Europe’s screening regime enters a new phase

Five years after the EU’s foreign direct investment (FDI) screening regulation came into force, Europe’s experiment in monitoring cross-border capital has matured into a permanent fixture of the regulatory landscape. What began as a cautious coordination mechanism is now a cornerstone of the EU’s economic security strategy – and one that is expanding rapidly but unevenly.

The European Commission’s fifth annual report (Report) on the application of Regulation (EU) 2019/452 (FDI Regulation) offers a telling snapshot of this evolution. Twenty-five Member states now operate national FDI regimes, with more than 3,100 filings reviewed in 2024 – almost double the number recorded two years earlier (1,444 in 2022 and 1,808 in 2023). Yet despite this consolidation, the system remains fragmented, with divergent national procedures, thresholds and timelines still complicating dealmaking across the bloc.

A maturing system with uneven depth

The Report confirms that Europe continues to attract capital. The total stock of foreign investment rose by 7.5% in 2024, underlining the EU’s enduring appeal as a destination for international business. But annual inflows – the value of new investments – fell by 8.4%, a sign of geopolitical caution and a slowdown in greenfield projects.

M&A activity by non-EU investors told a different story, rising modestly by 2.7%. The United States remains the largest investor (30% of all M&A transactions and 37% of greenfield projects), followed by the United Kingdom and China/Hong Kong – the latter showing a sharp rebound after a subdued 2023. Among Member States, Germany accounted for the largest share of acquisitions (21%), while Spain attracted nearly a quarter of all new greenfield projects.

Manufacturing, information and communications technology, trade and financial services remained the most active sectors. These patterns reveal a dual trend: steady interest from global investors coupled with mounting scrutiny from national authorities.

Divergence beneath the surface

Despite the existence of an EU cooperation mechanism, FDI screening remains far from harmonized. Each Member State retains discretion over which sectors are deemed sensitive, what thresholds trigger review and how filings are processed.

France, for instance, expanded its list of strategic R&D activities to include photonics and clean energy in 2024, while the Netherlands and Denmark introduced early screening procedures for offshore energy projects. Ireland and Bulgaria launched new regimes, whereas Italy’s “golden power” rules remained stable.

This diversity means investors must still navigate a patchwork of filings, often duplicating effort across jurisdictions. The Commission’s report notes that 29% of filings in 2024 were ultimately ruled non-reportable – a sign of both legal uncertainty and caution among dealmakers. Around 41% proceeded to formal review, 86% were cleared unconditionally and only 1% were blocked.

At the EU level, 477 transactions were notified under the cooperation mechanism. Most were closed at the preliminary stage, with just 8% requiring a detailed review. Manufacturing and ICT accounted for the majority, reflecting a focus on critical technologies such as defense, semiconductors, aerospace, AI and robotics.

Brussels pushes toward harmonization

The European Commission has made clear that it sees greater uniformity as essential to Europe’s economic resilience. A proposed revision of the FDI Regulation, now in trilogue negotiations between the Commission, the Council and the Parliament, would make screening mandatory in all Member States and introduce more consistent criteria and thresholds. It would also bring within scope EU investors controlled by non-European entities – extending the reach of the regime to complex ownership structures.

Alongside this proposal, the Commission issued a recommendation in January 2025 on outbound investment screening. This non-binding measure encourages Member States to monitor investments in strategically sensitive sectors such as semiconductors, quantum computing and AI, to prevent the transfer of critical know-how to third countries. Together, these initiatives reflect a broader policy shift: from openness qualified by caution to a more defensive industrial posture.

The tension with competition law

The Commission insists that FDI control complements, rather than conflicts with, EU competition policy. In principle, both aim to preserve market integrity – one by preventing distortive mergers, the other by scrutinizing investments that could compromise security or infrastructure.

In practice, the relationship is more complex. Some national FDI interventions have clashed with the Commission’s merger assessments, particularly where security rationales have been used to justify blocking otherwise unproblematic transactions. These cases test the boundary between legitimate protection and economic nationalism – and will determine whether the primacy of EU law can be reconciled with Member State sovereignty.

For global investors, this interplay between competition and security policy adds another layer of uncertainty. The risk is not just delay, but unpredictability – where approval depends less on economic substance than on political context.

What it means for dealmakers

For businesses and their advisers, the message is clear: FDI screening is now a central part of the European transaction landscape. Any cross-border deal – particularly in technology, energy or infrastructure – requires early FDI analysis alongside merger control.

While the direction of travel points toward harmonization, the near-term reality remains fragmented. National regimes will continue to evolve in response to domestic politics and strategic priorities, and filings are likely to increase before they simplify.

Dealmakers must therefore integrate FDI risk assessment into due diligence from the outset, ensuring transaction timelines, disclosure obligations and communication strategies account for both EU and national processes. The cost of overlooking this dimension is no longer theoretical – it can derail or reshape a deal.

With thanks to Freshfields Thomas Lübbig for his contribution to this update.