Published on: May 15, 2020

The EU worries about foreign investors

Industry Blogs

Amidst the novel coronavirus outbreak, the world economy has been sent in a downward spiral. Small businesses are struggling to stave off bankruptcy, while multinationals are scurrying to secure government support. Many shareholders see their portfolio’s value shrinking as stock markets take hit after hit. On top off the economic hardships are global leaders who try to shift the blame to other countries to distract from their failures to act duly.

During tough times there are always those who see opportunity. The crisis causes many businesses to drop in value. Opportunistic investors and corporate raiders are presented with the chance to buy stocks at alluring prices.

CureVac, a German biotech firm, found itself at the centre of controversy after the alleged US attempts to gain access to an experimental coronavirus vaccine it is developing. Although the company later denied that a formal offer was made, the incident showed that the EU needs to implement mechanisms to deflect foreign attempts to take over strategic sectors.

Europe Commissioner Margrethe Vestager even went as far as to say that “European countries should buy stakes in companies to stave off foreign threats.” (FT, 2020)

The fear that foreign powers can buy European companies to take over their technology has existed before the coronavirus outbreak. A study on foreign ownership of EU firms carried out by the Commission showed the importance of foreign investment in the EU economy. Foreign ownership has risen constantly in the last ten years. This increase is largely due to acquisitions of increasingly large, listed companies.

Some of these companies are backed by non-EU governments. This in itself is not an issue, as governments are allowed to act as market participants in the EU. State-backed companies often have access to extra funds however, causing an unfair competitive advantage compared to European businesses. As these are usually not backed by their governments.

Italy is one of the biggest targets for foreign investors in the economic downturn. It is among one of the most important countries, purely looking at economic interests in Europe. It is a source of strategic assets both in advanced and traditional industries and internationally recognized for its famous brands and technology.

Since the coronavirus outbreak in February, Italy’s economy has been severely bruised. With more than 20,000 deaths from COVID-19, its economy is likely to suffer the deepest recession in the country’s history since WWII.

Because the economy is suffering, many companies are in distress. Italy is worried that foreign competitors will take over businesses at cheap prices. To prevent this from happening the Italian government quickly extended the “golden power rules” to a wide range of sectors, including health, finance, insurance, land and infrastructure, raw materials, robotics, and media, among others (The Diplomat, 2020). The “golden power rules” is a tool that can be used by the government to prohibit or impose restrictions/conditions to an investment by foreign persons in certain industries deemed strategic for the country (whitecase, 2020).

Spain has already implemented new rules on foreign investment. On March 17, the government stated that investors from outside the EU will require a new authorization from the government if they wish to control or increase their participation to more than 10% in a local company, when it is public or private, and in a strategic sector (Bloomberg, 2020).

Spain and Italy are not the only ones protecting their companies from foreign takeovers. The Polish government wants to be notified of any planned takeovers of companies by investors from outside the European Union. They also announced a rescue plan worth up to €72,37 billion to assist its economy in surviving the pandemic and resulting crisis (bbj, 2020).

Europe’s answer to the foreign threat should come sooner rather than later. In March 2019, the EU implemented the FDI Screening Regulation. It embodies the first EU common framework for screening FDI into Member States’ territories and within the EU zone. The new regulation provides member states and the commission with a framework to investigate incoming foreign direct investment that may affect security and public order (blogdroiteuropeen, 2020).

The regulation defines a procedure in which the commission may issue statements in case an investment threats security or public order of more than one member state. The same goes for investments that could undermine a project or programme that benefits the whole EU. Cooperation between member states on investment screening, sharing experience, best practices and information on common concerns may be encouraged by the commission.

The regulation will become active in October 2020, EU-wide. Correct implementation of such regulations always takes time. Currently, 14 EU-countries will work together using the proposed framework. The call for more protection against hostile foreign takeovers has been heard for months in Brussels, especially in a time of unprecedented economic competitiveness between the United States and China. Time will tell whether the new regulation offers the EU economy the protection it has asked for.

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