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This blog belongs to the CSS’ coronavirus blog series, which forms a part of the center’s analysis of the security policy implications of the coronavirus crisis. See the CSS special theme page on the coronavirus for more.
The criticality of medical goods and volatility of European economies resulting from the corona crisis increase the risk of opportunistic acquisitions of strategic assets and technology via foreign direct investments (FDI). The EU Commission and Member States are stepping up the protection of European economies to contain the fallout of the crisis.
The economic fallout of the Covid-19 crisis raises significant national security challenges for the European Union. Market volatility, decreasing company valuations, and the criticality of medical goods and infrastructure have increased the risk of opportunistic acquisitions of strategic assets and technology via foreign direct investments (FDI). Such losses could not only negatively impact the EU’s capacity to cater for the current health needs of its citizens but also affect the EU’s ability to realize strategic objectives beyond the corona crisis, including the quest for technological sovereignty. The European Commission has reacted quickly to these risks, issuing a communication on guidance on the screening of FDI and the free movement of capital at the end of March. However, it remains to be seen whether the EU’s measures combined with efforts at the Members State level will suffice to protect strategic industries and how the crisis will shape the EU’s approach to FDI in the long run.
FDI Screening in the EU
Prior to the corona crisis, rising national protectionism across the globe had sparked calls for stronger screening of foreign direct investment. While maintaining one of the world’s most open investment regimes according to the OECD, the EU has become more vigilant as investments, especially from China, Russia, and Brazil in strategic infrastructure and high-tech sectors, have increased and have often been linked to companies with state ownership or ties to governments. In order to better protect the EU’s interests, the first EU-wide framework for the screening of FDI from third countries in critical sectors and technologies on grounds of security or public order entered into force in April 2019.
While the FDI regulation brings oversight of foreign investments and their national security implications within the purview of the European Commission, it falls short of permitting the Commission to block an investment, which remains a Member State competence. The Commission can issue opinions when it determines an investment poses a threat to the security or public order of more than one Member State or when an investment could undermine a project or program of interest to the whole EU. Moreover, the regulation creates a mechanism for Member States and the Commission to exchange information and raise concerns related to specific investments. Since April 2019, the Commission and Member States have been taking steps to make sure that the EU can fully apply the screening mechanism as of 11 October 2020. However, the ongoing Covid-19 crisis has highlighted the mechanism’s importance and sped up its application.
The Impact of the Corona Crisis
Several weeks into the corona crisis, most EU countries have substantially restricted public life to avoid overloading national health-care systems. However, these measures have brought economic activity in most European countries to a near standstill. The stricken economies could afford opportunistic investors the chance to acquire strategically important businesses at a discount. According to a recent report by Bloomberg, certain Chinese companies are already preparing potential takeovers of weakened European companies. The crisis has also underscored the great reliance of the EU on imported medical supplies and increased fears that critical European assets and technology in the healthcare sector may be snapped up by foreign investors. These unprecedented economic circumstances mean the EU needs to temper its openness to FDI “with appropriate controls”, according to the Commissioner for Trade Phil Hogan.
With remarkable speed, the EU released the guidance on FDI and the free movement of capital to address these risks. The guidance clarifies that risks to critical health infrastructures and the supply of critical health inputs are crucial factors to be considered when screening foreign investments on the grounds of security or public order. However, Member States are called upon to “ensure the continued critical capacity of EU industry, going well beyond the healthcare sector”. To this end, the Commission asks Member States which have FDI screening mechanisms in place to “make full use of them already now” and to “take fully into account the risks to critical healthcare infrastructures, supply of critical inputs, and other critical sectors.” Member States that do not have a screening mechanism in place yet or whose controls do not cover relevant sectors are called on to set up full-fledged screening mechanisms and use “all other available options” to scrutinize investments until mechanisms are established. Fourteen of the 27 Member States currently have FDI screening mechanisms in place. The Commission also encourages careful consideration of acquisitions that do not constitute FDI, such as portfolio investments, as they may also be relevant in terms of security or public order.
The guidance represents the Commission’s strongest statement on FDI yet and signals to non-EU investors that there will be increased scrutiny of any attempts to acquire strategic assets. However, the architecture of the EU’s FDI regime implies that Member States remain the first line of defense against potentially harmful acquisitions. German Minister for Economic Affairs Peter Altmaier made clear that the German government would do everything to avoid the sell-off of German businesses and industrial actors, stating that “there cannot be any taboos. Temporary and limited state support as well as participations and takeovers need to be possible.” As the IMF’s policy tracker indicates, several EU countries —including Italy and Spain, which have been hit particularly hard by Covid-19— have stepped up the protection of their industries. Spain, for example, approved a Royal Decree in March, requiring all FDI in strategic sectors or conducted by certain investors to receive an ex ante authorization from the Spanish government.
The EU’s FDI Regime beyond the Crisis
While the Commission and Member States’ efforts are good first steps at mitigating some of the national security risks emanating from the corona crisis, it remains to be seen whether these measures are sufficient to protect strategic assets and technology given the volatile economic situation. The success or failure of the Commission and Member States’ efforts to defend their interests will have a crucial impact on the EU’s ability to quickly recover from the crisis. Losing strategic assets in the healthcare sector could constrain the EU’s ability to address potential future waves of the virus. Moreover, the effect of the measures will have an important impact on the EU’s pursuit of longer-term strategic objectives, including the new Commission’s quest for economic and technological sovereignty.
The corona crisis will probably also shape the EU’s and Member States’ future approaches to FDI screening. With regard to the EU level, it is likely that the Commission will get more actively involved in individual screenings through the opinion mechanism. According to the guidance, the Commission could provide ex post opinions on investments taking place now as from 11 October and within 15 months after the foreign investment has been completed if it did not undergo a national screening. Such opinions could still lead to the prohibition of the investment by the EU Member State where the investment took place or alternatively to the adoption of ‘mitigation measures’. With regard to Member States, countries that do not yet have a screening mechanism in place at the national level will likely establish one all the more rapidly given the increased vulnerability of economies. Member States with existing FDI screening mechanisms may decide to expand their scope or reporting requirements on the national level. Germany has already further tightened its rules on takeovers by non-EU investors to better protect key industries. Ultimately, FDI related measures both on the EU and Member State level that were triggered by the crisis will probably spark a new debate in the EU on how to rebalance increased protectionist instincts and the desire for an open investment environment post-corona.
The Center for Security Studies (CSS) is investigating the medium and long-term consequences of the corona crisis through two research projects. One project focuses on national and international crisis management. The other addresses the effects of the crisis on international relations and national and international security policy. To find out more, see the CSS special theme page on corona.
About the Author
Sophie-Charlotte Fischer is a PhD Candidate at the Center for Security Studies (CSS), ETH Zurich.
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