Covid-19: the urgent need for stricter foreign investment controls
Par Elvire Fabry, Senior Research Fellow, Jacques Delors Institute, & Micol Bertolini, Research assistant, Jacques Delors Institute.
The global pandemic is shaking up the EU’s agenda and Europeans are eagerly waiting for the October 2020 deadline to set up the EU’s Foreign Direct Investment (FDI) screening mechanism. Whether the recession that is triggered by the health crisis is severe but temporary or whether it is a shock that brings about structural change in the global economy, the weakening position of European companies will create many opportunities for corporate takeovers at bargain prices. The 2008 crisis has shown that strategic assets must be protected against investments that undermine the strategic autonomy of a member state or the single market, which is built on the physical and digital interconnection of national economies. The aggressive acquisition of a company in one member state can create dependencies in an entire supply chain and therefore affect several member states. Takeovers of European companies by investors from China, Hong Kong and Macao have been sharply increasing (from five thousand to twenty-eight thousand between 2007 and 2017), particularly in countries weakened by the sovereign debt crisis. This has prompted collective European vigilance to protect the single market, especially because state-owned enterprises and investment funds, which are increasingly active in M&A, remain opaque about their governance and the origin of their financing.
The planned European mechanism preserves the competence of member states to prohibit or authorise FDI projects and only encourages them to set up a screening system. A FDI that is subject to control has to be notified to the other member states and the European Commission and all relevant information has to be transmitted so that the Commission can issue a non-binding opinion on investment projects that pose risks to the security and public order of more than one member state or to European programmes such as Horizon 2020 and Galileo. But there are still only fifteen member states with a screening mechanism. The European Commission therefore took the initiative on 25 March to call on all member states to deploy all possible means to protect their strategic assets, particularly in the field of public health. This is a strong political commitment by the Commission, which has hitherto been careful to preserve the delicate compromise between the member states that balances security and free trade.
The world economy has plunged into an unprecedented crisis, with a drop in annual GDP growth estimated at an average of two per cent per country for each month of containment. It remains unclear if there is cyclical contamination ahead and how much time is needed for a full return of economic activity. We must therefore move fast to equip all member states with screening capacity and speed up the implementation of European coordination by starting to strengthen it immediately.
It is more essential than ever that the measures are proportional. FDI is as necessary for recovery as it is harmful if it further weakens the economy. This could be the case if strategic assets are targeted, notably technological know-how. A surge of protectionist measures, including export restrictions, would undermine the single market and create new imbalances around the world. But the limits of economic interdependence, highlighted by the lack of self-sufficiency in medical equipment, underline the security and geopolitical stakes of trade and investment. The willingness to defend the EU’s economic sovereignty has been repeatedly expressed by Emmanuel Macron and by Ursula von der Leyen when she assumed the presidency of the European Commission. More recently, Angela Merkel also struck a similar tone. We should accelerate this trend by stimulating a debate on the degree of dependence which, depending on the sector, is sustainable vis-à-vis third countries. Looking through the security prism is even more necessary since the massive recourse to state financial aid to absorb the pandemic and the crisis will also generate competition distortions in the medium term. This will make some countries, sectors or companies even more vulnerable to investors who are backed by large public subsidies.
In addition to the European Commission’s warning and in light of the unprecedented crisis, the October 2020 targets have to be revised immediately. First, the crisis reveals the limits of the European current control capacities. Second, beyond the consolidation of these capacities over time, we must also anticipate a profound transformation of the political economy of FDI. Third, we must plan for measures that will help prepare for this change.