draft implementing act within a time-limit which the Chair may lay down according to the urgency of the matter. The time-limits are to afford the committee members early and effective opportunities to examine the draft implementing act and express their view.32 It recognises a pre-condition for a discursive working atmosphere in the committees. The following new provision follows the same rationale. Until the committee delivers an opinion, any committee member may suggest amendments and the Chair may present amended versions of the draft implementing act.33 The Chair is to endeavour to find solutions which command the widest possible support within the committee.34 Only in duly justified cases may the Chair obtain the committee’s opinion by written procedure.35 The advisory procedure is very informal. The committee is to deliver its opinion, if necessary by taking a vote. If the committee takes a vote, the opinion is to be delivered by a simple majority of its component members.36 The Commission is to decide on the draft implementing act to be adopted, taking the utmost account of the conclusions drawn from the discussions within the committee and of the opinion delivered.37 Such informal conditions make it rather difficult to control the Commission. Where the examination procedure applies, the committee is to deliver its opinion by the majority laid down in Article 16(4) and (5) TEU and, where applicable, Article 239(3) TFEU, for acts to be adopted on a proposal from the Commission. The votes of the representatives of the Member States are to be weighted in the manner set out in those Articles.38 Where the committee delivers a positive opinion, the Commission is to adopt the draft implementing act.39 If the committee delivers a negative opinion, the Commission is not to adopt the draft implementing act.40 As part of the simplification of the comitology procedure and likewise as part of its ‘downgrading’ to the purely administrative spheres of politics, there will be no appeal procedure to the Council. Where an implementing act is deemed to be necessary—in the view of the Commission—the Chair may either submit an amended version of the draft implementing act to the same committee within two months of delivery of the negative opinion, or submit the draft implementing act within the shorter ‘cooling-off period’ within one month of such delivery to the appeal committee for further deliberation.41 Where no opinion is delivered, the Commission is free to adopt the draft implementing act,

31 32 33 34 35 36 37 38 39 40 41

Ibid, Art 3(3) sentence 1. Ibid, Art 3(3) sentences 3 and 4. Ibid, Art 3(4) sentence 1. Ibid, Art 3(4) sentence 2. Ibid, Art 3(5). Ibid, Art 4(1). Ibid, Art 4(2). Ibid, Art 5(1). Ibid, Art 5(2). Ibid, Art 5(3) sentence 1. Ibid, Art 5(3) sentence 2.

280 Josef Falke except in certain constellations.42 Where the Commission does not use this option and does not adopt the draft implementing act, the Chair may submit to the committee an amended version thereof.43 The Commission is not to adopt the draft implementing act where: —

— —

that act concerns taxation, financial services, the protection of the health or safety of humans, animals or plants, or definitive multilateral safeguard measures; the basic act provides that the draft implementing act may not be adopted where no opinion is delivered; or a simple majority of the component members of the committee opposes it.44

The mechanisms for controlling the implementing acts protect the interests of the Member States rather than the institutions that have conferred implementing powers to the Commission. Consequently, the Comitology Regulation has minimised the influence of the EP and the Council. Where a basic act is adopted under the ordinary legislative procedure, either the EP or the Council may, at any time, indicate to the Commission that, in its view, a draft implementing act exceeds the implementing powers provided for in the basic act. In such a case, the Commission is to review the draft implementing act, taking account of the positions expressed, and is to inform the EP and the Council whether it intends to maintain, amend or withdraw the draft implementing act.45 It was a general pattern of the old comitology system that the Commission had to refer a matter to the Council when it had failed to mobilise enough support for its proposal in the relevant committee. The referral to the appeal committee aims to find a negotiated solution in a new surrounding with high representatives of the Member States. Until an opinion is delivered, any member of the appeal committee may suggest amendments to the draft implementing act.46 The Chair is to try to find solutions which find the widest possible support within the appeal committee.47 Where the appeal committee delivers a positive opinion, the Commission is to adopt the draft implementing act; it may do so, where no opinion is delivered; where the appeal committee delivers a negative opinion, the Commission is definitively not allowed to adopt the draft implementing act.48 The Rules of Procedures for the appeal committee49 make it clear that such an appeal is estimated as a rare event. The Members States are free to ensure an appropriate level of representation, which should be of a sufficiently high and

42 43 44 45 46 47 48 49

Ibid, Art 5(4) sub-para 1 sentence 1. Ibid, Art 5(4) sub-para 1 sentence 2. Ibid, Art 5(4) sub-para 2. Ibid, Art 11. Ibid, Art 6(2) sub-para 1. Ibid, Art 6(2) sub-para 2. Ibid, Art 6(3). [2012] OJ C183/13–16, 24.6.2012.

What is Left of Comitology After Lisbon? 281 horizontal nature, including a Ministerial level.50 Regularly, they send their Permanent Representatives. One may doubt whether the referral to the appeal committee may have any advantages in relation to the referral to the Council. The Council in its special formations is experienced in conflict management in different constellations; furthermore, they are standing bodies and must not be convened in certain conflicting situations. Until December 2013, the vast majority of appeal cases (20 out of 23) ended in the same deadlock as the regular committee procedure because the appeal committee failed to obtain the qualified majority which was needed for a negative or favourable opinion. The Commission has to keep a register of committee proceedings which is to contain a lot of information, including a list of committees, the agendas of committee meetings, their summary records, the draft implementing acts on which the committees are asked to deliver an opinion and the voting results, and the final draft implementing act.51 The Commission has also to publish an annual report on the work of the committees.52 The EP and the Council are to have access to the information in the register of committee proceedings.53 At the same time as they are sent to the committee members, the Commission has to make available, to the EP and the Council, the agendas of committee meetings, the draft implementing acts and the final draft implementing acts.54

II. COMMON UNDERSTANDING ON DELEGATED ACTS

In order to ensure a consistent practical application of Article 290 TFEU, at the initiative of the EP, a Common Understanding on Delegated Acts was agreed in April 2011 between the EP, the Council and the Commission.55 Although this document is not formally binding, it has far-reaching standardising effects. More importantly, the legislators can concentrate on the material provisions, ie, the objectives and scope of delegated acts. The Common Understanding entails the practical arrangements and agreed clarifications and preferences applicable to the delegations of legislative power. The basic idea is formulated as follows: In exercising their powers and in compliance with the procedures laid down in the TFEU, the three institutions shall cooperate throughout the procedure with a view to a smooth exercise of delegated power and an effective control of this power by the EP and the Council.56

50

Rules of procedure for the appeal committee, Art 1(5). Ibid, Art 10(1). Such a register can now be found at: ec.europa.eu/transparency/regcomitology/ index.cfm?CLX=en. 52 Regulation (EU) No 182/2011, Art 10(2). 53 Ibid, Art 10(3). 54 Ibid, Art 10(4). 55 Council of the European Union, Document 9753/1/11 REV 1, 14 April 2011. 56 Common Understanding on Delegated Acts, n 55 above, para 2. 51

282 Josef Falke They undertake to refer as far as possible to the standard clauses annexed to this Common Understanding when proposing or making delegations of power under Article 290 TFEU.57 The following topics are regulated in detail: consultations in the preparation and drawing-up of delegated acts (paragraph 4), arrangements for the transmission of documents and computation of time periods (paragraphs 5–7), duration of the delegation (paragraphs 8–9), periods for objection by the European Parliament or the Council (paragraphs 10–11), urgency procedure58 (paragraphs 12–15), publication in the Official Journal (paragraphs 16–17), and mutual exchange of information, in particular in the event of a revocation (paragraphs 19–20).

III. CRITERIA FOR APPLYING ARTICLES 290 AND 291 TFEU

József Szájer, the responsible rapporteur of the Committee on Legal Affairs of the EP for the new system of ‘delegated acts’ and ‘implementing acts’, has delivered a Report59 on the follow-up on the delegation of legislative powers and control by Member States of the Commission’s exercise of implementing powers. The purpose of this Report is to take stock of the practical application of Articles 290 and 291 TFEU and provide the rapporteurs of the responsible committees of the EP with a number of practical guidelines when dealing with delegating and implementing acts.60 The Report recalls that the delegation of legislative power to the Commission and the reform of the system of implementing acts ‘were designed to further improving the control exercised by the co-legislators of secondary legislation and thereby reinforcing the democratic legitimacy of these acts’ (as well as) ‘aimed to enhancing effectiveness and further simplifying legislation at European level’.61 It considers delegation as ‘a delicate operation in which the Commission is instructed to exercise a power which is intrinsic to the legislator’s own role’.62 Consequently, the Report underlines the freedom of the legislator and that, ‘according to the settled case-law, the adoption of rules essential to the subject matter envisaged is reserved to the legislator’ and that ‘the adoption of provisions requiring political decisions that fall within the responsibility of the legislator cannot be delegated’.63 Therefore, the Report concludes ‘that delegated power can only consist in supplementing or amending parts of a legislative act that are not essential’ and that ‘the basic act must explicitly define the objective, content, scope

57

Ibid, para 3. This procedure should be reserved for exceptional cases, such as security and safety matters, the protection of health and safety, or external relations, including humanitarian crises. See Common Understanding, n 56 above, para 12. 59 PE, A7-0435/2013, 4.12.2013. 60 Ibid, 12. 61 Ibid, 12. 62 Ibid, 4. 63 Ibid, 4. 58

What is Left of Comitology After Lisbon? 283 and duration of that delegation, and must lay down the conditions to which the delegation is subject’.64 The decision as to whether, in a given case, delegated or implementing acts will be used determines whether the EP will have a say in these measures (delegated acts), or not (implementing acts). Therefore, the individual rapporteurs should, at the very start of the negotiations, flag the issue of delegated and implementing acts as a key institutional issue for the EP. This strategy would avoid the issue only being dealt with at the end of the negotiations. Files in which the institutional rights of the EP with regard to the inclusion of delegated acts are not safeguarded would not be put on the plenary agenda.65 Another possibility could be to include as many provisions as possible in the basic legislative acts adopted under codecision, which, while potentially leading to longer processes in any future modifications of these acts, would help to secure the prerogatives of the EP. But this is in contradiction to the overarching aim to effectuate the legislative process and to concentrate the strengths of the EP on central political questions. Because the delineation of delegated and implementing acts, and the correct and most appropriate choice of provisions to be included in the basic act are an integral part of most negotiations on legislative proposals, the Report presents a number of practical proposals to safeguard the Parliament’s prerogatives. This proposal is assisted by the legal consideration that ‘the decision as to whether to confer delegated or implementing power must be based on objective factors which must permit judicial review of the solution adopted’.66 The following nonexhaustive list of criteria should be followed by the EP in applying Articles 290 and 291 TFEU:67

A. Criteria in Favour of Delegated Acts —

—

—

—

64 65 66 67

In general, delegated acts should be used where the basic act leaves a considerable margin of discretion to the Commission to supplement the legislative framework laid down in the basic act; The Commission may only amend legislative acts by means of delegated acts. This includes amendment of annexes, as annexes are an integral part of the legislative act; Measures leading to a choice of priorities, objectives, and/or expected results should be adopted by means of delegated acts if the legislator decides not to include them in the legislative act itself; Measures designed to lay down (further) conditions, criteria or requirements to be met will, by definition, alter the content of the legislation and add new

Ibid, 4. Ibid, 7. Ibid, 5. Ibid, 5–7.

284 Josef Falke

—

—

—

—

—

—

rules of general application. Consequently, the creation of such further rules or criteria may be accomplished only by means of a delegated act; If the Commission is empowered to adopt additional binding rules of general scope that affect, in substance, the rights or obligations laid down in the basic act. These measures will, by definition, supplement those laid down in the basic act, further defining the Union policy. This can be achieved only by means of a delegated act; Regarding financial programmes, non-essential elements amending or supplementing the basic act, such as those concerning specific technical matters, strategic interests, objectives, expected results, etc, can be adopted by delegated acts to the extent that they are not included in the basic act. A measure that determines the exact content of information to be provided under the basic act generally supplements the obligation to provide information and should be carried out by means of delegated acts; Elements of procedures or methods involving further non-essential policy choices in order to supplement the legislative framework of the basic act should be laid down in delegated acts; The legislator may only delegate to the Commission the power to adopt nonlegislative acts of general application. Measures of individual application may not be adopted by means of delegated acts; Authorisations (for instance, decisions regarding the inclusion of a specific substance in food, cosmetics or drugs) can be measures of general application because they concern any operator willing to use such substance. If the criteria still allow the Commission to make further politically-motivated choices, such authorisation should be a delegated act.

B. Criteria in Favour of Implementing Acts —

—

—

—

—

Implementing acts should not add any further political orientation and the powers given to the Commission should not leave any significant margin of discretion; The implementation of the rules or criteria already established in the basic act, without modifying the substance of the rights or obligations stemming from them and without making further policy choices, can take place through implementing acts; Regarding financial programmes, the legislator may allow adoption through implementing acts only for elements that do not reflect any further political or policy orientation; A measure determining arrangements for the provision of information (ie, the format) does not add further obligations, but, instead, enables uniform implementation; Measures establishing details of procedures or methods in order to ensure uniform conditions for the implementation of an obligation laid down in the basic act should, in general, be implementing measures;

What is Left of Comitology After Lisbon? 285 —

If authorisations of certain substances are fully based upon criteria contained in the basic act, they should be implementing acts.

The Report68 urges the Commission and the Council to enter into negotiations with the EP in order to reach an agreement on the above-mentioned criteria, and considers that this can be achieved within the framework of a revision of the Inter-institutional Agreement on Better Law-Making.69

IV. COMITOLOGY—INTERGOVERNMENTAL BARGAINING OR DELIBERATIVE DEMOCRACY?

There exist two distinct theoretical images of the day-to-day practice of comitology. The first approach—associated with authors such as Steunenberg et al,70 Pollack,71 Ballmann et al,72 and Franchino73—depicts comitology as an arena for inter-governmental bargaining designed by the Member States (as the principals) to control the Commission (as their supranational agent) in its executive duties. The central underlying assumptions are that the preferences of the Member State governments are fixed, the aim of comitology is control rather than deliberation, and that the rules governing a committee determine the discretion of the Commission in a given issue area. This approach has helped to analyse the differences among the three primary types of comitology committees—advisory, management, and regulatory committees—and the preferences of Member State governments to select a specific comitology procedure with the aim of maximising their influence and controlling the Commission. The different procedures provide the structure for a bargaining arena not only between the Member States

68

Ibid, 7. [2003] OJ C321/1–5, 31.12.2003. 70 B Steunenberg, C Koboldt and D Schmidtchen, ‘Policymaking, Comitology, and the Balance of Power in the European Union’ (1996) 16 International Review of Law and Economics 329–44; B Steunenberg, C Koboldt and D Schmidtchen, ‘Beyond Comitology: A Comparative Analysis of Implementation Procedures with Parliamentary Involvement’ (1997) 52 Aussenwirtschaft 87–112; D Schmidtchen and B Steunenberg, ‘European Policymaking: An Agency-Theoretic Analysis of the Issue’, CSLE Discussion Paper, No 2002-13. 71 MA Pollack, The Engines of European Integration. Delegation, Agency, and Agenda Setting in the EU (Oxford, Oxford University Press, 2003) 114–46; Pollack, ‘Control Mechanism Or Deliberative Democracy? Two Images of Comitology’ (2003) 36 Comparative Political Studies 125–55. 72 A Ballman, D Epstein and S O’Halloran, ‘Delegation, Comitology, and the Separation of Powers in the European Union’ (2002) 56 International Organization 551–74. 73 F Franchino, ‘Institutionalism and the Commission’s Executive Discretion: An Empirical Analysis’, European Integration Online Papers 2/6; Franchino, ‘The Determinants of Control of Commission’s Executive Functions’, European Integration Online Papers 3/2; Franchino, ‘Control of the Commission’s Executive Functions: Uncertainty, Conflict and Decision Rules’ (2000) 1 European Union Politics 63–92; Franchino, ‘The Commission’s Executive Discretion, Information and Comitology’ (2000) 12 Journal of Theoretical Politics 155–81; Franchino, ‘Efficiency or credibility? Testing the Two Logics of Delegation to the European Commission’ (2002) 9 Journal of European Public Policy 677–94; Franchino, ‘Delegating Powers in the European Community’ (2004) 34 British Journal of Political Science 269–93; Franchino, ‘A Formal Model of Delegation in the European Union’ (2005) 17 Journal of Theoretical Politics 217–47. 69

286 Josef Falke and the Commission, but also between the EP, the Council and the Commission. In this view, comitology committees are seen as Councils of Ministers en miniature, the decision style is inter-governmental bargaining, Member State representatives are careful watchdogs of their national interests, and formal rules are of paramount importance.74 The second approach is drawn from sociological institutionalism and constructivism and suggests that comitology committees provide a forum in which national and supranational experts deliberate in a search for the most efficient solution to regulatory problems and in which good arguments matter more than economic interests and formal voting rules. ‘The advocates of the deliberative image argue that comitology is government by persuasion, argumentation and discursive processes rather than by command, control and strategic action’.75 In this view, EU comitology committees provide a forum in which national and supranational experts meet and deliberate in a search for the best or most efficient solutions to common policy problems … comitology is not an arena for hardball intergovernmental bargaining … but rather a technocratic version of deliberate democracy in which informal norms, deliberation, good arguments, and consensus matter more than formal voting rules.76

Christian Joerges and Jürgen Neyer have introduced the term ‘deliberative supranationalism’ as the most apt characterisation of comitology,77 based upon three main arguments:78 —

—

Formal structures of different committees are of limited importance—the lines are blurred between comitology committees and other expert groups, and issues as well as working groups overlap across various committee arenas; The decision style in the comitology system is not one of bargaining, but of problem-solving; the ability to present and substantiate arguments is decisive, and, ideally, these must be backed by scientific evidence;

74 See the condensed characterisation in MA Pollack, ‘The New Institutionalisms and European Integration’ in A Wiener and T Diez (eds), European Integration Theory, 2nd edn (Oxford, Oxford University Press, 2009) 125–43, at 133, and in J Blom-Hansen and GJ Brandsma, ‘The EU Comitology System: Intergovernmental Bargaining and Deliberative Supranationalism?’ (2009) 47 Journal of Common Market Studies 719–40, at 723 et seq. 75 Blom-Hansen and Brandsma, n 74 above, 722. See, further, the characterisation of this approach by A Héritier, C Moury, C Bischoff and CF Bergström, Changing Rules of Delegation: A Contest for Power in Comitology (Oxford, Oxford University Press, 2013) 23. 76 See Pollack, n 74 above, 133. 77 C Joerges and J Neyer, ‘From Intergovernmental Bargaining to Deliberative Political Processes: The Constitutionalisation of Comitology’ (1997) 3 European Law Journal 273–99; C Joerges and J Neyer, ‘Transforming Strategic Interaction into Deliberative Problem-solving: European Comitology in the Foodstuffs Sector (1997) 4 Journal of European Public Policy 609–25. For an instructive summary, see JJ Schulte, Die Komitologie aus demokratietheoretischer Perspektive. Demokratische Betrachtungen des Ausschusswesens der Europäischen Union und seiner Genese (Osnabrück, JMCE Award Series Nr 2, 2011) 15–20. 78 See Blom-Hansen and Brandsma, n 74 above, 722; Blom-Hansen, n 1 above, 146.

What is Left of Comitology After Lisbon? 287 —

Comitology has a strong socialising effect on its participants; during the course of working together, the representatives develop common understandings of problems and solutions.

Joerges and Neyer have presented their deliberative approach on comitology and on the ‘comitology mode of decision-making’ several times,79 and defended it against critical objections80 as recently as 2014.81 They argue upon a sound empirical basis82 as well as with a normative intention. In reaction to the critical remark that deliberative supranationalism cannot be equated with democratic

79 C Joerges and J Neyer, ‘Von Intergouvernementalem Verhandeln zur Deliberativen Politik: Gründe und Chancen für eine Konstitutionalisierung der Europäischen Komitologie’ in B KohlerKoch (ed), Regieren in Entgrenzten Räumen, Politische Vierteljahresschrift, Sonderheft 29 (Opladen, Westdeutscher Verlag, 1998) 207–23; C Joerges and J Neyer, ‘“Deliberative Supranationalism” Revisited’, EUI Working Papers Law No 2006/20; C Joerges, ‘“Good governance” through Comitology?’ in C Joerges and E Vos (eds), EU Committees: Social Regulation, Law and Politics (Oxford-Portland OR, Hart Publishing, 1999) 311–38; C Joerges, ‘Transnationale deliberative Demokratie oder deliberativer Supranationalismus? Anmerkungen zur Konzeptualisierung legitimen Regierens jenseits des Nationalstaats bei Rainer Schmalz-Bruns’ (2000) 7 Zeitschrift für Internationale Beziehungen 145–61; C Joerges, ‘“Deliberative Supranationalism”—A Defence’, European Integration online Papers 2001–08; Joerges, ‘“Deliberative Supranationalism”—Two Defences’ (2002) 8 European Law Journal 133–51; Joerges, ‘“Comitology and the European model” Towards a Recht-Fertigungs-Recht in the Europeanisation Process’ in EO Eriksen, C Joerges and J Neyer (eds), European Governance, Deliberation and the Quest for Democratisation, ARENA Report No 02/2003, 501–40; Joerges, ‘“Deliberative Political Processes” Revisited: What have we Learnt about the Legitimacy of Supranational Decision Making?’ (2006) 44 Journal of Common Market Studies 779–802; J Neyer, ‘Administrative Supranationalität in der Verwaltung des Binnenmarktes: Zur Legitimität der Komitologie’ (1997) 20 Integration 26–39; Neyer, ‘The Comitology Challenge to Analytical Integration Theory’ in Joerges and Vos (eds), n 79 above, 219–38; J Neyer, ‘Justifying Comitology: The Promise of Deliberation’ in K Neunreither and A Wiener (eds), European Integration. Institutional Dynamics and Prospects for Democracy After Amsterdam (Oxford, Oxford University Press, 2000) 112–28; Neyer, ‘Discourse and Order in the EU: A Deliberative Approach to Multi-Level Governance’ (2003) 41 Journal of Common Market Studies 687–706; Neyer, ‘Explaining the Unexpected: Efficiency and Effectiveness in European Decisionmaking (2004) 11 Journal of European Public Policy 19–38; Neyer, ‘The Deliberative Turn in Integration Theory’ (2006) 13 Journal of European Public Policy 779–91; Neyer, ‘Die Stärke deliberativer politischer Theorien und das Elend der orthodoxen Demokratietheorie. Eine Replik auf Marcus Höreth’ (2009) 19 Zeitschrift für Politikwissenschaft, 331–358; J Neyer, ‘Justice, Not Democracy: Legitimacy in the European Union’ (2010) 48 Journal of Common Market Studies 903–21; J Neyer and M Schroeter, ‘Deliberative Europe and the Rejected Constitution’ in EO Eriksen, C Joerges and F Rödl (eds), Law and Democracy in the Post-National Union, Arena Report No 1/2006, pp 61–88; M Everson and C Joerges, ‘Re-conceptualising Europeanisation as a Public Law of Collisions: Comitology, Agencies and an Interactive Public Adjudication’ in HCH Hofmann and AH Türk (eds), EU Administrative Governance (Cheltenham, Edward Elgar Publishing) 512–41, at 525–28. 80 See, inter alia, C Closa, ‘Comment on “Comitology and the European Model? Towards a RechtsFertigungs-Recht in the Europeanisation Process” by Christian Joerges’ in EO Eriksen, C Joerges and J Neyer (eds), European Governance, Deliberation and the Quest for Democratisation (Oslo, ARENA, 2003) 606–16; M Höreth, ‘Überangepasst und realitätsentrückt. Zur Paradoxie der Theorie deliberativer Demokratie in der EU’ (2009) 19 Zeitschrift für Politikwissenschaft 307–30. 81 C Joerges and J Neyer, ‘Deliberativer Supranationalismus in der Krise’ in O Flugel-Martinsen, D Gaus, T Hitzel-Cassagnes and F Martinsen (eds), Deliberative Kritik—Kritik der Deliberation. Festschrift für Rainer Schmalz-Bruns (Wiesbaden, Spinger VS, 2014) 353–72. 82 In addition to the empirical studies of Christian Joerges and Jürgen Neyer, see the pioneering study of T Roethe, ‘EG-Ausschußwesen und Risikoregulierung. Ein Problem von Handlungsstruktur und Rationalität’, EUI Working Papers LAW 94/7.

288 Josef Falke governance,83 they make it quite clear that deliberative modes of interaction within comitology cannot be interpreted as the advent of deliberative democracy in the EU.84 Inter-governmental deliberation is viewed as ‘a necessary supranational supplement to state-based majoritarian democracy and international cooperation’.85 The empirical evidence of deliberative supranationalism in the comitology field under certain pre-conditions and the yardstick of the ability to realise—to a certain degree—the promise of a deliberative decision-making procedure are two sides of the same coin.86 The deliberative supranationalism approach is founded on the following consideration: Under conditions of complex interdependencies, a major shortcoming of the democratic nation-state is the negligence of its external effects. Individual state actions affect other states and societies without giving them a constitutionally guaranteed voice in deciding on those actions. Deliberative procedures would correct these deficiencies by giving voice to ‘foreigners’ in all cases where they have legitimate concern. A supranational polity would then have the task of facilitating deliberative interaction among affected states and societies by providing an institutional set up which complements national Member State democracies with transnational deliberative structures.87

For deliberative decision-making, three procedural requirements must be fulfilled:88 — —

The collective aim of the participants of the group and the substantive boundaries of the discourse must be defined as concretely as possible; The act of casting votes plays only a minor role in decision-making and is subordinated to argumentative interaction.

The preferences of delegates are not viewed as intrinsically legitimate reflections of the individuality and democratic nature of any Member State’s preferences but only as governmental decision style in the comitology claims which attain their normative status by being convincing to the other delegates.89

—

The existence of a neutral third party which provides a disciplinary function for the actors involved in the discourse to refrain from openly selfish arguments and to legitimise their preferences by referring to the normative criteria laid down in the definitions of a given discourse.

83 R Schmalz-Bruns, ‘Deliberativer Supranationalismus. Demokratisches Regieren jenseits des Nationalstaates’ (1999) 6 Zeitschrift für Internationale Beziehungen 185–244; O Gerstenberg and CS Sabel, ‘Directly-Deliberative Polyarchy: An Institutional Ideal for Europe?’ in C Joerges and R Dehousse (eds), Good Governance in Europe’s Integrated Market (Oxford, Oxford University Press, 2002) 289–341, at 295. 84 Everson and Joerges, n 79 above, 528. 85 Neyer, ‘The Comitology Challenge to Analytical Integration Theory’, n 79 above, 236. 86 Ibid, 237. 87 Joerges and Neyer, ‘“Deliberative Supranationalism” Revisited’, n 79 above, 2. 88 See Neyer, ‘The Comitology Challenge to Analytical Integration Theory’, n 79 above, 233–36. 89 Ibid, 234.

What is Left of Comitology After Lisbon? 289 Empirical studies—based upon a questionnaire to the Danish and Dutch national representatives in nearly all comitology committees in 2006—on the daily workings of comitology show that a deliberative as well as a bargaining interaction style exists in the comitology committees and that their relative importance is determined by the nature of the issues dealt with by the individual comitology committees.90 This result is backed by several case studies of selected individual committees and by two studies on individual representatives working in different committees.91 One consequence of the transformation of the regulatory procedure with scrutiny in highly controversial and sensitive political areas into the delegation of legislative powers to the Commission under the political control of the EP and the Council will be that comitology committees can concentrate their work on ‘genuine’ executive acts with limited political sensitivity. This can strengthen the deliberative working style.92 The transparency of the comitology procedures was decisively increased by the online comitology register that provides detailed information on the agendas for meetings, attendance lists, summary records, vote results and draft measures. The confidentiality of proceedings has remained unchanged. According to Article 11(2) of the Standard Rules of Procedure for Committees,93 the committee’s discussions are to be confidential. Meetings behind closed doors are a necessary pre-condition for ‘protecting’ national representatives from the public eye and from the eyes of their Member State, allowing them to have a freer, deliberative discussion.94 The written procedure does not allow an effective exchange of arguments and makes it difficult for the members of the committee really to control the Commission. Deliberative discussions need face-to-face communications and enough time to change one’s mind and to take new positions as a consequence of convincing arguments. The written procedure is suitable for routine constellations in which a committee rubber-stamps the prepared implementing acts, namely, inter alia, the Standing Committee on medicinal products for human use,95 the Standing Committee on veterinary medicinal products,96 and the programme committees for the execution of specific programmes implementing the Seventh EC Framework Programme for research, technological development and demonstration activities.97 In 2012, 889 written consultations took place, compared with only 793 meetings in Brussels. The protagonists of a deliberative

90

See Blom-Hansen and Brandsma, n 74 above; Blom-Hansen, n 1 above, 143–75. Clearly summarised by Blom-Hansen, n 1 above, 147 et seq. 92 See A Metselaar, ‘The Functions of Comitology—What Will Lisbon Change?’, PhD Thesis, Faculty of Law, Universiteit Maastricht, 2008, 19 et seq, and 39. 93 [2011] OJ C206/11–13, 12.7.2011. 94 See E Vos, ‘50 Years of European Integration, 45 Years of Comitology’, Maastricht Working Papers—Faculty of Law 2009–03, 31. 95 288 positive opinions in 291 written procedures and in 5 meetings in 2012. 96 50 positive opinions in 57 written procedures and in 4 meetings in 2012. 97 235 positive opinions in 226 written procedures and in 39 meetings in 2012. 91

290 Josef Falke interpretation of the comitology activities argue that comitology has a strong socialising effect on its participants and that, during the course of their working together, the representatives develop common understandings of problems and solutions. This kind of esprit de corps cannot grow in those committees which are never active, or only meet in rare cases, and whose members do not act under the rule of seeing each other again (Gesetz des Wiedersehens).98 85 of 269 committees did not have one single meeting or one single written procedure in 2012, and a further 40 committees had only one meeting in 2012. Jürgen Neyer showed the rich potential of deliberative approaches for studies on the institutional design and the political process of the EU in general.99 He suggested the baselines of a research agenda, following three different, but supplementary, approaches of deliberation: normative,100 rational,101 and functional.102 These suggestions and ideas can be used for structuring studies not only on the reformed comitology system in connection with delegated legislation by the Commission, but also on the activities of European agencies as well as on the preventive arm of ‘European Economic Governance’ or other fields. Christian Joerges has based his re-visited version of the ‘deliberative supranationalism’ approach103 upon the assumption that the EU will not be transformed into a unitary state or some kind of federation, but will, instead, remain a multi-level system which needs to manage its affairs without a hierarchical order of political authority and to organise its political action in networks. He understands comitology and its diverse reforms as a response to the much needed institutionalisation of continuous fine-tuned co-operation between the European Commission (including the European agencies) and the executives of the Member States with their specific knowledge (including scientific and other expertise). In contrast to the usual reading of supranational law and its hierarchical relations to the national laws of the Member States, he re-structures European law as a special kind of conflicts law which reacts to the virtue (!) of legal diversity in Europe. As a second dimension of such conflicts law, he characterises the establishment of complex transnational non-legislative quasi-administrative regimes in the field of regulatory politics of the EU and the co-operation of national bureaucracies (including networks of epistemic communities) with the European Commission in the comitology system and the establishment of ever more European 98 With this term, Niklas Luhmann summarised the following trust-building conditions in informal organisations and other social relations: enduring relationship, reciprocal dependence, and momentum of unforeseeability. See N Luhmann, Vertrauen. Ein Mechanismus zur Reduktion sozialer Komplexität (Stuttgart, Ferdinand Enke Verlag, 1973) 39. 99 Neyer, ‘The Deliberative Turn in Integration Theory’, n 79 above; Joerges and Neyer, ‘“Deliberative Supranationalism” Revisited’, n 79 above, 1–14. 100 Deliberation as truth-seeking in an ideal speech situation. 101 Deliberation as an instrument for advancing preferences. 102 Deliberation as a means for providing for efficient, effective and legitimate governance. 103 Joerges, ‘“Deliberative Political Processes” Revisited: What have we Learnt about the Legitimacy of Supranational Decision Making?’, n 79 above; Joerges and Neyer, ‘“Deliberative Supranationalism” Revisited’, n 79 above, 15–32.

What is Left of Comitology After Lisbon? 291 agencies.104 The conflicts-law approach seeks to defend the ides of the rule of law and law-mediated legitimacy.105 The invention of delegated acts and the reform of the comitology procedure have weakened the conditions that enable comitology to function as a means of deliberative democracy. In sum, they have strengthened the position of the Commission and changed the incentives for deliberation. Christian Joerges and Jürgen Neyer have conceptualised new interdisciplinary-oriented research strategies for studies on comitology and on the taming of an unbound expertocracy in times of ‘European Economic Governance’ with dense political interaction, high economic interdependence and a weakened rule-of-law principle.106 ‘Deliberative Supranationalism’ can be used as an analytical research design and as a yardstick for political processes.

104 C Joerges, ‘Unity in Diversity as Europe’s Vocation and Conflict’s Law as Europe’s Constitutional Form’, London School of Economics: Europe in Question Discussion Paper Series No 28/2010 (revised version: April 2013) 42. 105 Ibid. 106 See, recently, Joerges and Neyer, n 81 above.

12 Risk Regulation, GMOs, and the Challenges to Deliberation in EU Governance: Politicisation and Scientification as Co-Producing Trends MARIA WEIMER AMSTERDAM

I. INTRODUCTION

R

ISK REGULATION IS often considered as a domain favourable to the occurrence of deliberation, and a promising testing ground for deliberative theories in public regulation, especially in the transnational space.1 The underlying assumption is that the scientific and technical questions arising in the regulation of risk-entailing products and technologies, including the accompanying scientific uncertainty, are likely to encourage a collective search for truth and best policy.2 In the EU, the networked system of governance in comitology and in the Council has often been considered as fulfilling the special pre-conditions for successful deliberation.3 Back in 2001, Christian Joerges, in an article on the role of science within democratic risk management, stated that the regulation of transnational markets should be guided by ‘transnational deliberative fora’, which would become the basis of legitimate transnational governance: ‘among the three levels of

1 See P Dabrowska, ‘EU Governance of GMOs: political struggles and experimentalist solutions?’ in C Sabel and J Zeitlin (eds), EU Governance: Towards a New Architecture? (Oxford, Oxford University Press, 2010); A Spina, ‘European Networks in the Regulation of Biotechnologies’ (2010) 35 European Law Review 197; S Murphy, ‘Biotechnology and International Law’ (2001) 42 Harvard International Law Journal 47. 2 For a critical view, see M Pollack and G Shaffer, ‘Risk Regulation, GMOs, and the Limits of Deliberation’ in D Naurin and H Wallace (eds), The European Union Council of Ministers (Basingstoke, Palgrave Macmillan, 2008). 3 See T Risse, ‘Let’s argue!: Communicative Action in World Politics’ (2000) 54 International Organization 1, at 19–20; C Joerges and J Neyer, ‘From Intergovernmental Bargaining to Deliberative Political Processes: The Constitutionalisation of Comitology’ (1997) 3 European Law Journal 273.

294 Maria Weimer governance—the nation-state, the EU, and the WTO—the EU comes closest to that ideal’.4 This defence of deliberative supranationalism has become the basis for the second dimension of the successor theory of European Conflicts-Law Constitutionalism (CLC): namely, the claim that European law in general, and European transnational governance in particular, can be re-interpreted as European conflictslaw, because they derive their legitimacy from existing deliberative practices, which are constitutionalised through procedural norms of transnational co-operation.5 In a similar vein, other theorists of EU governance have identified the deliberative, self-transformative nature of European regulation as the core of the EU’s legal and regulatory architecture. According to Charles Sabel and Jonathan Zeitlin, the EU is a functioning novel polity without a state due to the fact that ‘its decisionmaking is at least in part deliberative: actor’s initial preferences are transformed through discussion by the force of the better argument’. The EU has developed a new architecture of experimentalist governance, which reconciles centralised decision-making with local diversity by networking various types of decisionmakers.6 This chapter looks at the European regulation of agricultural biotechnology as a particularly instructive example of both the potential and the limits of deliberation as the legitimation basis for supranational regulation. Since Ulrich Beck’s Risk Society,7 at the very latest, it has been recognised that regulating technological risks has a strong political dimension, because it raises re-distributional conflicts. In other words, it raises essential political questions as to who should bear the economic, environmental, and social costs (the ‘bads’ rather than the ‘goods’) of globalisation, economic interdependence, and technological progress. Over the last 20 years, the issue of GMO (genetically-modified organism) regulation in the EU has divided not only agricultural land (namely, into GM and non-GM cultivation), but, with it, also the politics, societies, and even identities in Europe.8 Deliberation holds out the promise of legally enabling ‘unity in diversity’ in European governance via the creation of institutional frameworks within which comprehensive conflict resolutions become conceivable. In other words, deliberative transnational fora are seen as counteracting purely science-based technocratic

4 C Joerges, ‘Law, Science, and the Management of Risks to Health at the National, European and International Level—Stories on Baby Dummies, Mad Cows and Hormones in Beef ’ (2001) 7 Columbia Journal of European Law 1, at 15–16. 5 See C Joerges, ‘The Idea of a Three-Dimensional Conflicts Law as Constitutional Form’ in C Joerges and E-U Petersmann (eds), Constitutionalism, Multilevel Trade Governance and Social Regulation, 2nd edn (Oxford-Portland OR, Hart Publishing, 2011); and C Joerges, PF Kjaer and T Ralli, ‘A New Type of Conflicts Law as Constitutional Form in the Postnational Constellation’ (2011) 2 Transnational Legal Theory 153. 6 C Sabel and J Zeitlin (eds), Experimentalist Governance in the European Union (Oxford, Oxford University Press, 2010) 2. On both similarities and differences between CLC and experimentalist governance, see J Corkin, Chapter fifteen in this volume. 7 U Beck, Risk Society: Towards a New Modernity (London, SAGE Publications, 1992). 8 For example, regional identities that are either ‘GMO-free’ or not. See: www.gmo-free-regions.org.

Politicisation and Scientification 295 governance, because they are able to balance various concerns (for example, trade, health, environment, socio-economic and ethical factors), thereby managing the political dimension of risk regulation. This chapter will show, however, that it is precisely this that EU institutions have been failing to do in the field of GMOs. The failure of European risk governance in this field presents itself as a challenge to deliberative theories such as CLC and experimentalist governance. At the same time, it also offers important insights into the pre-conditions of successful deliberation in European decision-making. By analysing the problems of the EU governance of GMOs as well as their causes, this chapter seeks to enhance our understanding of the scope conditions of successful deliberation in transnational governance.

II. RE-FRAMING THE PROBLEM OF GMO REGULATION: POLITICISATION AND SCIENTIFICATION AS CO-PRODUCING TRENDS

Since the establishment of the first EU harmonising measures for the cultivation of GMOs back in the 1990s, this area has developed from a low-profile technical issue into a political issue of high salience on the EU agenda. The authorisation of GMOs9 as food, feed and agricultural products in the EU continues to be one of the most gridlocked policy fields on the Union’s agenda despite continuous reform efforts. ‘A political agreement on the GMO dossier is not possible’, concluded the Danish EU presidency in 2012, referring to its failed attempt to push forward the adoption of new legal rules on the agricultural cultivation of GMOs in the EU.10 The proposed reform aims to grant the Member States more freedom to restrict or ban GMO cultivation on their territories, and thereby to resolve the year-long stalemate in the EU authorisation of GMO crops.11 Over the last 20 years, the controversy12 surrounding this policy area has divided the EU not only politically, but also geographically. At the moment, there are over 100 voluntary ‘GMO-free regions’ in the EU.13 Preferences (and, as their basis, beliefs, risk perceptions and socio-economic interests) with regard to GMO cultivation differ greatly among the Member States. Moreover, several ‘Euro-barometer’ surveys have indicated that the majority of European citizens oppose the use of GMOs

9 Article 2 of Directive 2001/18 defines GMO as ‘organism(s), with the exception of human beings, in which the genetic material has been altered in a way that does not occur naturally by mating and/ or natural recombination’. 10 The Council of the European Union (2012), Progress report from the Danish presidency, Interinstitutional File 2010/0208 (COD), 6. 11 Note that in June 2014 the Environmental Council produced a political agreement on a Greek presidency proposal to move forward with the reform. 12 See, for an overview, M Lee, EU Regulation of GMOs: Law and Decision Making for a New Technology (Cheltenham, Edward Elgar Publishing, 2008) 19. 13 Not counting GMO-free provinces, departments or municipalities. See a map of GMO regions in 2012 at: www.gmo-free-regions.org/fileadmin/pics/gmo-free-regions/conference_2012/map/EU_ map_0912.png.

296 Maria Weimer as food and in agriculture.14 All these factors make EU agreement on common authorisations difficult, if not impossible, as evidenced by the year-long deadlock in both comitology and the Council of Ministers. Conflicts (ie, legal and political disagreement) are perpetuated in the postauthorisation phase. Several Member States have banned GMO cultivation on their territory in response to strong anti-GM movements at home. Although the Commission considers these bans to be unlawful, it is powerless to lift them against a qualified-majority of national representatives in the Council and comitology. The only issue Member States were able to agree upon over the past decade (since the enactment of the reformed GMO framework in 2001–03) was that the Commission should not be entitled to lift national GMO bans against the will of the Member States and their citizens.15 This is a profound contestation of the Commission’s authority to decide on GMO cultivation for the Union as a whole. All this seems to suggest that the high politicisation of decision-making on GMO cultivation is the main factor preventing successful deliberation in Council and comitology. Mark Pollack and Greg Shaffer, indeed, have argued that the GMO issue is not conductive to the sort of deliberative decision-making in the comitology process advocated by Joerges due to the intense politicisation of the issue in public opinion. According to them, politicisation has severely limited the ability of member-state representatives to engage in the sort of deliberative search for better policy depicted in the Habermasian literature. In this sense, our analysis lends further support to the view that transparency and politicization decrease the prospect for deliberation in transnational bodies, which appears to function most effectively in closed, in-camera settings. If confirmed by other studies, this finding suggests a stark normative trade-off between transparency and openness, on the one hand, and deliberative decision-making on the other (last emphasis added).

While politicisation certainly hampers a deliberative problem-oriented type of decision-making, how appropriate is it to draw a causal link from transparency to politicisation and, further, to the failure of deliberation? Are we, in this way, not omitting a part of the problem analysis? In this chapter, it is submitted that the problems of GMO regulation in the EU are rooted not just in the politicisation and decisional deadlock within comitology. This is accompanied by another equally salient dimension of the GMO governance failure: namely, the de facto shift from de-centralised to unilateral top-down decision-making combined with the scientification16 of the authorisation process. 14 The last survey indicated 58 per cent opposing GMOs, see Euro-barometer (2008), Attitudes of European citizens towards the environment, at 65. 15 The Council, on several occasions, voted by qualified-majority against Commission proposals to lift national safeguard measures on GMOs. See M Weimer, ‘Applying Precaution in EU Authorisation of Genetically Modified Products—Challenges and Suggestions for Reform’ (2010) 16 European Law Journal 624. 16 On the notions of politicisation and scientification, although in a slightly different form, see M Everson and E Vos, ‘The Scientification of Politics and the Politicisation of Science’ in Everson and Vos (eds), Uncertain Risks Regulated (Abingdon-New York, Routledge-Cavendish, 2009) 1.

Politicisation and Scientification 297 This other dimension points us to a sort of ‘parallel reality’ of GMO regulation. The two main EU institutions responsible for GMO authorisations, the European Commission and its expert agency, the European Food Safety Authority (EFSA), continue to approve GMOs. Despite strong opposition from several Member States and the public,17 under the current legal framework, the Commission has authorised every GMO application submitted to it, following, in each case, a positive EFSA opinion finding no risks to human or animal health or to the environment. Moreover, high-ranking EU officials have publicly taken a pro-GMO stance in an attempt to end what some perceive to be a ‘GMO psychosis’.18 Anne Glover, the chief scientific advisor of Commission President José Barroso, has publicly criticised opposition to GMOs on the grounds of health protection and environmental safety as lacking robust scientific evidence and declaring the precautionary principle as being no longer relevant with regard to GMO foods or crops.19 Last year, a report of the European Academies Advisory Council, a body representing national science academies in the EU which sees itself as the ‘collective voice of European science’,20 called upon European countries to re-think their rejection of the technology. Using strong terms, the Advisory Council warned of the ‘grave scientific, economic and social consequences of current EU policy towards GM crops’ including disadvantages for the Union’s global competitiveness in agricultural research and innovation. It also criticised claims of adverse effects as based upon ‘contested science’.21 Hence, this parallel reality is one in which regulatory science22 plays a crucial role which constitutes a powerful basis for Commission decisions on GMOs. It follows that Pollack and Shaffer’s analysis does not consider the, arguably, very important role which top-down decision-making combined with scientification plays in contributing to the increased politicisation of GMO regulation. In fact, the EU experience with GMO authorisation is strongly marked by the clash between these two above-described trends, namely, between politicisation, on the one hand, and scientification, on the other. To date, no settled view exists on how to define the actual problem with regulating GMOs. While some blame the polarised public debate calling for more science-based regulation, others see the over-reliance on science as the root of the problem. To understand the problems of GMO regulation in Europe (and, importantly, also to draw lessons for other fields of risk regulation) it is, therefore, of crucial importance to analyse the interconnection between both 17 See F Seifert, ‘Synchronised national publics as a functional equivalent of an integrated European public. The case of biotechnology’ (2006) 10 European Integration online Papers. 18 See a statement by former Commissioner for Health and Consumer Protection, David Byrne, in ‘Risk versus Benefit’, European Voice Conference ‘Farm to Fork’, SPEECH/01/565, Brussels, 22 November 2001. 19 See interview with EurActiv, EU science advisor: ‘Lots of policies are not based on evidence’, 24 July 2012, available at: www.euractiv.com/innovation-enterprise/chief-scientifc-adviser-policy-pinterview-514074. 20 See www.easac.eu/about-easac/what-is-easac.html. 21 www.euractiv.com/science-policymaking/chief-eu-scientist-backs-damning-news-530693. 22 On this term, see S Jasanoff, The Fifth Branch: Science Advisers as Policymakers (Cambridge MA, Harvard University Press, 1990).

298 Maria Weimer politicisation and scientification as dynamic processes. In other words, we need to analyse the ways in which both processes are inter-related and are potentially co-producing23 each other. This chapter begins to address this task by analysing the dynamics of GMO regulation between legislative ideals and institutional practices (Section III). Subsequently the chapter concludes with some final remarks (Section IV) on the promise of deliberation in European risk governance.

III. GMO REGULATION BETWEEN LEGISLATIVE RULES AND ADMINISTRATIVE PRACTICES24

The current EU legal framework for GMOs25 underwent significant reform in the years 2001 to 2003 as part of a wider overhaul of the Union’s food-safety regime in the aftermath of the BSE crisis.26 The current rules, first, respond to the institutional failures of EU food safety regulation uncovered by the BSE and other food-safety crises, which occurred during the 1990s.27 Second, reforming the authorisation procedure for GMOs was an essential pre-condition to ending the then EU de facto moratorium on the authorisation of GMOs, and thereby the transatlantic conflict over GMO trade.28

III.1. The Legal Framework: Co-operative Problem-solving and Precautionary Risk Governance The 2001–03 EU legal framework seems to recognise the complexity both in societal and in scientific terms of decision-making on GMO authorisations.29 It responds with a procedural solution, which structures the process of authorisation as a co-operative effort of various actors, thereby aiming to reconcile the scientific 23 The notion is being adapted from S Jasanoff (ed), States of Knowledge: The Co-production of Science and Social Order (London, Routledge, 2004) 1. 24 For more details see the extended version of this chapter, Amsterdam Centre for European Law and Governance Working Paper 2014-3, available at: papers.ssrn.com/sol3/cf_dev/AbsByAuth. cfm?per_id=1315485. 25 Directive 2001/18 on the deliberate release into the environment of genetically modified organisms, [2001] OJ L106/1; Regulation 1829/2003 on genetically modified food and feed, [2003] OJ L268/1 and 1830/2003 concerning the traceability and labelling of genetically modified organisms and the traceability of food and feed products produced from genetically modified organisms, [2003] OJ L268/24. 26 See E Vos, ‘EU Food Safety Regulation in the Aftermath of the BSE Crisis’ (2000) 23 Journal of Consumer Policy 227. 27 Ibid. 28 The de facto moratorium lasted between 1998 and 2004; See also M Pollack and G Shaffer, When Cooperation Fails: the International Law and Politics of Genetically Modified Foods (Oxford-New York, Oxford University Press, 2009). 29 As a reaction to previous protests and GMO opposition, see L Levidow, S Carr and D Wield, ‘Genetically Modified Crops in the European Union: Regulatory Conflicts as Precautionary Opportunities’ (2000) 3 Journal of Risk Research 189.

Politicisation and Scientification 299 legitimacy with the political legitimacy of GMO regulation. The matrix of the new legislative design for GMO authorisation is de-centralised administrative co-operation.30 As noted in the literature, it constitutes ‘a transnational governance regime which cuts across national/supranational and public/private distinctions, and which both guides and is accountable to scientific communities, national food authorities and civic society’.31 Shared responsibility and, in fact, shared authority for GMO authorisations is therefore a key feature of this regulatory regime.32 The legal framework, however, does contain some important features of centralised top-down regulation. First, it almost totally harmonises national provisions concerning GMO commercialisation both as food and as plants for agricultural cultivation. Moreover, the legislation has introduced the principle of priorauthorisation for all GMO products on the EU market, requiring every GMO to undergo an individual safety assessment before it can be placed on the market. In this administrative process, the Commission has been granted the exceptional competence of direct implementation (Article 291(2) TFEU) of GMO rules.33 It therefore acts as the central EU administrative authority adopting (following comitology rules) legally-binding decisions directly vis-à-vis private applicants.34 At the same time, a remarkable feature of the GMO framework is the mitigation of these top-down and command-and-control elements by both the legal indeterminacy of the substantive safety requirements for GMO products and the strong proceduralisation of the authorisation process. In other words, the legal provisions lay down a dense procedural and institutional framework for GMO authorisation whereas substantive requirements for authorisation (for example, ‘adverse effects on human health and the environment’) are rather indeterminate, and need further definition and concretisation in the process of administrative implementation. In this way, the Commission, as the final administrative authority, is granted a wide epistemic discretion when authorising GMOs, which means that it is left to the Commission, together with its expert agency, to determine how the requirements of GMO safety should best be measured or realised.35 In other words, the concretisation of the substantial safety requirements laid down in the legislative rules is being ‘outsourced’ to the administrative process of rule

30 On administrative co-operation, see E Schmidt-Assmann, Der europäische Verwaltungsverbund Formen und Verfahren der Verwaltungszusammenarbeit in der EU (Tübingen, Mohr Siebeck, 2005). 31 D Chalmers, ‘“Food for Thought”: Reconciling European Risks and Traditional Ways of Life’ (2003) 66 Modern Law Review 538. 32 For a more detailed analysis, see M Weimer, ‘Democratic Legitimacy through European ConflictsLaw? The Case of EU Administrative Governance of GMOs’ (PhD Thesis, EUI Florence, 2012). 33 As a rule, implementing powers lie with the Member States, see Article 291(1) TFEU. 34 On the differences between the procedures under Regulation 1829/2003 and Directive 2001/19, see T Christoforou, ‘The Regulation of GMOs in the European Union: The Interplay of Science, Law and Politics’ (2004) 41 Common Market Law Review 637. 35 See P Craig, ‘Review, Risk, Legality and Damages’ (2013) 3 European Journal of Risk Regulation 399, at 402 where, in a case note, Craig describes this as a phenomenon of risk regulation more generally.

300 Maria Weimer implementation with EFSA’s regulatory scientists playing a crucial role in this process (see Section III.2.(a) below). In order to compensate for their loss of ex-ante substantive control, the EU legislator has provided for a dense procedural framework to ‘orchestrate’36 the input of the various actors in the authorisation process. Two interconnected institutional principles were crucial in shaping this framework. On the one hand, the legal framework has been based upon the precautionary principle.37 On the other hand, and as an expression of the latter,38 the GMO authorisation procedure is governed by the principle of risk analysis. Seen together, these principles express the idea that GMO authorisation decisions should be able to reconcile two potentially conflicting rationalities: a scientific and a political rationality.39 The former underlies the process of risk assessment as an independent, objective and transparent process of scientific evaluation of GMO risks, thereby providing the overall administrative process with cognitive or functional legitimacy.40 The latter, in contrast, should govern the process of risk management, which is seen as a process of ‘weighing policy alternatives in consultation with interested parties’, and which not only takes into account the outcome of risk assessment but also other non-scientific legitimate factors,41 as well as the precautionary principles and scientific uncertainty.42 Political rationality can therefore be seen as securing both the normative and democratic legitimacy of GMO authorisations in the EU.43

36 See O Label, ‘The Renew Deal: The Fall of Regulation and the Rise of Governance in Contemporary Legal Thought’ (2004) 89 Minnesota Law Review 342. 37 See Article 1 and recital 8 of Directive 2001/18 and Article 1 of Regulation 1829/2003, together with Article 7 of Regulation 178/2003. 38 The Commission Communication on the Precautionary Principle describes the so-called structured approach to risk analysis as an expression of the precautionary principle in the EU, see COM(2000) 1. 39 See, also, T Christoforou, ‘The Precautionary Principle and Democratizing Expertise: A European Legal Perspective’ (2003) 30(3) Science and Public Policy 205. In the Pfizer case, Case T-13/99, Pfizer Animal Health SA v Council [2002] ECR II-3305 the EU General Court has confirmed this interpretation of the precautionary principle, stating that the latter is based on the idea that scientific legitimacy is not sufficient to underpin regulatory decisions on risk, but must be complemented by political legitimacy provided for by the risk manager who is democratically accountable and has the discretion to take into consideration other factors than the results of the scientific risk assessment. 40 See J Black, ‘Constructing and contesting legitimacy and accountability in polycentric regulatory regimes’ (2008) 2 Regulation & Governance 137, at 146: ‘functional legitimacy claims focus on the outcomes and consequences of the organization (for example efficiency, expertise or effectiveness) and the extent to which it operates in conformance with professional or scientific norms’. 41 Following Preamble 19 of Regulation 178/2003 laying down the general principles and requirements of food law and establishing the European Food Safety Authority, such factors can include societal, economic, traditional, ethical, and environmental factors and the feasibility of controls. 42 See Article 6(2) and (3) of Regulation 178/2003 and Article 3(12) of Regulation 178/2003 defining risk management. 43 According to Black, n 40 above, regulators often aim at satisfying various legitimacy claims. Normative legitimacy is achieved when the goals and/or procedures of a regulatory activity are perceived as morally appropriate, ibid at 144. Democratic legitimacy is achieved when the regulatory activity complies with certain models of democratic governance, for example, representative, participatory, or deliberative, ibid at 146.

Politicisation and Scientification 301 In institutional terms, while the Commission acts as the risk manager of GMO authorisations, the EFSA, a quasi-regulatory EU agency, is the risk assessor. At the same time, both actors are embedded in a de-centralised transnational network, which essentially aims at preventing unilateral action on the part of the EU institutions. On the one hand, before authorising GMOs, the Commission is obliged to follow the comitology examination procedure (the former regulatory committee procedure). Ideally, the involvement of a comitology committee representing the Member States should compensate for the loss of national regulatory competences by serving as a forum for them to express their concerns, and to raise arguments about, for example, the socio-economic or long-term environmental impact of GMO commercialisation on their national economies, agricultures, biodiversity, etc. The new comitology rules adopted in 2010 explicitly stress the deliberative element of this administrative process.44 On the other hand, the EFSA has not been designed as a superior authority to national scientific authorities, but as a networked agency that promotes networking and scientific co-operation between national authorities while mediating divergent scientific risk assessments.45 The 2001–03 GMO legal framework has been evaluated positively in the literature.46 Maria Lee, in one of the most comprehensive scholarly analyses of the EU regulation of GMOs at present, concludes: ‘The organisation of the legislation attempts to tread a delicate path between national and central authorities and between reaping the benefits and protecting public interests, as well as between scientific and political understandings of GMOs’.47

III.2. The Practice of GMO Regulation: Subversion of Precautionary Risk Governance by Technocratic Rule? The idea of a co-operative and de-centralised management of GMO risks, which seems to have guided the legislative design, is far from being realised in the current practice of GMO regulation. The latter is characterised by the failure of the legal structures described in the previous section to achieve a balanced deliberative form of decision-making able to reconcile scientific and political legitimacy. Instead, the institutional practice is caught between the scientification of the Commission’s risk management, on the one hand, and the politicisation of comitology decision-making, on the other. Moreover, the following 44

Article 3(4) and a corresponding provision in Article 6(2) of Regulation 182/2011. See Articles 22(7), 23, 30 and 36 of Regulation 178/2003. 46 See Dabrowska, n 1 above; D Chalmers, ‘Risk, Anxiety and the European Mediation of the Politics of Life’ (2005) 30 European Law Review 649, at 669. 47 Lee, n 12 above, 102. See, for a more critical view with regarding to the practice of GMO authorisation, M Lee, ‘Multi-level Governance of Genetically Modified Organisms in the European Union: Ambiguity and Hierarchy’ in L Bodiguel and M Cardwell (eds), The Regulation of Genetically Modified Organisms: Comparative Approaches (Oxford-New York, Oxford University Press, 2010). 45

302 Maria Weimer analysis shows problematical shifts of authority, which go beyond the system of shared responsibility envisaged by the EU legislator. Instead of administrative co-operation between national and supranational actors in the risk-management phase, the top-down decision-making by the Commission dominates the process. III.2.(a) The EFSA as an Uncertainty-Intolerant Epistemic Authority of GMO Authorisations? Since the establishment of the EFSA, co-operation with national scientific authorities on GMO risk assessments has been hampered by a lack of trust and conflicting views over GMO safety. An external evaluation report of 2011 on the EU legislative framework in the field of GMO cultivation (the EPEC report) found the need to improve communication and dialogue between the EFSA and the Member State authorities in order to increase the rate of learning in the system.48 The majority of national authorities perceive that the EFSA’s risk assessments do not sufficiently consider their comments, especially with regard to the diversity of agro-ecological environments and non-target species within Europe.49 One particular problem is that most applications for cultivation are now being submitted via Regulation 1829/2003, which means that applications are being sent to the EFSA directly, by-passing the national evaluation stage. A key difference between Directive 2001/18 and Regulation 1829/2003, from Member States’ point of view is that the Regulation provides fewer opportunities to engage in the risk assessment process. This adds to the demand for Member State authorities to be provided with better opportunities to comment, and to pressure for comments that are raised to be adequately addressed.50

Moreover, empirical studies of the EFSA’s work51 indicate that despite the fact that legally the EFSA has not been granted a superior authority over national scientific authorities, in practice the EFSA’s GMO scientific panel seems to assert scientific authority by overriding national safety concerns about GMOs during the risk assessment. In this field, it therefore fails to fulfil its legally-envisaged function as a mediator between different national risk assessors, and as a networked agency. 48 European Policy Evaluation Consortium (EPEC), Evaluation of the EU legislative framework in the field of cultivation of GMOs under Directive 2001/18/EC and Regulation (EC) No 1829/2003, and the placing on the market of GMOs as or in products under Directive 2001/18/EC, Final Report, March 2011, at 75. 49 Ibid, at 20 and 74. 50 Ibid, at 17. 51 See M van Asselt and E Vos, ‘Wrestling with Uncertain risks: EU Regulation of GMOs and the Uncertainty Paradox’ (2008) 11 Journal of Risk Research 281 with further references; M van Asselt, E Vos and B Rooijackers, ‘Science, Knowledge and Uncertainty in EU Risk Regulation’ in E Vos and M Everson (eds), Uncertain Risks Regulated (Abingdon-New York, Routledge-Cavendish, 2009); Chalmers, n 46 above, 649; For a view that co-operation problems between EFSA and the Member States are overstated, see S Poli, ‘Scientific advice in the GMO area’ in A Alemanno and S Gabbi (eds), Foundations of EU Food Law and Policy: Ten Years of the European Food Safety Authority (Farnham, Ashgate Publishing, 2014) 111.

Politicisation and Scientification 303 Marjolein van Asselt and Ellen Vos have shown that the EFSA tends to dismiss risk claims or indications of scientific uncertainty by way of discarding certain arguments as being non-scientific, or as not being part of the risk assessment— something scholars of science studies have termed ‘boundary work’.52 For example, the EFSA used boundary work in order to construct a boundary between risk assessment and risk management, or to reduce the scope of risk assessment by discarding possible uncertainties about the interference of GMOs with the European environment and regular maize crops as ‘non-scientific concerns’.53 The exclusion of risk-management and -mitigation issues from the scope of the EFSA’s assessment was also criticised in the 2011 external evaluation report.54 By drawing boundaries and dismissing competing claims, the EFSA manages to construct authority, and to produce authority claims. As van Asselt and Vos have observed, ‘The GMO Panel often mobilized “the scientific literature” but without specific references or they just agree with some particular findings or conclusions, without providing further justification. Through this ex cathedra style, EFSA presented itself as an authoritative voice’.55 Moreover, the quality of scientific risk assessment, which constitutes a metareview by the EFSA of the data and analyses provided by the applicant company, has often been strongly criticised by several stakeholders including national authorities, NGOs and independent scientific institutes. In 2008, the European Environmental Council has called upon EFSA to improve its assessment of the long-term risks of GMOs, and, for example, to revise its guidelines for environmental risk assessment.56 Furthermore, research by van Asselt and Vos based upon the study of several GMO applications57 has suggested that the EFSA’s risk assessment is being characterised by what the authors refer to as the ‘uncertainty paradox’. The latter is described as a situation in which scientific uncertainty is acknowledged in principle, but the role of science is actually framed as one of providing certainty and definitive answers about the absence or presence of risk, despite uncertainty precluding both conclusiveness and definitiveness. This situation, they argue, results from an uncertainty-intolerant attitude on the part of the EFSA (but also of other relevant actors such as biotech companies and the European Commission). This attitude is characterised by the EFSA’s reluctance to

52 M van Asselt and Vos define this term in reference to Thomas F Gieryn as ‘a strategic and purposeful act in which boundaries are drawn between realms, for example, between science and non-science and between science and politics. Boundary work involves drawing and maintaining contrasts through selective attributions, which effectively demarcate in order to construct ‘self-evident’ justification and “superiority in designated terrains”’. See van Asselt, Vos and Rooijackers, n 51 above. 53 M van Asselt and Vos, n 51 above, at 288–89 with further references. 54 EPEC Report, n 48 above, at 74. 55 M van Asselt and Vos, n 51 above, who explain this as a result of the EFSA’s so-called ‘uncertainty intolerance’. 56 European Council conclusions adopted on 4 December 2008, available at: www.consilium. europa.eu/ueDocs/cms_Data/docs/pressData/en/envir/104509.pdf. 57 For three cases pertaining to the import of GMOs, namely, NK 603, GT73, and MON 863 X MON 810, see van Asselt and Vos, n 51 above, at 283.

304 Maria Weimer acknowledge the existence of uncertainty in its GMO risk assessments, or, at least, to deem it relevant, instead of genuinely and systematically investigating it in the practice of GMO safety assessment.58 III.2.(a).(i) A Wind of Change in Controversial Cases of GMO Cultivation? The Example of Pioneer’s Maize 150759 There have been, however, some recent developments in the EFSA’s GMO risk assessment, which indicate a potential shift towards more uncertainty-tolerant assessment practices. One case is particularly important in this regard, namely, the EFSA’s series of risk assessments of Pioneer’s maize 1507.60 This case is particularly controversial, because it represents the first application for cultivation submitted to the EFSA since its establishment and under the new 2001–03 legal framework.61 Maize 1507 is an insect-resistant genetically-modified maize. Several concerns have been raised with regard to the effects of this GMO62 on non-target organisms as well as the risk of resistance development in target pests. Moreover, the maize is tolerant to glufosinate ammonium, a toxic herbicide the use of which will be phased out in the EU by the year 2017. Since the initial submission of the application by the company Pioneer in 2001, a total of six scientific opinions have been produced by the EFSA throughout the years. Both Member States and independent institutes have raised concerns over potential risks to human health and to the environment as well as strong objections as to the quality of the EFSA’s risk assessment. In its initial assessments, the EFSA remained reluctant to engage seriously with these contesting views on the safety of maize 1507. Probably in response to its awareness of the political pressure to provide authoritative scientific advice as the new expert agency, the EFSA framed its advice in definite terms. It concluded that the cultivation of maize 1507 ‘will not have adverse effects on human health and/or the environment’ (emphasis added).63 In its subsequent opinions, the EFSA adhered to this conclusion despite strong criticism and

58

Ibid. For details, see the extended version of this chapter, Amsterdam Centre for European Law and Governance Working Paper 2014-3, available at: papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_ id=1315485. 60 The following account is based upon a forthcoming empirical study by M Weimer and G Pisani (on file with the authors). 61 Another similarly controversial case has been the authorisation of BASF’s ‘Amflora’ Potato, which for reasons of space cannot be discussed here in detail. For a detailed account, see forthcoming publication by M Weimer and G Pisani (on file with authors). 62 Due to the insertion of the Bt-toxin Cry1F. 63 EFSA, ‘Opinion of the Scientific Panel on Genetically Modified Organism on a request from the Commission related to the notification (Reference C/ES/01/01) for the placing on the market of insect-tolerant genetically modified maize 1507 for import, feed and industrial processing and cultivation, under Part C of Directive 2001/18/EC from Pioneer Hi-Bred International/Mycogen Seeds’, Question No EFSA-Q-2004-072 (2005) 181 The EFSA Journal 1–33. 59

Politicisation and Scientification 305 conflicting scientific studies.64 Moreover, it engaged in boundary work by refusing to consider the issue of the adequacy of the applicant’s monitoring plan in relation to potential adverse effects on non-target organisms, as being beyond the scope of risk assessment.65 Interestingly, however, starting from 2010, the EFSA has shown a slight, yet meaningful, change in its approach, by providing a more nuanced answer to the Commission’s request, acknowledging the need to improve its methodology, the existence of knowledge gaps, as well as the potential risks arising from the cultivation of maize 1507. The change followed a Commission request for a new EFSA opinion, this time based upon scientific questions raised by a new independent study made available to the Commission.66 The study raised a number of objections to the conclusions made by the EFSA, emphasising the need for further studies on the effects of this GMO on the environment and biodiversity. At a plenary meeting in 2010, the GMO Panel acknowledged for the first time the need to improve the methodology used in order to produce a more accurate assessment of effects on non-target organisms. In 2011, the EFSA published a new opinion giving a more nuanced answer to the Commission’s request and acknowledging some potential risks and the need for further studies.67 For example, it identified potential risks in relation to the evolution of resistance to Maize 1507 in target pests and the toxicity of its Bt-protein to sensitive non-target organisms, such as European butterflies. Ultimately, however, the EFSA still concluded that the risks identified could be minimised or managed through appropriate monitoring and mitigation measures. Consequently, it found maize 1507 ‘unlikely to raise safety concerns for the environment’ (emphasis added).68 This case shows an interesting development in two respects. First, the pressure exerted by national authorities and independent research studies as well as the recurrent referral back to the EFSA by the Commission seems to have forced the agency to engage more seriously with competing views and uncertainty information.69 It moved from providing a definite answer (‘maize 1507 will not have adverse effects’) to a more nuanced answer (if monitoring and 64 See 11 independent scientific studies listed in EFSA (2008), Scientific Opinion of the Panel on Genetically-Modified Organisms, upon a request from the European Commission to review scientific studies related to the impact on the environment of the cultivation of maize Bt11 and 1507 (2008) 851 The EFSA Journal 6–7. 65 EFSA (2006), Annex to the opinions of the Scientific Panel on Genetically-Modified Organisms on the insect-resistant genetically modified Bt11 and 1507 maize. 66 The study at issue is A Bauer-Panskus and C Then (2010), Testbiotech opinion on the application for market approval of genetically modified maize 1507 (DAS-Ø15Ø7-1), available at: www.testbiotech.org/en/node/365, last accessed 27 January 2014. EFSA makes explicit reference to it in EFSA (2010), Minutes of the 61st plenary meeting of the scientific panel on genetically modified organisms held on 20–21 October 2010 in Parma, Italy (p 7). 67 See updated version in EFSA (2012), ‘Scientific Opinion updating the evaluation of the environmental risk assessment and risk-management recommendations on insect resistant genetically modified maize 1507 for cultivation’ (2011) 9 The EFSA Journal 2429. 68 Ibid, at 1. 69 On this term, see van Asselt and Vos, n 51 above.

306 Maria Weimer mitigation measures are taken, maize 1507 is ‘unlikely to raise safety concerns for the environment’), while indicating knowledge gaps and remaining uncertainties. The EFSA did not employ the same type of boundary work as before by adopting a holistic approach, which includes the consideration of monitoring and mitigation measures in the risk assessment. Second, however, this ultimately did not alter the substantial outcome of the EFSA’s risk assessment, namely, the finding of safety. Potential risks and uncertainties arising from the cultivation of maize 1507 were treated as manageable through post-authorisation measures such as monitoring and mitigation. III.2.(b) Politicisation, Deadlock and Reversion to Hierarchy in Comitology The EFSA’s constructed scientific authority has strong de facto influence on the outcome of authorisation decisions taken by the Commission within comitology. In the authorisation practice, the Commission ultimately followed every EFSA opinion, all of which were in favour of authorisation. In no case did the Commission exercise its discretion to depart from EFSA’s advice, for example, upon the basis of socio-economic concerns or with reference to scientific uncertainty and the need for a precautionary approach.70 However, in view of the new Commission practice developed over the last couple of years to delay authorisations while referring opinions back to the EFSA for an update, it may no longer be adequate to compare the Commission with a blind driver receiving directions from a passenger in the back seat.71 The Commission does not follow the EFSA blindly, but, to date, it has always followed its advice in the end, albeit with considerable delay at times. This indicates that the Commission is often, especially in controversial cases of GMO cultivation, paralysed between the opinion of the EFSA and national as well as public opposition to GMO cultivation. Above all, it is not able, or does not see itself as being entitled,72 to exercise political discretion, and to depart from EFSA’s advice even where there are indications of scientific uncertainty or strong socio-economic objections. It should be emphasised that, from the Commission’s point of view, the EFSA’s epistemic authority seems to be the only legitimate basis for the authorisation decision, which ultimately contributes to the loss of political responsibility for GMO authorisations in the EU.

70 See, for example, Mihail Kritikos, ‘Traditional Risk Analysis and Releases of GMOs into the European Union: Space for Non-Scientific Factors?’ (2009) 34 European Law Review 405. 71 This metaphor was originally expressed by a Commission official and cited in E Vos and F Wendler, Food Safety Regulation in Europe: A Comparative Institutional Analysis (Antwerp, Intersentia, 2006) 122. 72 The problem seems to be one of legal entitlement. The legal grounds for authorisation under Regulation 1829/2003 (Article 4(1) and (5)) are framed in narrower terms than its regulatory objectives, and stand in contrast with Article 7 of the Regulation, which requires the Commission to take into account ‘other legitimate factors’. See, on this, J Scott, ‘European Regulation of GMOs: Thinking about Judicial Review in the WTO’ (2004) 57 Current Legal Problems 117, at 118–19.

Politicisation and Scientification 307 Importantly, the comitology process, due to its malfunctioning in this field, fails to mitigate this problem. The failure of deliberative decision-making in the Council and comitology committees in the GMO field is well researched.73 Since the restarting of authorisations in 2004, the Commission pushed through all new applications for GMO authorisations despite the lack of approval on the part of the national representatives. The decision-making process in each case was highly politicised and accompanied by strong opposition on the part of the majority of Member States within the comitology procedure. All the Commission draft decisions were referred to the Council (under the old comitology rules) and could be adopted only because of the Qualified Reversed Majority Voting (QRMV) rule in the regulatory procedure.74 Shaffer and Pollack describe the nature of decision-making across both comitology committees and the Council as ‘a record of persistent conflict, bargaining from fixed positions, formal votes on nearly every proposed decision, substantial numbers of abstentions (representing a refusal to take a position) and ultimate deadlock’.75 Recent research indicates that this practice continues also under the new comitology rules,76 since the Commission has maintained the right to adopt decisions by default in cases in which the newly-established appeals committee fails to deliver an opinion.77 The political deadlock in the Council is thus being reproduced in the new forum of the appeals committee. All this leads to the de facto ineffectiveness of the national input into the authorisation process. Instead of shared authority and co-operation, the Commission appears as the most powerful institution in the GMO authorisation process.78 Through the, by now, common practice of adopting the final decision by default following the reversed majority voting rule—a mechanism that was originally created for exceptional cases—the Commission re-installs top-down unilateral decision-making vis-à-vis the Member States in this process. The weakness of national representation in comitology is even more precarious, as comitology networks are not able to mitigate effectively the strong influence of the EFSA on the Commission. This, in turn, reinforces the scientification of the authorisation process.

73 M Pollack and G Shaffer, ‘Risk Regulation, GMOs, and the Limits of Deliberation’ in Naurin and Wallace (eds), n 2 above; Lee, n 12 above; Kritikos, n 70 above; S Borras, ‘Legitimate Governance of Risk at EU Level? The Case of Genetically Modified Organisms’ (2006) 73 Technological Forecasting & Social Change 61. 74 Under QRMV, the Commission can adopt the final decision, if there is no qualified-majority in the comitology committee or if the Council is against such a decision. 75 Pollack and Shaffer, n 2 above, 17. 76 Regulation (EU) 182/2011 laying down the rules and general principles concerning mechanisms for control by Member States of the Commission’s exercise of implementing powers, [2011] OJ L55/13. 77 See C Klika, J Kim and E Versluis, ‘Why Science Cannot Tame Politics: The New EU Comitology Rules and the Centralised Authorisation Procedure of GMOs’ (2013) European Journal of Risk Regulation 327–34. 78 This power is, of course, very contingent, as the Commission is not able to enforce compliance with its decisions post-authorisation in several of the Member States.

308 Maria Weimer The authorisation process for Pioneer’s maize 1507 epitomises these problems. Interestingly, this is the only known case in which the Commission has attempted to depart from the EFSA opinion, and to refuse authorisation. In 2007, former Commissioner Stavros Dimas presented a draft decision proposing not to approve maize 1507 for cultivation upon the basis of the high degree of scientific uncertainty and the lack of scientific knowledge over significant traits of this GMO. The draft proposal stressed the need for a cautious approach based upon the precautionary principle, and indicated that the degree of uncertainty was so high that it was ‘not possible to establish appropriate management measures which would effectively mitigate the potential damage on the environment’.79 However, instead of submitting the proposal to the Regulatory Committee, the Commission again turned to the EFSA. After the EFSA re-affirmed its previous findings about the safety of maize 1507, the Commission made a U-turn in its position. It drafted a new proposal, this time in favour of authorisation. The previous concerns about existing knowledge gaps no longer appeared in the new draft. The successive process of authorisation of maize 1507 was marked by delay, inaction, and, ultimately, a ruling of the EU General Court in 2013.80 As usual, in 2009, the comitology committee failed to reach a qualified majority either in favour or against the Commission draft proposal. However, the Commission did not continue the procedure by submitting its draft to the Council until November 2013, when it was forced to do so by the finding of the EU General Court that the Commission had breached its procedural obligations, and had failed to act within the sense of Article 265 TFEU. In its latest draft, the Commission proposed to authorise maize 1507 subject to the implementation of certain post-market surveillance measures, case-specific monitoring and instructions to farmers. It justified its proposal upon the basis that the EFSA had not identified new scientific publications that would have invalidated its previous opinions on the safety of maize 1507.81 What is most striking about this proposal is the absence of any

79 The document reported a number of objections raised by Member States concerning the impact on soil organisms and anthropods, the long-term effects of the Bt toxin on the environment, and it also pointed out that, ex lege, environmental risk assessments need to consider potential effects on nontarget organisms and cumulative long-term effects which, at that time, were not adequately evaluated. Importantly, the Commission seemed to question the reliability of a meta-review of the applicant’s assessment, marking the lack of crucial data such as the concentration of Bt toxin, and contesting the methodology used by EFSA in its assessment. See EU Commission (2007), Draft Commission Decision of … concerning the placing on the market, in accordance with Directive 2001/18/EC of the European Parliament and of the Council, of a maize product (Zea mays L, line 1507) genetically modified for resistance to certain lepidopteran pests and for tolerance to the herbicide glufosinate ammonium. ENV/07/. 80 EU General Court, Case T-164/10, Pioneer Hi-Bred International v European Commission, 26 September 2013. 81 Commission proposal for a Council decision concerning the placing on the market for cultivation, in accordance with Directive 2001/18/EC of the European Parliament and of the Council, of a maize product (Zea mays L, line 1507) genetically modified for resistance to certain lepidopteran pests, COM(2013) 758 Final, 6 November 2013.

Politicisation and Scientification 309 references82 to the potential risks and uncertainties identified by the EFSA in its latest more nuanced opinions (see above). In other words, the EFSA shift towards a more uncertainty-tolerant approach was not followed by the Commission, but was, instead, met with a strikingly uncertainty-intolerant response. This contradicts previous findings that the Commission inherits its uncertainty intolerance from the EFSA.83 It is also noteworthy that the Commission proposal to authorise maize 1507 led the European Parliament—for the first time ever—to intervene actively in the comitology procedure.84 In a parliamentary resolution of January 2014, the Parliament called on the Council to reject the Commission proposal as it considered the Commission proposal to exceed the implementing powers conferred on the Commission under Directive 2001/18, and called on the Commission not to authorise any new GMO variety and not to renew old authorisations until the risk assessment methods had been significantly improved.85 It follows, therefore, that the European Parliament has emerged as a new political actor in the comitology procedure, filling the political vacuum created by the disagreement and the failure of deliberation in both the comitology committee and the Council. In February 2014 the Council voted on the authorisation of maize 1507. Nineteen Member States opposed the proposal, five were in favour, and four abstained. Despite the high number of opposing Member States, no qualified majority was reached against the Commission proposal, paving the way for the Commission to approve the GMO maize for cultivation. At the time of writing, the Commission has not yet taken its final decision.

IV. FINAL REMARKS: THE PROMISE OF DELIBERATION IN EUROPEAN RISK GOVERNANCE

What does the present analysis of the ‘GMO conundrum’ teach us about deliberative theories of EU law and governance? It is sometimes suggested that EU regulation of GMOs is a unique, exceptional case, which makes generalisation difficult. The extent to which the GMO case is unique stands, in fact, in direct negative proportion to the extent to which the insights gained from the GMO case can be generalised. In other words, the more uniqueness we see, the less generalisation is possible. 82 With the exception of the potential Bt toxin resistance in corn borers, for which the Commission refers to an EFSA opinion from 2005. 83 As suggested by van Asselt and Vos, n 51 above. 84 Pursuant to Article 8(1) of Council Decision 1999/468/EC (‘old comitology rules’). These rules remain applicable to the authorisation procedure of maize 1507 because it is a pending procedure in the sense of Article 14 of Regulation 182/2011. 85 European Parliament resolution of 16 January 2014 on the proposal for a Council decision concerning the placing on the market for cultivation, in accordance with Directive 2001/18/EC of the European Parliament and of the Council, of a maize product (Zea mays L, line 1507) genetically modified for resistance to certain lepidopteran pests (2013/2974 (RSP)).

310 Maria Weimer There is, arguably, something exceptional about the regulatory conundrum in the field of the EU regulation of GMOs. This exceptionality, however, is not intrinsic to the subject of agricultural biotechnology as such. Instead, the exceptional nature of the EU regulation in this field refers to the high degree of institutional path-dependence, as well as to how deeply entrenched and irreconcilable positions towards GMOs in the EU have become overtime. Agricultural biotechnology, as a policy field, shares several features with other areas of risk and technology regulation. Such features include, for example, the unavailability of conclusive scientific evidence of absence of harm, scientific uncertainty, the potential for long-term impact on the environment and public health, high media visibility, strong economic incentives and market pressure, and the relevance of consumer risk perceptions and other non-risk-related ethical and socio-economic concerns. In the risk governance literature, GMO risks have been characterised as so-called ‘uncertain risks’.86 Regulating such risks is especially challenging, but it is not exceptional. Other examples of policy fields which are highly controversial or have the potential to become cases of regulatory controversy, can easily be found, such as animal cloning for food, nanotechnology, and bisphenol A.87 In other words, the problems of regulating GMOs in Europe are problems inherent to risk regulation, as well as to the broader task of integrating technological innovations into society in a democratic and socially-sustainable way. If this is true, then the experience of regulating GMOs in the EU is an extremely important source for learning about risk governance, in general, and the potential of deliberation to contribute to its legitimacy, in particular. First, the GMO case challenges the sociological basis of both the second dimension of CLC and its predecessor theory of deliberative supranationalism, namely, that the EU comes closest to the ideal of transnational deliberation in networks as the basis for legitimate transnational governance.88 While the EU legal structures of GMO regulation embody the idea of proceduralised co-operation and the balancing of different risk and non-risk concerns, rule implementation has, in practice, failed to manage the political dimension of GMOs. In both deliberative fora of the authorisation procedure, the EFSA and comitology committee, de-centralised multi-level governance reverted to de facto assertion of authority and top-down regulation overriding national concerns. Ultimately, the failure of co-operation and deliberation within these fora strengthened the Commission’s reliance on scientific experts within the regime. As a result, in practice, although not foreseen as such, EU authorisation of GMOs reverts to a purely technocratic process.

86 Van O Renn and M van Asselt, ‘Risk Governance’ (2011) 14 Journal of Risk Research 431; Vos and Everson (eds), n 16 above. 87 See M van Asselt, E Vos and E Versluis (eds), Balancing between Trade and Risk (London, Routledge Taylor & Francis, 2013). 88 See Joerges, n 4 above.

Politicisation and Scientification 311 It may well be that learning is easier to achieve in theory than in practice. In response to the GMO and other case studies of EU governance, especially in the field of Europe’s economic crisis management, Joerges has recently suggested the need to re-conceive CLC as a critical, rather than a re-constructive, theory.89 Moreover, the second dimension of CLC has, to a certain extent, evolved beyond the plea for deliberate supranationalism in transnational governance, by developing an additional normative requirement. Regulatory outcomes of transnational governance must remain revisable by, for example, providing for the possibility of national opt-outs for those Member States whose legitimate regulatory concerns demand a deviation from the common European solution.90 It seems therefore adequate to complement the ‘trivial insight’91 of deliberative supranationalism— namely, that ‘crises which can no longer be managed at the national level require transnational responses’—with a similarly trivial insight that where transnational responses fail to produce legitimate solutions for the whole of the Union, a differentiated approach allowing for national derogations should be adopted. Seen in this light, the Commission reform proposal on national ‘opt-outs’ for GMO cultivation is a normatively desirable development even given its legal and political difficulties. Second, the GMO case also challenges related accounts of GMO regulation as an experimentalist governance regime. Also here, while the regulatory design can be characterised as building in elements of experimentalism, namely, through its procedural structure of the co-operation and bottom-up input of the various actors, the account of implementation failure in this chapter suggests a less optimistic view of the governance practice in this field. As explained above, the input of lower-level units from the national level is de facto precluded in both the EFSA and the comitology procedure, and is further hindered in the management of co-existence post-authorisation. This also stands in the way of mutual learning. The latter pre-supposes an open mind-set of all the actors, in the sense of their willingness to revise both their knowledge about, and their attitudes towards, GMOs in the light of the contributions and experience made by other actors. This, however, is difficult to perceive in the current institutional deadlock, in which positions are both entrenched and politicised. It cannot, of course, be excluded that institutional learning on a larger scale will eventually occur. The currently attempted reform of the GMO framework is certainly the result of a long and painful process of institutional failure and learning in this field. An essential condition for experimentalist governance is, however, that actors are able to agree on a common policy objective as a broad framework goal. Yet the political and societal divide on GMOs is so strong in the EU at the moment that neither Member

89 See C Joerges and M Weimer, ‘A Crisis of Executive Managerialism in the European Union— No Alternative?’ in G de Búrca, C Kilpatrick and J Scott (eds), Critical Legal Perspectives on Global Governance: Liber Amicorum for David M Trubek (Oxford, Hart Publishing, 2013). 90 See Joerges, Kjaer and Ralli, n 5 above. 91 According to Joerges, n 4 above.

312 Maria Weimer States nor societal groups are able to agree on whether to allow or to prohibit the use of this technology in food and agriculture. They are not even able to agree to disagree, as the reform impasse illustrates. All this indicates, however, that a response to the failure of deliberation and co-operation at EU level cannot be a return to top-down regulation with ‘behind closed doors’ technocratic deliberation.92 It also contradicts the assumption that deliberation is fostered by technocratic ‘behind closed doors’ decision-making. In the GMO case, the top-down imposition of epistemic authority has only served to increase the politicisation. Arguably, in cases of high political contestation and disagreement, especially in multi-level systems, deliberation remains the only way forward, because it manages to keep decisions open, where no legitimate final authority is available. The EU’s authority as a legal and political system is based upon an ongoing contestation and resettlement of legal and political authority,93 of which the GMO case serves as a vivid example. As one experimentalist scholar has aptly noted, such cases call for the ‘no-final-decider principle’,94 according to which the EU might well not be the appropriate locus of authority to decide on GMO cultivation at present, although dialogue must nonetheless go on. What this chapter has shown, however, is that blaming politicisation for the failure of deliberation in GMO regulation does not take the full regulatory complexity of this field into account, nor, in particular, the problematical effects of scientification, ie, the over-reliance on regulatory science and epistemic legitimacy as the basis for GMO authorisations. The two trends of politicisation and scientification are not only conflicting, they are actually, to some extent, mutually accelerative. On the one hand, instances of uncertainty intolerance on the part of the EFSA and the Commission serve to contribute to the distrust and the ever more fierce responses of the anti-GM movement, and therefore to the resistance of several of the Member States; on the other hand, this, in turn, infuriates the GMO proponents, who call for science-based decisions. The conclusions of the EPEC external evaluation report of the GMO framework are insightful in this regard: Despite the best efforts of many hard-working individuals and the ongoing efforts to improve it, the system is not working as envisaged and is not, in aggregate, meeting its objectives. As the analysis in this report and earlier outputs from this evaluation have suggested, the ‘dysfunction’ arises as a consequence of a complex set of factors, both external and internal to the authorisation process.95

The report further notes that the frustrations with the legislative framework among the consulted parties concentrate on the risk-management phase.

92 Nor is the ‘stark normative trade-off between transparency and openness, on the one hand, and deliberative decision-making on the other’—as suggested by Pollack and Shaffer, n 2 above— unavoidable. 93 See Joerges and Weimer, n 89 above. 94 Charles Sabel in the workshop on ‘Experimentalism in Transnational Governance’ at the University of Amsterdam, 1–2 November 2013, The Netherlands. 95 EPEC Report, n 48 above, at 73.

Politicisation and Scientification 313 However, it goes on to state that ‘many of the causal factors behind the blockages in decision-making lie “upstream” in the risk assessment process’.96 This complex intertwinement or co-production between the scientification of risk management and the politicisation of comitology, as analysed in this chapter, is, in fact, a major challenge to the EU regulation of GMOs, and, potentially, to other controversial cases of EU risk regulation. The unfortunate results of this are entrenched positions, polarisation, and a breakdown of dialogue. Importantly, the analysis confirms the insight that calling upon scientific experts to resolve political conflicts can ultimately backfire. Over-reliance on expert advice leads to the politicisation of science, and the consequent de-legitimation of political institutions. As noted by Stuart Shapiro and David Guston in the context of the US public administration: Just as judicial oversight of regulatory affairs has encouraged the politicization of the courts, regulatory peer review [by scientific experts] will likely result in the increased politicization of science. Rather than providing more certainty and leading to closure, the addition of more knowledge can lead to more conflict. Regulatory peer review [by scientific experts] may thus perversely contribute to the de-ligitimation of political institutions by politicizing the science that such institutions are supposed to rely on for conflict resolution.

In the case of EU GMO regulation, we are facing the problem of the de-legitimation of the EU public administration. Over-reliance on the EFSA to produce authoritative scientific advice, and the Commission’s dependency on epistemic legitimacy as the sole basis for risk management, together with the failure of the comitology system to exercise political responsibility, increasingly contribute to the sense that the EU institutions involved have disqualified themselves as legitimate decision-makers in this field. A successful reform is challenging as it must be able to mitigate the negative effects of both processes, namely, of politicisation and of scientification.

96 Ibid, at 76; see also at 14–32: ‘the effective functioning of the institutional decision-making phase of the legislative process critically depends on confidence in the risk assessment’.

13 Conflict Mediation Through International Agencies: The Case of the UN Specialised Agency for Information and Communications Technologies OLGA BATURA BREMEN

I. INTRODUCTION

I

N A WORLD where information is so important that it can be considered to be a primary good,1 and where information and communication technologies (ICTs) permeate all spheres of life, the question of access to, and the use of, these technologies is of great importance. However, even more important is the question of who regulates the supply of these valuable resources and products, such as infrastructure and services. Consequently, this chapter intends to explore the relevant regulatory arrangements. Of particular interest in this regard is the international dimension, because telecommunications is a network industry with strong externalities and economies of scale, in which top-down developments are at least as important as the bottom-up ones. In this context, the International Telecommunication Union (ITU) is the most obvious centre of attention: this specialised UN agency has been the main actor in the field for over a century and a half.2 The ever-increasing speed and expanding scope of technological change, market liberalisation and the privatisation of trade, with the emergence of new (non-state) actors and the increased importance of non-governmental actors, have led to contestation of the ITU’s legitimacy and competence as well as the growing concerns of the global South, which produce new distributional and regime conflicts, and thus challenge

1 A McKenna, The Human Right to Participate in the Information Society (New York, Hampton Press, 2011) 83; JAGM van Dijk, The Deepening Divide: Inequality in the Information Society (Thousand Oaks CA, SAGE Publications, 2005) 135–37. 2 The Union Internationale des Télécommunications, now the United Nations specialised agency, the ITU, was founded on 17 May 1865.

318 Olga Batura the resilience, competence, legitimacy and managerial zeal of the international telecommunications regime. This chapter employs the conflicts-law approach to study recent developments involving the ITU, with the aim of gaining a fresh perspective on international telecommunications governance in general, and a better understanding of the role and evolution of the ITU in particular. At the same time, it allows us to test, within an international setting, the constitutional claim of the conflicts-law approach that has been challenged in the context of the European integration project3 by the disturbing proliferation of new governance forms (comitology, agencification),4 the resulting strengthening of executive power,5 and the rise of managerialism6—all exacerbated as reactions to the ongoing crisis.7 Last, but not least, the study is to provide a contrast to the adverse developments at EU level as documented by other contributions to this volume. This endeavour will be accomplished in the following stages. Section II briefly introduces the ITU and its role. Due to the complex structure of the organisation and constraints of space, this chapter focuses, by way of example, more specifically on the ITU Telecommunication Standardisation Sector (ITU-T) as the main object of the investigation. In terms of the conflicts-law approach, the ITU-T is a typical second-dimension arrangement, as explained in Section III. The emergence and anatomy of new distributional conflicts that have resulted from the technological progress, liberalisation and globalisation of both markets and industry are described in Section IV, and their direct implications for the ITU-T are presented in Section V. The attempts of the ITU-T to cope with the challenges are outlined in Section VI. The findings are summarised and set in the conflictslaw perspective in a short conclusion.

II. A SHORT INTRODUCTION TO THE ITU

The ITU is a public international law organisation founded almost 150 years ago and incorporated into the UN system as a specialised agency responsible for co-operation in all forms of telecommunication in 1947. Its core objectives

3 C Joerges and M Weimer, ‘A Crisis of Executive Managerialism in the EU: No Alternative?’, Maastricht Faculty of Law Working Paper 2012/7 (2012) 33. 4 See contributions on agencification and comitology in this volume: M Everson, ‘A Technocracy of Governing: Power without the State; Power without the Market’, Chapter nine in this volume; J Falke, ‘Comitology after Lisbon: What is Left of Comitology as we have Praised it?’, Chapter eleven in this volume. See, also, E Chiti, ‘European Agencies’ Rulemaking: Powers, Procedures and Assessment’ (2013) 19 European Law Journal 93–110. 5 D Curtin, Challenging Executive Dominance in European Democracy, Chapter eight in this volume; idem, Executive Power of the European Union: Law, Practices, and the Living Constitution (Oxford, Oxford University Press, 2009). 6 M Koskenniemi, ‘Constitutionalism as Mindset. Reflections on Kantian Themes about International Law and Globalization’ (2007) 8 Theoretical Inquiries in Law 9–36. 7 Joerges and Weimer, n 3 above.

Conflict Mediation: The ITU-T

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have barely changed over the decades:8 it is responsible for the establishment and maintenance of international telecommunications in general through development of global networks, the promotion of universal service and fighting the digital divide. The competences of the ITU to achieve these objectives are quite extensive and include high-level policy co-ordination between the State members; the regulation of the use of radio frequencies and the allocation of satellite orbits; technical and operational standardisation; the management of the world numbering resources; technical assistance to developing countries in various aspects of ICTs, as well as dispute settlement in the field of its competence(s) (Article 1 ITU Constitution9). The ITU has several member categories. State members enjoy the fullest amount of rights: they can take part in all institutional bodies and conferences, nominate candidates for various official positions, and, most notably, vote to take binding decisions (Article 3 ITU Constitution). Non-state members can participate in the ITU-T’s work in two forms—as Sector members or as Associate members—subject to a prior authorisation by an appropriate State member, which can be given to an individual entity or in general for all entities coming from this state. Sector membership allows participation in all the practical activities of a chosen Sector. In comparison to State members, the rights of Sector members are limited, especially with regard to voting on substantive (binding) decisions. As an Associate member, a non-state entity is allowed to participate in the work of only one study group within a given Sector (Article 19 ITU Convention). The introduction of Sector and Associate membership has proved very popular and there are currently approximately 700 non-state members—telecommunications providers, equipment producers, academia and others—more than triple the number of State members.10 State members are not to be understood to represent a holistic group: various ministries (for telecommunications, for technology and innovation, for economy and/or other), independent regulatory authorities, and other interested administrative bodies are included in the representation of one and the same state.11 Typically for intergovernmental organisations, the supreme organ of the ITU is the Plenipotentiary Conference of the State members. It has an exclusive

8 F Lyall, International Communications: The International Telecommunication Union and the Universal Postal Union (Farnham, Ashgate Publishing, 2011) 131. 9 Constitution and Convention of the International Telecommunication Union: Final Acts of the Additional Plenipotentiary Conference, Geneva, 22 December 1992, Geneva, ITU, 2011, available at: www.itu.int/pub/S-CONF-PLEN-2011/en. 10 See lists of ITU members available at: www.itu.int/en/membership/Pages/sector-members.aspx. 11 The Netherlands may have the biggest government-related representation—there are five bodies registered for this country: Ministry of Economic Affairs, Directorate General for Energy, Telecommunications and Competition, Authority for Consumers and Markets, Radiocommunication Monitoring Station and Radiocommunications Agency Netherlands. See information about the Netherlands available at: www.itu.int/online/mm/scripts/mm.list?_search=1&_map=n&_search_ countryid=106&_country=Netherlands%20%28Kingdom%20of%20the%29, last accessed 31 January 2014.

320 Olga Batura competence to revise the ITU Convention; it determines general policies and financial plans, gives general staffing directives and considers reports of ITU activities, and concludes agreements with other international organisations (Articles 8–9 ITU Constitution). It should be mentioned that Sector members may attend Plenipotentiary Conferences, but only as observers. However, they can exert influence by working in study groups, preparing conferences and proposing items for the agenda.12 The Plenipotentiary Conference elects the State members of the Council, who are represented by telecommunications experts. The Council is an administrative body of the ITU, which acts through resolutions and decisions in order to facilitate the implementation of the ITU founding treaties and Administrative Regulations as well as the will of the Plenipotentiary Conference and other conferences. Between the Plenipotentiary Conferences and within the limits of the powers delegated by the latter, the Council can decide on the ITU’s policies (Article 10 ITU Constitution). The Council is supported by the General Secretariat (Article 11 ITU Constitution). Besides the Plenipotentiary Conference, which addresses general matters of the ITU, there are also world conferences, which address more specific matters of telecommunications. They are empowered to revise the International Telecommunication Regulations—a substantive and detailed international treaty aimed at the facilitation of interconnection and interoperability (Article 25 ITU Constitution). The main substantive work is carried out in the Sectors, which are organised thematically in the Radiocommunication Sector (ITU-R), the Telecommunication Standardisation Sector (ITU-T), and the newest one, created as a result of the institutional reform in the 1990s, the Telecommunication Development Sector (ITU-D). All Sectors are required to collaborate and to co-ordinate their efforts. Each Sector is assisted in administrative matters by a Bureau headed by a Director. Due to the limitations of the scope and space here, and in order to provide deeper insights in terms of the conflicts-law approach, this chapter further focuses on the Telecommunications Standardisation Sector (Article 17 ITU Constitution). The ITU-T deals with ‘technical, operating and tariff questions’ of international telecommunications provisions, and caters for procedures and practices to ensure compatibility between equipment and operating protocols for interoperability of networks and systems. To render it more precise, some examples of ‘technical, operating and tariff questions’ are network planning, infrastructure deployment, equipment manufacturing, service provisioning, interconnection, the security of networks, charging and revenue sharing.13 On these issues, the ITU-T

12 R Horvitz, ‘Towards an Open ITU’, August 2009, p 19. Electronic publication available at: www. openspectrum.eu_/files/Towards_an_Open_ITU_public_version_2.pdf, last accessed 31 January 2014. 13 D MacLean, ‘International Telecommunication Union (ITU)’ (2007) Global Information Society Watch 31. Retrieved from: www.giswatch.org/institutional-overview/civil-society-participation/ international-telecommunication-union-itu, last accessed 31 January 2014.

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adopts recommendations ‘with a view to standardising telecommunications on a worldwide basis’ (Article 17(1) ITU Constitution). These issues are scrutinised in special study groups that eventually prepare a report containing draft recommendations. The reports are submitted to a world telecommunications standardisation assembly which ultimately decides upon the fate of the recommendations (Articles 13–14 ITU Convention). The ITU-T produces two types of recommendation. The first type is part of the ITU Administrative Rulings and resulting standards are therefore legally-binding on ITU member states. In order to keep up with technological developments, an alternative approval process was developed, by which the second type of recommendation is adopted in a fast procedure (in uncomplicated cases—within about four weeks after the text drafting).14 The alternative approval process takes place exclusively after the text has been agreed upon by the study group responsible, and thus gives equal participation opportunities to both State and non-state members as well as to developing and developed countries. However, the latter standards are not legally-binding. The alternative approval process accounts not only for the extremely high pace of technological development and innovation that requires faster adoption of standards, but also for the growing importance of non-state actors in standardisation activity.15 Arguably, the burden of technical scrutiny and preparation of draft recommendations in the ITU-T standardisation sector lies almost exclusively with the Sector members. By contrast, State members participate mainly in the study groups which deal with numbering and tariff questions.16 In this context, the legal implications of the outcomes of the ITU-T’s decisionmaking need to be briefly considered.17 The ITU is an international organisation and the proceeds of its activity are subject to the rules of public international law. Thus, while basic ITU documents, such as the ITU Constitution, the ITU Convention, International Telecommunications Regulations and other proper international treaties are binding law for State members—subject to the usual conditions and limitations of public international law—the vast majority of the ITU-T’s recommendations, as well as its various declarations, resolutions, opinions and the like, are not binding. Nevertheless, generally, the ITU-T’s recommendations enjoy almost universal compliance by state and non-state actors due to the requirements of the international provision of telecommunications

14 Recommendation ITU-T A.8 (10/2008) ‘Alternative approval process for new and revised ITU-T Recommendations’. 15 See Section IV for a more detailed discussion of the role of non-state actors. 16 MacLean, n 13 above, 34. 17 On ITU law-making from the public international law perspective see an insightful analysis by Hinricher, Jens, ‘The Law-Making of the International Telecommunication Union (ITU)—Providing a New Source of International Law?’ (2004) 64 Zeitschrift für ausländisches öffentliches Recht und Völkerrecht 489–501.

322 Olga Batura and the restrictions of the laws of physics,18 and can therefore be described as ‘authoritative law’.19

III. CLASSIC ITU-T AS A TYPICAL SECOND DIMENSION OF CONFLICTS LAW

A brief retrospective glance at the ITU shows that functional necessity in the co-ordination of the technical operation of telecommunications provision across borders was a predominant reason for the creation and development of this organisation.20 In the nineteenth century, before the first predecessor of the ITU was established, proper communication flow across national borders was impossible.21 Provision of wired and wireless communications was concentrated on the territories of nation states and stopped at national borders due to incompatibility of standards designed according to local requirements. States were strongly interested in maintaining control of the means of communication within their sovereign territory due to the military and security implications of the then new technology, and the economic specifics of its deployment and maintenance, as well as for considerations of national cohesion.22 With the development of international trade, the demand for international telecommunication grew. A provision of end-to-end international connections was impossible and/or unthinkable of,23 so national providers were bound to co-operate and negotiate technical arrangements for the interconnection of networks, the interoperability of equipment, and the costs and payments mechanisms.24 ‘These were primarily national issues requiring international agreement’25 because the telecommunications providers were owned or controlled by national governments. Radical technological and disrupting political developments, which have occurred since the establishment of the ITU, have, if anything, only strengthened the necessity to co-operate internationally. For instance, the Second World War, the Cold War and de-colonisation all served to bring countries together to re-build

18

Lyall, n 8 above, 164. D Westphal, ‘International Telecommunication Union (ITU)’ in (2006) Max Planck Encyclopedia of Public International Law, para 24. 20 J-L Renaud, ‘The Role of the International Telecommunication Union: Conflict, Resolution and the Industrialized Countries’ in K Dyson and P Humphreys (eds), The Political Economy of Communications: International and European Dimensions (New York, Routledge, 1990) 34; A Tegge, Die Internationale Telekommunicaktions-Union: Organisation und Funktion einer Weltorganisation im Wandel (Baden-Baden, Nomos Verlag, 1994) 28–59; J Shahin, ‘The European Union’s Performance in the International Telecommunication Union’ (2011) 33 Journal of European Intergration 685–88; Lyall, n 8 above. 21 Tegge, n 20 above, 30. 22 Ibid, 28–30 and 37–38. 23 For different reasons for wired and wireless communications, see Tegge, n 20 above, 30 and 38–39. 24 Ibid, 30 and 39. 25 Shahin, n 20 above, 685. 19

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the infrastructure that had been destroyed in Europe, to co-ordinate the divergent developments in the East and West, and to develop, almost from scratch, telecommunications infrastructure in the newly-independent states.26 The shift from telegraph communications to telecommunications and technological advances in radiocommunication—in particular, the emergence of satellite communications— expanded to new fields the competences, and further entrenched the role, of the ITU as the exclusive administrator in the telecommunications domain.27 Arguably, political, economic and technological reasons have continued to justify the significance of the ITU until now.28 Co-operation in telecommunications matters supports stronger political involvement in order to meet the global challenges in the environmental, security, developmental and other spheres. Regionalisation, accompanied by regional market integration, affects the provision of telecommunications so that the telecommunications policies of regional organisations require co-ordination. Standardisation and innovation-sensitive regulation help to promote further technological advancement,29 and, at the same time, to steer the use and development of technology according to societal and economic needs. Economic globalisation, on the one hand, exacerbates market concentration and the effects of economies of scale and, on the other, poses heightened requirements of interoperability. For network industries, technical standards play a crucial role due to strong network externalities. In the liberalised trade environment, compatibility with standards allows a critical mass of producers of technical components and users of the technologies to be achieved in order to expand the size of the market.30 In the competitive global market, both companies and countries may be considered as the ‘standard-takers’, since, for an individual company, it is very difficult to sell incompatible products or to challenge world standards, and, for an individual country using unique allocation, it is difficult to attract new providers or producers. Another side-effect of globalisation is increased mobility, which requires greater portability of devices and services. The technical character of the ITU’s tasks has been reflected in its staffing and its institutional arrangements. From its earliest years, the ITU has been dominated by technical experts.31 National delegations were heavily staffed with experts at the International Telegraph Conference, which established the ITU’s predecessor, in Paris in 1865, and this practice has continued to the present:32 the majority of the members’ representatives in the study and working groups at world conferences and assemblies have an engineering background in telecommunications, and, where

26

Tegge, n 20 above, 46–51. Shahin, n 20 above, 685. 28 Similarly, see Horvitz, n 12 above, 3–4. 29 See, for instance, K Blind, ‘Standardisation as a Catalyst for Innovation’ (2009), ERIM Report Series Reference No EIA-2009-LIS, available at: ssrn.com/abstract=1527333. 30 R Werle, ‘Standards in the International Telecommunications Regime’, HWWA Discussion Paper 157 (2001), 11. 31 P Cowhey and J Aronson, ‘The ITU in Transition’ (1991) 15 Telecommunications Policy 310. 32 Lyall, n 8 above, 8–11. 27

324 Olga Batura applicable, have the necessary powers for voting on ITU-T recommendations. The substantive routine activity of the ITU-T is not bargaining for concessions or the negotiation of political compromises, which require diplomatic skills, but the study of specific technical problems and the search for common solutions to them, aimed at the further development of telecommunications, interconnection and interoperability, within the restrictions of the laws of physics. The permanent intensive work of the study groups is indispensable to this end, while the Plenipotentiary Conference, which takes decisions on the policy issues regarding the ITU’s agenda and development, but not regarding global telecommunications law and policy, meets only every four years. Physical constraints and the necessity of co-operation are also responsible for consensus as a preferred mode of decision-making, even where majority-voting is the official rule and even though State members have veto powers.33 Due to physical constraints and functional necessity, it is sufficient to adopt standards in the form of non-binding recommendations, which are, nevertheless, almost universally followed. To this end, the ITU-T responds to the inability of states to accomplish autonomously regulatory objectives in the sophisticated technological field of international telecommunications provision, and can be termed an arrangement of the second dimension of conflicts law.34 The ITU-T seeks to find a technical solution to the necessity of cross-border communications and helps to reconcile locallydesigned different national systems as well as various communications technologies and generations of technologies. For this, in addition to state representatives, it engages other interested actors—addressees and the users of standards—in the process of standards’ development and even in decision-making. Standard-setting in a consensus-based procedure, resulting in non-compelling recommendations, allows for their highly flexible use by all the affected actors (states and telecommunications operators). The ultimate goal of the ITU-T, regarding the effect of its activity, seems to be to ‘promote de facto standards, to provide guidance and to guide co-ordination’.35 A great number of scholars and critics have emphasised the exceptional resilience, stability and effectiveness of this body.36

IV. ITU-T UNDER PRESSURE OF NEW CONFLICTS

The claims of effectiveness, stability and resilience, and the very existence of the ITU as an exclusive telecommunications regulator, have been challenged in the context of several ongoing political, economic and technological trends. 33

Renaud, n 20 above, 41. C Joerges, ‘The Idea of a Three-Dimensional Conflicts-Law as Constitutional Form’, RECON Online Working Paper 2010/05 (2010), 20. 35 Y Zhao, ‘The ITU and National Regulatory Authorities in the Era of Liberalization’ (2002) 18 Space Policy 297. 36 See, for instance, Tegge, n 20 above, 20; A Noll, ‘The ITU in the 21st century’ (2001) 5 Singapore Journal of International and Comparative Law 63; Lyall, n 8 above, 5. 34

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On the one hand, the distinction between technical and non-technical issues has never been very clear-cut.37 Given the fact that technical standards shape the product and pre-determine its possible uses,38 standards may be used to regulate the market and to carry out certain policies, and may also have regulatory and policy implications in general. At the same time, with the growth of the importance of a given technology for the economy and for society, it becomes increasingly difficult to separate technical decisions from their regulatory and policy implications.39 On the other hand, the context in which the traditional technical co-ordination and regulation within the ITU-T was able to function has been crumbling under the forces of the technological progress in ICTs and the economic liberalisation of trade in services in the WTO. While the degree to which technological development and liberalisation mutually re-inforce each other in re-shaping the telecommunications sector is debatable, it is clear that the interplay of these two factors has led to the commodification of telecommunications services and the emergence of (competitive) transnational markets for them.40 From the perspective of the social embeddedness of markets,41 which largely characterised the provision of telecommunications until liberalisation, telecommunications services markets became subject to a dis-embedding movement that was not a result of natural economic development, but the product of a political decision.42 As a result, commercial considerations started to dominate the arrangements for the provision of telecommunications—a service vested with immense public value due to its significance for social cohesion, participation in social, economic and political life, and for the enjoyment of basic human rights. The dis-embedding movement, which is an artificial disruption of the natural ties between the market and the society to which it pertains, causes a reaction in the form of a re-embedding counter-movement.43 For the telecommunications services market, this movement became visible at WTO level in the document entitled ‘Reference Paper on regulatory principles’,44 which contains additional 37

Renaud, n 20 above, 53. D Burk, ‘Legal and Technical Standards in Digital Rights Management Technology’ (2005) 74 Fordham Law Review 540. 39 M Mueller, Ruling the Root: Internet Governance and the Taming of Cyberspace (Cambridge MA, The MIT Press, 2002) 218; E Calandro, A Gillwald and N Zingales, ‘Mapping Multistakeholderalism in Internet Governance: Implications for Africa’, ICT Research Paper, 2013, 31, available at: ssrn.com/ abstract=2338999. 40 O Batura, ‘Embedded Transnational Markets for Telecommunications Services’ in Christian Joerges and Josef Falke (eds), Karl Polanyi: Globalisation and the Potential of Law in Transnational Markets (Oxford-Portland OR, Hart Publishing, 2011) 255–75. 41 K Polanyi, The Great Transformation: The Political and Economic Origins of our Time, 2nd edn (Boston MA, The Beacon Press, [1944] 2001). See, in particular, Chapter five on the development of markets within the society. 42 O Batura and M Krajewski, ‘Liberalisierung und Regulierung von Telekommunikationsund Gesundheitsdienstleistungen’ in J Falke and C Joerges (eds), Handelsliberalisierung und Sozialregulierung in transnationalen Konstellationen (Baden-Baden, Nomos Verlag, 2013) 184–91. 43 Polanyi, n 41 above, 79. 44 Reference Paper on regulatory principles of 24 April 1996. Available at: www.wto.org/english/ tratop_e/serv_e/telecom_e/tel23_e.htm. 38

326 Olga Batura commitments to the GATS for this sector. However, arguably, this effort is hardly sufficient to restore the necessary balance of the social and the market: socially important issues are addressed at WTO level only in so far as they may hinder the advancement of trade liberalisation.45 The clashes between the opposing forces of dis- and re-embedding have resulted in a number of distributional conflicts, which have proven persistent, as the international community is still in search of satisfactory solutions to them. The conflict surrounding the accounting rates system is exemplary of this constellation and is of direct relevance for the ITU-T. The accounting rates system was established by ITU-T Recommendations and refers to the traditional pricing arrangements of the joint international provision of telecommunications services.46 Before market liberalisation, it could be considered as one of the operational standards developed by the ITU-T out of necessity to co-ordinate various national approaches and practices of cross-border service provision. The result of this system’s application is a bilateral agreement between telecommunications carriers in two countries who agree to compensate one another for transporting and terminating traffic that originates in the other country. For instance, in the case of an international call from country A to country B, the A provider handles the call up to the state boundary to B, at which point the B provider takes it over and completes it. The price of such a call is split 50/50 between the participating providers and remains the same between the two countries involved irrespective of the route over which the signal is transmitted (directly or over third countries). The record of international calls in a balance of activities is also peculiar: a call from country A to country B is booked as an export in B, whereby the export service consists of providing access to the telecommunications network in B and completion of the call by the B provider. In practical terms, the exporter pays the importer. Settlement payments between telecommunications providers are to be paid in the case of traffic imbalance between countries when a carrier originates more traffic than it terminates. Needless to say, this system of price formation does not reflect the real costs of the provision of the service and may be based upon different, sometimes political, considerations. The liberalisation of international trade has benefited the developed countries due to their competitive advantage (stronger telecommunications industries and technological advancement). However, the archaic accounting rates system has been a rather big fly in the proverbial ointment, as it has exacerbated the problem

45

Batura, n 40 above, 270. For detailed description of the Accounting-Rate-System, see SÓ Siochrú, ‘The ITU, the WTO and Accounting Rates: Limited Prospects for the South?’ (1997) 4 Javnost: The Public Journal, Special Edition (European Institute for Communication and Culture, Slovenia) 47–57; L Frühbrodt, Die Liberalisierung der Telekommunikationsdienste: Vom nationalen Monopol zum globalen Wettbewerb (Wiesbaden, Deutscher Universitäts-Verlag, 2002) 122–30; P Cowhey, ‘Accounting Rates, Cross-Border Services and the Next WTO Round on Basic Telecommunications Services’ in D Geradin and D Luff (eds), The WTO and Global Convergence in Telecommunications and Audio-Visual Services (Cambridge, Cambridge University Press, 2004) 34–50. 46

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of traffic imbalances and compensatory payments. Due to a significantly larger and growing amount of calls initiated in the developed countries, the latter have become net payers to the developing countries,47 basically subsidising the (stateowned) monopolies still existing there. Clearly, the developing countries strongly favour the ITU-T accounting rates system: not only can they use the money for the development of their own telecommunications industry and often nonexistent infrastructure, they can also value it as an important source of revenue (in hard currency) for the national budget.48 The enormous amounts of money transfers involved have led the providers from the developed countries to look for solutions. On the one hand, technological development provides a way around the ITU-T system (for example, thanks to call-back, routing via cheaper countries or the Voice over Internet Protocol). On the other hand, individual governments, most notably the United States, tried to adjust the ITU-T rules though national regulation.49 The developing countries protested against such moves, and preferred the ITU-T to alter the existing system. They and the smaller industrial countries lobbied for the ITU-T to be the central actor in the price-setting for all electronic communications, including the international traffic exchange of Internet service providers.50 The ITU-T responded to these changed circumstances and interests by adopting Recommendation D.140, which declares cost-orientation to be the main accounting-rates principle, and contains guidelines for the cost elements to be taken into account.51 While supporting a shift to a cost-based system, the ITU-T acknowledges the potential impact of the reform on the developing countries and therefore advocates a transition period for them to adjust. Nevertheless, the new rates which resulted from the application of the new ITU-T Recommendation were still deemed to be too high by the developed countries. Most importantly, in the liberalised environment, the price of telecommunications services is a function of the supply and demand of the market. The system of accounting rates goes counter to the spirit of the GATS and creates a trade distortion because prices are set arbitrarily and reward economic inefficiency.52 The conflict of the two regimes for telecommunications services provision—the 47 For example, the Mexico-US international long-distance route payments imbalance had prevailed for many years with the ratio of up to 3:1 in Mexico’s favour. Similar situations existed on other markets of outbound traffic from the USA to (mainly) developing countries, as documented in a number of studies, for example, Cowhey, n 46 above, 58 and 61–67. 48 For a detailed explanation of the situation in the developing countries and the justification for using the payments under the accounting-rates system for infrastructure development, see B Guermazi, ‘Reforming International Accounting Rates: A Developing Country Perspective’ in Geradin and Luff (eds), n 46 above, 83–129. 49 The USA adopted benchmarks for settlement rates that US carriers were allowed to pay for termination of calls originated in the USA. Guermazi, n 48 above, 93–95. 50 P Cowhey and J Aronson, Transforming Global Information and Communication Markets (Cambridge MA, The MIT Press, 2008) 169. 51 Charging and Accounting in International Telecommunications Services: Accounting Rate Principles for International Telephone Service, ITU-T Recommendation D-140 (07/98). 52 Guermazi, n 48 above, 102–3.

328 Olga Batura ITU-T and the WTO/GATS—is evident and reflects the underlying distributional conflict. The developing countries, which are interested in the preservation of the accounting-rates system, are in a majority in the ITU-T and can argue their case better there due to the specialised mandate of the organisation and its foundation on the sovereignty principle. The developed countries, in contrast, chose to fight their battles in the WTO, where they have greater leverage due to their bargaining power in negotiating package deals. The conflict over the accounting-rates system escalated in early 2000s, when it was put on trial before the Dispute Settlement Body of the WTO. In the case Mexico Telecoms,53 the United States claimed that the North-bound interconnection rates, negotiated by Mexican incumbent provider TelMex, were not low enough, not cost-oriented and not ‘reasonable, having regard to economic feasibility’, as required by the Section 2.2 Reference Paper, to which Mexico is a signatory. TelMex was a universal service provider in Mexico, and the disputed interconnection rates incorporated costs reflecting this obligation, which included universal access, geographically-averaged prices and minimum service-quality standards, the particular requirements to the network, the ‘carrier of last resort’ obligation as well as the necessity to develop its infrastructure constantly and extensively.54 Despite the cost structure, which is significantly different from its competitors, TelMex’s interconnection rates were consistent both with the costoriented target rates recommended by the ITU-T, and with the benchmark rates for Mexico unilaterally set by the US Federal Communication Commission.55 Nevertheless, the WTO Panel Report found a violation of Mexico’s commitment upon the basis of the Reference Paper. The Panel recognised that cost-orientation is a regulatory principle of both the WTO and the ITU, and examined the meaning of cost-oriented rates under ITU-T Recommendation D.140.56 However, the Panel applied a restrictive approach and concluded that cost-orientation only referred to the costs incurred as a result of service supply, and that, although different calculation methods can be employed, long-term incremental cost methodologies have become a de facto standard internationally.57 The qualifiers ‘reasonable’ and ‘having regard to economic feasibility’ did not modify the meaning of costorientation in such a way as to permit consideration of the general state of the telecommunications industry (coverage, quality, etc) in the calculation of interconnection rates.58

53 WTO, Mexico—Measures Affecting Telecommunications Services—Report of the Panel, WTO Doc WT/DS204/R of 02.04.2004. 54 Ibid, para 4.177; JG Sidak and HJ Singer, ‘Überregulation without Economics: The World Trade Organization’s Decision in the U.S.—Mexico Arbitration on Telecommunications Services’ (2004) 57 Federal Communications Law Journal 15. 55 Note 53 above, para 4.198. 56 Ibid, paras 7.134, 7.170–7.172. 57 Ibid, paras 7.168–7.177. 58 Ibid, paras 7.179–7.184.

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V. IMPLICATIONS OF THE NEW SITUATION FOR THE ITU-T

As indicated above, the re-definition of telecommunications services and their provision in economic terms cannot but heavily affect the major relevant regulatory arrangements, including their institutional framing. The distinction between some technical and non-technical issues has started to blur (for example, quality of service, net neutrality, terminological issues of services’ definitions), and the already blurred lines have started to sharpen, rendering certain issues, such as the above-discussed price-setting, unmistakably non-technical regulation. As a result, the ITU-T has turned from an exclusive, specialised telecommunications agency into one of many, with which it has shared or overlapping competences, and therefore has to compete for its turf. Due to the above-described commodification of telecommunications services, one of the major challengers to the ITU-T has become the WTO/GATS.59 The competition of the ITU-T with the WTO/GATS epitomises the Polanyian double movement of the dis-embedding and re-embedding forces in the telecommunications sector: while the free-trade-promoting activities of the WTO/GATS represent the dis-embedding movement, the ITU mandate allows its regulation to be understood as the functional to social re-embedding.60 Collisions between the two international regimes, fed by the underlying distributional conflicts, reflect the dynamics of the tide of the double movement. At the moment, the ITU-T is retreating from its position as the main international telecommunications regulator. With the changed mind-set about the provision of telecommunications, and also due to the technical origins of the ITU-T, its competences in regulatory issues are being called into question.61 At the same time, while the WTO can produce regulatory rules to ensure free trade in telecommunications services, they are mainly of a general character and lack theoretical and technical specification, which makes their effective application and implementation inappropriate. Thanks to its experience and expertise, the ITU-T possesses the capacity to fill this gap and complement the rules with the necessary details.62 The complementarity of the WTO/GATS and the ITU-T regimes is, nevertheless, based upon the subordination of the latter to the former, as the case of Mexico Telecom demonstrated: the ITU-T’s Recommendations can be applied to the extent that they facilitate or do not contradict the trade liberalisation agenda of the WTO. This means that considerations of a non-trade

59 Due to revolutionary advances in technology, ICANN—a private law organisation for coordination of the Internet Protocol address spaces and management of the top-level domain—is another major rival. This issue will not be developed further in this chapter due to the limitation of space. A detailed study of the Internet governance problématique was conducted by ML Mueller, Networks and States: The Global Politics of Internet Governance (Cambridge MA, The MIT Press, 2010). 60 Batura, n 40 above, 270–71. 61 Zhao, n 35 above, 297. 62 Cowhey and Aronson, n 31 above, 310; Zhao, n 35 above, 297.

330 Olga Batura character, which underpin the ITU-T’s (and other ITU sectors’) work, may recede into the background. Yet the score set in the Mexico Telecom case is only an intermediary result: the conflict over accounting rates is one of many distributional conflicts which have emerged as a result of technological progress and economic developments. Such issues as the allocation and assignment of spectrum frequencies, the allocation of satellite orbits, the regulation of the Internet, and the standardisation gap and digital divide are unlikely to be solved satisfactorily by the ‘WTO’s win-or-loseoriented dispute settlement system’.63 All these issues identify the cases of true conflicts,64 in which all the jurisdictions involved have vested interests, and which a court, biased to the interests of its own jurisdiction, is ill-equipped to resolve. Instead, a solution might be provided within an agency, which, having technical expertise in the specific subject-matter at the core of the conflict(s), can, at the same time, recognise the opposing interests and offer a platform for contestation and deliberation. Such an agency would still pursue its technical mandate to co-ordinate national efforts for effective and efficient provision of a certain good, but would not be subject to capture by a political agenda.65 The ITU seems to be trying to transform itself into such a type of international agency.

VI. TENTATIVE REFORMS IN THE ITU

Competition from other bodies with competences in telecommunications and determination to stay the regulatory hub of the most important infrastructure of the Information Society have encouraged the ITU enact to reforms that, on the one hand, capitalise on its competitive advantages (technical expertise, connections to the private sector) and, on the other, expand its competences to new topical issues. Thus, the ITU has built up a large external co-operation network with various partners.66 Co-operation with international and regional standardisation organisations in telecommunications and related fields leads to the development of common standards and/or co-ordinated standards as well as to the promotion of voluntary consensus-based international standards and the promotion of the recognition of regional standards at international level. The ITU institutionalises co-operation by establishing and participating in special entities (the World Standards Cooperation (WSC), established by the International Electrotechnical

63

Westphal, n 19 above, paras 29–30. On the notion of a true conflict as opposed to a false conflict, see B Currie, ‘The Disinterested Third State’ (1963) 28 Law and Contemporary Problems 754–94. 65 M Everson and C Joerges, ‘Re-conceptualising Europeanisation as a Public Law of Collisions: Comitology, Agencies and an Interactive Public Adjudication’ in H Hofmann and Alexander Türk (eds), EU Administrative Governance (Cheltenham, Edward Elgar Publishing, 2006) 528–29. 66 See information about the ITU’s external cooperation, available at: www.itu.int/en/ITU-T/extcoop/Pages/default.aspx. 64

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Commission (IEC), the International Organization for Standardization (ISO), and the International Telecommunication Union (ITU) in 2001, and the Governmental Advisory Committee to the ICANN) and regularly organising events with stakeholders (World Summit on the Information Society (WSIS)). Stakeholders are also admitted to the ITU substantive work as Sector or Associate members. Naturally, the majority of the Sector members are electronic communications providers, operators, equipment developers and producers. However, there are also NGOs, research facilities and universities,67 whose participation is encouraged by the application of a reduced membership fee for their participation. It should be noted that the participation of civil society is still quite limited and serious reforms are required to turn the ITU into a real multistakeholder organisation.68 In the vertical dimension, the ITU maintains co-operation not only with regional, but also with national authorities.69 As it is part of the UN system, the ITU maintains special relations with it. It is obliged to co-operate with international organisations which have related interests and activities that can promote the completion of the international co-ordination on telecommunication matters (Article 50 ITU Constitution). Following this, for example, a co-operation agreement with the WTO was signed establishing the mutual right to attend the relevant meetings with observer status. Both organisations can ask each other to present an expert opinion or to provide specific information on a particular issue. In order to fulfil its objectives to establish and maintain international communications, and to grasp at once the necessity of reacting to the changing conditions and requirements within the liberalised telecommunications services market, the ITU has adopted a more ‘client-oriented approach’. In particular, with the establishment of the ITU Development Sector, the ITU focus was expanded to include the needs of the ITU members, who, under the impact of technological and economic developments, had to create new mechanisms of telecommunications services provision that were consistent with their general policy framework. Developing countries have encountered the greatest difficulty, as some of them did not even have proper telecommunications laws at the time. As a result, the ITU launched a series of workshops, seminars and other educative events directed especially, but not exclusively, at the governments and regulators of developing countries. For instance, a very successful ICT Regulation Toolkit70 was developed in co-operation with infoDev (Information for Development programme of the World Bank) in order to assist the regulators from developing countries with the design of an effective regulatory framework to enable them to benefit from 67 See the list of Sector members available at: www.itu.int/online/mm/scripts/mm.list?_ search=SEC&_languageid=1. 68 For concrete suggestions, see P Ryan and J Glick, The ITU Treaty Negotiations: A Call for Openness and Participation, North American Network Operators’ Group 55th (NANOG 55) Meeting, June 2012, available at: ssrn.com/abstract=2077095. 69 An analysis of this co-operation is offered by Zhao, n 35 above, 293–300. 70 See the ICT Regulation Toolkit, available at: www.ictregulationtoolkit.org/en/about/about.

332 Olga Batura technological and market advances. The ITU revised some of its standards to bring them into compliance with the free trade environment. For instance, even though the revised accounting-rates system still needs adjustments,71 it has been a significant step forward to meeting the demands of free trade, and has been carried out gradually, despite the dissatisfaction of the developing countries. These activities by the ITU have, in fact, served to promote and to cement the WTO liberalisation framework. To this end, some scholars even argue that the ITU has embraced the neoliberal agenda of the WTO, and thus has become one of its main proponents,72 but an alternative explanation might be that of functional necessity: the ITU still needs to fulfil its mandate, which, in the changed circumstances, requires the requirements of liberalised trade and competitive markets to be taken into account. Due to the constraints of its legal nature and public international law instruments in general, the ITU has adopted an approach similar to that of the European Commission and the European regulatory agencies, namely, regulation through information. The adopted concepts of telecommunications services provision are fostered through the accumulation and dissemination of knowledge and expertise. The ITU conducts extensive research on the most topical issues (broadband development, technological convergence) and produces policy papers and recommendations—even in the fields where its competences are contested (for instance, the regulation of the Internet infrastructure). It gathers and disseminates best practice and develops indicators to examine liberalised telecommunications markets (for example, for the measurement of the independence of the regulatory market authorities or the existence of significant market power). It adopts guidelines for the implementation of the WTO regulatory framework, supported by seminars and workshops, which may also take the form of consultations on the design of national regulatory frameworks.

VII. DELIBERATION AND NEGOTIATIONS AS A MEANS OF CONFLICT RESOLUTION?

With regard to conflict resolution, the constitutional and institutional setting of the ITU is marked by two features. On the one hand, it seems to recognise distributional conflicts as true conflicts, which can ultimately be solved only by political means. Telecommunications services are commonly subject to public service obligations, and public interest has attributed to them positions that are not only within a technical- or market-driven logic, but also within the sphere of intensifying, conflicting

71

SÓ Siochrú, n 46 above, 47–57. For an analysis of this shift, see S Simpson, ‘The Evolution of International Policy Agendas in the Regulation of Electronic Communications: The Internet and Telecommunications’, paper presented at the International Political Science Association/European Consortium for Political Research Conference, ‘Whatever Happened to North-South?’, September 2011, São Paulo. 72

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political interests.73 However, even though telecommunications (and electronic communications in general) are becoming too important to be left to telecommunications experts, their technical knowledge and expertise are indispensable to the establishment of proper rules.74 On the other hand, the ITU attempts to internalise these conflicts and to become a place where technical expertise meets political discourse. In terms of the normative demands of the second dimension of conflicts law,75 the ITU is developing procedural arrangements that enable deliberation, establishing inclusive procedures to allow for the consideration and balancing of all concerns, and developing regulations that are flexible enough to accommodate the differences of its vast membership. Thus, the ITU expands the space for policy-making in order to facilitate an efficient outcome through diplomatic means, comity and negotiation opportunities. With this, the ITU embraces its politicisation, thereby accepting that, in the changed circumstances, it cannot be the technocratic body of ages past. At the same time, it strengthens its own position as a party in the political struggle for influence, remaining a relevant, and, in certain cases, central, actor (especially for developing countries, in questions of infrastructure development and management). Herewith, conflict mediation by the ITU does not take a form of conflict resolution through adjudication or legalisation. Instead, conflicts are dealt with by creating and/or maintaining the political processes that precede law-making.

73 74 75

Everson and Joerges, n 65 above, 530. Cowhey and Aronson, n 31 above, 310. Joerges and Weimer, n 3 above, 31.

14 Professionalisation Contra Technocracy: Global Governance, Reflective Practice, and the Constitutionalisation of the Transnational Sphere MARTIN HERBERG BREMEN

I. INTRODUCTION: GLOBAL GOVERNANCE AND THE PROFESSIONALISATION PROBLEM

P

ROFESSIONS ARE ONE of the most basic institutions of modern societies. In general, members of professions can be defined as experts, although it is constitutive of their practice that they apply their expert knowledge in a very specific way: In contrast to other, more technically-oriented experts, professional practitioners are supposed to use their expertise in a flexible, clientoriented and context-sensitive manner. The reason for this can be found in what Rudolf Stichweh has described as the ‘over-complexity of the situation in relation to the knowledge at hand’:1 Professional practice relates to a field of activities in which essential functions cannot be fulfilled in a standardised way. Instead, what is necessary is a high degree of individual responsibility as well as a set of specific diagnostic and communicative skills. These non-technocratic characteristics of professional action have also been emphasised by Donald Schön, who developed the concept of ‘reflective practice’ as a counter-term to technical problemsolving.2 In view of the present debates on good governance (and other normative models of global governance),3 it seems to be worthwhile to explore the degree 1

R Stichweh, Wissenschaft, Universität, Professionen (Frankfurt aM, Suhrkamp Verlag, 1994) 296. D Schön, The Reflective Practitioner: How Professionals Think in Action (New York, Basic Books, 1983). 3 See, World Bank, Governance: The World Bank’s Experience (Washington DC, World Bank Publications, 1994). See also, H Willke, Smart Governance: Governing the Global Knowledge Society (Frankfurt aM-New York, Campus Verlag, 2007); O De Schutter and J Lenoble (eds), Reflexive Governance: Redefining the Public Interest in a Pluralistic World (Oxford-Portland OR, Hart Publishing, 2010). 2

336 Martin Herberg of professionalism which different experts in different governance arrangements have achieved. Is it reasonable to say that professional practice constitutes a mechanism of social ordering in its own right? And furthermore: could it be that many problems associated with globalisation and global governance originate from a lack of professionalism in the sense of reflexivity and context-sensitivity? In the opinion of some authors, globalisation presents manifold threats to professionalism. While in the period of the ‘golden age nation state’,4 professionals received much trust, their autonomy seems to be eroding now due to the blurring of national borders. Under the conditions of a globalised world, professional practice tends to be replaced by the paradigm of ‘managerialism’,5 in which quantity dominates over quality, in which the standardisation of all products and services becomes a dogma, and in which professional ethics are sacrificed in favour of efficiency. As a general trend statement, these arguments are hard to dismiss: in fact, since a global demos has not evolved yet, and since strong consensus on global values is largely missing, global institutions are highly susceptible to a rather onedimensional and efficiency-oriented way of thinking. At the same time, however, trends in the opposite direction can also be observed. In some practical contexts, those responsible develop their own strategies in order to protect themselves against the dominant managerial paradigm, and, in some regards, the transnational sphere becomes the breeding ground for new and previously unknown forms of professionalism. In what follows, I will discuss some theoretical concepts from the sociology of the professions (Section II). These concepts will then be applied to several empirical cases which are taken from our research project ‘Transnational Governance and Environmental Policy’.6 The term ‘transnational governance’ directs the attention to various mechanisms of social ordering other than the widely-discussed international regimes. It refers to forms of problem-solving which are of a more de-centralised character, and which do not originate from initiatives of government representatives or high-level policy actors.7 Often, global governance does not take the form of authoritative rule-making. Instead, governance manifests itself as monitoring, information-gathering, risk assessment, auditing, consulting, and many other expert-based activities. As will be shown, many of these tasks are ‘professionalisierungsbedürftig’ in the sense intended by Ulrich Oevermann,8

4 A Hurrelmann, S Leibfried, K Martens and P Mayer (eds), Transforming the Golden-Age Nation State (Basingstoke, Palgrave Macmillan, 2007). 5 T Klikauer, Managerialism: A Critique of an Ideology (Basingstoke, Palgrave Macmillan, 2013). 6 The project is part of the Collaborative Research Center 597, ‘Transformations of the State’, at the University of Bremen and is conducted under the guidance of Prof Dr Gerd Winter and Prof Dr Friedhelm Hase. 7 See G Winter, ‘Transnationale Regulierung: Gestalt, Effekte, Rechtsstaatlichkeit’ (2007) 8 Aus Politik und Zeitgeschichte 9–15. 8 U Oevermann, ‘Theoretische Skizze einer revidierten Theorie professionalisierten Handelns’ in A Combe and W Helsper (eds), Pädagogische Professionalität—Untersuchungen zum Typus pädagogischen Handelns (Frankfurt aM, Suhrkamp Verlag, 1996) 70–182, at 91.

Professionalisation Contra Technocracy 337 which means that the nature of the activity requires a professionalised and reflective mode of action. Three empirical cases will be studied in greater depth: —

The practice of legal reform and legal consulting in foreign countries (Section II.1.) requires a high degree of context-sensitivity on the part of those acting as consultants. This attitude is an essential pre-requisite in order to avoid the technocratic fallacy of a mere ‘transfer’ of laws from one country to another. Accordingly, the necessary skills of those responsible may be discussed as a form of advisory-oriented professionalism; The practice of environmental auditing in multinational companies (Section II.2.) calls for an attitude which might be defined as criminological professionalism. Sometimes, these audits are conducted in a rather standardised, managerial manner (as in the case of ISO 14000), while, at the same time, by contrast, it appears that the task can also be accomplished in a more professionalised and case-oriented way; The use of scientific risk assessment as a basis of global standard-setting (Section II.3.) requires special provisions in order to strengthen the professional integrity of scientists. As a concrete study object, I discuss standardsetting in the framework of Codex Alimentarius. While there is the danger that the boundaries of science may be stretched beyond its legitimate limits, there are also indications that experts have learned to develop an attitude of professional self-restraint.

—

—

Clearly, in what follows, none of these cases can be described exhaustively. The goal of the chapter is to highlight some main findings from these three issue areas, in order to demonstrate the broad applicability of the professionalisation concept. In the absence of a global demos or a world government, it is important to take the ‘Eigenstructures’ of world society into account9—among them transnational communities and networks, different forms of custom and usage, as well as various forms of private self-regulation. A significant number of these transnational ordering structures are related (directly or indirectly) to the profession topic, although awareness of this fact is beginning to emerge only slowly in the global governance literature. As will be argued, professionalisation is an important driving force of transnational institution-building, and, furthermore, it can be seen as an important basis of the emergence of societal constitutions beyond the state.10 This constitutional dimension of professional practice has been elaborated in the theoretical work of David Sciulli,11 and it is the aim of this chapter to underpin it with some empirical evidence.

9

M Amstutz, ‘The Opium of Democracy’ (2011) 2 Transnational Legal Theory 215–26, at 221. See G Teubner, Verfassungsfragmente. Gesellschaftlicher Konstitutionalismus in der Globalisierung (Frankfurt aM, Suhrkamp Verlag, 2012) 134. 11 D Sciulli, Theory of Societal Constitutionalism: Foundations of a non-Marxist Critical Theory (Cambridge-New York, Cambridge University Press, 1992). 10

338 Martin Herberg II. SETTING THE STAGE: PROFESSIONAL PRACTICE AS A MECHANISM OF INSTITUTION-BUILDING

Professional practice comes in many different forms, including the work of a judge, a scientist, or a financial auditor. In general, professions can be defined as communities of practice based upon specialised knowledge, which have the mandate of providing society with particular services, and which are capable of regulating themselves. For a long time, the sociological debate on the professions has been dominated by approaches which were rather one-sidedly oriented towards organisational aspects, such as the existence of a professional association or a code of professional ethics.12 Other authors such as Schön13 or Oevermann14 place more emphasis on the specific mode of action which is constitutive of the distinct rationality of professional practice. From this view, the practical challenge which professional actors face lies in coping with dilemmatic demands, which calls for a high degree of flexibility, creativity and discretion on their part. One of these dilemmas is the tension-laden relationship between theory and practice. While professional actors possess their own theoretical expert knowledge, they must be aware that this knowledge cannot be applied in a ‘linear’ or technical way. If professional actors lose this self-critical stance towards their expert knowledge, this will lead to different forms of dogmatism and failure. An additional dilemma results from the fact that professional services relate to situations in which the autonomy of the client is restricted, weakened, or lost. As a consequence, clients are often not able to assess the quality of the services they receive critically. Often, they are in a state of crisis,15 and as a remedy, they place their trust in the professional. Accordingly, the professional/client relationship cannot be re-constructed in the terms of principal and agent: since the expectations of the client are often rather vague—he or she may expect health, justice, or the truth—he or she can hardly be seen as the principal. In fact, it is the interaction between both parties by which the client’s goals or interests begin to take concrete shape. As a consequence, there is great danger that professional services may have a negative effect on the client’s autonomy—a situation which can only be avoided if the professional pays due respect to these adverse effects and tries to anticipate them. It is constitutive of the practical dilemmas just described that practitioners can only resolve them upon a case-by-case basis. An important pre-requisite of this is the existence of a commonly-shared professional habitus in the sense of an ensemble of practical (and often rather implicit) capabilities and skills which

12 See A Abbott, The System of Professions: An Essay on the Division of Expert Labor (Chicago IL, University of Chicago Press, 1988). See, also, E Freidson, Professionalism: The Third Logic (Chicago IL, University of Chicago Press, 2001). 13 See n 2 above. 14 See n 8 above. 15 See Oevermann, n 8 above, 114.

Professionalisation Contra Technocracy 339 enable professional actors to perform their task(s).16 These competencies are the result of a process of socialisation, in which the candidate acquires the ability to apply his or her knowledge in a flexible and client-oriented manner. In the old established professions such as science, medicine or jurisprudence, this habitus can be studied in an almost prototypical form, while in other fields of practice— such as consulting, or auditing—things are often more heterogeneous, with some actors having attitudes and skills which are typical of the professions, and others being more technical in their orientation. As a result, one may say that the concept of professionalisation is a gradual concept, rather than an ‘all-or-nothing’ approach. Even in those fields of practice which have little in common with the classical professions, one often finds the dilemmatic situations just described, as well as different strategies to cope with them. The same holds true if we move from the micro-sociological level to a more macro-sociological level. Here again, the concept of professionalisation proves to be a gradual concept, since some professions have established their own, powerful institutions, while, in other cases, such institutions are rather weak. Instead of one exclusive professional association, there may be various associations (or none at all), and, instead of an official code of ethics, we often find norms and rules of a more informal character. In fact, professional self-regulation can take many forms, ranging from unitary and centralised mechanisms (as in the case of the classic professions) to more de-centralised, dispersed, or informal structures. Even in the absence of traditional professional institutions, it can often be observed that professional actors contribute, in their respective working contexts, to the development of specific institutional structures. For example, professional actors working for national authorities and/or private enterprises will try to exert influence on the way in which their tasks are conceptualised and controlled, and often, they develop their own collegial forms of work organisation, of peer review and mutual control. Why is it that professional practice constitutes such an important element of the institutional architecture of modern societies? Professional actors provide services which neither markets, nor hierarchies could provide.17 The model of the self-regulating market reaches its boundaries here because those receiving professional services are not able to assess or compare these services critically. With regard to hierarchies, it should be emphasised that professional services cannot be pressed into a standardised programme due to the dilemmatic demands described above. Against this backdrop, professional practice constitutes a mechanism of social ordering in its own right, based upon a specific Eigenrationalität and Eigenlegitimation. The centre-piece of this self-legitimation is the establishment and re-inforcement of professional integrity. Just as members of other public interest groups, professional actors can be characterised by their altruistic 16 See H-J Wagner, Eine Theorie pädagogischer Professionalität (Weinheim, Deutscher Studien Verlag, 1998) 33. 17 See Freidson, n 12 above.

340 Martin Herberg orientation. This altruism, however, is based upon an attitude of professional neutrality and self-restraint. Professional actors’ altruism corresponds to an ethics of responsibility (‘Verantwortungsethik’) rather than an ethics of ideology (‘Gesinnungsethik’),18 which means that professional actors are highly aware of the paternalistic dangers implicit in their work, and that they try to anticipate these dangers in a pro-active way. In the face of the present concerns about the rise of a global expertocracy,19 it may seem paradoxical to discover professionalisation as a source of institutional legitimation in its own right. Where does this leave democracy? Isn’t it a fact that governance by professional actors implies a deeply undemocratic, authoritarian element? In order to anticipate these objections, it should be noted that even the ‘golden-age nation state’20 of the classic period of modern statehood would have been unthinkable without the professions. In fact, the modern state is a ‘state of the professions’,21 in which hierarchical rule-setting based upon democratic decision-making is accompanied by the professional practices and standards of those working in different sectors such as science, medicine, education, the judicial system, police work, social work and financial auditing. Just like the achievements of modern democracy, these professional cultures help to legitimise existing governance arrangements, by adjusting them to people’s needs, and by protecting the quality of professional work against the pressure of ‘countervailing powers’,22 such as commercialisation and bureaucracy. What are the implications of this for global governance research? The recourse to the sociology of the professions proves to be highly relevant as soon as we heed the fact that global governance often manifests itself as sectoral governance such as global health governance, global criminal governance, global social policy, global educational policy, and the globalisation of legal services. In all these sectors, we can observe the emergence of global standards which have manifold consequences on those acting as doctors, scientists, lawyers, teachers, etc, in different institutional contexts. Sometimes, the emerging standards help to improve the quality of their work, whereas in other cases, these standards create new blockages and obstacles to professional practice. In some cases, professional actors participate in the emerging governance arrangements themselves, but often it is the members of an emerging functional élite (in particular, economists) who set these standards.23 Accordingly, one might say that we are witnessing the emergence of

18

M Weber, Gesammelte Politische Schriften (Tübingen, Mohr Siebeck, 1988) 551. See C Crouch, Postdemokratie (Frankfurt aM, Suhrkamp Verlag, 2006). 20 See Hurrelmann et al, n 4 above. 21 J Evetts, ‘Professionalism beyond the Nation-State: International Systems of Professional Regulation in Europe’ (1998) 18 International Journal of Sociology and Social Policy 66. 22 DW Light, ‘Countervailing Powers: A Framework for Professions in Transition’ in Terry Johnson, Gerald Larkin and Mike Saks (eds), Health Professions and the State in Europe (London-New York, Routledge, 1995) 25–41. 23 See R Münch, Globale Eliten, lokale Autoritäten. Bildung und Wissenschaft unter dem Regime von PISA, McKinsey & Co (Frankfurt aM, Suhrkamp Verlag, 2009). 19

Professionalisation Contra Technocracy 341 different activities beyond the state which are directed towards the governance of professional practice, whereby it must be left to further inquiry to determine whether the emerging standards have a positive or a negative impact on the quality of professional work in its different institutional settings. Besides, and perhaps even more importantly, there are different forms of what may be called governance by professional practice. As outlined above, global governance includes much more than global rule-making; it also implies manifold expert-based activities such as monitoring, information-gathering, risk assessment, auditing, and consulting. What these activities have in common is that they cannot adequately be conducted in a standardised way. The reason for this is that they are coined by the dilemmatic demands outlined above, which can only be resolved upon a case-by-case basis. In fact, those acting as consultants, auditors, or scientific experts working for global institutions must be highly aware of these non-technocratic aspects of their tasks if they wish to avoid creating considerable damage. Due to the dominance of the managerial paradigm, however—which manifests itself, inter alia, in the prevalence of standardised approaches and various forms of ‘governance by numbers’24—it seems rather unlikely that these tasks will be accomplished in a professional way. At the same time, however, we should take into account the possibility that global practitioners develop their own professional habitus—be it due to the nature of their task, due to processes of collective learning, or due to the practical competencies which they have acquired throughout their working lives—and that they develop their own forms of resistance against existing forms of managerial power. As pointed out by authors dedicated to the issue of global constitutionalism, the transnational sphere should not be seen as an institutional vacuum.25 While there is great danger that experts abuse their power, or become corrupted by powerful economic interests, we can also observe processes which point in the opposite direction; and while there are serious concerns that society will fall victim to the expansionary dynamics of the economy (or other functional sub-systems), we are witnessing the emergence of institutional safeguards against these dangers. Many of these auto-constitutional processes are closely linked to the ethics of responsibility embodied in professional practice. In order to direct their activities towards the common good, it is not necessary that those responsible develop their own political vision or try to build a ‘perfect’ society. To the contrary: what gives a specific constitutional dimension to their activities is that they are committed to principles such as professional integrity, professional impartiality and

24 B Heintz, ‘Governance by Numbers. Zum Zusammenhang von Quantifizierung und Globalisierung am Beispiel der Hochschulpolitik’ in GF Schuppert (ed), Governance von und durch Wissen (Baden-Baden, Nomos Verlag, 2008) 110–28. 25 See C Joerges and E-U Petersmann (eds), Constitutionalism, Multilevel Trade Governance and International Economic Law (Oxford-Portland OR, Hart Publishing, 2011). See, also, Teubner, n 10 above.

342 Martin Herberg professional self-restraint, which help to avoid both dogmatism and possible abuses of their expert authority.

II.1. Case Study I: Assisting Legal Reform Abroad—International Law Consultants as Reflective Practitioners Western experts who assist legal reforms in foreign countries are important actors of global governance. As can be illustrated by the enormous amounts spent worldwide on legal reform initiatives,26 legal assistance can be seen as an important way of governance and institution-building. Partly, these reform projects are conducted on behalf of national development agencies, and partly, they are initiated by international organisations such as the World Bank, the European Commission, or the United Nations Environment Programme (UNEP). Sometimes, these projects are conceptualised upon a long-term basis (as in the case of civil law reform in post-soviet countries, where a broad range of relevant legal areas had to be covered),27 and sometimes law reform projects are rather short-term oriented, especially if they are limited to the creation of one special legal act. But irrespective of these organisational conditions, it holds true that legal reform assistance can be seen as an activity which requires special skills on the part of those responsible. But in what sense can we say that this kind of practice is ‘professionalisierungsbedürftig’?28 And are there any processes towards its professionalisation? In our research project, we conducted several interviews with practitioners in order to tackle these questions.29 In the past, as critical studies reveal,30 the challenge of legal assistance has often been addressed in a technocratic manner, which means that Western experts tended to apply their expert knowledge in a rather dogmatic or ethnocentric way. As a consequence, the clients—ie, the recipient countries—often became the victims of legal statutes which were so poorly adjusted to the national context that they were either put away in the famous ‘drawer’, or, even worse, became a threat to the functional capacity of the legal system of the relevant jurisdiction.31 Accordingly, one might say that the practice of legal development aid bears its

26

See W Gaul, ‘Sinn und Unsinn internationaler Rechtsberatung’ (2001) 31 Welttrends 63–83. See R Knieper, Juristische Zusammenarbeit: Universalität und Kontext (Wiesbaden, Deutsche Gesellschaft für technische Zusammenarbeit, 2004). 28 Oevermann, n 8 above. 29 The analysis is based upon several problem-centred and semi-structured interviews with legal consultants. While each interview partner has his or her own approach or personal style, the focus is on re-constructing the commonly-shared rules of good practice which are seen as indispensable by all the actors in our sample. 30 See Gaul, n 26 above. See, also, Gunther Teubner, ‘Rechtsirritationen: Zur Koevolution von Rechtsnormen und Produktionsregimes’ in Günter Dux and Frank Welz (eds), Moral und Recht im Diskurs der Moderne: Zur Legitimation gesellschaftlicher Ordnung (Opladen, Leske & Budrich, 2001) 351–81. 31 Interview A 01. 27

Professionalisation Contra Technocracy 343 own potential of causing damage. This was also emphasised by our interview partners. In order to give real support, one should avoid presenting oneself as a ‘teacher’ or ‘instructor’, as one of the practitioners put it. The standards of good practice often mentioned by our interview partners include, among others: the postulate to develop a broad range of possible solutions, instead of insisting on the ‘one best way’; the postulate of listening to local experts, rather than imposing something on them; and last, but not least, the postulate to take into account the individual country’s legal tradition and socio-economic characteristics, instead of adopting a one-size-fits-all approach. On the other hand, however, it would be of little use if the consultant shied away from leading the process, or if he or she adopted a rather passive wait-and-watch approach. In our interviews, both attitudes were often criticised as inadequate: an authoritative style leads to the above-mentioned institutional deficits. Moreover, there is the danger that local experts will become discouraged and become used to a situation in which all the relevant decisions are made over their heads. At the same time, however, if the consultant restricts himself or herself to the role of a moderator without giving any input, there is great danger that the process will lead to no results at all. In fact, if the country was able to solve the problem on its own, there would be no reason to seek the services of a Western consultant. Therefore, the consultant cannot deny the asymmetry which is implied in this situation; rather, he or she must develop strategies in order to use his or her authority in a responsible way. But how do experienced legal consultants cope with this dilemma, and how do they manage, in their daily practice, not only to be not too dominant, but also not too vague or permissive? Since there is no final solution to this dilemma, it seems appropriate to conceptualise the practice of legal advice-giving as ‘professionalisierungsbedürftig’ in the sense outlined above. Consultants must flexibly adjust their behaviour to the situation. They must try to establish a co-operative working relationship with their partners.32 Ideally, this working relationship is based upon mutual trust and includes special duties and responsibilities for both parties: While the consultant is committed to listening to his or her clients, the latter are obliged to co-operate. They should talk to the consultant openly about their problems and doubts, and they should make every effort to support the consultant’s work. This orientation towards a professional expert/client-relationship based upon mutual obligations also becomes manifest in our interviews. For example, even practitioners who explicitly distance themselves from the role of a ‘teaching master’ emphasise that the consultant should possess specific pedagogical skills. This pedagogical authority becomes important in cases in which clients are uncooperative, or withhold relevant information from the consultant. Here, experienced consultants insist that they will not accept this behaviour, and they remind their partners that it is the future of their own country which is at stake.

32

In German: a professional ‘Arbeitsbündnis’, see Oevermann, n 8 above, 115.

344 Martin Herberg To cut a long story short: the practice of international law reform assistance calls for specific practical skills which are gained through practical experience. Those working as consultants must possess their own expert knowledge—in particular, legal knowledge in the relevant field—and, furthermore, they must develop specific communicative, intercultural and hermeneutical skills. They must be able to listen to their clients. In addition, they must be able to read between the lines, so to speak, in order to discover even those problems which are latent, and which are only reluctantly admitted by local actors. At the same time, it is important for consultants to maintain a critical distance from the donor organisations, such as the European Commission, or the World Bank. If the consultant presents himself or herself as an ‘extended arm’ of these donor institutions, he or she will never win the trust of his or her clients. Therefore, as was mentioned in one of our interviews, the consultant has to adopt a ‘dual role’:33 on the one hand, he or she has to convince local practitioners and explain to them why the reform is both good and necessary, and, on the other hand, he or she must explain the country’s specific situation to the donor organisation, and must—at least to some extent—protect the country against standardised solutions and inadequate reform strategies. In fact, as our interviews show, there are manifold conflicts between those acting as consultants and the servants of the organisations under whose direction the reform projects are conducted. In a managerial world, donor organisations such as the European Commission or the World Bank often adopt a rather technocratic, top-down oriented approach. Therefore, experienced legal consultants see it as an important aspect of their task to protect their clients against regulations from ‘above’. An issue area where this conflict becomes very clear is the evaluation of reform projects. Often, evaluators are not aware of the fact that legal consulting is an open-ended process which cannot be evaluated upon the basis of quantitative indicators or pre-defined goals. In this situation, practitioners develop special strategies in order to protect their professional autonomy, as the following passage illustrates: I often wonder why evaluators have no practical experience at all. But you can try to explain things to them in order to prevent the worst. Sometimes, their conclusions are really surprising. They write: this and that is missing. Or, this and that should be done. That makes me angry, because they often have no idea of the complexity of the story. That’s why I always invest much time and energy in order to explain the whole project in detail.34

The passage sheds light on the eternal struggle between professional practice and managerialism, and furthermore, it gives us an impression of the practitioners’ strategies to deal with this situation. The challenge here is to avoid a situation in which evaluators fail to take the complexity of the reform project into account. The counter-strategy adopted by our interview partner is to seek a dialogue with

33 34

Interview A 02. Interview A 02.

Professionalisation Contra Technocracy 345 those acting as evaluators in order to sensitise them to the non-standardisable aspects of his work. He tries to familiarise them with the fact that law reforms have a life of their own, and thus, can only be evaluated in a case-oriented way. These lessons, which our practitioner gives to his evaluators, go far beyond his official duties: In principle, he could just hand in a report with all necessary information, hoping that the evaluators will read it. But often, as mentioned in another passage of the interview, these reports are not studied carefully enough by the evaluators—which does not prevent them from criticising the project just like this, as though it were the easiest thing of the world. Our interview partner seems to anticipate this situation. By seeking the dialogue with his evaluators, he makes them take a closer look at the project than they normally would have done. What general conclusions can be drawn from these empirical insights? First and foremost, it appears that the interview partners in our sample might very well be characterised as ‘reflective practitioners’ in the sense of Schön.35 They have developed a professional habitus with specific communicative, hermeneutical and reflective skills. As a matter of fact, international legal consultants do not have their own professional association. At the same time, however, we are witnessing several efforts towards their professional self-coordination. For example, there are numerous conferences on the problems of international legal development aid, in which practitioners get in contact, exchange experiences and build their own networks. Quite often, more experienced practitioners feel responsible for training younger colleagues, sensitising them to the practical and ethical challenges of the task. As might be added, some of our interview partners see it as an important goal that legal consultants from all over the world should learn to see themselves as a distinct community of practice, and that they should develop their own code of ethics, which would include, inter alia, the standards of good practice as described above.

II.2. Case Study II: Detecting the Unexpected—Environmental Auditing in Multinational Companies The challenge to detect crime, fraud and breaches of the law is another governance function which calls for reflective practice, since such infringements are, by their very nature, hard to discover. Often, it is the state and its special agencies (such as the police, but also national health and safety authorities) which carry out these investigative tasks. To some degree, however, these functions can also be executed by non-state actors, which leads to our second case study, namely, the practice of environmental auditing in multinational companies. While the last decades have seen much progress in modernising the environmental law systems of countries in Asia, Africa, Latin America and Eastern Europe, there are still manifold regulatory

35

See Schön, n 2 above.

346 Martin Herberg gaps. Sometimes there are no rules on specific areas of concern (such as the disposal of hazardous waste), and sometimes state authorities do not enforce the existing rules with the necessary rigour.36 As a consequence, if companies want to avoid environmental damage in their overseas operations, they must take the initiative and conduct regular checks and audits, in order to compensate for the loopholes in the legal systems of their countries of investment. Why is it that actors of the corporate world feel responsible for this task? From an economic point of view, the main motivation lies in maintaining the company’s reputation, which is an important asset. At the same time, it should be seen that modern companies—at least those in the manufacturing sector—do not consist of managers alone, but also employ engineers and members of technical professions, who have their own professional ethics. For them, it is a matter of professional self-respect that their technical constructions do not cause any harm. However, this is hard to accomplish when technical systems are transferred from one country to another. The most dramatic example of this was the Bhopal tragedy in 1984: apparently, the Union Carbide plant was equipped with all necessary safety devices, but due to a lack of maintenance, none of them were working.37 Historically, Bhopal was, in many ways, a turning-point: what came to light here was that damage occurring in subsidiaries can only be prevented if the parent company conducts regular checks and audits in order to detect operational errors at a sufficiently early stage. As a response, many corporations have instituted their own internal task forces which evaluate the foreign production sites at regular intervals. Normally, those working for these internal audit departments are engineers who are familiar with the technical installations used at their company’s facilities. Besides their technical knowledge, these practitioners have developed their own investigative strategies which help them to discover existing deficits and operational problems. Here again, the practical challenge lies in the above-mentioned ‘over-complexity of the situation in relation to the knowledge at hand’:38 in order to fulfil their task, auditors must possess a well-grounded technical knowledge, but they cannot apply this knowledge in a standardised way. In fact, each plant has its own problems, which are often invisible, latent and ‘atypical’, and therefore, it is important that audits are conducted in a case-oriented manner. Just like public officials working for national inspection agencies, environmental auditors in multinational companies fulfil a task which implies criminological skills. Auditors must be open to the peculiarities of the audited firm, and they must turn their attention to those errors which, from a logical point of view, may seem rather irrational, but nevertheless occur in reality.

36 See U Desai, Ecological Policy and Politics in Developing Countries (Albany NY, State University of New York Press, 1998). 37 S Jasanoff, ‘Introduction: Learning from Disaster’ in Jasanoff (ed), Learning from Disaster: Risk Management after Bhopal (Philadelphia PA, University of Pennsylvania Press, 1994) 1–21. 38 Stichweh, n 1 above.

Professionalisation Contra Technocracy 347 As our interviews with practitioners from different companies show, most auditors are highly aware of the cognitive challenges of their task.39 For them, the quality of their work depends on an attitude of professional scepticism. In order to make things visible, they adopt different strategies of investigation. As a first step, they evaluate various documents, including the audited firm’s organisational procedures and technical blueprints of the plants. In addition, they conduct inspection tours in order to obtain a realistic picture of the firm’s operations. They also conduct interviews with local technicians and plant managers, which often come close to an oral examination. Just like criminal investigators, the auditors assess whether the local practitioners’ explanations contain any inconsistencies or evasion.40 An important pre-condition for this investigative and (quasi-) criminological approach is the special position of auditors in the companies’ governance structure: they are authorised to move freely within the location of the audited firm, and they are free to choose their interview partners, which means that they are not dependent on information from the firm’s top management. In the end, the results are included in an audit report which contains a detailed deficit analysis, and which is made available to both local managers and the company’s international management board. In the growing literature on private governance and corporate social responsibility, the above-described practice of internal auditing in multinational enterprises has not attracted much attention yet. Instead, what dominates the discourse is the standardised audit procedure of ISO 14000 as developed by the International Standardization Organization (ISO). In some regards, however, the managerial approach adopted by ISO 14000 proves to be highly ineffective. Instead of focusing on technical issues, the emphasis is on organisational aspects, which leads to the situation in which even heavy polluters can easily acquire the certificate as long as they possess all the necessary documents. Contrary to the inspection-based audits described above, ISO 14000 is a mere paper-based audit procedure.41 In fact, one might say that ISO 14000 is symptomatic of the technocratic mentality which prevails in many fields of global governance. Interestingly enough, this criticism is shared by many of the practitioners in our sample, who perceive ISO 14000 as an assault on their professionalism: When you take a prefabricated model and impose it on the audited factory, there is always the danger that you will not see the daily operations. We have had this experience in the past, and we have learned from it. I have seen firms which were paralyzed for weeks. They were paralyzed, because they were re-writing all their procedures in an audit-proof way. But that does not mean that the production is safe. And we have

39 For a more detailed analysis, including information on the research methods used, see M Herberg, Globalisierung und private Selbstregulierung: Umweltschutz in multinationalen Unternehmen (Frankfurt aM, Campus Verlag, 2007). 40 Interview B 02. 41 See M Herberg, ‘Global Governance and Conflict of Laws from a Foucauldian Perspective: The Power/Knowledge Nexus Revisited’ (2011) 2 Transnational Legal Theory 243–270, at 263.

348 Martin Herberg learned from that. When we conduct an audit, we do it so that everybody learns from it, and we make sure that we will find the deficits of the plant.42

The passage illustrates the high affinity of the auditors’ work to the practice of a criminal investigator. Clearly, the above-quoted practitioner is fully aware that the audited firms often tend to hide their deficits under a modern-looking organisational façade. For him, the practical challenge of auditing lies precisely in scrutinising those things which appear to be proper and ‘audit-proof ’. The audit of ISO 14000, by contrast, provides little chance for the auditors to break through this organisational façade. However, as mentioned by some of our interview partners, ISO 14000 still enjoys such wide recognition in public opinion that no company can afford to do without it. As a response to this dilemma, most companies adopt what might be called a ‘double’ strategy: They encourage their subsidiaries to apply for the ISO-certificate, and at the same time, they continue to conduct their internal audits. The practitioners in our sample are fully aware that on its own, ISO 14000 is no reliable instrument for environmental protection, and thus, they adopt it mainly for public relations purposes.43 However, resisting the pressure of ISO 14000 and its managerial approach is not always easy. Sometimes, top managers at corporate headquarters raise the question of whether ISO 14000 would not sufficiently cover the problems. To their defence (and to their credit), those doing the job recall the numerous deficits which were detected by them due to their investigative approach, and which would have remained undetected in an audit of ISO 14000. The above-described practice of environmental auditors in multinational companies leads to the question of whether these practitioners can be called a profession (such as, for example, the profession of financial auditors, who have much in common with environmental auditors due to the quasi-criminological aspects of their work). The answer must be differentiated. On the one hand, it seems true that the environmental auditors in our sample have attained a considerable degree of professionalism as far as their practice is concerned. On the other hand, typical features of the old established professions such as the existence of a professional association are missing. However, there are indications that environmental auditors from different companies are on their way to constituting themselves as a transnational community of practice. As was often emphasised in the interviews, there are lively exchanges between auditors across the boundaries of individual companies. Furthermore, there are commonly-shared ideas about how audits should be carried out. In addition, auditors have a common interest to defend themselves against the standardised management model of ISO 14000. From a more general perspective, we can say that professional practice (such as criminological practice, described here) is not restricted to the national context. Professional practice does not necessarily take place under the umbrella of the

42 43

Interview B 03. See Herberg, n 41 above, at 263.

Professionalisation Contra Technocracy 349 state; it can also emerge in the private sector. The transnational sphere becomes the scene of different networks and communities of practice, which have their own practical skills and their own ethical attitudes, and which play an important role in solving today’s governance problems. Furthermore, it becomes visible that transnational institutions—including multinational enterprises—can shape their structures so that professional practice is both encouraged and supported. This includes professional actors enjoying a high degree of independence and being enabled to maintain their professional autonomy. According to Gunther Teubner, one could say that, by creating the appropriate structures, modern enterprises develop their own company constitutions.44 What is instituted here, in the corporations under research, is a system of checks and balances: auditors are able to deal with managers on an equal footing. They serve as a kind of intra-organisational police, and they take the responsibility of protecting society against possible forms of malpractice.

II.3. Case Study III: Codex Alimentarius—The Professional Autonomy of Scientists in International Standard-Setting Our third case study relates to the role of scientists in international standardsetting. Standards designed to protect health, safety and the environment are an important element of today’s governance architecture, and often scientists are key actors of standardisation. The technocratic implications of this have often been described:45 where the boundaries of science are stretched beyond its legitimate mandate, this will violate the autonomy of society. If scientists take on the role of a global legislator, political issues will be de-politicised, and the sovereignty of national governments will be damaged. Besides, there is the danger that the process of global standard-setting is, or will be, dominated by Western experts, whose methods often do not match or suit the problems of the less developed countries. Here again, it seems helpful to turn to the sociology of the professions in order to see how these technocratic dangers can be prevented. What makes science a profession, and how should international standards bodies be shaped in order to protect the professional integrity of those participating? According to Ulrich Oevermann,46 the main function of science should not be seen in providing society with new, applicable knowledge. Rather, science is

44 Gunther Teubner, ‘The Corporate Codes of Multinationals. Company Constitutions beyond Corporate Governance and Co-Determination’ in Rainer Nickel (ed), Conflict of Laws and Laws of Conflict in Europe and Beyond: Patterns of Supranational and Transnational Juridification (Oslo, ARENA Report, 2009). 45 See Crouch, n 19 above. See, also, C Joerges, ‘Bureaucratic Nightmare, Technocratic Regime and the Dream of Good Transnational Governance’ in C Joerges and Ellen Vos (eds), EU Committees: Social Regulation, Law and Politics (Oxford, Hart Publishing, 1999) 3–17. 46 U Oevermann, ‘Wissenschaft als Beruf—Die Professionalisierung wissenschaftlichen Handelns und die gegenwärtige Universitätsentwicklung’ (1995) 14 Die Hochschule 15–51.

350 Martin Herberg oriented towards the critical examination of the convictions and beliefs which already exist in society. This view of science is closely associated with the falsificationist approach of Karl Popper.47 Normally, every-day actors are so attached to their practical concerns that they are unable to test their knowledge with the same rigour that scientists do. The professional role of scientists thus lies in putting all knowledge to the hardest tests that one can think of. What science cannot do is to provide society with absolute certainties or ultimate assurance—and by refusing to do so, scientists maintain their professional integrity. In other words, science helps to prevent a situation in which society turns into one big laboratory in which technical innovations reveal their risks through accidents and damage. By producing epistemic crises, science helps to spare society from ‘real’ crises. An important pre-condition for this is that science enjoys a high degree of autonomy. This includes a collegial climate for discussion, where all the relevant arguments are taken into account (irrespective of who puts them forward), and where only the ‘unforced force’48 of the better argument prevails. Does this kind of professionalism also prevail in international standardisation? As an empirical illustration, I will use interviews with participants of the Codex Alimentarius, the biggest international initiative in the field of global food regulation.49 The Codex is a science-based organisation: one of its primary concerns is to ensure that its standards withstand the most rigorous scientific scrutiny. Furthermore, Codex standards are legally-binding. According to international trade agreements, member states must not exceed these standards unless there is new scientific evidence. In some instances—such as in EC beef hormones—the legal bindingness of Codex standards is heavily discussed. At the same time, however, it seems that the majority of the Codex standards are widely accepted by the Member States. Over the years, the Codex has developed over 200 standards covering different kinds of food, and it has set more than 3,000 maximum levels for pesticide residues. From a professionalisation perspective, one of the most important institutional achievements of the Codex Alimentarius is the separation of risk assessment and risk management. Risk assessment refers to the scientific examination of a substance, its hazards and the tolerance limits of the human body. Risk management, by contrast, is oriented towards designing adequate counter-measures (such as mandatory exposure limits); it is based upon risk assessment, but it also includes a political element. This separation is also reflected in the existence of different types of expert bodies: risk management tasks are assigned to the so-called Codex Committees, such as the Codex Committee on Pesticide Residues (CCPR). 47 K Popper, Conjectures and Refutations: The Growth of Scientific Knowledge (London, Routledge, 1963). 48 J Habermas, Vorstudien und Ergänzungen zur Theorie des kommunikativen Handelns (Frankfurt aM, Suhrkamp Verlag, 1984) at 137. 49 The analysis is based upon interviews with participants of the Codex Committee on Pesticide Residues. For comparative purposes, it is planned to extend the analysis to members of other committees such as the Codex Committee on Food Additives (CCFA).

Professionalisation Contra Technocracy 351 They consist of national delegations, which include the employees of national authorities and ministries. In these committees, we find arguing, bargaining, and compromise. Risk assessment tasks, by contrast, are allocated to scientific expert bodies such as the Joint Meeting on Pesticide Residues (JMPR). Here, experts participate in their individual capacity as scientists who do not represent their own governments.50 In the context of these scientific bodies, experts cultivate a scientific discourse in which disagreements are not settled upon the basis of bargaining or compromise, but through scientific arguing. The separation between risk management and risk assessment is crucial for the success of the standardisation process—it makes it possible to combine science and policy so that both are respected in their own right. This is also emphasised by our interview partners. As an explanation for the separation of both tasks, they often refer to different cases of misconduct in the past, in which scientists had failed to conduct all the necessary tests. They had failed to do so because they were afraid of the political consequences of a negative test result.51 What causes this fear? As a matter of fact, toxicological test results can have an enormous impact on politics, and therefore, political actors are tempted to exert influence (directly or indirectly) on the work of scientists. In the framework of the Codex Alimentarius, it seems that this situation is effectively prevented. In the past, this was clearly not always the case, which has led to a process of collective learning. In the context of the Codex Alimentarius, the independence of science is seen as a central value, which should be protected, and this shared perception has given birth to specific rules and procedures. Another indication of the professional culture which marks the Codex Alimentarius is the experts’ orientation towards a falsificationist approach as described above. In order to act professionally, toxicologists must base their analyses upon the worst case, ie, the case in which the substance under research coincides with the most dangerous conditions. An instructive example of this is that of pesticides. Depending on the climate in different regions of the world, pesticides are sprayed in higher or lower quantities. As a consequence, members of the CCPR will only accept a standard for a pesticide if test results for all the climatic zones of the world are available. The same applies to the living and eating habits of people in different countries. Here again, it is indispensable that toxicologists base their risk assessment upon worst case scenarios from all over the world, including the most vulnerable population groups.52 While in the past, Western toxicologists used to conduct their tests primarily with a view to their own societies, it seems that globalisation has fostered a more reflective and context-sensitive approach. Another aspect worth mentioning relates to the two-fold purpose of the initiative, namely, trade liberalisation and the global protection of consumers. From the 50 See M Masson-Matthee, The Codex Alimentarius Commission and its Standards (The Hague, TMC Asser Press, 2007). 51 Interview C 03. 52 Interview C 03.

352 Martin Herberg perspective of global managerialism, one might expect the members of the Codex Alimentarius to be obsessed with harmonising standards as fast as possible in order to foster global trade liberalisation. However, as our interviews show, there are also elements built into the standard-setting procedure which have a decelerating effect on the process. According to the Procedural Manual of the initiative, only such standards which stand up to the most rigorous scientific tests should be adopted. As a result, the creation of a new standard can take, in some cases, 10 years or more—which may seem, from a neo-liberal point of view, a regrettable situation, but which also sheds a positive light on the professional orientation of those participating. The Codex Alimentarius is characterised by an attitude of professional self-restraint: in cases of doubt, experts are readily willing to abstain from a new standard. In such cases, the regulatory power remains at national level. As the following passage shows, this attitude may lead to various conflicts, especially if the economic interests of one of the member countries are at stake: The biggest problem at the moment is that the USA tries to use the Codex for its economic purposes. They want to establish global standards as fast as possible, so that they can export their products. I remember a case when the Americans wanted to force upon us, at the very last minute, a standard for one of their pesticides. This was not accepted, because our committee has a list of priorities two years in advance. When the proposal was discussed a year later, we found that all the maximum levels in the proposal were far too high. So, if some actors try to force the process out of economic interests, we will not go along with them.53

What our interview partner describes here is a conflict between national delegates from the USA and other members of the CCPR. In order to sell their agricultural products throughout the world, the USA was interested in establishing global standards for the pesticides with which these products are treated. However, the Committee was already so busy with its work on other standards that there was no time for a critical examination of the American proposal, and therefore, it was denied. At first sight, the situation may be described in terms of conflicting political interests, in which the USA was oriented towards economic interests, and the EU (or other members of the CCPR) towards consumer protection. But this is only half of the story. What was at stake here, and what had to be defended against the American delegation, was the collective interest in maintaining the professional autonomy of experts. From this viewpoint, the list of priorities just mentioned appears as an important institutional achievement: it keeps the members of the Committee from being overrun by proposals of dubious quality. In conclusion, we can say that the institutional framework of the Codex Alimentarius contains many elements which help to support the professional integrity of those participating as scientific experts. Many of these rules and institutional safeguards are included in the Procedural Manual of the initiative, which was drafted by experts themselves, and which is marked by their 53

Interview C 02.

Professionalisation Contra Technocracy 353 interest in shaping their working context so that professional practice is facilitated, supported, and protected. It does not appear too far-fetched to describe this as an auto-constitutional process driven by professional actors. Clearly, standard-setting in the Codex Alimentarius may pose more problems than could be described here, and sometimes, experts will not succeed in maintaining their collegial discourse. At the same time, however, future research on the Codex Alimentarius may very well use the standards of good practice as re-constructed here for the analysis of both cases of success and cases of failure.

III. BRINGING PROFESSIONS BACK IN: TOWARDS A THEORY OF REFLECTIVE GLOBAL GOVERNANCE

Are we thus living in a global expertocracy? As the overview shows, the emerging governance-arrangements of the transnational space can give birth to quite different types of experts. Some experts pursue a rather technocratic approach, in which the linear application of theoretical models dominates over a thorough examination of individual cases. Experts of this type derive their authority from their specialist knowledge, which has its own persuasiveness, and which is only rarely cast into doubt. Other experts, by contrast, can be characterised as ‘reflective practitioners’ in the sense of D Schön.54 In addition to their theoretical knowledge, they have special skills which help them to make their decisions in a non-technocratic and context-sensitive manner. What generates legitimacy here is not the experts’ theoretical knowledge, but rather their ability to apply this knowledge in a reflective, client-oriented manner. In order to do so, it is not necessary for experts to have their own visionary goals or idealistic aspirations towards society as a whole. Instead, their practice is based upon what Sciulli has described as a distinct ‘morality of duty’,55 which implies the ability to maintain one’s own professional integrity and to avoid possible mistakes and forms of malpractice in a self-responsible way. Why is it that a mere technical application of theoretical knowledge can have such negative effects? The examples chosen here give many insights into the pitfalls of today’s knowledge-based governance structure: Western experts who assist law reform in foreign countries must do this in a context-sensitive manner; otherwise, they will endanger the functional capacity and the normative cohesion of the country’s legal system (see, above, Section II.1.). The same holds true for practitioners working in a quite different context, namely, environmental auditors in multinational corporations. If those conducting the audits adopt a standardised or checklist-oriented approach, there will be little chance that existing mistakes or deficiencies are discovered at all (Section II.2.). The practice of toxicologists and other scientists engaged in the setting of global standards reveals a similar 54 55

Schön, n 2 above. Sciulli, n 11 above, at 116.

354 Martin Herberg picture: if experts fall victim to different kinds of dogmatism, or if the boundaries of science are stretched beyond its legitimate limits, this will violate the autonomy of society (Section II.3). However, these technocratic fallacies are only half the story, since professional actors are perfectly capable of developing their own strategies in order to withstand these tendencies. This becomes visible in all three case studies: in each field of practice, we find patterns of action marked by a high degree of reflexivity and professionalism. But what causes this? Sometimes, the professional habitus of those fulfilling the tasks is a result of the socialisation process which they have gone through at national level. In order to act professionally as global experts, it is not necessary for them to be socialised anew; instead, they have already acquired the relevant skills in an earlier stage of their working lives. In other instances, it is due to scandals and recurring malpractice that actors become aware of the professional challenge of their work and try to adopt a more reflective approach. Moreover, it should be mentioned that actors searching for an appropriate mode of practice do not have to re-invent the wheel—instead, they can often draw on institutional models and examples of good practice, which often stem from their old national context, but can be transferred, at least to some extent, to the transnational level. This is not to say that each activity which appears as ‘professionalisierungsbedürftig’ in the sense of Oevermann56 will actually be accomplished in a professionalised mode. In fact, professionalisation is highly precarious and vulnerable. Often, professionalism is impaired by ‘countervailing forces’,57 such as managerialism, commercialisation and bureaucratisation, but also by various political interests, which are not always on friendly terms with the professions. While, at national level, the state has often taken the role of supporting and facilitating professional self-regulation, an equivalent ally or partner is largely missing at global level. As a result, many fields of practice are marked by a rather heterogeneous mixture of professional and technocratic practices. Even where the transnational sphere gives birth to different forms of professional self-organisation, the emerging institutions are often much weaker than they were before, in the era of the ‘classic’ nation state. Among the biggest barriers to professionalisation is the prevailing managerial mentality of today’s world society, in which only those practices which can be measured quantitatively, which are standardised and which can be described in economic categories, are recognised as legitimate and rational. However, even in the absence of strong professional associations beyond the state, there are several strategic responses available to global practitioners who are facing such pressures, ranging from compromise and avoidance to resistance.58 Besides fulfilling their actual tasks and duties, members of different professions 56

Oevermann, n 8 above. Light, n 22 above. 58 C Oliver, ‘Strategic Responses to Institutional Processes’ (1991) 16 Academy of Management Review 145–79. 57

Professionalisation Contra Technocracy 355 and/or groups of practice accomplish manifold forms of ‘institutional work’.59 They develop norms and rules which are constitutive of the specific rationality of their practice. Some of these standards are written down (as in the case of the Procedural Manual of the Codex Alimentarius Commission), and some are circulating in a more informal way (such as the numerous publications and reports written by experienced legal consultants for other practitioners). Reflective practitioners such as the ones described in this chapter promote their superiors’ understanding of the unique problems of their work. They set up their own networks across national and organisational borders, and they publicly express their criticism towards different approaches or models which are, in their opinion, false or mistaken. All in all, the emerging norms and standards of good practice are an important element of what Gunther Teubner has called an evolving ‘global law without a state’.60 As a consequence, it seems important that researchers who deal with issues of global governance become aware of concepts such as professionalisation or professional practice, and make efforts to use them as analytical tools for their work. The usefulness of these concepts relates both to the micro-sociological and the macro-sociological dimension of global governance. At micro-level, the professionalisation concept helps us to re-construct the practical skills of those responsible, as well as the underlying logic of their work (which can be professional, or technocratic). What makes an expert is not just the specialist knowledge available to him or her, but rather, the way in which this knowledge is applied, modified or cast into doubt upon a case-by-case basis. With regard to the macro-sociological level, it seems necessary to emphasise that professionalism provides an important source of institution-building across borders. The most basic governance structures of modern societies are not restricted to markets, hierarchies and networks, as many authors seem to believe; instead, the list should be extended by adding professionalism as a mechanism of social ordering in its own right (or sui generis, as Émile Durkheim would have said). Sometimes, the emerging governance arrangements of the transnational sphere are shaped in a way that supports professional practice, and sometimes, professional actors fall victim to the dominance of the managerial paradigm—but either way, professionalism constitutes an important aspect of global governance, which must be taken into account if we are not to miss an essential dimension of our research object. From a more normative perspective, the professionalisation concept should be seen as an important reference point for the ongoing debate on ‘good governance’,61

59 T Lawrence and R Suddaby, ‘Institutions and Institutional Work’ in S Clegg, C Hardy, T Lawrence and WR Nord (eds), The SAGE Handbook of Organization Studies (London-Thousand Oaks CA, SAGE Publications, 2006) 215–54. 60 Gunther Teubner (ed), Global Law without a State (Aldershot, Ashgate-Dartmouth Publishing, 1997). 61 World Bank, n 3 above.

356 Martin Herberg ‘smart governance’62 and ‘reflexive governance’.63 The normative implications of the professionalisation concept are not necessarily a disadvantage for the empirical analysis; to the contrary, professional practice is based upon its own norms, rules and criteria of rationality, which are constitutive in the sense that they establish professional practice as such. These normative aspects are neither fantasy nor wishful thinking, and they can be re-constructed empirically. In a world which is increasingly governed by efficiency and cost-benefit-calculations, there are still actors who commit themselves to a quite different type of rationality—a rationality which cannot be reduced to the kind of Zweckrationalität as described by Max Weber, but rather refers to an open-ended process, in which the goals and the definition of the situation are constantly re-defined, and in which those responsible are not subjected to the goals or instructions of their superiors, but rather feel responsible towards their clients. Professional practice represents a type of rationality which connects both, the functional systems of society as described by Niklas Luhmann, and the concerns of the Lebenswelt in the sense of Jürgen Habermas.64 Against this backdrop, professionalisation can be seen as the expression of a Polanyian ‘counter-movement’65 against the threats of commercialisation and bureaucratisation. Just like other public interest groups (such as non-governmental organisations or social movements), professional actors make efforts to protect society against the dominant neo-liberal and managerial paradigm. In the absence of an overarching global constitution, there are still manifold processes towards the constitutionalisation of global governance,66 and it seems important to emphasise that some of these auto-constitutional processes originate from the dynamics of professionalisation. In order to be interpreted as constitutional orders, the emerging governance arrangements of the transnational sphere must be shaped in a way that supports professional practice. They become constitutionalised in the sense that they help to avoid possible forms of malpractice, prevent abuses of power, and thereby endorse the professional integrity of those working in these institutional contexts. Not all activities of global governance require the same degree of professionalism, and not all governance arrangements of the transnational space are characterised by the same level of professionalism, but it is precisely the chance of detecting such differences which makes the professionalisation concept so useful for the debate on global governance.

62

Willke, n 3 above. Schutter and Lenoble, n 3 above. 64 J Habermas, Theorie des kommunikativen Handelns. Vol 1: Handlungsrationalität und gesellschaftliche Rationalisierung (Frankfurt aM, Suhrkamp Verlag, 1981) 470. 65 K Polanyi, The Great Transformation: Politische und ökonomische Ursprünge von Gesellschaften und Wirtschaftssystemen (Frankfurt aM, Suhrkamp Verlag, 1978) 79. 66 See Joerges and Petersmann, n 25 above. See, also, Teubner, n 10 above. 63

15 Experimental Constitutionalism in the EU: Co-ordinating Legal Difference Through Mutual Recognition, Mutual Law and Mutual Learning JOSEPH CORKIN MIDDLESEX

I. INTRODUCTION

T

HE EU CANNOT eradicate its legal pluralism through an ever more comprehensive body of substantive law, administered by an ever more unified supranational institutional architecture, because the peoples of Europe reject any such merger of their national constitutional orders into a federally constructed United States of Europe. Instead, we witness two prominent patterns in European governance, commonly labelled ‘multi-level’ and ‘new’, each pointing to the fact that European integration is no longer about (if it ever was) proceeding inexorably towards an ever closer legal union, but will rather be about finding ways to co-ordinate legal difference.1 Both Christian Joerges and Charles Sabel re-construct these patterns in their own theoretical terms. They draw attention to how the EU uses architectures of co-operation to institutionalise the means to manage conflict between its distinct, but nevertheless interdependent, legal systems, or, when no such conflicts arise, to facilitate mutual learning between them and their differing solutions to shared societal problems. So, Joerges, under the motto ‘Unity in Diversity’, which he borrows from the illfated Constitutional Treaty, describes multi-level governance and how the EU goes about co-ordinating conflicts between legal systems in terms of his theory of Conflicts-Law Constitutionalism (CLC).2 Meanwhile, Sabel, under the motto 1 For more on the limits of legal supranationalism and why it is always accompanied by political bargaining, see JHH Weiler, ‘The Community System: The Dual Character of Supranationalism’ (1981) 1 Yearbook of European Law 257. 2 C Joerges, ‘Unity in Diversity as Europe’s Vocation and Conflicts Law as Europe’s Constitutional Form’, LEQS Paper No 28/2010, available at: www.lse.ac.uk/europeanInstitute/LEQS/LEQSPaper28.pdf.

360 Joseph Corkin ‘Learning from Difference’, describes New Governance and its mobilisation of the differences between national legal systems to encourage them to learn from one another in terms of his theory of Experimentalism.3 Their remarkably similar choice of Leitmotif belies significant points of departure between these theories: CLC focuses on the constitutional qualities of the EU’s architectures for managing conflict; whereas Experimentalism focuses on the problem-solving qualities of the EU’s architectures for enabling mutual learning. There are also significant overlaps, but this chapter uses their different foci to interrogate the opposing theory.

II. CO-ORDINATING LEGAL DIFFERENCE THROUGH MUTUAL RECOGNITION AND MUTUAL LAW In a world of strong and increasing economic interdependencies, however, people’s lives may be more affected by what happens in and among other countries than by what their own community decides. Dignity seems to require that people everywhere be permitted to participate in some way—even if only in some minimal way—in the enactment and administration of at least those policies that threaten the greatest impact on them. An unmitigated Westphalian system makes that impossible.4

Conditions of mutual interdependence, intensified by globalisation and membership of the EU, produce conflicts between national legal systems that adopt different solutions to shared societal problems. These conflicts are both inevitable and intractable. They are inevitable because distinct legal systems interacting in an increasingly interdependent continent will interfere with (in the sense that they will have external effects upon) one another. They are intractable because legal difference is here to stay. It cannot be removed by slowly dismantling Europe’s distinct national legal systems and replacing them with an ever more unified supranational institutional architecture that enacts, administers, implements and enforces an ever more comprehensive body of substantive EU law. This would only supress the different politics that produced the legal differences in the first place, and the very politics that would be necessary to legitimate such EU law. Hierarchical attempts to reconcile the different political worldviews that had hitherto been embodied in distinct national legal systems are always likely to be incomplete, leaving the resulting ‘harmonised’ EU law attempting futilely to further a set of overlapping and contradictory preferences.5 The relentless striving for ‘more Europe’ in the form of legal harmonisation and institutional centralisation is simply no longer viable. Even in the wildest dreams of the founding fathers of

3 C Sabel and J Zeitlin (eds), Experimentalist Governance in the European Union: Towards a New Architecture (Oxford, Oxford University Press, 2010). 4 R Dworkin, ‘A New Philosophy for International Law’ (2013) 41 Philosophy & Public Affairs 1, 18. 5 M Barnett and M Finnemore, ‘The Politics, Power, and Pathologies of International Organizations’ (1999) 53 International Organization 699, 724; E Haas, When Knowledge is Power (Berkeley CA, University of California Press, 1990) 188.

Experimental Constitutionalism in the EU 361 European integration, integration was never intended to be total—the creation of a self-standing federal constitutional order, in the form of a hierarchicallyconstructed super-state that subsumed its Member States—and there is certainly no political will for this now. The permissive consensus of the peoples of Europe that has sustained integration thus far—a largely élitist strategy of ‘integrate and democracy can follow!’—has long since dissipated and today’s multi-level order, indeed, one that increasingly integrates its Member States through softer modes of co-ordination short of law, may prove to be the high-water mark of their legal integration. The constitutional pedigree of national law is grounded in its generation by democratically accountable national political processes. These entitle it to considerable respect. However, the respect to which it is entitled is also qualified due to the tendency of national political processes to ignore the external effects of the very laws that they enact and oversee. Under conditions of mutual interdependence, national law tends to spill over national borders to affect neighbouring constituencies that were unrepresented in the political processes that oversaw its generation. In this way, we are continually affected by the political choices of neighbouring constituencies, formalised in their national law, and over which we had no influence. CLC seeks then to impose some legitimate order on this world of semi-autonomous centres of law production—distinct, but nevertheless interdependent, legal systems—by establishing rules and principles that each can accept as representing a fair means of managing their differences and the conflicts that result from their mutual interdependence. Most fundamentally, the interdependent legal systems of a multi-level EU ought to take one another’s justified (constitutionally sound) claims for recognition in one another seriously. Each can stake a strong claim to the constitutional pedigree of its own law; a claim that is paradoxically self-limiting because no system that claims to be constitutionally legitimate can simultaneously ignore the external effects of its law on neighbouring legal systems that can assert equally strong claims to the constitutional pedigree of their law. The conflicts between them ought then to be managed in a constitutionally sound manner. CLC is all about this constitutionalisation of conflict resolution. Joerges interprets the gap, spotted by Luhmann, between ‘Entscheidungszuständigkeit’ (political decision-making power) and ‘Entscheidungsbetroffenheit’ (affectedness by political decisions) as a democratic failing and re-interprets the market freedoms and the doctrine of mutual recognition as the remedy to this.6 For him, the market freedoms and the doctrine of mutual recognition check the inherent parochialism of national political processes that are otherwise inclined

6 C Joerges, ‘A New Type of Conflicts Law as the Legal Paradigm of the Postnational Constellation’ in C Joerges and J Falke (eds), Karl Polanyi: Globalisation and the Potential of Law in Transnational Markets (Oxford-Portland OR, Hart Publishing, 2011) 465.

362 Joseph Corkin to burden ‘foreign’ citizens untilaterally through the law which they enact.7 The market freedoms and mutual recognition ensure that these processes take into account all concerns and interests, regardless of whether they are ‘foreign’ or domestic, thereby compensating for their democratic deficits, to complete the constitutionality of national law.8 Joerges describes this variously as its ‘taming’, ‘perfecting’ or even ‘civilising’, thus fulfilling the function that Kant ascribed to his ius cosmopoliticum of obliging otherwise sovereign states to treat one another’s citizens with Hospitalität by committing them to behave as good republics and thereby to co-exist peacefully with one another.9 By avoiding heavy-handed prescription of uniform (European) solutions, legal diversity and national sovereignty are respected, but, at the same time, national sovereignty is to be exercised in a Union-compatible way that enables the beneficial (and close) co-existence of equally democratically legitimated, but increasingly interdependent, national legal systems. This ‘argument from transnational effects’10 sets up the problem convincingly, in the sense that it is normatively coherent, but its conceptual promise obscures significant practical difficulties in its implementation. No matter how sensitively the Court of Justice (ECJ/CJEU) deploys the market freedoms and the principle of mutual recognition to force Member States to acknowledge the efficacy of their neighbours’ different legal solutions to shared societal problems (except when they can objectively justify their insistence on their own legal standard), it will always struggle to determine why these differences existed in the first place.11 They are rarely the result of some blithe disregard for the consequences of their law for non-constituents, but rather a result of the nuanced balances struck and the compromises made between competing concerns and interests, economic and social, effected in different national political processes in different ways and the democratic accountability of which—even considering their structural tendency towards parochialism that heavily discounts ‘foreign’ concerns and interests—still lends the resulting law significant constitutional legitimacy. The Member States

7 See, also, K Nikolaïdes and S Schmidt, ‘Mutual Recognition on Trial: The Long Road to Services Liberalization’ (2007) 18 Journal of European Public Policy 667. 8 See, also, M Maduro, ‘Reforming the Market or the State? Article 30 and the European Constitution: Economic Freedom and Political Rights’ (1997) 3 European Law Journal 55; Maduro, We the Court: The European Court of Justice and the European Economic Constitution (Oxford, Hart Publishing, 1997); JHH Weiler, The Constitution of Europe: ‘Do the New Clothes Have an Emperor?’ and Other Essays on European Integration (Cambridge, Cambridge University Press, 1999) 221. 9 I Kant, ‘Perpetual Peace: A Philosophical Sketch’ in H Reiss (ed), Kant: Political Writings, 2nd edn, trans H Nisbet (Cambridge, Cambridge University Press, 1991) 93. See P Eleftheriadis, ‘Cosmopolitan Law’ (2003) 9 European Law Journal 241; and Eleftheriadis,‘The European Constitution and Cosmopolitan Ideals’ (2001) 7 Colombia Journal of European Law 21. 10 A Somek, ‘The Argument from Transnational Effects I: Representing outsiders through freedom of movement’ (2010) 16 European Law Journal 315. 11 J Corkin, ‘Reconciling European integration and national sovereignty with a conflict of laws method: conceptually compelling, practically problematical?’ in R Nickel (ed), Conflict of Laws and Laws of Conflict in Europe and Beyond: Patterns of Supranational and Transnational Juridification (Oslo, ARENA, 2009) 361.

Experimental Constitutionalism in the EU 363 remain ‘the legitimate locus for the provision of social and political welfare’;12 being (for the time-being at least) the uppermost level at which the peoples of Europe feel a strong sense of solidarity with one another, allowing them to function as a coherent political community, capable of determining the social obligations which they wish to extend towards one another in their calibration of their respective regulatory and social security programmes, the highly politicised tradeoffs which they make between freedom and security, on the reach and organisation of their public services and other collective goods, and so on. This constitutional pedigree demands considerable deference from the Court, so as to respect the compromises incorporated into national law, but not so much deference that it fails to intervene when one constituency does unjustifiably burden another. This is an incredibly fine line to tread. In fact, the Court’s bias towards extending liberalisation and de-regulation has led it to err towards activism, so that its deployment of the market freedoms and the doctrine of mutual recognition end up combining to produce what Alexander Somek characterises as a ‘neo-liberal charter’, vulnerable to being co-opted by those who seek liberalisation, de-regulation and the erosion of national welfare traditions; and certainly not some grand completion of the constitutionality of national law. For him, the Court has continually expanded the reach of directly effective market freedoms into national legal orders; prising them open, with nothing other than neo-liberalism offered in return, so that CLC’s re-interpretation of the market freedoms and mutual recognition as political rights rings rather hollow: it achieves only a very virtual kind of representation, to be realised in a judicial setting, and compensates only for the disregard of the concerns and interests of the economically active and enterprising—those who seek economic gain from accessing another’s market—while, in the process, neglecting the diffuse concerns and interests of others who were effectively and fairly (ie, non-parochially) represented in the national political process. For Somek, this re-inforces the power of capital and weakens the political processes that might control it, thereby leaving democracy a casualty in the process of its supposed transnational re-inforcement because the ‘context of justification where non-commercial interests have to be strong enough to outweigh the interest in the free flow of goods does not allow for a symmetrical democratic debate to emerge’.13 But the EU’s correction for the parochialism of national systems is not the only claim that CLC makes to its constitutionality. Were CLC only about giving voice to ‘foreign’ concerns and interests in national law-making processes, Somek’s powerful challenge would be difficult to answer. But Joerges is not blind to the de-regulatory potential of the market freedoms and mutual recognition. He recognises how integration-by-law has become a victim of its own success and draws attention to its potential to disrupt the systematic coherence of complex 12 G de Búrca, ‘The Constitutional Challenge of New Governance in the European Union’ (2003) 28 Community Law Review 814. 13 Somek, n 10 above, 342.

364 Joseph Corkin areas of national law,14 or to disturb collective (political) efforts to tame free markets, including forceful criticism of the Court for its judgments in Viking, Laval and Rüffert, which undermined hard-won rights in the field of labour law.15 For Joerges, this ‘first dimension’ of CLC (compensating for the parochialism of national systems) is complemented by a compensatory ‘second dimension’ that concerns the constitutional legitimacy of the architectures of co-operation that enable Member States to elaborate harmonised law, designed, in no small part, to relieve the pressures on their national legal systems exacerbated by the ‘first dimension’.16 The two dimensions must, then, be taken together: whereas the first dimension of CLC is concerned to manage conflicts that stem from legal differences, without eradicating those differences, the architectures of co-operation that are the concern of the second dimension are about enabling the Member States to address shared societal problems that have exceeded their unilateral law-making capacity and necessitate the elaboration of harmonised EU law that is specifically designed to reduce their legal differences. Member States thereby transform themselves into open, collaborative law-making partners to further shared objectives that, due to the scale or effects of the necessary action, are better achieved by the EU than they can achieve unilaterally. While the peoples of Europe are not prepared to subsume their political choices, as manifested in their different national legal solutions to shared societal problems, into a federal super-state, they do accept that national law is sometimes overburdened and that collaborative law-making becomes necessary to reduce their legal differences. Furthermore, they are genuinely committed (in a felt, not just a theorised, way) to strive for fair compromises to their mutual interdependence, whether that is achieved by the first dimension of CLC, in its management of the conflicts that result from their insistence on maintaining legal differences in an increasingly interdependent world, or by the second dimension, in its constitutionalisation of the architectures of co-operation that are necessary to achieve greater legal uniformity when they accept, at least tacitly, that this has become necessary. The resulting harmonised law claims its constitutional pedigree upon this basis, provided always that the architectures for its generation are constitutionally legitimate. They, too, manage conflict, only it is of a different type to that which is the concern of the first dimension of CLC. Here, national concerns and interests differ, but there is agreement on the need for, at least, a degree of legal harmonisation, so CLC is rather about institutionalising the means to broker fair

14 C Joerges, ‘On the legitimacy of Europeanising Private Law: Considerations on a Justice-Making Law for the EU Multi-level system’ (2003) 7 Electronic Journal of Comparative Law, available at: www. ejcl.org/ejcl/73/art73-3.html. 15 C Joerges and F Rödl, ‘On De-formalisation in European Politics and Formalism in European Jurisprudence in Response to the ‘Social Deficit’ of the European Integration Project: Reflections after the Judgments of the ECJ in Viking and Laval’ (2008) 4 Hanse Law Review 3. 16 C Joerges, ‘Conflicts-Law Constitutionalism: Ambitions and Problems’ in M Cremona, P Hilpold, N Lavranos, S Staiger Schneider and A Ziegler (eds), Reflections on the Constitutionalisation of International Economic Law: Liber Amicorum for Ernst-Ulrich Petersmann (Leiden, Brill, 2013) 111.

Experimental Constitutionalism in the EU 365 compromises to achieve this harmonisation in a way that takes one another’s different concerns and interests into account.

III. CO-ORDINATING LEGAL DIFFERENCE THROUGH MUTUAL LEARNING

CLC’s explicitly normative (constitutional) perspective is born of its focus on re-constructing the EU’s ‘multi-levelledness’—a characterisation of the EU that Joerges considers ‘sociologically in tune’ with the conflicts patterns that arise between its distinct, but nevertheless interdependent, legal systems, each possessing their own constitutional pedigree, so that their integration demands a constitutionally sound theory. Sabel’s Experimentalism, on the other hand, focuses more narrowly on what has become known as New Governance, which institutionalises the means for neighbouring legal systems to learn from (rather than just to live with) one another’s differences, in circumstances that are rather more benign: New Governance operates where different national legal solutions to shared societal problems do not run into conflict with one another, but operate in parallel, quite harmoniously.17 The absence of conflict or the need for coercive architectures (‘vertical concertation’18) to manage it makes an explicitly constitutional approach less pressing. The focus is not, then, on the constitutional legitimacy of the architectures of co-operation that institutionalise mutual learning, but simply on their problem-solving capacity, in an attempt to frame a ‘third way’ between regulatory harmonisation and fragmentation, capable of reconciling the pursuit of common European objectives with respect for national diversity while encouraging mutual emulation and experimental learning through comparison of different approaches to shared problems.19

This increasingly prominent architecture of co-operation applies to the regulation of utilities, environmental protection, medicines, transport safety, pensions, migration, organised crime, financial markets and drug control. Through it, Member States seek mutual support in facing shared problems in these fields which they do not believe demand ‘European’ (in the sense of harmonised) legal solutions. These architectures make a virtue of the necessity of persistent legal diversity and the absence of anything approaching a unitary EU constitutional order, by institutionalising mutual learning between national public authorities. They bring together these local units—typically arm’s-length bodies, but sometimes also government departments—with their direct (functional) counterparts from other Member States to compare and learn from one another’s different solutions, whether in implementing broad EU regulatory frameworks that leave 17 J Scott and D Trubek, ‘Mind the Gap: Law and new approaches to Governance in the EU’ (2002) 7 European Law Journal 1. 18 C Sabel and J Zeitlin, ‘Learning from Difference: The New Architecture of Experimentalist Governance in the EU’ (2008) 14 European Law Journal 271, 275. 19 Ibid, 292.

366 Joseph Corkin considerable discretion to the national level (in the case of regulatory networks) or in dealing with shared societal problems not regulated by substantive EU law at all (in the case of the Open Method of Co-ordination (OMC)). Their distinguishing feature is their mechanism of co-ordination: not law and hierarchy, but the soft discipline of peer pressure. Democratic constitutionalism assumes the public interest is defined within representative institutions, electorally accountable to the people, and then transmitted along formal lines of legal and political accountability to multiple administrative agents who are bent to the will of their political principals by these lines of accountability. Experimentalism suggests, instead, that, to overcome social complexity and limited knowledge, the law must be organised ‘reflexively’ so that the public interest is defined at decentred locations where it is made and implemented (a supposed administrative task that inevitably intersects with law-making) via the direct participation of those subject to it who are sufficiently proximate to the societal problems that it must confront. This makes them simultaneously the addressees and the authors of the law, involved systematically and directly in its generation to establish a ‘societal constitutionalism’ that makes the law ‘cognitively open’ to their expertise and experience.20 And Experimentalism suggests, further, that this proceduralised self-regulation (reflexive law) can itself be overburdened by wicked societal problems that involve ‘persistent’ or ‘strategic’ uncertainty, to which even knowledgeable primary actors from civil society and the private sector are unsure how to respond, so that we must organise law-making not only reflexively, but also as a recursive process of institutionalised experimentation:21 Local units responsible for enacting, implementing, administering and enforcing the law are to be brought together with other local units that do the same job elsewhere. These architectures of co-operation enable them to learn from one another in an open-ended exploration of their shared societal problems and different legal solutions to them. It is an experimental process in which knowledge is shared, ideas are pooled and results are compared, thereby uncovering new solutions and disturbing one another’s settled (yet sub-optimal) solutions, while also avoiding the repetition of one another’s mistakes. Significantly, this institutionalised experimentation is to allow for joint re-conceptualisations or re-definitions of their (always broadly defined) shared problems and goals, as well as the standards by which their success at solving and/or achieving them is to be measured, and against which they are to discipline one another softly. All this is to remain provisional, truly experimental, subject to revision through the same institutionalised feedback loops.

20 See, generally, G Teubner (ed), Autopoietic Law: A New Approach to Law and Society (Berlin, Walter de Gruyter, 1987). 21 Sabel and Zeitlin, n 18 above.

Experimental Constitutionalism in the EU 367 Albeit not explicitly, the EU has certainly embraced the theory of Experimentalism in practice.22 It aligns with its technocratic, consensual modi operandi, to which it lends a stamp of academic respectability. So, the ‘new’ paradigm of integration-by-coordination is contrasted with a still relevant, but ‘older’, paradigm of integration-by-law, which consists of the market freedoms and mutual recognition to check national law (the constitutionality of which is the concern of the first dimension of CLC) and the EU regulations and directives to harmonise national law (the constitutionality of which is the concern of the second dimension of CLC). Underlying these ‘new’ and ‘old’ labels is a caricature of their organisation and their suitability for the functional necessities of lawmaking given conditions of societal complexity and the post-national constellation.23 Upon this basis, integration-by-coordination belongs to a horizontal (heterarchical) world of governance, networks, ‘complex webs’24 and peer-to-peer accountability—supposedly nimble, experimental, innovative and learningorientated—whereas integration-by-law belongs to the vertical (hierarchical) world of governments, administrative law, legal and constitutional formalism, judicial scrutiny and all the other trappings of the democratic constitutional state that have become too cumbersome, inflexible and overly juridified to deal with contemporary functional necessities. As William Scheuerman sarcastically puts it: high-speed capitalism and the dynamisation of economic life needs ‘high-speed democracy’ and ‘dynamic law’.25 Those who extol horizontal over vertical arrangements include Anne-Marie Slaughter, who describes transnational networks as the ‘optimal form of organization for the Information Age’26 and a ‘blueprint for the international architecture of the 21st century’, establishing a ‘genuinely new world order in which networked institutions perform the functions of a world government—legislation, administration, and adjudication—without the form’.27 Meanwhile, David Harvey suggests a shrinking world of ‘new organizational forms, new technologies, new

22 A Schout, ‘Organizational learning in the EU’s multi-level governance system’ (2009) 16 Journal of European Public Policy 1124; M Egan, ‘Governance and learning in the post-Maastricht era?’ (2009) 16 Journal of European Public Policy 1244; R Eising, ‘Policy Learning in Embedded Negotiation: Explaining EU Electricity Liberalization’ (2002) 56 International Organization 47; W Kerber and M Eckardt, ‘Policy learning in Europe: The Open Method of Co-ordination and Laboratory Federalism’ (2007) 14 Journal of European Public Policy 227; S Padgett, ‘Between Synthesis and Emulation: EU Policy Transfer in the Power Sector’ (2003) 10 Journal of European Public Policy 227. 23 C Radaelli, ‘Europeanization, Policy Learning and New Modes of Governance’ (2008) 10 Journal of Comparative Policy Analysis 239, 240; N Walker, ‘EU Constitutionalism and New Governance’ in G de Búrca and J Scott, Constitutionalism and New Governance in Europe and United States (OxfordPortland OR, Hart Publishing, 2006). 24 C Scott, ‘Accountability in the Regulatory State’ (2000) 27 Journal of Law and Society 38, 51. 25 W Scheuerman, ‘Democratic Experimentalism or Capitalist Synchronization? Critical Reflections on Directly-deliberative Polyarchy’ (2004) 17 Canadian Journal of Law and Jurisprudence 101. 26 A-M Slaughter, ‘Governing the Global Economy through Government Networks’ in M Byers (ed), The Role of Law in International Politics: Essays in International Relations and International Law (Oxford, Oxford University Press, 2000) 204. 27 A-M Slaughter, ‘The Real New World Order’ (1997) 76 Foreign Affairs 183, 195–97.

368 Joseph Corkin lifestyles, new modalities of production and exploitation’, including the ever faster circulation of goods, people and information, makes traditional democratic constitutionalism ‘too rigid, clumsy and slow’.28 And Martin Rhodes and Jelle Visser ascribe ‘new forms of flexible yet durable coordination under decentralised conditions, with only limited scope for the exercise of hierarchical power’ to ‘changes in industrial and economic organization—namely, the arrival of a service or knowledge economy, and the shift from Fordism to post-Fordism’;29 a theme also of William Simon who, without any hint of irony, describes just such a mode of legal organisation as ‘Toyota jurisprudence’.30

IV. THE CONSTITUTIONAL CRITIQUE OF EXPERIMENTALISM

We should not be surprised that exponents of Experimentalism are predominantly from the New World: there is a long US tradition of seeing its federal system of government as enabling legal experimentation among the States. So, in 1932, Justice Louis Brandeis declared in New State Ice Co v Liebman: ‘It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory’.31 Meanwhile, the intellectual roots of Experimentalism can be traced to US pragmatism and its practical, problem-solving orientation.32 From their perspective, there is little to be gained from the Old European preoccupations with democratic constitutionalism, theoretical niceties that were only really applicable to the truly sovereign nation states of a bygone era, long since disempowered by globalisation. But all their heralding of new dawns is rather reminiscent of the Anglo-Saxon economists who were busy writing the obituaries of the German model of social capitalism—too old-fashioned and ill-suited to the rigours of global competition—just as a financial crisis hit, brought on by the follies of their own model, to leave the German model in continuing rude health. As it happens, German jurists and political theorists are prominent among those defending the continuing relevance of older democratic constitutional traditions, though, of course, updated

28 D Harvey, Justice, Nature and the Geography of Difference (Oxford, Blackwell Publishing, 1996) 240–41. 29 M Rhodes and J Visser, ‘Seeking Commitment, Effectiveness and Legitimacy: New modes of socio-economic governance in Europe’ in A Héritier and M Rhodes (eds), New Modes of Governance in Europe (Basingstoke, Palgrave, 2011) 104, 105. 30 W Simon, ‘Toyota Jurisprudence: Legal Theory and Rolling Rule Regimes’ in G de Búrca and J Scott (eds), Law and New Governance in the EU and the US (Oxford-Portland OR, Hart Publishing, 2006). 31 Justice Louis Brandeis (dissenting), New State Ice Co v Liebman, 285 US 262, 311 (1932). 32 J Dewey, The Public and Its Problems: An Essay in Political Inquiry (Chicago IL, Swallow Press, 1927).

Experimental Constitutionalism in the EU 369 for the ‘postnational constellation’;33 not only Joerges, but also Dieter Grimm, Jürgen Habermas and Fritz Scharpf. Experimentalists are not overly concerned by the tenuous connections of their architectures of co-operation to the democratic constitutional frameworks that we have traditionally thought of as legitimating public power because, for them, accountability is achieved through horizontal means. In an interesting example of the genre—with the arresting title The Life and Death of Democracy—John Keane writes that we now live in a ‘monitory democracy’ in which intricate webs of control hold concentrations of otherwise unaccountable power to account, so that the law is better characterised as series of flexible, dynamic responses to broad goals that are themselves subject to continual re-definition and certainly not as a set of fixed rules issued from on high.34 But this plays fast-and-loose with some very fundamental democratic constitutional ideas, depicting different modes or instruments of co-ordination—government or governance; law or soft disciplining short of law—as perfectly interchangeable, to be judged solely upon the basis of their problem-solving capacity. It tolerates all manner of nebulous architectures of co-operation that wield public power in ways that are neither mediated through the law, nor rendered politically accountable to representative institutions and thence back to the people, to be judged solely on their problemsolving efficacy. But any institutionalisation of co-operation of such constitutional import cannot be assessed upon the basis of its problem-solving efficacy alone (a positivistic inquiry), to leave its normative (constitutional) quality so under-theorised. Public power, in all its manifestations, ought to be channelled through the law, via stable, general and relatively clear norms that, at the very least, provide a framework for administrative action. It also ought to be constrained by the law, organised, controlled and limited by legally-constituted processes that connect it, and the law through which it is to be wielded, to the politics capable of legitimating that law. This is law’s precarious relationship with politics, each simultaneously enabling and constraining the other.35 And, in the words of Scheuerman, this ‘hardly depends on liberal nostalgia or a romanticized account of a mythical nineteenthcentury “golden age”’.36 However, the very experimentation that supposedly makes these architectures so effective at mutual problem-solving is only possible through the co-ordination of the sub-state units of disaggregated states (agencies, arm’s length bodies, etc) that perform increasingly functionally specific tasks at increasing distance from their supposed political principals. These architectures only institutionalise

33 See, generally, J Habermas, The Postnational Constellation: Political Essays (Cambridge MA, The MIT Press, 2001). 34 J Keane, The Life and Death of Democracy (New York, Simon & Schuster, 2009). 35 N Walker, ‘The EU and the WTO: Constitutionalism in a New Key’ in G de Búrca and J Scott (eds), The EU and the WTO: Legal and Constitutional Issues (Oxford, Hart Publishing, 2001) 34. 36 Scheuerman, n 25 above.

370 Joseph Corkin experimentation among local units if those units enjoy sufficient discretion to re-define their own goals and to discover new ones in the course of their cooperative problem-solving, so they cannot be extensively pre-defined by political principals.37 For Sabel, this makes for a ‘forward-looking’ or ‘dynamic’ accountability38—no longer about rule-following or the political steering of representative institutions—but it also disturbs the normal principal-agent relationship that we associate with democratic constitutionalism by severing significant lines of vertical accountability, legally back to courts (upholding rule-of-law values like due process, administrative rationality, legality, etc) and politically back to representative institutions. While the legitimating weight is then supposed to be carried by the national constitutional systems into which the local units remain embedded, their interactions with one another in these networks empower them to pull (even further) away from their national political principals and thereby to escape accountability to them. These architectures are designed to exploit horizontal lines of accountability—experts held to account by other experts—but end up impacting significantly on vertical lines of accountability, between those experts and their supposed political principals, and thus also ultimately through to the public. The result is a new, legally and politically unaccountable, hierarchy: politically unaccountable because we can question the adequacy of their connections back to democratic processes capable of legitimating their work; legally unaccountable because we must not under-estimate the coercive forces at play within these architectures of co-operation despite their (only) soft, non-legal, modes of disciplining participants. This soft discipline has real normative force, even if it is not mediated through the law; a de-formalisation that, in turn, makes it more difficult to render them politically accountable. Indeed, the local units (bureaucratic organisations) that meet in these horizontally-organised architectures are increasingly functionally specific, which limits their field of vision and detaches them from the concerns and interests of the general public, which their vertical accountability to representative institutions then fails to factor back in. It is difficult to see why forcing them to account to one another, in what is effectively an incestuous network that involves only other technocrats of the same type, will make them more responsive to those concerns and interests. In place of vertical accountabilities to representative institutions, Sabel emphasises, instead, the direct participation of those, including citizens, who are affected by the output of these architectures and the local units that they softly discipline. This ‘direct deliberativeness’ supposedly obviates the need for the involvement of representative institutions, producing what he calls ‘Democratic

37 C Sabel and W Simon, ‘Minimalism and Experimentalism in the Administrative State’ (2011) 100 Georgetown Law Journal 53. 38 Ibid.

Experimental Constitutionalism in the EU 371 Experimentalism’,39 or a ‘radical, participatory democracy with problem-solving capacities’.40 But the reality is that these architectures are generally insular and opaque; their agendas and minutes go unpublished, and they operate behind closed doors. The general public, as well as civil society organisations that might (to an extent) have stood in for the public, are excluded from their cycles of peer review. However, even if they did fulfil Sabel’s participative conditions, the idea that direct participation is capable of legitimating what they do ignores the very form that this participation usually takes: if these architectures are accessed at all, they will be accessed only selectively by those whose concentrated interests and concerns motivate that involvement, who can justify their input through reasoned, factual and ‘decision-relevant’ analysis and who can force others to take their input seriously because they are ‘blockage-capable’.41 Functionally specific national authorities and the architectures that coordinate them with their equally functionally specific counterparts from other Member States tend to neglect the less well-organised and -articulated ‘anxious and ethical ... concerns of the concrete, “socialised” and often politically-motivated European citizens’ whose political, social and ethical values are not readily integrated into their usual ‘grammar of science and technology’.42 Nor can we rely on organised civil society to represent lay voices that otherwise have diminished currency in such functionally-differentiated settings. Organised civil society cannot stand in for the whole of the people, somehow filtering and articulating the public’s inchoate concerns and diffuse interests to deliver neatly-packaged, scientificallygrounded, but nonetheless public, opinion into otherwise technocratic architectures. For this, we need politics and that means vertical accountability to representative institutions.

V. CONSTITUTIONALISING EXPERIMENTALISM

Experimentalism emphasises horizontal accountability to peers, over vertical accountability to political principals. But the blend between the two is more subtle in Sabel’s more recent work: he no longer writes of ‘democratic experimentalism’43 but of an altogether less assuming, ‘experimentalist governance’, whose architectures have (only) ‘democratising effects’.44 They do not replace representative institutions, but complement them with a ‘dynamic accountability’ that 39 M Dorf and C Sabel, ‘A Constitution of Democratic Experimentalism’ (1998) 98 Columbia Law Review 267. 40 J Cohen and C Sabel, ‘Directly-Deliberative Polyarchy’ (1997) 3 European Law Journal 313. 41 B Eberlein and E Grande, ‘Beyond Delegation: Transnational regulatory regimes and the EU regulatory state’ (2005) 12 Journal of European Public Policy 89, 106. 42 M Everson and C Joerges, ‘Reconfiguring the Politics-law Relationship in the Integration Project through Conflicts-law Constitutionalism’ (2012) 18 European Law Journal 644. 43 Dorf and Sabel, n 39 above, 267. 44 C Sabel and W Simon, ‘Destabilization Rights: How Public Law Litigation Succeeds’ (2004) 11 Harvard Law Review 1015.

372 Joseph Corkin supplements their conventional democratic processes, particularly by supplying them with richer information.45 The effect of forcing local units to justify their choices publicly against the comparable choices and criticisms of other local units is one of ‘democratising destabilisation’ to undercut entrenched and apparently incontrovertible forms of authority, including technocracy, so as to combine local learning and self-government with ‘heightened political accountability’ and thus to clear the way for an ‘eventual reconstruction of democracy’.46 In the final instance, representative institutions and the lines of vertical accountability back to them remain necessary because only they can put the legitimating politics back in. Horizontally-structured experimentalist architectures depend for their legitimacy, ultimately, on that of their constituent local units and how these units are embedded into their respective national constitutional orders. In this, Sabel has moved closer to Joerges and what Joerges sees as the crucial legitimating mechanism for the second dimension of CLC, that of ‘deliberative supranationalism’, which also blends horizontal and vertical accountabilities. Joerges introduced the term in relation to the comitology machinery of the classical Community Method, to describe the dynamic that is supposedly engendered within its committees and that supposedly legitimates their contribution to EU law-making. Briefly, the national officials that meet in these committees are civilised by their institutionalised exposure to one another—the demands of the supranational setting—which force them to justify their positions deliberatively to one another and to avoid nakedly asserting particular national concerns and interests without heed to the national concerns and interests that are aired by fellow delegates. This works if all the officials are sufficiently accountable to their national political principals, via their embedding in their respective national administrative and constitutional orders, to convey faithfully the interests and concerns of their respective national publics to the supranational level, unencumbered by the horizontal pressures of the committee setting. If we accept this mechanism of legitimation, it ought to extend to other architectures of co-operation, including transnational networks of either the regulatory or the OMC variety, because their participants are subject to similar horizontal and vertical accountabilities to those meeting in comitology committees. Horizontally, they, too, ought to be ‘civilised’ by their institutionalised exposure to their direct (functional) counterparts from other Member States. Vertically, they, too, ought to be subject to similar oversight from their supposed political principals (or, indeed, the lack thereof if one is sceptical of this notion of legitimacy). Crucially, however, national officials who meet in regulatory networks or through the OMC have more scope to form and reform their own architectures of cooperation from the inside than those who meet in comitology committees, which are now so formalised as part of the EU’s institutional landscape. Transnational

45 46

Ibid. C Sabel and J Zeitlin, n 18 above, 271, 277 and 313.

Experimental Constitutionalism in the EU 373 networks are less formalised—their architecture is more open—and there is more scope for the participants to truly shape their design. At law- and policy-making level, experimental architectures are self-organising because their members recognise their interdependence and the importance of mutual adaptation.47 This lends bite to their soft disciplining and makes mutual learning practically automatic, but should their self-organisation extend also to their self-constitutionalisation, or do we need some fixed points—a basic democratic constitutional frame—to ensure that they are sufficiently connected to representative institutions and that their soft disciplining is sufficiently lawmediated? Sabel is relaxed about architectural experimentation. For him, architectures of co-operation that institutionalise mutual learning ought, themselves, to be experimental; not designed exhaustively from above by the political principals that establish them or that formally endorse an existing architecture, but open, dynamic and flexible, capable of endogenous change. They should be free to constitute and re-constitute themselves ‘in response to the logic of self-adjustment which has become their animating principle’48—an ongoing search for institutional solutions to problems that manifest themselves only in the day-to-day praxis of the architecture. Similarly, Armstrong celebrates the OMC’s ‘relative non-legalisation’ and ‘institutionalisation through practice’, which has produced a ‘differentiation in design’ that is its ‘experimental strength’ and that would be jeopardised were it to be fixed as a ‘constitutionalised ideal-type’ (a possibility debated by the European Convention),49 thus ossifying future architectural experimentation.50 Biological metaphors abound here: notions of ‘autopoiesis’ and comparisons with organisms successfully adapting to new conditions.51 So, continuing this theme, we ask whether democratic constitutionalism has reached an evolutionary dead-end because it lacks the beneficial mutations necessary to enable adaptation to the changed environment of the post-national constellation and increased societal complexity? This then leaves variants of Experimentalism, societal constitutionalism, reflexivity and their horizontally-organised ilk to pick up the slack because they only possess the necessary mutative capacity to allow for adaptive evolution. Alternatively, might there, instead, be a co-evolution of the two or, to move away from the metaphor, just as we can ask whether Experimentalism can forego thoroughgoing constitutionalism, to concentrate on the problem-solving efficacy of the architectures which it commends, yet still claim legitimacy for them, we might also ask whether CLC can constitutionalise architectures of co-operation without damaging their problem-solving efficacy? There may be dangers in both 47 A Jordan and A Schout, The Coordination of the European Union: Exploring the Capacities of Networked Governance (Oxford, Oxford University Press, 2006). 48 Sabel and Zeitlin, n 18 above, 278. 49 For a comment on this debate, see G de Búrca and J Zeitlin, Constitutionalising the Open Method of Coordination: What should the Convention Propose? (Brussels, Centre for European Policy Studies, 2003). 50 K Armstrong, Governing Social Inclusion: Europeanization through Policy Coordination (Oxford, Oxford University Press, 2010) 101. 51 G Majone, Europe as the Would-be World Power (Cambridge, Cambridge University Press, 2009) 207.

374 Joseph Corkin over-constitutionalising and under-constitutionalising Europe’s architectures of co-operation. So, is there, perhaps, a ‘Goldilocks’ zone, an optimal amount of constitutionalisation? A recent study into how one such architecture formed and reformed in the field of telecommunications regulation reveals the potential consequences of architectures of co-operation assuming responsibility for their own constitutionalisation:52 Officials from the national regulatory authorities concerned were already members of a pre-existing epistemic community, for which they sought, and secured, institutionalisation as a regulatory network, formalising their epistemic community in the governance process with which it already interacted informally. They were powerfully positioned to push for this institutionalisation due to their cross-border reach, the informational advantages that they had over their political principals and their greater internal consensus. And, once formed, the regulatory network then de-coupled them (further) from their national political principals, but without re-coupling them onto the supranational level and a new set of political principals, so they now float, ever more autonomously, in a transnational space between national and supranational levels. Arguably, they sought to free themselves of vertical accountabilities (increasing their disconnection from political principals) while welcoming enhanced horizontal (peer-to-peer) accountabilities not as a cynical ploy to escape oversight, but simply because they favoured a particular type of oversight. They, like technocrats everywhere, believe that the oversight of their peers is more relevant to the quality of their work than the oversight of their political principals; that more horizontal accountability and less vertical accountability would improve their decisionmaking. The more influence that they enjoy over the constitutionalisation of the architectures of co-operation in which they participate, the more they will push them in this direction. Epistemic communities cultivate particular values, notions of duty, obligations, responsibilities, principled beliefs and identities that act as powerful motivations for their members and which they internalise as scripts to which they ought to conform. In shaping the design of the architectures in which they participate, they can scarcely escape these commitments to doing things in a certain way, to which they attribute a universal validity that transcends the needs of their epistemic community, and is equally suited to the organisation of governance processes more generally. This leads them to steer the architectures of co-operation that they populate in certain directions, so that that these architectures and, indeed, European integration itself (given its growing reliance on them) increasingly take on the organisational forms of epistemic communities, lending significant pathdependency to the networked turn in European integration. Made in their image, New Governance ramps up characteristics (governance traits) that we associate

52 N Boeger and J Corkin, ‘How Regulatory Networks Shaped Institutional Reform under the EU Telecoms Framework’ (2011) 14 Cambridge Yearbook of European Legal Studies 49.

Experimental Constitutionalism in the EU 375 with epistemic communities, including commitments to experimentation, peerreview, mutual learning and consensus building; to the collegiate sharing of best practice, over competition and negotiation; to the heterarchy of networks, over the hierarchy of centralised authority; to an organisation around shared epistemic perspectives, over national affiliations; and to transnational, technocratic problem-solving, over parochialism and politics.

VI. DEMOCRATIC CONSTITUTIONALISM AND THE POST-NATIONAL CONSTELLATION

Joerges describes CLC as a ‘re-constructive endeavour’. He is a critical friend of an integration project that he broadly supports for its compensation of the democratic deficits (parochialism) of national systems, and as a bulwark against the gradual destruction of their welfare-state achievements, but he laments particular manifestations of the project, not least its own democratic deficits. CLC is a means to describe and to re-interpret the EU, as well as a position from which to critique particular aspects of it. Thus, Joerges is particularly critical of the EU’s tendencies towards de-formalisation and de-politicisation that undermine its claimed commitments to the rule of law and democratic constitutionalism. These tendencies were revealed most starkly in its recent (mis-)management of the financial and sovereign debt crisis, a crisis that is a perfect example of the problems of the postnational constellation: we are made acutely aware of our interdependence, but are deeply unsure about what to do about it; yet, even while we recognise that solutions can only come through co-ordination, we distrust the very architectures of co-ordination that might deliver them. The EU’s deeply unsatisfactory response to the crisis (ineffective even in its own terms) has transformed the project of ‘social Europe’ into an ‘austerity Union’ that demands sacrifices of its citizens in return for bail-outs that primarily benefit foreign banks, a transformation developed in a legal and political vacuum via extraconstitutional means and without the consent of its peoples. Intensified austerity programmes are imposed on them in bargains struck behind closed doors that strengthen some governments and weaken others, but that always marginalise and discredit national and European democratic institutions, including parliaments: The ratings agencies dictate, with threats of downgrades, what supposedly sovereign and democratic states may do for their citizens and what they must refuse. Citizens increasingly perceive their governments, not as their agents, but as those of other states or of international organizations, such as the IMF or the European Union, immeasurably more insulated from electoral pressure.53

And these self-same international institutions and markets (banks, bond-holders and rating agencies) threaten electorates by resorting to ‘conditionality’ and the 53

W Streeck, ‘The Crises of Democratic Capitalism’ (2011) 71 New Left Review 5.

376 Joseph Corkin threat of sanctions, demanding that they defeat political parties that oppose austerity and thus forcing all mainstream parties to commit themselves to cuts that disenfranchise the (disproportionately affected) young, and that risk social unrest, while further eroding support for the EU and the solidarity between its peoples.54 Only the political extremes flourish, cynically manipulating populist nationalistic sentiment to achieve the very same. For Habermas, the EU’s ad hoc incremental response to the crisis is testament to its lack of a wider perspective,55 and a perfect example of its ‘post-democratic executive federalism that only aggravates a long-standing problem of executive domination in the EU’.56 This is captured well by Martti Koskenniemi as the ‘managerial mindset’, an intellectually shallow and politically objectionable alternative to democratic constitutionalism:57 Formal rules give way to amorphous ‘regulation’. ‘Government’ becomes ‘governance’ and the language of legal ‘responsibility’ is transformed into assessments of ‘compliance’. ‘Disputes’ become ‘management problems’ and the question of lawfulness is replaced by that of ‘legitimacy’, situated uncertainly between legal formality and political justice, but reducible to neither—existing principally as a feeling of legitimacy, a warm psychological sense looking for no further justification.

The EU is, too often, guilty of all of this. At the same time, however, a political community’s yearning for legitimacy founded on national representative institutions is of little use if those institutions lack the requisite law-making capacities, not least because the societal problems that they must confront have taken on cross-border dimensions, beyond their unilateral resolution. The extra-territorial reach of supposedly territorially-bounded legal systems, which affect and are, in turn, affected by others, reduces the capacity of national political systems to define their priorities unilaterally and then implement them through their respective legal systems. They are, instead, forced to co-operate out of functional necessity. Any adequate constitutional theory must be able to accommodate these realities. On this basis, it is naïve to critique architectures of co-operation simply for departing from narrow understandings of constitutional legitimacy inherited from the truly sovereign nation-states of yesteryear. The quest for constitutional legitimacy has to consider the weight of functional necessity. But functional necessity must not be deployed as a trump card to justify the dismantling of all manner of democratic constitutional traditions, but rather something that we take seriously in updating those traditions: How should we adapt democratic

54 F Scharpf, ‘Monetary Union, Fiscal Crisis and the Preemption of Democracy’, LEQS Paper No 36/2011, available at: www.lse.ac.uk/europeanInstitute/LEQS/LEQSPaper36.pdf. 55 J Habermas, The Crisis of the European Union: A Response (Cambridge, Polity Press, 2012). 56 J Habermas, ‘Bringing the Integration of Citizens into Line with the Integration of States’ (2012) 18 European Law Journal 485, 487. 57 M Koskenniemi, ‘Constitutionalism as Mindset: Reflections on Kantian Themes about International Law and Globalization’ (2007) 8 Theoretical Inquiries in Law 9.

Experimental Constitutionalism in the EU 377 constitutionalism to the interdependence and fragmentation of the post-national constellation and to increased societal complexity and limited knowledge? That said, while the force of any constitutional critique of the EU must be tempered by realistic assessments of the functional pressures under which national systems labour, we can surely do better than simply lower expectations. Although the EU’s architectures of co-operation might look very different to those of the nation state, CLC points to ways in which they might be rendered constitutionally legitimate nonetheless. In particular, it doggedly insists on the continuing relevance of deep normative commitments to the rule of law and constitutional frameworks capable of generating democratic legitimacy for the law, despite these practical challenges. In this, it represents a bold attempt to sketch out the legitimate constitutional form of democratic governance for the post-national constellation, to uphold the rule of law and democracy, and thereby to deliver lawmediated, self-government to the peoples of Europe through architectures of cooperation whose output the peoples of Europe can understand as a combination of national and European law-making, each operating in their legitimate sphere. Democratic constitutionalism re-imagined for the post-national constellation. For Joerges, the genius of EU law, re-interpreted as CLC, lies in its subtle reconciliation of unity and diversity. Its method—a ‘constitutionalisation of co-operation’—rightly acknowledges the continuing deep commitment of the peoples of Europe to their respective national constitutional orders and the democratic guarantees that they offer. It is therefore respectful of subsidiarity and seeks to stabilise the European political order without impinging on the core democratic legitimacy of the nation state: So, legal diversity is to be tolerated when local concerns rule out uniform solutions, provided only that adequate account be taken of the external effects on neighbouring systems. Moreover, this management (rather than eradication) of legal difference is not only legitimate, but also enables us to reap experimental benefits. There are significant experimentalist tropes in CLC, which Joerges describes as ‘a discovery procedure of practice’,58 but, importantly, experimental benefits are not derived at the expense of democratic constitutional values, albeit adapted to the dramatically-changed law-making conditions of the post-national constellation. CLC combines an experimental impulse with a more thoroughgoing constitutional theory. Alongside the horizontality of notions such as ‘deliberative supranationalism’, CLC recognises the need for some vertical ordering to manage conflicts and to ensure fair dealing. It imposes a constitutional frame that determines the arenas in which conflicts are to take place and the terms on which they are to take place, thus managing conflicts that arise between distinct, but interdependent, legal systems in a multi-level EU that lacks an encompassing political process, capable of reconciling competing interests and 58 C Joerges, ‘Re-Conceptualizing the Supremacy of European Law: A Plea for a Supranational Conflict of Laws’ in B Kohler-Koch and B Rittberger (eds), Debating the Democratic Legitimacy of the European Union (Lanham MD, Rowman and Littlefield, 2007) 311, at 326.

378 Joseph Corkin concerns in any particularly definitive way. Such reconciliations are a matter of routine for national democratic processes (though always provisionally, awaiting problematisation when the political wind changes), but they are more difficult to organise in the post-national constellation.

VII. EXPERIMENTAL CONSTITUTIONALISM

Like subsidiarity (another notoriously difficult principle to apply in practice, despite an equally sound logic), CLC is conceptually compelling, but practically problematical to implement. This problem applies as much to its first dimension,59 as to its second dimension: While few would disagree that the EU’s architectures of co-operation ought to ‘deserve recognition’ and that their constitutionalisation ought to be ‘normatively defensible’, what does this necessitate in practice? Here CLC is vague, drawing on the standard list of ‘good governance’ characteristics: law-making ought to be deliberative, informed, inclusive, transparent, and so on. This is to be achieved through careful proceduralisation and institutional channelling to ensure that those who come together in these architectures of co-operation seek solutions in deliberative modes of communication, based upon universal motivations, thus interacting in a principled (non-strategic) manner that takes one another’s distinct concerns, interests and contributions seriously; that they proceed from an adequate informational base by, for instance, exploiting the capacity of relevant epistemic communities (internal and external to the architecture) to expose weaknesses in competing expert claims, via the self-regulation of their peer review processes; that we ought not to idealise such self-regulation, nor overlook the fact that experts can sometimes frame issues more narrowly than the general public, so it is sometimes necessary to broadened them out again so as not to exclude relevant lay voices.60 There being no golden ratio for integrating expert knowledge and public opinion, all we can do is refine the framework conditions under which architectures of co-operation operate to ensure the appropriate legal constraints and political incentives are in place, so that the full range of voices that speak to their work feature in their deliberations. All of this proceduralisation is good common sense, but is it enough? ‘Deliberation’, so familiar to democratic theory,61 is regularly celebrated by those who seek a means to legitimate a post-national constellation lacking any representative institutional apparatus that wields comprehensive powers of the

59

Corkin, n 12 above, 361. For example, ethical objections to methods of industrialised agriculture, including the use of hormones, antibiotics and GMOs, are not susceptible to being framed as a matter of scientifically verifiable questions of safety to human health. See, generally, J Corkin, ‘Science, Legitimacy and the Law: Regulating Risk Regulation Judiciously in the European Community’ (2008) 33 European Law Review 359. 61 J Elster (ed), Deliberative Democracy (Cambridge, Cambridge University Press, 1998). 60

Experimental Constitutionalism in the EU 379 type associated with sovereign nation states.62 The emphasis is less on raw politics than on mutual learning and consensus-oriented decision-making,63 a ‘deliberative turn’64 that is frequently allied to calls for direct participation (particularly of civil society) in these deliberations. However, the notion that we might generate democratic legitimacy via expert deliberation, leavened with a little participation from organised civil society (serving as some kind of proxy for the general public) represents a particularly anaemic, apolitical notion of democratic legitimacy. Deliberation and direct participation cannot be combined to somehow transcend supposedly ‘old fashioned’ political contestation or power asymmetries. And, to the extent that they purport to do so, they only really succeed in disguising these politics and power imbalances. Here, there is at least an honesty to CLC, in its recognition that no amount of deliberation will overcome conflict because there is no right way of solving societal problems, of determining that they are susceptible to legal solutions, or even of defining them as societal problems in the first place. Deliberation might help to reduce some of the disagreement, but it will not manage to do this all the way down. The disagreements that remain are the very stuff of politics. We must resist attempts to de-politicise politics. While the ‘turn to governance’ may represent a permanent feature of contemporary law-making,65 the familiar conclusion that we have either traded legitimacy for effectiveness or that we might secure both with a bit of proceduralist alchemy that somehow replaces accountability to representative institutions with deliberation and direct participation, is simply complacent.66 But just because proceduralisation is not enough on its own does not mean it is unimportant. The interventions of representative institutions in the law-making activities of their bureaucratic agents are rarely direct and frequently unpredictable in their consequences, so they, too, are forced to embrace proceduralisation and reflexivity in order to exert meaningful control. They seek to prompt, facilitate and co-ordinate by the use of smarter, softer and more creative instruments of control and persuasion, or, in Habermas’ terms,

62 See, for example, U Puetter, ‘Europe’s Deliberative Intergovernmentalism: The Role of the Council and the European Council in EU Economic Governance’ (2012) 19 Journal of European Public Policy 161, 164, which describes deliberation as a pre-condition for successful EU policy-making; not just during the process of policy formation and initial adoption, but at every phase of the policy process. 63 See, for example, EO Eriksen, ‘Deliberative supranationalism’ in EO Eriksen and JE Fossum (eds), Democracy in the European Union: Integration through Deliberation? (London, Routledge, 2000) 42. 64 J Neyer, ‘The Deliberative Turn in Integration Theory’ (2006) 13 Journal of European Public Policy 779. 65 C Joerges, ‘Law, Economics and Politics in the Constitutionalisation of Europe’ (2002) 5 Cambridge Yearbook of European Legal Studies 123, 143. 66 See, for example, M Everson, ‘The Constitutionalization of European Administrative Law: Legal Oversight of a Stateless Internal Market’ in C Joerges and E Vos (eds), EU Committees: Social Regulation, Law and Politics (Oxford, Hart Publishing, 1999); S Andersen and T Burns, ‘The European Union and the Erosion of Parliamentary Democracy: A Study of Post-Parliamentary Governance’ in S Andersen and T Burns (eds), The European Union: How Democratic is it? (Thousand Oaks CA, SAGE Publications, 1996) 227.

380 Joseph Corkin they recognise the fact that they will be more effective as ‘an intelligent adviser or supervisor who makes procedural law available’;67 so, instead of trying to run things too directly, they (to use the well-worn metaphor) steer rather than row.68 His thesis that the social deficits and methodological flaws of legal formalism led to purposive legal programmes, whose regulatory and welfare interventions then ‘colonised’ or ‘juridified’ the ‘lifeworld’ is well known; and so, too, is his proposed antidote: reflexive, ‘post-interventionist’ alternatives to command-and-control law. But, crucially, he never regarded the elaboration of ever more sophisticated modes of proceduralisation as somehow post-parliamentary.69 Any constitutionalisation of the law-making process must provide for the law’s political renewal, which can only happen through exposure to raw politics. In the final instance, only truly representative institutions can stand in for the whole of an absent people. No amount of careful proceduralisation will substitute for the crucial final connection which they make back to the very people that those institutions represent to ensure law-making remains a genuinely collective endeavour. The symbolism here is perhaps as important as the theory. Constitutional theory must avoid getting too far ahead of popular understandings of democratic legitimacy. The idea that those who make the law ought to serve at the pleasure of those who must live their lives within its bounds—endorsement that is renewed or withdrawn at every election—possesses an elegance that makes this constitutional arrangement symbolically important and a treasured term in our social contract. Elections are a concrete affirmation of the fact that, ultimately, we are the masters of our collective destiny, even when submitting to laws made by others. Because as long as a law-maker’s authority is open to our electoral challenge, their laws can be seen, without too much artifice, as an expression of our collective self-determination, not just something that is done to us, but something that we also do. We are not merely the addressees of their law, but can make a plausible claim to be, at least in part, its author.70 And that is true even if our authorship passes through a long chain of delegations and our influence is diluted by millions of co-authors. And, frustrating though it can be for those of us deeply committed to the idea of European integration, the locus of democratic legitimacy remains (and will do so for the foreseeable future) in political processes organised at national level, towards which the peoples of Europe continue to feel their strongest affinity—their guarantee that they live in a democratic society.71 While it might

67 J Habermas, Between Facts and Norms: Contributions to a Discourse Theory of Law and Democracy (Cambridge MA, The MIT Press, 1996) 441. 68 D Osborne and T Gaebler, Reinventing Government: How the Entrepreneurial Spirit is Reinventing Government (Reading MA, Addison-Wesley, 1992). 69 J Habermas, ‘Reply to Symposium Participants, Benjamin N. Cardozo School of Law’ (1996) 17 Cardozo Law Review 1477, 1541; and Habermas, n 67 above, 441. 70 J Habermas, ‘Paradigms of Law’ (1996) 17 Cardozo Law Review 771, and Habermas, n 67 above, 126; Cohen and Sabel, n 40 above, 318. 71 See, for example, P Lindseth, ‘Democratic Legitimacy and the Administrative Character of Supranationalism: The Example of the European Community’ (1999) 99 Columbia Law Review 628, 699.

Experimental Constitutionalism in the EU 381 be constitutionally convenient to dismiss their attachment to national political processes as old-fashioned and parochial, the popular yearning for legitimacy founded on their representative institutions cannot be wished away as some constitutional relic. These institutions continue to enjoy considerable (if at times grudging) loyalty and must be incorporated into any democratic constitutional theory of the post-national constellation. As such, European integration, whether by law or by New Governance’s co-ordination short of law, has still to be mediated through the national system, a source of considerable transferred democratic legitimacy. CLC recognises this, but also that the problem of tapping into national systems as a reservoir of democratic authenticity is their inherent parochialness, to which its first dimension then responds. CLC and more recent incarnations of Sabel’s Experimentalism hint at ways of understanding how we might integrate national and European political principals and their respective agents via a blend of horizontal and vertical mechanisms of accountability: that they do different things; that they are not surrogates, but complementary; and that both are necessary. Vertical accountability is necessary because, regardless of how cleverly bureaucratic actors are proceduralised to check and balance one another in ever denser, more sophisticated architectures of co-operation, these horizontal accountabilities cannot magic legitimacy out of thin air, somehow pulling the participants up by one another’s bootstraps. Representative institutions and the vertical accountabilities that render bureaucratic agents accountable to them remain necessary to anchor their agents’ self-referential (horizontal) steering constitutionally. And this horizontal accountability is itself necessary because the functional necessities of the post-national constellation and social complexity have forced political principals to rely increasingly on bureaucratic actors. The more specialised these actors become, and the more that has to be done at European level, the more difficult they are to control. Indeed, to have any hope of exerting meaningful control over the specialised officials of the functionally-differentiated governance units of the disaggregated state, representative institutions must resort to horizontal mechanisms of accountability. By locking their agents into transnational architectures of co-operation, through which they answer to other such agents from other Member States, they render these agents more politically accountable to them, their open critique of one another undermining any pretension which they might otherwise have cultivated to incontrovertible authority. Nor should we neglect the vertical accountability of bureaucratic actors to the principal EU institutions. While these institutions cannot claim as strong a constitutional legitimacy as that of national parliaments (even accounting for the structural tendency of national parliaments to ignore the external effects of their laws on non-constituents), they are not merely administrative agents of the Member States, through which they derive all their constitutional legitimacy. The principal EU institutions are linked back to the peoples of Europe via sufficient mechanisms of accountability in their own right to give them a correlative mandate that places them, sui generis, somewhere between a traditional legislature

382 Joseph Corkin and an administrator, a status captured neatly by the ‘political administration’ tag. Within this ‘political administration’, the blend between the horizontal and vertical lines of accountability then becomes even more complicated, but is another means of achieving ‘deliberative supranationalism’. Achieving the perfect blend of horizontal and vertical accountabilities to stem a seemingly inexorable drift towards de-legalisation and de-politicisation is a delicate and complex task. It is not simply about embedding horizontal architectures into a vertical hierarchy, but rather ensuring that mechanisms of horizontal accountability (peer review, soft discipline, mutual learning, etc) are not swamped, so that we can continue to make productive use of legal diversity via institutionalised experimentation, while, at the same time, ensuring that these mechanisms are simultaneously subject to sufficient mechanisms of vertical accountability to deliver the requisite political impulse. Experimental architectures and their horizontal accountabilities must operate in the shadow of representative institutions— national and European—that are equipped to discern and to articulate the diffuse concerns and interests of the silent majority and to ensure that these concerns and interests count for something in their more rarefied deliberations.

16 ‘Conflicts Law as Europe’s Constitutional Form’ … and the Conflict of Social Norms as its Infrastructure KARL-HEINZ LADEUR BREMEN-HAMBURG

I. PRELIMINARY REMARKS

F

ROM THE METHODOLOGICAL point of view concerning the doctrinal integration and internal co-ordination of the vast body of European law and the necessary rules of application, one may have the impression that the concept of ‘supranational law’ is shaped following the model of state law: transcending the territorial limits of the nation state and constructing the European ‘Superstate’!1 It seems to be difficult to accept that this can only turn out to be an illusion and that we, instead, need, at least as a supplement, a new type of ‘conflicts of law’2 that does not conceive of the Member States as segmented territorial units of an ‘ever closer union’ that is on its way to completion as a traditional federal state. Conflicts between European law and Member State law will always exist and will, even paradoxically, increase in the process of a deepening of European Union law. This is due to the fact that, in this process, the impact of social norms, procedural versions of societal self-organisation and complex ‘regimes’ that are composed of different forms of legal and non-legal norms, patterns of decisionmaking, preferences for conflictual or consensual versions of social governance, and versions of coupling between social systems, traditions, levels of trust, etc,3 become increasingly relevant.

1 R Michaels, ‘Globalisation and Law: Law Beyond the State’ in R Banakar and M Travers (eds), Law and Social Theory (Oxford, Hart Publishing, 2013) 287, available at: www.ssrn.com. 2 C Joerges, ‘Unity in Diversity as Europe’s Vocation and Conflicts Law as Europe’s Constitutional Form’, LSE ‘Europe in Question’ Discussion Paper Series, No 28 (2010), revised version April 2013, available at: www.lse.ac.uk/europeanInstitute/LEQS/LEQSPaper28.pdf. 3 A Fischer-Lescano and G Teubner, ‘Regime-Collisions: The Vain Search for Legal Unity in the Fragmentation of Global Law’ (2004) 25 Michigan Journal of International Law 999, at 1012; R Michaels and J Pauwelyn, ‘Conflict of Norms or Conflict of Laws? Different Techniques in the Fragmentation of International Law’ (2012) 22 Duke Journal of Comparative and International Law, 349, available at: www.ssrn.com.

384 Karl-Heinz Ladeur The welfare states are to be seen as varieties of a ‘social state’ in three dimensions: it is a state that intervenes in society, it is a state that reflects the plurality of the social groups within its forms of governance, and it is a state that pre-supposes and interferes with the societal process of norm-building (standards, regulated self-regulation) and even the shaping of the processes of individualisation and collective values. A major part of the rules of the regimes of the social state, in this broad sense, are not made explicit. They are generated and reproduced within the different forms of governance below the traditional state of the ‘rule of law’—and a major part of these rules are kept invisible—not for purposes of ideological manipulation, but because this is the way that practices work—they are not the product of reflection but of continuous experimentation, variation and retention in an implicit way of ‘instituting’ order (see below). The conflicts-of-law approach in its new understanding that focuses on the problems that proliferate beyond the traditional forms of the limited co-ordination of sovereignty in overlapping domains of action4 is focused more and more on the intense forms of processing of the inter-dependencies between societies that expand beyond the borders of the state. This process finds its repercussion in new types of law that are called ‘global’ and ‘transnational’—with good reason.5 It is an emergent field of law6 that emancipates itself also from the methods of state-based law, for example, in the basic question of what the law actually is. Is its existence dependent of an explicit decision of a competent public body? Or is the typology of the concepts of law itself transcended by the evolving new legal order beyond the state?7 In a supranational (incomplete) legal order that lacks a clear separation of competencies, new forms of conflicts come to the fore that do not exist at state level and can rather be compared to the regime conflicts at international level in the traditional sense: this is true for the so-called ‘diagonal conflicts’8 between, for example, general competition law and specific broadcasting law. In an incomplete legal order without a clear hierarchy of norms, it is far from evident that competition law pre-empts media regulation at Member State level.9 ‘Comitology’10 was a procedural form of integration of standards, para-legal norms that might have allowed for divergent interpretation practices of EU regulation. This is an interesting follow up to legal integration—but it pre-supposed the existence of explicit standards at Member State level. At the same time, it 4

Joerges, n 2 above; Michaels, n 1 above. See P Zumbansen, ‘Defining the Space of Transnational Law: Legal Theory, Global Governance & Legal Pluralism’, CLPE Osgoode Reasearch Paper No 21, 2011, available at: www.ssrn.com. 6 Michaels and Pauwelyn, n 3 above. 7 Ibid. 8 CU Schmid, ‘Diagonal Competence Conflicts Between European Competition Law and National Regulation—A Conflicts of Laws Reconstruction of the Dispute on Book Price Fixing’ (2000) 8 European Private Law Review 155. 9 K-H Ladeur, ‘Die Kooperation von europäischem Kartellrecht und nationalem Rundfunkrecht’ (2000) 50 Wirtschaft und Wettbewerb 965. 10 C Joerges and E Vos (eds), EU Committees: Social Regulation, Law and Politics (Oxford, Hart Publishing, 1999). 5

The Conflict of Social Norms 385 took into consideration the fact that divergent standards could undermine the harmonised legal norms. It also pre-supposed that the judicial homogenisation of the application of such norms without the assistance of an infrastructure of standards of concretisation of the legal rules would be next to impossible because the European courts could not be expected to play a similar role in the process of law-making as the national courts have done in the past. The new approach to ‘conflicts of law’ as formulated by Christian Joerges is understood as being inspired by the ideas of ‘legal realism’,11 and has a focus on domains of decision-making that remain at Member State level, but have at the same time, as a repercussion of the explicit legal integration of the law in a specific field, an implicit ‘silent’ (potentially negative) effect on other Member States. The generic requirement of European law imposed on Member States to guarantee the ‘effet utile’12 of a norm in practice—for example, by the functional adaptation of the interpretation of general administrative law—would again be a different version of a kind of ‘diagonal’ conflict between a specific norm of European law and a form of the application of the general infrastructure of administrative law that is needed to put European law into practice. This, in particular, is the case if an interpretation of the protection of the legitimate expectations of Member State law has a serious impact on the effectiveness of the European law and on the citizens of a different Member State. The above-mentioned types of conflict seem to be manageable because the constellation of the conflicts can still be referred to legal norms or to their intention (in the ‘effet utile’ type of cases). However, there are types of conflict in harmonised fields of law (for example, the euro) that are highly complex and politicised, and especially characterised by long-term effects which are difficult to anticipate, and the ‘framing’ of which is even more difficult to find consensus upon among the Member States and the Commission. What does a common economic or budgetary policy—which is, to a certain extent, required by the common currency—demand in a concrete social situation? It would be an illusion to assume that this complex issue could just be solved by further measures of integration and by transferring competencies to the European Commission or the European Parliament. The legal system establishes and processes a trans-subjective project of distributed knowledge generation13 in a society that does not have a privileged point of overarching self-observation that would allow for the construction of a rational society. Processing simplified operations (contracts, administrative acts, etc) upon the basis of the ‘fictions’ created by the legal system contributes to the uncertainty that emerges with the necessity of an experimental and search process once the reproduction of tradition is no longer a viable perspective. But these legal fictions have to keep in touch with the ‘real’ network of the concrete operations that are 11

Joerges, n 2 above, 27. See the overview in CU Schmid, ‘From effet utile to effet néoliberal—A Critique of the New Expansionism of the ECJ’, Bremen ZERP Working Paper, 2011, available at: www.ssrn.com. 13 E Hutchins, Cognition in the Wild (Cambridge MA, The MIT Press, 1996) 353. 12

386 Karl-Heinz Ladeur made possible by the ‘repertory’ of legal forms. There is a whole architecture of intermediary rules, models and practices, which is needed for the more or less consistent ‘management of rules’ in complex multi-layered legal systems. And it is precisely the difference between public and private law that comes into play at this point: the co-ordination process is much easier in private law, with its open modes of private self-organisation, than in public law where patterns of processing decisions are much more insulated in closed legal regimes. In the following, it should be made very plausible that more intense integration requires a paradoxical ‘diversity management’; that it would be better to refine the new version of the conflict-of-laws approach as a tool-box for this task and to accept the limits of integration, instead of piling up ever more explicit European norms and competencies that either ignore the complexities of the implicit social norms deeply embedded in formal and informal institutions of societies, or— perhaps even worse—just try to impose a uniform practice in vital fields of action by force. This would provoke the risk of strengthening anti-European political forces, on the one hand, and would, unwillingly, even deepen the social divergence, on the other hand, because it could allow Member States to continue to follow a risky trajectory and foist the negative consequences of a policy onto their neighbours.

II. THE ‘INSTITUTING POWER’ OF SOCIAL NORMS

I will now turn to what may be called the silent ‘instituting power’14 that generates, or transforms, the social norms and the rules of application that work below the surface of explicit ‘constitutive’ norms. The financial crisis15 of recent years has not only made visible economic divergences in the development of the EU Member States, but has also provoked, as a reaction among the protagonists of the ‘ever closer union’, a voluntaristic approach to compensate for these disintegrating tendencies by a new move towards a ‘constitutionalisation’ of the EU. This is meant to replace the emergency regime that is, more or less, fuelled by measures taken in intergovernmental arrangements of national governments in order to mitigate the consequences of the financial risks that have come to the fore. The political debate is seen to be able to create its own pre-conditions in a situation of deep crisis that is expected to find its repercussions in the rise of anti-European parties of different political colours in the next election of the European Parliament (May 2014). In a recent book by Daniel Cohn-Bendit and Guy Verhofstadt,16 one can read that national discussions on

14

V Descombes, Les embarrass de l’identité (Paris, Gallimard, 2013) 245. K-H Ladeur, ‘The Financial Market Crisis: A Case of Network Failure?’ in PF Kjaer, G Teubner and A Febbrajo (eds), The Financial Crisis: A Constitutional Perspective: The Dark Side of Functional Differentiation (Oxford-Portland OR, Hart Publishing, 2011) 63. 16 D Cohn-Bendit and G Verhofstadt, Für Europa!: Ein Manifest (Munich, Hanser, 2012). 15

The Conflict of Social Norms 387 political isssues have to be narrow-minded because they are restricted to a limited territory and necessarily exclude other people and other perspectives from participating in the argumentation process. As Euro-scepticism has never been so high as it is today, a kind of creatio ex nihilo is expected to be brought about. All the problems that emerge at the level of the nation state will disappear once the decision-making process has been shifted to the European level.17 Up to now, Europe has existed mainly as a‘legal community’(‘Rechtsgemeinschaft’); the further ‘deepening’ of the Union would go far beyond an extension of the legal integration of a ‘plural subject of legitimation’18 and enter into the process of ‘founding’, of ‘constituting’ a community in its own right.19 However, as already mentioned above, below the level of ‘constituted’ explicit norms, there are the different layers of ‘instituted’ norms, rules, practices, patterns of ‘application’ of explicit legal norms, etc, that are much more important for the functioning of a society than the legal norms themselves. The formal rules do not let us know how they will be applied in practice and what their effects will be. There are no stable meta-rules about the application of legal norms, and methods cannot compensate for this lack. Patterns of rule application have an emergent character,20 in that they are generated by a practice that cannot be formulated in advance. They are the outcome of an acentric search process that is distributed over a heterarchical network of experimental moves by social actors (including judges) that are difficult to stabilise by formal institutions. This is because they remain linked to situations like ‘episodes’21 that keep their creative variable character invisible in as far as they are presented as ‘applications’ of norms. With Stanley Cavell, one could talk about a paradoxical process that is the reverse model of an explicit ‘foundation’ of a normative order; that is ‘finding as founding’.22 From this perspective, one can distinguish a heterarchical process based upon processes of ‘instituting power’ from a hierarchical decision based upon ‘constitutional power’.23 The ‘instituting power’ has, according to Vincent Descombes, its basis in an ‘anonymous and diffuse sovereignty of conventions’.24 This is not only the case with rules of application, but all the more so with rules that remain inherent in social domains that underlie only a loose legal control in the stricter sense, such as budgetary political practices, corporate governance, industrial relations, professional standards, etc.

17

M Kumm, ‘Ein Signal für Europa’, Frankfurt Allgemeine Zeitung, 10 August 2012. C Franzius, Recht und Politik in der transnationalen Konstellation (Frankfurt aM, Campus Verlag, 2013) 97; see, also, J Habermas, Zur Verfassung Europas: Ein Essay (Berlin, Suhrkamp Verlag, 2011). 19 S Laugier, ‘Pourquoi des théories morales? L’ordinaire contre la norme’ (2001) 5 Cités 93, at 108. 20 DC North, JJ Wallis and BR Weingast, Violence and Social Orders: A Conceptual Frameword for Interpreting Recorded Human History (Cambridge, Cambridge University Press, 2009) 7. 21 See, generally, D Hofstadter, I am a Strange Loop (New York, Basic Books, 2008) 85. 22 S Cavell, ‘Finding as Founding. Taking Steps in Emerson’s Experience’ in DJ Hodge (ed), Emerson’s Transcendental Etudes (Stanford CA, Stanford University Press, 2003) 111; Laugier, n 19 above, 106. 23 Descombes, n 14 above, 245. 24 Descombes, Le complément de sujet (Paris, Gallimard, 2004) 442. 18

388 Karl-Heinz Ladeur III. GENERAL NORMS AND THEIR SPECIFIC APPLICATION

As an example of the tension between a legal norm and its ‘application’ one might refer to the different ways of defining the limits of the freedom of opinion in cases of conflict with protection of the personality rights (privacy, defamation, libel, etc).25 Over a long period, a whole network of hundreds or thousands of judgments has evolved that is not independent from the practices of the media and professional standards that define the status of the public realm and its relationship to economic systems and moral rules, on the one hand, and privacy, on the other. This is why the disruptive interventions of the European Court of Human Rights (ECtHR)26 into this complex network may end up creating nothing but unproductive irritations, because national courts have difficulties in integrating them into the network—until, after a while, they are forgotten. This can easily happen (and happens all the time) because the disruptive judgment creates a kind of ‘structural hole’ that is, after a while, ‘repaired’ by a practice that only pays lip-service to the ‘exceptional’ judgment, whereas the ECtHR does not really have the possibility of creating a new ‘attractor’ that creates a new pattern and a new frame of reference. It simply has too few cases—unlike, for example, the German Federal Constitutional Court, which passed hundreds of judgments in the last few decades in order to impose patterns of argumentation in this field of court practice. This is only one of the varieties of emergent practices of entangling norms and their application. It is all the more complex because, for institutional reasons—the doctrine of application as distinguished from the norm itself—this process has to be kept more or less invisible (which is not to be mistaken for a form of manipulation). This is only one of the varieties of generating a certain ‘like-mindedness’27 of actors in the domains of practice. This is one of the reasons why, in fact, the impact of the decision-making processes of constitutional courts at national level is so different across European countries although, ironically, the actual constitutional texts are not that different at all.28 This constitutional practice is, under the conditions of postmodernity, characterised by a process of transformation of civil rights that couples rights and

25 See only Reports of the Federal Constitutional Court BVerfGE 7, 198—Lüth; BVerfGE 54, 148, Eppler; BVerfGE 54, 208, Böll/Walden; BVerfGE 75, 369, Strauß; BVerfGE 86, 1, geb Mörder; BVerfGE 93, 266, Soldatenurteil; D Grimm, ‘Die Meinungsfreiheit in der Rechtsprechung des Bundesverfassungsgerichts’ (1995) 48 Neue Juristische Wochenschrift 1627; K-H Ladeur, Das Medienrecht und die Ökonomie der Aufmerksamkeit (Cologne, von Halem, 2007). 26 ECtHR, Caroline von Monaco (Hanover), Case No 59320/00 of 24 June 2004, available at: hudoc. echr.coe.int/sites/eng/pages/search.aspx. 27 RB Pippin, The Persistence of Subjectivity: On the Kantian Aftermath (Cambridge, Cambridge University Press, 2005) 12. 28 See, for Italy and Germany, K-H Ladeur, ‘Verbindlichkeit der Verfassung’ in J Isensee and P Kirchhof (eds), Handbuch des Staatsrechts, Vol XII, forthcoming 2014; see, also, EC Ip, ‘The Evolution of Constitutional Adjudication in the Chinese Special Administrative Regions: Theory and Evidence (2013) 61 American Journal of Comparative Law 799 (arguing convincingly that the cleavage between Hong Kong and Macao is due to different forms of political governance in both territories).

The Conflict of Social Norms 389 historical facticity:29 rights are increasingly interpreted as guarantees of the access to the application of real social resources and not just formal possibilities that do not take real conditions of action into consideration (for example, freedom of opinion as a basis for real pluralism of media communication). In this respect, one speaks about the ‘constitutionalisation of the legal order’ in the sense that legal norms have to read as the outcome of a concretisation of constitutional norms. This evolution can be demonstrated upon the basis of the guarantee of freedom of opinion. Whereas the formulation of the constitutional norm (Article 5, paras 1 and 2GG) is a repercussion of the classical tension between the right and its legal limits (to be enshrined in general norms), in practice, this relationship has been completely transformed into a balancing process that works on a casuistic reasoning—not very different from Anglo-Saxon court practice.30 The rise of ‘balancing’ has accelerated the dissolution of the distinction between norm and norm application, and the transformation of the hierarchical construction of the legal system to a horizontal network of decision-making. It transforms the relationship between normativity and facticity in a fundamental way: it would be an illusion that one could stabilise this new constellation at a higher (European) level by reference to shared ‘principles’31 and just allow for a wider pool of variety. Of course, it is obvious that the new ‘relational rationality’ of the legal system does not exclude any process of Europeanisation. However, one has to bear in mind that this process is dependent on close co-operation of legal actors, professional groups, courts (and, in the field of administrative law, administrative agencies). And this is, in fact, a highly-complex pre-condition that cannot be taken for granted. And the more a whole infrastructure of social, professional and administrative rules, cultural preferences, patterns of industrial relations and their controversial understanding come into play, the less the functioning of such a set of relational patterns of decision-making can be regarded as generated by explicit normative decisions. This is all the more so because such a broadened Europeanised network of networks would allow for the emergence of new perverse patterns of operation that could shift problems and negative consequences of decision-making patterns across the border. At the same time, it would be highly difficult to observe, not to mention mitigate, the negative consequences of such a broadened network of interrelated cross-border effects because, again, there is a risk of the generation of ‘structural holes’ that cannot easily be repaired both from the upper level of norms and the lower level of decision-making in practice. If one looks for a more general formulation of the problems of harmonisation of legal and social practices and not only for explicit norms in Europe, one may opt for Charles Taylor’s formula of the necessary ‘repertory’ that is needed to put a

29

M Gauchet, ‘Le tâches de la philosophie politique’ (2002) 19 Revue du MAUSS 275, at 279. BVerfGE 99, 185, 196; 114, 357 (Balancing freedom of opinion and personality rights). 31 With regard to the role of ‘principles’ in the Europeanisation process, see A von Bogdandy, ‘Grundprinzipien von Staat, supranationalen und internationalen Organisationen’, Wissenschaftskolleg Berlin, Working Paper 7.2012 D. 30

390 Karl-Heinz Ladeur normative project into practice.32 Such a ‘repertory’, which can only be generated from a specific practice, forms the infrastructure of the ‘social imaginary’33 that brings about the ‘like-mindedness’ of actors and allows for the co-ordination of actions. This is not only a kind of tool-box; it also constitutes the relevant range of actions, mediations, patterns of co-ordination (or lack thereof), upon which new options are generated and tested without the possibility of pre-supposing stable frames of legal norms. This is also the pre-condition for the functioning of a constitution. One can, for example, assume that the American Constitution was a success in as much as it was based upon an informal sub-text that gave a contour to the explicit will for the construction of a new community, while at the same time drawing on the past experiences with the English institutions. In France, the necessary ‘like-mindedness’ of societal actors could not be pre-supposed after the failure of the Revolution because the state had to play an important role of mediation between divergent ideologies and social groups. Against this background, one can assume that public democracy and its realisation cannot be based primarily upon explicit legal norms34 that interfere more or less with private interest, but are dependent on a process of mediation with the implicit norms that are generated in society. This does not mean that democracy just has to accept the rules of the game that are formulated in the private domains of action—not at all. However, one has to be aware of the fact that, in some way or other, a new set of informal rules has to be put in place. Otherwise, the explicit normative ordering of a field of action runs the risk of failure. Rule-making, from this perspective, is a kind of experimentation with social institutions that have to take into account the ‘repertory’ of informal norms and practices that have their own—and often hidden—relational rationality that does not always concur with public interest.

IV. THE ACQUIS ÉTATIQUE: GOOD AND BAD INSTITUTIONS AND THE DIFFICULT PROCESSES OF TRANSFORMATION

Against this background, it should also be plausible that the administrative agencies are more directed by internal informal rules35 than by explicit parliamentary norms.36 And if one bears in mind the heterarchical, acentric, implicit character of practices of decision-making in social fields of action, it comes as no surprise that such patterns can also be perverse and destructive, and, at the same time, they are nevertheless reproduced. Coming back to Europe, one may take the view

32

CA Taylor, Modern Social Imaginaries (Durham NC, Duke University Press, 2004) 23. Ibid. 34 J Habermas, Faktizität und Geltung (Frankfurt aM, Suhrkamp Verlag, 1992) 153. 35 JL Mashaw, ‘Reluctant Nationalists: Federal Administration and Administrative Law in the Republican Era 1801–1829’ (2007) 116 Yale Law Review 1636; Mashaw, ‘Federal Administration and Administrative Law of the Gilded Age’ (2010) 119 Yale Law Journal 1362, at 1377 et seq. 36 More theoretically inspired authors talk about a ‘concretisation’ of law. F Müller and R Christensen, Juristische Methodik, 10th edn (Berlin, Duncker & Humblot, 2009) No 14. 33

The Conflict of Social Norms 391 that we have countries with good institutions that allow for productive reasonable co-ordination of public and private action and reproduce a rational ‘repertory’ of rules and patterns of action, and, at the same time, we have countries with bad institutions that reproduce, time after time, perverse effects. Consequently we get stuck in lock-ins that make transformations next to impossible because the negative effects of bad institutions proliferate through the whole system and prevent productive experimenting process from coming about. The problem consists in the fact that every bad institution creates incentives for some groups to preserve it, whereas, for the majority, the incentive for change is only weak and even difficult to imagine. This is due to the above-mentioned fact that practices always have a tendency to hold the rules of their functioning invisible. If the Mafia were to be completely defeated, thousands of people would immediately lose their jobs; an inefficient state creates a lot of sinecures that are defended by civil servants.37 This is why, for example, trust in public institutions is low in Italy, but also why the incentives for change are also low. To a certain extent, this is also true for France with its huge state bureaucracy and many people interested in the preservation of unproductive jobs as civil servants. These are social rules and patterns of action that reproduce themselves and prevent productive reforms. The relationship between norms, institutions and their practical effects has to be further differentiated. I will only point to the different versions of adaptation to the European market. The adaptation process need not be limited to the market alone: states can also choose a perverse form of adaptation and compensate a lack of work productivity with the expansion of state bureaucracies—a solution that aggravates problems and, at the same time, prevents compensatory reform. The solution of one problem consists in the creation of two problems that demonstrate their negative consequences ‘only’ in the future. This has happened in several European countries such as France, Italy and Greece, where more than 40 per cent of the working population is employed in the public sector—without delivering productive services that could be compared to countries with (relatively) good institutions. At the same time, we can observe an increasing tendency towards a fragmented ‘expertise’-based practice of informal norms that is, more or less, exempt from public deliberation and allows for ‘efficient’ lobbying and intransparency. This practice also has an impact on discriminating practices in Europe that can be much more harmful than explicit norms. On the other hand, constructive versions of institutions and approaches of citizens towards the state can also be observed: in Germany, there is a higher than average level of co-operation between employers and trade unions; in Scandinavian countries, one can observe a high level of responsibility of citizens with regard to tax-paying and the claiming of social benefits: about 90 per cent 37 For the cleavage between well organised partial interests and diffuse general interests that do not mobilise a fragmented public, see M Olson, The Logic of Collective Action (Cambridge MA, Harvard University Press, 1965).

392 Karl-Heinz Ladeur of Scandinavian citizens take the view that it is immoral to ask for public money without fulfilling the normative conditions: in Germany, it is only 60 per cent, in France, 40 per cent—not to mention the southern European countries.38 This should be taken into consideration when considering a European unemployment benefits scheme. The de-territorialisation of social solidarity is dependent on many pre-conditions—it can be completely destroyed if it is overburdened,39 and it is an open invitation for rent-seeking once the consequences of such a development are more or less invisible because of the increasingly abstract networks of the inter-relationship. Why should a public authority in southern Italy or Greece be willing to have a closer look at the recipients of unemployment benefits once the cost is spread across all of the Member States including the rich countries? Even today, there is an apparently unbridgeable gap between the administrative rationality in northern and southern Italy. The example shows that an ‘ever closer union’ may have the perverse effect that the divergence between richer and poorer countries may even increase because the negative effects produced by bad institutions in one country can be deepened because incentives for reform are weakened by subsidies paid by countries that are better off. According to some approaches in the theory of society, the idea of a territorial self-limitation is necessarily linked to the modern understanding of political identity in both its collective and its individual aspects.40 This assumption has nothing to do with nationalism; it is rather the consequence of a doubt that the silent ‘instituted power’ of both society and the state would really be transformed by the ‘constitutive power’ of a European super-state. It is also the expression of the idea that the concept of democratic deliberation about a ‘common cause’ pre-supposes the possibility of forming a shared ‘social imaginary’, including an understanding of the consequences of productive and unproductive norms. The bigger the territory, the more difficult the idea of a shared reality is to sustain.41 It is also dependent on a distributed ‘common knowledge’ of the ‘repertory’ of actions, rules, motives, and values of the ‘instituted society’.42 These assumptions cast considerable doubt on the hope that the lack of a European public may be compensated once the European institutions are strengthened. One might even fear that the mere complexity and fragmentation of public and private domains of power will put a permanent limit on public deliberation and strengthen the power of European bureaucracies. It is now evident that the introduction of the euro as a common currency was a fatal mistake. Perhaps it would turn out to be an even more destructive decision to deepen the political union in order to mitigate

38 Y Algan and P Cahuc, ‘Civic Attitudes and the Design of Labor Market Institutions’, CEPREMAPWorking Paper 2005, 14. 39 Descombes, n 14 above, 216. 40 Ibid, 218. 41 Ibid, 228. 42 Ibid, 246.

The Conflict of Social Norms 393 the bad consequences of the common currency. As this chapter might have made clear, the main problem of the EU is not a lack of centralised political and legal competencies, but the lack of a common ‘repertory’ of patterns of co-ordination, of shared approaches to social governance, or of generating conventions as the infrastructure of the legal system. In the market-related field of law, this co-ordination is, to a certain extent, mainly managed by economic actors which are themselves spontaneously or via mediation brought about by the lex mercatoria or other self-organised private institutions. However, this looks completely different in fields where co-ordination has to absorb and mitigate many more conflicts such as in industrial relations, administrative action, budgetary discipline, welfare practices, etc. The upcoming ‘transfer union’ will re-inforce problems instead of solving them. The ever ‘closer (political) union’ may thus turn out to repeat the same serious mistake that is now seen in the monetary union.

V. EUROPE AND THE NATIONAL REGRESSION

The European dimension of the financial crisis also has a negative impact on the political relations in countries such as Italy and France (not to mention Greece): a major part of the Italian public—independent of political orientation—takes the view that ‘Europe’ (in fact, mainly Germany) should, in some way or other, pay for the shortcomings of the Italian economic and political institutions—not as a kind of aid for the management of a burdensome reform process (which could seem acceptable) but upon a permanent basis. Thus, Italy remains as before and shifts the cost of the stalemate to the ‘rich’ northern countries. The rising star of the left, Matteo Renzi,43 newly appointed Prime Minister, has recently taken the view that countries such as Italy should be allowed to cross the three per cent limit of budgetary deficit per annum—not as an exception, but because the Maastricht system is said to be outdated. The consequences of this high burden of public debt would, in the end, be borne by other Member States. France does not even accept European criticisms of its fatal public policy—and this would not be different once the European Commission had more power and could fight for more financial homogeneity with the paper sword of a European competence. What could not be brought about by the French government would, in the future, be ‘executed’ by the Brussels bureaucracies? One can well imagine the reactions of the French political parties vis-à-vis a ‘strong intervention’ by the European Commission! Perhaps we would need a European police force for the implementation of the unitary fiscal policy—or the institution of a European state of emergency that leads to the transfer of all the necessary competencies of the Member States to the European bureaucracy?

43

www.repubblica.it, 11 January 2014.

394 Karl-Heinz Ladeur One of the consequences of the emerging transfer union is a split between hard rules for ‘hard countries’ that have to bear the consequences of bad policies with a rising level of liability, and soft rules for the ‘weak countries’ that have to adopt new policies in a vague perspective that is prone to be re-negotiated again and again. The transfer union uses also a split language: a soft tone for the weak countries and a harsh tone for the stronger countries. On the other hand, the promise of Commissioner Viviane Reding that a European minister of finance should have strong competencies to intervene in Member State budgets is just talk.44 How, for example, in the midst of a deep economic crisis, should an intervention by the European Parliament into national parliamentary budget rights be brought about against the majority of the Italian voters? Where should a majority in the European Parliament be found for serious sanctions against a left-wing government that cannot find consensus about political reforms and is under pressure from right-wing opposition that blocks all political moves to cut the expenses?45 What will the European Parliament of the future look like? How strong will the anti-European parties become? When will the first country send an anti-European commissioner to the Commission? Looking at Greece, this does not sound unrealistic. Considering the ‘longue durée’ of the ‘instituted order’, one should bear in mind that the Italian political and economic system is still today characterised by a deep divide between the former Habsburg north, the former Papal state and the unproductive south. Against this background, the legitimacy of the unequal representation of citizens in the EU Parliament should also be questioned: as long as the EU is primarily a ‘legal community’, this does not appear to pose a major problem. However, in a transfer union, this question has to be raised again: ‘No taxation without (equal) representation!’ It makes no difference whether proper taxes are at stake or an obligation to contribute Member State resources as a subsidy to other Member States. A European transfer union is incompatible with unequal representation (of the ‘European’ people in Parliament and of Member States in crucial political decision-making by political bodies of the EU). The same is true for a hidden version of financing of Member States via the European Central Bank (ECB) if a majority of poor (and eventually small) Member States can, upon the basis of the principle ‘one state, one vote’, force bigger states representing the majority of the EU population to contribute to the solution of the budgetary problems of other Member States.

44

Frankfurter Allgemeine Zeitung, 25 February 2013, p 7. The EU Commission does not even insist on compliance with the binding budget rules in the present crisis because it fears that, for example, France might just ignore its decision. The dilemma of ‘supranationalism’ in a period of crisis is laid open by the willingness of countries such as France (and, of course, not just France) to refer more to ‘sovereignty’ in conflicts with the Commission: www. lefigaro.fr/flash-eco/2013/05/30/97002-20130530FILWWW00663-hollande-defend-la-souverainetede-la-france.php?page=&pagination=2, last accessed 14 October 2013). 45

The Conflict of Social Norms 395 It is interesting that there have already been attempts to interfere with the economic imbalances among the Member States. It is a perverse misunderstanding of the goals of the EU that both the Commission and the French government demand higher salaries in Germany, in order to reduce German competitiveness. The problem is that in many countries the relationship between productivity and salaries has been uncoupled in a major part of the industry: In Italy, for example, salaries have increased by 30 per cent during the last decade without economic growth—it would be of no help for Italy if salaries in Germany increase.

VI. THE ILLUSION OF THE INTEGRATION BY LEGAL ‘PRINCIPLES’

Armin von Bogdandy has observed, in a recent publication, the mutual crossborder impact of the legal systems of the Member States on the EU. He also registers that there are states with ‘strong and weak social institutions’, which is already astonishing in the community of European lawyers that normally tends to ignore all social conflicts that might darken the prospects of the ‘ever closer union’. However, what is the answer to this problem? From the ‘principles’ of a common core of European constitutional law that forms a kind of functional equivalent to the ‘materialisation’ ie, constitutionalisation of the legal system in countries such as Germany, one can—according to von Bogdandy—derive ‘problem adequate rules of union law’ that contribute to a process of co-evolution. In fact, it is quite the other way round: the implicit ‘instituted Order’ takes the lead at the social and legal ‘interfaces’ at which it meets European law. Armin von Bogdandy just presupposes that the ‘legal construction of political and social conflicts as conflicts of principles … can play a positive role in democratic discourses’,46 and, secondly, he pre-supposes that the different ‘legal regimes and institutions … on the whole contribute to the construction of stable legal relationships’,47 which—one might add—allows for the mutual observation of the conflicts and the emergence of a productive mode of mediation and co-ordination. This view plays down the impact of the ‘longue durée’ (Fernand Braudel) of ‘instituted order’ and the silent sovereignty of conventions.48 They never present themselves in public: the Italian clientelismo or the French fixation on the state are not the product of constitutive decisions. They are based upon ‘non-decisions’ and are present before any decisions are made. They distribute burdens of proof and they determine the rules of argumentation in ‘discourse formations’ (M Foucault). This is the ‘powerless power’ not of the better argument but of implicit rules that need not be put forward explicitly because they determine what is relevant.

46 47 48

A von Bogdandy, n 31 above, 23. Ibid, 35. Descombes, n 24 above, 442.

396 Karl-Heinz Ladeur VII. OUTLOOK

It should have been made clear that the EU cannot become a super-state whose legal system can be modelled on the example of the nation state—on a much bigger territory. It can only be conceptualised as a new form of polity that has to manage a much higher level of conflict within its institutions. It has to develop a completely new architecture of meta-rules, including methodologies that are adapted to the persistence of variety. The new version of ‘conflicts of law’ can make a valuable contribution to such a complex control project.

Epilogue How to Make it More Complicated Again? The European Constitutional Evolution between Kantian and Managerial Mindset HAUKE BRUNKHORST FLENSBURG

I. INTRODUCTION

A

COUPLE OF years ago, Martti Koskenniemi introduced the important distinction between two different constitutional mindsets: the Kantian and the managerial mindset.1 The differentiation between the Kantian and the managerial mindset is one of many variants in the eternal struggle between Dr Jekyll and Mr Hyde, which is fought throughout Koskenniemi’s work, beginning with Kantian utopia vs managerial apologia.2 It was followed up with the struggles between Kelsen and Schmitt, Lauterpacht and Morgenthau, ‘Mr Hyde’ Wolfgang Friedmann, the last hero of the gentle civilisers, and the many Dr Jekylls who are the embedded jurists from the American State Department. They, as ever, justified the invasion and replacement of a democratically-elected government in the Dominican Republic in the spring of 1965.3 The fight was renewed in 2003 when the good people of the world said ‘No’ to the infringement of international law by the United States and the so-called ‘Coalition of the willing’, the states that supported George W Bush’s invasion of Iraq, and international lawyers.4 Although I take the distinction from Koskenniemi, I will use it in a slightly different way (Section II). In particular, I will integrate it into a theory of the social 1 M Koskenniemi, ‘Constitutionalism as Mindset: Reflections on Kantian Themes About International Law and Globalization’ (2006) 8 Theoretical Inquiries in Law 9–36. 2 Koskenniemi, From Apologia to Utopia: The Structure of International Legal Argument (Helsinki, Lakimiesliiton, 1989). 3 Koskenniemi, The Gentle Civilizer of Nations (Cambridge, Cambridge University Press, 2002) 413–15, 494–509. 4 Koskenniemi, ‘What should International Lawyers Learn from Karl Marx’ (2004) 17 Leiden Journal of International Law 229–46, at 245.

398 Hauke Brunkhorst evolution of law (one which, in the end, seems not to be completely compatible with Koskenniemi’s history of legal discourses).5 Then, I will give a brief account of the functional and normative evolution of European constitutional law, which, in a way, is paradigmatic for global legal and constitutional development, and not another example of European exceptionalism (Section II). I will finish the chapter with the present crisis (Section III).

II. MINDSETS

A mindset is a network of practical concepts which are internal to, and constitutive for, a form of life, such as a professional community of experts, for example.6 But it can be any communicative community such as citizenship, social class, a street corner society, a religious sect, or a group of soccer fans. I begin: (1) With a rough juxtaposition of the meaning of the two mindsets: the Kantian mindset’s key-words are autonomy, egalitarian self-determination, representative government and universal rights. It is Law that shall enable the government both of and by the people, and this means the emancipation from any law to which we have not given our assent.7 The language of the Kantian mindset is the normative language of the constitutional revolution, the pouvoir constituant, and the rhetoric of radical change (such as that of Barack Obama at the beginning of his first campaign). The Kantian mindset is the ‘legislature’ which ‘produced the French Revolution’ (Marx).8 At the centre of the Kantian mindset is the internal relation of law and democracy. By contrast, the managerial mindset is more about law and economics. Its keywords are rule of law, judicial review, possessive individualism, and ‘peaceful competitive struggle’9—best watched over by a competition commissioner and some judges, as in the current EU. The managerial mindset is performed by incremental decision-making, gradual change, muddling through a jungle of hegemonic opinions, managing a complex mix of ideal and material classinterests, and unexpected evolutionary hazards and coincidences. The managerial mindset’s language is the technical language of courts, committees, conferences and all kinds of agencies which implement and stabilise the pluralised powers of the pouvoir constitué. Managerial government is government for or against the people. The Kantian and Marxist (and American presidents’) rhetoric of

5 See H Brunkhorst, Critical Theory of Legal Revolutions—Evolutionary Perspectives (London, Bloomsbury, 2014 forthcoming). 6 On this concept of ‘concept’, see R Brandom, Making It Explicit: Reasoning, Representing & Discursive Commitment (Cambridge MA, Harvard University Press, 1994). 7 A Somek, ‘Europe: From Emancipation to Empowerment’, unpublished e-man 2012. 8 K Marx, Kritik des Hegelschen Staatsrechts, MEW 1, 260, English quoted from: Marx, Critique of Hegel’s Philosophy of Right, 57). 9 K Marx, Der 18. Brumaire des Louis Bonaparte (Berlin, Dietz, 1985) 97, English quoted from: available at: www.marxists.org/archive/marx/works/1852/18th-brumaire/ch01.htm, 19 March 2012.

How to Make it More Complicated Again 399 changing the world is displaced by negotiation, diplomacy and compromise, by new public management and the noiseless implementation of structural reform (such as Bill Clinton, Gerhard Schröder and Tony Blair in their respective second terms). In the world of the managerial mindset, public contestation is simply ‘not helpful’ (Angela Merkel), and parliamentary rule must be restricted to ‘market-conformity’ ‘parliamentary participation’ (originally: ‘parlamentarische Mitbestimmung’)—again, the words of Angela Merkel, the mastermind of the present European managerial class of politicians, bankers, chief-economists, jurists and embedded journalists. If you want paradigms, southern Europe is full of them today. The troikaenforced replacement of elected governments by technocrats and bankers, such as Mario Monti or Lucas Papademos, is a paradigm case of the functioning of the managerial mindset, the Italian elections in February 2012 which brought the technocratic government in Italy to an end is a paradigm case of the functioning of the Kantian mindset. In both cases, the results can be catastrophic. Dr Jekyll who wants the bad can cause the good—but without any Mandevillean metaphysical guarantees; and Mr Hyde who is the bearer of the Kantian goodwill can cause bad—but must not. (2) Both mindsets have different social extensions: whereas the Kantian mindset speaks the universal language of everybody, the extension of the managerial language is the exclusive medium of understanding between professional experts, and between the political and economic classes. The specialisation of their language allows them to draw a sharp distinction between the internal systemic discourse, and the human beings out there in the environment of the system. The borderline between system and environment is watched and observed by simple codes and complicated programmes. For the human beings out there, the programmes are translated into the hopelessly under-complex language of the kitchen morale of the ‘Swabian housewife’ and her ‘housekeeping money’ (Angela Merkel). From the point of view of his own Kantian mindset, Kant himself would have called the members of the managerial class sorry comforters.10 However, from the point of view of the managerial mindset, the opposite is true, and the Kantian constitutional mindset is just another empty signifier: ‘illusions of manageability’, ‘solemn declarations’ and ‘revolutionary chants’ (Machbarkeitsillusionen, feierliche Erklärungen und Gesänge)11—and rightly so, at least as far as declarations and constitutions are, at best, legal texts, and not yet legal norms.12 Niklas Luhmann’s thesis is: as far as legal and constitutional 10

I Kant, Zum ewigen Frieden in Werke XI (Frankfurt aM, Suhrkamp Verlag, 1977) 191–251, at 210. N Luhmann, ‘Verfassung als evolutionäre Errungenschaft’ (1990) 9 Rechtshistorisches Journal 176. 12 On the distinction, see F Müller, ‘Richterrecht’. Elemente einer Verfassungstheorie IV (Berlin, Duncker & Humblot, 1986) 13, 34, 38, 47 et seq, 88 et seq; idem, Demokratie zwischen Staatsrecht und Weltrecht. Nationale, staatlose und globale Formen menschenrechtsgestützter Globalisierung. Elemente einer Verfassungstheorie VIII (Berlin, Duncker & Humblot, 2003) 52–53; F Müller and R Christensen, Juristische Methodik II: Europarecht 170, 185, 198–99, 363, 437–38. 11

400 Hauke Brunkhorst concepts are evolutionary advances with a certain cash-value, they are due to adaptive cognitive learning that is performed by the managerial class or independently by social systems once they have completed their self-referential closure (and, hence, have become learning or Turing machines). Legal and constitutional advances offer good examples. A functionallydifferentiated, and hence self-referentially closed, legal system produces itself (autopoiesis) through the combination of normative closure with cognitive openness.13 From the perspective of cognitive or systemic learning, normative expectations and moral points of view are nothing more than mere learning blockades. They inhibit the improvement and enhancement of adaptive capacities. But they have a positive function for cognitive learning within the legal system, because normative closure of the legal system enables cognitive learning that is highly specialised to improve the adaptation of the legal system to its environment. The structural coupling of law and politics, and thus their constitutionalisation, is a further step in the enhancement of the adaptive capacities of both systems. They learn reciprocally to adapt to each other. They learn that every ‘legal now’ can be changed at any time by political decisions, but only in a legal procedure which is itself due to legally-organised political decisions (at the same or at higher levels, logically, but never practically, ad infinitum). Moreover, structural coupling together with solemn declarations, illusions of manageability and revolutionary chants (‘Allons enfants de la Patrie’; ‘United we stand’) and the ‘whole immense superstructure’14 make the unlikeliness of ruling through positive law alone both likely and expected not only for legal experts and the political élites but also for the people, in particular because the ascription of legal change to the people and their legislative powers gains time that is needed to obscure, and thus to de-paradox-icate the paradoxical consequences of the recursive procedures of structural coupling. So far, constitutions are just evolutionary advances which enable legitimisation through procedure: Legitimation durch Verfahren.15 In as far as constitutions fulfil the functional requirements of structural coupling, they contribute to the enhancement of the adaptive capacities of modern society. This, however, requires the Kantian mindset no longer. All this has to be done, must be performed, by managerial incrementalism, legal experts, career politicians and bureaucrats. Praise the routine!: Lob der Routine!16 (3) I both agree and disagree with this argument of Luhmann. First, my disagreement. As we know from cognitive psychology17 as well as from social

13

N Luhmann, Das Recht der Gesellschaft (Frankfurt aM, Suhrkamp Verlag, 1993) 78–95, 555. K Marx, A Contribution to the Critique of Political Economy, ‘Introduction’ (1859), quoted from: www.marxists.org/archive/marx/works/1859/critique-pol-economy/preface.htm. 15 N Luhmann, Legitimation durch Verfahren, (Frankfurt aM, Suhrkamp Verlag, 1983 [1969]). 16 N Luhmann, ‘“Lob der Routine”’ in Luhmann, Politische Planung: Aufsätze zur Soziologie von Politik und Verwaltung (Opladen, Westdeutscher Verlag, 1971). 17 See only, J Piaget, The Moral Judgment of the Child, trans M Gabain (London, Routledge & Kegan Paul, 1968); L Kohlberg, Essays on Moral Development, vol 2 (San Francisco CA, Harper & Row, 1981). 14

How to Make it More Complicated Again 401 history18 and from the sociology of religion, rationalisation and religious evolution,19 the social evolution (as the socialised development of human beings) is not only characterised by cognitive learning that enhances adaptive capacities, but also by normative learning that is not adaptive but which channels and constrains systemic adaptation (which is blind to the negative externalities that it produces in its environment of natural and social systems, and the social lifeworld). In particular, the normative closure of the legal system through constitutional law is not just functionally-adjusted to adaptive cognitive and systemic learning, but is also an embodiment of normative learning processes which have a lasting internal relation to the minds, actions and bodies of all the individual addressees of legal norms. Therefore, constitutions not only couple law and politics structurally, but also express the—internally differentiated—unity of these systems within the general public sphere. What appears as a learning blockade from the perspective of adaptive cognitive learning is itself the result of evolutionary learning that consists in an increase and categorical progress of moral insight, measured in dimensions such as social inclusion, moral universality, political egalitarianism, reciprocal understanding, justice as fairness and societal individualization (for example, Émile Durkheim’s modern cult of the individual). The results of normative learning are embodied within the whole system of positive law, and, in particular, in constitutional rights and principles such as public and private autonomy, democracy, check and balances, due process, social equality, human and civil rights, and thus the whole list of solemn declarations and revolutionary chants: ‘The Internationale unites the human race’. (‘Die Internationale erkämpft das Menschenrecht’20). These are holistic statements and empty signifiers which everybody understands in legal terms as well as in terms that are, at the same time, notions of special discourses and colloquial language, or, in the terminology of Jürgen Habermas, of the system and life-world. Revolutionary declarations such as the declarations of 1776, 1789 or 1948 are sometimes very significant for professional jurists (at least for Supreme Court Judges in the US), but they are even more significant for philosophers and for the people, especially when it comes to social conflicts that are structural. Why?—Because they express a better, or at least presumably better, justified (or better interpreted) idea of freedom that seems to be more universal, more inclusive, more individualised and de-centred than all the

18

See B Moore, Injustice: The Social Bases of Obedience and Revolt (New York, Sharpe, 1978). See, only: J Habermas, Zur Rekonstruktion des Historischen Materialismus (Frankfurt aM, Suhrkamp Verlag, 1976); Habermas, Nachmetaphysisches Denken II (Frankfurt aM, Suhrkamp Verlag, 2012) 7–53; W Schluchter, Die Entwicklung des okzidentalen Rationalismus (Tübingen, Mohr, 1979); K Eder, ‘Collective Learning Processes and Social Evolution: Towards a Theory of Class Conflict in Modern Society’ (1983) Tidskrift för Rätssociologi 23–36; Eder, ‘Learning and the Evolution of Social Systems—An Epigenetic Perspective’ in M Schmid and FM Wuketits, Evolutionary Theory in Social Science (Dordrecht, D Reidel Publishing Company, 1987) 101–25; R Bellah, Religion in Human Evolution—From the Paleolithic to the Axial Age (Cambridge MA, Harvard University Press, 2011); Brunkhorst, n 5 above. 20 The German version is not a translation but a separate German version of the song. 19

402 Hauke Brunkhorst former ideas of freedom. Hegel called the historical sequence of these ideas and justifying discourses progress in the consciousness (or understanding) of freedom.21 Thus, constitutions are not only evolutionary but also revolutionary advances, and revolutionary advances such as human rights and democracy are due to a kind of evolutionary change that is not steered by the improvement of adaptation through natural and social selection. To be sure, they exist only because they are adapted: nothing that is not adapted, exists. To be adapted, modern constitutions must fulfil the functional requirements of structural coupling. But they are neither designed as improvements of adaptation nor can they be explained as improvements of adaptation. For the latter purpose, they emerge far too rapidly, like punctuational bursts in the evolution of living systems (biological evolution).22 Instead of improving adaptation, revolutionary advances constrain the morally-neutralised adaptive mechanisms of society normatively. And as normative constraints, they limit adaptation in a similar way as the construction plans (Baupläne) of animals limit the adaptation of living organisms to their environment. The ‘role of historical and structural constraints’ consists in ‘channelling directions of evolutionary change’.23 And we can add to this quotation from the biologist Steven Jay Gould that this is true also of the role of normative constraints in social evolution. The latter disclose new evolutionary paths. As results of successful normative learning, the constitutional normative constraints of systemic adaptation contain the emancipatory potential of a respective society.24 Under the never-ending selective pressure of the three selective mechanisms of modern society: — systemic (in particular, economic) imperatives; — dominating and dominated (material and ideal) class interests; and — hegemonic and counter-hegemonic mindsets, the emancipatory potential that is embodied in constitutional textbooks and legal practices ‘can be halted and inhibited. But it cannot be eliminated’.25 Because they are normative, the constraints of blind evolutionary adaptation can be violated, neglected, and/or derogated from again and again. The violation of a legal norm is the proof of its existence. But as long as they ‘will not be forgotten’ (Kant), they can ‘strike back’ (Friedrich Müller).26 This distinguishes revolutionary documents

21

GWF Hegel, Werke 12 (Frankfurt aM, Suhrkamp Verlag, 1970) 32. See SJ Gould, ‘Darwinian Fundamentalism’ (1997) 44 New York Review of Books 34–37; Gould and RC Lewontin, ‘The Spandrels of San Marco and the Panglossian Paradigm’, quoted from: www.aaas.org/spp/dser/03_Areas/evolution/perspectives/Gould_Lewontin_1979.shtml; SJ Gould, The Structure of Evolutionary Theory (Cambridge MA, Harvard University Press, 2002) 26. 23 Gould, The Structure of Evolutionary Theory, n 22 above, 26. 24 See Brunkhorst, n 5 above. 25 Somek, n 7 above, 8. 26 Kant, Streit der Fakultäten, Werke XI (Frankfurt aM, Suhrkamp Verlag, 1977) 361 (my trans of the German ‘vergessen sich nicht’). 22

How to Make it More Complicated Again 403 from the Dictatus Papae of 1075 from mere words, celebrations and chants.27 It is the emancipatory progress of revolutionary advances that made Kant’s ‘enthusiasm’ and ‘moral rapture’ vis-à-vis the French Revolution never disappear, not even at the height of Jacobean terror. Becoming normative constraints that channel evolutionary directions, the revolutionary advances of the Kantian mindset are no longer empty signifiers but (what Hegel called) existing notions.28 (4) So far, I am more or less in agreement with Koskenniemi. But now comes my disagreement with him and my partial agreement with Luhmann and the managerial mindset. The Kantian enthusiasm vis-à-vis the spark of the revolution that makes ‘men and things seem set in sparkling diamonds’ and ‘ecstasy … the order of the day’, is regularly followed by ‘a long Katzenjammer [hangover]’. What remains is a ‘sober reality’, managed by ‘its own true interpreters and spokesmen’: ‘the Says, Cousins, Royer-Collards, Benjamin Constants, and Guizots’29—managed in the aftermath of the French Revolution in the same way as in Europe since the fifties with the ‘Méthode Monnet’.30 In a long period of managerial incrementalism and gradual adaptation, society learned (after Napoleon’s final defeat as well as after the Treaty of Rome) ‘to assimilate the results of its storm-and-stress period soberly’. It needed heroism and costumes, the ‘conjuring up of the dead of world history’ to perform the normative learning process of revolutionary social classes.31 But the path-disclosing force of normative constraints also enabled new cognitive learning processes which corrected the revolutionary dreams. However, it is through gradual adaptation, incremental adjustment, muddling through and clever management that Dr Jekyll is needed to stabilise Mr Hyde’s high-flying plan of a just society.32 In a deal with the devil, he had to pay for stability with justice and democratic self-determination. Human emancipation was reduced first to political emancipation (Marx),33 then to the ironic emancipation of the political system of power from its societal embedment (Thornhill).34 Parliamentary rule

27 H Berman, Law and Revolution: The Formation of the Western Legal Tradition (Cambridge MA, Harvard University Press, 1983). 28 Hegel, Wissenschaft der Logik II (Hamburg, Meiner, 1975 [1934]) 424; see Hegel, Lectures on the History of Philosophy, quoted from: www.marxists.org/reference/archive/hegel/works/hp/hparistotle.htm. 29 Marx, n 9 above, 97, 101. 30 Jacques Delors, ‘Entwicklungsperspektiven der europäischen Gemeinschaft’ in Aus Politik und Zeitgeschichte B1/ (1993) 3–9, see also, K Möller, ‘Die Europäische Sozialunion’, Lexikonartikel, e-ms, Berlin 2013, im Erscheinen, on file with the author. 31 Marx, n 9 above, 101 32 J Habermas, Theorie des kommunikativen Handelns II (Frankfurt aM, Suhrkamp Verlag, 1981) 228; see Armin Nassehi, Der soziologische Diskurs der Moderne (Frankfurt aM, Suhrkamp Verlag, 2006) 126–27. 33 K Marx, ‘Zur Judenfrage’ in Marx-Engels I. Studienausgabe (Frankfurt aM, Fischer, 1966) 31–60. 34 See Chris Thornhill, A Sociology of Constitutions: Constitutions and State Legitimacy in HistoricalSociological Perspective (Cambridge, Cambridge University Press, 2011).

404 Hauke Brunkhorst became façade democracy (Habermas),35 and constitutional claims became kitsch and cliché (Koskenniemi).36 Nevertheless, the managerial mindset cannot be reduced to the evil genius of Mr Hyde—as in the Rouben Mamoulian film of 1941, or in Koskenniemi’s history of international law. The managerial mindset not only stabilises the Kantian constitutional mindset at the price of justice, it also realises and concretises Kantian constitutional justice and fairness, at least partially. In the language of systems theory, one can say that, during the process of managerial adaptation and the stabilisation of revolutionary advances, the difference between Dr Jekyll and Mr Hyde again had to be copied into the character of Dr Jekyll. Dr Jekyll cannot just get rid of the revolutionary established normative constraints of the Kantian constitutional mindset. He has to cope with them whether he wants to or not. They become effective as his very own existing contradiction (‘daseiender Widerspruch’).37 This existing contradiction urges Mr Hyde to cope with the Kantian normative constraints not just from the perspective of cognitive learning. From this perspective (which is the one side or the extremity of the contradiction), they appear only as learning blocks, as we have seen. But the normative constraints also urge Dr Jekyll to participate in a proceeding normative learning process (that is the other side or other extremity of the contradiction). Normative learning—and here I disagree again with Luhmann—does not end with the hangover after the revolutionary job has been done. In the same way as cognitive learning normative learning has ‘to assimilate the results of its storm-and-stress period soberly’,38 once they become effective normative constraints (hence normative constitutional law in the sense of Loewenstein), the revolutionary advances not only enable cognitive learning of the legal system, but also incremental and gradual normative learning of both the human individuals and social groups that are subject to public law and involved in the democratic process of public law formation. The pouvoir constituant that lies at the core of the Kantian constitutional mindset is present in all legal performances, and, hence, is ‘permanent’.39 The internalised contradiction between Dr Jekyll and Mr Hyde urges Mr Hyde to participate in an ongoing process of negative communication with his opponent, which triggers the rapid growth of variation … by communication that refutes or rejects communicative propositions … The refutation contradicts the expectation of acceptance. It contradicts the tacit

35 P Bofinger, J Habermas and J Nida-Rümelin, ‘Kurswechsel für Europa. Einspruch gegen die Fassadendemokratie’, Frankfurter Allgemeine Zeitung, 3 August 2012, available at: www.faz.net/aktuell/ feuilleton/debatten/europas-zukunft/kurswechsel-fuer-europa-einspruch-gegen-die-fassadendemokratie-11842820.html, last accessed 25 August 2012. 36 M Koskenniemi, ‘International Law in Europe: Between Tradition and Renewal’ (2005) 16 European Journal of International Law 113 et seq, at 122. 37 Hegel, n 28 above, 59. 38 Marx, n 9 above, 101. 39 See E-W Böckenförde, Die verfassungsgebende Gewalt des Volkes—Ein Grenzbegriff des Verfassungsrechts (Frankfurt aM, Metner, 1986).

How to Make it More Complicated Again 405 consent that everything continues, ‘as always’. All variation therefore is contradiction as disagreement, hence, not in the logical meaning of contradiction but in the originally dialogical meaning.40

However, the dialogical negations and contradictions are not only contributions to the rapid growth of variation that triggers evolutionary selection—they are, at the same time, no-positions of the Alter Ego which responds to the Ego’s claim of truth or normative rightness that is internal to his or her speech-act, and this response triggers a critical discourse of normative learning.41 Now, we must go beyond Koskenniemi’s Wittgensteinian use of Dr Jekyll’s and Mr Hyde’s reciprocal world-perspectives, which can only be changed by an arbitrary gestalt switch from one to the other. In contrast to Koskenniemi’s history of discursive raptures, the evolutionary combination of normative and adaptive learning, first, allows for a dialogical re-construction of the existing contradiction between the two evolutionary world-perspectives which, second, are internally related through a whole and holistic network of normatively-binding inferential operations.42 The difference between the revolutionary Kantian and the reformist managerial perspective now becomes less unbridgeable, and it no longer excludes Kantian reformism from the performance of managerial incrementalism. On the contrary, Kantian reformism proves to be one of its possible developmental tracks that both opposes and contradicts the reduction of democratic self-determination to mere economic adjustment to the imperatives of the markets.43

III. EVOLUTION AND CRISIS

In my third part, I will try to combine the Kantian mindset of the Finnish jurist Martti Koskenniemi with the managerial mindset of another Finnish jurist, Kaarlo Tuori. Tuori has suggested trying a highly plausible schema of a general and incremental development of a plurality of European constitutions.44 Both are

40 N Luhmann, Die Gesellschaft der Gesellschaft (Frankfurt aM, Suhrkamp Verlag, 1997) 461, my translation (German original: ‘Variation kommt … durch eine Kommunikationsinhalte ablehnende Kommunikation zustande … Die Ablehnung widerspricht der Annahmeerwartung oder auch einfach einer unterstellten Kontinuität des “so wie immer”. Alle Variation tritt mithin als Widerspruch auf—nicht im logischen, aber im ursprünglicheren dialogischen Sinn’.). See H Wimmer, Evolution der Politik. Von der Stammesgesellschaft zur modernen Demokratie (Vienna, WUV, 1996) 115. 41 On the constitutive role of the negating answer, see E Tugendhat, Traditional and Analytical Philosophy: Lectures on the Philosophy of Language, trans PA Gorner (Cambridge, Cambridge University Press, 1982) 190. 42 On the logic of inferential commitments, see P Lorenzen, Normative Logic and Ethics (Mannheim, Bibliographisches Institut, 1969); W Kamlah and P Lorenzen, Logische Propädeutik (Mannheim, Bibliographisches Institut, 1967); Brandom, n 6 above. 43 See C Lafont, ‘The Cunning of Law: Remarks on Hauke Brunkhorst’s Critical Theory of Legal Revolutions’, Flensburg-Workshop June 2013 (forthcoming in Law and Society 2014). 44 K Tuori, ‘Multi-Dimensionality of European Constitutionalism: The Many Constitutions of Europe’ in K Tuori and S Sankari (eds), The Many Constitutions of Europe (Farnham, Ashgate Publishing, 2010) 3–30.

406 Hauke Brunkhorst extreme, and rightly so. But the extremes can be integrated in a complementary and dialectical manner. Koskenniemi constructs a non-dialectical, unbridgeable, and, as I suppose, too fundamentalist opposition between the two mindsets. To get from one to other, its needs the gestalt switch from one closed linguistic universe to another one. In contrast, Tuori neglects and represses the action of the Kantian mindset within the managerial praxis, and, in particular, he ignores the fact that the Kantian constitutional mindset existed at the outset of the European unification process. The European Union was founded on the battlefields of the Second World War.45 It was founded by the Kantian constitutional mindset of peoples and social classes who emancipated themselves from fascist rule over Europe. The battles and struggles were fought in the name of comprehensive democratic and social selfdetermination. Liberating violence was transformed into the constituent power of a new foundation and the unification of Europe.46 It was the new foundation that replaced the classical Peace Treaty that was no longer possible after the European and Asian atrocities of the former Axis Powers. European unification did not begin with the Treaties of Paris and Rome in 1951 and 1957, and did not begin with the Méthode Monnet but with the new constitutions that all the founding members (France, Belgium, Italy, Luxemburg, the Netherlands and West Germany) had given themselves between 1944 and 1948.47 All the founding members had changed their political leaders and had replaced great parts of the former ruling classes with former resistance fighters or emigrants who had defected.48 All the constitutions of the founding members were new, or, in important aspects, had been revised and were more democratic than ever before, and all had eliminated the remains (or, after 1918, the newly invented structures) of corporatist political representation of society.49 The German

45 I use European Union as a notion that covers both the former European Communities and the present European Union. 46 See Somek, n 7 above. Even the present President of the European Commission, the Portuguese José Barroso, owes his job to the late effect of the emancipation of Europe from fascism. 47 Thornhill, n 34 above, 327–71; JE Fossum and AJ Menéndez, The Constitution’s Gift: A Constitutional Theory for a Democratic European Union (Lanham MD, Rowman & Littlefield, 2011); on the two basic ideas of a constitution (power-founding vs power-limiting), see H Brunkhorst, Solidarity: From Civic Friendship to a Global Legal Community (Cambridge MA, The MIT Press, 2005) 67 et seq; C Möllers, ‘The Politics of Law and the Law of Politics: Two Constitutional Traditions in Europe’ in EO Eriksen, JE Fossum and AJ Menéndez (eds), Developing a Constitution for Europe (London, Routledge, 2004) 131. 48 J Osterhammel and NP Petersson, Geschichte der Globalisierung (Munich, Beck, 2007) 85; E Hobsbawm, Das Zeitalter der Extreme. Weltgeschichte des 20. Jahrhunderts (Munich, Hanser, 1994) 185–87. This does not mean that strong continuities did not remain in all countries; in particular, in Germany, the Nazi-continuities of the élites were still strong but were silenced and displaced, strikingly described by Hermann Lübbe as ‘kommunikatives Beschweigen brauner Biographieanteile’); see H Lübbe, ‘Der Nationalsozialismus im politischen Bewußtsein der Gegenwart’ in M Broszat, U Dübber and W Hofer (eds), Deutschlands Weg in die Diktatur (Berlin, Siedler Verlag, 1985). 49 See D Jesch, Gesetz und Verwaltung. Eine Problemstudie zum Wandel des Gesetzmäßigkeitsprinzips (Tübingen, Mohr, 1961); Thornhill, n 34 above, 327–71.

How to Make it More Complicated Again 407 Grundgesetz even constituted a completely new state.50 All the constitutions of the founding members expressed a strong emphasis on human rights and had opened themselves (explicitly or implicitly) to international law.51 They were committed to the egalitarian project of mass-democracy and social welfare. Even the programmes of conservative parties advocated ideas of democratic socialism. In 1941 Altiero Spinelli, Ernesto Rossi and Eugenio Colorni, all three communists or socialist resistance fighters had—in the Manifesto di Ventotene52—outlined the project of a European federal social welfare state that preceded the later foundation of the national welfare states.53 Finally, and most crucial for the foundation of the European Union, all the founding members of the European Communities bound themselves by the constituent powers of their peoples to the project of European Unification. Only Luxemburg had no explicit commitment to Europe in its constitution, but its constitutional court decided that it was implicit. It is appropriate and fitting that John Fossum and Augustín Menéndez speak of a synthetic constitutional moment of Europe.54 In consequence, it can be concluded that, from the very outset, the European Union was not founded as an international association of states. On the contrary, it was founded as a community of peoples who legitimated the project of European unification directly and democratically through their combined, but still national, 50 See H Kelsen, ‘The Legal Status of Germany according to the Declaration of Berlin’ (1945) 39 American Journal of International Law 518–26. 51 See, on the German case, which was not exceptional: R Wahl, Verfassungsstaat, Europäisierung, Internationalisierung (Frankfurt aM, Suhrkamp Verlag, 2003); U Di Fabio, Das Recht offener Staaten. Grundlinien einer Staats- und Rechtstheorie (Tübingen, Mohr, 1998). 52 E Rossi and A Spinelli, Manifest von Ventotene, August 1941, available at: www.europarl.europa. eu/brussels/website/media/Basis/Geschichte/bis1950/Pdf/Manifest_Ventotene.pdf (27.8.2013); ‘The manifest is in accordance with a time-diagnosis that was accepted at that time by most of the political parties who opposed fascism’. Möller, n 29 above, my translation; see AJ Menéndez (ed), Altiero Spinelli: From Ventotene to the European Constitution (Oslo, Arena, 2007). 53 See Möller, n 30 above. ‘Lutz Leisering has generalized observations like that to demonstrate that international welfarism preceeded the development of the modern welfare state after World War II‘: Lutz Leisering, ‘Gibt es einen Weltwohlfahrtsstaat?’ in M Albert and R Stichweh (eds), Weltstaat und Weltstaatlichkeit (Wiesbaden, Verlag für Sozialwissenschaften, 2007) 185–205; see, also, U Davy, ‘The Rise of the Global “Social”. Origins and Transformations of Social Rights under UN Human Rights Law’ (2013) 3 International Journal of Social Quality (www.journals.berghahnbooks.com/ijsq), forthcoming. The development of the modern state always already was mediated by a co-evolution of cosmopolitan norms and sometimes powerful institutions (as the medieval church or the United Nations; see Thornhill, n 34 above; H Brunkhorst, ‘The Co-evolution of Cosmopolitan and National Statehood—Preliminary Theoretical Considerations on the Historical Evolution of Constitutionalism’ (2012) 47 Cooperation and Conflict 176–99; Brunkhorst, n 5 above. 54 Fossum and Menéndez, The Constitution’s Gift, n 47 above, 80 et seq, 175. The only instance of a constitution of a founding member that made no declaration about Europe, the Constitution of Luxemburg, is of itself a revealing case. In this case, the Luxemburg Conseil d’État decided in 1952 that the Constitution implicitly committed the representatives of the people to join the European Coal and Steel Community, and to strive for further European unification. It is argued that, even if the constitution of Luxemburg did not contain anything vaguely resembling a proto-European clause, the Conseil d’État constructed its fundamental law along very similar lines. When reviewing the constitutionality of the Treaty establishing the Coal and Steel Community, the Conseil affirmed that Luxembourg, not only could, but also should, renounce certain sovereign powers if the public good so required. See the Report on the 1952 judgment of the Conseil d’État.

408 Hauke Brunkhorst constitutional powers At the same time and with the same founding act, these peoples, acting in plural, constituted a single European citizenship. Therefore, from the very beginning, the Treaties were not just intergovernmental, but legal documents with a constitutional quality. However, what followed was the long Katzenjammer of gradual incrementalism and the Méthode Monnet. The Kantian mindset of emancipation from fascism was repressed by the rhetoric of peace, of reconciliation and anti-communism. The first stage of the constitutional evolution was triggered by the invention of the economic constitution of Europe, which consisted in the structural coupling of law and economics. German Ordo-liberals had already had ‘hijacked’ the idea of an economic constitution from the political left, from Hugo Sinzheimer and Franz Neumann, in the early 1930.55 In the treaty negotiations in 1957, the German Ordo-liberals—with strong backing from the conservative American government—took the opportunity to realise their old dream of a mere technical constitution without government or legislator.56 The economic constitution was centered in competition law, and presided over by the Court. If we look back from today, the beheading of the legislative power that once produced the French Revolution, corresponded exactly to the overlapping consensus between the German-Austrian Ordo-liberals of the Freiburg School and the successive Neoliberals of the Chicago School of Economics, between Friedrich von Hayek and Milton Friedman. In the words of Ernst-Joachim Mestmäcker: Die wichtigsten Aufgaben obliegen nicht der Legislative oder der Regierung, sondern der Rechtsprechung. [The most important powers in economic concerns should be reserved for the judiciary, and taken away from legislation and government.]

Seen in retrospect, and from the perspective of the observer, the programme of economic constitutionalisation appears as an immunisation of free market capitalism from democratic control in two giant steps: first, the Ordo-liberals took Europe, then the Neo-liberals took the rest of the world. First, the transnational constitution of Europe, then the transnational constitution of the WTO, were to be detached from their national political constitutions, which had to stay at home alone, spared of the great economic decisions of the world outside. In 1957, Dr Jekyll had won his first round against Mr Hyde. Retrospectively, the basic constitutional idea of the (objectively performed, not intended or planned) programme that the Ordo-liberals and the Neo-liberals are sharing, becomes evident. It is the idea of changing law from functioning as the immunity system of society into law that functions as the immunity system of transnational capitalism, triggering an auto-immune disease by stigmatising the rest of the societal body, and especially its legislative organs, as public enemy number

55 Tuori, n 44 above, 16. The hijacking was organised by: F Böhm, Wettbewerb und Monopolrecht, (Baden-Baden, Nomos Verlag, 2010) 1933. 56 See W Streeck, ‘Zum Verhältnis von sozialer Gerechtigkeit und Marktgerechtigkeit’ (unpublished e-manuscript of a Lecture, Verona 20 September 2012) 8.

How to Make it More Complicated Again 409 one. The immunity system of all stakeholders and their clients should become the immunity system of the few shareholders. It is here (by the way) that Luhmann’s fear of a loss of freedom through de-differentiation, and Habermas’ fear of a loss of freedom through the colonisation of the life-world, coincide. However, until the 1980s, the national social welfare regimes were strong enough to cope with the slowly emerging liberalisation machinery of ‘peaceful competitive struggle’ (Marx). A quick knock-out of Mr Hyde seemed impossible. But, from mid of the 1970s onwards, things began to change. The European constitution increasingly became the transnational constitution that it has become today, and the hegemony of the economic constitution became stronger and stronger, culminating in the introduction of the Euro, a currency without legislator nor government. Nevertheless, the ordo-liberal takeover was not without contestation, which was due to the same process of constitutional trans-nationalisation. Dr Jekyll had to cope with a copy of Mr Hyde within himself. Their relation resembled more an antagonistic Georg Herbert Meadian reciprocity of interactive perspectives and role-taking than a Wittgensteinian gestalt switch. First, the establishment of the rule-of-law constitution (or rights-constitution) during the second stage of European constitutionalisation, challenged the reduction of constitutionalisation to technique and technocracy.57 The growth of European norms and their corresponding legal conflicts urged European and national courts to construct, apply and implement European rights and the direct effect of European law, together with the corresponding European citizenship. At the end of this process, European and national law became one single, deeply interpenetration legal order.58 In systems-theoretical terms, the rule-of-law constitution can be defined as reflexive structural coupling of law and law, or, maybe better and more precisely, as reflexive structural coupling of law and rights.59 The Kantian point is actually that subjective rights can no longer be normatively neutralised by law that is technical, such as competition law. In order to implement European subjective rights for mere economic purposes of private autonomy requires—at least, counterfactually and anticipatorily—the construction of fully-fledged European citizenship. There is no private autonomy without public autonomy. The opposite view was the great illusion of classical liberalism.60 In a famous essay on Eros and the civilisation of European citizenship, Joseph Weiler once argued that ‘you could create rights and afford judicial remedies to slaves’ because ‘the ability to go to court to enjoy a right bestowed on you by the pleasure 57

Tuori speaks of a juridical constitution: Tuori, n 55 above, 3, 18. T Hitzel-Cassagnes, Entgrenzung des Verfassungsbegriffs. Eine institutionentheoretische Rekonstruktion (Baden-Baden, Nomos Verlag, 2012); see KJ Alter, ‘The European Court’s Political Power’ (1996) 19 West European Politics, 458; Alter, ‘Who are the “Masters of the Treaty”?’ (1998) 52 International Organization 121. 59 Tuori, n 55 above, 18. 60 See I Maus, Zur Aufklärung der Demokratietheorie (Frankfurt aM, Suhrkamp Verlag, 1992); J Habermas, Faktizität und Geltung (Frankfurt aM, Suhrkamp Verlag, 1997). 58

410 Hauke Brunkhorst of others’, and here Weiler means international agreements between states or governments, such as the European Union, in his opinion, ‘does not emancipate you, does not make you a citizen’.61 From a normative point of view, I believe, Weiler is wrong, even if there are a lot of empirical cases of rights-bearers who are denied full citizenship. He is wrong because, once I go to a public court, I must— whether I myself (or the respective ruling classes) want it or not—participate in the judicial ‘concretisation’ (Kelsen) of the respective legal norms, and this means that I must participate in the procedure of creating and changing law that has the legislative aspect that legal texts are transformed into legal norms which, in many cases, are new, and the transformation from text to norm is publicly arguable in any case of a judicial judgment.62 At every level of the (Merkl-Kelsian) normative hierarchy of steps (Stufenbau des Rechts), concretisation is in need of direct democratic legitimisation—in as far as it creates a new norm or modifies an old one. Thus, Christoph Möllers rightly speaks of individual legitimisation through legal actions that is part and parcel of the whole procedure of democratic legitimisation. Thus, the existing notion of European rights contradicts (as an ‘existing contradiction’) the status of slavery once the slave makes use of them (if he or she has any rights, such as Dred Scott had in Missouri). Therefore, the European Court in Van Gend en Loos rightly interpreted the Treaties as ‘agreement between the peoples of Europe that binds their governments and not simply as agreement between the governments that binds the peoples’.63 The construction of European citizenship by the Court must thus be derived from the synthetic constituent power of the peoples of Europe, and the Kantian mindset is back in. Once European rights and citizenship have been created, a single people can no longer quit membership on its own, out of its sovereign will. Not only must all other peoples have a say, but so too must the European citizens as a whole. If, for example, Denmark quits the Union, I, as a German and European citizen, lose my European rights in that country, which now even includes active citizenship’s rights such as voting for the Danish contingent of the European Parliament (if I live in Denmark). Consequently, today the Treaty of Lisbon allows the withdrawal of a nation but binds it to European law and a European legal procedure. Habermas has rightly called this a civilisation

61 JHH Weiler, ‘To be a European citizen-Eros and Civilization’ (1997) 4 Journal of European Public Policy 495–519, at 503. 62 See J von Bernstorff, ‘Kelsen und das Völkerrecht’ in H Brunkhorst and R Voigt (eds), RechtsStaat: Staat, internationale Gemeinschaft und Völkerrecht bei Hans Kelsen (Baden-Baden, Nomos Verlag, 2008) 181; F Müller, ‘Richterrecht’. Elemente einer Verfassungstheorie IV (Berlin, Duncker & Humblot, 1986) 13, 34, 38, 47 et seq, 88 et seq; Müller, Demokratie zwischen Staatsrecht und Weltrecht. Nationale, staatlose und globale Formen menschenrechtsgestützter Globalisierung. Elemente einer Verfassungstheorie VIII (Berlin, Duncker & Humblot, 2003) 52–53. 63 D Chalmers, G Davies and G Monti, European Union Law (Cambridge, Cambridge University Press, 2010), Kindle-edition: Pos 5677; See C Franzius, Recht und Politik in der transnationalen Konstellation (Berlin, Buch-Ms, 2012) 87 et seq; Franzius, ‘Besprechung von “Habermas, Die Verfassung Europas”’ (2013) 2 Der Staat 317–21, at 318; C Franzius and UK Preuß, Europäische Demokratie, Die Zukunft der europäischen Demokratie (Baden-Baden, Nomos Verlag, 2012).

How to Make it More Complicated Again 411 of state power by overcoming state-sovereignty and individualising popular sovereignty.64 It is not only the existing justice of the national state that is at stake once it comes to a transfer of sovereign rights from the national state to the European Union, but also the already existing justice of the European Union once it comes to a return of powers of the Union to the national state. Thus, it seems that the second round goes to Mr Hyde. The growing audience of European lawyers applauds. The two decisions of the Court of1963 (Van Gend en Loos) and 1964 (Costa) were emphatically described by the jurists as ‘the declaration of independence of Community law’.65 Maybe, this was a shade too early, because, as long as there was no fully-fledged political constitution of Europe, active citizenship remained both virtual and arbitrary. Individual, or rather private legitimisation without public legitimisation remains structurally incomplete at the level of the rule-of-law constitution. Round two is a draw, and the hegemony of the economic constitution prevails. But then comes the third round, with the impressive progress of European parliamentarisation.66 In the third stage of constitutionalisation, the political constitution couples law and politics structurally, and even the beginnings of a European social-welfare and security constitution—the fourth and fifth stages—are now observable.67 Again, Mr Hyde is contesting the hegemony of the economic constitution and its liberalisation machinery seriously. The Czech Constitutional Court in its judgment on the Treaty of Lisbon states that the European Union today forms a complete and gapless system of democratic legitimisation, and rightly so.68 It seems as if the third round goes to Mr Hyde. Unfortunately, just at the moment when the hard issues of the unequal distribution of wealth, the unequal living conditions and unequal life-chances come to the fore, the bodyguards of Dr Jekyll—the European Council, the German hegemon, and the hastily established troika—reach for their guns. The economic state of siege is declared. It is a technical knockout, Dr Jekyll is the winner, and the winner takes all. The austerity regime with constitutionalised debt breaks becomes the prerogative constitution of Europe.69 There are no longer alternatives to the austerity regime

64 J Habermas, Zur Verfassung Europas—Ein Essay (Frankfurt aM, Suhrkamp Verlag, 2011) 57. Idem, ‘The Crisis of the European Union in the Light of a Constitutionalization of International Law’ (2012) 23 European Journal of International Law 335–48. 65 Tuori, n 44 above, 3, 17. 66 See P Dann, ‘Looking through the Federal Lens: The Semi-Parliamentary Democracy of the EU’ (2002) 5 Jean-Monnet Working Paper; J Bast, ‘Europäische Gesetzgebung—Fünf Stationen in der Verfassungsentwicklung der EU’ in C Franzius, FC Meyer and J Neyer, Strukturfragen der Europäischen Union (Baden-Baden, Nomos Verlag, 2011) 173–80. 67 See Tuori, n 44 above; S Buckel, ‘“Welcome to Europe”—Juridische Auseinandersetzungen um das Staatsprojekt Europa’ (Frankfurt, Habilitation, 2013). 68 I Ley, ‘Brünn betreibt die Parlamentarisierung des Primärrechts. Anmerkungen zum zweiten Urteil des tschechischen Verfassungsgerichtshofs zum Vertrag von Lissabon vom 3.11.2009’ (2010) 65 Juristen-Zeitung 170. 69 See W Streek and D Mertens, ‘Politik im Defizit. Austerität als fiskalpolitisches Regime’, MPIfG Discussion Papers 10/5, Cologne (2010).

412 Hauke Brunkhorst on the democratic agenda. Europe now resembles the situation in a sketch of Monty Python: Michael Palin: ‘Here are some really exciting games you can play this Christmas. First, from Terry, the A and B game’. Terry Jones: ‘The guests are divided into two teams, A and B, and B are the winners. You can make it more complicated as you want’.70

The problem of democracy today is how to make it more complicated again.

70

A scene from Do not Adjust your Set, BBC 1967–69, precursor to Monty Python’s Flying Circus.

Index accountability, 36 administrative agents, 366, 381 Commission and EP, 217 EP as co-legislator, 218, 225 democratic accountability, 217–18, 221, 225, 362 deliberative supranationalism, 248–49, 382 executive dominance, 217, 219–20, 225 experimentalism, 366–67, 369–72, 374, 381–82 integration-by-coordination, 367 national governments, 217–18, 221 German Parliament, 230 adaptation to the European market, 112–13, 373 civic responsibility, 391–92 co-operation between employers and unions, 391 de-territorialisation of social solidarity, 392 growth of public sector, 391 lack of productivity, 391 modern constitutions, 402–04 wages, 112–13 Administrative Procedure Act (US), 87–88 Agamben, G, 58–59 agencies, 203, 390–91 conflict mediation, 317–33 deliberation and, 290–91 executive power, 206–07 experimental constitutionalism, 369 independence, 239 managerial mindset, 398–99 security agencies policy-making, 85–86 suspicion of, 239 see also International Telecommunication Union (ITU) Aisbett, E, 64 Ålands Vindkraft case, 174–76, 180 Alvarez, J, 58, 59 American administrative law, 86–89, 91, 93 emergency legislation, 89 Amsterdam Treaty, 182 Agreement on Social Policy, 105 Stability and Growth Pact, 111 social policy, 182–83 architectures of co-operation: conflicts of law, 359, 364, 366 constitutional legitimacy, 364, 365, 372–75, 376–77

experimentalism, 369, 378, 381 transnational networks and accountability, 372, 381 see also co-operation Arendt, H: enlarged mentality, 69 Argentina: economic crisis, 52–54, 66–67 international investment law and, 47–50 law and lawyers, 52–54 investment disputes, 54–58 regime shift, 52–54 audi alteram partem, 50, 68–69 austerity measures, 75, 125–26 debt and, 135–37 debt re-structuring, 131 parliamentary approval, 85 threat to integration, 31 Authorization for the Use of Military Force (AUMF), 86–87 Ballmann, A, 285 Basel Committee on Banking Supervision (BCBS): transnational governance arrangements, 2 Beck, U: risk regulation, 294 behavioural economics, 237–38, 240–42 Benhabib, S, 69 bilateral investment treaties, 78 democratic theory and, 59–62 international investment law, 50, 53–54 US-Argentina, 54–55 CMS Gas Transmission Company, 54 exceptions clauses, 55–56 Block, F: embeddedness, 194–95 Böckenförde, E-W, 30 Bretton Woods system, 7, 11–13 embedded liberalism, 18 market-negating regulation, 18–19 Bryan, D, 12 Cassis de Dijon case, 109, 159, 161 Cavell, S, 387 central banking, 13–17 see also European Central Bank (ECB); Germany Charter of Shareholder Rights, 143–44 Chatterjee, P, 62

414 Index Chevron USA Inc v Natural Resources Defense Council Inc, 87–88 Chicago School of Economics, 28, 408 CMS v Argentina, 49 co-operation, 290 GMO regulation, 301–02, 310–12 legitimacy and, 294 telecommunications regulation, 318, 323–24, 330–31 see also architectures of co-operation Codex Alimentarius, 337, 352–53 falsificationist approach, 351 international standardisation, 349–53 risk assessment: risk management distinguished, 350–51 trade liberalisation v protection of consumers, 351–52 collective bargaining systems, 101–02, 103, 110, 113–15, 121, 125 Article 28 EUCFR, 102, 112, 117–20 Community Charter, 104 decentralisation, 115–17, 128 deregulation, 115 ECHR and, 119 favourability clause, 115–16 reform: Greece, 115–16 threats to, 133 collective labour relations, 101–02, 121 collective bargaining systems: deregulation, 115–17 fair pay, 107 wage competition, 112 free movement of goods, 109 harmonisation of working conditions, 107–08 impact of Euro-crisis policy, 112–15 Internal Market programme, 109–12 stability provisions, 102 see also collective bargaining systems comitology, 384–85 advisory procedures, 279 appeal committee, 280–81 Article 290 TFEU, 273–77 Article 291 TFEU, 277–81 background, 271–72 control, 285 delegated acts, 273–77, 291 deliberative supranationalism, 286–91 implementing acts and, 279 inter-governmental bargaining, 285–86 New Comitology Regulation (EU) No 182/2011: impact on EP and Council, 280 old comitology practice, 278–79, 280 register of proceedings, 281 simplification, 278 Committee of Permanent Representatives (COREPER), 215–16

commodification, 5, 9–11, 193–95 commercial debt, 9 commodification of money, 16, 19 commodification of risk, 12 fictitious commodification, 5, 7, 10, 19, 193 quasi-commodification, 10 real commodification, 10 societal objectives, 193 telecommunication services, 325 commodity theories of money, 6–8, 10, 11 Community Charter of the Fundamental Social Rights of Workers, 104, 109, 118 constitutionalisation of social rights, 105 competition, 127–28, 132–33, 178–79, 233, 242 collective labour relations, 109–12 competition policy, 252–53 electricity markets, 158–59 free trade and, 190, 192 German energy promotion scheme, 162–64 competitiveness, 165–66 Internal Market programme, 109 Lamfalussy and, 232 managerial mindset and, 398 public interest objectives, 196 Solvency II Directive, 234 subsidies law, 160 telecommunications regulation, 329, 330 transnational wage competition, 109, 111–12, 125 see also regulation conditionality, 34–35, 40, 117, 229, 375–76 conflicts-law constitutionalism (CLC), 1–2, 3, 26, 157, 361, 383–86 challenges, 77–79 compensatory constitutionalism, 71, 78 crisis, 32–35 deliberative supranationalism, 248–49, 267–68, 294, 372, 377–78 ‘demoi-cracy’ and, 26, 37–38 embeddedness, 181–82 ECB monetary policy and, 245–47 European Semester, 41–42 law-politics relationship, 39–40 constitutional guardianship, 43–46 European Parliament and national parliaments, 40–42, 393–95 social policy, 42–43 mutual recognition and market freedoms, 363–65 welfare states, 384 constitutional law, 395 collective bargaining, 121 evolution, 400–05 constraints, 402 Méthode Monnet, 403, 406, 408 mindsets, 398–400, 404 normative constitutional law, 404

Index 415 constitutionalisation, 410–12 emergency governance and, 92–96 European Union, 94 experimentalism, 371–75 parliamentarisation, 411 transnational governance bodies, 94–95 Copenhagen School, 79 corporate social responsibility, 347–48 Council of Ministers, 207, 213–14 access to documents, 224 accountability, 217–18 autonomous and quasi-autonomous committees, 216–17 Committee of Permanent Representatives (COREPER), 215, 216 GMO and, 296 impact of political union, 216 role, 214, 216 decision-making, 216–17 intergovernmental negotiations, 215 legislative role, 214–15 operational role, 216 credit theories of money, 6–8 commodification of money, 9 crisis law, 39, 74, 123 Dassonville case, 109 debt: austerity and, 135–37 debt re-structuring, 131 commercial debt, 9 sovereign debt, 386–87 budgetary autonomy, 75 emergency politics, 74–77 credit facilities, 74–75 geographical political differences, 393–94 GIIPS countries, 75 see also austerity measures delegated acts, 273–77, 291 application of Article 290 TFEU, 282–84 application of Article 291 TFEU, 282–84 comitology procedures, 275, 291 Common Understanding on Delegated Acts, 281–82 control mechanisms, 274–75 EP application, 283–84 implementing acts distinguished, 274, 284–85 delegation, 76, 89–90, 212, 252, 272 EU competences, 239–40 monetary policy, 253, 268 public wellbeing, 228 see also comitology; delegated acts deliberative supranationalism, 32, 40–41, 71, 80, 196, 198, 245–47, 267–68 accountability, 248–49, 382 CLC and, 248–49, 267–68, 294, 372, 377–78

comitology, 286–91 old comitology practice, 278–79, 280 ECB, 253–54 impact of inter-governmental conflict, 255 re-distributive policies, 251–52 regulation and, 252–53 Delors, J, 28, 109 democratic constitutionalism, 366–67, 370, 373 EU failure, 375 experimentalism versus, 368–69 post-national constellation and, 375–78, 381 ‘demoi-cracy’, 26 conflicts-law constitutionalism and, 37–38 Desbordes, R, 64 Descombes, V, 387 diagonal conflicts, 2, 46, 384–85 Draghi, M, 76, 263, 264, 266 Durkheim, E, 355, 401 Ebner, A, 194–95 ECOFIN, 212–13, 223, 267 deliberative intergovernmentalism, 260, 264 EFSF, 256 ESM, 258–60 effet utile, 385 embeddedness, 174, 181–82, 192–98 background, 182–83 commodification of societal objectives, 193 governance structure, as a, 181–82, 195–96 ‘independent’ central banking, 13–17 Polanyian concept, 194–95 social embeddedness, 13–17, 37, 41, 325 ‘Emergency Europe’, 25–26, 74, 80 emergency governance: Europe, 71–80 US, 89–92, 96–97 constitutionalisation and, 92–96 exceptionalism, 91 legislation, 89–90 presidential powers, 92–93 energy policy, 158–59, 162 conflicts-law approach, 157 energy-intensive enterprises, 169–70 free movement of goods, 161–62, 170–74 developments, 174–76 German promotion scheme, 162–64, 180 competitiveness, 165–66 consequences, 165–66 external market effects, 165 market liberalism, 174–79 national promotion schemes, 159–60, 179 Germany, 162–64 Sweden, 163–64 operating aid schemes, 177 political sensitivity, 172–73 subsidies law, 160–61, 167 applicability, 166 developments, 176–78

416 Index freedom of movement versus, 166 interference with competitiveness, 166–67 renewable energies, 168 epistemic communities, 290, 374–75, 378 Epstein, D, 285 equity markets, 145, 148, 152–56 ESM judgment, 41, 44–45 Essent Belgium case, 174–76 EU Charter of Fundamental Rights (EUCFR), 101 Right of Collective Bargaining and Action (Article 28), 112, 117–20, 121 EU Solvency II Directive, 234–36 euro crisis: background, 247–48 bargaining v deliberation, 260–61 competitiveness, 112–15 deliberative supranationalism, 248–53 ECB empowerment, 261–64 excessive macro-economic imbalances, 114–15 impact on national politics, 393–95 management: geographical differences, 393–95 labour market reform, 113–14 limited role of national parliaments, 85 responsive measures, 84–85 rescue funds, 114 securitisation, 85 sovereign debt and, 18 wage competition 112–13 Euro Plus Pact, 42, 212 Euro-scepticism, 82, 110, 387 European Central Bank (ECB), 13, 17, 76, 101, 267, 394 austerity measures, 125, 135 CLC and, 245–47, 267–68 constraints: legal constraints, 266–67 national ideological divisions, 265–66 Maastricht Treaty prohibitions, 266–67 deliberative supranationalism, 253–54 Longer-term Re-financing Operations (LTROs), 261, 262–63, 266 Outright Monetary Transactions programme (OMT), 76, 85, 261, 263–64, 265 Securities Market Programme (SMP), 261–62 standard interest rate policy, 261 supervision of private banking market, 238–39 see also Germany European Commission, 83–84 comitology, 290–91 delegated acts and, 273–77 delegation and implementing powers, 271–72 European Food Safety Authority (EFSA), 297 GMO authorisations, 297–98

national promotion schemes, 164, 168 subsidies law, 176 SSM, 211 European Convention on Human Rights (ECHR), 119–21 European Council, 40, 101 access to documents, 224 debt crisis and, 210–11, 264–65 executive powers, 208 structure, 208–10 summit meetings, 210 European Court of Human Rights (ECtHR), 60–61, 388 EUCFR and, 119–20 European Court of Justice (CJEU), 39, 44–45, 75, 120 direct investments, 147–49 EUCFR, 117–18 market integration, 108–09, 120 mutual recognition and market freedoms, 362 portfolio investments, 146 shareholder primacy, 143–45, 156 case law, 145–46 financialism, 150–56 golden shares, 143–45 social rights, 103, 105 Treaty modifications and, 229 European Economic Community (EEC), 214 social policy, 103 European economic constitution, 27–30, 145, 408–09 European Financial Stability Facility (EFSF), 74, 212–13 establishment, 256, 261 Ireland and, 257–58 replacement with ESM, 258–60 European Food Safety Authority (EFSA), 297, 300–01 GMO risk assessments, 302–09 European Monetary Union (EMU), 2, 74, 230 de-politicisation, 257 establishment, 16, 25, 29–30, 38 internal market objectives, 42 social dimension, 43 European Parliament, 81, 217, 394, 410–11 co-legislator, 217–18, 221, 271 comitology, 309 conflicts-law constitutionalism, 40–42 delegation of legislative powers, 273, 275 national parliaments and, 40–42, 217–19, 393–95 relationship with Commission, 217–18 relationship with Council, 213–15 suspicion of agencies, 239 European Securities and Markets Authority (ESMA): emergency intervention powers, 239–40 European Social Charter, 118–19, 121

Index 417 European social model, 42–43, 107, 185 European Stability Mechanism (ESM), 74, 117, 212, 227, 229 establishment, 258–60 European System of Financial Supervision (ESFS), 2, 74–75 European Supervisory Authorities (ESAs), 231 European Systemic Risk Board (ESRB), 231, 238 National Supervisory Authorities (NSAs), 231 security of financial markets, 232 European Union: austerity measures, 125 bargaining, 250 co-operation, 359–60 community of peoples v international association of states, 407–08 delegated acts, 273–74 deliberation, 249–50 embeddedness, 181–82, 192–97 governance structures, 181, 188–89 embeddedness, 181–82, 195–96 legal pluralism, 359–60 marketisation of societal objectives, 187 national budgets and, 204 non-economic interests, 189–92 social policy, 184–89 values, objectives and competences, 182 Eurozone, 72, 83, 210–12 consequences of Euro-crisis policy, 112–14 constraints of monetary union, 131 impact of national fiscal policies, 33–34, 75–77 political stalemate, 255–61 empowerment of ECB, 261, 263, 264–67 Everson, M, 67–68, 79 Excessive Imbalances Procedure (EIP), 77 excessive macro-economic imbalances, 114–16 executive dominance, 83–84, 203–06 accountability, 217, 219–20, 225 courts’ role, 225–26 agencies, 206–07 Council of Ministers, 207, 214–17 terrorism and sanctions, 207–08 democratic accountability, 217 European Council, 208–13 executive informality, 223–25 executive secrecy, 220–23 international relations negotiations, 222 fragmentation of EU institutions, 206–08 national parliaments, 217–20, 226 deliberation, 223 transparency, 219 Experimental Constitutionalism, 378–82 deliberation, 378–79 direct participation, 379

law-making process, 380 proceduralisation, 379–80 experimentalism, 365, 366–67 accountability, 381–82 horizontal accountabilities, 369–70, 371–72 vertical accountabilities, 370–71, 372, 374 background, 368 constitutionalisation, 371–75 New Governance, 365 reflexive law, 366 self-regulation, 366 technocratic governance, 367 variants, 373 Fair Labor Standards Act (US), 132 false commonalities, 35–36 financial derivatives: commodity money, as, 12 connectivities of capital, 11–12 financialisation, 4, 7–8, 11–14, 18, 151–52 Fiscal Compact, 33, 212 fiscal consolidation, see austerity measures Fischer-Lescano, A, 75 Franchino, F, 285 free movement of capital, 143–45, 146 free movement of goods, 159, 161–62, 180 certificate systems, 174–75 current developments, 174–76 electricity market, 161–63 national promotion schemes, 170–74, 176 subsidies law, 160–61, 162–63, 166 Friedman, M, 28, 150, 408 Friedmann, W, 397 fundamental rights, 92, 101–05, 118–20 weakening, 85–86 see also collective bargaining systems; EU Charter for Fundamental Rights genetically modified organism (GMO) regulation: authorisation procedure, 300–01 comitology, 306–09 background, 295–98 criticisms, 297 deliberation and risk governances, 309–13 EU legal framework, 298–301 governance regime, as a, 311–12 politicisation, 296 practice, 301–02 comitology, 306–09 GMO risk assessments, 302–06 reform, 298–309 responsibility, 297–98 shared responsibility, 299 Germany: accountability for integration, 230 central bank, 14–16

418 Index collective labour relations, 112, 125, 391–92 macro-economic adjustments, 113 democratic constitutionalism, 368 EFSF amendment, 257–59 energy policy, 157–80 national promotion system, 162–64 ESB capital, 265–67 internal wage devaluation, 136 OMT, 76–77, 94, 265 ordo-liberalism, 408 protection of the Constitution, 40–41, 44–45 ratification of Maastricht Treaty and monetary union, 30 GIIPS countries, 247–48 collective bargaining systems: deregulation, 115–17 dissent, 230 impact of Greek bail-out, 255–57, 258 Longer-term Re-financing Operations (LTROs), 261, 262–63 reform targets, 116–17 Gill, S, 54 Gilson, R, 153 global administrative law, 62, 91 global exceptionalism, 71–72 CLC and, 77–80 emergency politics and, 72–77 gold-exchange standard, see Bretton Woods system Gordon, J, 153 Graeber, D, 7, 9, 11 Greece: collective bargaining systems: deregulation, 115–17 financial crisis, 255–61 impact, 130 labour market reforms, 126–27 reform targets, 116–17 see also GIIPS countries Greenwood, R, 154 Grimm, D, 368–69 Habermas, J, 2, 368–69, 379–80, 401, 410–11 citizenship, 37–38 executive federalism, 84, 205, 376 facticity and validity, 2–3, 4 social integration, 3 systems integration, 3 Hamilton, A, 92 Hampshire, S, 68–69 Hansmann, H, 153 harmonisation, 33, 389 European integration, 103–04 mutual recognition, 360–65 social policy, 103–04, 108–09 Solvency II, 236 see also mutual recognition Harvey, D, 367–68 Hirsch, F, 187–88

Hoppmann, E, 27–28 horizontal conflicts, 2, 45–46, 80, 232, 274 accountability, 369–71, 374, 381–82 income inequality, 129, 131, 137–38 information and communication technologies (ICT): regulation, 317–18 see also International Telecommunication Union (ITU) Ingham, G, 7–8 integration: collective labour relations, 102 health and safety, 103 integration-by-law, 26–31, 367, 381, 395 ordo-liberalism, 27 social progress, 103–07 solidarity, 182–83 sustainability, 25, 182–84 see also experimentalism; New Governance interest, 9–11 internal market, 183–84 expansion, 111 Posted Workers Directive, 111–12 Services Directive, 112 solidarity, 105, 183 sustainable development, 183 international gold standard, 11–12 international investment law, 47–50 aim, 48 bilateral investment treaties, 50, 53–54 crisis management, 48–49 democratic theory, 59–62 defects, 63–67 neoliberalism, 50–52 ‘normality, 48–49 see also Argentina International Law Commission (ILC), 56–57 International Monetary Fund (IMF), 101 austerity measures, 125, 136 labour market reform, 128–29 international organisations (IO) emergency governance, 72–73, 80 international standardisation: Codex Alimentarius, 350–53 see also International Telecommunication Union (ITU) International Telecommunication Union (ITU), 317–18 conflict resolution, 332–33 co-operation, 330–32 national authorities, 331 World Standards Cooperation (WSC), 330 development, 322–23 dis-embedding movement, 325–26 establishment, 318 Mexico Telecom case, 328, 329–30 reform, 330–32

Index 419 role, 319–20 Telecommunications Standardisation Sector (ITU-T), 320–22, 323–24 accounting rates system, 326–28 impact of economic liberalisation, 325, 326–37 impact of technological development, 325, 337 technical and non-technical standards, 325 WTO/GATS and, 327–38 investments: direct investments, 147–49 portfolio investments, 146 shareholder engagement, 148–49 stewardship, 149 voting rights, 149 Ireland: economic reform, 133–34 EFSF bailout, 257–58 impact of financial crisis, 130 labour market reforms, 127 James and Others v UK, 60, 61 Jessop, B, 10 deficit hysteria, 18 Joerges, C, 4–6, 67–68, 81, 368–69 comitology, 291 deliberative supranationalism, 286–87, 290, 372 conflicts-law approach, 4, 32–35, 311, 385 challenges to, 77–78 demoi-cracy and, 37–38 democratic constitutionalism, 375–77 economic sociology, 3–4 false commonalities, 35–36 integration-by-law, 26–31 law-politics relationship, 39–46 monetary union, 4–5 mutual recognition and market freedoms, 361–62, 363–64 ordoliberal monetarism, 6 post-national law, 67 risk management, 293–94 states and markets, 6–7 supranationalism, 71–72, 78, 81 unity in diversity, 37, 82–83, 377 multi-level governance, 359–60 judiciary, 40, 45–46, 91 austerity measures and, 43–44 judicial scrutiny, 87–88 Kantian mindset: constitutional revolution, 398 definition, 398 European citizenship, 410–12 foundation of the EU, 406 emancipation from fascism and, 408 federal social welfare state, 407

human rights, 407 international law, 407 law and democracy, 398 managerial mindset distinguished, 397, 398 subjective rights, 409 Kay, J, 148, 154 Kelsen, H, 397, 410 Khamsi, K, 59 Koboldt, C, 285 Koskenniemi, M, 376, 397 Kantian v managerial mindsets, 397–405, 405–06 Kraakman, R, 153 Kumm, M, 81 labour law, 110, 132–33, 139–40, 364 realignment, 134 reform, 123–25, 129, 133–34 social progress, 103–05 labour market: crisis, 125–29 flexibility, 128 impact of financial crisis: living standards, 130 unemployment, 130–31 reform, 133 conditionality, 123–24 crisis interventions, 123–24 impact on work force, 126–27 regulation, 124–29 subordination of objectives, 124 Lamfalussy process, 231–33, 238, 240 Lapavitsas, C, 8, 10, 12–13 euro, 17 independent central banking, 17 market-conforming and market-negating regulation, 18 Lauterpacht, H, 397 Laval case, 42, 118, 186, 363–64 Leaman, J, 13, 15 embeddedness, 16–17 Lee, B, 11 Lehman Brothers, 247 Leibfried, S, 107 LiPuma, E, 11 Lisbon Treaty, 182–83, 410 agencies, 239–40 democratic legitimisation, 411 establishment of internal market, 183 fundamental rights, 105, 118 internal market, 183–84 reforms, 216–18 delegation, 238 social policy, 105, 181 solidarity, 105, 183 sustainable development, 183 Loewen tribunal, 60

420 Index Lowi, T, 251 Luhmann, N, 399–400, 403, 404 Maastricht Treaty, 182 Agreement on Social Policy, 104, 109 ECB role defined, 254, 266 EMU, 17, 26, 29–31 establishment, 25, 110 impact on Council of Ministers, 216 integration, 28–31 political union, 216 Protocol on Social Policy, 104, 110 social policy, 104, 106 Stability Pact, 29–30 treaty structure, 182 Madison, J, 92 Maduro, MP, 35, 81 Mair, P, 205 Majone, G, 16, 185 managerial mindset, 399–400 definition, 398 Kantian mindset distinguished, 397 law and economics, 398 NPM, 399 technocracy, 399 Marbury v Madison, 87 margin of appreciation, 59, 61 market fundamentalism, 128 market-negating regulation, 18–19 Meroni doctrine, 239, 240 Mestmäcker, E-J, 27, 408 ‘méthode monnaie’ monetary integration, 4–6 méthode Monnet, 403, 408 Mexico Telecom case, 328, 329–30 mindsets, see Kantian mindset; managerial mindset monetary policy, 4–6, 30–31 impact on labour markets, 130–34 inflation control, 126 negative effects, 125–29, 132 price stability, 126 quantitative easing, 131–32 relationship with social policy 123–25 subordination of labour market concerns, 126 wage devaluation, 131, 136 Monti, G, 182, 399 Morgenthau, H, 397 mutual recognition: co-ordination of legal difference, 360–65 market freedoms and, 361–62 integration-by-law, 367 see also harmonisation National Labour Relations Act (US), 132 national preference model, 64 neoliberalism, 128, 408–09

New Governance, 359–60 epistemic communities, 374–75 experimentalism, 365 integration, 381 New Public Management (NPM), 189 Neyer, J: comitology: deliberative supranationalism, 286–87, 290 ‘no bail-out’ provision, 29, 74–75, 255 ‘normative learning’, 401–05 norms, 409–10 application of general norms, 388–90 dictum of necessity, 80 facts and, 2–4 ‘instituting power’, 386–87 institutions and, 391 social norms, 386–87 O’Halloran, S, 285 Obinger, H, 107 Oevermann, U, 336–37, 338, 349–50, 354 Omnibus Directives, 240 Open Method of Co-ordination (OMC), 42, 128, 366 transnational networks, 372–73 ordo-liberalism, 6, 27, 408–09 classical ordo-liberalism, 27 Keynesian macro-economics versus, 27 Ordnungspolitik, 27–28 Organisation for Economic Cooperation and Development (OECD): austerity measures, 135 inequality, 137–38 labour market reforms, 128–29, 138, 189 Outright Monetary Transactions programme (OMT), 76–77, 85, 261–65 parliamentarisation, 411–12 Peters, A, 71 Piketty, T, 137 Polanyi, K, 3–4 central banking, 13–14, 16 embeddedness, 181–82, 192–97 ‘fictitious commodities’, 5, 7, 10, 19, 193 self-regulation, 13–14 Pollack, MA, 285, 296–98 Popper, K, 350 Preuß, UK, 33 PreussenElektra case, 160, 162, 164 subsidies law, 160–61 free movement of goods, 161–62, 170–71, 175 Pringle case, 75, 117, 215, 229 private credit money, 9, 10, 17–18 private governance, 347–48 professionalisierungsbedürftig, 336, 354 environmental auditing, 337, 345–49 legal consulting, 337, 342–45

Index 421 legal reform, 337, 342–45 scientific risk assessment, 337 international standard-setting, 349–53 professionalisation: bureaucratisation distinguished, 356 commercialisation distinguished, 356 global governance and, 335–38, 340–41 reflective global governance, 353–56 good governance, 355–56 institution-building, 338–42 macro-sociological professionalisation, 338–39 micro-sociological professionalisation, 338–39 reflective governance, 355–56 risk assessment: risk management distinguished, 350–51 smart governance, 355–56 proportionality, 44, 56, 60–61, 66 Protocol on Social Policy, 104 employment termination protection, 104 exclusions, 104 health and safety, 104 minimum standards, 104–05 working conditions, 104 Prudential Regulatory Authority (PRA), 234–37 public wellbeing: impact of debt crises, 227 Lamfalussy and, 232–33 see also social policy Puetter, U, 223–24 Rafferty, M, 12 Rauh, C, 81–82 reflective global governance, 353–56 regulation: deliberative supranationism, 252–53 discretionary supervision, 237–42 ESFS, 231–32, 238–39 interventionalist supervision: EU Solvency II Directive, 234, 236 PRA, 234–37 Lamfalussy, 232–33 SSM, 231–32 telecommunications, 374–75 see also genetically modified organisms regulation; International Telecommunication Union Reichsbank: history: Bank deutscher Länder, 14–15 Bundesbank, 15–16 Reinhart, C, 135 rescue funds, 114, 256, 259–60, 262 Rhodes, M, 368 risk: uncertainty distinguished, 233–34

risk regulation, 293–95 European risk governance, 309–13 GMO regulation, 295–98 reform, 298–309 Rödl, F, 81 Rogoff, K, 135 Rome Treaty, 182 social policy, 103 Sabel, C: experimentalism, 365, 366 New Governance, 365 New Governance, 359–60, 365 Saez, E, 137 Sandel, MJ, 187 Sangiovanni, A, 182 Scharfstein, D, 154 Scharpf, F, 42, 368–69 Schmidtchen, D, 285 Schmitt, C, 34, 58, 397 Schneiderman, D, 78–79 Schön, D, 335, 338, 353 Sciulli, D, 337, 353 securitisation, 79–80, 84–91, 96–97 security agencies: policy-making, 85–86 Shaffer, G, 296–98 shareholder primacy, 150–56 shareholders: buybacks, 155 direct investments, 147–49 pay-outs, 155 portfolio investments, 146 shareholder engagement, 148–49 stewardship, 149 voting rights, 149 see also shareholder primacy Simon, W, 368 Single European Act 1987, 103, 109 Single Supervisory Mechanism (SSM), 204–05, 211, 231–32 Skinner, Q: universal reason, 68 Slaughter, A-M, 367 social embeddedness, 13–17, 37, 41, 325 social policy, 41–42, 101–02, 120–21 analysis, 106–07 collective bargaining systems, 115–17 development, 103–05 EUCFR, 117–20 failure of single currency, 392–93 harmonisation, 389–90 ‘instituting power’, 386–87 labour relations, 107–12 consequences of euro-crisis policy, 112–15 relationship with market policy, 123–25 social norms ‘instituting power’, 386–87

422 Index subordination, 124 sustainability, 182–83 see also EU governance structures; public wellbeing; solidarity Social Security Act (US), 132 societal politicisation, 82 solidarity, 37–38, 105, 125, 182–83, 256, 268, 363, 376 social solidarity, 228, 392 Somek, A, 48, 363–64 sovereign debt crisis, 386–87 emergency politics, 74–77 geographical political differences, 393–94 Stability and Growth Pact, 34, 111 constraints inflicted by, 125 Steunenberg, B, 285 stock markets, 152–56 Streeck, W, 106, 140 subsidies law, 160–61, 167 applicability, 166 freedom of movement versus, 166 interference with competitiveness, 166–67 renewable energies, 168 Suez, 64–65 Sum, N-L, 13 deficit hysteria, 18 Sunstein, C, 86–87 supervision, see Basel Committee on Banking Supervision (BCBS); European System of Financial Supervision (ESFS); regulation supranationalism, see deliberative supranationalism Szájer, J, 282 Taylor, C: necessary repertory, 389–90 technocratic governance, 227–30, 242–43, 312 agencies, 206 austerity policies and, 135 ECB, 261–64 experimentalism, 367, 371 GMO regulation, 301–09 labour market policy, 128–29 post-crisis market utility, 231 discretionary supervision, 237–42 risk and uncertainty, 232–37 professionalisation versus, 353–55 rule of law and, 229 standardisation, 349 telecommunications: regulation, 374–75 see also International Telecommunication Union (ITU) theories of money, 6–8 credit, 7–8 fictitious commodity, 7

primordial debt, 8 virtual money, 7 Théret, B, 19 primordial debt, 8 Touri, K, 405–06 trade barriers, 183–84 Services Directive, 112 see also internal market transfer union, 393–94 transnational networks, 367–68, 372 OMC, 372–73 Treaty on Stability, Coordination and Governance, 33, 229 Treaty on the Functioning of the European Union (TFEU): Article 290 TFEU, 273–77, 282–85 Article 291 TFEU, 277–81, 282–85 comitology Article 290 TFEU, 273–77 Article 291 TFEU, 277–81 delegated acts, 283–84 implementing acts, 284–85 Trichet, J-C, 258 Tully, J, 69 uncertainty: risk distinguished, 233–34 United Nations Security Council (UNSC), 73 anti-terrorist measures, 73 violation of human rights, 73–74 United States: Administrative Procedure Act (US), 87–88 American administrative law, 87–89 emergency legislation, 89 Authorization for the Use of Military Force (AUMF), 86–87 bilateral investment treaties, 78 CMS Gas Transmission Company, 54 exceptions clauses, 55–56 US-Argentina, 54–55 constitutionalisation: emergency governance and, 92–96 dollar, 12–13 ‘world money’, 12 emergency governance, 89–92, 96–97 constitutionalisation and, 92–96 presidential powers, 92–93 US exceptionalism, 91 US legislation, 89–90 unity in diversity, 37, 82–83, 377 multi-level governance, 359–60 see also Joerges, C van Asselt, M, 303 Van Gen den Loos case, 411 Van Rompuy, H, 209, 223–24 Vauday, J, 64 Vermeule, A, 87–89

Index 423 Vernon, R, 63 vertical conflicts, 2, 46, 80, 127, 365 accountability, 370–74, 381–82 Viking case, 42, 118, 364 Visser, J, 368 Vivendi case, 64–65 von Bogdandy, A, 395 von Hayek, F, 408 Vos, E, 303

wage devaluation, 131, 136 competitiveness and, 136–37 see also income inequality Weiler, J, 26 White, J, 74 World Bank, 54, 64–65, 331, 342, 344 Zürn, M, 81–82