Nicesave

Iceland did not break international law through its response to the financial crisis, found the European Free Trade Association (EFTA) Court last week.

Andrew Higgins at the New York Times explains the basic dispute:

Icesave collapsed in October 2008 along with Landsbanki and the rest of Iceland’s banking sector in a spectacular blowout by the North Atlantic island nation’s entire financial system.

Caught in the wreckage were some 350,000 people in Britain and the Netherlands who, lured by unusually high interest rates, had put their money in Icesave accounts.

The Icelandic government protected the deposits of Icelanders who had money in failed banks by moving the deposits into new, solvent versions of the banks. But the government declined to cover the losses of foreigners with online accounts operated by Icesave, a move that prompted complaints of illegal discrimination to the court in Luxembourg.

The case against Iceland was bought by the Surveillance Authority of the European Free Trade Association and revolved around interpretation of a European Union directive requiring that deposits in European banks be covered equally by deposit guarantee systems. Britain and the Netherlands supported the case.

My colleague Michael Waibel has a very full run-down of the EFTA Court decision at the EJIL blog. He understands European law far better than I do, so I won’t attempt to replicate his analysis.

But I did want to draw out a few things.

The way that the European judges approached this issue seemed quite a bit more delicate than the way that the World Trade Organization (WTO) often approaches regulatory questions. There has been very limited financial services jurisprudence at the WTO (see here for the exception), but the interpretation of consumer protection questions in products trade has left a bit to be desired. (See here for my take on a recent public health case.)

First, there’s the citation to Joseph Stiglitz at paragraph 167, which I doubt a WTO panel would ever cite to. The judges note that, if you provide too much deposit protection to foreigners, you could discourage them from doing due diligence to see if it really made sense to dive into the Icelandic banking sector. This is known as the moral hazard problem. WTO panels often seem to ignore whether their findings promote patterns of trade and investment that are actually counterproductive from a societal viewpoint.

Second, there’s the very common sense conclusion that foreign entities shouldn’t be able to use international law to get treated better than their domestic counterparts. Iceland noted that the financial crisis was no picnic for Icelandic depositors:

it is unclear whether the transfer of domestic deposits to the new bank led to a better position of the depositors holding such accounts. These account holders were subject to strict capital controls, and were unable to convert their (severely depreciating) Icelandic krónur into any other currency. By contrast, the priority claimants in the Landsbanki winding up now stand to be fully reimbursed in a fully convertible currency. (para 199)

The EFTA Court found that the Icelandic regulations did not violate national treatment obligations, apparently mostly on grounds of the way that the applicants made their plea. However, the judges noted,

For the sake of completeness, the Court adds that even if the third plea had been formulated differently, one would have to bear in mind that the EEA States enjoy a wide margin of discretion in making fundamental choices of economic policy in the specific event of a systemic crisis provided that certain circumstances are duly proven. This would have to be taken into consideration as a possible ground for justification. (para 227)

Contrast this with the country of origin label dispute or the tuna-dolphin cases at the WTO, were US authorities were found to need to adjust origin-neutral regulation so as to accommodate particular marketing strategies of foreign producers.

Now, it’s hard to say whether it’s the shared regulatory norms that makes European courts more sensitive to Icelandic policy than a WTO panel might have been, or whether it’s just better and more balanced rules that they are interpreting. Eric Posner and John Yoo – no big fans of international tribunals – admit that they seem to work better at the European level than others because of the shared cultural background.

That said, the rules seem pretty damn balanced, so maybe the judges were just applying better rules. (As the EFTA court wrote, the European directive at issue has a “dual objective” that “is expressed in the first recital of the Directive which states that the harmonious development of the activities of credit institutions throughout the Community should be promoted through the elimination of all restrictions on the right of establishment and the freedom to provide services, while increasing the stability of the banking system and protection for savers.”)

You can see the EFTA Court ruling here, . In a future post, I’ll dive into Panama’s WTO notification case against Argentina. This may provide a test case to see whether the WTO is up to the task of dealing with financial services trade questions.