The EU in the Whirlwind of (Risky) Foreign Investments: Towards Stricter (and More Effective) Screening

The European Union is founded on four fundamental freedoms: the free movement of goods, capital, labour, and services. These freedoms, along with the emphasis on the rule of law, can be said to form the glue that holds the member states together in a union that has so far ensured peace, stability, and prosperity. However, due to strained relations with Russia and the rise of China as an actor that is very much willing to use its economy as a foreign policy tool (as any global power would), a question arises: as member states formulate their own investment policies, how can the EU ensure these do not result in adverse consequences for the Union as a whole?

Considering that the EU is now pursuing a “de-risking” strategy in redefining its relations with China, protecting domestic markets, and enhancing overall competitiveness, the need for more effective oversight of the impact of foreign investments is more apparent than ever. Starting from the already existing common rules for investment screening, on April 8, 2025, the European Parliament’s Committee on International Trade adopted revised rules for the screening of foreign investments in the EU. While these are expected to be almost unanimously adopted at the next plenary session, member states are simultaneously discussing in the Council the introduction of additional measures for a stricter but more effective approach to this issue.

What is Investment Screening?

Based on the assumption that due to the high level of integration within the EU, a foreign direct investment (FDI) in one member state could pose a risk to the security or public order of another member state or the Union as a whole, the European Parliament and the Council of the EU adopted a measure in 2019 to address this issue. Specifically, the Regulation on the screening of foreign direct investments, which came into force in October 2020, enables EU member states to review foreign investments on their territory that could impact the security or public order in one or more member states. The innovations at that time included:

1. Establishing a framework for cooperation among member states and the European Commission, enabling information exchange and risk identification for the first time.
2. Defining minimum standards for national screening mechanisms in order to reduce the scope for lack of transparency and promote alignment of investment policies among member states.
3. Increasing the role of the European Commission in investment assessment, which was significant given that this EU body previously had no jurisdiction or competence in this area.

These provisions were indeed put into practice. By 2024, as many as 1,500 investments had been screened. This enhanced cooperation at the Union level without changing the fact that member states retain the final say on whether a particular investment will be allowed in their territory. The following benefits of this approach were highlighted:

1. Member states received security-relevant information that they otherwise would not have access to (without the cooperation mechanism);
2. Contributed to greater alignment among member states regarding what may pose a risk to security or public order, and how to assess these aspects;
3. Successfully influenced the final decisions made by member states when screening transactions.

The Commission’s evaluation showed that the Regulation provided added value greater than what member states could achieve individually when screening potentially risky investments on grounds of security or public order.

What Is the Room for Improvement?

With the onset of the war in Ukraine, the Union realised that the existing Regulation would not be sufficient to address all the challenges. Until then, about two-thirds of member states had established mechanisms, and by 2024, the remaining ones had initiated legislative processes to consider introducing such mechanisms. Although the Regulation does not impose a formal obligation on member states to establish and maintain a screening mechanism, the trend clearly moves in that direction. This indicates a widely accepted need to adhere to the same standards—especially considering the Commission’s 2024 findings that most acquisitions by Russian investors targeted member states without screening mechanisms.

Given such risks, the following changes were highlighted as urgently needed:

1. Ensure all member states have a screening mechanism, to prevent foreign investors from accessing the single market through states without such mechanisms.
2. Extend the cooperation mechanism to intra-EU transactions under foreign investor control (current definitions exclude certain transactions), especially when the foreign investor invests through an EU entity.
3. Avoid wasting resources on “non-critical transactions” by setting clearer and more detailed criteria for mandatory reporting, ensuring risky investments are not overlooked due to inconsistent national standards.
4. Introduce mandatory synchronised processing of transactions occurring in multiple member states, to avoid fragmented assessments and enable more effective cooperation and information exchange.
5. Give the Commission more time to assess complex and risky cases, to consider member state comments and issue better-founded opinions, without affecting national deadlines.
6. Strengthen the ability of member states to address other member states’ concerns, including the ability to pose questions to actors outside their territory and apply measures with cross-border effects.
7. Introduce an obligation for member states to provide the outcome of proceedings when other actors (the Commission or other member states) have raised concerns, to ensure transparency and decision-making effectiveness.

Is Serbia Also Expected to Adopt Investment Screening?

The accession process involves full adoption of the EU’s legal framework. The Regulation governing foreign investment screening certainly falls into this category. Therefore, there is a recommendation for its adoption, and as member states move closer to common standards—aligning rules, methods, and deadlines—there will be growing emphasis on the importance of candidate countries following this trend in a timely manner. At the same time, as the EU aims for strategic autonomy and greater competitiveness, it is expected that neighbouring countries and future members will begin to view this issue similarly.

Although Serbia is only a candidate country, it is clear that the EU will not be satisfied with imposing strict controls on potentially sensitive or security-risk investments only within its own territory, while allowing such investments just across the border, from where they could still pose a threat. In a world where the EU increasingly feels like a “fenced island,” Serbia would certainly earn extra points if it demonstrates maturity and recognizes the need—even on its own initiative—to strengthen cooperation with the EU in regulating this increasingly important issue.

Originally published on EUpravozato.