In this post, Prof. Dr. iur. Dr. rer. pol. h.c. Carl Baudenbacher, Partner Nobel Baudenbacher, Zurich/Brussels, Door Tenant Monckton Chambers, London, Visiting Professor at LSE, President of the EFTA Court 2003-2017 provides a summary of EFTA.
The European Free Trade Association, abbreviated “EFTA”, was founded in Stockholm in 1960 under British leadership as a counter-model to the European Economic Communities (now the EU). Unlike the EU, EFTA did not create a customs union but a free trade area. Internally, customs duties were abolished, but vis-à-vis outside countries, each EFTA State has its own foreign trade regime. Unlike the EU, EFTA also has no supranational features such as a Commission or a Court of Justice. Rather, the EFTA Convention is a classic treaty under international law.
EFTA has a complicated, truly European, history. At the beginning, it consisted of seven countries: Denmark, Norway, Portugal, Austria, Sweden, Switzerland and the United Kingdom. Today, EFTA is made up of the four States of Iceland, Liechtenstein, Norway and Switzerland. In 2001, the EFTA Convention was updated in Vaduz, the capital of Liechtenstein.
EFTA is an inherently flexible organisation. Today, it appears in three different formations depending on the topic and each country’s policies. The Association acts as “EFTA at four” when it comes to trade relations with States outside the EU, as “EFTA at three” with common EFTA institutions in relation to the EU (the EFTA Surveillance Authority and the EFTA Court), and also as “EFTA at three”, but with a different composition and without common institutions, when it comes to participation in the Lugano Convention on jurisdiction, recognition and enforcement of civil and commercial judgments.
FTA’s with the EU
In 1973, the United Kingdom, the then leading EFTA State, joined the EEC together with another former EFTA State, Denmark, and non-aligned Ireland. The remaining EFTA States Iceland, Norway, Austria, Portugal, Sweden and Switzerland each concluded bilateral free trade agreements (“FTAs”) with the EEC at the same time. Materially, these agreements were largely based on EEC law, but there was (and in the case of Switzerland there is) no obligation to adopt new EEC law dynamically and no supranational institutions. The most important rulings were issued by the Swiss Federal Supreme Court on the Switzerland-EEC FTA, and by the ECJ on the Portugal-EEC FTA. In the Stanley Adams and Omo cases, in 1978 and 1979, the Swiss Federal Supreme Court incomprehensibly barred private actors from access to justice by ruling that only the Contracting Parties could invoke the competition law and free trade law provisions of the FTA. In other words, the Federal Supreme Court did not grant these provisions direct effect in the Swiss legal system.
This narrow-minded case law, which the Swiss Federal Supreme Court has never openly corrected, contrasts with its Banque de Crédit international ruling of 13 October 1972, in which the general prohibition of discrimination in Article 16(1) of the 1960 EFTA Convention concerning the right of establishment was found to have direct effect. This was in line with established case law on international treaties. Such an interpretation was all the more necessary because the Convention did not establish a common jurisdiction accessible to private parties.
In November 2021, the traditionally state friendly Borgarting Court of Appeal in Norway had to answer the question whether Article 23(1) 2001 EFTA Convention guarantees the same right of establishment as Article 31(1) EEA Agreement. A Norwegian company had been taxed when it sold shares in a Swiss company. Unsurprisingly, the Court of Appeal answered the question in the negative and the Supreme Court denied certiorari.
EEA
In 1994, EFTA split. Finland, Iceland, Norway, Austria, and Sweden joined the multilateral Agreement with the EU and its Member States on the European Economic Area. This treaty guarantees the freedoms of movement of goods, persons, self-employed persons, services, and capital. It has created a market, and the main actors in a market are not the States, but rather those who create wealth: producers, workers, traders, investors, and financial actors. The EEA Agreement established a two-pillar system with one EU and one EEA/EFTA pillar. Each pillar is subject to its own supervisory body, the EU to the Commission and the EEA/EFTA to the EFTA Surveillance Authority (often simply called “ESA”). As far as judicial review is concerned, the ECJ has jurisdiction in the EU pillar and the EFTA Court in the EFTA pillar. At the same time, the EEA/EFTA States have kept their sovereignty in the fields of foreign policy, foreign trade, agriculture, and fisheries.
Switzerland rejected the EEA Agreement in a referendum on 6 December 1992 and subsequently expanded its network of bilateral treaties with the EU. The bilateral treaties (with the exception of the Air Transport Agreement, where the Commission and the ECJ have jurisdiction) are administered by Joint Committees, which can only decide by consensus.
Finland, Austria, and Sweden joined the EU on 1 January 1995. Since 1 May 1995, the EEA/EFTA pillar has consisted of Iceland, Liechtenstein, and Norway.
After Brexit, the EEA/EFTA and the UK concluded an agreement that covers trade in goods, services and investment, digital trade, capital movements, government procurement, intellectual property, competition, subsidies, small and medium sized enterprises, good regulatory practices and regulatory cooperation, recognition of professional qualifications, and trade and sustainable development. It also encompasses legal and horizontal issues including dispute settlement.
A new Switzerland-UK trade agreement includes provisions on trade in goods, IP including geographical indications, and government procurement.
Lugano Convention
After the June 2016 Brexit decision of the British electorate, an agreement caused a public stir that was previously known only to specialists: the Lugano Convention on Jurisdiction, Recognition and Enforcement of Judgments in Civil and Commercial Matters (“Lugano Convention”). The first Lugano Convention of 1988 was replaced by an updated treaty signed in 2007 between the Member States of the European Union, Switzerland, Norway, and Iceland. This is another example of “EFTA at three”, but with a different composition and without the involvement of the EEA/EFTA States’ common institutions. Through their membership in this treaty, Iceland, Norway, and Switzerland participate in an area where judgments in civil and commercial matters can freely circulate. Liechtenstein has refrained from joining the Lugano Convention after fierce opposition from domestic lawyers.
After its Brexit vote, the UK unsuccessfully applied to join the Lugano Convention as an individual member. The EU has regrettably replaced the free movement of judgments with protectionism vis-à-vis the UK. The European Commission claimed that a link existed between being part of the Single Market and Lugano membership, stating that if a country is not in the Single Market, it cannot be part of Lugano. The argument is false if only because the Lugano Convention predates the completion of the internal market.
In reality, the EU’s way of acting is a punishment of the UK desired above all by France. In the French parliament, the hope was unabashedly expressed that Paris as a financial centre would benefit. Germany allowed the Commission to have its way. All three EFTA States belonging to the Lugano Convention, Iceland, Norway and Switzerland, had spoken out in favour of admitting the UK as an individual member. As a result of this, individuals and businesses suffer, including, significantly, children on either side of the Channel, who have difficulty enforcing support claims against their fathers.
Is there an EFTA legal culture?
Legal culture is an ambiguous term. It may refer to “law in action”, as opposed to “law on the books”. Sometimes it relates to legal families or legal traditions. One speaks of the culture of continental European “civil law” and that of Anglo-Saxon “common law”, or of the German or French legal systems. In the sociology of law, legal culture is understood as the values, ideas and attitudes that a society has with regard to the law. At the European level, a distinction must be made between the common European legal culture of the EU and non-EU States and the legal culture of the EU as an organisation. The EFTA States and EFTA as a grouping also have their own legal culture, although their association is only a loose one. It is characterised by a commitment to free trade. For “EFTA at Four”, this continues to be relevant today. The same applies mutatis mutandis to “EFTA at Three” with regard to the Lugano Convention.
Since its inception in 1994, the EFTA Court has been committed to free movement in the broadest sense, and it has delivered many leading judgments which reflect not only the EFTA legal culture but the nimbleness of a small court. However, a Court consisting of only three judges can rapidly change with a new composition in particular if it lacks an awareness of precedent. This vulnerability may be exploited by governments if they seek to appoint judges whose independence open to doubt. Since 2018, the interests of private actors are no longer paramount in all cases; (too) much consideration is given to the wishes of governments, to the detriment of market actors.
The future
There are people in the UK who are talking about the country joining EFTA. This would make the UK the leading member of a prestigious club of successful economies. However, it would not solve British industry’s biggest problem: the lack of access to the single market. Nor would it allow membership of the Lugano Convention because of the EU’s intransigence. So, it seems that EFTA membership would make sense as a precursor to joining the EEA or docking with the EFTA Surveillance Authority and the EFTA Court. Switzerland will have to seriously consider the question of EEA membership or docking if it wants to maintain privileged access to the internal market. The alternative, the Ukraine model with its sham arbitration court, would be an unequal treaty.
I have always been of the opinion that a free-trade-minded second structure should be established alongside the EU, to which the existing four EFTA states and the UK should belong. Recently, President Emmanuel Macron of France has proposed the creation of a ‘European Political Community’, an idea which, while light on content, was endorsed by European Commission President Ursula von der Leyen in her State of the Union speech on 14 September 2022. The first meeting of the European Political Community, to be held in Prague on 6 October 2022 many are anticipated to attend including the countries of the Western Balkans, the members of the EU’s Eastern Partnership, in addition to Ukraine, Georgia, Armenia as well as Israel. In Switzerland, of course, large casts are not expected and in Norway they are happy with their current superpower position in the EFTA pillar of the EEA. The initiative for a free-trade-minded second structure would therefore have to come from London.
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