European Commission proposes stricter screening of foreign investments amidst security concerns

In a move to safeguard key sectors against high-risk foreign direct investments (FDI), the European Commission on Wednesday, 25 January, unveiled an extensive proposal to enhance scrutiny and understanding of these investments within the EU. The legislation would cover a wide range of technologies and industries, including quantum technology, cloud computing, robots, drones, virtual reality, advanced sensors, 6G networks, nuclear fusion, hydrogen, batteries, space surveillance, and military equipment.

The level of risk attributed to an investment, regardless of its size and origin, would be determined by assessing its potential impact on critical infrastructure, supply chains, sensitive information, and media pluralism. Notably, funds from authoritarian regimes, such as China, Russia, and Belarus, as well as individuals under EU sanctions, would trigger immediate scrutiny. The heightened vigilance also extends to investments within the EU ultimately controlled by non-EU entities.

This move by the Commission is not without precedent. The original regulation, enacted in 2019, was a response to increasing concerns about foreign entities seeking control over EU firms crucial for security or public order. These firms often had significant roles in critical technologies, infrastructure, or held sensitive information. The proposal builds upon this by evaluating experiences gained from reviewing over 1,200 FDI transactions notified by Member States in the past three years under the existing FDI Screening Regulation.

The intention is to rectify the shortcomings of the current system and enhance its efficiency by ensuring all Member States have a screening mechanism, harmonising national rules, and identifying key sectors for mandatory screening. Under the proposed rules, the screening of FDI in high-risk sectors would become mandatory for all member states. Currently, Croatia, Bulgaria, Greece, Cyprus, and Ireland (in progress) lack a proper screening system.

The proposal is the first legislative step following the Economic Security Strategy presented in June by Ursula von der Leyen, signalling a shift from the longstanding mantra of free and open markets. In response, the EU has faced accusations of protectionism and dirigisme, but the executive argues that “de-risking” is a logical response to the challenging global political climate, exacerbated by events like the COVID-19 pandemic, Russia’s invasion of Ukraine, and China’s assertiveness.

Before being written into law, the amendment of the FDI Screening Regulation will undergo the ordinary legislative procedure, necessitating approval from both the European Parliament and the Council of the EU. Given the approaching elections in June, potential delays in this process are to be expected.