This column was published by Vox, Bruegel and PIIE, as well as De Tijd (Belgium), Caixin (China), Expansion (Spain), La Tribune (France), FT Deutschland (Germany), Kathimerini (Greece), La Voce (Italy), RBC Daily (Russia) and Radikal (Turkey).
One of the biggest questions of the coming decade is whether global economic and financial integration will continue or go into reverse as the consequences of the financial crisis unfold. Much public discussion focuses on trade and capital controls, but the outlook for foreign direct investment, including cross-border corporate acquisitions, is just as important. In this context a recent call by Antonio Tajani, the European commissioner for industry in Brussels, for the establishment of "an authority tasked with examining foreign investments in Europe" is an apparent departure from the commission’s traditional emphasis on openness to international investment and the dismantling of existing barriers.
Concerns about the implications of foreign acquisitions are certainly not all new. In America, the Committee of Foreign Investment in the US (CFIUS) was created in 1988 with an extensive mandate to review such transactions for their possible impact on national security. In the European Union, legal regimes are very diverse. The British government can veto virtually any deal but almost never does. France has stringent controls in the defense and security sectors but none in other industries. Germany in 2008 introduced a CFIUS-like framework. The Netherlands has no such process at all. At the EU level, the legal framework allows investment reviews to protect national security, but the European Commission also strives to prevent member states from blocking acquisitions for protectionist reasons, as in the case of Mittal Steel’s acquisition of Arcelor in 2006.
What is new, and has been accelerated by the crisis, is that such foreign investment will increasingly come from countries such as China and oil-rich economies, with which Europe’s geopolitical interests are not self-evidently aligned and which now hold much of the world’s current account surpluses. The consequence is a probable rise in legitimate security concerns. For example, one can understand why Central European countries would be cautious about Russian investment in their oil and gas distribution infrastructure. The European Union thus needs to find a new balance between two ill-advised extremes: absolute economic openness in denial of the reality of some risks, or a siege mentality that implausibly considers any acquisition by a non-Western company a threat to national security, often in fact as an excuse to shelter vested domestic interests to no advantage for the general public.
The reassuring truth is that the vast majority of companies are not indispensable from a strategic standpoint, and their acquisition by foreigners should not be opposed, even assuming the acquirer has politically hostile intent. Blocking such acquisitions is damaging both economically and politically, as it prevents access to useful capital sources, and needlessly curtails the creation of links of economic interdependence that may reduce the probability of future conflict. Many acquisitions by Chinese firms, such as that of IBM’s personal computer division by Lenovo in 2005 or of Volvo Cars by Geely in 2010, have raised some controversy but cannot be reasonably described as dangerous. The equity stakes taken in major European and American banks by various sovereign wealth funds in 2007–08 similarly caused concern, but have eventually proved a shockingly good bargain for the West.
What is needed is a clear and consistent legal framework that allows the protection of those few companies that are genuinely strategic because of their unique technological capacity, control of critical networks or infrastructures (for example in telecommunications or the internet), or other security considerations, without the process being exploited to block harmless transactions. This would help underpin both a stable and predictable investment environment and the completion of the EU single market, two key conditions for future EU growth and job creation. The catch is to minimize the friction that a review process inevitably creates, and this aim is made more difficult by the sheer diversity of attitudes to foreign investment throughout Europe. For example, French governments are generally obsessed by the defense of "national champions." By contrast virtually nobody in Denmark objected as one of the country’s largest companies, Danisco, was just acquired by a US chemical group. To smooth the impact of such differences, the process and criteria for the review of foreign acquisitions should be defined by EU legislation, rather than national initiatives as is currently the case. Implementation should remain the prerogative of individual member states, which remain at this point the only ones with the capacity to conduct credible security assessments, but with adequate coordination and monitoring at EU level.
Commissioner Tajani is right to express the need for vigilance and new thinking on foreign investment. But the scope and purpose of a "European CFIUS" should be rigorously defined, or it will risk becoming self-defeating. Reassuring Europe’s citizens—without forgoing the huge potential economic benefits of future investment from emerging economies—involves delicate trade-offs. The sooner the European Union brings a coherent response to this challenge, the better.