Fiscal and monetary policies, particularly questions over compliance with budgetary rules and the European Central Bank’s quantitative easing, have traditionally divided core and peripheral euro area countries. Similar divisions are now becoming visible in another area of economic policy, that of trade and investment. A major area of contention is China – with Greece at the forefront.
Chinese investment into Greece accelerated significantly over 2016-17, particularly in the shipping, technology and energy sectors. Located at the junction between Asia, Africa and Europe, Greece plays an important role in China’s Belt and Road Initiative. In 2017 it was the fourth-largest recipient of Chinese investment into the European Union, despite being one of the bloc’s smallest economies.
Last year European Commission President Jean-Claude Juncker indicated the Commission’s intention to launch in 2018 a framework for screening foreign investment into assets considered important for public order and security, particularly in infrastructure and technology. This would complement screening rules already in place in several EU countries, notably Germany, France and Italy, and would bring the EU in line with practices in the US and Japan.
The move is motivated by worries about China in particular, whose investment flows into the EU have been steadily growing. These reached $49.8bn in 2016, corresponding to around 30% of China’s total outbound investment and equivalent to that attracted by the US and East Asia combined in that year. Through its two sovereign funds, the State Administration for Foreign Exchange and the China Investment Corporation, and other state-owned enterprises, China has acquired stakes in major European infrastructure and technology assets, including a German robotics firm, Britain’s Hinkley Point C nuclear power plant and the Greek port of Piraeus.
European governments’ concern over China’s increased control of sensitive industries is matched by businesses’ fear of increased competition. The French government has taken action to block Chinese investment into what it considers to be ‘strategic assets’, from airports to the yoghurt industry. German firms are especially alarmed by the transfer of know-how through acquisitions and its potential to accelerate China’s transition from the world’s factory into a technology hub. President Donald Trump’s actions against China are another spur to Europe, as it seeks to preserve a strong relationship with the US at a time of geopolitical uncertainty in its neighbourhood.
In Europe’s crisis-hit south, the reality looms markedly different. With their economies still not fully recovered and domestic government investment hit by fiscal tightening, Spain, Greece, and Portugal view China as a source of much-needed funds. Nowhere is this felt more acutely than in Athens. The Greek government wants a ‘clean exit’ from the third bail-out in August and conditionality attached to any post-programme debt relief are linked to progress with the privatisation of state assets, which in turn is largely dependent on the country’s ability to attract foreign investment.
Free trade proponents such as the Netherlands and other northern European governments also oppose EU proposals for tighter screening rules on foreign investment. The same is true of some central and eastern European countries, where the popularity of the EU has been in gradual decline. However, Britain’s upcoming exit from the bloc is tilting the balance of power in favour of the cautious, more protectionist camp. Traditionally a vocal supporter of free trade and a country close to China, Britain has long been the favourite for Chinese investment. Between 2011-17, it was the destination for 78 Chinese investments, higher than any other EU country and greater than that of Germany and France combined. The total value of these investments was $63.6bn, one-third of the $195.5bn China invested in the EU over that period.
Britain may continue to attract significant Chinese investment after Brexit, especially if China faces growing hurdles in the EU. Northern European protectionism over China may be based on valid concerns, but would accentuate new divisions in a continent that is desperately trying to heal existing ones.
Danae Kyriakopoulou is Chief Economist and Head of Research at OMFIF. For further analysis into international capital flows, trends in sovereign funds’ investments and global net international investment positions, read OMFIF’ s upcoming Global Public Investment 2018 report, to be released on 23 May.