In May of this year, the covid-19 crisis was engulfing Europe. The response has been a plethora of economic support initiatives at both the national and EU levels. Against this dramatic backdrop, one crucial piece of legislation took effect, almost without notice: the Agreement for the Termination of IntraEU Bilateral Investment Treaties (BITs) was signed by 23 EU Member States.

This far-reaching piece of EU legislation may well come back to haunt private equity firms: BITs were a standing guarantee that state authorities of a host country would not abuse their powers to harm foreign investors. They were in place to counter situations where state authorities confiscate assets belonging to foreign investors and then fail to pay fair compensation. With the abolition of BITs, EU-based investors investing in other member states now have no effective protections against host-governmental confiscation of assets, discriminatory actions or other predatory behaviors.

It is ironic that, as national governments were rushing to pass aid schemes to save their businesses and jobs, and as the EU was finalizing the €750 billion Europe-wide support package, EU-based investors were being stripped of a crucial, but little appreciated, protection.

Prior to their abolition, this cross-border investment protection system was based on bilateral agreements established both between member states and also between individual member states and non-EU countries. It is true that BITs weren’t terribly well-coordinated and that they differed in details (they were, after all the result of bilateral negotiations between sovereign states). But the situation now leaves a gaping absence of any legal regulatory mechanism and has destroyed any enforceable protection of investor rights.

This cannot be seen as progress. While BITs may not have been coordinated at an intra- or supra-national level, they were, by and large, consistent in their core protection provisions, which investors relied upon when they deployed capital in foreign countries.

The key element underpinning BITs was the firm commitment by a host state not to discriminate against foreign investors or show preference to local or third-country investors, thereby guaranteeing that most cherished of EU principles: the “level playing field.” A crucial provision that existed in BITs – maybe the most important – was an undertaking to not expropriate manufacturing facilities, infrastructure, real estate, equities or any other asset from a foreign investor and, if that were to occur, then to provide a clear mechanism to establish and enforce the payment of fair compensation. And yes, such situations are not confined to distant, corrupt dictatorships, as is often imagined, but frequently occur in developed countries, including in EU member States.

At a time when – as the European Commission acknowledges in the Capital Markets Union Initiative – greater cross-border investment is urgently needed to support growth, the removal of a core investor protection mechanism could hardly be more counterproductive. To add insult to injury, non-EU investors – such as US, Swiss, Russian and, soon, UK institutions – will continue to enjoy their current levels of investor protection.

It remains a puzzle as to why would the EU be willing to discriminate against EU capital to the benefit non-European investors. It has been claimed that EU law holds sufficient legal guarantees to protect investors in the absence of supporting bilateral treaties. This, in legal theory, may be correct, but the reality is not nearly as black and white.

Despite the lip service paid to the principles promulgated by the EU of “the four freedoms”, these legal principles are – to put it mildly – not all crystal clear and open to national interpretations. Additionally, the first instance arbiter of these not-so-clear rules will be authorities in the very Member State with whom the investor has a disagreement or – in the worst-case scenario – from whom they are seeking redress.

A further complication is that redress for EU investors can now only be sought only in the national courts of the breaching country. In certain countries’ cases, legitimate questions can be raised as to the degree of their judiciary’s independence from the State. Such issues of judicial independence are well known to the EU, as witnessed by its Article 7 proceedings against certain countries. It seems strange that the EU can convince itself that the rule of law is consistent across the whole of the EU in the case of investor protections, while at the same time launch Article 7 actions against Member States accusing them of compromising the independence of their national judiciaries.

 Need for a new approach

If written law lacks a mechanism for enforcement, it is merely a wish list. A nicely written contract that one cannot enforce, if breached, is no different from a handshake. Would anyone invest €100 million on a handshake? Or even €100,000?

This is now, in effect, what investors are left with: the promise that all member states will respect the rule of law, in the full knowledge that there are no consequences for them if they breach it. Is it credible to believe that authorities in all member states would never consider discriminating against foreign investors versus domestic institutions? And in the case of expropriation by administrative decision, can investors be certain that each country’s courts will be equally swift, diligent, impartial and immune to state influence?

A new approach is urgently needed, recognizing that the current situation has significantly unleveled the playing field by undermining the legal protections for cross-border EU investors, and risks significant, detrimental economic consequences.

The EU Commission’s consultation on the issue is relevant but comes very late in the day. Clarity is very much needed over whether member states’ actions can be considered reasonable or not, and in particular what constitutes expropriation. And it is crucial to have certainty that if any Member State breaches its commitments it will have to bear the consequences of those actions, and therefore that investors can be sure of receiving damages.

For this to occur, there needs to be access to an impartial process staffed by an independent judiciary, expert in international investment and commercial dispute resolution and acting pursuant to uniform, transparent and effective procedures. It is a shame this was not established before the existing system of BITs was jettisoned, thereby leaving the current damaging vacuum for investor protections.