PBf 071108 Safe and Sound

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SUMMARY A growing share of inward investment into the European Union,including but not limited to sovereign wealth funds (SWFs), will come fromcountries with diverse political regimes with which Europeans may notalways see eye-to-eye. The current crisis may increase both Europe’s needfor such investment and its sensitivity to the non-economic implications.New investor countries have incentives to refrain from political use of theirassets, as illustrated by the recently published ‘Santiago principles’ fortransparency and accountability of SWFs. But these incentives are notpowerful enough to spare Europe its own assessment of security riskslinked to new trends in foreign investment.

SAFE AND SOUND:AN EU APPROACH TOSOVEREIGN INVESTMENT

bruegelpolicy brief ISSUE 2008/08

NOVEMBER 2008

POLICY CHALLENGE

by Lars-Hendrik RöllerNon-resident Senior Fellow at Bruegel,

President of [email protected]

and Nicolas VéronResearch Fellow at Bruegel

[email protected]

The EU should proactively address the increasing likelihood of mountingpolitical tensions over foreign investment. It needs a comprehensive,open and sustainable framework to address the security aspects of foreign acquisitions, without which there is a risk of protectionist drift

that could harm the economy andimpair the integrity of the singlemarket. We recommend anchor-ing the aims and mechanisms for

review of foreign investments ina common EU legislative frame-work, while implementation,including security assessment of individual investments, wouldremain a national prerogative.This new approach would enableEurope to maintain its opennessto investment while crediblyaddressing security concerns.

2.5%

2.0%

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Countries classified ‘free’ Other countries

Current-account surpluses andpolitical regimes

Cumulated current-account surpluses (countries with deficits not included) asa share of World GDP. Sources: IMF; Freedom House for country classifications.



b r u e g e l p o l i c y b r i e f02

SAFE AND SOUND: AN EU APPROACH TO SOVEREIGN INVESTMENT

EUROPE’S OPENNESS TOINVESTMENT can be maintained

and increased only if its consider-able economic benefits do notcome at the expense of fundamen-tal security concerns. The USresponded to this challenge 20years ago with the Exon-Florioamendment to the Trade andCompetitiveness Act of 1988,which gave the Committee onForeign Investment in the UnitedStates (CFIUS) an extensivemandate to review foreign acquisi-

tions1

. By contrast, the EU’sapproach to cross-borderinvestment has been dominatedby the drive to create a singleinternal market. But new globalinvestment patterns and thecurrent financial and economicturmoil are combining to increaseboth the need for inwardinvestment and political sensitivi-ty towards it2. In such a context,the ECOFIN Council’s call in March

this year for a ‘European approachto sovereign wealth funds’3 couldbe the starting point for a broaderdebate on the nexus betweenforeign acquisitions and securityconcerns, which is the focus of this policy brief.

1. A SHIFT IN INVESTMENTPATTERNS

The global economic imbalances of

the past decade have given rise toa significant shift in wealthdistribution. The current accountof western economies hasgenerally deteriorated. Emergingcountries, such as China, the Gulf states and Russia, which untilrecently played no substantial roleas international investors, havebuilt up large surpluses linked tofossil-fuel production or highsavings and exports. In these

economies the state is a majorforce in both economic activity

and outward investment

4

.

Related policy debates haverecently focused on sovereignwealth funds (SWFs), but theseare only part of a larger picture.Their aggregate size is generallyestimated at around $3 trillion in2008 (comparable to publicpension funds in the US5), whilethe total stock of sovereigninvestments from emerging

countries, including central bankreserves, is estimated at around$9 trillion6. SWFs alone are esti-mated to have quadrupled in valuebetween 2003 and 20077, andmany expect them to grow beyondan aggregate $10 trillion over thenext few years8, even if the presentrecession prospects may slowdown this growth somewhat. Totalgovernment surpluses availablefor investment will be larger still.

The political dimension of corpo-rate governance and investment isnot limited to state-controlled enti-ties. To varying degrees, concernsprivatised in the 1980s and1990s in France and Italy, USdefense contractors, Russia’s oli-garchic conglomerates, holdings of the Gulf states’ ruling families, orCommunist Party-linked Chinesebusinesses are all examples of

economic actors that are techni-cally part of the private sector butthat are widely considered to beunder at least the partial influenceof political authorities in theirhome country. In this policy brief,we use the phrase ‘sovereigninvestment’ loosely to refer toinvestment ultimately controlledby governments, bearing in mindthat this categorisation may notreflect a precise legal definition.

1 E. Graham & D.Marchick, US National

Security and ForeignDirect Investment,Peterson Institute,

2006.

2 In the US context, thistension was vividly

summarised by Jim

Cramer, host of MadMoney on CNBC on 17January 2008: “Do wewant the communists

to own the banks, orthe terrorists? I’ll take

any of it, I guess,because we’re so

desperate.”

3 Conclusions of theECOFIN Council of

4 March 2008.

4 The share of the statein GDP has been esti-

mated at above 80percent in the United

Arab Emirates, 35percent in Russia and

29 percent in China,compared with typicallyless than 10 percent in

developed countries.Sources: CIA World

Factbook 2008; EBRD;China’s National Bureau

of Statistics, WorldBank Bureaucrats in

Business Database1971-1991.

5 Pensions &Investment 1000

Report, January 2008.

New investment patterns changepolitical balances. An in-depth

geopolitical analysis is beyond thescope of this policy brief, but it canbe observed that many newlycash-rich countries have differentpolitical regimes from thecountries that previously dominat-ed international investment. Thisis illustrated using country scoringby Freedom House, a respectedUS-based NGO that publishes anannual assessment of allcountries as ‘free’, ‘partly free’, or

‘not free’. Since first publication in1973, EU countries have alwaysbeen ‘free’. Using current-accountsurpluses as a measure of poten-tial outward investment, Figure 1illustrates how countries not clas-sified ‘free’ have recently becomesignificant potential internationalinvestors.

In spite of the dearth of relevantdata9, these trends seem to be mir-

rored by actual investments. ‘Free’countries no longer hold the bulkof foreign assets10. Foreign directinvestment (FDI) from countriesnot classified ‘free’ to the EU15(EU members before 2004)reached an all-time high of nearly$14 billion in 200611.

These findings echo a broaderglobal rebalancing of economicpower. Figure 2 illustrates that a

growing share of world GDP, and of headquarters of the world’s largestlisted companies, is accounted forby countries not classified ‘free’,even though their rise is lessspectacular than that of current-account surpluses.

Developments in the years tocome will depend on a number of factors, including fossil-fuel prices,exchange rates, growth and





Share of countries not classified 'free '

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Aggregate current- account surpluses

World GDP (actual to 2007)

World GDP (IMF forecast)

Market value of FT Global 500companies

Figure 2: The changing distribution

of global economic power

Sources: IMF; FT Global 500 rankings (as of 30September of each year), www.ft.com;Freedom House; authors’ calculations, assum-ing unchanged political regimes in the forecastyears from their scoring in 2008.

6 This in turn comparesto $28 trillion for

pension funds world-wide, $26 trillion for

mutual funds, $19 tril-lion for insurance

assets, and $2.8 trillionfor the sum of private

equity and hedgefunds. D. Farrell, S. Lund

& K. Sadan, The NewPower Brokers,

McKinsey GlobalInstitute, July 2008.

7 Testimony of ScottAlvarez (Federal

Reserve Board) beforethe US House

Committee on FinancialServices, 5 March 2008.

8 eg Stephen Jen, Howbig couldsovereignwealth funds be by

2015?, Morgan Stanley,3 May 2007; Steffen

Kern, Sovereign wealth funds – state

investment on the rise,Deutsche Bank

Research, 10September 2007.

9

See US GovernmentAccountability Office,Sovereign Wealth

Funds: Publicly Available Data on Sizes

and Investments forSome Funds Are

Limited,September 2008.

10 Brad Setser,Sovereign Wealth and

Sovereign Power,Council on Foreign

Relations, September2008 (Figure 9).

11 Source: OECD.

savings and political changes, allof which will be affected by thefinancial crisis. But in virtually allscenarios, countries not classified

‘free’ will continue for the foresee-able future to have significantfinancial capacity for internationalinvestment.

2. EUROPE’S OPPORTUNITIES

AND RISKS

The rise of investment fromcountries with different politicalregimes is largely an opportunityfor Europe. Cross-borderinvestment creates a powerfulalignment of interests betweensuch countries and the EU, whichcould play a big role in defusingpotential tensions. Sovereigninvestment could also have a sta-

bilising effect if it is long term-oriented and insensitive to marketvolatility, even though evidence tothis effect remains controversial12.In any case, Europe’s ability toattract investment will be of particular value in the years tocome in the context of possiblysevere economic hardship.

But there are also new risks forEurope. Then Trade Commissioner

Peter Mandelson expressed this atan OECD conference on 28 March

2008:

“Why are we having this debate

at all? Looking coolly at the question

the answer is – and I will put this as

diplomatically as possible – that the

biggest new funds are in economies

which have raised some sensitivi-

ties in our own politics. No one is

worried about Norway's plans for

global domination. Chinese

investment vehicles and the Russian

stabilisation fund on the other hand

are new investors, with hugereserves, backed by governments

with mixed democratic credentials,

substantial foreign policy projection

and no track record as investors.”

Two broad categories of concerncan be distinguished: ‘macro’ risk,or the possibility that entireeconomies might be disrupted bythe actions of sovereign investors;and ‘micro’ risk, or the possibilitythat individual acquisitions might

be abused for political purposes.Our choice to focus on the latter inthis policy brief should not beunderstood as playing down the‘macro’ risk category, which is tooserious a possibility to be dis-missed, even if there are only fewexamples of it in history13 and theEU may be less vulnerable thanother economies. ‘Macro’ risk fromsovereign investment meritsextensive future policy research,

which should obviously be linkedwith the broader policy debate onfinancial stability as it unfoldsfrom the ongoing financial crisis.

The ‘micro’ security risk tends tobe smaller than perceived in manyEuropean countries, where acqui-sitions by non-western actors areoften attributed to dark motives.The vast majority of foreigninvestments are innocuous14.

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Figure 1: Current account balances and political regimes

Country scoring: Freedom House, Freedom in the World Report 2008. Current-account data: IMFWorld Economic Outlook, October 2008. The left-hand chart is not symmetrical because of measurement errors.





BOX 1: A FRAMEWORK FOR ASSESSING RISK FROM FOREIGN ACQUISITIONS

The potential threats that a foreign acquisition of a US company might pose fall into three categories.

• The first category of threat is that the proposed acquisition would make the United States dependent upon aforeign-controlled supplier of goods or services crucial to the functioning of the US economy (including, butnot exclusively, the functioning of the defense industrial base) who might delay, deny, or place conditions

upon provision of those goods or services.

• The second category of threat is that the proposed acquisition would allow transfer of technology or otherexpertise to a foreign-controlled entity that might be deployed by the entity or its government in a mannerharmful to US national interests.

• The third category of threat is that the proposed acquisition would allow insertion of some potential capabili-ty for infiltration, surveillance, or sabotage – via a human agent, or non-human agent – into the provision of goods or services crucial to the functioning of the US economy (including, but not exclusively, the function-ing of the defense industrial base).

Quoted from Theodore H. Moran, ‘Three Threats: An Analytical Framework for the CFIUS Process’, unpublisheddraft, Peterson Institute for International Economics, forthcoming 2009.

12 See for exampleBrad Setser:

Follow the Money(blogs.cfr.org/setser).

13 Benn Steil & Robert E.

Litan, FinancialStatecraft: The Role of Financial Markets in

American ForeignPolicy, Yale University

Press, 2006.

14 John Kay, ‘Sovereignwealth is a force for sta-

bility’, Financial Times,27 February 2008.

15 International WorkingGroup of Sovereign

Wealth funds, ‘SantiagoPrinciples’,

October 2008(www.iwg-swf.org).

However, some risks can be real,especially when the market power

or access resulting from an acqui-sition can be abused by thegovernment that controls theacquirer. In particular, harm can beinflicted or influence exerted inorder to advance political or redis-tributional goals. Box 1 shows aclassification of how such risksmight emerge. It is taken from theUS context, but it could equallyapply to the EU. Europe currentlyhas friendly relations with most of

the world, but scenarios of futurepolitical tension with major invest-ing countries could include, toname only three, crises withRussia over Ukraine, with Chinaover Taiwan, or with Gulf states inthe event of their overthrow byforces hostile to the west, as hap-pened in Iran in 1979.

A counterpart to the potentialsecurity risk is the risk of

protectionist drift. In the US, theproposed takeover of Unocal byChina National Offshore OilCorporation (2005) and the pur-

chase of US port facilities by DubaiPorts World (2006) were memo-

rable cases. Europe offers fertileground for protectionist sentimentbecause of its historical legacy of wars and state intervention.

Figure 3 shows the frequency of use of the word ‘protectionism’ inthe press in three major westernlanguages. The curves show short-term fluctuations from specificnews events, but also a markedstep-up in the ‘floor’ level, which

roughly doubles in 2005 com-pared to the previous ten years.Remarkably, this effect is simulta-neous in the three languages.Protectionism has never beenabsent from Europe, but this roughindicator would suggest its pres-ence in public discussion hasincreased in step with the emer-gence of countries not classified‘free’ on the global economic stage,as detailed in the previous section.

Protectionism can create its ownsecurity risks. The US veto toCNOOC’s acquisition of Unocal may

have contributed to persuadingthe Chinese leadership that US

advocacy of an open global marketfor fossil fuels is insincere and thatwhat counts is direct ownership of reserves, a belief that is plainly notin US security interests. But themost obvious negative effect of protectionism is the economicharm it inflicts on countries thatadopt it. Moreover, in Europenational protectionism threatensthe single market, and thus is of concern for the entire EU. And his-

torical experience suggests thatwhen protectionism is embracedin one country, it tends to shift thepolitical balance towards protec-tionism in neighbouring countriesas well.

The security risk from foreigninvestment and the risk of protectionist drift are at least tosome extent negatively linked.Complete investment autarky would

eliminate the security risk at enor-mous economic cost; unrestrictedopenness to foreign investmentleaves the security risk unchecked.





16 Only six months agothe president of the

China InvestmentCorporation commented

about calls for increas-ing SWF transparency

requirements: “Why do you need a law like

that? That law will onlyhurt feelings. It is noteconomic. It does not

make sense. Politicallyit is stupid” , and the

head of the KuwaitInvestment Authority

said: “Recipient

countries are placinghandcuffs on sovereign

wealth funds in the form of regulations

termed – in the besttraditions of George

Orwell’s Newspeak –‘codes of conduct’ or

‘principles of operation’ or ‘best practices’.

These regulations willnot solve or preventany future financial

crises” . Sources: inter-view with Gao Xiqing on

‘60 Minutes’, CBS, 6

April 2008; A. Newton,‘The Politics of Sovereign Wealth: An

Overview’, LehmanBrothers, 10 April 2008.

17 S. Schwarzman,‘Reject sovereign

wealth funds at yourperil’, Financial Times,

19 June 2008.

18 EuropeanCommission, ‘A com-

mon Europeanapproach to Sovereign

Wealth Funds’,27 February 2008.

Between these extremes lies athorny policy trade-off.

3. THE PERSPECTIVE OF INVESTINGCOUNTRIES

In general, sovereign investmentin recent years has not raisedsecurity concerns , with the possi-ble exception of Russian acquisi-tions of a stake in EADS in 2006and of energy companies in east-ern Europe. The investments bySWFs in several large banks in late

2007 and 2008 have benefitedwestern economies by providingtemporary relief to a strainedbanking system. Some sovereigninvestors, such as the Governmentof Singapore InvestmentCorporation, have attracted highrespect for their professionalism.

Indeed, there are powerful incen-tives for sovereign investors not totake initiatives that might stoke

security concerns. Given the sizeand growth of their assets, andtheir long-term horizon, they needcontinued access to recipientcountries’ markets and are carefulnot to attract criticism. This wasillustrated when a group of 26investing countries recentlyadopted a set of ‘generally accept-ed principles and practices’ –known as the Santiago principles– with coordination provided by

the International Monetary Fund15.Given strong initial doubts aboutsuch common norms in somecountries16, the adoption of theseprinciples demonstrates thestrength of the incentives for coop-eration. Together with ongoing dis-cussion at the OECD, they embodythe hope of a ‘grand bargain’ inwhich foreign investment isaccepted in return for a pledge of ‘good behaviour’.

economic incentives to accept‘rules of the game’, they canalso have political, economic orfinancial incentives not to.Politics sometimes runs con-trary to economic interest, as

was shown when Russia’s inva-sion of Georgia in August 2008contributed to wiping hundredsof billions of euros off domesticequity wealth. Also, sovereigninvestors’ legitimate willing-ness to maximise investmentreturns can frustrate recipients’wishes for, say, specific disclo-sures18 or restrictions on directinvestment in companies19, onthe size of equity stakes20, on

the exercise of shareholderrights21, or on the use of deriva-tives and leverage. Figure 5(overleaf) illustrates how long-term investors generally tend todiversify asset allocation overtime. Sovereign investors arelikely gradually to expand intothe full range of investmentpossibilities, including directequity stakes and all sorts of alternative investments22.

However, three important factorslimit the scope for such a bargainand suggest that the correspon-ding discussions will not eliminateall recipient countries’ securityconcerns.

• Emerging sovereign investorsmay find it politically difficult tomeet developed countries’ cri-teria for governance andaccountability if these run con-trary to features of their domes-tic system. In regimes where asingle family or party controlsvirtually all institutions, it isunreasonable to expect a statefund’s operations to be truly

independent. In such a context,transparency can create prob-lems of its own, specificallywhere ties to the west are con-troversial and not well acceptedin the body politic17. Figure 4(overleaf) shows there is astrong correlation between SWFtransparency and the respec-tive countries’ political regime.

• While investing countries have

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'Protectionnisme' in the French-speaking press

‘Protektionismus’ in the German-speaking press

Current-account surpluses – countries classifiedother than ‘free’ (right hand scale)

Q2 2008 = 100 % of World GDP

Figure 3: A change of tone

Source: Factiva, IMF and Freedom House.





F o r m o

f g o v e r n m e n t

Low High

Democratic

Autocratic

China Inv. Corp. (CN)

Abu Dhabi Inv. Authority (AE)

Qatar Inv. Authority (QA)

Mubadala (AE)

Alaska Permanent Fund (US)

Gov. Pension Fund-Global (NO)

Kazakhstan National Fund (KZ)

Oil Stabilisation Fund (RU)

Temasek Foreign Assets (SG)

Korea Inv. Corp. (KR)

Future Fund (AU)

Gov. Singapore Inv. Corp. (SG)

Kuwait Inv. Authority (KW)

Algerian Fonds de régulation des recettes (DZ)

Level of transparency

Figure 4: Political regimes and transparency of SWFs

Source: Brad Setser and Arpana Pandey. Transparency is measured using the scoreboard developedby Edwin Truman25; the form of government index is from the Economist Intelligence Unit.

Norway's Government Pension Fund-Global

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Alternative, private equity, other Public equities Fixed income

Figure 5: Gradual asset diversification of long-term investors

Source: Websites of HMC and GPF-G; CalPERS Investments Department.

• Developed economies’ leverageto impose and enforce desired

standards on sovereigninvestors is limited. True, theyrepresent around four-fifths of global financial assets23. Butthey are unlikely to maintain acommon restrictive front giventhat each of them wants toattract investment; and anyrules imposed unilaterallywould be resented as patronis-ing by emerging investingcountries, many of which are

former European colonies, andwould ultimately prove counter-productive. Moreover, evenwhen common norms areaccepted, as with the Santiagoprinciples, enforcement willremain dependent on eachcountry’s goodwill and is likelyto be imperfect.

Specifically, the idea that sover-eign investment in the EU should

be subject to a condition of reci-procity24, while seductive, shouldnot be pursued. Because manyreforms cannot be forced onemerging countries whose levelsof economic development remaindiverse and different from those of recipient countries, the main

effect of reciprocity would likely beto import legal uncertainty andsuboptimal practices from lessdeveloped economies into the EU.

Overall, it seems reasonable to

hope that sovereign investors willmake progress towards moretransparency, but this progresswill be gradual and incomplete, itspace will vary among countries,and it will not eliminate recipientcountries’ concerns about theirsecurity26.

4. POLICY OPTIONS FOR EUROPE

As the crisis reinforces the needfor Europe to attract foreigninvestment, it also may exacer-bate defensiveness and economic

nationalism27. In this context,Europeans need credible policyinstruments of their own to ensurethat inward investment does notput their security at risk. The EU’strade and competition policies,which are sensibly designed toaddress economic concerns only,

19 Lawrence Summers,‘Funds that shake capi-

talist logic’, FinancialTimes, 29 July 2007.

20 Philipp Hildebrandt,‘The Challenge of

Sovereign WealthFunds’, speech on 18December 2007 (on

www.snb.ch).21 Evan Bayh, ‘Time for

Sovereign WealthRules’, Wall Street

Journal,13 February 2008.

22 Knut Kjaer, “Do notregulate wealth funds,

improve them”,Financial Times,

13 April 2008.23 McKinsey GlobalInstitute, Mapping

Global Capital Markets,January 2008.

24 See for example AlainDemarolle, Report to the

French Government onSovereign Wealth

Funds, May 2008.25 Edwin M. Truman, A

Blueprint for SovereignWealth Fund Best

Practices, PetersonInstitute, April 2008.

26 W. Miracky et al, Assessing the Risks:

the behaviors of sover-eign wealth funds inthe global economy,

Monitor Group,June 2008.

27 Martin Wolf, ‘Financialcrisis tests durability of

globalisation’,Financial Times,

10 October 2008.




07

b r u e g e l p o l i c y b r i e f

28 Laurent Cohen-Tanugi,Euroworld 2015: A

European Strategy forGlobalisation, report to

the French Government,April 2008.

cannot and should not be used toaddress security concerns. We

identify three main requirementsfor the corresponding policyframework:

• It should be open, and ensurethat the EU remains among theworld’s most attractive placesin the global competition forcapital. Any investment reviewproceedings must offer legalpredictability (includingthrough guarantees that the

security objective is notinvoked for non-securitymotives), due process, andempowered jurisdictions.

• It should be comprehensive andcredibly address the wholegamut of potential securityrisks, in the defence and securi-ty industry but also potentiallyin other sectors crucial to thefunctioning of the economy,

including some energy facilitiesand critical physical and/orelectronic infrastructure.

• It should be sustainable andprovide a stable framework forpolicy. Steadiness is requiredboth because of the need forlong-term predictability, anessential factor of attractive-ness to investment, andbecause political tensions from

sovereign investment are morelikely to increase than decreasein the near future.

We consider that these threerequirements are broadly met bythe CFIUS framework in the US, andby legislation in some EUcountries. But looking at the EU asa whole, they are not fulfilled. Theopenness criterion is not met,since the diversity of national

approaches to foreign investmentis a barrier to the internal market

in the defence/security industry.Current policies also fail to addressthe security risk comprehensively,as in many member states there isno consistent framework to reviewforeign investment outside of thedefence industry. This gap can beexploited by populist politicians topush for protectionist moves orthe abuse of other regulatoryinstruments, including in caseswhere no real security risk exists.

Moreover, national frameworks failto address cross-border securityspillovers that arise in an integrat-ed EU market: for example, if acontractor in one European coun-try critically depends on a near-monopoly supplier from anotherEuropean country, then a foreigntakeover of the latter may havesecurity implications for the for-mer’s home country, and thereview process should allow ade-

quate coordination. Finally,current policies are notsustainable. Many currentinvestment control regimes arelegacies of the cold war, a timewhen virtually all FDI came fromlong-term allies. These do not pro-vide a stable policy framework inthe current investment context, asis evidenced by a flurry of legisla-tive initiatives since 2005 incountries including France,

Germany and Greece.

To improve the policy frameworkfor the review of foreigninvestment in Europe, threeoptions can logically be envisaged.The first option consists of specificlegislation and implementation ineach member state, as is currentlythe case. A second option wouldinvolve common legislation at theEU level, with implementation

(review of actual acquisitions)carried out at national level. A third

option would consist of EU-levellegislation and implementation,the latter by the Commission or anewly created ad hoc EU agency.

The first option’s above-mentionedshortcomings are only likely toworsen over time, because of theprobable increase in protectionisttendencies in many memberstates as a reaction to the chang-ing global investment patterns,

and in spite of the countervailingincentives to loosen controls aris-ing from regulatory competition toattract inward investment. Thethird, federalist option has beenadvocated28 but we see it as unre-alistic and undesirable in thecurrent make-up of EU politicalinstitutions. It appears to us thatneither the European Commissionnor any other EU institution can beentrusted with ultimate responsi-

bility for security assessments,now or in the foreseeable future.Unlike essentially economicpolicies such as trade andcompetition, security policyinvolves a broad range of consider-ations which cannot in practice bedelegated by national govern-ments to the EU.

The second option better reflectsthe policy trade-off highlighted at

the end of Section 2. It could takethe form of an internal marketdirective (Article 95 of the Treaty)establishing a framework andprocess for the security review bymember states of foreign acquisi-tions within the EU. The objectiveshould be limited to ‘hard’ security,both national security of the coun-try in which the investment takesplace and security of the EU as awhole. The scope should be

PBf 071108 Safe and Sound

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