New Initiatives to Strengthen the EU’s Economic and National Security

On January 24, 2024, the European Commission announced five new initiatives to advance the European Union’s (EU) economic and national security.

Key Takeaways:

• Public consultation launched in relation to monitoring outbound investments in advanced technologies.
• New FDI Regulation proposed requiring EU member states to screen investments made by non-EU persons that present risks to security and public order.
• Proposal for EU member states to establish an FDI screening mechanism within 15 months of the new FDI Regulation being implemented.
• Amendments proposed to the definitions of “dual-use” technologies and “technologies with dual-use potential” to mitigate vulnerabilities and provide support research and development programmes.
• Proposals made encouraging EU member states to engage in greater coordination on the implementation of National Control Lists for export controls.

The EU Commission’s Five Initiatives - Analysis

(a) Legislative Proposal to Strengthen Foreign Investment Screening

• Over the past three years, the Commission has reviewed over 1,200 foreign direct investment (FDI) transactions notified by EU member states pursuant to the FDI Screening Regulation (Regulation 2019/452). Approximately 22.7% of foreign acquisitions and 20% of FDIs in greenfield gas projects were made in member states without a fully applicable screening mechanism.¹   Whilst cooperation between national authorities and the Commission have helped to identify high-risk foreign direct investments (FDIs), challenges remain in managing multi-jurisdictional communication. The Commission has therefore proposed to introduce the following measures:

• The scope of the new FDI Regulation will provide for the monitoring of “risks to security and public order flowing from investments that ultimately lead to control and decision-making power by a third-country investor, whether they are carried out either directly from outside the EU or indirectly through an entity established in the EU but controlled by a foreign investor”.
• The Commission has also proposed that it and national authorities should be given powers to scrutinise foreign investment affecting security or public order in cases where the transactions have not been notified, under an ‘own initiative’ procedure.
• EU member states will be required to establish an FDI screening mechanism within 15 months of the new FDI regulation coming into force.

(b) Monitoring and Assessment of Outbound Risks

• The Commission has warned that outbound investments in a narrow set of advanced technologies could enhance military and intelligence capacities of actors who may use these tools against the EU or undermine international peace and security. These risks are not currently monitored or controlled at EU or member state level, leading the Commission to identify the following issues:

1. 1. Substantial knowledge gaps and limited visibility of outbound investments by EU investors.
   2. Member states do not systematically review / assess outbound investments for security risks. Concrete granular data on outbound investment transactions at the national level is required.
   3. Member states should try to address security risks from outbound investments by fully utilising existing instruments either by enhancing or amending those tools to cater for new risks (e.g. Dual-use export controls or FDI screening mechanisms).

(c) More Effective EU Controls Dual-Use Goods

• The Commission emphasises that greater coordination of export controls is required at the EU level on items with both civil and military uses to safeguard security and human rights (e.g. advanced electronics, toxins, nuclear or missile technology).²

(d) Enhancing Support for Research and Development in Dual-Use Technologies

• The Commission has published a White Paper on options for enhancing support for research and development involving technologies with dual-use potential which has identified the following potential actions for increasing support, as well as coordination, for research & development (R&D) programmes involving technologies with dual-use potential that can help develop state-of-the-art defence capabilities:
  • Adapting the definition of “dual-use” items within the EU’s Export Control Regulation³   to define the scope of R&D activities to be funded by the EU. Currently, the definition of “dual use” or “technologies with dual-use potential” in respect of R&D and funding programmes has not reached a consensus among EU member states.
  • Creation of an EU instrument specifically focused on R&D with dual-use technologies with its own budget, rules on participation and dissemination of results, eligibility, etc.

(e) Enhance Research Security Across the Union

• The Commission has published a Proposal for a Council Recommendation on enhancing research security recommending practical safeguards to protect research organisations, as well as principles for responsible internationalisation that should underpin all research security policies.

What Impact Will These Initiatives Have?

• Whilst the EU’s initiatives present an important step in bolstering the Union’s security, many of the measures proposed appear to be vague and will require further guidance. For example, although the expanded scope of the new FDI Regulation may remove the need to demonstrate that an EU company with non-EU control is an “artificial arrangement”, further guidance is required regarding what will constitute a “risk to security and public order”. Without such clarity, the FDI regulation may lead to a notable increase in defensive filings by EU entities or with foreign ownership.
• The Commission’s proposed measures to achieve greater coordination among member states in respect of export controls on items with both civil and military use are likely to face criticism from member states, citing increased complexity, bureaucracy and diverging economic interests. As a result, the strength of the current proposals may be diluted further to achieve consensus across the Union.

^{1 EU Commission: Proposal for a Regulation of the European Parliament and of The Council on the screening of foreign investments in the Union and repealing Regulation (EU) 2019/452 of the European Parliament and of the Council, 24.1.2024 (here).}

^{2 https://circabc.europa.eu/ui/group/aac710a0-4eb3-493e-a12a-e988b442a72a/library/a44df99c-18d2-49df-950d-4d48f08ea76f/details?download=true.}

^{3 Regulation (EU) 2021/821 of 20 May 2021 setting up a Union regime for the control of exports, brokering, technical assistance, transit and transfer of dual-use items.}