European Internal Market

From Max-EuP 2012

by Norbert Reich

1. Foundations

The Singe European Act (SEA) of 1987 first introduced the concept of the ‘internal market’ into primary E(E)C law. It followed earlier case law of the ECJ which had stated in its Gaston Schul case (Case 15/81 [1982] ECR 1409): ‘The concept of a common market as defined by the Court in a consistent line of decisions involves the elimination of all obstacles to intra-Community trade in order to merge national markets into a single market bringing about conditions as close as possible to those of a genuine internal market’ (emphasis added). It is important that not only commerce as such but also private persons who happen to be conducting an economic transaction should be able to enjoy the benefits of that market’ (para 33). An important earlier example of this approach was the well known Cassis judgment of the ECJ (Case 120/78 – Rewe Zentral/Bundesmonopolverwaltung [1979] ECR 649) where the Court ruled that, according to Art 34 TFEU/28 EC (earlier Art 30 EEC), each product legally put on the market in one country should be able to circulate freely within the entire common market unless it is in opposition to mandatory requirements of the public interest (eg consumer protection, fairness of commercial transactions, public health concerns, effectiveness of fiscal supervision). The European Commission, in its White Paper on the completion of the internal market of 14 June 1985 (COM(1985) 310 final) came to the conclusion that different product standards of Member States should be automatically recognized as equivalent, and that in this area—with the exception of health and safety standards—the principle of mutual recognition should prevail without any harmonization via EC legislation being required.

The principle of mutual recognition of marketing standards had first been established for rules on quality, designation and packaging in the area of free movement of goods. This principle was later also extended as a general ‘country of origin’ principle to services and to establishment. Legal authors insisted on this principle containing a ‘hidden conflict rule’, which leads to a ‘competition between legal systems’. This conflict oriented understanding of the free movement rules is only applicable to cases relating to the internal market and stands therefore in a certain opposition to the principle of universality of conflict rules. In private law matters, it cannot be a substitute for harmonization.

The SEA codified the internal market concept in Art 8a EEC, later to become Art 14(2) EC and now Art 26(2) TFEU, insisting on the completion of an internal market (at the time before 31 December 1992) in the sense of unrestricted free movement of goods, persons, services and capital. This concept does not have direct effect, but can be found in the case law of the ECJ as an interpretation guideline. The SEA created a specific competence norm for the Community, called the cooperation procedure of Art 149(2) EEC, which provided for a majority decision in the Council coupled with a right to veto vested in the European Parliament. A new Art 100a EEC (later Art 95 EC, now Art 114 TFEU) gave broad powers to the Council, in cooperation with the Parliament, to adopt ‘measures’ for the establishment and functioning of the internal market. The Amsterdam Treaty introduced the co-decision procedure of the Council and Parliament in Art 251 EC. The Lisbon Treaty confirms both the concept of the internal market in Art 26(2) TFEU and the ordinary legislative procedure as a mechanism for its realization in Art 294 TFEU.

2. ‘Negative’ vs ‘positive’ integration

The internal market principle gave rise to a remarkable dynamism in the development of both primary and secondary EU law. It works in two directions, namely as ‘negative’ and as ‘positive integration’. These concepts concern the relationship of Union law to Member State law insofar as they have an effect on free movement. There are some more indirect effects on private law relations because of the principle of limited ‘direct horizontal effect’.

a) ‘Negative integration’

‘Negative integration’ refers to all Union measures which have as their objective or effect the elimination or reduction of state-imposed restrictions on free movement. This relates most of all to the case law of the ECJ which recognizes direct effect on the fundamental freedoms concerning goods, persons (workers as well as self-employed persons), services and capital. Any Member State restriction or discrimination must comply with these fundamental freedoms. It is not possible here to go into the very detailed and complex case law of the ECJ. As a consequence, any state rule which contradicts the fundamental freedom as interpreted by the ECJ should no longer be applied by courts or administrative institutions (the principle of priority of EU law, recently re-affirmed also against national Constitutional law and decisions of Constitutional Courts, ECJ Case C-341/08 – Kr. Filipiak v Dyrektor Isby Skarbowej w Poznaniu paras 82–3, [2009] ECR I-11049). Every EU citizen and business can invoke their ‘subjective rights’ under the free movement provisions before state courts to protect their economic or personal interests against opposing state rules. They may even claim compensation against a Member State that has in a ‘sufficiently serious’ manner violated rules of Union law protecting third party interests (principle of effective legal protection).

The effects of Union law are ‘negative’ insofar as it does not in itself set the standards for Member State law which are to replace earlier ones violating EU law. The principle of ‘mutual recognition’ modifies this negative effect to the extent that the product or service which is to circulate freely in the entire EU must at least conform to the standards of the country of origin. In this regard the principle of ‘mutual recognition’ has a certain ‘positive element’. It also leaves Member States discretion under the principle of proportionality, as monitored by the ECJ, to decide whether its standards conform to specific public interests without having protectionist effects. The catalogue of justified public interest restrictions has been extended since the Cassis-decision to include environmental standards, road safety and rules on social protection of workers; mere economic reasons are excluded.

Legislation on the internal market based on Art 114 TFEU/95 EC furthers these principles and specifies them according to the particular policy area. It is always concerned with the elimination of trade restrictions, which is achieved through the ‘internal market clauses’ in directives: if a product or service conforms to the requirements of the directive, it is not to be burdened with additional requirements by the state of activity, unless a ‘safeguard procedure’ has been initiated and followed (ECJ Case C-470/03 – AGM COS. MET [2007] ECR I-2749). This negative effect of a directive takes direct effect in favour of businesses and Union citizens against a Member State which has not correctly implemented or acted under it. To this extent, ‘subjective rights’ are extended into the area of secondary law if they concern the position of (physical and legal) persons falling under the scope of protection of Union law (vertical direct effect of directives).

b) ‘Positive integration’

Positive integration refers to the process of Union law setting common standards for product safety, consumer and environmental protection, social rights, etc at Union level instead of the different levels of Member States. This is done through measures in the sense of Art 114 TFEU/95 EC for the completion of the internal market which therefore assumes a dual function both with regard to ‘negative’ and to ‘positive’ integration. The case law of the ECJ (Case C-359/92 – Germany v Council [1994] ECR I-3684) has recognized this dual conceptualization of the internal market for the area of product safety and has given competence to the Community to adopt appropriate rules in the internal market even if this leads to restrictions of free movement: ‘…The free movement of goods can be secured only if product safety requirements do not differ significantly from one Member State to another. A high level of protection can be achieved only if dangerous products are subject to appropriate measures in all the Member States’ (para 34).

This case law has been further developed in other areas, eg protection against the insolvency of a tourist operator (ECJ Case C-178/84 – Dillenkofer [1996] ECR I-4845 paras 36–9) and health protection (ECJ Case C-380/03 – Germany v Parliament and Council [2006] ECR I-11573 para 93), however without the obligation to opt for the highest level of protection existing in one Member State (ECJ Case C-233/94 – Germany v Parliament and Council [1997] ECR I-2405 para 48). It may even lead to an augmentation of the standards of the protection offered by a certain directive, for instance concerning compensation for non-material damage suffered by tourists which was not foreseen in the package holiday directive (Dir 90/314) (ECJ Case C-168/00 – Leitner [2002] ECR I-2631).

3. Internal market and private law (substantive law)

The importance of the internal market for private law is not yet fully understood. For its understanding, it seems appropriate to use the distinction between ‘negative’ and ‘positive’ integration. The ‘horizontal direct effect’ of the fundamental freedoms of the internal market will be discussed under 5.

a) ‘Negative’ integration in private law

Taking account of the traditional concept of the internal market and, more specifically, the aim of fundamental freedoms to eliminate state-imposed restrictions on free movement and distortions of competition, private law will only come into conflict when it is based on mandatory provisions protecting the weaker party. If parties can autonomously choose the applicable law, even mandatory rules will not present a restriction as the parties can avoid their application under conflict rules ( ECJ Case C-339/89 – Alsthom Atlantique [1991] ECR I-107; in a similar sense ECJ Case C-93/92 – CMC Motorradcenter [1993] ECR I-5009). This argument of the ECJ has been criticized insofar as rules that can be disapplied by party autonomy may nonetheless be a restriction because they incur transaction costs which make free movement more difficult. This argument, however, does not seem to be convincing given the priority of party autonomy, particularly since the negative effects of transaction costs on free movement can hardly be calculated.

Within secondary law the ‘negative effects’ will take place based on the extent of harmonization which sets aside conflicting national law and/or prevents the adoption of later differing rules. As ruled by the ECJ in a set of controversial cases concerning the effects of the product liability directive (Dir 85/374) on Member State law, such effects exist in the area of product liability law. According to the Skov case (ECJ Case C-402/03 – Skov [2006] ECR I-199), Member States are prevented from introducing a strict liability system for sellers beyond what is foreseen in the directive; it does not, however, preclude the introduction of a strict liability system of compensation for damages of property used for professional purposes (ECJ Case C-285/08 – Société Motors Leroy Somer v Société Dalkai France [2009] ECR I-4735 para 30). The new tendency of EU law towards full harmonization, for instance in the area of consumer credit (regulatory principles) in Dir 2008/48, increases the pre-emptive effect of Union law, at least in the harmonized area (ECJ Case C-3/95 – Konsumentombudsmannen [1997] ECR I-3843). The recent case Gysbrechts (C-205/07, [2008] ECR I-9947) concerned the question whether the free movement rules of primary law—in this case the prohibition of measures having an effect similar to export restrictions under Art 35 TFEU/29 EC—can prevent Member States from taking more consumer protective measures in an area of minimum harmonization. Earlier case law of the ECJ had not found the minimum harmonization principle to run afoul of the fundamental freedoms (ECJ Case C-71/02 – Karner [2004] ECR I-3025). Gysbrechts seems to indicate a change of perspective because both AG Trstenjak and the Court saw an unjustified restriction of the free movement provision of Art 29 in a rule of national law prohibiting a trader engaged in distance selling from taking the credit card number of a consumer whose right of withdrawal according to Dir 97/7 had not yet lapsed; the trader could however be forbidden from asking for advance payment before the end of the withdrawal period.

b) Internal market and a ‘high level of protection’

As a consequence of the internal market concept, the Commission takes a ‘high level of protection’ as a base in its proposals in the area of safety, health, environmental and consumer protection, Art 114(3) TFEU/95(3) EC. This is repeated to some extent in the so-called horizontal provisions on consumer protection in Art 12 TFEU/ 153(2) EC, even though the reference to a ‘high level of protection’ is missing. These provisions do not take direct legal effect, even though they are important for the interpretation of secondary law (ECJ Case C-350/03 – Schulte [2005] ECR I-9215).The internal market competence of Art 114 TFEU can be used for selective-instrumental measures by way of private law, in particular in the area of consumer contract law. However, it cannot serve as conferring an overall competence on the EC/EU in the area of private law, as the Court has held in what is known as the ‘tobacco advertising judgment’ (ECJ Case C-378/98 – Germany v EP and Council [2000] ECR I-8419): ‘Those provisions, read together, make it clear that the measures referred to in Art 100a(1) of the Treaty (now Art 114 TFEU/95 EC) are intended to improve the conditions for the establishment and functioning of the internal market. To construe that article as meaning that it vests in the Union legislature a general power to regulate the internal market would not only be contrary to the express wording of the provisions cited above but would also be incompatible with the principle embodied in Art 3b of the EEC Treaty (now Art 5 TEU/Art 5 EC) that the powers of the Union are limited to those specifically conferred on it’ (para 83).

4. Internal market and private law (conflict rules)

a) ‘Negative effects’

Insofar as conflict of law provisions give parties freedom to choose the applicable law, as in Art 3 of the Rome Convention of 1980, substituted by Art 3 of the Rome I Regulation (Reg 593/2008), there will be no conflict with the ‘country of origin principle’; it takes on importance mostly with public law rules. The rules on applicable law in the absence of choice in Art 4 do not present problems with an internal market specific principle of the country of origin; normally in para 1(a) and (b) they refer to the law of the seller or service provider. There are, however, problems with regard to the law applicable to sureties in movables because most Member States do not allow freedom of choice but refer to the lex rei sitae which means that in case of a cross-border transaction a security interest agreed to in the country of origin of a product may become ineffective if the country of destination does not know this type of interest, for instance a retention of title clause with third party effect. In an action brought by the Commission against Italy (ECJ Case C-302/05 [2007] ECR I-10597 para 28) the Court held that the Late Payment Directive 2000/35 did not affect the Italian rules in question ‘… which concern the enforceability of retention of title clauses against third parties, whose rights are not affected by Directive 2000/35, (which) are still governed exclusively by the national legal orders of the Member States’ (para 30). On the other hand, ‘overriding mandatory provisions’ according to the old Art 7(2) of the Rome Convention and Art 9(1), (2) of Rome I must conform with Union law. The definition follows the Arblade-judgment of the ECJ ((joined cases C-369 and 376/96) [1999] ECR I-8454 paras 30–1) stating that ‘… that term must be understood as applying to national provisions compliance with which has been deemed to be so crucial for the protection of the political, social or economic order in the Member State concerned as to require compliance therewith by all persons present on the national territory of that Member State and all legal relationships within that State’ (para 30). The implementation of the country of origin principle in secondary law is somewhat unclear. It had been introduced into Art 3(1) and (2) of the E-commerce Directive 2000/31, but at the same time Art 1(4) insists that the directive does not contain conflict-law provisions. Questions of quality and liability for products bought via the internet do not come into the scope of application of the directive in any event (ECJ Case C-244/06 – Dynamic Medien [2008] ECR I-505).

b) ‘Positive effects’

Union law assumes a positive effect in cross-border litigation by autonomously defining the ordre public proviso in cases of recognition of a foreign judgment or arbitration award. This has been said with regard to the competition rules of Arts 101, 102 TFEU/81, 82 EC (ECJ Case C-126/97 – Swiss [1999] ECR I-3055) and with regard to consumer protection by the Unfair Terms in Consumer Contracts Directive 93/13 (ECJ Case C-168/05 – Elisa Maria Mostaza Claro [2006] ECR I-10421). In an earlier, controversial decision the ECJ (Case C-381/98 – Ingmar [2000] ECR I-9305) held that the purpose of Arts 17 to 19 of the Directive on Self-employed Commercial Agents 86/653 ‘… is thus to protect, for all commercial agents, freedom of establishment and the operation of undistorted competition in the internal market. Those provisions must therefore be observed throughout the Community if those Treaty objectives are to be attained’ (para 24). The new conflict rules relating to contractual obligations (Rome I) contain detailed rules on consumer contracts (Art 6) and individual employment contracts (Art 8). For consumers this leads to the application of the most protective rules, despite freedom of choice, if the activity of the trader is directed at his home country (Joined Cases C-584/08 and 144/09 – Pammer not yet reported). According to the conflict rules for non-contractual obligations (Rome II Reg 864/2007), with regard to claims arising out of product liability the law of the country of the victim will usually be applicable if the product has been marketed there (Art 5(1)(a)). Collective action in social conflicts will be governed by the law of the country of origin where ‘the action is to be or has been taken’, not by the law of the country where its effects are felt (Art 9). Conflict rules can be found in different directives which aim to ensure that, when the contract has a close link with the Union, protective consumer provisions cannot be avoided by making the law of a third country applicable. It remains uncertain whether such clauses are still necessary after the codification of the consumer protection provisions in Art 6 Rome I.

5. ‘Horizontal direct effect’ of the fundamental freedoms in the internal market?

The fundamental freedoms of the internal market are mostly directed against Member States. Article 3(c) EC (less clear Art 3(3) TEU) defines the internal market somewhat broader, specifying it as being ‘characterised by the abolition, as between Member States, of obstacles to the free movement of goods, persons, services, and capital’—regardless of where the obstacles originate or the means by which they are produced. Quite early the ECJ (ECJ Case 34/74 – Walrave [1974] ECR 1405) held that the fundamental freedoms of Arts 45, 49, 56 TFEU/39, 43 and 49 EC can be applied to ‘… rules of any other nature aimed at regulating in a collective manner gainful employment, self-employment and the provision of services’ (ECJ Case C-438/05 – IWTF & FSU [2007] ECR I-10779 para 33; repeated and extended to employment relations in Racanelli v Max-Planck-Gesellschaft [2008] ECR I-5939 para 43). The justification offered for this case law—which is controversial with regard to social action—has been, on the one hand, the effet utile of the fundamental freedoms of the internal market and, on the other, the different regulatory mechanisms of Member States which may provoke restrictions on free movement both by rules of public and collective private law. This contrast justifies putting state and collectively imposed restrictions on the same legal footing. In the area of free movement of goods there are no similar pronouncements of the ECJ; usually the competition rules of Arts 101, 102 TFEU/81, 82 EC will be applicable which prohibit market segregation by collective agreement or dominant positions of undertakings (ECJ Joined Cases 56 and 58/64 – Grundig & Consten [1966] ECR 299). However, such a broad application of the free movement principle may result in conflicts with the principle of private autonomy if applied without reservation to all privately generated restrictions and discriminations. A ‘collective regulation’ or correspondingly aimed measure must always ensure that Union citizens are not given freedom of choice which assumes the form of ‘take it or leave it’, for example, as concerns by-laws of associations, social actions and general contract terms.

Literature

Norbert Reich,Competition Between Legal Orders—A New Paradigm of EC Law?’ [1992] CMLR 861; Jürgen Basedow, ‘Der kollisionsrechtliche Gehalt der Produktfreiheiten im europäischen Binnenmarkt: favor offerentis’ (1995) 59 RabelsZ 1; Kamiel Mortelmans, ‘The Common Market, the Internal Market and the Single Market, What’s in a Market?’ [1998] CMLR 101; Eva-Maria Kieninger, Wettbewerb der Rechtsordnungen im Europäischen Binnenmarkt (2002); Eva-Maria Kieninger (ed), Security Rights over Movable Property in European Private Law (2004); Niamh Nic Shuibne (ed), Regulating the Internal Market (2006); Paul Craig and Gráinne de Búrca, EU Law (4th edn, 2008) 604; Luca Enriques and Martin Gelter, ‘Regulatory Competition in European Company Law and Creditor Protection’ in Horst Eidenmüller and Wolfgang Schön (eds), The Law and Economics of Creditor Protection (2008) 421; Hans-W Micklitz, Norbert Reich and Peter Rott, Understanding European Consumer Law (2009); Norbert Reich, ‘The Interrelation between Rights and Duties in EU Law: Reflections on the state of liability law in the multilevel governance system of the Union: Is there a need for a more coherent approach in European Private law?’ (2010) 29 Yearbook of European Law, 112; Peter Oliver (ed), Free Movement of Goods (5th edn, 2010); Norbert Reich, Understanding EU Law (2nd edn, 2005; 3rd edn, 2011).

Retrieved from European Internal Market – Max-EuP 2012 on 06 October 2022.

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