The Big Reveal? Europe’s New Economic Security Strategy

On Wednesday, 24 January 2024, the European Commission unveiled a Communication on advancing a European Economic Security Strategy, complementing the Defence of Democracy Package, which alerts the public to covert actions by (non-likeminded) third countries attempting to disrupt the EU’s political democratic space. The new Communication also gives an insight into the Commission’s risk analysis and priorities for upcoming legislation and policy.

Furthermore, it adds to the growing corpus of EU policies– most notably the Global Gateway Initiative (GGI), the Critical Raw Materials Act (CRMA), the European Chips Act (ECA), and the Net-Zero Industry Act (NZIA) that seek to assert the EU’s economic power on the international stage. Similar to these other policies,[i] this strategy aims to de-risk Europe’s economic relations while enhancing the Union’s long-term economic competitiveness, security, and overall strength at a time of global geopolitical turbulence and profound technological shifts. The GGI was Europe’s response to China’s Belt and Road Initiative; the CRMA came as Europe’s response to geo-politically induced supply chain disruptions;[ii] the subject of the ECA came to public attention with a global shortage of semiconductors due to tensions around Taiwan which led the Biden Administration to pressure the Dutch government to impose controls on certain exports to China;[iii] and the NZIA was Europe’s response to the US Inflation Reduction Act (IRA).[iv] As one can gather, EU action has, thus far, been relatively reactive rather than proactive.

As the original Economic Security Strategy was presented last year, the European Commission somewhat attempted to remedy this by adapting it to new challenges. At the root of the original strategy was the goal of protecting Europe’s competitiveness by impeding the export of crucial technologies to third countries, such as China, while balancing this with free and open trade and diverse and robust supply chains.

The new, enhanced strategy was published at a critical time when Europe is facing several overlapping economic challenges – both internally and externally. Three major trends emerge:

1. Many Member States have lagging economies and are facing the prospect of renewed austerity measures. Perhaps most starkly, in 2023, Germany, Europe’s industrial powerhouse and largest economy, billeted the worst performance of any major economy and entered recession.[v]
2. Fears abound of potential fragmentation in the Single Market on account of uncoordinated national industrial policy and state aid measures pursued by several Member States.[vi]
3. At an international level, Europe is facing increasing geo-political tumult, having the knock-on effect of an ever-changing and uncertain trading landscape where many major economies, such as China and the United States of America, have adopted assertive and competitive economic policies.

The format of the new economic security strategy is set out in five strands – providing for a mixture of old and new. It comprises proposals for revising existing legislation, three non-binding white papers, and a council recommendation. Consequently, in its current form, it favours soft instruments over hard, legally binding rules. The five strands can be broadly broken down into three categories:

(i) screening inbound foreign direct investment (FDI); (ii) exploring export controls and restrictions on outbound international investment; and (iii) strengthening research security.

The strategy firstly proposes a revision of the FDI Screening Regulation to reinforce already existing safeguards to ensure that moneys entering into EU Member States in the form of FDI are ‘clean’. FDI screening is traditionally within the purview of Member State governments in their own territory, but Bulgaria, Croatia, Cyprus, Greece, and Ireland do not currently have sufficiently robust screening mechanisms for incoming FDI.[vii] Specifically, Cyprus has been highlighted as a particularly problematic Member State in regard to the opaque and potentially corrupt origins and use of incoming FDI.[viii] Hence, the idea of an own-initiative procedure which would allow the Commission and other EU Member States to oversee transactions entering the EU which they consider harmful.

The new strategy points towards enhancing harmonisation between national systems, as well as identifying specific sensitive and strategic sectors that will require enhanced scrutiny regarding incoming FDI. In an important step, the strategy proposes extending screening to EU entities, which are ultimately controlled by non-EU actors, closing a glaring loophole in current oversight mechanisms and problematised by the Court of Justice of the EU last June with the Xella Magyarország case.[ix]

The second main strand of the new strategy concerns export controls. Conscious of how such measures will be viewed in third countries, the strategy underlines that ‘multilateral export control regimes remain at the heart’ of EU action on dual-use technologies, reserving, however, the EU’s commitment to undertake unilateral action in cases where it considers it necessary to do so.[x] This strand does not propose anything revolutionary in this field. Rather, the communication outlines the need for better use of existing regulation, specifically the Dual-Use Regulation passed in 2021.  It reveals the Commission’s desire to improve coordination between competent national authorities to enhance the effectiveness of existing EU export restriction regimes and, additionally, to reinforce multilateral forums.

In the strategy’s third strand, the Communication underlines that there is currently no EU-level requirement to screen outbound FDI. This is somewhat problematic for the enforcement of sanctions, as has been seen with the spike in trade and outward investment to Central Asian states immediately following the imposition of sanctions on the Russian Federation in 2023.[xi] The communication remains vague on what the Union shall do in this area, noting that further ‘work and analysis’ is needed to determine a suitable policy response (if any). Somewhat more concretely, it points to the possibility of a 12-month period of monitoring and risk assessment to be undertaken by the Member States to support this work.

The fourth stand of the strategy builds off previous industrial policy instruments with a view to enhancing Europe’s security and competitiveness by highlighting the need to develop a framework that supports indigenous research, innovation, and development. In particular, the strategy pin-points dual-use technologies and streamlining the pipeline between centres of research and public authorities in terms of access to funding as well as deployment of developed technologies for non-civilian purposes.

The new strategy also deals with enhancing security around research in Europe to ensure that sensitive research, innovations, and development do not hamper Europe’s security. The strategy looks to boost safeguards in EU funding mechanisms for both education and research institutions as well as those provided for private sector start-ups and SMEs. Specifically, the strategy highlights the exclusion of entities based in China from certain Horizon Europe innovation actions and the complete exclusion of entities from Belarus and Russia from participating in any Horizon Europe. Similar to the other strands and proposals of the strategy, the Commission is urging closer cooperation amongst Member States to avoid a fragmented framework that leaves gaps or loopholes.

Like many EU White Papers, this Communication seeks to broaden the discussion and understanding of outbound investments in certain strategic sectors and any potential related risks and point towards future concrete action. Virtually none of the proposals or actions outlined can or will be completed before the 2024 European Parliament elections and the beginning of a new Commission.  As such, it falls to incoming policymakers and political leaders to operationalise the contents of the proposed strategy through legislative processes, implementation, and enforcement. The strategy could, however, shift the dial further towards a more pragmatic interests-based foreign trade policy rather than a values-based one.

The big reveal is a wake-up call to business leaders and researchers in centres in the technology sector to heed covert attempts at disruption or access to innovative European research or key technology breakthroughs. Many have welcomed the added clarity this Communication has brought but have highlighted the added costs it will bring. If all aspects of the strategy do materialise into concrete actions and policies, this will certainly have a sizeable impact on Ireland with its FDI-heavy economy and strong research ecosystem. This will touch both public administrative and regulatory bodies, who will have to adapt their work to geo-economic and geo-political realities, and private actors, who may have to increase expenditure on compliance-related activities and re-evaluate certain partnerships.

This big reveal has the potential to sensitise business actors, policymakers, and the wider public to matters that might otherwise remain hidden – although whether it actually does remains uncertain.