C-59/81

defendant,

APPLICATION for a declaration that the following measures are void:

1. Council Regulation (Euratom/ECSC/EEC) No 187/81 of 20 January 1981 adjusting the salaries and pensions of officials and other servants of the European Communities and the weightings applying thereto (published in Official Journal L 21, p. 18, and replaced by the version published in Official Journal L 130, p. 26);

COMMISSION v COUNCIL

2. Articles 1 (a), 2 (a), 2 (b) and the first paragraph of Article 11 of Council Regulation (Euratom/ECSC/EEC) No 397/81 of 10 February 1981 fixing the tables of salaries and other components of remuneration consequent upon Regulation No 187/81, in so far as they result from that regulation (published in Official Journal L 46, p. 1, and replaced by the version published in Official Journal L 130, p. 28),

THE COURT

JUDGMENT OF 6. 10. 1982 — CASE 59/81

In the case of the other members of staff, index shall reflect the situation as at however, Regulation No 187/81 as 1 July in each of the countries of amended allowed each of them the same the Communities. net amount at a flat rate, thus reducing During this review the Council shall the general average increase to 1.5%. consider whether, as part of [the] The Council also failed to adopt the economic and social policy of the proposal for a quarterly adjustment of Communities, remuneration should the weightings for various countries of be adjusted. Particular account shall employment with particularly large be taken of any increases in salaries increases in the cost of living. in the public service and the needs of recruitment.

The Commission claims that in adopting the regulations in question the Council (2) In the event of a substantial change has broken with a practice of many in the cost of living, the Council years' standing and, in particular, one shall decide, within two months, which has been observed for the past what adjustments should be made four years in which the Council followed to the weightings and if appropriate the method for adjusting remuneration to apply them retrospectively." drawn up by itself on 25 June 1976, which was still applicable when the regu­ lations were adopted.

COMMISSION v COUNCIL

3. Civil service per capita emoluments in At the end of the three-year period real terms, also taken from the first during which the first method was to method, where it constituted the apply the Council adopted, after much second part of the specific index.

JUDGMENT OF 6. 10. 1982 — CASE 59/81

It should be noted that these first three The annual adjustments thus decided factors are supplied by the Statistical upon were adopted in accordance with Office. the basic principle set out in the 1976 method and were based in the main on the changes in the net real specific 4. General factors of an economic and indicator measuring variations in the real social nature. This item, supplied by incomes of national civil servants. the Commission, represented "other macro-economic factors indicative of Member States' economic and social In addition, and still in accordance with policies, such as the gross domestic that method, five regulations making product per capita of the working interim adjustments to the weightings population and the aggregate per were adopted in the light of the sub­ capita earnings in the economy as a stantial rise in the cost of living which whole". occurred during the months following the date on which the previous annual adjustment of remuneration took place 5. Recruitment needs and the structure of (1 July)· Community staff complements, infor­ mation likewise supplied by the Commission. Between 1975 and 1979 real net Community remuneration showed an increase' of 4.4% whereas real net remuneration in the national civil Despite the Commission's proposals, the services showed, for the same period, 1976 method provides for salaries to be an increase of 4 %. The difference, adjusted annually ex post facto, and for described by the Commission as the adjustments to take effect retro­ negligible, was attributable to different actively from 1 July of the year in which staffing structures, and equally to the the end of the reference period used for fact that in the Community less emphasis the salary review occurs, the reference was placed on the linear principle period corresponding to the 12 months designed to favour the middle and lower preceding the first day of July of the salary groups. year in which the review is made.

At the end of June 1980 the Commission open the oral procedure without any submitted such a study emphasizing a preparatory inquiry. "most satisfactory result". It did, however, propose two alterations, one concerning the interim adjustments and the other the annual adjustments: the II — Conclusions of the parties Commission proposed that when the latter were calculated the rate of increase of the oil bill should be deducted from The Commission claims that the Court the specific indicator to the extent to should: which the oil factor represented more than 0.5% of the Community gross domestic product during the year of "Declare that Council Regulation No reference. The deduction was to be 187/81 of 20 January 1981 is void in its temporary, and repayable over a period entirety; of four years. Declare that Articles 1 (a), 2 (a), 2 (b) and the first paragraph of Article 11 of Before the Council had revised the the supplementary Council Regulation method again, however, the Commission No 397/81 of 10 February 1981, are forwarded to it on 27 November 1980 its void; customary report on the annual review of the level of remuneration, together Declare that the provisions of the regu­ with the Statistical Office's report. The lations in question shall continue to have Council then adopted the Commission's effect until the entry into force of the report only for officials in the lowest- new regulation to be adopted consequent paid categories. upon the judgment."

Moreover, at the same time as it adopted The Council contends that the Court Regulation No 187/81 the Council should: declared that that regulation was the last one to be adopted on the basis of the "Dismiss as unfounded the Commission's 1976 method which must therefore be application for a declaration that Council revised, and that the new method "will Regulation No 187/81 of 20 January exclude, in particular, all automatic 1981 is void in its entirety and that the indexing and will adopt the principle of supplementary Council Regulation No harmonization with national incomes" 397/81 of 10 February 1981 is void as (statement recorded in the minutes of its regards Articles 1 (a), 2 (a), 2 (b) and the 685th meeting). first paragraph of Article 11 thereof."

397/81 the Council took account of 'the direction of even a modest increase in worsening of the general economic employees' purchasing power, a situation in the Community .. ., brought reduction in the purchasing power of about, particularly by the increased cost Community staff must fall outside the of energy', whereas Article 65 (1) of the terms of that policy. Consequently the Staff Regulations required it to base its reduction in the purchasing power of decision regarding the adjustment of Community staff which was effected by remuneration and pensions not on 'the the regulations at issue was not "part of economic situation' but on the 'economic the economic and social policy of the and social policy of the Community'." Communities" pursued between July 1979 and June 1980. A decision of that nature no longer satisfies the requirements of the Staff Regulations, according to which consideration is to The Commission points out that Article be given to the question whether re­ 65 (1) of the Staff Regulations requires muneration should be adjusted as part of the Council to consider "whether, as (that is to say if appropriate, suitable or part of the economic and social policy of proper, regard being had to) such a the Community, remuneration should policy. be adjusted". The economic situation comprises an array of facts and phenomena, whereas economic policy is the art, or the science, of guiding matters in a particular direction by the application of various techniques. Thus The Council, maintains, first, that when for the reference period July 1979 to it considered the deterioration in the June 1980 special attention should be general economic situation in the given to the "guidelines for economic Community during the reference period and social policy" set out by the it relied on point 4 of the method Community in the Annual Economic adopted in June 1976, which is headed Report for the year 1979—1980 "General Economic and Social Factors". (published in Economie Européenne No In the circumstances the inclusion of 4, p. 14). It is common ground that from point 4 and consideration of the factors July 1979 to June 1980 the direction in question were consonant with the taken by Community policy on pay, and requirement contained in Article 65 (1) the effects of that policy, resulted in a that decisions should be made "as part of rate of increase in employees' real [the] economic and social policy of the remuneration of the order of 1.35% per Communities". employee. That rate was only 0.65% for the reference period July 1976 to June 1977, and 0.95% for the period July 1977 to June 1978. Yet in both cases, the method of calculation adopted in June 1976 was applied in the usual manner and no decision was made to reduce the Moreover, to take such factors into purchasing power of Community staff. account is compatible with the second sentence of the second subparagraph of Article 65 (1). On the wording of the article, which requires that "particular account shall be taken ...", it is clear The Commission concludes that if that consideration of general economic Community policy on pay leads in the and social factors other than the two

In any case, when the Council decides whether it should adjust remuneration in the light of the factors referred to in the method it must do so "as part of the economic and social policy of the The Commission first rejects the Communities". Since "as part of" has a Council's argument that the method flexible meaning and "the economic and adopted in 1976 allows it to take into social policy of the Communities" is a consideration "general economic and wide-ranging concept it would, the social factors". Since the method does Council maintains, be contrary to the not constitute a rule incorporated in the wording and logic of Article 65 (1) to Staff Regulations it cannot be construed claim that that expression, in conjunction in a sense contrary to the higher rule, in with some sentence or other taken from this case Article 65 (1) of the Staff Regu­ the guidelines on economic policy lations. In addition the elements of fact addressed to the Member States, or with referred to in this context by the some figure or other representing Council, namely the gross domestic variations in purchasing power recorded product per capita of the working popu­ during the reference period, have the lation and the total emoluments, which effect of restricting the Council's margin are the reflections of a specific economic of discretion in a precise respect. and social policy, run counter to the decision taken by the Council to reduce in real terms the total average remuner­ ation of officials since those two indices rose during the reference period.

The Council reviews the relevant decisions of the Court concerning the scope of the discretion enjoyed by an institution when evaluating a complex economic situation, and the scope of a Aware of the contradiction, the Council judicial review of the lawfulness of the sought to justify its decision by relying exercise of such powers (see, in on "the deterioration in the general particular, the judgment of 25 May 1978 economic situation ... as a result of, in in Case 136/77, Racke [1978] ECR particular, the rise in energy costs". 1245). However, the rise in energy costs is a

In the circumstances "facts unrelated to the policies pursued and applied within the Communities, in particular with The Commission also takes issue with regard to pay, must therefore be the lesson drawn by the Council from regarded as irrelevant." the judgment of the Court of Justice in Case 136/77. It maintains that the decision in question dealt with a case different from the present one. In this The Commission does not deny that case it is not a question of assessing an other factors may be taken into economic situation but of taking note of consideration in the adjustment of the effects of, and the course followed remuneration, but only if they reflect the by, economic policy. In any case even if policy pursued by the Communities, the judgment cited by the Council were which is not true of the increase in relevant here it must be noted that it energy costs. The Commission recalls indicates "that the Court has the power that no mention was made in 1976 of the to review the Council's exercise of its first oil crisis. power of appraisal to ensure that it is not vitiated by manifest error". The Court would be forced to such a conclusion in this case, however, in view of the fact that the Council's decision results in an As to the interpretation of the expression average decrease of 1.8% whereas the "as part of the economic and social Communities' economic and social policy policy of the Community", the during the reference period was not Commission submits that they imply the directed to securing a reduction in real existence of certain restrictions, and that remuneration for employed persons. is also borne out by an analysis of the method adopted in 1976 (especially in section II, paragraph 4) as well as by the case-law of the Court (see, in particular, the judgment of 5 June 1973 in Case As to the Council's last argument, 81172- Commissions Council[1973] ECR finally, to the effect that it considered 575, especially paragraph 8 of the the matter "as part of" the Community's decision). On that basis the Commission social and economic policy, not only is concludes that the expression in question its contention, that the maintenance of places a restriction on the Council's purchasing power represents a maximum discretion. In this instance the Council and does not preclude a reduction, a "unquestionably" went beyond the misinterpretation but, more important, confines of the Community's economic the economic facts indicate that Member and social policy because in order to States did more than maintain pur­ adopt its decision reducing officials' chasing power since the remuneration of purchasing power it took into account a employed persons rose in real terms by situation which was the result of a 1.35% during the reference period.

The Commission concludes that both the Point 4 of the 1976 method must not be economic guidelines and the effects construed so as to deprive the Council of recorded during the period July 1979 to any discretion whatsoever and introduce June 1980 confirm that maintenance of an automatic effect which would, in the the purchasing power of employed Council's view, be "contrary to the persons was secured in all the Member letter, the logic and the spirit of the States and that in not giving such a provision of the Staff Regulations which guarantee the Council disregarded the is at issue". The two factors expressly provisions of Article 65 (1) of the Staff referred to in point 4, the gross domestic Regulations. product and the gross per capita emoluments, are not sufficient to give a full and accurate picture of the economic The Council contends that there is no and social situation in the Community, question of attempting to interpret the or of the economic and social policies method adopted in 1976 otherwise than pursued within it.

To that extent, admittedly, the Council is obliged to have regard to In consequence, the Council maintains principal trends in the Community's that it has not ignored the two factors economic and social policy, but "to say expressly referred to in point 4 but "has that such a policy exists and is composed had to give weight, at the same time, to of precisely defined elements, and that other factors in order to establish a more such elements make up a rigid balanced picture of the situation and of framework to which the Council is the policy affecting it". bound to adhere when making its decision appears to the latter contrary to the actual nature and aims of the Staff The Council goes on to contend that the Regulations". judgment cited by the Commission is not germane to the case because it concern's the method adopted in 1972 which was The Council has not exceeded the very different from the 1976 method.

Communities. There is merely a coordi argument that the wording ot the nation of the general economic policies reference to guidelines of economic of the Member States, ensured by the policy for 1980 establishes the "target Council pursuant to Article 145 of the ceiling" which represents the average for EEC Treaty. the Community as a whole and thus

allows for variations as against that As to the Council's contention that average. The Commission is thus in error where there is a discretion the duty to in claiming that real income levels must "take into consideration" a particular be maintained at all costs. factor does not give rise to an obligation conferring on that factor a decisive influence on the decision to be taken, and that in addition the factor in As a result, the Council considers that it question is not the only one to be taken has not exceeded the boundaries of the into consideration, the Commission economic and social policy of the maintains that such an argument would Communities merely because "it has imply that the Council must take account progessively remained, while keeping of any increase in remuneration in the pace with the level of remuneration, public services which has taken place in below the ceiling which it had itself fixed Member States while denying it any for the Member States". influence on the fixing of remuneration for officials of the European Communi­ ties, since "it is quite obvious" that that factor was utterly ignored. Second submission: "Infringement of Article 65 (1) of the Staff Regulations inasmuch as the contested regulations, which bring about a reduction in the Nor can the argument relating to discret­ purchasing power of European officials ionary power be upheld, since Article 65 with effect from 1 July 1980, are (1) "requires the Council to take certain contrary to the salaries policy pursued factors into consideration". during the reference period July 1979 to June 1980 in the national public services, whereas the provision of the Staff Regu­ lations in question required the Council The Commission does not deny that the to take account of 'any increases in Council might have regard to other salaries in the public service'." factors but it maintains, in the first place, that "the needs of recruitment" are not relevant in this instance to the reasons on which the contested regulations are The Commission submits that the based and, in the second place, that the provision in question is not a vague wish Council failed at the same time to have incorporated in the Staff Regulations regard to economic and social policy. and without much practical significance, but a well-defined obligation imposed by the regulations, whereby an increase in salaries in the national public services is Lastly, the Commission is of the opinion a compelling factor in the annual that the judgment which was given in adjustment to Community remuneration. Case 72/74 is relevant to this case If that parameter shows an improvement despite the fact that it was given under in purchasing power in real terms of the the 1972 method. According to the order of 0.2°/o on average, to reduce Commission, the Council itself admitted purchasing power in real terms would that the 1972 method met the show a disregard of that fact, "and at requirements of Article 65 of the Staff the same time be in breach of the Regulations of Officials and that it was a provision of the Staff Regulations which system designed to ensure parallel stipulates the use of that standard of development with trends in salaries in the reference". public services. Since that principle was

abandoned in practice in January 1981, it method, which designedly allows the follows that the decision which was Council a wider margin of appraisal, is adopted in the form of the regulations at not likewise compatible with that issue no longer meets the requirements provision or that it is not "in accordance of the relevant provision in the Staff with" the latter. Regulations. Moreover, the fact that the judgment cited concerned the 1972 method is unimportant since in the 1976 method the Council re-adopted and Finally, the Council challenges the confirmed the principle of parallel Commission's argument to the effect that development. the wording of Article 65 (1) shows that the principle that parallel development must be absolute and effected annually is incorporated in the Staff Regulations, on The Council insists that its argument the ground that were that so the 1976 does not amount to saying that the method would be largely superfluous, expression "take into consideration" and even in conflict with the Staff Regu­ allows merely for regard to be had to lations. increases in salaries in the public services in Member States without deducing the least consequence from that in specific Third submission: "Breach of customary terms, and reiterates its submission that it law arising from the application of forms an important factor in the Article 65 (1) of the Staff Regulations assessment to be made but that that inasmuch as the contested regulations factor is merely one of several and must signify a departure from a long-standing not automatically prevail over the others. practice, a source of customary law, which led the Council on the annual implementation of Article 65 (1) of the Staff Regulations to adjust remuneration It denies that the factor in question was at first in such a way as at least to wholly ignored, for the second recital in safeguard the maintenance of purchasing the preamble to Regulation No 187/81 power and then, even before 1970, in referred to the proposals put forward by such a way as to vary that purchasing the Commission and the increase of power in the light of the increase in the 3.3% suggested by the latter was given level of recorded real incomes in the to officials and other servants of the Community, particularly in the public lowest-paid categories, the others having administrations". received an increase which was identical in absolute terms. According to the Council such a result is consistent with the economic and social policies pursued The Commission submits that the in the Community "since the rate of arguments set out under the two first increase for persons with the highest heads of claim, taken together, show that remuneration has been reduced in most the purpose of both the 1972 method of the Member States". and the 1976 method was to bring about the achievement of a double aim already acknowledged in previous practice, namely that the annual adjustments to As to the relevance of the judgment in remuneration "must not only endeavour Case 72/74 the Council reiterates the to adjust salaries to take account of fact that Article 65 of the Staff Regu­ increases in the cost of living, but must lations in no way implies that the 1976 also give officials and other servants the

Thus arose a body of customary law which was infringed by the regulations at issue inasmuch as that customary law The fact that this factor was not taken required an increase in the real re­ into consideration during the first four muneration of Community officials, years of applying the method does not whereas the regulations reduced re­ prevent it from being considered on the muneration in real terms. occasion of the 1980 review, since the Court has declared that "it cannot be presumed that provisions of the Treaty have lapsed" (judgment of 14 December in Case 7/71 [1971] ECR 1003). In any The Council concedes that unwritten case a practice which was followed for law, which might be described as such a short time cannot have created a "customary law", has a tendency to arise legitimate expectation that such factors with the passage of time, but considers would be excluded from the review for that until now the Court "has never 1980. expressly admitted the existence of customary rules of Community law arising from long practice". The Commission submits that there is no obstacle to the Court's drawing on the national legal systems in order to Moreover, in this instance, in view of the establish the concept of customary law, a fact that written Community provisions process which is in any case exist — Article 65 (1) of the Staff Regu­ acknowledged by legal writers and to lations, supplemented by the method which reference was made in the adopted in June 1976 — the Council judgment of 17 December 1970 (Case wonders whether the practice referred to 30/70 Scheer [1970] ECR 1197, in by the Commission "has the effect of particular paragraph 15 of the decision) restricting the freedom of discretion where an argument relating to the un­ enjoyed by the authority under the fairness of a procedure was rejected by provision in question". If that question is the Court on the basis of "the consistent to be answered in the affirmative it must practice of the Community institutions". first be shown that there is agreement Custom is "a general practice responding between the national laws of the to the requirements of the social group Member States on the principle in within which it is applied, long-standing, question. That is for the applicant to consistent and well-known". In this case show. the practice, which has existed for over 10 years, amounts to a custom.

The use in the 1976 method of the expression "à la lumière de" conferred Furthermore, the use of the expression on the Council complete freedom, in "à la lumière de" in the 1976 method fact, to decide the relative importance to instead of the expression "sur base de" 1 be attached to each of the factors and which appears in Article 65 of the Staff such freedom does not conflict with the Regulations cannot extend the scope of terms of Article 65 of the Staff Regu­ the Council's discretion defined by lations. Furthermore, the fact that the Article 65. Even if the Council has the Council did not react to the first oil crisis power to determine the relative of 1973/1974 is not "a good reason for importance of each item of information, saying that it could not do so in the how is it to be explained that "the final circumstances which obtained when it decision leads to a reduction in pur­ adopted its decision in January 1971" chasing power, when none of the inasmuch as it envisaged that such relevant data points in that direction?" factors might have to be taken into Moreover, the fact that energy costs account in the future by approving a have risen appreciably cannot avail method which left it a wider margin of against customary law. discretion than the much narrower one of 1972.

The Council points out, with regard to the existence of customary law in this matter, that in its view "in the legal Fourth submission: "Infringement of the systems of certain Member States the terms of the 1976 method and frustration practice followed by an administrative of the legitimate expectation which it authority cannot alter the clear meaning engendered inasmuch as the contested regulations, allegedly adopted (even though for the last time) pursuant to that method, have the effect of setting at naught the 'basic principle' of parallel 1 — Translator's note: In the English versions both these expressions appear as "in the light of". development laid down in the method."

The Commission considers that the In addition the Commission considers methods drawn up by the Council have a that the principle of parallel development mandatory effect. Thus, the staff have amounts to more than a mere declaration the right to obtain an adjustment of their of intent inasmuch as the Council itself financial entitlements subject to has stated that the principle gives rise to conditions which satisfy both the basic legitimate expectation on the part of principle set out in the preamble to the officials. By incorporating the principle 1976 method and the criteria and in the 1976 method, therefore, "the methods for adjustment which are Council has merely confirmed the defined in that document for the purpose existence of a pay policy based on the of ensuring that the basic principle is provisions of the Staff Regulations and observed when the method is put into confirmed by long practice, as the Court practice. Even if the Council were auth­ has noted on two occasions". orized, as it contends, to derogate in certain circumstances from its earlier commitments embodied in the method, the Commission considers that the power to derogate is irrelevant in this instance "since the Council maintains that it has not derogated from its commitments and has expressly declared that the regu­ In reply to the Council's argument that lations at issue were adopted on the basis principle must allow for flexible appraisal of the present method, that of 1976". in the medium term the Commission maintains that inasmuch as the principle in question is based on Article 65 of the Staff Regulations which provides for an annual review of remuneration, it must be applied at the same intervals of time. The requirement of parallel development Since the Council is thus bound to abide is therefore to be applied annually. The by the criteria laid down, it follows that theory of "parallel development in the the staff are entitled to enjoy remun­ medium term" is equally untenable in eration which is determined on the basis view of the fact that it is clear that a of those criteria. departure from the principle of parallel development cannot be subsequently remedied. According to the Commission it is obvious that the reduction of 1.8% applied to remuneration in 1980 will not be compensated for later. Admittedly, the increase during the period 1976/1979 As to the Council's argument that this was made by applying both a percentage submission does not raise a question as increase and a linear one, yet the to whether legality has been observed as principle of parallel development of far as the implementing measures are salaries for the officials as a whole was concerned, on the ground that the respected since the "net package" to be method and the annual decisions are distributed was calculated on the basis of both implementing measures adopted a percentage fixed in accordance with solely on the basis of Article 65 of the the principle of annual parallel adjust­ Staff Regulations, the Commission ment. The reason for the proportionately maintains that the 1976 method and the greater increase which was given on annual decisions are not provisions of several occasions to officials and other equal rank. servants in the lower categories was not

Lastly, the Commission submits that the Council's argument that it is entitled to In concluding that Article 65 requires depart from the method on grounds of parallel development to be effected some overriding public interest conflicts annually the Commission is ignoring the with the Council's statement that in words "in the medium term" which adopting the regulations at issue it appear in the principle as it was stated in merely applied the method in force at the December 1972 and in the 1976 method. time. Moreover, there is no reference to The Council also reiterates the fact that such an overriding public interest in the the principle of parallel development in preamble to Regulation No 187/81, and the medium term cannot, by its very as a matter of substance the Commission nature, be specifically applied on an wonders whether from the economic annual basis. point of view a measure reducing the purchasing power of some 20 000 officials and pensioners is capable of As regards the method for the future the altering the rate of inflation in any way Council confirms that the system of a whatsoever. "crisis levy" is to be introduced over a period of five years but such a levy must be disregarded in any review of the The Council concedes that the staff were application of the principle of parallel entitled to protection of the legitimate development during the period of expectation to which the adoption of the application of the new method. The method of 1976 gave rise, and that a Council also considers that it is not corresponding obligation was placed required to guarantee immediately that upon it. Nevertheless, it does not accept the percentage increase in remuneration that it was an absolute one. The Council which was not given in 1981 will be leaves the issue to be settled by the Court made good over the next five years for, but points out that regardless of what it maintains, it must be seen how may be the correct analysis of the rights application of the new method and duties in question the issue of progresses during that period.

On those grounds the Council incorrectly interpreted by the Council in "concludes that the question raised in circumstances which were wrong in law, this submission cannot be definitively especially as regards the alleged desire to resolved at present, and that it is take into account the increase in the rate therefore premature". In the circum­ of unemployment and to fight inflation. stances the theory concerning the Council's power to depart from the method on the ground of an overriding public interest is mere speculation. Finally, the Commission observes that such criteria could not in any case be taken into consideration by the Council in order to bring about adjustments in Fifth submission: "Breach of the method remuneration in a direction contrary to adopted in June 1976 and frustration of both the trends and the effects of the the legitimate expectation which it economic and social policy of the aroused inasmuch as the contested regu­ Communities. lations, allegedly adopted (even though for the last time) pursuant to that method, whilst avoiding the application The Council repeats that it was legally of the first three criteria laid down by entitled to have regard not only to the the method, give precedence to the two criteria expressly referred to in point fourth criterion in conditions which are 4 of the method but also to other factors wrong in law." of a macro-economic nature indicative of the economic and social policy of the Member States, especially as the two criteria do not give an appropriate The Commission repeats its arguments on picture of the economic and social the first and second submissions situation and the policies pursued in concerning the difference between the order to deal with it. It was thus entirely "economic and social policy" of the logical and reasonable to take into Member States and the "general account the increasing rate of economic situation". Relying on those employment and the rise in energy costs, conclusions, it claims that the manner in in particular for petroleum products, which the fourth criterion — general during the reference period. economic and social factors — was applied by the Council appears to be vitiated by abuse of powers and error in law. The abuse of powers is thus Accordingly, the Council contends that connected with the defectiveness in law the manner in which point 4 of the 1976 of the statement of reasons upon which method was applied was in no way the disputed regulation is based. In vitiated by abuse of powers or manifest invoking such reasons the Council has error of law and that it did not fail to failed to comply with the rule that have regard to the rule that legitimate legitimate expectation must be protected. expectation must be protected. It is pointless for the Council to attempt to justify its disregard of the criteria laid down in the method by arguing that the discretion conferred upon it by Article 65 Furthermore, the Council maintains that of the Staff Regulations justifies its its assessment of the general situation, consideration of other economic and described in the third recital in the social factors. The criteria not envisaged preamble to Regulation No 187/81, to by the 1976 method were, moreover, the effect that the general economic

The Commission makes this submission The Council's attempt, whilst acknowl­ in the alternative. It offers to show, if edging the succinctness of the statement necessary by means of expert evidence, of reasons, to justify it by pointing out that during the reference period the that the Commission participated in the increase in energy costs compared to the process of drafting the decision is average increase of the gross domestic irrelevant in this case for the following product in Europe was far short of 1.8% reasons. First, the statement of reasons of the gross domestic product, the rate ought to have indicated not only the represented by the deduction made by factors which were taken into the Council. It maintains that the consideration but also the manner in increase in energy costs amounted, at which their incidence was reflected in the most, to 1.17% of the annual gross figures; secondly, there is no reference to domestic product. In those circum­ the aims pursued, in particular to the stances, either the 1.8% deduction made campaign against inflation; thirdly, the by the Council was the result of a wrong requirements laid down by the case-law appreciation of the facts and was in of the Court concerning the statement of breach of the principle of proportion­ reasons were not fulfilled; and, fourthly, ality, or it "embraced, besides the the Commission's participation in the increase in energy costs, other factual process of drafting the decision was not circumstances contributing to the such as to enable it to learn either the

precise factors taken into consideration to refer expressly to particular aspects of by the Council or the method by which the deterioration in the general economic their incidence was reflected in the situation, the broad characteristics of figures. which are well known, or, above all, to attempt to quantify their repercussions on the adjustment to officials' remuner­ ation. The statement of reasons was thus succinct, but adequate. Its adequacy is shown particularly by the fact that the The Council contends, first, that the Commission participated in drafting the third recital in the preamble to Regu­ decision at issue (see in that context the lation No 187/81 shows clearly that the judgment of 14 January 1981 in Case increased cost of energy is mentioned 819/79 Federal Republic of Germany v only as the principal cause of the deteri­ Commission of the European Communities oration of the general economic situation [1981] ECR 21). and that the main factor taken into account by the Council was that deteri­ oration in all its aspects. The Council insists in that context that the growth in the rates of unemployment and inflation provides ample evidence that the general Seventh submission: "Infringement of economic situation deteriorated seriously Article 65 (2) of the Staff Regulations during the reference period. It did not, and disregard of the principle of equal therefore, disregard the principle of treatment of officials and of the proportionality, because the deteri­ obligation arising therefrom to ensure oration in question provided ample just­ for them by means of their remuneration ification for limiting the adjustment of an equivalent purchasing power whatever salaries which it was obliged to make in their place of employment inasmuch as January 1981. Admittedly, that limitation the contested regulations, uniformly represented a departure from the way in adjusting remuneration and pensions which adjustments were made in the with effect from 1 July 1980 and preceding years, but in the circumstances consequently adjusting with effect from of the case, since the situation had that date the weightings valid for developed gradually the difficulty faced countries other than Belgium and Luxem­ by the authority responsible for taking bourg do not give effect to the periodical decisions was to know at Commission's proposal for the adjust­ which moment it should take action in ment from 1 April 1980 of the response to the change. The Council is weightings valid for 11 countries with of the opinion that in proceeding as it high inflation." did in the regulation at issue it ensured that the limitation which was imposed was not out of proportion to the gravity of the deterioration in the general economic situation. The Commission claims that by refusing to adopt its proposal at the end of 1980 to adopt every quarter weightings applicable to 11 countries with a parti­ cularly high cost of living (10% or more As to the alleged inadequacy of the in 6 months) the Council failed to statement of reasons the Council comply with Article 65 (2) as it is to be contends, after analysing the recital in interpreted in the light of the practice question, that it was not necessary either followed until then.

IV — Oral procedure Accordingly, the Commission maintains that the Council's argument with regard to the need to combat inflation has no bearing on the case. At the sitting on 11 May 1982 the Commission of the European Communi­ ties, represented by Joseph Griesmar, acting as Agent, assisted by Daniel The Council endeavours principally to Jacob, of the Brussels Bar; and the show that it is not possible to trace the Council of the European Communities, existence of any consistent practice with represented by David Gordon-Smith, regard to quarterly adjustments, and that Director General of the Legal even if in the past the Council has Department at the General Secretariat of considered an increase of x % over six the Council, acting as Agent, presented months to be a substantial variation oral argument and their replies to justifying a six-monthly adjustment of questions which had been put to them by the weightings to match, nevertheless it the Court.

JUDGMENT OF 6. 10. 1982 — CASE 59/81

The Court also heard, in response to in a joint statement, a reply, with figures, questions put by it, Mr Werden, head of to the following question: "What would Division at the Statistical Office whose be the cost to the budget, in figures, responsibility it was each year to make were the Court to adopt the arguments the report referred to in Article 65 of the advanced by the Commission?" Staff Regulations for the Commission, as a technical expert. The Advocate General delivered his The Court also decided that the parties opinion at the sitting on 29 June 1982. should submit within 15 days, if possible

COMMISSION v COUNCIL

The Council adopted the Commission's proposal only with regard to the lowest paid officials and servants, that is to say, those in Step 1 of Grade D 4, and gave other members of the staff only the same amount, thus reducing the general average increase in nominal salaries for all officials and other servants to 1.5%. Furthermore, the Council rejected the Commission's proposal for a quarterly adjustment of the weightings for various countries of employment where rises in the cost of living were particularly large.

3 The Commission maintains that by adopting that course the Council broke with a long-standing practice based on observing the terms of the method for adjusting remuneration drawn up by the Council on 20 June 1976, and thereby infringed Article 65 (1) of the Staff Regulations, committed a breach of the principle of the protection of legitimate expectation and the principle of proportionality, and failed to satisfy the requirement of a precise statement of the reasons on which the measures were based; in addition as far as Regulation No 397/81 was concerned, it infringed Article 65 (2) of the Staff Regulations and failed to have regard to the principle of equal treatment of officials.

4 Before the various arguments relied upon by the Commission in support of its application are considered, it is appropriate to review the background to the dispute.

The background to the dispute

5 Article 65 (1) and (2) of the Staff Regulations of Officials reads as follows:

7 Pursuant to the first subparagraph of Article 65 (1) of the Staff Regulations the review must be based on a joint index showing the variations in remun­ eration in the Member States and thus until 1972 a Community specific indicator was used for this purpose, prepared according to a weighted average on the basis of national specific indices which were required to reflect, for a representative group of officials, the alteration in average nominal pay in relation to the increase in the cost of living.

8 Since application of that indicator gave rise to disagreement at the time of the annual review of the level of remuneration, the Council òn 20 and 21 March 1972, acting on a proposal put forward by the Commission, adopted a "system of adjustment of remuneration" in which it undertook, for a trial peripd of 3 years from 1 July 1972 to 30 June 1975, to fix the level of the real increase in Community remuneration within a bracket formed on the one hand by the specific indicator already used previously, but improved, and on the other hand, by an indicator called "total emoluments per head in public administration", as published in national accounts, which was intended to reflect the variation in the total remuneration and other benefits given to national civil servants in each Member State, that is to say, giving a

COMMISSION v COUNCIL

specific form to the increase in the level of incomes recorded in the Community. The Court stated in its judgment of 5 June 1973 that "by its Decision of 21 March 1972, the Council, acting within the framework of the powers relating to the remuneration of staff conferred on it by Article 65 of the Staff Regulations, assumed obligations which it has bound itself to observe for the period it has defined".

JUDGMENT OF 6. 10. 1982 — CASE 59/81

economic information indicative of the economic and social policy of the Member States of the Community, such as the gross domestic product per head of the working population and total per capita emoluments in the economy as a whole" — and, secondly, recruitment needs and the structure of Community staff complements.

13 The method provides for the annual adjustment of remuneration to be made a posteriori and to take effect retroactively on 1 July of the year in which the end of the reference period used for the review of the level of remuneration falls, that period corresponding to the 12 months preceding 1 July of the year in which the review is carried out.

1 4 In accordance with that method the Council adopted four regulations providing for an annual adjustment of remuneration following proposals made by the Commission on the basis of information supplied by the Statis­ tical Office. It also adopted, again on proposals put forward by the Commission, five regulations making interim adjustments to the weightings consequent upon a substantial rise in the cost of living.

15 However, by the time Regulation No 161/80 of 21 January 1980 (Official Journal L 20, p. 5) was adopted, reservations had already been expressed with regard to the 1976 method and the Commission was asked to submit to the Council by "1 July 1980 a study of the results of applying the method" together with an appropriate proposal for revising it. At the end of 1980 the Commission submitted to the Council the study which it had requested together with proposals for adjusting the method. However, the 1976 method had not been revised when the Council, on 20 January and 10 February 1981, adopted the regulations at issue, adopting the Commission's proposals only with regard to the lowest-paid officials.

19 The Council has submitted that these two submissions both concern the scope of its discretionary power under Article 65 (1). There is no doubt, it maintains, that the provisions accords it a wide discretion; thus the Court of Justice must confine itself, in its review of legality, to considering whether the regulation at issue is vitiated by mainifest error or by misuse of powers, or whether the institution in adopting it manifestly exceeded the bounds of its discretion. The Council points out also that there is no impenetrable dividing line between the concepts of "policy" and "situation" and that whilst it is admittedly bound to take fully into consideration the variation in salaries in the public service in the Member States, that is not the only criterion to be applied. In that regard the Commission's argument, it is claimed, amounts to incorporating the principle of annual parallel development in the Staff Regulations themselves, which would be contrary to the provisions in Article 65; hence that requirement of the Staff Regulations does not necessarily have a decisive influence on the decision to be adopted.

JUDGMENT OF 6. 10. 1982 — CASE 59/81

20 Whilst Article 65 leaves the Council free to choose the most suitable means and forms for implementing the policy with regard to remuneration, the first sentence of the second subparagraph of Article 65 (1) requires the Council to pursue its policy in adjusting remuneration "as part of the economic and social policy of the Communities", and the second sentence of that subpar­ agraph requires the Council to take "particular" account of "any increases in salaries in the public service".

COMMISSION v COUNCIL

25 By contrast, the Council regulation at issue has the effect of reducing the purchasing power of Community salaries for the same reference period by an average of 1.6%. The Council has thus disregarded a criterion which by virtue of the second subparagraph of Article 65 (1) of the Staff Regulations it has a duty to apply, namely any increases in salaries in the public service in the Member States, whereas its assessment of "the economic and social policy of the Communities" for the period in question had led it to recommend that purchasing power be maintained.

26 It follows that in deciding to reduce the purchasing power of Community salaries by an average of 1.6% when for the same reference period that of salaries in the public services in the member States rose by 0.2% (and even by 1.6% after correction of the figures for Italy) the Council failed to comply with Article 65 (1) of the Staff Regulations.

27 In the circumstances it does not appear necessary to consider the other grounds advanced by the Commission to the like effect.

Adjustment of the weightings

28 In a seventh submission the Commission claims that by refusing to implement in December 1980 its proposal to adjust the weightings every quarter, and in particular to adjust them from 1 April 1980 for 11 countries, some of them Member States and some non-member countries, with a particularly high rate of increase in the cost of living (10% or more in six months) the Council failed to comply with Article 65 (2) as it is to be interpreted in the light of previous practice and, in addition, the principle of equal treatment which requires the competent authority to guarantee equal purchasing power for all officials regardless of their place of employment.

33 Moreover, that provision, as the Council itself has acknowledged, is designed to guarantee, in accordance with the principle of equal treatment, the main­ tenance of equal purchasing power for all officials regardless of their place of employment.

34 It follows that the power available to the Council is not to determine whether weightings should be adjusted at intervals of six months or quarterly, but to decide whether or not there has been a substantial increase in the cost of living and, if there has, to draw the appropriate conclusions.

35 In this case the Commission proposed an interim, supplementary adjustment for countries in which inflation was at least 10% in six months, pointing out

COMMISSION v COUNCIL

in its proposal that that was a substantial increase since annual inflation recorded in the European Community was in the region of 10.3% per annum.

36 The Council did not deny that such an increase in the cost of living was substantial and therefore was not entitled to refuse to take steps to adjust the weightings for the countries in question in accordance with Article 65 (2), and the absence of a practice regarding quarterly adjustments could not justify it, within the scope of its discretionary power as defined above, in refusing to take the measures necessary for the correct application of that provision.

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On those grounds,

THE COURT

hereby:

1. Declares void Council Regulation No 187/81 of 20 January 1981 (Official Journal L 21, p. 18, replaced by the version published in the Official Journal of 16 May 1981, L 130, p. 26), together with Articles 1 (a), 2 (a), 2(b) and the first paragraph of Article 11 of Council Regulation No 397/81 of 10 February 1981 (Official Journal L 46, p. 1, replaced by the version published in the Official Journal of 16 May 1981, L 130, p. 29) in so far as they result from Regulation No 187/81;

2. States that the provisions of the said regulations concerning the adjustment of the salaries of Community officials shall continue to have effect until such time as the Council has adopted the measures incumbent upon it in order to ensure compliance with this judgment;