Regulación Jurídica Interna

The European Commission is moving quickly, with an October 2017 proposal to the European Council and European Parliament. The plan, if agreed, would be broad-based and encompass all investments that have an implication for public order or security. It creates a right for the European Commission to supervise investments in sectors where it subsidised technologies. It also lists critical technology sectors that are key to the industries of the future and which more often than not have direct military applications. Indeed, given the difficulty in predicting what the sensitive areas of the future will be, it is important for the EU to allow itself the freedom to act, within established rules, complete autonomy, and perhaps even a degree of unpredictability. The European Commission would be able to conduct “screening on grounds of security and public order, in case where a foreign direct investment may affect projects or programmes of Union interest”, and this goes beyond simple analysis. This includes “critical infrastructure, critical technology or critical inputs”. And there is an obligation for member states to inform the European Commission of their own screening, along with the possibility for the European Commission to request information. The proposal provides for peer pressure – member states may ask questions of each other – and also applies to mergers, recalling a little-applied merger rule that calls for “protection of public security, plurality of the media and prudential rules as legitimate interests”. The area under screening is quite extensive, and includes critical technology. The phrase “Union interest” almost – but not quite – creates a golden share for the European Commission on projects involving more than one member state, or

subsidised by the European Commission. The proposal is non-discriminatory – it does not target China in any way, a requirement which is consistent with European policies on trade.

Yet Europe is not well prepared to define investment screening, not to mention implementing it, given the lack of human resources at the EU level, the dependence on external intelligence sources, and the sheer difficulty of identifying key technologies that relate to national security.

The proposal does not enter the area of national security, which remains a member state prerogative. It is also not a tool aimed at direct leverage over partner countries: for instance, the proposal leaves the issue of reciprocity untouched, even though this might give a valid basis for bargaining on mutual opening of public procurement. It is mandatory in one key respect: information is required from all member states on cases of foreign investment, with a review and guidance to be steered by the European Commission. Yet it is not mandatory in terms of what comes after the review: the guidance and recommendations from the European Commission will lead to a debating process with each member state if called for, but there will be no binding decision by the European Commission. Clearly, this is a compromise between those who wanted to shift authority on investment screening to the European Commission, and those who insist on retaining national control – whether or not they have investment screening mechanisms in place. It is likely that the authors of the proposal are counting on peer pressure, on reciprocity among member states, and on public opinion making its voice heard in some cases. One knowledgeable participant explained that meeting regularly on investment and security issues was already in progress: “the Commission provides a table and chairs” for a monthly meeting on foreign investment issues involving member state officials.41 In a fashion that follows the EU’s guidelines on arms

exports, or what DG Internal Market and Services achieves on clandestine financial flows with successful intergovernmental cooperation, the process will include mandatory coordination and exchange of information. Investment screening will require that the European Commission and member states pool investigative tools and initiate exchanges of information and views with third parties – the US, Japan, Australia, and Canada come to mind, because they are the most advanced in this area. But this raises issues of its own. Exchange of information implies reciprocity, and a dialogue backing up the data exchanged. It is unlikely that Europe’s major partners would share sensitive

data with all 28 member states, as this increases exponentially the probability of leakage. And transferring EU data to others implies an analytical capacity to sift through the raw data communicated by member states and an ability to reach practical conclusions. In short, in spite of the non-binding nature of the proposal, the EU institutions themselves needs staff that are empowered to make this happen. Identifying key technologies with implications for public order and security, and piercing through the opacity of offshore banking and firm ownership, is crucial. So is identifying the growing practice of ‘false flags’ and jumping-off bases (where a foreign company acquires a minority share in a European company but injects enough capital by lending that it multiplies its investment capacity as a European investor).

In spite of these difficulties, some unity has appeared at the core. In 2017 France, Germany, and Italy sent two joint letters and a non-paper to the European Commission urging it to devise a proposal for investment screening. The Netherlands, Spain, and the UK are likely to support this approach. For some of these countries, and for many European Commission officials, this marks a major shift. A Brussels official sums up the mood change thus: “I have been fighting barriers to investment all my life, and now I find myself supporting them. China – and even more Russia – have convinced me.”42

Since the style of Angela Merkel and Germany in general is to “lead from behind”, it fell to newly elected Emmanuel Macron to give a presentation on the matter to the European Council in June 2017. While some resistance by northern European countries had been expected, the most vocal opponents came from southern Europe – Antonio Costa from Portugal and, predictably enough, Alexis Tsipras from Greece.43 The mandate to the European Commission

so far is to “analyse” rather than to “screen” investment in strategic sectors from third countries. To expect otherwise would have been foolish, and a broad mandate scares those member states that have already accepted bilateral Chinese investment in their infrastructure and finance sectors, and that applies especially to Portugal after the euro crisis. CEE countries, although mostly disappointed by China’s delivery on Silk Road promises and prioritising EU membership and rules over the “Chinese way”, will no doubt look very closely at any additional controls. Northern European member states, more involved in finance and services, and often with very strong investment interests in China, have not been heavily targeted for critical acquisitions by Chinese companies so far – in the words of one Finnish observer, “the Chinese operate step by step,

42 ECFR interview in Brussels, July 2017.

43 Laurens Cerulus and Jakob Hanke, “Enter the dragon”, Politico, 10 April 2017, available at https://www. politico.eu/article/china-and-the-troika-portugal-foreign-investment-screening-takeovers-europe/. 56

region by region, and they have not really got to us yet.”44

Even among the three signatories of the proposal to the European Commission, there is no complete agreement on process. Italy professes to seek regulations and implementation solely in the hands of the European Commission, apparently because it fears national bias among its powerful neighbours. Its own behaviour towards Chinese investment, including in sectors that include defence interests, sometimes seems to belie its present position at the European level. Germany would also federalise the process – leading to some observations that it makes the deals for itself and mutualises the difficulties. France seeks a common rule but national implementation and decision, in part because it believes the EU process is cumbersome and too slow (both CFIUS and Japan’s FEFTA have very strict time constraints on their processes). And even those few member states that have adequate tools for investigation and legal action may have an interest in a shared process. For France there is a real risk of seeing its own decisions countered by the single market and by other less demanding member states; since 2005 it has had legislation in place (which it strengthened in 2014), informally described by some within the European Commission as “borderline industrial protectionism.”45 The

European Commission has not challenged this – yet. Germany’s strong private sector, and, for example, its Federation of German Industry (BDI), lean towards continued free access for investors. But many German firms operating in China can see the writing on the wall and are sensitive to the asymmetry between Europe’s free market and China’s ever more centralised industrial and technology policies. For the UK, there is a need to demonstrate both to Europe and to the US that it is a reliable partner on strategic matters. Convincing some other member states to back investment control will be harder. Some have already given up any hope of preserving their ground, and see foreign investment as a financial resource. A few have interests in the Chinese market that at present dwarf any other consideration.