The EU budget puzzle: New ambitions, old constraints

Europe wants to do more with less. This is the daunting financial challenge that policymakers must overcome as they develop the European Union’s next budget for the period 2028-2034, the Multiannual Financial Framework (MFF). The significance of this budget should not be underrated: this framework will define how Europe funds its green transition, defense capabilities, and industrial competitiveness, while it also repays debt from the pandemic recovery plan. 

EsadeGeo Senior Fellow Juan Moscoso del Prado spoke with Nils Redeker, Deputy Director of the Jacques Delors Center, and Béatrice Dumont, Director of Economics at the College of Europe, in a recent podcast to examine how the European Commission’s proposal attempts to update the EU’s financial rulebook to better serve a world with new emergencies and growing crises. Their discussion reveals some progress, but also limits, in a system that still reflects priorities set decades ago. 

We have less money, more things we want to do jointly, and an incredibly rigid structure

The EU budget may seem abstract and distant to the average European, but its effects will be felt by every citizen. The availability of funds will determine how the Union responds to crises, supports innovation, and maintains global influence in an increasingly uncertain geopolitical climate. 

More goals, less money

Conforming to the recommendations of the Draghi and Letta Reports—both of which call for a more competitive and resilient Europe—will not be easy. From 2028 onwards, the EU must begin repaying around €24 billion every year in debt raised for the NextGenerationEU recovery plan. Yet the overall budget remains small—only about 1 percent of EU GDP. 

Such financial demands on an already small budget have serious consequences. The EU is expected to allocate more money to defense, energy, competitiveness, and enlargement, but with little fiscal room to maneuver. As Redeker put it, “We have less money, more things we want to do jointly, and an incredibly rigid structure.” 

The Commission has tabled the idea to increase the budget slightly to 1.26 percent of GDP (almost 2 trillion euros), but even that modest rise will be politically difficult to realize.  

New priorities, new pressures

To address these realities, the Commission is proposing a long-overdue shift in spending priorities. Agricultural and regional funds, which currently make up around 62 percent of the total budget, would represent 44 percent, while allocations for research, energy, and infrastructure would rise to roughly 30 percent.  

Redeker sees some upsides: “The most positive aspect of this proposal is that it adapts the structure of the budget to Europe’s real needs.” But political challenges could quash any progress: cutting farm subsidies would likely trigger fierce opposition from national governments and lobby groups. 

The Commission’s proposal proffers a different strategy—reorganizing but not cutting traditional funds such as the Common Agricultural Policy (CAP) and Cohesion Policy—to increase efficiency and free up resources for Europe’s industrial policy, energy projects, and technological innovation. The aim is a more balanced system that allows for both productivity and regional cohesion. 

Redefining European public goods

Dumont stressed that the EU budget must focus on projects with clear cross-border benefits—such as energy grids, digital networks, or research programs. “We should go for the most elementary European public goods, not a broad list.” 

The EU must define which ventures truly serve common European interests before directing its funds

Focusing funds on shared European priorities avoids money being spent nationally on projects that would be best financed at EU level. It also serves to maximize European added value, because every euro invested in cross-border projects produces benefits for multiple member states. This strategic focus is fundamental at a time when resources are tight and the list of challenges is long. 

The discussion touched on the need to define these “European public goods”. But the EU has to decide which ventures—energy connectedness, defense capabilities, transport corridors—truly serve common European interests before it can decide where to direct its limited funds. 

Competitiveness and private investment

Researchers from the European Central Bank (ECB) recently calculated that Europe will need public and private investments worth around 3.75 percent of EU GDP—about €5.4 trillion over the next seven years—to finance the green transition, digitalization, and defense. In a different study, the ECB also puts annual green investment needs alone at between 2.7 and 3.7 percent of 2023 GDP.  

For the EU to remain competitive, it needs more than public money; it also needs cuts to bureaucracy. “Harmonizing tax, insolvency, and company laws would make it easier for firms—especially SMEs—to invest across borders,” says Redeker. 

Public funds should act as catalysts for private capital. Increasing the share of financial instruments such as loans, grants, and equity investment, following the InvestEU model, would make EU spending more productive and better connected to the business fabric. 

“Public EU money cannot match the private money spent by American tech giants… so Europe must choose its niches wisely,” says Dumont. As an example, in 2024, global private investment in generative artificial intelligence alone reached nearly $34 billion—far beyond what public budgets can match. The EU’s challenge is therefore to target its resources strategically, supporting innovation and value chains where it can add the most impact. 

This approach would also help reduce the fragmentation of state aid and budget spending among member states, which risks distorting the single market. A coordinated EU framework can ensure that support for industries and innovation enhances, rather than undermines, Europe’s competitiveness. 

Politics of reform

Despite a consensus that the MFF needs reforming, political constraints limit the available options for change. Some governments have labeled the Commission’s proposal “dead on arrival,” and others are against even modest reductions to traditional funds. Yet for once, France and Germany appear unusually aligned in their views that the Union’s current structure is inadequate to meet today’s geopolitical and economic demands. 

The debate highlights a key trade-off: size versus flexibility. The EU needs a larger and more adaptable budget to respond quickly to crises—from pandemics to wars to industrial shocks—without sacrificing either its scale or stability. The experts emphasize that a balance must be struck between increasing resources and enhancing investment capacity. 

Which path forward?

Drawing up an innovative budget with greater flexibility, new instruments, and clearer priorities will be essential for Europe to respond effectively to global challenges while maintaining cohesion among its members and competitiveness in markets. 

As Esade’s Moscoso del Prado reflected, Europe’s future “depends a lot on this new framework.” The decisions made now will determine whether the EU remains a global economic player or remains constrained by a fiscal model conceived in the 1980s.