Openness to FDI is a key principle of the EU’s single market, and foreign investment can enhance growth and innovation in countries where the money is received. However, investment in strategic sectors that are vital for security and public order in the EU (e.g. ports, nuclear plants, semi-conductors, or dual-use microchips) may at times create a risk of unwarranted control by non-EU investors (e.g. those involved in criminal activity, or controlled by foreign governments or armed forces). This risk may increase if EU countries do not coordinate their efforts.

“Screening of foreign investment in the EU is a work in progress,” said Mihails Kozlovs, the ECA Member in charge of the audit. “As the EU’s safety net, it has some large holes in it. If the EU wishes to mitigate the risks better, both the Commission and all member states must repair the net.”

The auditors found that the European Commission has taken appropriate steps to set up the framework, and that more and more EU countries are now following up with their own screening mechanisms and are working together more closely. This makes it possible to detect risks that could otherwise stay under the radar. However, various factors still hinder the proper functioning of the system. EU rules do not require countries to set up a screening mechanism, and also allow them discretion in determining the scope of their national screening rules. In addition, countries are not obliged to report the outcome of their screening decisions to the Commission, even when it issues an opinion or other EU countries have shared their concerns. The auditors observed that several countries reported only those transactions that were likely to affect their own public order or security, thus depriving other member states and the Commission of a chance to assess the potential impact on them, or on EU programmes. Between 2020 and 2022, EU countries reported 886 screened cases to the Commission. We found that the number of notifications did not correlate with the level of inward FDI for a number of countries. Six countries submitted 92 % of all cases, and nine countries the remaining 8 %. Twelve countries did not carry out any screening at all or report any cases, even though they account for almost half of the EU’s inward FDI. At the same time, the mechanism is overburdened with a high volume of low-risk or ineligible cases.

The Commission’s eligibility and risk assessments, opinions and recommendations need to improve. Although its assessments identify risks and help with forward thinking on potential vulnerabilities, the auditors identified issues with the Commission’s assessments and aspects of the recommendations which may pose challenges in terms of enforceability, or be inconsistent with a market-economy environment.

Background information

The EU has exclusive competence for common trade policy, while national security and public order are the sole responsibility of member states. Until very recently, many EU countries did not have any investment screening mechanisms at all. The EU Regulation established the cooperation mechanism for the first time, enabling member states and the Commission to share screening information and risk assessments on FDI. FDI screening should not just prevent circumvention, but should also stop member states from using protectionist measures as a pretext for security. FDI brought inflows of around €117 billion into the EU in 2021. Between 2020 and 2022, France submitted the most screening notifications (193), followed closely by Italy, Spain, and Austria. The Netherlands and Luxembourg, which account for 50 % of all inward FDI, reported only seven and zero cases, respectively.

Source: ECA special report No 27/2023 “Screening foreign direct investment in the EU: first steps taken, but significant limitations remain in addressing security and public-order risks effectively” is available on the ECA website.