Balancing Security and Economics: The EU Investment Screening Mechanism

In the EU, Member States and the Commission are increasingly turning to trade and investment tools to address national security issues. In the face of concerns over technology leakage, supply chain resilience, dependencies in critical industries, data security and a more acute perception of geopolitical threats emanating from foreign investments, the EU and its Members States have resorted to the adoption of a wide range of trade and investment tools as part of an overarching objective to attain higher levels of ‘strategic autonomy’  and ‘economic security’.

As part of the EU’s 2023 European Economic Security Package, the European Commission has announced that it sought to improve investment screening in the EU, in order to further strengthen the EUs public order and security. [i] The initiative is a natural segue that neatly merges into the 5-yearly mandatory revision of EU Regulation 2019/452 (‘the Regulation’) proposing a framework for investment screening. The Regulation has entered its 5^th year and is currently being discussed with a view to improving both its effectiveness and efficiency at preventing security and public-order risks. In January 2024 the Proposal for a new regulation, repealing and replacing the current EU FDI Screening Regulation was officially announced (‘the Proposal’).[ii]

Many analyses have focused on the 'geopoliticisation' of EU trade policy and the backlash against globalization (Meunier & Nicolaidis, 2019; Erikson, 2021)[iii] or on the broader geo-economic or dirigiste turn at the European level (Herranz-Surrallez et al., 2024)[iv]. Much less attention has been paid to investment screening mechanisms (ISMs) at the national level. In fact, the current Regulation is a framework for the coordination of national policies on incoming FDI. This framework sets basic standards for investment screening and creates a network for information exchange across the EU. Each Member State therefore maintains its own ISM at the national level, providing the building blocks for the EU-wide regime.

The Proposal explicitly aims at harmonizing ISMs across the EU, improving the coordination mechanism between member states and the Commission’s own assessment of FDI likely to affect projects or programmes of Union interest. It is therefore crucial to understand the differences between existing Member State screening mechanisms. In this analysis, we identify and explain some key differences between member state ISMs in Europe and reflect on how European proposals for greater coordination or integration are likely to have to come to terms with different models of economic policy making in Europe.

Limitations of the Existing EU’s Investment Screening Framework

In February 2017, the economy ministers of France, Germany and Italy sent a letter to the European Trade Commissioner Cecilia Malmström to start discussions on FDI screening at the European level (BMWK, 2017). In March 2019, the European Parliament and the Council adopted Regulation (EU) 2019/452, which establishes a framework for cooperation and information-sharing on incoming FDI. Information-sharing takes place mainly between member states—who remain responsible for the screening process—and between member states and the European Commission for transactions related to EU-wide critical technologies and infrastructures.

Although the Regulation stopped short of imposing a strict obligation on all member states to install a mechanism for the screening of incoming FDI, it has been very successful in stimulating the spread of ISMs to more EU member states and in streamlining cooperation by establishing a coordination mechanism between them. However, the Regulation has not yet been able to prevent significant differences in ISMs between member states. In part, this is due to differences across the EU when it comes to their own security assessments, which remains a member state competence. In its current form, Regulation 2019/452 does not impose any obligations on the extent of sectoral coverage, so states can (and do) follow their own judgement on which sectors they deem relevant for their public order and security as well as the thresholds they apply to classify an investment as notifiable. Similarly, some screening mechanisms strictly screen non-EU investors (e.g. Belgium), while others do not differentiate on the basis of nationality, but screen domestic, EU and foreign investors in pre-defined sectors (e.g. UK, the Netherlands). Others still screen EU and foreign investors, but differentiate between the two according to notification thresholds and the like (e.g. France).

Variation between member states is not limited to sectoral coverage, thresholds and actors that are screened. How countries screen investments varies also along other axes, such as decision making procedures and the level of ‘investor protection’ they provide. In this regard, the EU Regulation does not prescribe how countries should screen investments, i.e. who should be involved in the decision-making process, which time-lines governments have to abide by, whether they can or should screen FDI already present in the country, i.e. ex post screening, or which measures aimed at improving legal certainty they have to implement. In many respects, therefore, the Regulation is crafted somewhat akin to an EU Directive than to a Regulation, as it sets some minimum standards but leaves considerable room for agency, interpretation and implementation to member states.[v]

No ISM will ever be exactly the same given each and every one of them are also embedded within their own legal traditions. However, it is possible to group them in one of two categories. On the one hand ISMs can be open, meaning that their scope is relatively broad, involve quite a few players and decision makers in the screening process, and are relatively less focussed investor protection. On the other hand, they can also be closed, which indicates that their scope is limited, often involve only a limited amount of players, and their focus is very much on achieving high levels of legal certainty for investors. While this categorisation tells us little about the restrictiveness of these ISMs, thinking of ISM along these lines can unveil something about how governments balance security and public order with economic interests, and in turn, the viability of some of the Commission suggestions in the revision on the Regulation.

State-Firm Relations & Investment Screening in Europe

How can we explain the persistence of significant national differences in the trade-off between a liberal FDI regime and the protection of strategic assets, which is then reflected in the configuration of their ISM? In our research, just published in the Review of International Political Economy, we have shown that the relationship between states and firms is crucial for understanding this variation. Institutions matter here and are likely to be sticky. In some member states, the presence of a revolving door dynamic, which sees policymakers and industry executives move between the public and private sector, and relatedly that are characterised by close informal public-private relations, allow firms within these networks to much more easily navigate their screening mechanism. In those screening systems, some lines between the public and private sphere are blurred as privileged firms can capitalise on their informal relationship with the government. This effectively excludes those actors like small and medium sized enterprises –(SMEs) who cannot tap into these enmeshed networks and lack the capacity to gain access to the privileged connections and knowledge on screening mechanisms. Often, this does lead to more broad screening mechanisms, as governments face less opposition from their own domestic firms.

This is the configuration to be found in France for example, where the government gradually widened the range of sectors covered by the review and retained considerable discretion over how to intervene. Strategic firms indeed often preferred a rather broad review, where they could take advantage of their privileged relationship with the government.[vi] French start-ups and investment funds however complained about the lack of detail on the scope of the new law and the lack of specifics on how to intervene in very large, and poorly defined, technology sectors.[vii]

Conversely, where state-firms relations are much more characterised by arms-length relations and enforceable formal contracts, firms need a detailed legal framework to operate in. In the absence of privileged informal access to governments, legal certainty becomes a valuable commodity. This is the configuration to be found for example in the Netherlands, where legal certainty and a limited and clearly defined scope took centre stage in firms’ lobbying efforts.[viii]

In addition to the French and Dutch cases, we coded all European ISMs to assess whether our explanation applies to more cases and to demonstrate the usefulness of our conceptualization of ISMs. We relied on the PRISM database to code our scope variable and we supplemented it with newly collected data on scope, screening authorities, and formal investor protection. We also added variables on silent positives, time-frame, ex post screening, and on the possibility of appeal. According to our preliminary analysis, out of 29 European countries, nine have closed ISMs (Denmark, Estonia, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Slovenia), while 14 have open ISMs (Austria, Belgium, Czech Republic, Finland, France, Germany, Hungary, Italy, Poland, Portugal, Romania, Slovakia, Spain, Sweden, UK). The remaining six countries (Bulgaria, Croatia, Cyprus, Greece, Ireland, Switzerland) had no ISMs in force at the time of writing. Table 1 summarizes the results for each country.

Table 1: