EU to mandate screening of risky foreign investments

After almost two years of negotiations, the Council and Parliament have reached an agreement to strengthen rules on screening foreign direct investments (FDIs) in sensitive EU sectors such as defence, semiconductors, artificial intelligence, critical raw materials and financial services.

Needed revision: closing the loopholes

The current regulation, adopted in 2019, introduced a screening framework under which the EU and its member states can exchange information and raise concerns about potential security or public order risks linked to such investments.

Already in 2023, the European Court of Auditors judged the framework only „partially effective” and warned that „significant limitations” leave blind spots that can allow risky investments to slip through. In fact, the Court found that six member states still lacked a screening mechanism at the time, while those that existed differed widely in scope and scale.

These concerns were amplified by the rebound of Chinese investment in Europe after years of decline. While Chinese mergers and acquisitions in high-tech sectors have faced growing political and regulatory headwinds, Beijing’s investment strategy has increasingly shifted toward greenfield projects, which in 2024 reached a record EUR 5.9 billion.

These projects largely involve new EV and battery facilities across the continent. Hungary has emerged as their largest recipient, accounting for over 30% of all Chinese FDI in Europe, which suggests that China increasingly aligns its investment strategy with friendly governments. This also raises the risk that some EU countries could serve as loopholes for high-risk investments into the internal market.

Against this backdrop, the case for a major update became hard to ignore. The Commission committed to revising the rules in early 2024 as part of its broader economic security agenda, following the 2023 European Economic Security Strategy’s call to review the framework.

From coordination to obligation

The resulting agreement on the new regulation fits well into Brussel’s ongoing push into prioritizing economic security, with increasing use of legally binding instruments in place of a purely cooperative framework.

Expected to apply in 2027, the regulation will make FDI screening mandatory and more harmonised across all EU countries. It will also introduce a common minimum scope of sensitive and strategic areas that must be subject to scrutiny, including dual-use items, hypercritical technologies, and critical and electoral infrastructures.

Moreover, the rules will not only cover investments coming directly from outside the EU, but also transactions carried out within the Union where the investor is ultimately owned or controlled by a non-EU entity. At the same time, procedures are set to be streamlined through a minimum level of harmonisation, limited to key procedural elements.

This balancing act between tightening controls while simplifying procedures reflects the EU’s concern about deterring valuable foreign investment by adding new safety barriers.

Negotiations over the revision also revealed „strongly diverged views between Parliament and Council on the concept of economic security and the Union’s role in safeguarding it”, in the words of Parliament’s rapporteur Raphaël Glucksmann. This internal rift is likely to resurface as the EU moves into further economic security debates, including measures such as conditionalities for allowing FDIs.

Nevertheless, even if Parliament succeeded in mandating and broadening the scope of screening, national governments will retain the ultimate decision whether to allow a given FDI — even against a negative opinion from the EU or other member states. As a result, the EU will gain a better overview of incoming high-risk investments, but it will still lack the power to collectively block them, allowing some countries to deepen their risky economic ties despite wider security concerns.