| By Jens Bastian

Last year, Chinese activities in Southeast Europe and in Europe in general expanded and diversified, as explained in the first article of this two-part series. Here’s how Europe is responding, and what to expect in 2019.

As Greece and Croatia illustrate, European Commission authorities are increasingly vocal and – where appropriate - critical about the nature and origin of various Chinese investments and concessional lending practices. In November, the Directorate General for Energy of the European Commission took the unusual step of publicly expressing its reservations about the extent to which Chinese companies are seeking to expand their presence in Greece’s energy sector. Moreover, the Athens-based real estate company Destiny has become the focus of an investigation across EU member states engaging in the provision of visa programs for non-EU residents. Destiny, which organizes the acquisition of real estate by Chinese nationals seeking to secure a residence permit as part of Greece’s Golden Visa scheme, is alleged of having accepted illicit payments.

In Croatia, after awarding the public tender for the bridge construction project to the Chinese consortium, one of the two losing bidders – the Austrian construction company Strabag – sought legal recourse in order to challenge the decision. After a four-month inquiry the Croatian authorities again awarded the tender to the same Chinese company. The Croatian bridge case raises a troubling aspect of the EU public procurement process: when participating in such tenders, state-sponsored and subsidized Chinese companies will regularly underbid European competitors at the price level. The Commission in Brussels and local funding authorities in EU member states are thus faced with the challenge how to apply (or rewrite) procurement rules when Chinese competitors participate in the process.

The Commission is also reacting to the China challenge with two encompassing initiatives. In September 2018 the Commission published a vision for increasing connectivity between Europe and Asia that emphasizes the harmonization of regulatory standards, e.g. in the fields of tender procedures, governance standards and digital parameters. Two months later, the Commission released a political agreement with member states on the EU framework for foreign investment screening. While China is not explicitly mentioned, the proverbial elephant in the room is visible between every line. The framework, which still requires final confirmation by the European Parliament, seeks to create a cooperation mechanism between Brussels and the member states, giving the Commission the capacity to issue opinions on individual cases while reaffirming that member states have the last word on investment screening. Currently, only 12 out of 28 member states have screening mechanisms in place.

The investment screening debate further exposed division within Europe. Individual countries such as Italy, Greece, the Czech Republic, and Hungary sought to water down the Commission’s proposal. Ensuring that individual countries do not become overly reliant on China is proving difficult to implement.

Prospective EU members such as Serbia, which has the most extensive interchange with China in the Western Balkans, will be hard pressed to adopt screening mechanisms in the accession negotiations with the Commission. Montenegro is increasingly exposed to “debt-trap diplomacy” with China. The Hungarian prime minister, Viktor Orban, considers Chinese policy banks a viable alternative for the infrastructure financing needs of his country. Croatia ignored the Commission’s call to reconsider awarding the EU-financed bridge tender to a Chinese company.

Looking ahead, we should expect EU member states (in particular Germany, France, and the UK unless/until it executes Brexit) to continue reformulating their domestic investment screening rulebooks. These interventions will be supported and contested at the same time from different constituencies, including the media, employers, and trade associations, as well as individual companies doing business with Chinese counterparties.

The list of countries inside and outside the EU is growing that are prepared to engage in bilateralism when dealing with China instead of participating in the maintenance of a joint European approach. For its part, China illustrates through the 16+1 network that it can become less reliant on European structures of transnational governance defined by Brussels.

The debate about foreign investment frameworks as a means of establishing new European standards or introducing higher levels of protectionism will continue. This debate is exposing cross-cutting cleavages in Europe that go beyond the China challenge: Government versus private sector; concerns with national security versus commitments to open markets; and East-West as well as North-South divisions. These three European fault lines run deeper than the China-related debate about establishing a framework for foreign direct investment screening. They will not be resolved any time soon.

Jens Bastian is an independent economic consultant based in Athens, Greece and Stuttgart, Germany. In 2017 he authored a report for the European Bank for Reconstruction and Development in London on the Balkan Silk Road.