It was an unexpected call. The CEO of Spain’s Telefonica Jose Maria Alvarez-Pallete was visiting Silicon Valley, meeting with US investors. He learned that Saudi Arabia’s largest telecoms operator, STC Group, wanted to buy a 9.9% stake in his company. Alvarez-Pallete left the US and traveled to Riyadh.

Since the September 2023 call, the debate over Saudi investment has become a litmus test of Europe’s attitude to investments from authoritarian countries in strategic industries. A lucrative Saudi vote of confidence in Telefonica could help the struggling telecom burdened by billions of euros in debt. But it also could give Saudi Arabia too much sway over Spain’s telecom and internet infrastructure. Telefonica provides services to Spain’s defense industry and its operations stretch across 65 markets in Europe, Latin America, the Middle East, and Africa.

Spain’s concerns underline a broad dilemma facing Europe — how to reinvigorate its competitiveness by encouraging investment while restricting losing control of key strategic industries.

The continent must invest twice as much as it did rebuilding after World War II, former European Central Bank president Mario Draghi said in long-awaited blueprint to stem the continent’s economic decline. “This is an existential challenge,” he said in his 328-page report. At the same time, Draghi highlights the dangers of dependence on foreign industries and calls on the continent to coordinate on screening foreign investments.

It’s a big change. Traditionally, the European Union prided itself on its openness to foreign direct investment. But the dream of benign free global trade is fading. A desire for digital autonomy and concerns about investments from authoritarian countries have pushed the EU to toughen the rules.

The EU proposed regulating foreign investment into the union in 2017 and adopted a regulation in 2019. Under the rules, governments share information on security and public-order risks stemming from foreign investments. The European Commission recommended “screening mechanisms” to evaluate and, if necessary, block foreign investments compromising national security.

The problem is inconsistent implementation. Ultimate power to block investments remains with the EU’s 27 national governments. In January 2024, the European Commission proposed to toughen the rules. The revised regulation makes national screening mechanisms mandatory for all member states — Greece and Croatia never have put one in place.

The most common target is China, which ranks among Europe’s top foreign investors. The Dutch government has opened up an investigation into China’s ownership of chipmaker Nexperia and Belgium refused to bail out the Chinese owners of chipmaker BelGaN, allowing the company to go bankrupt. The Draghi Report notes China’s large investments in electric vehicle production in Hungary, writing that they can “promote technological development in Europe, as well as the creation of high-quality jobs, but only if executed in a coordinated manner.”

Russia, and other authoritarian states share the spotlight. Madrid recently blocked Hungarian company Ganz-Mávag’s attempt to purchase Talgo, a Spanish train manufacturer citing concerns about the Hungarian company’s suspected ties to the Kremlin. The US and the UK, Spain’s leading — and trustworthy — investors, fall under Spain’s screening mechanisms.

Although any “genuine and sufficiently serious threat to a fundamental interest to society” gives the EU member states reason enough to blockade foreign investment, the line often is blurred, inviting fears of political meddling and generating distrust among investors, worries Juan María Soler Ruiz, Investment Director at Avanza Capital Family Office. Overall foreign investment into the EU fell by 4% last year for the first time since 2020.

The Saudi Telefonica investment saga continues to be unresolved. After the Saudi plans became public, the Spanish government secured a 10% stake, and the Spanish investment group CriteriaCaixa, acquired 9.9%, making Madrid reportedly more comfortable about the Saudi investment.

The Spanish government is now expected to give a green light by the end of the month, though with certain “conditions.” A decision will not end the debate over the proper balance between the continent’s need for foreign investment — and its desire to control those investments. But it will show that the continent will probably privilege hard cash over potential security concerns.

Natalia Hidalgo Martinez is a Spanish-based freelance writer covering transatlantic relations between the US and Europe, European security, and geoeconomics.

Oona Lagercrantz, an Intern for CEPA’s Digital Innovation Initiative, contributed reporting.

Bandwidth is CEPA’s online journal dedicated to advancing transatlantic cooperation on tech policy. All opinions are those of the author and do not necessarily represent the position or views of the institutions they represent or the Center for European Policy Analysis.

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