The Quest for Policy Coherence between Competition Law and Foreign Investment Screening in the EU: Consistency or Disruption?

By Pietro Chiarelli, European Central Bank

Disclaimer: This blog post was prepared by the author in his personal capacity. The opinions expressed in the blog post are the author’s own and do not reflect the view of the ECB.

Introduction

Foreign investment and competition are no strangers to one another. While the former is a multiplying factor for the latter as it increases its standards, a smooth and sound functioning of the latter fosters the attractiveness of an economy for the former. What is more, not only do these policies go hand in hand, but in so doing they are headed towards the same direction. In fact, the development of these policies is grounded on the righteous assumption that both the attraction of foreign investors and the establishment of an effective competition share the same long-term effects, e.g. the promotion of economic growth.

Nonetheless, while this is accurate in essence, among the vast spectrum of foreign investment policies, national security policies set themselves apart. In fact, investment screening mechanisms which aim to pursue the protection of national security from the risks associated with foreign investment have the potential to deter foreign investors from entering a market, with the added result of decreasing competition levels. In other words, while investment screening mechanisms force policymakers to build a serious response to their intrinsic, long-standing paradox of hindering a cornerstone of economic development and growth, i.e. the attraction of foreign investors and foreign capital, they have in so doing the potential of reducing competition standards by decreasing an economy’s attractiveness.

However disastrous it may seem, the significant expansion of investment screening mechanisms in EU jurisdictions is duly justified and reasonable in its grounds and means. Time has now shown that mechanisms grounded on predictability, legal certainty, intelligibility do not drastically hinder the inflow of foreign investment. Rather than delving into this matter, it is more compelling to emphasize the relationship between investment screening and antitrust instruments, notably merger control, and to dwell into the question of the coherence of these divergent policy frameworks in the EU.

From a theoretical standpoint, the establishment of investment screening mechanisms may hold the capacity to sunder the essential bond between investment and competition. This concerns the potential hurdles to provide coherence in the enforcement of these regulatory frameworks. The policy question that is worth exploring building on this conceptual friction is thus whether the coherence of the regulatory framework is flawed and to what extent this may significantly impact the investment climate. The question may be tackled by considering firstly whether the decisions adopted may give rise to incoherence or conflicts (I). Secondly, it will be considered whether a spillover of national security concerns to merger control enforcement has taken place in the Commission’s practice (II).

Potential and conceptual frictions contradicted by factual considerations

In broad and still quite abstract terms, an inherent discrepancy appears when analyzing the juxtaposition of the enforcement of competition policies, notably merger control, and investment screening mechanisms. A negative decision adopted in the enforcement of merger control has an “expansive effect” for effective competition within the market insofar as it blocks a concentration that may endanger it. In contrast, a negative decision within a national security assessment inevitably results in a restrictive effect on competition within the relevant market insofar as it precludes the entry of a new player (and potentially on the whole investment climate). However, it is evident that this is nothing more than a theoretical and anecdotal exercise: merely adopting a negative decision in the enforcement of investment screening is not sufficient to assert that competition levels in a specific market are undermined.

It is rather more noteworthy to draw the attention to other points of contact between investment screening and merger control. These can be identified in those many cases where the decision is neither negative nor positive, and the enforcing authority adopts a conditional decision. However, this outcome does not have a univocal effect on the issue at study. Indeed, remedies may well turn out to be both mutually sustaining whenever they are headed towards the same direction (e.g., when they both target single supplier questions). However, remedies may also be in clear contradiction (e.g. when the FDI decision imposes the continuation of the line of business, while the merger control decision demands the dismissal of one branch of the business activity)[1]. While it may also portray a situation that is neither utterly detrimental nor fully positive to ensure the consistency of policies, this latter outcome does indeed suggest that potential inconsistencies in the system might actually and quite vividly occur. Thus, while it is true that remedies are not always opposed to one another and a case-by-case analysis would be needed, it is still true that – potentially – they might be.

In any case, it is essential to consider a highly relevant factual element. There is certainly a possibility that the same transaction may undergo both a competition-related assessment and a national security assessment. However, it is noteworthy to observe that cases where there is an overlap are rarer than it may initially seem. Indeed, while not many investment screening mechanisms cover them, greenfield investments are excluded from this debate as they are not involved in merger control. Additionally, many transactions undergo merger control but not investment screening because they do not involve foreign investors. Finally, transactions not subject to merger control due to not meeting necessary size criteria (e.g., revenue threshold) but falling within the scope of investment screening mechanisms are also excluded.

Therefore, while it is not possible to have precise data on the number of transactions actually concerned by this issue, it follows that the potential regulatory inconsistency pertains to a very limited number of transactions. It is important to add that not in all cases the decisions adopted have conflicting effects, as there are few scenarios in which the two decisions clash. As already mentioned, only the presence of opposing remedies can harm the system and render the remedies themselves inefficient.

Therefore, the optimal solution remains to ensure a smooth institutional coordination among the actors involved in the respective assessment in order to avoid these rare, extreme cases of regulatory hurdles. There are various ways in which this can occur, depending on how the investment screening mechanism and process are designed at the national level. For instance, in Italy, it has been convincingly suggested[2] to include a representative from the national competition authority within the Coordination Group responsible for the investigation and analysis of screening procedures. It remains challenging to discern how to manage the fact that screening decisions are always made at the national level, while the one-stop-shop system of merger control allows decisions to be made either at the national or European level. Notwithstanding, an enhanced institutional cooperation represents the most logical answer to the potential discrepancies that may derive from the implementation and enforcement of these regulatory frameworks. This would allow antitrust and national security enforcers to better coordinate their responses to the risks related to the transactions undergoing their assessment.

Nonetheless, apart from these limited cases, one cannot arguably say that the policy framework is incoherent, inconsistent or discrepant. However, there is one topic, quite closely linked, which has sparked a debate over the last years, not only from policy, legal or economic standpoints, but also from political actors. This is the question whether considerations related to national security must or can be taken into account within the adoption of antitrust decisions. In other words, it is questioned whether there has been a spill-over of national security concerns into antitrust reasoning that could thus impair the regulatory balance established by the EU legislator together with national legislators.

Potentially conflicting outcomes: European Champions

We have observed that the surge in the proliferation of screening mechanisms is a relatively recent phenomenon, stemming from the dissemination of various factors, including, among others, the pandemic and shifting equilibrium in times of geo-economic tensions. The heightened focus on security that has emerged in the last decade, particularly intensifying in the last five years, prompted to inquire whether the policy grounds underpinning the surge and expansion in investment screenings imply a spill-over of these considerations into antitrust, and whether this is, in any way, desirable in the European context.

The issue traces its roots to the concept of public interest in antitrust decisions, particularly to Article 21(4) of the Merger Regulation. The European commission traditionally applies a stringent interpretation that carves-out out all economic, industrial, or political interests to prevent protectionist pressures. This interpretation, coupled with the understanding that national security is the sole responsibility of the Member States, has consistently led to the belief that the European Commission cannot introduce considerations related to national security within a merger decision—thus, approving or rejecting a decision based on such considerations. While this position has proven consistent and coherent for years, the growing concerns that led to the expansion of national investment screening mechanisms, as well as the adoption of the FDI Regulation, have shaken its foundation and led some to believe that a review of this position would be very much welcome.

As much as antitrust and national security policies are different and distinct, with diverging grounds and objectives, the issue must seem unproblematic. Yet, in many cases, their enforcement might give the illusion that they are more intertwined than they are, consequently giving rise to debates in the media and the public, as well as political endorsements and stances, eventually pressuring the antitrust enforcer towards a specific decision. In particular, this matter arose as a response to the intention expressed in 2017 by the two largest railway manufacturers in Germany and France, the French rolling stock manufacturer Alstom and the German conglomerate corporation Siemens, to join their forces and built a European champion in transport and mobility.

In the context of a purely European case, investment screening was irrelevant, while the debate at the European level took another dimension, as it was effectively questioned whether national security considerations would need to be taken into account in this decision. Indeed, the transaction aimed at creating a European champion in the high-speed railway market capable of competing with the prominent non-European giants already active in the relevant market. Needless to say, the sensitivity of this transaction towards national security concerns is evidenced by the inclusion of transport in the material scope of application of most national investment screening mechanisms, as well as in Article 4 of the FDI Regulation, which designates it as critical infrastructure.

Despite the pressure under which the European Commission was put, it unequivocally blocked nonetheless the transaction through an orthodox and impeccable application of antitrust law. Thus, it refused to introduce national security, industrial, economic or political considerations.

Stemming from this landmark case, an even more abstract question started haunting European policymakers, which in legal terms would mean abandoning the previous interpretation of Article 21 of the Merger Regulation: should antitrust rules be made more flexible in order to protect the European industry to make it more resilient towards foreign giants?

After the Commission’s response in the Alstom/Siemens case, a certain activism from the French and German governments resulted in the adoption of several documents whose underlying idea is that of the need for an industrial policy to conciliate competition policy and the safeguard of security and public order through the protection of the European industry (e.g., the Joint Statement of 6th Meeting of the Friends of Industry, the Franco-German Manifesto for a European industrial policy for the 21^st century). What is more, this question remains vividly relevant in the public debate if nothing else for some interpretations of the EU strategic autonomy, while the pace of the calls for a loosening of competition rules do not seem to slow down as often appeals to a European industrial policy tend to bring back the protection of domestic businesses based, inter alia, on national security.

As authoritatively emphasized by former Advocate General Pitruzzella[3], it would be possible within the current regulatory framework to that end to adopt a broad interpretation of Recital 36 of the FDI Regulation, which states that when a foreign direct investment constitutes a concentration falling within the scope of the Merger Regulation, the application of the FDI Regulation should be without prejudice to the application of Article 21(4) of the former, and that they should be applied in a consistent manner. This Recital could then be interpreted in such a way that the concerns associated with security risks under the FDI Regulation to give substance to the notion of public interest within the meaning of Article 21 of the Merger Regulation, which would undoubtedly allow to further adapt the standards of merger reviews to the pursuit of industrial policy objectives. What seems to be quite worrying with this interpretation is however the discretionary power that the competition authority would be entitled to and that would go far beyond their mandate, regardless of all the efforts legislators and policymakers can make to ensure the intelligibility and the predictability of the whole investment climate to keep attracting foreign investment.

Conclusion

While it is yet to be thoroughly explained how the creation of oligopolies or monopolies in strategic sectors of the EU internal market would allow a better protection of its security, EU institutions do seem to be convinced by this approach. Hence, they have built their response firmly grounded on the social market economy, which is enshrined in the Treaties and that they have been promoting for decades.

This kind of policy often involves systemic decisions, such as the choice between a de-coupling or a de-risking approach, which extend far beyond mere investment screening policies and their relationship with competition law. Thus, it currently seems wiser to continue on this path, avoiding the temptation to pursue short-term objectives like creating a European giant in a specific market, thereby compromising the excellent European competition standards to achieve industrial purposes hidden behind the noble purposes of national security. If the Union deems it appropriate to change course, it should do so with extreme care and through a systematic and reasoned approach – and to do so, decisions on competition policy, national security, and industrial policies should – at the very least – be made at the same level.

[1] OECD (2022), The Relationship Between FDI Screening and Merger Control Reviews, OECD Competition Policy Roundtable Background Note, www.oecd.org/daf/competition/the-relationship-betweenfdi-screening-and-merger-control-reviews-2022.pdf.

[2] DI VIA L., PASQUALE L., Controllo degli investimenti stranieri e antitrust. Un matrimonio che s’ha da fare, in Mercato Concorrenza Regole, 22 (1), 2020, pp.99-118.

[3] PITRUZZELLA G., Foreign direct investment screening in EU, in NAPOLITANO G. (ed.), Foreign Direct Investment screening – Il controllo sugli investimenti esteri diretti, 2020, pp. 63-70