Europe Must Own Up to Its Hypocrisy

May 6 , 2023
By Andrés Arauz , Guillaume Long

Developing countries are in a much worse position if advanced economies are being cowed by large corporations and struggling to implement urgently needed reforms, argued Andrés Arauz, a senior research fellow at the Center for Economic & Policy Research, and Guillaume Long, a senior policy analyst at the Center for Economic & Policy Research (Washington, DC). This commentary is provided by Project Syndicate (PS).

Over the past year, a stream of European countries have exited the controversial Energy Charter Treaty (ECT). France, Spain, the Netherlands, Germany, Poland, Luxembourg, Slovenia, and Denmark have all withdrawn from the Treaty or announced their intention to do so, joining Italy, which left in 2016. By allowing foreign energy investors to sue national governments for losses caused by policy changes, the Treaty prevents countries from delivering on their commitment to meet the Paris climate agreement’s targets. It effectively neutralizes their plans to tax oil companies’ windfall profits.

Developing countries are in a much worse position if advanced economies are being cowed by large corporations and struggling to implement urgently needed reforms. Lured by the often deceptive promise of higher capital inflows, many have signed a raft of bilateral and multilateral investment treaties. Like the ECT, these agreements contain investor-state dispute settlement (ISDS) mechanisms that allow foreign investors to bring a claim against a state before a private international tribunal.

Dissatisfaction with the Treaty in Europe could have sparked an important debate on how dispute settlement affects the planet's future; instead, many European Union (EU) member states continue to press developing countries to conclude investment treaties.

Established at the end of the Cold War, the ECT was designed to encourage Western investment in the energy sector of former Soviet bloc countries, particularly the fossil-fuel industry. To assuage concerns about expropriation, breach of contract, and other discriminatory treatment, the Treaty permits investors to submit disputes to international arbitration, a supposedly neutral forum, rather than national courts. This system allows corporations to sue governments for investment losses, including future profits, which can amount to billions of dollars.

As of June 2022, at least 150 investment arbitration cases have been brought under the ECT.

But the ECT is just the tip of the iceberg.

Roughly 2,500 investment treaties - most of them bilateral – permit international investors to use arbitrators to settle disputes with states. Corporations can sue states for any judicial, legislative, or regulatory decision, including at the municipal level, that could affect their bottom line. Investment treaties thus make it harder for governments to implement stronger and more effective environmental safeguards, labour rights, and safety standards. Even the threat of an investor suit can stymie policymakers.

Not even the promise of reform has tempered key European member states’ resolve to leave the ECT. The European Commission (EC) has said that a coordinated EU exit treaty – an outcome called for by the European Parliament – appears inevitable. There is also talk of EU countries agreeing among themselves not to apply the ECT’s sunset clause, which protects any existing investment for an additional 20 years after a state’s exit (the European Parliament also voted to annul the clause).

Many believe that phasing out fossil fuels cannot wait another two decades.

Developing countries could make the most of this unprecedented pushback against the ECT by demanding an overhaul of the many crippling investment treaties they are a party. Yet while EU member states are leaving the ECT, a growing number of African countries, including The Gambia, Mali, Burkina Faso, Nigeria, Rwanda, Senegal, and Eswatini, are joining it.

Unfortunately, Europe’s refusal to subordinate political decision-making to corporate interests has not extended beyond the bloc’s borders. Despite announcing its withdrawal from the ECT, France still has 19 bilateral investment treaties with countries in Latin America and the Caribbean, as well as another 20 with African countries. Spain has 18 and 11, respectively, and The Netherlands has 15 and 22. And all three states continue to pressure developing countries to sign new investment treaties (researches estimate that most investor claimants come from advanced economies, though it is not always easy to determine their nationality).

Ecuador, which has vast oil reserves, is a striking example of this dynamic. It withf¥drew from all its investment treaties in May 2017, after the Commission for the Audit of Investment Protection Treaties spent several years analyzing their legality and impact. The Commission’s report found shortcomings in many treaties’ ratification and record on attracting foreign investment. Some are still in force because of sunset clauses but no longer grant protection to new investments (Ecuador did not go as far as the European Parliament in calling for these clauses to be ditched).

But subsequent Ecuadorian governments, under pressure from transnational corporations, have demonstrated a renewed interest in reinstating dispute settlement mechanisms, and Europe has reciprocated.

Last August, on an official visit to Ecuador, Spanish Prime Minister Pedro Sanchez, reflecting Spanish companies’ growing interest in the country, insisted that “it is important that we can conclude a [bilateral investment] treaty before the end of the year.” Most notably, Repsol, Spain’s biggest oil company, has several projects in Ecuador and previously filed an arbitration against the country over its windfall tax.

The Netherlands has likewise pressed Ecuador to sign an investment treaty to protect its energy sector.

A recent award made under the France-Ecuador bilateral investment treaty strikingly illustrates these agreements’ pernicious tendency to prioritize corporate profits over sovereign states’ efforts to ensure sustainable development and shared prosperity. Despite registering its main assets in the Bahamas, a tax haven, the British-French oil corporation Perenco used the arbitration clause in the Ecuador-France treaty to seek compensation for a tax on windfall revenues. The arbitral tribunal awarded 412 million dollars to Perenco for “indirect expropriation,” and Ecuador has agreed to pay.

Such “treaty shopping” allows multinationals to minimize tax liability while maximizing investment protection.

Investment treaties remain a major obstacle to fighting climate change and protecting the dignity of all human lives. The spate of European withdrawals from the ECT is a golden opportunity to roll back many other investment treaties’ provisions on dispute settlements. But first, Europe must own up to its hypocrisy.

PUBLISHED ON May 06,2023 [ VOL 24 , NO 1201]

By Andrés Arauz ( Andrés Arauz, a senior research fellow at the Center for Economic & Policy Research, ) , Guillaume Long ( Guillaume Long, a senior policy analyst at the Center for Economic & Policy Research (Washington, DC). )

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