Estonia and subsidiarity

Essays - November 16, 2022

It is the honour of the Republic of Estonia to have challenged a European Union legislative measure in front of the Court of Justice of the EU for the first time after the Lisbon Treaty.  The honour of the Baltic nation further escalates based on the fact that, since then, this has only happened on three more occasions.

The object of such a claim, brought in September 2013, was Directive 2013/34/EU on annual financial statements of undertakings.

The claming Member State argued that both the principles of subsidiarity and proportionality had been breached by the European Parliament and the Council of the European Union.

In particular, Estonia explained that subsidiarity had not been observed for five reasons.

First, the Directive did not supply a relevant improvement in ensuring the comparability of undertakings’ financial information.

Second, Member States could better achieve the objective of reducing administrative burden on small undertakings.

Third, the co-legislators failed to provide the detailed statement on compliance with proportionality required by Article 5 of Protocol 2 to the Treaty on the Functioning of the European Union.

Fourth, subsidiarity should be justified for the Directive’s different provisions, not as a whole.

And fifth, the particular situation of the different Member States under the subsidiarity principle should have been taken into account.

In their allegations, the Parliament and the Council did not convincingly comment on item 3.

They did respond to the first issue, albeit in a weak manner.  According to both Union institutions, they had sufficiently considered the draft Directive having regard to the subsidiarity principle to find the need for action at EU level.

But such reply does not at all contest the basic failure which Estonia had brought forward, namely, that the Directive was not complying with Article 5(3), first paragraph, of the Treaty on the European Union (TEU), insofar as the Directive did not better ensure comparability of undertakings’ financial information in a relevant manner.

To the second subsidiarity flaw, the co-legislators responded that the particular interests of each Member State individually does not follow from the principle of subsidiarity, if any harmonisation is pursued.

As to the fourth topic, Parliament and Council replied that subsidiarity is to be assessed as a general consideration, and not for each provision taken separately.

Finally, both defendants held that the situation of a particular Member State, irrespective of its progress in achieving a specific objective, does not preclude the need for EU action to attain different objectives throughout the European Union.

One can hardly agree with Parliament and Council’s argument:  By all means the situation of Member States should be analysed in terms of progress towards achieving a specific objective, in order to eventually preclude or else confirm a need for EU action.  That is precisely what TEU Article 5(3), first paragraph, requires in fine, i.e., that the objective of a proposed action be better achieved at Union level rather than at Member State level.  In order to make that comparison, an analysis of the national situation and progress seems rather necessary.

In its 18 June 2015 judgment, commonly known as Estonia v Parliament and Council, the Second Chamber of the Court dismissed all of the five arguments advanced by the applicant.

With regards to the first, there is a breach of the judicial principle of congruence, as the applicant’s allegation is not addressed.  Nowhere in the judgment a reasoning as to whether the Directive ensured a relevant improvement in the comparability of undertakings’ financial information is to be found.  Many Member States’ supreme courts could have easily overridden such a judicial decision based on its lack of congruence.

The Court’s line of thought for Estonia’s second item seems quite poor, as well.  The Chamber accepts that the objective of reducing administrative burden on small undertakings can be better achieved by Member States.  Therefore, that should prove enough to annul the Directive per direct application of TEU Article 5(3), first paragraph.

But here, the Luxembourg magistrates take a contradictory path and proclaim that different levels of administrative burden reduction for small undertakings in different Member States would actually run contrary to the first objective, that is, establishing minimum equivalent legal requirements as regards the accounts of undertakings that are in competition with one another.

In so doing, we sustain that the Court incurs in a double contradiction:  First, it plays with the nature of the two explicit objectives of the Directive, ignoring the analysis of the second one (the reduction of administrative burden on small undertakings) and transforming it into a measure for achievement of the first.  And it also contradicts itself when defending such first goal, “the establishing of minimum legal requirements as regards the accounts of undertakings that are in competition with one another”, as two of the Directive paragraphs cited in the judgment (Articles 4(6) and 6(3)) explicitly allow Member States to apply different measures to reduce the administrative burden on small undertakings.

The third point at issue, deemed obligatory by way of TEU Article 5(3), second paragraph, is dismissed by the Court in just one line:  “it is not such as to invalidate the conclusion of compliance with the subsidiarity principle” (paragraph 50), for all legal reasoning to the matter.  A clear case of breach of the Rule of Law on behalf of the EU Court of Justice, that ignores the obligatory application of the treaty.

In the treatment of the fourth allegation we find at last a more interesting set of criteria determined by the Luxembourg judges, in order to ascertain the degree of detail at which a legally binding instrument should be justified.  These are the the context and the circumstances of each case, in particular the interest which the addressees of the measure may have in obtaining explanations.  It certainly is not much in terms of specificity, but it does confirm a standard of measure for this and further rulings.

The grounds for the decision on the fifth and last subsidiarity allegation fall once more in the category of disappointment.  The question was whether the situation of different Member States should be considered or not.  The Court rules that “the particular situation of a Member State” should not be subject to such consideration – thereby keeping silence, as a ratio decidendi, on what would happen if, let us say, the situation in more than one Member State make it clear that subsidiarity under TEU Article 5(3), first paragraph, is not in place.

As outlined at the beginning, Estonia asserted that the Directive also ran contrary to the principle of proportionality.  According to TEU Article 5(4), the content and form of Union action must not exceed what is necessary to achieve the objectives of the Treaties.

But the Court adds an adverb to it, certainly absent in the treaty, to their own interpretation on when the principle is not complied with:  the measure would need to be “manifestly” inappropriate in view of the objective pursued not to be legally acceptable.  If it were merely inappropriate, it would still be proportionate, as per Estonia v Parliament and Council.

A second flagrant aggression against the Rule of Law this could be well termed, even more so if we recall that aggression to be not less than against primary law.

As a conclusion, we might think that perhaps this was not the case, if we compare it with more recent and continuous attacks and cases of disregard for the principles of conferral, subsidiarity and proportionality, to annul a binding act on the basis of such principles.

But unfortunately the judgment contains the multiple defects and discussed statements that amount to contemplating the Court of Justice of the European Union as not deserving the full prestige and auctoritas of an independent body of legal professionals.

Source of the picture:  Courdecassation.fr