The European Commission says that bilateral investment protection agreements between EU member states are incompatible with the EU treaties and therefore the arbitration mechanisms provided for in those agreements are contrary to EU law.

Intra-EU bilateral investment treaties (BITs) are incompatible with the EU treaties and therefore the arbitration mechanisms provided for in such treaties are contrary to EU law. The Commission is of the view that these treaties fragment the single market by conferring rights on a bilateral basis to nationals of the countries with such treaties rather than to all investors in the EU, the Commission's press service said on Thursday when asked about the Commission's position on UniCredit's lawsuit against Croatia.

Arbitration proceedings provided for in these treaties exclude national courts and the European Court of Justice and create a situation in which these courts cannot ensure the full effect of European law, it said.

Italy's UniCredit, which owns Zagrebacka Banka, has recently announced that it will sue Croatia over the conversion of Swiss franc loan conversion at the International Center for the Settlement of Investment Disputes in Washington.

In June 2015, the Commission initiated proceedings for breaches of EU law against Austria, the Netherlands, Sweden, Romania and Slovakia, demanding that they cancel bilateral investment treaties within the EU.

Arbitration proceedings based on those treaties are different from the procedure the Commission initiated against Croatia.

The EC on June 16 sent Croatia an official letter of warning regarding its law on the conversion of loans pegged to the Swiss franc into euro-denominated loans, claiming that the conversion law shifted all of the conversion cost onto banks and that its retroactive application jeopardised the principle of legal security.

A letter with a formal warning is the first step the EC takes against a country it believes has violated EU law.

If the country fails to reply to the letter or fails to provide a satisfactory explanation in its reply, the EC takes the second step, namely a reasoned opinion. If after that there is still no satisfactory response, the EC may approach the Court of the EU.

The EC objects that the law adopted by the Croatian parliament allows all loan holders (except for legal persons) to retroactively convert loans pegged to Swiss francs into euro loans in line with historical exchange rates, regardless of their ability to repay those loans. That makes loan conversion costs fall entirely on creditors.

The EC believes that it is necessary to strike a balance between the interests of consumers and the need to protect the single capital market and its legislative framework.

The Croatian government yesterday adopted a reply to the Commission's objections and will send it by the end of the week.

Asked if they received the reply, the Commission said the deadline was September 30 and that they would need time to analyse it before making a judgement.

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