European Economic Constitution

From Max-EuP 2012

by Ernst-Joachim Mestmäcker

1. Overview

The European Union (EU) is founded upon the Treaty on European Union (TEU) and the Treaty on the Functioning of the European Union (TFEU); EC Treaty, EU Treaty. The EU is successor to the European Community. The Union implements its tasks through the establishment of an internal market and an Economic and Monetary Union (Art 2 TEU/1 EU). The Union’s legal order is according to the ECJ’s jurisprudence the functional equivalent of a constitution. This constitution is an economic constitution insofar as it provides for principles, aims and instruments applicable to the monetary union, the internal market, and the system of competition. The internal market is the aim and instrument of an economic space without frontiers. As internal frontiers are eliminated it becomes the Union’s permanent task to maintain the internal market governed by the principles of free trade and competition.

Among the principles to be observed by the Member States and Union in the implementation of monetary policy are an ‘open market economy with free competition’ (Art 3(3) TEU/4(1) EU and Art 127 TFEU/105 EC; competition (internal market)). The treaty’s general principles do not give rise to specific duties of Member States and do not create individual rights (ECJ Case 126/86 – Giménez Zaera [1987] ECR I‑3697 para 19). These principles are nevertheless relevant: with the extent of the market the overall economic advantages of cross-border division of labour grow; the cooperation of undertakings on markets contributes to efficient allocation of resources. The social market economy mentioned in Art 3(3) TEU/4(1) EU, which is a condition for the accession of new Member States, contributes to the separation of power between governments and industry. This kind of economic order limits the Union’s claim or temptation to centralize regulatory powers and simultaneously limits the impact on Member States’ sovereignty. As a matter of law these principles prevent a policy which implements the aims of Art 2 TEU/1 EU through central planning.

The aims of Art 2 TEU/1 EU become legally relevant in the context of the specific means provided for in the treaty. In particular, they are relevant for the interpretation of specific Union law provisions. The connection of aims and means may be so strict as to make an aim itself binding. Residual competition is a precondition for the practical effectiveness of a great number of specific provisions of the treaty. This is why restraints of competition that exclude effective competition in the common market are absolutely prohibited (ECJ Case 6/72 – Continental Can [1973] ECR 215).

2. Constitutionalized economic liberties

The European economic constitution is frequently discussed in comparison with its German origin. We have to distinguish formal economic constitutions as part of the political constitution which contain principles for the regulation of the economy (eg Weimar Constitution with a chapter on ‘The Economy’; Constitution of the German Democratic Republic). In this tradition the economic constitution is to establish political prerogatives for the organization and regulation of economic activities. The idea to develop constitutional principles for an economic order based on economic liberties was not considered or treated as self-contradictory. The theory of an economic constitution has been developed in opposition to policies of central economic planning, ad hoc intervention and discretionary administrative controls. Determinative are principles derived from individual liberties that inform the governance of the economic system as a whole. These principles coincide with the separation of government and economy in the tradition of separation of powers, with the legal guarantee of individual liberties, the maintenance of competition and simultaneous limitation of economic power. The implementing economic policy takes into account and gives priority to individual economic planning on competitive markets with free prices on the basis of a stable monetary order. These ideas were instrumental in shaping economic policies of post-war Germany. Through the Treaty of Rome (1958) these principles became directly relevant for the European Community and its economic constitution.

The idea of constitutional liberty in civil society independent from the political constitution or as an annex thereto is a product of the European Enlightenment. In its application to the economy, to division of labour and decentralized economic planning on markets, it was developed by authors like Adam Smith, David Hume and Adam Ferguson. Even before the French and US declarations of human rights, they explored the systemic relevance of law and economics, of mutually respected individual liberties, particularly freedom of opinion, property rights, limited government and the rule of law. Rules of just conduct adjust economic liberties to the requirements of competitive markets: without the institution of competition the profit motive is a very real social danger (Franz Böhm). Without preventive and remediable legislation, governmental as well as private monopolies or restrictions of competition will be used to limit production and interfere with equal liberties of rivals and consumers.

Within the framework of Economic and Monetary Union Member States retain their own welfare agenda and responsibility. Union policies that may interfere with the internal market and competition system take into account competing Member States’ interests. Examples are industrial policy, economic and social cohesion, research and technological development, social policy and the environment. In view of the economic constitution this situation is one of opportunities and risks. The particular opportunities are due to strict Union law provisions guaranteeing the priorities of the internal market and competition. These strict provisions are not subject to political bargaining. The risks follow from the temptation to give priority to national protectionist policies at the expense of the Union’s public interest. Where Union law recognizes conflicting aims they have to be harmonized and must be implemented within the limits of strict provisions. Where effective competition prevails, rule-governed economic liberties tend towards positive overall welfare effects. Interpretation and application of preventive and remediable competition rules are informed by the economic process and pattern predictions based thereon. This approach is to be distinguished from that of neo-classical welfare economics. In these theories optimal economic effects or the tendencies towards them are to be determined on the basis of competition models (Pareto optimality or Kaldor-Hicks-equilibrium). Welfare effects derived from this static model do not indicate with sufficient certainty the causal connection with the underlying conduct or practices. In particular they are of doubtful validity in passing upon the legality or illegality of the underlying conduct or practices under competition rules. In view of the economic constitution the major shortcoming of welfare economics is that there is no space for individual rights; these rights, however, are its very foundation.

3. Institutions

All Union institutions, namely the Council and the European Council, the European Commission, the European Parliament, the European Central Bank and the European System of Central Banks are bound by Union law in their activities. The different tasks, however, require different rules and degrees of discretion. In order to guarantee policies which are governed by Union interests and are not dependent on the political influence of Member States, Union law provides for the independence of constitutionally crucial institutions. That is a matter of course for European courts who are to ensure that in the interpretation and application of this treaty the law is observed (Art 19 TEU/220 EC). Characteristic of the Union’s institutional structure is the task of the Commission to promote the Union’s interests and to ensure that the provisions of this Treaty are applied (Art 17(1) TEU/9 EU). Even though the Commission has gradually become similar to a government, its competences are to be applied independently.

The primary aim of common monetary policy is the stability of prices (Art 127(1) TFEU/105(1) EC). Such a policy requires the independence of the European System of Central Banks and the European Central Bank from Member States and from Community institutions (Art 130 TFEU/108 EC).

Union institutions are in their relations to each other bound by and limited to their respective competencies and have to observe their respective proceedings (Art 13(2) TEU/5 EU). Contrary to the universal competence of sovereign states, the Union shall act only within the limits of powers conferred upon it by this treaty and of the objectives assigned to it therein (Art 5(2) TEU, introduced by the Treaty of Lisbon). In relation to Member States the principles of subsidiarity and proportionality apply (Art 5(3) and (4) TEU, introduced by the Treaty of Lisbon).

4. Legal entities (agents) of union law

The Union’s organization and the instruments at its disposal must be distinguished from rights and duties of individual Union institutions, Member States and citizens. Only entities recognized as legal persons have rights and duties in their respective legal orders. The Union is based upon international law treaties. An international law agreement does not create legal rights and obligations of private individuals. The ECJ’s ruling that under Union law, in addition to Member States, private individuals have rights and duties, is a cornerstone of the Community’s—now the Union’s—legal order (ECJ Case 26/62 – van Gend & Loos [1963] ECR 1). The recognition of private individuals as legal persons is a necessary condition of their endowment with individual rights under Union law. Such rights are conferred by Union law not only in cases where its provisions are by their very nature directly applicable among individuals as applies in particular to competition rules. Rather, Union law confers individual rights where it imposes upon Member States, Union institutions, or private individuals obligations in a clearly defined way. Obligations that are applicable unconditionally have direct effect and must be applied by courts and public authorities of Member States. Individuals have standing to enforce their individual rights. They flow from interests protected by Union law and are independent of the plaintiff’s private interests. The most important areas of applicability of these rights are the fundamental freedoms constituting the internal market and rules of competition.

An economic constitution based upon market economy principles is predicated upon the individual freedom of action and planning of undertakings and consumers. Freedom of contract and property rights (property rights, protection of) as well as a right to participate in competition are essentials of the economic constitution. This functional interdependence of a market economy and private law systems is taken for granted by Union law and is operative independently from prior harmonization. Individual rights under Union law do not serve private interests and are not directed against Union interests. This is an important difference from German public law where individual rights of citizens protect their private interests and are to be enforced against governmental public interests. In the Union individual rights serve Union law interests and contribute to the practical effectiveness of Union law in the legal order of Member States. They are supplementary to the procedures and remedies which are at the disposal of the Commission in enforcing Union law against Member States.

5. Fundamental freedoms

The fundamental freedoms (general principles) and competition rules create and govern the internal market. The dynamic development of free movement of goods, free movement of services, free movement of persons, freedom of establishment and free movement of capital and payments progressed from the prohibition of discriminations to the prohibition of restraints and from the country of destination principle to the country of origin principle. This convergence of principles does not exclude different conflicts of interest and difficulties that are due to specific functions of the respective fundamental rights. This applies particularly to different exemptions recognized by the ECJ for compelling public interests of Member States.

The most important general exemption provided for in the treaty is applicable to undertakings that are entrusted with the operation of services of general economic interest (Arts 14, 106(2) TFEU/86(2) EC). The application of Union law rules to these undertakings is excluded where their application does in fact or in law obstruct the performance of the particular task assigned to them. So far some Member States have tried in vain to introduce a general exemption. The Commission and the Court examine according to the principle of proportionality whether the exemption under Art 106(2) TFEU/ 86(2) EC is indispensable.

The fundamental freedoms specify the prohibition of discrimination for reasons of nationality in Art 18 TFEU/12 EC. Exemptions are recognized only if provided for in the Treaty itself.

The prohibition of discrimination does not cover barriers to cross-border trade which are due to the divergence of non-discriminatory Member State policies or measures. Even those may, however, interfere with cross-border trade. They can be justified by unwritten exemptions if and insofar as they are indispensable in light of overriding public interests of Member States (ECJ Case 120/78 – Cassis de Dijon [1979] ECR 649, 662 para 8). Member States can justify their measures only if they are, in light of their legitimate purpose, viable and proportionate.

If no exemption applies, products and services which are marketed legally in any Member State cannot be excluded from import into other Member States. This modification of the country of destination principle to the country of origin principle may lead to the coexistence of different Member State regulations. This situation is frequently referred to as ‘competition of systems’.

In this situation Member States have the following political options:

(i) The coexistence of different Member State regulations with the consequence that their own undertakings have to observe rules that are stricter than those that are applicable to their competitors from other Member States.

(ii) The adaptation of their own regulation in order to arrive at a regulation that is equivalent to that of other Member States.

(iii) The proposal of approximation of laws under Arts 114, 115 TFEU/94, 95 EC, particularly with respect to such regulations of other Member States which are under the ECJ’s jurisprudence justified because of overriding public interests and which interfere with cross-border trade.

(iv) In the case of a majority decision of the Council (Art 114(4) TFEU/95(4) EC), there is the possibility of maintaining trade barriers that are justifiable under Art 36 TFEU/30 EC or for reasons of labour, environment, or the protection of either.

The only active participants in regulatory competition are Member States. The Member State for whose undertakings stricter rules apply must decide whether to tolerate competition of systems, to adapt its own regulation autonomously or to participate in the approximation of laws under Union law. The country of origin principle does promote economic competition and contributes to the dynamics of political processes in the Union.

A by-product of open markets which continue to feature diverging Member State regulations is the most controversial problem of ‘reverse discrimination’. Union law does not oblige Member States to protect their own undertakings against competitive disadvantages caused by Union law.

Since the establishment of the Economic and Monetary Union, restrictions on the free movement of capital are prohibited not only between Member States but between Member States and third countries as well (Arts 63–66 TFEU/56–59 EC). The potential reach of the free movement of capital is particularly relevant because it is applicable to Member State regulations that prevent the acquisition of shares of an undertaking or that are liable to deter potential investors from other Member States (ECJ Case 112/05 – Commission v Federal Republic of Germany, Volkswagen [2007] ECR I‑8995, 9020). In these cases compelling public interests of Member States may justify an exemption. The further question whether strict rules of national corporation laws of general applicability may be found to be incompatible with free movement of capital and whether they may be justified has so far not been decided.

6. The Union’s economic constitution

The Union’s economic constitution is based upon the interdependence of a monetary union, a European internal market, and competition. Cross-border trade is no longer subject to Member State regulations. Economic policy purposes of Member States do not justify exemptions from the principle of free cross-border trade. The well-established jurisprudence on the systematic unity of the internal market and competition does not exclude differences due to specifics of economic areas or different legal positions of the legal entities concerned. The principles that apply in such cases of conflict to the supremacy of Union law over the law of Member States are a touchstone for the economic constitution.

The applicability of Union law provisions to Member States and undertakings, respectively, is independent from the traditional separation of private and public law in Member States. The equal and effective application of Union law leads to the specification of principles that are derived from private law and exchange transactions on competitive markets. The following cases are but examples of a more general principle.

The treaty does ‘in no way prejudice the rules in Member States governing the system of property ownership’ (Art 345 TFEU/295 EC). Under the court’s jurisprudence rules of Union law are nevertheless applicable to the exercise of property rights as well as to Member States as owners of public undertakings. It is not the ownership of economic resources that determines the character of an economic order but the coordination principle of competition.

The rules of competition are applicable to ‘undertakings’. The functional interpretation of this term means that competition rules are applicable to Member States as such as well as other public law organizations whenever they participate in the economic process.

The rules applicable to public procurement are derived from the fundamental economic freedoms. They obligate Member States to organize their procurement such that it is analogous to private purchases of products or services under conditions of competition. Member States have to provide for competitive bidding and to protect bidders against discrimination and arbitrary practices of public or semi-public buyers. Competition rules are applicable in addition to procurement rules.

In cases where Member State investments in private undertakings are subject to state aid rules, conditions must meet the market economy investor principle.

Where market structures prevent effective competition as in telecommunications or in energy, Member State regulations must under the Union’s guidance develop rules that will lead to or substitute the effects of competition.

Literature

FA Hayek, The Constitution of Liberty (1960); Franz Böhm, ‘Rule of Law in a Market Economy’ in Alan Peacock and Hans Willgerodt (eds), Germany’s Social Market Economy: Origins and Evolution (1980); Christoph Engel, ‘Imposed Liberty and its Limits—The EC-Treaty as an Economic Constitution for the Member States’ in Talia Einhorn (ed), Spontaneous Order, Organisation and the Law, Roads to a European Civil Society (2003) 429–37; Wernhard Möschel, ‘Competition as a Basic Element of the Social Market Economy’ in Talia Einhorn (ed), Spontaneous Order, Organisation and the Law, Roads to a European Civil Society (2003) 285–92; Josef Drexl, ‘Competition Law as Part of the European Constitution’ in Armin von Bogdandy and Jürgen Bast (eds), Principles of European Constitutional Law (2006) 632–74; Armin Hatje, ‘The Economic Constitution’ in Armin von Bogdandy and Jürgen Bast (eds), Principles of European Constitutional Law (2006) 587–632; Ernst-Joachim Mestmäcker, ‘On the Legitimacy of European Law’ in Ernst-Joachim Mestmäcker, Wirtschaft und Verfassung in der Europäischen Union (2nd edn, 2006) 133–52; Ernst-Joachim Mestmäcker, A Legal Theory Without Law, Posner von Hayek on Economic Analysis of Law (2007).

Retrieved from European Economic Constitution – Max-EuP 2012 on 05 December 2022.

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