On January 24, the EU Commission released a communication announcing the European Economic Security Package (EESP) – as trailed in our previous blog. The Communication, which implements the EU’s Strategy (published in June 2023), is aimed at strengthening the EU’s economic security in a number of areas:
- improved screening of foreign investment into the EU;
- greater export controls coordination;
- identification of outbound investments risk;
- enhanced support for research and development involving dual-use technologies;
- upgraded research security.
The EESP comprises five measures – a legislative proposal; three white papers; and a Proposal for a Council Recommendation.
Proposed revision of the Regulation on the screening of Foreign Direct Investment
The proposed revisions to the screening framework would broaden the scope of the existing FDI Screening Regulation by:
- extending screening to cover indirect foreign investment, including acquisitions by EU investors ultimately controlled by a non-EU country;
- bringing certain greenfield investments within the scope of screening regimes;
- ensuring all Member States have a screening mechanism in place, with better harmonised national rules (there are currently five Member States without complete foreign investment screening legislation); and
- identifying minimum sectoral scope where Member States must screen foreign investments.
Notably, the proposed minimum scope for Member States’ screening regimes would encompass military, dual-use and medical sectors; projects identified as sensitive or as being of ‘Union interest’; and certain ‘critical technology’ sectors including- advanced semiconductors, artificial intelligence, biotechnologies, and quantum technologies.
The Commission also proposed requirements for greater coordination in the submission of foreign investment review filings across the EU, which could significantly impact transaction timelines. These proposals will be covered in more detail in a blog post on our Covington Competition blog.
White Paper on Outbound Investment
The non-binding nature of the White Paper reflects both the limited information available to substantiate perceptions that potential security risks could arise from EU outbound investment, that would not be addressed by existing tools and the tensions between the Commission and Member States’ positions on this issue (whilst the Commission stressed the need to scrutinize outbound EU investments to protect the EU’s security interests by preventing technology and know-how leakage, Member States feared the loss of sovereignty).
As a compromise, the White Paper proposes a detailed analysis of outbound investment; a three-month stakeholder consultation; and a 12-month monitoring and assessment of outbound investments at national level. The White Paper initially proposes that the monitoring phase focuses on the four ‘critical technology areas’ mentioned above. The assessment period will conclude with a joint risk assessment report, expected in Autumn 2025, which will enable the Commission to decide whether a more concrete policy response is required.
The Commission’s consideration of outbound investment screening follows similar moves by other countries to review or make enhancements to their capacity to intervene in such transactions – including the United States and the United Kingdom (where the Government has been undertaking engagement with industry stakeholders to understand and assess potential risks).
White Paper on Export Controls
The White Paper proposes the creation of a political coordination forum to help Member States reach common positions on export control matters, and proposes bringing forward the evaluation of the recast Dual-Use Regulation to the first quarter of 2025.
While the modernization of the EU export control regime effected by the adoption of the recast Dual-Use Regulation in 2021 is still relatively recent, the White Paper contemplates a need for further changes prompted by current geopolitical tensions, the continued pace of technological change, and the increased use of trade restrictions for foreign policy purposes by the EU and its partners.
In a notable departure from the EU’s previous position, the Commission will make a proposal to introduce controls at an EU level for items that ‘would have been adopted’ by multilateral regimes (such as Wassenaar Arrangement and the Missile Technology Control Regime) but have not been so-adopted because members of those regimes have blocked such revisions.
The Commission will also adopt a Recommendation to encourage coordination within the EU on any new national control lists. Particularly relevant for advanced and emerging technologies, these measures are designed to avoid divergence between Member States’ national controls, and to aid the EU in responding to third countries outside the EU that impose new controls unilaterally. However, the possibility that EU-level lists could further fragment the enforcement of multilateral regimes and undermine their implementation and effectiveness will remain controversial with industry and a consideration for Member States.
White Paper on enhancing support for research and development involving technologies with dual-use potential
The White Paper opens a consultation with public authorities, civil society, industry, and academia on options for strategic support for dual-use technology development aimed at maintaining a competitive edge in critical and emerging dual-use technologies.
The Paper also reviews the R & D support offered under current EU funding programs and identifies three potential options for the future:
- no change to existing regimes;
- removing the exclusive focus on civil applications in selected parts of the successor program to Horizon Europe; or
- creating a dedicated instrument with a specific focus on dual-use R&D.
Proposal for a Council Recommendation on enhancing Research Security
The Commission recognizes that international tensions, combined with the increasing geopolitical relevance of research and innovation, mean that European researchers and academics are increasingly confronted with risks when cooperating internationally. These risks may mean that research and innovation is targeted and used in ways that threaten EU security and facilitate undesirable transfer of critical technology.
The Proposal sets out a number of EU-level cooperation and coordination principles that should underpin all research security policies, such as academic freedom, institutional autonomy, and non-discrimination. The Proposal includes practical safeguarding measures that can be taken by the Member States and suggests the establishment of a European Centre of Expertise on Research Security as well as encouraging Member States to establish a policy framework for research security, including by incentivizing research centers to appoint research security advisers.
The EESP is another plank in the EU’s policy of Strategic Autonomy. It gives legislative weight to the Commission President’s speeches in March and April 2023 (which focused on re-balancing the trading relationship with China) and the European Economic Security Strategy of June 2023 (aimed at creating a framework for assessing and addressing risks to EU economic security, while ensuring that the EU remained an open and attractive destination for business and investment).
The EESP brings the EU into line with the US approach of a more national security-focused approach to foreign investment – an approach which appears reciprocated in China. Whether this approach to economic security will continue depends to a large extent on the outcome of the European elections in June, which will shape not only the new Parliament, but also the Commission.
Covington’s international teams of policy and regulatory experts are well-placed to help and advise companies caught in the middle of this geopolitical and policy tussle, grappling with the competing demands of de-risking inward and outward Chinese investment without de-coupling trade.