The European Union has approved new rules that establish a framework for screening foreign direct investments to protect against security threats, adding to a growing list of governments that have imposed mechanisms to block investments in the name of national security.

In addition to the U.S., Japan, Canada and Australia have taken steps to upgrade their own national security investment review processes.

The new legislation is the EU's response to a rising tide of acquisitions by mainly Chinese companies of European technology, energy and other businesses. It is often compared to CFIUS, the U.S. system for reviewing foreign investments for their impact on national security.

But CFIUS has more teeth, lawyers say.

"At the EU level, it's weaker than CFIUS control. The commission does not have the ability to block or restrict [an investment]," said Felix Helmstaedter, a lawyer at Morrison & Foerster's Berlin office.

CFIUS, which stands for the Committee on Foreign Investment in the United States, has that power. But under the EU legislation, member states remain in charge, Helmstaedter said.

Still, in the current climate of fear and suspicion, directed mostly at China, the EU was able to establish rules after about a year of negotiations.

"Europe must always defend its strategic interests and that is precisely what this new framework will help us to do," European Commission president Jean-Claude Juncker said in November, when the member states finally agreed to an outline of the new system. "We are not naïve free traders. We need scrutiny over purchases by foreign companies that target Europe's strategic assets."

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How the Law Came About

In 2017, the French, German and Italian governments wrote to the European Commission, expressing concern that foreign—specifically Chinese—investors were taking stakes in strategic assets, such as energy grids.

The concern was not so much about the Chinese buying national businesses, as these countries had their own screening rules in place. It was rather about the risks posed if China controlled sensitive businesses in the EU's poorer countries, such as Greece, Portugal and former communist bloc countries. Greece and Portugal, two countries that had been through financial crises, looked to the Chinese for much-needed capital, as they were being shunned by other international investors.

France, Germany and Italy wanted the European Commission to have a degree of central oversight, if not outright control, of investment in other countries.

The ambitions for the EU screening rules had to be scaled back once those drafting the legislation realised that even in the EU's setup, where many powers are centralised, security remained a prerogative of national governments. There was little scope for giving the commission the power to police acquisitions because of security concerns. There was also fierce pushback from countries like Portugal and Hungary, which did not want any interference in their investment plans.

What emerged is a system that allows for sharing information about proposed acquisitions among member states. The commission will be able to give its opinion on whether acquisitions could undermine security in cases involving more than one EU member state or EU projects, such as its Galileo satellite programme. But that's the limit of its powers.

Crucially, member states are not even required to set up national screening schemes. At present, 14 of the 28 member countries have national measures in place. But if a country does not have one, it is not obliged to share information with its EU partners.

Helmstaedter said the rules will have an impact on the length of time it takes to complete a screening process in which the EU gets involved. "It has an impact on the timeline," he said. "Investors will have to be aware [of this] because screening procedures will take longer."

Fredrik Erixon, director at the European Centre for International Political Economy, said there is a fundamental challenge for the regulation that will limit its effect. "There's no commonly agreed-to definition of what we are talking about, whether it's geopolitically controversial or economically controversial," he said.

At present, the EU governments block investments from each other on security grounds. "If you want to have a common screening policy, the first thing would be to have a common approach," he said.

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