The Elephant in the Room: Subsidiarity in Investment Screening in the EU
Part 5 in the CELIS blogseries on the revision of FDI Screening Regulation 2019/45
Authors: Andrew Hill (AmCham EU[1]), and Floor Doppen (University of Antwerp)
Introduction
White smoke poured over Brussels on December 11th as the European Commission, Council and Parliament reached agreement on the Foreign Investment Screening Regulation (the ‘Regulation’).
Over the past few months, with this blog series, CELIS has commented on some of the key issues that have been top of mind for investors. Namely, those related to ensuring that investors know what, where and how to file before a case goes into the ‘black box’ of investment screening.
While these questions have also been top of mind for the co-legislators, these have also had to focus on the ten thousand pound elephant in the room: subsidiarity. Subsidiarity is the principle that a central authority should perform only those tasks which cannot be performed at a more local level. In the EU, unlike in merger control, where there is a clear framework for assessing the extent to which national or EU rules apply, and how they interact, the decision on whether to screen, accept, condition, or prohibit a transaction is the responsibility of the Member States.
This poses an important coordination problem: How do you address cross-border or EU-wide security and public order concerns while investment screening continues to be largely the responsibility of Member States?
Although the existing EU Regulation on FDI screening set-up a Cooperation Mechanism, and the revised Regulation is set to expand and optimise the workings of this Cooperation Mechanism, the true reality of solving the coordination problem of investment screening is much larger. We can think of subsidiarity, i.e. the division of tasks between the EU level and the Member States, in two ways:
First, as a structural question: Co-legislators, in their negotiations on expanding and optimising the EU Regulation and the cooperation mechanism in particular, must decide who receives notifications and makes decisions, as well as how information exchange and discussion happen within the Cooperation Mechanism.
Second, as a conceptual question: Co-legislators have to decide how to address dynamic concepts central to investment screening. Some of this is related to dynamic or evolutive elements of the Regulation, such as updates to the minimum mandatory scope and the issuance of guidance. Yet, some of the conceptual discussion are broader, relating to how investment screening stands alongside concepts in merger control and the emerging concept of ‘economic security’ and how EU monitoring instruments can inform the Cooperation Mechanism.
This blogpost looks at how the Regulation’s negotiations and peripheral documents such as the new Economic Security Doctrine (henceforth ‘the Doctrine’) address these structural and conceptual issues related to subsidiarity in the investment screening framework.
Structural subsidiarity – the elephant in the room
Protecting security and public order is a core duty for most nations, and investment screening is fundamentally a tool that allows states to leverage their national security capacities to analyse whether a given transaction would risk undermining its security interests and remedy accordingly. As a result, Member States in the EU firmly, and understandably, retain their decision-making authority over these issues.
However, in a unified market, risks arising from foreign investment are often not contained to the state itself, but may have an impact across borders. Particularly in the case of the EU, an investment in one Member State may raise concerns in others, reflecting a deep degree of economic and social integration. There are two ‘problems’ that the Regulation therefore seeks to address: on the one hand, coordination between Member States through the Cooperation Mechanism needs to be aligned and optimised in order to effectively and efficiently address cross-border risks. On the other hand, Member States are often constrained by their own laws and many cannot take into account security concerns in other Member States in their decision-making on a particular investment.
There are different solutions to these considerations. The solution contained in the legacy Regulation fundamentally maintained exclusive decision-making powers for the Member States, respecting their authority over national security. At the same time, it created a system that addresses cross-border or EU-wide risks through a platform for information exchange, access to expertise, and coordination on cases that involve multiple Member States.
The new Regulation will most likely maintain this approach. First, the Commission, while proposing the Regulation, saw a need to optimise the working of the Cooperation Mechanism. Accordingly, they proposed a Regulation that sought an aligned understanding of which cases Member States needed to notify to the Cooperation Mechanism, and formalised the process for coordination (particularly in the case of multi-jurisdictional notifications), including when Member States may have questions or objections. Their approach reflected a measured approach that gives different Member States the opportunity to share information and views at their own volition, but doesn’t oblige any Member State to share confidential information.
At the same time, the Commission included a provision in the proposal that would require Member States to nominally take into account security concerns in other states (Art. 11(4) of the Commission’s proposal). Member States would, accordingly, need to ensure they have ‘all necessary legal means and powers to consider concerns expressed or likely impacts identified by another Member State or the Commission in its screening decision is included in the Regulation’ as one of the preconditions necessary for the Cooperation Mechanism to work effectively (ibid.).
The Council appreciated the Commission’s approach to a degree, with many benefiting from Commission support during past investigations, but made edits to ensure that Member States were not forced to share classified information (e.g. originating from intelligence agencies) and maintained some flexibility. Many Member States preferred to keep the current balance between the Member States and Commission, where the Commission would be open to continue providing capacity support through assessments and insights without any attached obligations.
Interestingly, the Council went along with the Commission’s proposal on ensuring they have the necessary tools to take into account security concerns in other states, providing us with a strong argument to expect that this provision will be maintained in the final Regulation. Similarly, the Council’s Art. 9(8) would increase Member States’ accountability by including the obligation for Member States to respond to opinions provided through the Cooperation Mechanism, but softened the language in their mandate on the obligation to set-up a meeting with those Member States that issued a comment or the Commission when it issues an opinion (Art. 7(6)).
The Parliament saw great value in expanding the Cooperation Mechanism to give stronger unilateral and decision-making power to the Commission to not only participate in deliberations within the Cooperation Mechanism, but launch and conduct investigations[2]. It also provided for a system in which the Commission, following a Member State objection, could overturn a host country’s decision (see the Parliaments amendments 116-123). They also proposed a Single Portal to facilitate notifications and communication between investors and screening authorities. Essentially, the solution proposed by the Parliament relied on a partial supranationalisation of decision-making in investment screening by proposing a ‘security valve’ that would allow the Commission to intervene in exceptional cases.
Naturally, the Council and Parliament’s positions on the issue of subsidiarity were most divergent. Member States were unlikely to welcome unilateral powers for the Commission or the ability for other Member States to play a role in overturning their national decisions. The Parliament saw a greater role for the Commission as vital to protecting European economic security, and greater democratization in the Cooperation Mechanism as necessary to protect Union interests, as is evident from the Parliament’s Amendment 119.
Absent a final text, it is difficult to analyse the conclusion in depth, but the Council’s press release indicates that Member States maintained their exclusive responsibility on decision-making while increasing their accountability to other Member States, in having to explain how they took comments into account, unless an explanation would create national security risks.
Conceptual subsidiarity – quantum physics
This month saw not just the conclusion of the negotiations of the Regulation, but also the adoption of a joint communication on strengthening EU economic security which prominently features security risks related to foreign investments. While the structural questions of subsidiarity will be resolved in the Regulation itself, there are other mechanisms and pathways through which the Commission may influence the Regulation’s implementation. The most important lever in this respect may be through the concept of economic security.
Within the context of the Regulation itself, the Parliament proposed including ‘economic security’ as a constitutive element of “security and public order” in Art. 1(1) of the proposed Regulation (Parliament amendment 48), which the Council and Commission refrained from doing. Although the inclusion would not have served as a separate legal basis for screening, if it were to be accepted, it would acknowledge that developments to the concept of ‘economic security’ (for now largely determined in Brussels) could influence decisions and assessments made through the lens of security and public order. This, presumably, could give the Commission stronger leverage within the Cooperation Mechanism to push Member States to adopt certain decisions on the basis of an assessment conducted within the context of Union economic security.
It is indicative that in the Parliament’s press release, MEP Raphael Glucksmann’s stated that ‘[T]hese were intense negotiations because we had strongly diverged views between Parliament and Council on the concept of economic security and the Union’s role in safeguarding it.’ Similarly, the Parliament’s press release stressed that ‘the Commission also commits to take an initiative to set out conditions for foreign investments in specific strategic sectors’. Regardless of whether economic security is formally included in the new Regulation, the Economic Security Doctrine of 2025 has made it crystal clear that economic security will have close ties to investment screening. Most directly, the Doctrine emphasized that the Commission’s will seek to publish guidance on the implementation of the FISR in line with its economic security strategy (see Joint communication, p15).
The new Doctrine heavily focuses on not only public order and security when it discusses investment security, but also (unsurprisingly) on risks to economic resilience, and strikingly on risks derived from low economic and competitiveness returns on an investment (ibid., p7). Accordingly, the guidance could cover the application of risk assessment criteria in view of key priorities for economic resilience risks, such as supply chain resilience and dependencies, but also ‘lack of technological transfer, limited added value creation (e.g. assembly lines only), hiring workers from the investing country and thereby impacting, among others, the local labour market’ (ibid.,p 7). The guidance on how Member States conduct their risk assessments is aimed to help create predictability and uniformity in the application of different screening mechanisms. At the same time, it leaves plenty of room for the Commission to informally push Member States to align their assessments with Union-wide economic security priorities and may create some overlap with merger control, as the Commission also consults on whether and how merger control should assess similar supply chain resilience risks related to transactions.
Beyond the publication of screening guidance, there are other mechanisms through which the Commission may be able to influence decision-making in investment screening beyond the structural provisions outlined in the Regulation. First, the Doctrine demonstrates the Commission’s intention revise the Dual Use framework, which would directly affect the mandatory minimum scope of the Regulation, which we know, will be part of the mandatory minimum scope in the new Regulation. Next, the Doctrine also states the Commission’s intention to work with supervisory authorities to examine portfolio investments that fall out of scope of the FDI Coordination Mechanism. Although there is no certainty as to what this would look like, this examination might provide data that could be used to inform ex officio investigations in Member States. Finally, the Doctrine announces an exploratory activity to see whether it would be possible to provide State aid to target companies who may face financial issues following the prohibition of their acquisition.
Conclusion
While we’re far from an EU FDI screening authority, the trilogues and broader political context shows that we’re moving towards a more robust system of cooperation across the EU and a more common practice for screening. Although this may seem like a given, particularly to those approaching FDI from the competition law perspective, it is a massive innovation for a practice that has largely been secretive and jealously guarded by national authorities.
With the Parliament’s role on standby, the Regulation’s implementation and implementation will reveal to us the extent to which Member States and the Commission feel comfortable working together to address security and public order concerns, and the extent to which the Parliament’s economic security push makes it way into day-to-day screening.
We will be back soon with our final blog assessing the trilogues’ outcomes!
[1] The views below are those of the authors alone
[2] Earlier amendments had even called for stronger unilateral powers for the Commission, including call-in powers and overturn decisions
