Is €1.2T enough to save Europe?

BRUSSELS — Mario Draghi, Italy’s former prime minister, was enjoying his retirement when the phone rang. It was September 2023, and Ursula von der Leyen’s office wanted to know if he might do one last job for Brussels: find a way to make Europe competitive again. 

“I had to think for a few days … before actually saying yes,” Draghi recalled later as he published his final report on reinvigorating the European Union economy. “The task seemed to be so daunting, so difficult.” 

On Wednesday, Draghi’s ideas on competitiveness will be back in focus as von der Leyen unveils her blueprint for the EU’s next seven-year budget, in what will be a defining moment in her tenure as European Commission president. 

The Multiannual Financial Framework (MFF), as the behemoth of a long-term spending plan is known, will apply from 2028 to 2034. The fact that two years have been set aside for negotiations over what the budget contains is a sign that — as usual — von der Leyen expects a huge battle with national governments, who must unanimously agree on its contents. 

Commission officials spent the weekend locked in marathon meetings to finalize the proposal and were still working late into Monday evening, fueled on pizza, cola and water.

The stakes could hardly be higher. The MFF proposal will need to finance the EU to cope with unprecedented challenges, including a trade war with Donald Trump’s America; an actual war with Vladimir Putin’s Russia; intensified competition from China; conflict in the Middle East; climate change; international migration; and the rise of the far right, with its anti-Brussels political agenda. 

In the words of Draghi, the venerable sage of European economics: “We have reached the point where, without action, we will have to either compromise our welfare, our environment or our freedom.”

The EU’s current core budget is worth around €1.2 trillion, hardly a small number. 

But that represents only around 1 percent of total EU GDP, compared with 48 percent for the budget of Germany and 57 percent for France. Respected observers — including Draghi — argue that EU public sector investment is woefully inadequate to meet the challenges facing the continent. 

The question is, how much bigger does the Brussels budget bazooka need to be? The answer varies wildly, depending on who is giving it.

Some countries want zero increase while others want the EU budget to double, said Jan Stráský, senior economist at the OECD. 

“This is the range, zero to double, and my assessment would be that by increasing it by less than half, you could already achieve a lot of what makes sense to do at the EU level,” Stráský told POLITICO. “Perhaps let’s say 20 or 30 percent” — which would take the total budget up to around 1.3 percent of GDP — “if well spent, could be a huge improvement.” 

Low-hanging fruit

As well as a bigger pot overall, the OECD recommended, in a report this month, reprioritizing existing EU funds to focus on defense and a more integrated electricity market, which would reduce power costs and help spur growth. 

A bigger share of public spending should be handed over to Brussels, the think tank suggested, to coordinate more efficient cross-border infrastructure projects, like electricity interconnectors, and defense procurement. 

“It’s also not about looking for the perfect solution, it’s about reaping the first-order benefits like the lowest-hanging fruit,” Stráský said. 

Other analysts say Brussels must be even more ambitious if the EU is to meet the moment. According to Zsolt Darvas, one of the authors of a new study from the Bruegel think tank, the MFF spending envelope needs to double, more or less, to take account of the need for financing the climate transition and paying off its Covid-19 debts. 

“The European Union faces growing pressure to deliver on priorities that are increasingly European in nature,” the Bruegel study concluded. “Challenges including the climate and digital transitions, competitiveness, economic resilience, defence, migration management and foreign policy go beyond national borders and demand coordinated and well-resourced responses. But the EU’s main financial instrument, its budget — or Multiannual Financial Framework (MFF) — remains stuck in the past.” 

Darvas proposed raising the budget to around 2 percent of GDP. Such an increase would put the EU budget on track to meet its share of the additional €800 billion a year Draghi said would be required from the private and public sectors to revive Europe’s economic competitiveness. 

Some countries, including France, agree that the EU budget needs to get bigger.

Others, like Germany and the Netherlands, don’t want the budget to grow at all. “Sweden is mindful of not just buying into the narrative that now we need a larger budget because we have new problems to handle,” Swedish EU Affairs Minister Jessica Rosencrantz told POLITICO. “We will have to do priorities within the budget.” 

Sweden is particularly keen for the MFF to address defense and security, though some analysts say EU law prevents the bloc from making direct military expenditure through its long-term budget. “How exactly that should be formulated or portrayed in the budget, that we will have to come back to,” Rosencrantz said. “But I think defense, security, support for Ukraine as well, also competitiveness — those will be the topics that a new budget should handle.” 

Draghi also proposed radically simplifying the budget, an idea von der Leyen has taken on with her outline proposal to combine the Common Agricultural Policy and Cohesion Fund — the EU’s biggest outlays — into a single mega fund. 

A second pillar of the MFF, under the outlines already announced by the Commission, would create a new European Competitiveness Fund, providing investment capacity for key sectors and support for research. The third pillar of the budget would be a new external action fund, combining development aid and diplomacy, under von der Leyen’s initial plan. 

Already, some EU countries and politicians are up in arms about these reforms, particularly on cash for European farmers and economically struggling regions. 

EU taxes?

So much for the spending. The harder part — potentially, at least — is deciding where the money should come from in the first place. 

A fierce debate is already underway over whether new forms of these “own resources,” as the EU’s income is termed, should be approved as part of the new budget, potentially by expanding the share of revenue Brussels can take from existing taxes or financial arrangements. 

One reason often cited in favor of new forms of own resources is to take the heat out of the debate over different countries’ contributions to the budget, the political fixation with so-called “net balances.” 

Countries that are net contributors — like Germany, the Netherlands and Sweden — pay more into the pot than they receive back. That often makes it politically harder for these governments to justify to their domestic audiences why the EU’s overall budget must rise. 

EU Budget Commissioner Piotr Serafin has promised “an ambitious own resources package” which will “on the one hand strengthen the financial capacity of what we have here at the European level, but on the other hand will be also politically and socially acceptable for the member states but also for the citizens of Europe.”

He will need luck on his side. “We don’t see a need for new own resources and definitely not European taxes,” said Sweden’s Rosencrantz. “We know there’s a large discussion on everything from using revenues from the EU Emissions Trading Scheme and Carbon Border Adjustment Mechanism to different kinds of other forms of new own resources. This is not something that Sweden sees the need for. We would rather see a focus on re-priorities within the budget, which is always difficult, but that’s what you have to do in a national budget, also when you have new challenges to address.” 

Rule of law

One way to make savings is to prevent “a single euro” from going to any country that flagrantly breaches the EU’s democratic “rule of law” standards, Rosencrantz added. It’s a view that chimes with the Commission’s aims for the next MFF. 

Von der Leyen’s team is working up a new regime of “conditionality” which would strengthen the financial penalties for countries like Hungary (and, in the past, Poland) that Brussels has found to be failing to uphold the democratic freedoms it says are core to the EU’s values. 

But when every EU country has to agree on the budget package in full — including Viktor Orbán’s Hungary — there’s no guarantee that any conditionality rules will make it through to the final budget blueprint, whatever von der Leyen and her commissioners want. 

In truth, the question over punishing countries for falling short on the “rule of law” comes back to the same essential question underpinning the entire budget: What is the EU really for? How much, in this era of multiple global challenges, should the bloc’s 27 countries do together, via action coordinated inside towering glass and steel offices in Brussels, and how much should they decide at home? 

In the end, the scale and scope of the EU’s final budget will be an expression of the bloc’s collective answer to this question. 

“If you look back at the history of the agreements on the next MFF, we saw very limited changes from one framework to the next,” said Darvas, one of the Bruegel report authors. In his view, the biggest risk to the EU rising to the challenges it now faces is that the requirement for unanimous agreement between 27 countries will “severely limit” any room for reform.

“There is huge rigidity,” he said. “I’m a bit skeptical that there will be big changes this time either.”