Prof. Nikos Lavranos, Secretary General of EFILA

In December 2018, the EU institutions agreed on the text for an EU Regulation establishing a mechanism for screening all foreign investments into the EU.

In just over a year the EU institutions adopted this Regulation, which is unusually fast and reflects the apparent political will of the institutions involved to deliver something tangible that would address the fear against Chinese investments that would essentially take over the European economies.

The Regulation is in particular noteworthy because it introduces an EU-wide screening mechanism at the EU level as well as at the Member States’ level, which in many ways is similar to the US screening mechanism (CFIUS) whose scope of application was recently also significantly expanded. (The revised CFIUS text is part of the very extensive National Defense Authorization Act for Fiscal Year 2019, sections 1701 et seq.)

The EU Regulation is also significant in that it gives the Commission and other Member States the power to directly interfere in the screening of FDI in a particular Member State.

At the Member States’ level, it should be noted that there is a disparity among them regarding their approach of whether or not to screen FDI, and if so, under which conditions and procedures.

According to the Commission, about half of the Member States have currently no screening mechanism at all, while the other half does have one. In addition, the conditions and procedures of the existing screen mechanisms differ.

Accordingly, the Regulation aims to harmonize this situation by grandfathering all existing screenings mechanisms and by encouraging all Member States, which have not yet one, to establish such a mechanism. In addition, common basic criteria for the screening of FDI are laid down in this Regulation. Indeed, all Member States are required to register all incoming FDI and to report them to the Commission and to all other Member States. In fact, the Member States and the Commission are required to set up a dedicated contact point for that purpose.

At the European level, the Regulation gives the Commission – for the first time – the power to actively screen FDI – not only those that are “likely to affect projects or programmes of Union interest on grounds of security or public order”, but also those that are “likely to affect security or public order in more than one Member State”.

The Commission may issue opinions, which the Member State concerned is required to duly take into consideration. Similarly, Member States can comment on the screening of FDI in other Member States.

However, what is most interesting is the wide scope of the sectors that may be screened, which covers, inter alia, the following areas:

(a) critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, as well as sensitive facilities and investments in land and real estate, crucial for the use of such infrastructure;

(b) critical technologies and dual use items as defined in Article 2.1 of Regulation (EC) No 428/2009, including artificial intelligence, robotics, semiconductors, cybersecurity, quantum, aerospace, defence, energy storage, nuclear technologies, nanotechnologies and biotechnologies;

(c) supply of critical inputs, including energy or raw materials, as well as food security;

(d) access to sensitive information, including personal data, or the ability to control such information; or

(e) the freedom and pluralism of the media.

Also, noteworthy is the fact that there is no minimum threshold of the amount of the FDI for screening, which means that potentially any FDI from 1 to 100 billion euros could be screened.

While the fear against a Chinese takeover of the European economies is widespread and understandable, it is not supported by facts. Indeed, as a recent study by the well-respected Copenhagen Economics institute shows that countries other than China invest much more into the EU.

According to this study the US is by far the largest investor in the EU and accounted for 51.1% of the M&As by third country investors, followed by Switzerland (10.8%), Norway (4.6%) Canada (3.8%), while China comes only fourth with a meager 2.8%.

When it comes to investments by State Owned Enterprises (SOEs) from third states, Russian investors accounted for 16.6% of M&As, followed by Norway (15.8%), Switzerland (11.8%), while Chinese SOEs account only for 11% of the M&As.

In other words, the amount of Chinese FDI are far lower than from several other third countries, but which seemingly are considered friendlier and thus approached with less hostility.

Be that as it may, the real risk of this Regulation is not so much the screening of FDI but that it could be abused as a tool for disguised protectionism and classic state-governed economic nationalism.

This is so because the big Member States will be able to force smaller Member States to block FDI, for example from China, in order to give preference instead to French, German or Spanish investors.

Similarly, the Commission may force a Member State to block an FDI for unrelated more important geopolitical reasons.

This can also raise the tension among EU Member States which are competing for FDI. For example, if the Rotterdam harbour wants to attract Chinese investments for upgrading and expanding its facilities in order to be able to better compete against the harbour of Hamburg, Germany might very well use the argument of “security or public order” in this Regulation to force the Netherlands to block the Chinese investor and rather accept a European investor instead, or forget about the whole project altogether.

This is not to say that one should be naïve about Chinese, American or Russian investments, which are often connected with geopolitical aims or potentially (business) espionage. The example of Huawei, which has been restricted in developing the 5G network in some Western countries, is telling. At the same time, one should not forget that EU Member States are competing with each other to attract FDI and have the vested interests of their national champions always in mind.

Thus, the line between genuine protection of “security and public order” and disguised protectionism is very thin and tempting to cross for short term political and/or economic gains. However, this Regulation – unsurprisingly – does not contain any effective mechanisms to mitigate this risk.

Therefore, when this EU Regulation enters into force, foreign investors are well-advised to seek proper in-depth advice prior to investing into the EU.