European Economic Security Strategy: New Ideas and Next Steps

On 24 January 2024, the EU Commission released a package of initiatives on economic security, containing proposals to reform the bloc’s screening mechanism for foreign direct investment and to address research security. White papers, as well, were released on screening outbound investment, better controlling the export of technologies with potential military applications to third countries and promoting research in these technologies within the EU. The Commission has thus reaffirmed its geopolitical ambition. Now, the responsibility shifts to the Member States, who have yet to practically support their declarations regarding the pivotal change represented by the Zeitenwende.

Six months after introducing its Economic Security Strategy, the EU Commission has unveiled proposed revisions to enhance parts of its geo-economic toolbox. The Commission is also considering new measures aimed at strengthening safeguards and enhancing resilience.

The rapid development of this package is notable, particularly in light of the significant policy changes it suggests. Previously, concepts such as outbound investment screening, which significantly impact the free movement of capital, were considered off-limits within the EU’s free-market liberal framework. These ideas continue to be a source of contention among Member States.

At the same time, the package also demonstrates the limits of the current approach: Due to these controversies, the Commission has found itself unable to present legislative proposals except for a (modest) reform of inbound investment screening. In the other policy areas in the package, which have only been addressed in white papers, prospects are much more uncertain.

To succeed beyond the current Commission’s time in office, the EU’s economic security agenda needs stronger political ownership within the Commission itself and by Member States, especially powerful ones like France and Germany – as part of a broader debate on overall security in Europe.

What may change: Stronger inbound investment screening and the struggle for unified dual-use export controls

The Commission’s most concrete proposal, an update of the 2019 regulation establishing a framework for the screening of foreign direct investment, is meant to close the gaps in the current mechanism and, at the same time, increase the efficiency of the process.

Most importantly, the proposal extends the scope of investment screening to investors established within the EU but controlled by a foreign entity – a situation that is not covered by the current legal framework, as the European Court of Justice ruled in its Xella judgment, and that currently allows foreign actors to circumvent the screening mechanism in certain cases.

Under the new proposal, national investment screening mechanisms would become mandatory for all EU Member States (currently, only 21 out of 27 have one in force). At the same time, coordination between Member States and the Commission would be strengthened to better address investment-related security risks affecting more than one EU member. In essence, this proposal aims to improve the EU’s existing policy in this area and makes a strong case for a harmonized approach.

Regarding export controls, the Commission has presented a White Paper instead of a legislative proposal. It identifies three critical vulnerabilities in the EU’s regime for controlling dual-use items, goods, software, and technology, as outlined in the 2021 Dual-Use Regulation.

The first issue arises from the EU’s commitment to multilateralism: Currently, its export control list for dual-use items is aligned with those of multilateral control regimes like the Wassenaar Arrangement, the Missile Technology Control Regime, and the Nuclear Suppliers Group. Consequently, the EU’s ability to adapt its list in response to evolving security needs is hindered, especially when countries like Russia block updates of the multilateral regimes to protect their interests.

The second issue is the reluctance of Member States to cede sovereignty over their national export control laws to the EU – or, in many cases, to share sufficient information regarding their controls. Despite the Dual-Use Regulation’s intent for better coordination via a common list and the possibility of applying other states’ export controls, a lack of transparency and coordination among Member states has led to a disparate patchwork of national measures. This not only complicates enforcement but also risks fragmenting the Single Market. Additionally, the leniency of certain Member States’ controls creates loopholes for circumventing stricter regulations.

The third challenge is the EU’s lack of a unified international stance, which weakens its efforts to maintain the multilateral control system. It compromises the security of individual Member States and leaves them vulnerable to geopolitical pressures, to the detriment of the EU´s global role.

Whether these insights will be reflected in new legislation remains to be seen. Given Member States’ preference for national approaches, there seems to be little space for new EU-wide controls for the time being. There may be more flexibility regarding the promotion of dual-use research, which is addressed in a different white paper.

While EU research funding schemes are currently limited to the civilian domain, the Commission now ponders new options to support research with potential military applications, as EU companies are falling behind in many key technologies.

What is new: Ideas for enhancing research security and exploring options for outbound investment screening

Research security is a fairly new topic for the EU and especially difficult to tackle through legislation, if at all, as competencies are mainly spread among national, sub-national, and institutional levels in the Member States.

The package, therefore, only includes a Proposal for a Council recommendation, which is non-binding and voluntary. Its implementation lies completely in the hands of the Member States. So, the goal of the proposal is vaguely formulated as having the “potential to enhance research by raising awareness and building resilience throughout Europe.”

It addresses measures on the Member State level (e.g., setting up a Research Security Advisory Hub) as well as on the level of research funding institutions (e.g., special risk appraisal for projects that raise “red flags”) and research performing institutions (e.g., implementing internal risk management procedures).

It also more generally calls upon Member States to support EU measures such as “establishing a European Centre of Expertise on Research Security as focal point” for further dialogue and coordination. The Proposal certainly is a first step to achieve a more concerted EU-wide approach to research security, but its progress, by and large, depends on the commitment of Member States.

The most controversial issue in the package certainly is outbound investment screening, as it has been met with strong opposition from business, which impacts individual Member States’ stance on this issue. Therefore, it is not surprising that the package does not include a concrete legislative proposal but comes with an informal, non-binding “White Paper on Outbound Investments.” With this White Paper, the Commission pursues the goal of making a thorough risk assessment on outbound investment and related security issues through a public consultation process.

Based on that, recommending Member States “monitor/review certain outbound investment transactions involving a set of sensitive technologies” in the period between summer 2024 and summer 2025. Based on that risk assessment, the Commission will recommend if and which measures are possibly needed by autumn 2025. A lengthy and cautious process with an uncertain outcome is thus to be expected, while at the same time-sensitive technology might still be flowing out via unchecked foreign direct investment.

It is certainly true that outbound investment screening is a delicate instrument, especially for a market economy, and potentially implies strong state interference in corporate decision-making. However, this instrument would also only tackle “a narrow set of advanced technologies that could enhance military and intelligence capacities of actors who may use these capabilities to threaten international peace and security“ – an approach similar to that of the US, which has been described by US national security advisor Jake Sullivan as “small yard, high fence”.

Moreover, it should have become clear by now that the transfer of technology with a strong dual-use character to systemic rivals should not be taken lightly and may require new instruments beyond export controls. These work well for tradable tangible assets, such as lithography machines.

They do not work as well in the case of the transfer of intangible assets, e.g., via foreign direct investment and research cooperations. The EU and, in particular, Member States should move quickly to decide on an EU-wide tool to deal with this. In the process, they should try to think outside the box to analyse whether there are creative ways besides outbound investment screening to ensure sensitive technology does not flow to third countries unchecked.

What is needed now?

In a previous post, we concluded that the proclamation of an EU strategy on economic security itself may indeed be regarded as a Zeitenwende for the bloc’s trade and investment policy. However, more detailed measures and instruments for practical implementation were still missing at the time. Expectations were high that the newly released package would fill this void, but results are mixed.

This is mainly due to divisions between the Commission and Member States. While the Commission was apparently trying to make more ambitious and far-reaching proposals, Member States seemed to be more hesitant and subdued by their own national interests as well as corporate lobbying from specific industries (e.g., strong opposition to outbound investment screening).

In a time when the “Brussels effect” is waning and no single Member State alone has the economic power to play a notable geopolitical role, the lack of coordination and ability to look beyond national borders at common European interests weakens the EU to a great extent and prevents it from throwing its full economic weight into the geopolitical arena.

The EU’s economic security, its ability to protect itself in an era where geopolitical tensions rise and economic relations are increasingly weaponized, will be one of the main challenges the next EU Commission, and the EU as a whole, will have to deal with in the next five years. Consequently, it should be addressed in this year’s electoral cycle – by European political parties and in the political priorities the next Commission sets for its mandate.

In this process, the EU should look beyond its borders and learn from its partners. For instance, Japan, an open economy with high exposure to geopolitical risks, has adopted a mix of restrictive policies, including outbound foreign direct investment screening and incentives for companies to diversify and reduce risk exposure. It has even gone as far as to establish a Ministry for Economic Security.

As we pointed out earlier, and ahead of the 2024 European elections and the start of a new Commission, it might be high time for the EU to consider new governance structures that allow for better coordination regarding this transversal issue, such as an Economic Security Commissioner to give this topic a headwind within the Commission.

This Commissioner could take the rank of a Vice-President, ensuring coordination between the different services involved. The political changes ahead are an opportunity to recalibrate the EU’s foreign economic policies and to secure a strong political mandate for action.

About the authors

Etienne Höra is a project manager in the ‘Europe’s Future’ programme at Bertelsmann Stiftung. His focus lies on the EU’s trade policy in this geoeconomic age, as well as the consequences of China’s increasing assertiveness for the EU.

Cora Jungbluth is a senior expert in the Europe’s Future Program at the Bertelsmann Stiftung. Her research focus is on China, foreign direct investment and international trade (especially the role of emerging economies).

Stefani Weiss is Senior Expert for EU Governance, Foreign and Security Policy in the Bertelsmann Stiftung’s ‘Future of Europe’ programme and currently in charge of the project “Sovereign Europe: Strategic Management of Global Interdependence”.

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