FT: Romanian twins throw wrench in US-EU trade deal?

Meet the Miculas: two twin brothers, Ioan and Viorel, whose battle with EU law will be of interest to anyone following Europe’s fitful trade negotiations.

The duo’s battle to save their beer-to-biscuits food empire in northern Romania may not seem an obvious proxy for an increasingly bitter fight over the EU’s trade deals with the US and Canada. But it cuts to the heart of one of the most politically contentious issues surrounding both trade accords: the status of international investment tribunals.

The brothers, who also hold Swedish citizenship, have had a terrible start to the week.

On Monday, the EU said they would have to repay all the subsidies they received to build up their business in the poor northern Romanian county of Bihor, on the Hungarian border. Their factories, which produce brands such as Servus beer and Rony biscuits, depended on what Brussels ruled was illegal state aid. According to their lawyers, the pair had decided to invest in a region as impoverished as Bihor on the understanding that Romania would subsidise them. On that pledge hang some 9,000 jobs.

Their business model, which predated Romania’s accession to the EU, came unstuck when Bucharest decided to join the European club. Competition authorities no longer allowed this kind of state largesse. In 2005, Bucharest cut the funds to the brothers in Bihor. (Romania finally joined in 2007).

This is where things get interesting legally, and the trade aficionados will start to realise something is afoot.

As Swedish citizens, the Miculas took their case to an international tribunal and won. At the end of 2013, the International Centre for Settlement of Investment Disputes awarded a settlement of $250m from the Romanian government because of its suspension of the subsidies. It was one of the largest sums ever awarded by an international investment tribunal. To Brussels, the award of damages meant state aid was now effectively being paid “through the back door”.

Anyone following Europe’s landmark trade deal with the US will know that these international tribunals are an incendiary issue. They allow companies who feel they have been aggrieved by local legal authorities to appeal to arbitrators appointed under the terms of trade deals. To EU and US trade officials, they are an important way to protect investor rights, while opponents fear that they could undermine national and EU law. Opposition is especially strong in Germany and among Socialists in the European Parliament.

So, the involvement of a tribunal has put Brussels in a bind. On the one hand, EU trade officials have been talking up tribunals as a good thing to have in trade accords, such as that with the US and Canada. On the other hand, EU competition officials have been seeking to overturn the Micula brothers’ verdict, one of the most closely watched rulings from the ICSID.

What does this all add up to? For EU trade officials, there is no problem here. They say any tribunals included in the US deal will be designed to avoid any of the problems that cropped up in past cases. They argue the Miculas are something of an anomaly because their case is complicated by Romania’s accession to the EU. EU law has simply triumphed in clearing up a minor intra-EU glitch. In fact, many in Brussels hope future tribunals will clear up the confusion created by existing bilateral trade accords, like the one between Sweden and Romania.

Investors may well not see it the same way. The European Commission’s decision on Monday means Brussels has overridden the ICSID – and that is a highly significant development. Yes, the Micula case has peculiarities but every complex investment case is going to have peculiarities. Many will involve countries outside EU law or new members of the bloc. The Micula case is certainly a significant show of intent from the commission.

So, is that it: Brussels trumps international tribunals? Not quite. There will probably be one final chapter in this saga. The case could well go to appeal at the European Court of Justice. Lawyers say both brothers are considering an appeal. To the Miculas’ supporters, the EU is challenging perfectly sound treaties that investors should be able to trust (a Romania-Sweden trade accord and the ICSID framework itself).

The only thing we can take for granted is that the Micula brothers will only fan the debate about tribunals, not lay it to rest.