The EU Economic Security Strategy: a Novel Approach or the Reemergence of an Old Idea?

[This blog post summarizes the following article: A. Lymperopoulos, ‘The EU Economic Security Strategy: a Novel Approach or the Reemergence of an Old Idea?’ (2024) 1 European State Aid Law Quarterly 40.]

1. What is Economic Security?

The recent Economic Security Strategy (Strategy) of the European Commission (EC) introduces a new dogma in the trade relations of the EU. The introduction or the planning of various instruments that scrutinize incoming and outgoing investments and subsidies seems to solidify following the Russian invasion of Ukraine, the COVID-19 health crisis, and the rising tension with China. In response to those external developments, the EU aims to protect its interests and minimize its exposure to potential risks. This shift, however, did not happen in a vacuum. This blog post will show that calls to adjust the block’s trade policy can be traced back to the 2019 Franco-German Manifesto for a European industrial policy fit for the 21^st century (Manifesto).  This blog post will also explain why and how merger control and State aid law have a role to play in achieving economic security, even though the Strategy does not currently deploy them.

Economic security strategy is a new concept for the EU. Some of the tools of the Strategy, such as the anti-coercion instrument, the outbound investment screening mechanism, and the Single Market Emergency Instrument, are indeed new concepts. Other tools, like the Foreign Direct Investment (FDI) Screening Regulation, the Foreign Subsidies Regulation, or the EU’s Regulation on export control of dual-use items, are not new. The Strategy is an aspect of EU industrial policy that stemmed and evolved from previous initiatives of the EC, such as the Green Deal Industrial Plan. So, economic security considerations are not unknown to the EU, as they were the driving factors behind adopting those tools. However, it is the first time that the existing tools are systematized, and that the EU unfolds a full-fledged strategy to tackle economic risks rather than standalone tools. Different puzzle pieces now appear as a cohesive plan for the EU trade relations. The Strategy aims to de-risk certain economic activities threatening the EU’s security. According to the Communication, ‘the aim is to provide a framework for a robust assessment and management of risks to economic security at EU, national, and business level while preserving and increasing EU’s economic dynamism.

The EC and the HR have already identified four initial types of risk that the new initiative aims to tackle: first, the resilience of supply chains, which provide critical inputs to the EU economy, such as Green Transition-related inputs, pharmaceuticals, and energy supply; second, the security of critical infrastructure, both physical and cyber; third, technology leakage to third countries; and fourth, economic coercion and dependencies. Based on the type of risks identified, it seems that the concept of economic security is a hybrid of trade defense measures with traditional, “military” security.

2. Why Complement Economic Security with State Aid and Competition Law?

The tools that compose the Strategy may, in theory, contribute to attaining economic security. However, how effectively, how fast, or to what degree, such security will be achieved is not guaranteed. The Strategy’s tools are by no means a panacea and their efficacy depends also on the reaction of other States. In other words, whether third countries choose to offer more subsidies, retaliate against the new tools, or try to evade them will influence the efficacy of the proposed tools. It is therefore submitted that additional tools could increase the effectiveness of the Strategy.

State aid and competition law could serve as additional tools given that they are communicating vessels with the tools of the Strategy. They both aim at protecting the internal market and their application is complementary. The internal market cannot be protected only by employing competition and State aid law, because those have a territoriality defect. Regarding State aid, only aid given by the EU Member States can be assessed by the EC. Any subsidies granted by any other State and their distortive effects on the internal market cannot be offset through State aid law. Regarding merger control, the EC can authorize or ban only those concentrations with a community dimension. Due to that defect, both State aid law and merger control cannot counter the type of threats that the FSR, the FDI, or other trade tools may counter, because these risks derive from outside the internal market. Vice versa, the new trade tools are not able to protect the internal market by themselves, as they can only mitigate risks deriving from international trade. Therefore, the holistic protection of the internal market from economic security risks requires the alignment of trade instruments with analogous competition and State law provisions. On this ground, it is submitted that economic security considerations may also find their way into competition and State aid law because trade tools are insufficient to achieve economic security. In other words, only deploying trade tools, as the Strategy does, is not a cure-all.

3. State Aid and Competition Law as Economic Security Tools?

1. State Aid Law

State aid aims to balance two different objectives: on the one hand, the internal market shall be protected by deterring competition between Member States to subsidize their businesses. On the other hand, State aid helps address market failures and achieve public policy objectives. An illustrative example of the delicate balancing exercise is the new Temporary Crisis and Transition Framework (Framework) that the EC adopted in March 2023. The new Framework aims to support technologies that facilitate the transition to a net-zero economy (such as solar panels, batteries, electrolyzers, carbon capture and storage technology, and wind turbines), conforming with the Green Deal Industrial Plan. Member States may offer aid to projects that promote renewable energy, energy storage, and decarbonization of industrial processes. The Framework is understood as the EU response to the US IRA initiative, to retain and attract businesses active in green transition technologies.

Economic security considerations inform the recent Framework. The framework allows, subject to conditions, for matching aid, i.e., the possibility to provide the same amount of aid as the subsidy that a company could receive to locate its investment outside the EU, a feature rarely seen in EU State aid law. The Framework is, therefore, an “extroverted” initiative, in the sense that it recognizes the global subsidies’ race for clean technologies and aims to allow the Member States to compete in offering subsidies. In that way, the EU aspires to locate green investments in its territory and reduce dependencies, in line with its economic security and climate targets.

The new Framework is an illustrative example of why State aid may help achieve economic security, despite not being explicitly recognized as a tool to achieve economic security in the Communication. State aid is deployed to overcome market failures, i.e., situations where the private sector cannot deliver the expected results. Given that State aid in specific sectors helps achieve objectives that are in line with the Strategy, its contribution to economic security cannot be overlooked.  Given that EU funding, through RRF or the Cohesion Fund, is explicitly recognized as a tool of the Strategy, so must be state aid, as the only dividing line between the two is the source of funding. In the latter, the source is the Member State, while in the former, the funding comes from the EU and is not considered State aid. Apart from that, State aid and EU funding may very well serve the same purposes, such as green and digital transition.

But how does State aid contribute? The answer is quite simple: if fewer restrictions apply to granting State aid, then larger amounts of aid can be granted. As the amounts get larger, attaining public policy objectives becomes easier, as more market failures get addressed. By pursuing certain public policy objectives, Member States help ensure economic security for the EU. Therefore, in pursuit of economic security, the way forward for the EC is the relaxation of State aid rules that relate to sectors critical for economic security, much like what the new Framework did for the net-zero industry. In an ideal scenario, the augmentation of aid will foster the development of the targeted sector, create stronger EU businesses, and reduce dependencies.  That is not to say that using State aid law as an instrument for achieving economic security is without its contradictions. Relaxation of State aid rules risks increasing disparities between Member States as wealthier Member States can subsidize domestic undertakings to a greater degree than the poorest Member States.

2. Merger Control

Merger control is also a balancing exercise. When it comes to assessing a merger, the EC will evaluate its anti-competitive effects against any efficiencies that the merger may create. If the efficiencies (lower prices, greater choice, improved products) counteract the anti-competitive effects, then the merger will be allowed irrespective of its anti-competitive effects.

A case that will help illustrate why economic security could play a role in mergers is the Alstom/Siemens merger that invoked industrial policy arguments. More specifically, one argument put forward by the merging parties to address the anti-competitive effects of the merger was that the transaction would create a European champion in the train rolling stock/high-speed trains market. This champion would be able to compete globally with other rail giants. More specifically, the merging parties argued that their Chinese competitor, CRRC, could enter the EEA market and exercise competitive pressure and that they were competing against CRRC at the global level. The EC examined and dismissed their arguments, noting that the CRRC has significant barriers impeding her from entering the EEA market. It also noted that CRRC was only active in China, except for only one international contact, which was the result of government-to-government negotiations. As a result, it was concluded that CRRC would not compete against the merged entity, nor would it be able to enter the EEA market. Due to the anti-competitive effects of the merger, the EC prohibited the merger, a decision heavily criticized by France and Germany.

Following the Siemens/Alstom decision, France and Germany issued the Manifesto, which included their views on modernizing EU industrial policy in the wake of global challenges. Regarding competition law, the Manifesto claims that it should consider industrial policy arguments to enable European companies to successfully compete globally. The two Member States were calling for the amendment of the existing merger control regime in that direction. More importantly, introducing a Council right of appeal to override EC’s decisions was also suggested.

When responding to the Manifesto, the EC agreed on the need for action on industrial policy but was quick to discard any adaptation of competition law.  The EC’s mind remains unchanged until today. Following the same logic that applied to industrial policy considerations in the Alstom/Siemens case, the EC resists the idea of weaponizing competition law to achieve economic security in strategic sectors (such as green transition, raw materials, semiconductors, 5G/6G security). But how would competition law be used to help achieve economic security in strategic sectors? A way to do this would be to assign the EC the responsibility of assessing the economic security gains of a proposed transaction. It would then decide whether the transaction could be allowed, irrespective of its anticompetitive effects, much like what happens with efficiencies. Allowing mergers on economic security grounds, in exceptional circumstances that justify so, would give the EU additional wiggle room in case it is needed. It isn’t unthinkable that the only response to an economic security threat may be the creation of an EU giant. Under the existing framework, the EC could not allow such a development in the presence of anticompetitive effects. To put it simply, the real dilemma for the EU in an era of unpredictable trade relations is the following: Are EU consumers better off if there is an EU champion, created after a merger, able to provide economic security in strategic sectors even if that results in anticompetitive effects, such as higher prices? Or is it preferable to prohibit the merger, accepting the risk of EU businesses failing against foreign competition and EU consumers being at the mercy of foreign businesses and interests?

At this point, an important distinction is in order. A Siemens/Alstom type of argument, i.e., the creation of a European giant that could effectively compete with its international rivals outside the EU, is not what the Strategy is about. Put correctly, an economic security-oriented argument would suggest that the merger will create a European champion that will be able to construct, operate, and protect critical infrastructure within the EU and secure the EU’s supply chains in critical products and services. Thus, the continuity of supply to EU consumers would be ensured. Put differently, the creation of European champions is not about gaining market share in third countries and being more competitive globally, but it aims to create companies active in the EU, protecting EU infrastructure and benefiting EU consumers. Their international competitiveness is immaterial.

The consideration of economic security arguments in merger control is not without its risks. Politics would infiltrate the analysis, undermining the consistent and predictable practice of the DG COMP thus far. Indicative risks regarding the introduction of non-competition criteria are the exercise of political pressure to allow a merger by the merging parties and Member States and the deterrence of the merging parties to offer remedies since they are aware that there is another way around. Additionally, further delay in an already lengthy process would be expected, and intra-Member States conflicts to promote their national champions could arise.

4. The Franco-German Manifesto’s Suggestions and their Reflection on the Strategy

Many trade aspects of the Manifesto are reflected in the Strategy. France and Germany called for offensive and defensive measures. Indicative examples of offensive measures are support for innovation, EU funding of cutting-edge technology (artificial intelligence, batteries, etc.), adaptation of merger control, and relaxation of State aid rules.  Concerning defensive measures, they called for the thorough application of the FDI regime and the introduction of reciprocity in public procurement. France and Germany also requested attention to be given to subsidies or state-controlled enterprises in the context of merger control. Finally, they suggested that free trade and multilateralism should remain at the heart of EU trade policy, along with a continuous effort to regulate subsidies through WTO.

A comparative reading of the Manifesto and the Strategy reveals that they are structured in the same way. They both suggest offensive measures (to develop the EU industry to become more competitive globally) and defensive measures (to protect the EU against foreign businesses) while keeping a foot at multilateralism and the resuscitation of WTO. Many suggestions in the Manifesto seem to have influenced the EC in shaping the Strategy, as the following examples of offensive measures will indicate. First, the Manifesto called for a common EU strategy for technology funding, which the new Strategy seems to embrace with funding from NextGenerationEU and Cohesion Funds. Second, the Manifesto advocated for a strong focus on EU innovation, which the Strategy recognizes as key while also trying to prevent leakage of innovation to third countries. Third, both the Manifesto and the Strategy prioritized artificial intelligence as a strategic sector for the EU’s interests. Fourth, the Manifesto emphasized the EU’s capability of producing cutting-edge technology, which is central to the Strategy’s priorities. Both documents refer to the contribution of Important Projects of European Interest (IPCEI), but the Strategy goes even further, as the Critical Raw Material Act, the Chips Act, and the Net-Zero Industry Act aim to bolster EU production of the relevant technologies. Fifth, the Manifesto stresses the importance of financial markets’ contribution to industrial innovation, especially through the Capital Markets Union. Accordingly, the strategy aims to crowd in private investment through the development of the Capital Markets Union.

Parallelisms between the two proposals are also visible regarding defensive measures. First, the Manifesto urges the effective application of the FDI Regulation and asks Member States to enforce strict national legislation for investment screening. The same attention to the FDI regulation is mirrored in the Strategy, as the EC urges those Member States that do not have a screening mechanism in place to adopt one, while the EC is in the process of evaluating and reforming the Regulation. Second, the Manifesto requested that subsidies be considered in the context of merger control. This request was granted with the introduction of the FSR. Finally, the suggestions of both proposals align when it comes to multilateralism and WTO activism. The Manifesto calls for the EU to promote multilateralism and open trade and try to regulate subsidies through WTO, while the Strategy emphasizes bilateral and plurilateral cooperation and the effort to reform the WTO.

While there are significant parallelisms between the two proposals that testify to the influence of the Manifesto over the Strategy, it must be said that not all suggestions of the Manifesto have affected the Strategy, as the section on merger control proves. In addition, the Strategy goes significantly beyond and above the Manifesto regarding the proposed tools.

5. What is the way forward?

The efficacy of the proposed economic security tools remains uncertain. The complementarity of trade and competition law allows for the consideration of additional tools that are not strictly trade-related, yet can contribute towards achieving economic security. State aid law is aware of and responsive to international subsidies and seems aligned with economic security considerations. However, further relaxation of state aid rules in pursuit of economic security risks augmenting the disparities between Member States. Regarding competition law, the EC is hesitant to include merger control in the toolkit of the Strategy, possibly because it considers that the risks of introducing non-competition criteria outweigh the benefits of such intervention. It remains to be seen whether the currently unthinkable solution of exceptionally allowing a merger based on economic security grounds will become more appealing soon.