European Commission Unveils Plan Aimed at Strengthening Economic Security
The Development: On January 24, 2024, the European Commission ("EC") unveiled a package of five fresh initiatives aimed at strengthening the European Union's ("EU") economic security (the "Package"). This will likely increase the walled-garden approach of the EU market with expanded control of inbound investments and possibly also novel restrictions on outbound investments.
The Background: Ensuring economic security has recently emerged as a new policy priority for the EU. This was recently formalized in the EU's "Economic Security Strategy" published in June 2023, calling for the better deployment of existing tools—such as on foreign direct investment ("FDI") screening and export controls—and the adoption of new ones to protect the EU from economic security risks. The Package is the first step toward delivering on this policy.
Looking Ahead: The Package does not change current rules. Four initiatives will not lead to hard law unless further legislative proposals are made. The Package only proposes hard EU law regarding the revision of the EU FDI framework, which is unlikely to be enacted in the short-term due to fast-approaching European Parliament elections in June 2024. Elections and the resulting change in the EC also mean that it is uncertain whether the political direction announced in the Package will be carried on past 2024.
Ensuring economic security has recently emerged as a new policy priority for the EU.
Founded on a three-pillar approach that seeks to promote the EU's competitiveness, to protect against risks, and to create partnership with the broadest possible range of countries to advance shared economic security interests, the EU's economic security initiatives aim to: (i) harmonize foreign investment screening throughout the EU; (ii) increase coordination on export controls; (iii) expand outbound investment controls in certain technologies; (iv) enhance research and development ("R&D") support for certain technologies; and (v) enhance research security at national and sector levels. Should these initiatives materialize, a wide range of businesses would be affected by the obligations they would set, both inside and outside the EU.
Harmonizing FDI Screening Throughout the EU
The current EU FDI framework leaves significant discretion to Member States in deciding whether to screen foreign investment, the type of economic areas subject to screening, what constitutes a notifiable transaction, jurisdictional criteria, and the related review procedures. Several business associations that participated in the consultation leading up to the adoption of the proposal highlighted how the current FDI screening regimes create uncertainty and impediments to investment into the EU. They called for procedures to be aligned, due process to be strengthened, and for appropriate resources to be allocated to the competent authorities to ensure an effective and expeditious screening.
The Package includes a proposal for a new EU FDI framework aimed at harmonizing national rules on investment screening. If adopted, the proposal would notably increase the number of EU screening regimes (22 today) by requiring all 27 Member States to establish preclosing, foreign investment screening mechanisms. In addition, the EC lists a minimum set of areas where investments (including greenfield but excluding certain intra-company transactions) would have to be screened throughout the EU. The list of areas subject to Member State screening builds on the 10 technology areas qualified as "critical" to the EU economic security which, as discussed in our October 2023 Alert, included semiconductors, AI, quantum technologies, and biotechnologies.
Despite the stated aim of harmonizing national rules such as identifying a minimum sectoral scope for investment screening, the EC's proposal principally deals with inter-agency procedures and coordination. The proposal does not address all existing divergences between Member States' FDI screening regimes, including on jurisdictional criteria, review deadlines, or due process considerations. Member States would thus retain wide discretion to set filing thresholds to determine what constitutes a notifiable event, diverge on review procedures and deadlines, and require authorization for investments into areas not listed in the EU framework.
Export Controls and Outbound Investment
As regards export controls, the EC proposes to expand, beyond the requirements of multilateral export control regimes, the list of items for which an export authorization is required under the EU Dual-Use Regulation. The EC wishes to do so in the short-term but has yet to make a formal legislative proposal on that issue. Furthermore, the EC seeks to enhance coordination in export control between the EU and its Member States. It also plans to bring forward to early 2025 the evaluation of the Dual-Use Regulation (instead of 2026 and 2028), potentially paving the way for its modification.
Concerning outbound investment, the Package launches a policy initiative for the possible adoption of EU rules on outbound investment control, echoing a similar initiative in the United States (as detailed in our August 2023 Alert). As a first step, the EC has opened—until April 2024—a public consultation to understand how risks associated with outbound investments from the EU can be mitigated through existing tools, or whether they could justify additional legislation at EU or national level. The EC will then recommend Member States to review certain outbound transactions made since 2019. This could lead to the EC eventually suggesting specific rules for controlling outbound investments.
To address vulnerabilities in research and innovation emerging from complex geopolitical context, the EC puts forward a proposal for a Council Recommendation to provide more clarity, guidance, and support to Member States and the research and innovation sectors. In particular, the EC proposes that Member States: (i) cooperate to enhance research security in the EU; (ii) engage with research funding organisations (e.g., to ensure that research security is taken into account and that research projects presenting red flags undergo a risk appraisal); (iii) support research perform organisations (e.g., to implement risk management procedures); and (iv) support EU-level action (e.g., to establish a European Centre of Expertise on Research Security).
In addition, the EC is launching a public consultation on EU-level support for R&D concerning technologies with dual-use potential. In so doing, the EC wishes to consider the expansion of current EU programs (including Horizon Europe or the European Defence Fund), the partial repurposing of the Horizon Europe for noncivil applications, and/or the creation of new EU instruments to fund R&D with dual-use potential.
What Are the Next Steps?
The Package includes a legislative proposal regarding the revision of the EU FDI framework, but the rest of the initiatives included in the Package will not lead to hard law unless further legislative proposals are made. Additionally, the June 2024 European Parliament elections may disrupt the implementation of the Package. First, depending on procedures that may be adopted by EU institutions over the coming months, the legislative procedure for the revision of the EU FDI framework will at the very least be interrupted by the elections. Second, in light of the European Parliament elections and the resulting change in the EC, it is uncertain whether the political direction announced in the Package will be carried on past 2024.
Four Key Takeaways
- The proposed EU FDI framework would require all 27 Member States to establish preclosing screening mechanisms of non-EU businesses' investments into a common set of areas throughout the EU, including semiconductors, AI, quantum technologies, and biotechnologies, among others.
- The EC contemplates expanding the EU list of dual-use items beyond the requirements of multilateral export control regimes. It also seeks to enhance coordination in export control between the EU and its Member States and plans to bring forward to early 2025 the evaluation of the Dual-Use Regulation, potentially paving the way for its modification
- The EC has launched a policy initiative regarding outbound investment control. As of yet, it has only opened a public consultation on the matter, but this could eventually lead to a legislative proposal on the control of outbound investments.
- The EC proposes that the Council adopt a recommendation setting in motion research security cooperation in the EU. It is also launching a public consultation on EU-level support for R&D concerning technologies with dual-use potential.